Mr Alex Kazongo, NSSF Managing Trustee (left) and Mrs Stella Kilonzo, Capital Markets Authority CEO (right)
Pension savers were on Tuesday headed for a big blow as the capital markets regulator unveiled its plan to wind up Discount Securities, a collapsed stockbroker with which the National Social Security Fund (NSSF) had invested billions of shillings.
NSSF, the public pensions service provider, could get as little as Sh50,000 out of the Sh1.2 billion it had put in the hands of Discount Securities according to the investor compensation plan that the Capital Markets Authority (CMA) released.
The revelation casts a dark cloud over NSSF’s earnings outlook.
CMA said it would use the Investor Compensation Fund to cut the losses of retail investors who had bought shares at the securities exchange through the collapsed broker up to the statutory limit of Sh50,000.
Stella Kilonzo, the CMA chief executive, said the compensation, which starts this month, will be done in phases. “Investors will be paid a maximum of Sh10,000 in the first phase that starts on February 8 (today) with the balance payable in the second phase to be announced later,” she said.
Though it may help restore the confidence of thousands of retail investors in the stock market, the low level of compensation sets up big investors such as the NSSF for big losses with far-reaching consequences on the social scene.
“The poor state of the market is partly linked to low retail investor participation but what is important is the regulator taking preemptive steps to stop this from happening again,” said Fred Mburu, the chief executive officer Apollo Asset Management Company.
NSSF’s managing trustee Alex Kazongo told the Business Daily that the fund had submitted compensation claims running into the billions but was expecting very little from the fund.
“We have put in claims of approximately Sh1.2 billion at cost and Sh2 billion at market value but payments can only be within CMA limits,” he said in a telephone interview.
NSSF is just one of the investors that took a hit when the CMA placed an insolvent Discount Securities under statutory management in 2009.
The broker has since been found to have had serious corporate governance and liquidity problems before the regulator moved in.
Discount’s collapse in 2009 only deepened a stock market confidence crisis that began with the insolvency of Francis Thuo and Partners in 2007 and Nyaga Stockbrokers in 2008.
Its fall came at the height of a prolonged market dip in the wake of the 2008 post-election turmoil and global economic crisis that further dented investor confidence in the Nairobi bourse.
CMA appointed a statutory manager to run Discount Securities when it had an estimated 100,000 clients, whose shares had allegedly been sold without their knowledge. The corporate governance crisis at Discount was found to have been so deep that it had no certificates for shares it bought on behalf of the NSSF in a five-year period beginning 2004.
Stock market analysts yesterday said the decision to compensate investors though small compared to the loss incurred was critical to the survival of the securities market as it sends a strong message that the small investors have somebody watching their backs.
“No investor compensation fund is ever adequate. It is just like the deposit protection fund which compensates up to Sh100,000 and it is there to settle the claims mainly of small investors,” said Job Kihumba, the executive director at Standard Investment Bank.
Mr Kihumba, also the chairman of the Centre for Corporate Governance, said the series of stockbroker collapses had awakened the market regulator to the risk that lies in the weak management structures that existed in some stockbrokers and investment banks.
Investment banks are now required to have a minimum core capital of Sh250 million while stockbrokers are required to maintain at least Sh50 million to remain in business.
The CMA has moved further to rollout a risk-based surveillance plan for all market intermediaries — a move that saw 2011 pass without the collapse of a stockbroker.
Mr Kihumba said that other measures such as proposals to increase amounts being remitted to the ICF would have negative effects, including rising the cost of business to investors and intermediaries.
“What needs to be done is to minimise the risk of collapse because once the loss has set in, it is very difficult to compensate,” he said. According to him, big investors are expected to conduct adequate background checks on brokers before investing billions with them.
Last year, thousands of investors who lost money through Nyaga Stockbrokers received a total of Sh281 million from the ICF.
CMA said it had paid 90 per cent of the 27,000 investors who had lost money with the collapsed firm.
CMA’s annual report for the period ended June 2010 indicated that those who made genuine claims had been compensated up to the legal limit of Sh50,000.
The payments cut the ICF’s pool of funds by almost half to Sh193 million from the Sh424 million it had accumulated by June, 2009. The fund still has to pay Sh11.4 million related to claims by other investors.
ICF draws its money from the 0.01 percentage charge on the sale or purchase of shares at the Nairobi Securities Exchange, interest accruing on funds received from subscribers to public issues, financial penalties for non-compliance with CMA rules and interest earned from investments.
