CDSC in the red after funding drops to a trickle

By Jackson Okoth and James Anyanzwa

The Central Depository and Settlement Corporation (CDSC) is sinking into financial trouble following the decline in the level of activities at the Nairobi Stock Exchange (NSE).

The company, which depends on income from equity transactions, has petitioned the Capital Markets Authority (CMA), demanding a review of the fees it gets from the regulator. CDSC wants either an increase in the proportion of its transaction levies, or permission to introduce additional charges to replenish its eroded reserves.

The CMA acknowledged receipt of CDSC’s proposal on the fee increment.

"CDSC just like the other licensed persons has submitted to the Authority a proposal on fees which is under review," the authority told The Standard in an e-mailed statement.

CDSC’s primary revenue streams include transaction and depository levies, meaning that any decline in the volume of activities on the bourse severely affects its earnings. Currently, CDSC earns 0.06 per cent as transaction levy from every equity transaction.

"CDSC has been in problems because of low activity at the exchange in the last two years," said a source, who declined to be named because of the sensitivity of the matter said.

Pressure for CMA to increase its funding to CDSC comes after more than two years of poor performance in the bourse.

Available figures indicate that transaction fee earned by NSE declined from Sh248.9 million in 2008 to Sh137.6 million by June last year. This is as a severe bear run, accompanied by the global financial crisis, took its toll on the bourse.

During the 2009 financial year, fee income declined to Sh265 million from Sh651 million earned in 2008, with the CMA recording a gross surplus of Sh56.5 million from Sh509.6 million made the previous year.

"It is possible for CMA to consider increasing its funding to the CDSC or allow the corporation to introduce new fees on clients," said a leading investment banker who requested anonymity.

Endure lean times

Most market players, including the CDSC, have had to endure lean times due to low turnover and depressed transaction levels at the bourse. Dwindled funding levels and strain has hit market players when CMA is working overdrive to compensate investors in collapsed Nyaga Stockbrokers, as well as reopening Discount Securities Limited, another stockbrokerage firm tottering on the brink of collapse.

CMA’S expenditure rose to Sh312 million, Sh121 million higher than in 2008, thanks to statutory management expenses for Nyaga Stockbrokers and staff expenses.

Figures indicate that the NSE 20-Share index dipped by 35.3 per cent and 7.8 per cent in 2008 and 2009 respectively, due to global economic recession and the local stockbrokers unethical behaviours.

The slow down in earnings growth of listed companies and relative higher returns available from fixed income securities reduced the appetite for equity investments by domestic investors.

Consequently, the stock market turnover plummeted by 71.5 per cent to Sh27.7 billion in 2009 from Sh97.5 billion in 2008, as retail investors fled the market, while others scampered for safety in less volatile bond market.

However, fuelled by improved corporate earnings and promising economic outlook, the local equity market has started rebuilding momentum for another take-off.