More than one million share accounts that were frozen in 2019 after being dormant for two years have been freed back to the stock market in a major win for investors on the Nairobi Securities Exchange (NSE).
The Central Depository and Settlement Corporation (CDSC) Ltd lifted the directive that declared millions of shares ‘dormant’, providing relief to investors who buy shares to earn dividends and not for trading.
The CDSC, which provides automated clearing, delivery and settlement of NSE transactions, in 2019 barred the accounts from transacting unless the owners applied for reactivation to protect investors against fraud, particularly the accounts with cash balances.
After freezing accounts, the CDSC alerts the accountholders to push them to visit their stockbroker for reactivation.
Usually, dormant accounts reduce equity trading activities on the NSE, which in return denies the exchange, CDSC and brokers revenues in terms of trading commissions and levies.
The CDSC says the latest policy shift, which was crafted during the Covid-19 period (2020) seeks to bring “fairness” in stock market investments.
The company’s CEO Jesse Kagoma says the shift in the treatment of ‘dormant’ share accounts has been informed by the understanding that investors buy shares for different reasons, including speculation and the hunt for dividends.
“First, our understanding of dormant accounts are accounts that don’t trade at all and have been blocked from trading. So, we don’t have any of these accounts. The accounts that we have are allowed to trade. Currently, we have 1.5 million to 1.6 million accounts that are allowed to trade, which means we don’t have dormant accounts,” Mr Kagoma told the Business Daily on Monday.
“We looked at the investors, some of them buy shares just to get dividends only without trading. If you look at those accounts that do not trade at all without understanding the motive of the investor, then you will be wrong because some of them buy shares so that they can be getting dividends every year.”
Data from the CDSC shows that of the 1.64 million share accounts as of the end of March 2022, 1.2 million were dormant.
“Instead of calling those investors and asking them to trade or that we are going to make those accounts dormant and all those things, we asked ourselves, ‘Why should you make my account dormant? I receive my dividends and my intention of buying shares was to get dividends every year. We have talked to quite a number of investors, some who are upcountry, who are earning their dividends on an annual basis on their shares,” says Mr Kagoma.
The majority of the dormant accounts were introduced in the market through the oversubscribed KenGen and Safaricom initial public offerings (IPOs) of 2006 and 2008, respectively, bringing more than one million new investors to the market.
For instance, Safaricom IPO pulled more than 742,000 new investors to the market, many of whom had taken bank loans and sold personal properties to buy into the 10 billion share offer.
Many of these investors ended up being one-time participants after Safaricom’s post-IPO price fell below the offer price of Sh5 per share, causing many investors, particularly the small and retail investors to flee the market.
In 2022, the NSE and CDSC started encouraging individual investors to either buy, sell, or lend their securities to keep their accounts active.
The CDSC is the provider of clearing and settlement services in the Kenyan capital markets. It is controlled by the Capital Markets Challenge Fund, which owns 50 percent of the shares.
The rest of the shares are held by NSE, AKS Nominees, Capital Markets Investor Compensation Fund and Uganda Securities Exchange in the ratio of 22.5 percent, 18 percent, seven percent, and 2.5 percent, respectively.
The CDSC is implementing a wide array of cost rationalisation and revenue-generating activities as part of a five-year recovery plan starting in 2021, including coming up with a new fee structure for its services.
“Management continues with its high-level engagements with the regulator, with the support of the board, to seek approval for the various fees-related proposals that are currently under review by the Capital Markets Authority,” the company says.
The management secured market stakeholders’ approval for a revision of the depository levy to Sh150 from Sh90 with an increase in the limit to Sh5 million from Sh1 million.
“This was a critical step towards progressing a revision of this levy to Parliament for approval. We expect clear implementation timelines for the next steps in Quarter 1 (January-March) of 2024,” the company says.
In 2022, CDSC suspended the implementation of a Sh100 monthly maintenance fee on Central Depository System trading accounts after the investing public rejected the step.
The corporation had introduced the fees, arguing it would deliver financial sustainability while also supporting new products such as securities, lending and borrowing.
The implementation of the maintenance fee would have seen the CDSC mobilise revenues of up to Sh2 billion per year.
