Unresolved regulatory matters keep NSE investors guessing

By Jackson Okoth and James Anyanzwa

Capital Markets Authority (CMA) is yet to give its verdict on a dispute involving Equity Bank and the Central Depository and Settlement Corporation (CDSC).

The row is the latest among unresolved cases dogging the Nairobi Stock Exchange, and have left investors in a quandary over CMA’s regulatory effectiveness.

Shareholders of Carbacid Investments and BOC Gases are yet to smile, more than three years after CMA suspended shares of the two firms from trading at the bourse.

Their complaints, which are fuelled by lost opportunities during the stock market’s bull run (2006 to 2007), could stretch even longer than expected, owing to protracted legal battles between CMA and its tribunal over the merger proposal.

A dealer at the Nairobi Stock Exchange. Some investors are yet to be compensated after the collapse of three stockbroking firms.

Carbacid and BOC Gases shares were suspended from the Nairobi bourse on December 5, 2005, after CMA ruled against the takeover deal.

Carbacid has continued to request CMA, in the interest of majority shareholders of both companies, to lift the suspension.

More than a month ago, CDSC suspended Equity Bank’s Central Depository Agent (CDA) licence and stopped its transactions on the trading floor only for the decision to be overturned a few hours later by CMA.

While both parties have made their submissions to the authority for arbitration, the two weeks timeline given by the regulator has since expired.

At the centre of the row is a colossal Sh47 million which CDSC claims Equity collected from customers during the Safaricom Initial Public Offering (IPO), but never remitted to the corporation.

This was while lending to its customers to buy into the IPO, using shares as security. CDSC claims that Equity was not paying the lien (charge) to the corporation.

Equity, which has about 400,000 CDS accounts, argues that these IPO loans were all unsecured.

"What we have been offering is unsecured loans to customers, based purely on trust and knowledge about our clients, as per the bank’s business model," Equity CEO James Mwangi told a press conference when the row erupted early last month.

CDSC charges Sh1,000 for shares used as security to borrow from banks, a fee that Equity insists it has not been charging clients.

single regulator

With both bank and central depository licences, Equity says that CDSC has no jurisdiction on how the bank should lend to customers.

Should CMA suspend Equity’s depository licence then investors whose shares are held by the bank may not be able to trade as they move their investment to another institution.

Stella Kilonzo, CMA chief executive.

There is no single regulator for the financial sector, creating a breeding ground for potential conflicts between banks and stockbrokers.

As matters stand, Equity has been able to ride on its banking licence to pay investors immediately, hence giving brokers a run for their money, because they pay clients after five days.

How this row between the two parties is resolved will set precedent and will send signals to other commercial banks on how to conduct their trading at the NSE.

CDSC says that as depository agent, Equity Bank can only lend to small investors, after receiving security and charging lien.

But cutting corners round this is the bank’s move to spare small traders the inconvenience of (paying) legal charges or lien on their shares.

Concerns are now building over the capacity of the CMA to resolve disputes quickly, in a bid to minimise economic losses that accrue to stock market players and investors. But when contacted by the Financial Journal for comments, Ms Stella Kilonzo, the CMA chief executive allayed the fears saying the matter was still under arbitration.

"As you are aware the arbitration on this matter is ongoing and I wish to comment no further on this matter as doing so may prejudice the interests of all the parties," said Kilonzo.

investors’ money

An apparent delay by CMA to resolve this matter comes at a time when investors and stakeholders are staring at the regulator to restore confidence in the market, after three stockbrokerage firms collapsed with millions of shillings of investors’ money.

Ms Mambo, CDSC chief executive.

Last week, the CMA established a fraud investigation unit with a view of strengthening its market supervision capacity.

But whether establishment of the unit will calm the nerves of investors, especially those still chasing money owed them by collapsed Nyaga stockbrokers and Discount securities, remains to be seen.

"I am still waiting to be paid Sh800,000 that was lost when Nyaga Stockbrokers sold my KCB and Barclays shares, without my consent," Ms Charity Mukami, a retired civil servant living in Thika told FJ at a Barclays annual general meeting in Nairobi last week.

Trouble for Mukami, aged 63, begun when she discovered her KCB shares missing when she visited Nyaga in October 2007.

Although Nyaga apologised for the error, and later informed her that the said shares had been ‘bought’ back, she later discovered a different story.

Not only were the KCB shares sold again without her consent, but also her 8,700 Barclays shares went missing. Although CDSC has assured her that she will not lose her investments, she is yet to be paid a cent by the receivers.

" I would have got a cheque worth Sh13,500 in dividends today. But now, I will only be paid Sh60. This is the pain we are going through," said Mukami.

Also at the end of the road is Mr Simeon Mirau, a Barclays shareholder from Nyahururu, who is owed Sh 603,747.95 for his shares, which disappeared at Nyaga.

statutory management

A damning forensic audit report by the PricewaterhouseCoopers on Nyaga stockbrokers, which is yet to be made public, revealed the institution was insolvent to the tune of Sh1.3 billion.

Francis Thuo & Partners collapsed in 2007, while Nyaga Stockbrokers and Discount Securities were placed under statutory management last year after their managers were found to be selling their clients’ shares without consent.

The fate of investor funds locked up in Nyaga and Discount Securities is yet to be determined.

While the statutory management period for Nyaga expired more than eight months ago, investors are still in darkness over when they could be compensated. CMA, however, insisted it was still working on the procedures of settling the claims.

"The modalities of payments to Nyaga are being worked on and we will advise on this in due course," said Kilonzo.

Francis Thuo and Partners, a much smaller outfit compared to Nyaga's clientele base, went under with about Sh140 million of investors' money, which the NSE settled through the unprecedented auction of the broker’s seat at Sh251 million.

The unexpected catastrophe on the equity market, prompted mainly by global financial unrest, and unethical behaviours of certain brokerage firms has seen retail investors exit the market while institutional investors reconsider their investment strategies.

Reduced activity at the bourse have resulted in low turnover and poor commissions forcing market intermediaries to engage in cost cutting operational measures including staff layoffs and closure of branches.

Although global financial crisis has impacted negatively on the stock market, corporate governance issues have been widely blamed for the woes in the industry.

The total investor base, which climbed to about 1.5 million after the listing of Safaricom, has rapidly shrunk to less than one million following massive exodus of retail and foreign investors from the bourse.

While the establishment of a fraud department could enhance the authority’s capacity to deal with fraudsters, market intermediaries single out investor confidence as very critical to the recovery of the market.

 

 

Read all about: NSE Stella Kilonzo Central Deposit ory

 

 

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