Worried customers of Nyaga Stockbrokers outside the company’s offices after it collapsed in 2008. Photo/FILE
Prime properties belonging to collapsed Nyaga Stockbrokers have been sold, raising fresh hope that investors, who lost millions of shillings when the firm went into liquidation, may get additional compensation.
The hammer fell on the two developed parcels of land located in Embu town last week following a court order that allowed two commercial banks to recover from the sale an estimated Sh49 million the broker owed them.
Garam Investments, the auctioneer, on Friday confirmed that it had sold the two parcels of land that were registered under Nyaga Stockbrokers.
One of the two parcels of land had a three-bedroomed house and a single storey residential house on it while the other had a single storey building and a light industrial complex.
They were sold to clear debts that Nyaga Stockbrokers owed Consolidated and Prime banks at the time of collapse.
Garam Investments declined to disclose the price at which the two parcels were sold, but the two banks are known to have obtained two judgments from the High Court allowing them to sell Nyaga’s property to recover loans worth Sh49 million.
Though the Capital Markets Authority (CMA) is not the primary recipient of the proceeds of the auction, the market watchdog said it was monitoring the transactions closely for any residual funds to compensate investors.
“The authority is aware of the auctions and has reached an agreement with the banks that any residue from the sales shall be passed on to the statutory manager for application to the settlement of investor claims,” said CMA in an email to the Business Daily.
Rich investors who bought shares at the Nairobi Stock Exchange through Nyaga Stockbrokers lost an estimated Sh500 million when CMA announced in September last year that it could only pay investors to the maximum legal limit of Sh50,000 from the Investor Compensation Fund.
More than 90 per cent of 27,879 Nyaga clients received full compensation for their losses, but an estimated 2,714 who had invested more than Sh50,000 in the stock market through the broker walked away with only a fraction of their claims.
CMA chairman Micah Cheserem promised investors who did not get full compensation additional payments when seized assets belonging to Nyaga Stockbrokers managing director and principal shareholder Patrick Gakiavih is sold.
Personal assets
The sale of Nyaga’s property to compensate investors sets precedence that could help the market regulator find a way out of the huge settlements burden it faces on the account of another collapsed stockbroker, Discount Securities.
At the time it was placed under statutory management in March last year, Discount Securities owed the National Social Security Fund (NSSF) Sh1.4 billion besides undisclosed amounts it owed small and high net worth investors.
A breakdown of the clients’ roll prepared by the CMA and seen by Business Daily shows that Discount had 127,580 investor accounts at the time of collapse, out of which 101,509 were active.
This is the first time that CMA has seized a stockbroker’s personal assets to compensate investors.
Mr Gakiavih has been charged with the alleged theft of Sh523 million from his brokerage firm and his personal assets worth millions of shillings have been frozen.
In April, the CMA advertised in the newspapers that it was selling Nyaga’s office equipment and furniture.
The regulator also put up for sale Discount Securities’ property.
Sale of Nyaga Stockbrokers assets open yet a new avenue for CMA to settle investor and creditors’ claims against collapsed market intermediaries.
The market regulator has in the past raised money to compensate investors through the sale of a collapsed broker’s seat at the Nairobi Stock Exchange.
Such was the fate of Francis Thuo and Partners Stockbrokers, which collapsed in March 2007 and had its seat at the NSE sold to Renaissance Capital Investment Bank for Sh251 million.
CMA’s annual report for the year ending June 2009 indicates that the regulator had Sh272 million in the investor compensation kitty.
This amount is, however, likely to have been significantly consumed by claims from Nyaga Stockbrokers, which the regulator put at Sh302 million in September last year.
Investor confidence at the stock market - which had risen steadily buoyed by robust economic growth since January 2003- was badly eroded by the collapse in a succession of three stockbrokers Francis Thuo, Nyaga and Discount in a span of three years amid allegations that they were trading investors’ shares without authorisation.
A fourth broker, Ngenye Kariuki Stockbrokers, is under statutory management after it fell into financial difficulties.
The CMA has since brought into force a series of reform measures and imposed new capital requirements on market intermediaries aimed at restoring their stability to win back investor confidence.
Silas Onyango, the dean at KCA University’s graduate school said stockbrokers should not be allowed to handle money in excess of their capitalisation.
CMA has raised to Sh50 million from Sh5 million the minimum capital requirement for stockbrokers and also increased to Sh250 million from Sh30 million the minimum capital for investment banks.
The stock dealers have complained that they do not directly handle clients’ funds and do not therefore need to maintain “high” minimum capital balances.
But Mr Onyango reckons that alleged unauthorised sale of shares by the brokers is enough justification for the regulator to raise the capitalisation bar.
“The regulator should also regularly check that all the players have adequate insurance to cover their risk exposures,” said Mr Onyango, adding that such a move will completely eliminate the risk of loss to investors in the event that a broker collapses.
CMA has since added this as part of requirements for licensed dealers.
Mr Onyango, whose speciality is financial mathematics, says the regulator also needs to keep a register of all assets belonging to owners of brokerage firms and investment banks as a back up to the other measures.
“All payments to creditors of the collapsed firms should also be monitored as they could be used to fleece investors,” said Mr Onyango.
The Kenya Association of Stockbrokers and Investment Banks chief executive, Jane Njeru, said the market regulator should follow the transactions closely to ensure that investors are not left holding the short end of the stick in the ongoing liquidations as the big players get full compensation for what they lost.
“The CMA’s priority should be to protect investors,” said Ms Njeru.
Early last month - and perhaps aware that collapse of another broker would raise compensation claims to unmanageable levels - the CMA announced that it had extended the statutory management period for Ngenye Kariuki Stockbrokers by six months in the hope that the firm will raise new capital to strengthen its financial position.
If successful Ngenye Kariuki - which was in the red to the tune of Sh227 million - will become the first Kenyan stockbroker to survive a bankruptcy and statutory management.
Previous attempts to revive collapsed brokers have ended in liquidation.
Compensation claims
But a return to the market of Ngenye Kariuki could also leave it with a fresh challenge of winning back investor confidence - and especially dealing with alleged irregular sale of shares.
Ngenye had reportedly received offers from suitors who wanted to buy the firm before it was placed under statutory management.
Finance minister Uhuru Kenyatta reconstituted the CMA board following Discount Securities’ failure in March last year and also ordered an overhaul of the Nairobi Stock Exchange (NSE) and the Central Depository and Settlement Corporation (CDSC) boards.
The NSE is also preparing to separate ownership of the bourse from its management through a process known as demutualisation that it hopes to complete by end of next year.
The demutualisation process seeks to entrench good corporate governance practices in management of the stock exchange by diluting stockbrokers’ ownership stake of the Nairobi bourse and hence their influence in appointing the NSE’s top management team.
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