Ngenye crisis stirs war of words at NSE

By James Anyanzwa

Friction has re-surfaced between the Capital Markets Authority (CMA), stockbrokers and investment banks over the mess in the stock market that has seen investor confidence ebb to its lowest.

Although stakeholders had agreed to jointly take steps to restore investor confidence, the recent collapse of a family-owned brokerage firm Ngenye Kariuki & Co Ltd has rekindled what appears to be an existing animosity between the market intermediaries and the regulator.

The resurgence of hostility comes barely a year after the chief executives of the CMA, Nairobi Stock Exchange (NSE), Central Depository and Settlement Corporation (CDSC) Ltd and the Kenya Association of Stockbrokers and Investment Banks (KASIB) met in Nairobi in July last year to map out a way forward for a struggling market whose NSE 20-Share index had dropped by 70 per cent since 2008.

"Our ailing economy has done little to improve the situation at the bourse. But we must act swiftly and forcefully to resuscitate the stock market, Michael Gichohi, chairman KASIB said last year.

The rare gathering was a milestone in the recovery of the stock market, which was and is still facing an all-time loss of investor confidence owing to peculiar behaviours by certain market

intermediaries.

Some investors have kited away their entire investment from the stock market due to the agony they undergo when seeking compensation after the collapse of a broker.

The NSE 20-Share index dipped by 35.3 per cent and 7.8 per cent in 2008 and last year respectively while the stock market turnover fell by 71.5 per cent to Sh27.7 billion last year from Sh97.5 billion in 2008.

The secondary bond market was relatively buoyant last year as investors’ risk appetite for equities remained low.

In the same period, the total bond turnover stood at Sh95 billion compared to Sh67 billion in 2008 and Sh85 billion in 2007.

The much-anticipated turnaround of the stock market has previously been weighed down by wrangles between the CMA, stockbrokers and investment bankers over the Safaricom IPO refunds and the regulators’ new market regulations.

But while there has been a whiff of optimism at the stock market due to expectations of improved earnings from listed firms, the closure of Ngenye Kariuki is a huge setback to the market that is still trying to come to terms with the collapse of three other brokerage firms — Francis Thuo & partners, Nyaga Stockbrokers and Discount Securities.

Predictably, KASIB reacted angrily to the takeover of one of their own by the CMA, saying the action was unjustified since it was not based on any evidence that the broker was indeed in a financial distress.

"What should surprise any observer though is that at the time of this action, there appears to be no evidence to support the conclusion that the firm is unable to meet its obligations to its clients," said Ms Jane Njeru, the association’s chief executive.

Njeru says the decision by the CMA exacerbates jitters in the stock market and destroys the budding investor confidence.

"CMA has seen fit to foment the situation by taking an action that exposes investors at the firm to huge opportunity costs, inconvenience and creates unnecessary anxiety about the state of the industry and the safety of their investments," said Njeru.

However, in a hurriedly convened press conference, Mr Wycliffe Shamash, the CMA-appointed statutory manager for Ngenye Kariuki highlighted the firm’s regulatory non-compliance issues.

These include negative working capital, weak financial base, overdrawing clients’ bank accounts, maintaining a bank overdraft facility above stipulated regulatory requirements, weak corporate governance and internal control.

Last year, CMA extended the firm’s licence to give it an opportunity to address its issues.

Although the firm was granted a licence on the indications that it was in discussions with strategic investors to strengthen its financial position, it was later suspended from trading at the NSE in mid November, last year after failing to confirm the negotiations had indeed been successful.

"Throughout this period, CMA has continued to receive complaints from Ngenye Kariuki & Co. Ltd clients of its inability to pay them as and when payment fell due," said Shamiah.

Shoved between a slow economy, unethical behaviours by market intermediaries and a crippling global recession, the NSE has been on a bear run, partly a spin-off from the botched 2007 polls.

A large proportion of retail and institutional investors have since fled the market after losing funds to the collapsed brokers and to Safaricom stock, which fell below the IPO price.

But market signals indicate the worst may be coming to an end for the 56-year-old bourse.

In December last year, foreign investors began tiptoeing slowly into the market, stirring trade and setting off certain counters, particularly Safaricom shares to shoot above the Sh5 offer price for the first time in several months.

Fund managers are optimistic the renewed interest in the stock market by foreign portfolio investors, who were previously net sellers, could be sustained if the economic outlook continues to improve.

The stock market recovery this year merely hinges on the overall economic growth and it is widely anticipated the Government’s proposed fiscal stimulus package, if implemented, could shore up the economy and boost corporate earnings.

Improved rainfalls, recovery of the global economy, increased earnings, improved profits and higher dividend payouts are expected to positively affect prices of listed companies at the bourse.

International investors are expected to dominate the equity market until the second half of the year, although pundits are concerned that volatile political temperatures ahead of the much-touted constitutional referendum could stall the recovery process.

The equity market is also expected take an upward swing as foreign investors, seeking for higher returns, move back to emerging markets.

Also boosting activity at the bourse is the planned sale of the Government’s stake in several public-owned sugar millers, National Bank of Kenya and Consolidated Bank.

The Government will be offloading 19 per cent of its stake in several public-owned sugar firms through an initial public offer.

Fund managers have also cautioned that investors could remain cautious in the run up to the referendum and only a positive outcome of the process and a resolution of the post-election violence-related issues could provide a much-needed impetus to the market.