Treasury rejects brokers’ bid to dilute its stake in Nairobi bourse

The planned change of ownership at the Nairobi Securities Exchange (NSE) has hit yet another obstacle after the capital markets regulator differed with stockbrokers over the new shareholding structure.

The differences emerged after the regulator rejected the brokers’ demand that the government cedes part of its 20 per cent stake to two market players not initially included in the new ownership sharing plan.

According to the Capital Markets Authority (CMA), the Treasury, which owns the government’s 20 per cent stake, could not cede part of its portion.

It asked the brokers to share with new-comers the 80 per cent stake reserved for them under the initial plan.

“They cannot get what they want. The Treasury has said that it intends to keep its stake and we are going with that directive,” CMA chairman Kung’u Gatabaki said in an interview.

The 20 stockbrokers had agreed to share the 80 per cent stake equally to the exclusion of two fallen counterparts — Francis Thuo and Shah Munge — but were forced back to the drawing board by a court order requiring inclusion of the two who were left out of the new ownership plan because they did not have active trading licences at the time of share allocation.

Francis Thuo collapsed under the weight of debt in 2007 while Shah Munge lost its right to trade at the bourse in 2003 in the wake of a scandal involving loss of public funds.

Francis Thuo, which had initially been denied ownership on the grounds that its seat had been sold to Renaissance Capital, moved to court to contest the position and obtained an order directing the NSE to include it in the new ownership plan.

The government, through the Treasury, was allocated a 10 per cent stake and an additional 10 per cent for the Investor Compensation Fund – to be administered by the CMA.

The stand-off between the brokers and CMA is expected to further delay the process of removing the stock market from the grip of the brokers

through demutualisation.

The planned change of ownership is meant to transform the market from being a members club (or a mutually owned entity) to becoming a company limited by shares.

The move is expected to open up ownership to other investors and eventually take the company public through sale of shares to willing buyers.

Mr Gatabaki advised the brokers to direct their energy to creating new business opportunities rather than pursuing the Treasury’s stake.

“What they are refusing to surrender for the two brokers is worth only Sh20 million because each broker is to get shareholding worth Sh10 million. If they concentrate their energies on the business, including merging their operations, they would make more money,” he said.

Mr Gatabaki said he had for a long time tried to convince the small brokers to merge instead of fighting a losing battle for the Treasury’s stake at the NSE.

He said consolidation of the many small brokers would give them capacity to bid for big deals as the situation currently favoured a few big players who are regularly being picked to arrange IPOs, rights issues and corporate bonds, among other transactions

The change of ownership at the NSE or demutualisation was to have been concluded before Stella Kilonzo, the former CMA CEO, exited the authority at the end of June.

The initial plan was to conclude the process by April this year after the brokers agreed to the inclusion of Shah Munge and Francis Thuo and Partners in the new ownership structure.

It now appears that the agreement was made without a determination of where the shares to be allocated to the two would come from.

Enthusiasm for the change of ownership peaked early in the year when the NSE board stated in its annual report that it expected to list the bourse on the Alternative Investment Market Segment (AIMS) by mid next year.

That optimism now appears headed for a thawing with the re-emergence of the ownership sharing formula and the hardening of positions by the protagonists.

“We expect that the CMA will convince the Treasury to surrender some stake to the two stockbrokers because they also deserve to be owners,” said a member of the Kenya Association of Stockbrokers and Investment Banks (KASIB), on condition of anonymity to avoid being singled out by the Treasury. “Should the government refuse to surrender the eight per cent for the two brokers, we will go to court to defend our rights.”

The brokers plan to argue in court that the state does not deserve any stake at the bourse because “the Treasury has never contributed a cent to the formation and development of the exchange’. 

Our source argued that while the brokers valued the Treasury’s holding of a stake as is the case in many other jurisdictions around the world, that stake should not be big.

That argument is hinged on the articles and memorandum of association of the Demutualised entity as approved by the CMA which shows that the shareholding is to be such that “no one person or related group of persons may hold more than five per cent of the share capital of the company.

The brokers contend that by holding on to 10 per cent stake each, the government and the ICF are already in breach of the articles and memorandum of association of the yet-to-be-formed demutualised entity.

Willie Njoroge, the CEO of KASIB, backed that position arguing that his members have met their part the bargain and expected the government to do the same.

“KASIB members have played their part towards the realisation of demutualisation and whatever is left must be put on the doorsteps of the regulator,” said Mr Njoroge.

Mike Rubia, a director of Francis Thuo and Partners, told the Business Daily he is yet to be told where his share of the exchange would come but will accept whatever the other NSE brokers would get.

The Rubia Family has a 40 per cent stake in Francis Thuo and Partners.

Final decision

Mr Rubia said the final decision on the sharing out of the NSE stake was not yet finalised but that every broker including his firm would get an equal share.

Francis Thuo and Partners’ case had been bolstered by the fact that other stockbrokers placed under statutory management — Nyaga, Discount Securities and Ngenye Kariuki and Company — were allocated shares in the demutualised exchange.

Delay in demutualising the market risks continuing to negatively impact on confidence in the exchange that is keen to attract new firms such as small and medium enterprises (SMEs) to list on its growth segment.

The NSE’s image has been battered by the series of stockbroker collapses in the past five years beside the uninspiring performance of a number of IPOs such as Safaricom.

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