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Bourse regulator seeks powers to discipline rogue bond dealers

By -James Anyanzwa | April 7th 2013 at 00:00:00 GMT +0300

By James Anyanzwa

The Capital Markets Authority (CMA) is seeking more powers to discipline errant bond dealers and to restore stability in the bond market whose investor confidence has been heavily shaken by reports of suspicious transactions.

At the same time the market regulator says it has lodged serious investigations into suspicious bond deals, which has shocked the investing fraternity to the nerves.

“We are in the process of mitigating the bond market against any form of malpractices. We want to make sure that every loophole is closed and those dealers who engage in misconduct will be dealt with in accordance with the law,” chairman Kung’u Gatabaki told The Standard On Sunday, adding that, “Severe measures will be taken against the culprits.”

“Strengthening of the bond market is my main agenda for this year,” he said. CMA has also revealed plans to restructure the entire local capital markets to make it a powerful instrument for the government’s long term funding requirements.

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Master Plan

The authority says it is assembling a five to 10-year master plan that seeks to attract new players and introduce more investment products in the market.

Faced with increasing expenditure needs due to the devolved system of governance, the Government is eyeing the money market to fund the glaring budgetary deficit.

The situation has further been worsened by the Kenya Revenue Authority (KRA)’s failure to meet its revenue collection targets as result of a decline in revenues in all major tax divisions including Value Added Tax (VAT), domestic excise duty, trade taxes and petroleum taxes.

The delayed enactment of the VAT Bill has also denied the taxman an estimated Sh11 billion.

“We want to have a regulator that has so much powers and ability to bring many products into the market,” said Gatabaki. The growing appetite for debt papers has raised the profile of the fixed income market.

CMA reckons that the key to access capital for long-term investment lies with the development of the secondary market for fixed income securities.  However, this market has been noted to be illiquid and thus unattractive to investors.

To increase liquidity in secondary trading for both Government and corporate bonds, the CMA is also seeking to facilitate the trading of all listed fixed income securities both on and off approved securities exchange.

The CMA expects the proposed trading model to have a trigger effect of increasing primary issues of bonds resulting in improved access to long-term capital for development.

An alternative platform for trading bonds is widely expected to increase overall liquidity, open the market for more players as well as enhance efficiency in bond trading. Currently, shares and bonds are traded through the NSE.

 “We want to make the local capital markets a strong source of funding for the Government’s infrastructural projects through the strengthening of the bond market,” said Gatabaki.

“We are in the process of investigating malpractice in the bond market and once this investigation is finalized stern measures would be taken against individuals involved.”

Over the years there have been a number of initiatives that have been undertaken to increase liquidity in the bond market including automation of the bond trading.

Treasury and Corporate bond settlement cycles at the bourse have dropped to three days after the day of agreement (T+3) following the automation of bond trading and subsequent immobilisation of the securities by all issuers.

Uncertainties linked to the manual-trading environment previously resulted into longer settlement cycles of T+6 or T+8.

The performance of the bond market has partly been affected by among others, increased competition from direct bank lending as a debt option, low culture of credit rating bond issues and low investor awareness and financial literacy levels among issuers and investors.

Last year the Nairobi Securities Exchange (NSE) working with international Index provider FTSE Group launched the FTSE NSE Kenya Shilling Government Bond Index. Funding of the county government and particularly the ballooning wage bill has been a major concern to the private sector fraternity, policy makers and even to the international community.

According to Treasury, the Government’s wage bill has increased substantially with the public sector wage bill rising at an annual average of 13 per cent over the last three years.

 In this current financial year, the wage bill increased by 30 per cent, largely due to hefty wage awards to teachers, lecturers, heath workers, and the police.

Kenya’s public sector wage bill has been ballooning out of control for years and the creation of new offices as Kenya switches to devolved Government is expected to exacerbate this problem.

It is estimated that hat more than 70 per cent of all public expenditures typically goes towards recurrent expenditures during every financial year.

However, reliance on donors and other external sources to finance development projects has come under scrutiny .

The Capital Markets Authority (CMA) bond dealers
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