allAfrica.com: Kenya: End of an Era Nears for Barons of NSE (Page 1 of 2)

The glory days of a few stockbroking barons who overshadowed the affairs at the Nairobi Stock Exchange for much of its 54-year existence are headed for an abrupt end.

In comprehensive reforms meant to renew confidence in the capital markets, the Capital Markets Authority (CMA) is now pushing for new laws that will limit the maximum shareholding an individual can own in an investment bank to 25 per cent and increase the minimum capital to Sh250 million from Sh30 million. Stock dealers will require a minimum capital of Sh20 million, up from Sh10 million.

These rules, which Finance minister Amos Kimunya is expected to introduce in the Budget next month, will have major implications in this sector because most brokerage firms are family owned with founders holding huge shareholdings.

These family businesses owned and controlled the Nairobi Stock Exchange because they owned a chair, which gives them a seat of the board.

It is through this avenue that some stockbroking firms, epitomised by Dyer & Blair Investment Bank, have attained a larger-than-life image and have come to wield a lot of influence in the Kenyan capital markets. Dyer & Blair is one of Kenya's oldest and biggest brokerage house with an estimated share capital of one billion shillings.

Acting CMA chief executive, Stella Kilonzo, has called on all stakeholders and the general public to give their feedback on the proposed new rules and regulations within the next one month. With the new rules aimed at improving corporate governance in the sector-more in line with what has happened in the banking and insurance industry-family businesses will be forced to sell to outsiders to reduce their shareholding to 25 per cent.

The increase in minimum capital will come as an additional burden that could force the hands of many small brokers whose investors cannot raise money easily.

Due to the unique monopoly that a stockbroker's licence brings, it is expected that some of the big firms may consider listing their shares on the NSE through IPOs while others will be forced to do trade sales by selling huge stakes to commercial banks, a strategy that has been used by Solid Investments in a deal with NIC Bank.

Other brokers will be forced to sell to private equity funds or raise money from a motley of investors.

The measures are meant to inject a new dose of confidence in the stock exchange after widespread abuse of fiduciary role player by brokers left investors in grief over unauthorised sale of shares, disregard of instructions and delayed payments of proceeds from share sale.

The abuses and lack of internal controls have seen two brokers -Francis Thuo last year and Nyaga Stockbrokers two months ago - go under in circumstances that would have been avoided were ownership and management of stock brokers separated.

Under the most comprehensive reforms to the Capital Markets Act since CMA was established in the early 1990s that were floated on Friday last week, individuals will not be allowed to hold substantial ownership of stockbrokerage, investment bank and fund management firms.

The new rules interpret substantial ownership as "having a direct or indirect beneficial interest of more than 25 per cent of the issued share capital of a licensed institution."

Almost all the 25 licensed stockbrokers and investment banks are family owned businesses, with the exception of a few that have over the years hired professional management teams or those that have been bought out by bigger institutions.

The latter include Renaissance Capital that bought out Francis Thuo Stockbrokers last year, NIC Capital Securities that bought out Solid Investment Securities early this year, Barclays Financial Services (investment bank) and CFC Financial Services, which are publicly listed companies.

Under the rules, shareholders, directors, chief executives and key management staff of CMA licensees will be subjected to a "fitness" test by the capital markets watchdog, while management and ownership of licensed institutions shall be separated.

Persons previously convicted of economic crimes will not be allowed to own or control CMA licensed institutions that handle public funds as part of the "fitness" test if the proposed rules are enacted.

The wide ranging and potentially controversial amendments will in effect force stockbrokers to sell up to 75 per cent of their businesses to new investors over three years.

The disposals are expected to be motivated by another amendment that requires about 20 out of the 25 CMA licensed stockbrokers and investment banks to raise their minimum paid-up capital within six months of the measures being enacted.

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