NSE feels the weight of huge investor accounts

By Morris Aron

The large number of investor accounts at the Nairobi Stock Exchange (NSE) could be a thing of the past as market players seek ways to reduce them.

Statistics show there are about 1.3 million retail investor accounts.

The number is huge compared to South Africa’s Johannesburg Stock Exchange, which has a market capitalisation of Sh52 trillion — 66 times the value of NSE —which just has 100,000 trading accounts, a figure which is less than a tenth of what NSE boasts of.

Brazil on the other hand has a bourse with a market capitalisation of Sh78 trillion — more than 100 times that of NSE — but trading accounts are less than less than half of what is at the Nairobi bourse.

"There are too many retail investor accounts considering the size of our market, a trend which presents both logistical and operational challenges," said Mr Peter Mwangi NSE chief executive

Analysts say that options to reduce trading accounts include consolidation and share buy-back. "But first, it is up to the individual companies to determine what numbers they are comfortable with," said Mwangi.

"We are not chatting any definite paths for companies to follow."

Consolidation is the process by which a company changes the structure of its share capital by reducing the number of shares it has in issue and increasing the par value of each.

A company with 100,000,000 shares might consolidate them on a 1-for-10 basis, reducing the number of shares to 10,000,000.

It is widely anticipated that Safaricom — which has more than 800,000 shareholders — could opt for share consolidation.

Market players

Another option at market players disposal is a concept known as share buy-backs.

Share buy back — the opposite of a share split — is when a company decides to repurchase stocks or bonds it has issued and in the process reducing the number of shares outstanding, giving each remaining shareholder a larger percentage ownership of the company.

Share buy back is outlawed in the Kenya although NSE has drafted proposals to amend the Company Act to allow for the buy backs.

"We have already drafted a legislation which aims to amend the law governing companies to allow for share buy-backs in future," said Mwangi.

"We are waiting for Ministry of Finance to take the Bill to Parliament for debate and subsequent enactment."

The new law is expected to become operational in the first quarter of 2010.

Investment analysts say the practice results in share price appreciation and less price volatility in the market.

"It has been noted that any attempts to reduce the number of share accounts in the market always leads to price appreciation and a reduction of market volatility," said Mr Lucas Otieno chief executive of African Alliance Kenya Securities.

Safaricom recently announced that it has accelerated its quest to reduce the number of shareholders. The decision was informed by logistical problems it faced in its first Annual General Meeting (AGM).

"We have made a proposal to our board of directors to allow us contract professionals to advice us on the options available in the market to reduce the number of shareholders," said Mr Michael Joseph Safaricom’s chief executive.

The firm went against traditional AGM practices in the country where companies provide their shareholders with transport, food and gifts to cut costs.

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