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Why public is being offered a piece of Nairobi Securities Exchange

By Lillian Kiarie | Published Tue, August 5th 2014 at 00:00, Updated August 4th 2014 at 22:31 GMT +3
Why public is being offered a piece of Nairobi Securities Exchange
Nairobi Securities Exchange CEO Peter Mwangi. [Photo: Lillian Kiarie/Standard]

Kenya: It is impossible to talk about the 60-year-old Nairobi Securities Exchange going public and ignore the man steering the ship, Mr Peter Mwangi, 44.

Mr Mwangi has done rather well for himself, working his way up from a nondescript village in Nyeri to head two multi-billion-shilling companies — Centum and the NSE.

The Alliance Boys alumnus studied electrical engineering at the University of Nairobi and graduated in 1993.

He later joined the Kenya Air Force and served for five years. He spent his downtime buried in finance books, studying to become a certified public accountant and certified public secretary. His first salary was Sh10,000 as a lieutenant in the National Youth Service.

With many opportunities available for a young graduate, why did you choose the Air Force?

As a boy, I thought they looked good in uniform and was intoxicated with the planes and the fighter jets ... they looked really good and I wanted to be part of this. I went in as a lieutenant and was promoted to captain. I didn’t stay long enough to climb up the ranks like my friend, Major General Ali, the former police commissioner.

Would you go back to the Air Force?

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Life has changed. I enjoy finance and plan to stay within the corporate scene.

So, what does demutualisation of the NSE mean?

Demutualisation is the process of separating the right to trade on the exchange from the ownership of the exchange.

This implies that we are changing the company from brokers owning the exchange and trading on the market to one where the right to trade on the exchange is separated from ownership. For instance, a random person, let’s call him Paul, can be a shareholder of the NSE, but not a broker or trader in the market. Paul can also be a trader at the NSE, but not a shareholder of the exchange.

The NSE will be trading at the NSE. What does this mean?

Yes. You know, this is a self-listing. We, as a demutualised entity, are now a company, just like any other one. We will be running our business and hopefully generate returns for our shareholders. The exchange as a business is now listed, but the only venue for listing is on the exchange, so it is a self-listing.

The road to demutualisation began in 2006. What led to this process in the first place?

The need to improve the level of corporate governance. The exchange is supposed to oversee the way the market is functioning, but if the people who are playing in the market are also the owners, there can be a conflict there.

This process addresses this conflict of interest and raises the standard of governance to improve transparency and make it possible for the exchange to raise capital and invest in platforms such as REITs [Real Estate Investment Trusts].

We will also be able to engage in mergers and acquisitions, as now we have a currency, shares, that we can use to make acquisitions.

We can also align the interests of the staff and management better as we can now give them employee stock ownership plans as incentives.

So why has demutualisation taken such a long time?

There are very many stakeholders — the Capital Markets Authority, Treasury, stockbrokers, the investment bank community and the internal management team —who needed to have their interests balanced. It is a legal process that needed much time to go through smoothly.

What does the NSE plan to do with the Sh627 million it is aiming to raise from this public offer?

We plan to upgrade the trading platform for equities and bonds, and support new products, such as ETFs [Exchange-Traded Funds] and REITs.

What key things investors should look for to judge if the NSE stock is a good buy?

First, investors should look at the business. Does the business have a good management team? Does it have a good track record? Has it been profitable? Has it been paying dividends? Does it have good prospects going forward?

In the case of the exchange, the answer to all those questions is yes; we have a splendid track record.

Secondly, is it being offered at a good price? At Sh9.50, it is an attractive buy, according to what it translates to as a price to earnings (P/E) ratio.

How does the stock exchange make its money?

First, from listings. The companies that have listed pay an annual fee. For instance, a company as big as Safaricom can pay Sh1.5 million per year, while the smaller companies pay between Sh500,000 and Sh1 million.

Listing is advantageous as a company is able to get a variety of tax incentives from the Government, access capital from the public at cheaper rates than credit from banks, and enhance its brand profile.

Secondly, we make money from the trading of shares. On every trade, we get about 0.12 per cent of the value.

For example, last year the volume of equity traded was Sh155 billion on one side — remember, we get fees from both sides as the seller and buyer each remit 0.12 per cent to us. So we had a turnover of around Sh310 billion.

On bonds, we get 0.04 per cent of the value of the bond that is trading.

We also charge for data vending, such as the live feeds television stations run. For instance, for foreign TV stations like Bloomberg, we charge about $1,000 (Sh87,800) a month.

The NSE share sale kicked off on July 24 and will close next Tuesday, August 12. Has the uptake so far been encouraging?

Yes. A large number of people have shown interest. We will release the results after the process is done.

The minimum number of shares one can purchase is 500, so with Sh4,750, you can be a shareholder of the NSE.

Are you happy with the number of Kenyans investing in shares?

We have almost two million Kenyans with accounts at the Central Depository and Settlement Corporation (CDSC), which allows them to trade in shares. With adults in Kenya at about 19 million, this is a good percentage. We also have local institutional investors, such as pension funds and insurance companies.

The NSE has also been attracting international investors, and last year, they made up about half of the trading volume.

There have been calls for a second securities market. What do you think of this?

Legally, the CMA can licence other exchanges, but it makes more sense to have one bigger market that is more liquid, as liquidity begets liquidity, attracting more players.

Why aren’t there more companies listing at the NSE?

The NSE requires companies to be well governed, transparent and reveal a lot of details, which many firms do not want to do. We are now being proactive in terms of innovating new products such as derivatives, REITs and selling the advantages of listing.

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