CMA regulatory actions should uphold shareholder interest but is that the case?

CMA regulatory actions should uphold shareholder interest but is that the case?The Public Watchdog returns to Kenya’s capital markets at a time of increasing concern over whether or not the regulatory actions of the regulator are upholding the interests of shareholders or undermining them in a manner that could see listing of companies dwindling or worse still, existing ones delisting.Further, investors in the capital markets now feel that regulator Capital Markets Authority’s (CMA) interventions are either coming too little, too late, are misjudged or lack the necessary depth and breadth to engender investor confidence.Why? Some of the listed companies have been suspended for over 60 days, e.g. CMC Motors Group. What does this portend to investors and liquidity of tradable securities?Worse still, investors have lost hundreds of millions of shillings, nay, billions of their investments in the form of failed transactions due to fraud involving some rogue firms such as Nyaga Stockbrokers and more recently, Discount Securities.Complexities of riskLast week CMA Chief Executive Stella Kilonzo announced that the authority’s Compensation Fund — the equivalent of banks’ Deposit Protection Fund, but which is poorly funded — would pay investors, including National Social Security Fund (NSSF) an amount of Sh50,000 in phases with respect to the winding up of Discount Securities. The NSSF alone lost over Sh1.2 billion, in a transaction involving Discount Securities and which represented a substantial loss of pensioners’ funds. But have we drawn any useful regulatory lessons?Public Watchdog believes that we have learnt absolutely nothing, given successive market failures! This explains why investors have reacted to CMA’s payout announcement with jeers! Yes jeers! Not Cheers!What, then, are compelling issues?First, the pertinent questions remain: Does CMA have regulatory capacity for those charged with the task of market oversight — supervision, compliance and enforcement? Has the regulatory regime failed to grow in tandem with market dynamism and management of complexities of risk? Or is it a combination of all these? What has CMA done against those responsible for the supervisory and compliance functions when the stockbroker went under? Who were they? Is it high time we audited the regulatory performance of CMA to determine appropriate responses, including gullibility, review of management, performance, capacity and appropriateness or otherwise of its leadership?We must ensure all market operators satisfy the proper criteria and that CMA is free of vested interests and is capable of reining in those who seek to undermine market confidence. In fact, we cannot afford a business-as-usual attitude, or cosy relationship with the regulated. This remains a sticky situation facing CMA as it seeks to confront emerging regulatory challenges and engender public confidence in the capital markets.Secondly, CMA must rethink its regulatory approach of listed companies at the Nairobi Securities Exchange (NSE). How? It is unwise to suspend trading in listed companies shares for several months in the name of protecting investors, as prolonged suspension undermines rather than engender investor confidence. How can investors’ interest be assured in a situation where liquidity is undermined? It is instructive that the regulatory window of suspension was intended to allow for prompt interventional measures such as dealing with price-sensitive information, including any investigative actions. Hence it must not be seen as sustained punitive actions. Further, CMA must not and cannot arrogate itself the right of shareholders with respect to removal or suspension of directors of listed companies, as listed companies are not directly subject to statutory actions applicable to licensed entities. Thus, any intervention by CMA must be through regulatory listing rules that firms accept as part of listing requirements and/or corporate governance regulatory issues. Thirdly, CMA’s enforcement actions on listed companies must be with respect to insider trading matters, for which CMA can prosecute gullible directors. In the case of Management and Board of Directors disputes, the best that CMA can do is direct the listed company to convene an Extra-Ordinary General Meeting of the company to deal with such issues under the purview of shareholders — and only shareholders.In case the regulator seeks to be progressive, it must issue regulations on what constitutes a fit and proper criterion for holding directorship in public listed companies consistent with the law and the Constitution. Anything else is challengeable in court. Thus, the regulator’s attempt to remove directors of CMC Motors Group was ill-advised and instead it should have required the directors to hold a special meeting of company to resolve the issue. Consider delisting?It is needless to state, however, that if the directors have violated the laws, they remain subject to Kenyan laws, same as any other person.Finally, the market regulator must be reminded that the issue of listing of shares is a voluntary action and many companies could consider delisting, if such continued listing obligations become onerous and/or are seen to be unreasonable regulatory intervention. As it is, there are many large companies that have avoided listing purely on account of public scrutiny, leave alone regulatory and disclosure obligations.The new chairman of CMA, Mr Kung’u Gatabaki, is a distinguished corporate director of high standing who has himself witnessed first-hand corporate shenanigans and should appreciate private-sector views on listing and governance, as this is a matter of compelling public interest! The author is an opinion leader who prefers to remain anonymous. Comments and suggestions to publicwatchdog@standardmedia.co.ke

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