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Kenya: At NSE, Players Set the Rules
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The Nation (Nairobi)
28 March 2008
Posted to the web 28 March 2008
Wachira Kang'aru
Nairobi
Is rapid growth returning to eat its own babies or is it a case of biting too much? Is regulation too weak to run the market or is the regulator too cozy with the players?
These are some of the questions that are emerging as capital markets regulators come to terms with the collapse of Nyaga Stockbrokers, barely a year after Francis Thuo & Partners went down under similar circumstances.
Many of analysts believe the root cause has been the insatiable hunger for growth without proper checks and balances. It helps little that the two companies followed almost the same script on their way down.
"We are very slow in learning and have refused to be our brother's keepers," says Mr James Murigu, the chief executive of Suntra Investment Bank.
With the huge appetite came uncontrolled expansion, either in branch network or in staff, putting a strain on the operating costs, which in turn has squeezed cash flow.
Investment banks
This is a trend mirrored in the recent quest by some companies to convert from stockbrokerages to investment banks. The former requires Sh5 million as minimum capital base and accords the licence holder authority to buy and sell shares and debts on behalf of clients.
A stockbroker gives advisory services as part of business and is not expected to charge fees. In contrast, and perhaps the reason for the push to upgrade to investment banks, the licence allows the holder to charge fees on advisory services and is a measure of capacity to offer services in companies seeking listing at the market.
"The licence encloses stockbrokerage services plus dealing, which involves buying and selling shares on own account," Mr Murigu says. In simple terms, Mr Murigu says, an investment bank is a higher stage of a stockbroker, at a cost of Sh30 million as minimum core capital.
In December last year, the number of investment banks increased by four and, by February, the Capital Markets Authority had written to some asking them to comply with the licence requirements.
Despite securing licences to upgrade, they were yet to put in money to meet the obligations. The other is an inherent problem deeply rooted at the Nairobi Stock Exchange (NSE) and the way it is managed.
The fact that those who own it - the members - are the same people who manage it help little in avoiding conflicts of interest. Unlike the normal companies, the NSE is a limited liability company by guarantee and not shares.
"Separation of management from ownership is very critical to the wellbeing of the industry. The sooner we do it the better," says Mr Fred Mweni, the managing director of Tsavo Securities.
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Demutualisation
Even Mr Kassim Bharadia, his counterpart at Apex Africa Investment Bank, says that, or what's is technically referred to as demutualisation, is long overdue. "It is time," he said "we brokers rose above our ambitions and let outsiders manage the NSE."
With the players refereeing their own game, analysts say the 2002 licensing regulation promulgated under the CMA Act requiring the NSE to set its own code of conduct to regulate its members is nothing but a sham. "That is there, but the problem is enforcement," observed Mr Mweni. "NSE, which puts up these rules, is managed by the same stockbrokers and you can guess how those rules are enforced."
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