Five investment banks become stockbrokers after demotion

By James Anyanzwa

The Capital Markets Authority (CMA) has officially downgraded the investment banking licences of five investment banks to stockbroker level.

The market regulator has also put Equatorial Investment Bank on conditional licence, and revoked the trading permit of Africa Alliance Kenya Securities, and Africa Alliance Kenya Management. Trading licences for two investment advisers (Equilibrium Capital and Finconsult) and an authorised Depository institution—Dubai Bank Kenya— have also been cancelled.

In a gazette Notice No 4937, the Authority reduced Africa Investment Bank, Drummond Investment Bank, Kestrel capital (EA), Apex Africa Investment Bank, and Sterling Investment Bank to stockbrokers.

"The licensees are in the process of effecting a change of name to reflect their license status as stockbrokers. Accordingly, this change of name shall be posted on the Authority’s website," said Stella Kilonzo, CMAs chief executive.

Although the reason for the demotion was not clearly spelt out, speculations point to the inability of the affected firms to meet the new capital requirements. The CMA revised minimum capital limit for market players after a string of four stockbrokers collapsed due to financial difficulties.

Operating license

Under new laws, investment banks are required to raise their minimum capital to Sh250 million, from Sh30 million, while stockbrokers are required to increase their capital to Sh50 million, up from Sh5 million, by the end of March in order to acquire an operating licence.

Ms Kilonzo, however, said CMA was satisfied with the high level of compliance in terms of share capital requirements for stockbrokers and investment banks. In a statement on Wednesday, Kilonzo said CMA is on-course to roll out internal control and risk management guidelines, and risk-based capital adequacy requirements this year, as part of the Risk-Based Supervision model adopted by the Authority last year.

"The approach puts emphasis on identification of emerging risks and assessing the adequacy of each intermediary’s risk management systems on a continuous basis," she said.

Players who revert to offering stockbrokerage services will miss out on the lucrative business of being transaction advisers in major transactions at the bourse; such as initial public offerings (IPO), rights issue, mergers, and acquisitions, which diversify their sources of income and increase the firms’ value.

Investment banks are also allowed to trade with their own money, and earn margins on transactions, although stockbrokers are also allowed to acquire dealership licenses at an extra cost.

Advisory services

Stockbrokers generate revenue from commissions charged on transactions and advisory services.

"In exercise of its mandate as outlined in the Capital Markets Act, the Capital Markets Authority has finalised the licensing process of market intermediaries for 2011," said Kilonzo.