Regulator orders Equity Bank to pay CDSC Sh47m fee

The Capital Markets regulator on Monday ordered Equity Bank to pay fees for investors accounts that the bank helped finance during last year’s Safaricom IPO to the Central Depository Settlement Corporation (CDSC).

The Capital Markets Authority (CMA) has instructed the bank to pay the custodian of shares Sh47.7 million, ending a feud that has seen a battle between commercial bankers and stockbrokers over the control of the stockbroking business.

The source of the dispute was the demand by CDSC to be paid Sh1, 000 for every loan that Equity gave to investors who bought Safaricom shares on the strength that the shares which were under its watch were being used as security.

Equity Bank, on the other hand, refused to pay the charge on claims that the lending was unsecured, which led CDSC to suspended the bank from trading at the Nairobi Stock Exchange (NSE) for two weeks over alleged breach of regulations in April.

But CMA lifted the suspension and offered to arbitrate over the dispute.

On Monday, however, the capital markets regulator sided with CDSC: “I find that Equity Bank had a legal obligation to levy, collect and remit Sh1,000 on every finance account as lien due to CDSC,” said the CMA Chief Executive, Ms Stella Kilonzo.

“I hold that all the sums that Equity Bank was legally bound to collect on behalf of the CDSC must be paid to CDSC forthwith.”

The move is set to ease the tension that had built up between the two regulators after the CMA ordered that Equity Bank’s licence be reinstated a day after CDSC had suspended the bank.

On April 8, 2009, CDSC had suspended Equity’s custodial licence over failure to settle a Sh47.7 million debt that CDSC said it had refused to pay since last year’s sale of Safaricom shares.

While the custodial and investment banking licences allow Equity Bank to offer advisory services and hold cash for its clients, the responsibility of executing buys and sells at the stock market still rests with existing market players since the bank does not hold a brokerage licence.

When issuing loans to investors to buy shares, banks use the very shares as security. The bank offered its clients easy loans against which to buy a piece of the mobile phone services operator.

In order to freeze the shares not to be tradable by the client, the bank has to apply to the CDSC. For the transactions, the CDSC charges Sh1, 000 per loan. To trade shares at the local stock market, investors need to have a central depository system (CDS) account, operated by the CDSC.

In April, 2009, when demanding reinstatement of Equity’s licence, Ms Kilonzo had argued that her counterpart at CDSC, Rose Mambo, had not followed due process.

But Ms Mambo, the CDSC’s chief executive, maintained that Equity’s agency would remain suspended until the arbitration was completed, accusing Ms Kilonzo of acting outside her mandate.

Ms Mambo said reinstatement of Equity’s licence would undermine the regulatory framework and curb CDSC’s ability to regulate the market in so far as the Central Depository Agents are concerned.

CDSC said it had acted within the provisions of the CDSC Act and had given Equity Bank adequate notice through letters copied to both the NSE and the CMA.

On Monday, Ms Kilonzo said Equity Bank in its letter of offer during the Safaricom IPO stated that the Safaricom shares would be used as security although not as the primary security.

“However, Equity Bank had the intention to create a security and they did so through the required custody service agreement with its customers,” Ms Kilonzo said, adding that the lien charged by Equity bank should be remitted to the CDSC.

Equity Bank had defended itself saying the suspension was on too short a notice.“The suspension was an arbitrary action as result of us lending to small investors,” said Mr James Mwangi, the CEO of Equity Bank, adding that the bank had extended unsecured loans of less than Sh1 million to investors seeking to buy stocks.

By standing its ground, the CDSC had locked out 400,000 retail investors who buy and sell shares through the bank. CMA had argued back in April that it had blocked the suspension order to protect investors, a view that the CDSC discounted.

Ms Mambo, however, said the CDSC had helped the CMA deal with investors claims following the collapse of Nyaga Stockbrokers and Francis Thuo and expected similar support from the CMA.

Equity Bank is said to have 400,000 of the CDSC accounts estimated at 1.6 million after the Safaricom IPO.