Tuesday, October 14, 2008



OCTOBER 14 2008

Monday’s press briefing by the Capital Markets Authority (CMA) and the Nairobi Stock Exchange (NSE) did little to redeem the regulator’s battered image.

Prior to the press conference — hastily cobbled together at the last minute by the two — copies of a letter from advocates representing a well-known stockbrokers’ agent, had been e-mailed to newsrooms. In it, the lawyers threatened legal action against any newspaper that printed what it termed as "unconfirmed rumours" it said were doing the rounds, that their client was in financial distress.

Soon afterwards, two public relations agencies representing the CMA and NSE called newsrooms separately to announce the press briefing. Both seemed unaware that it was a joint press conference as they lobbied for coverage of their client. The two institutions announced that Discount Securities had been placed under independent management as provided for in the CMA Act.

Monday’s events only served to demonstrate there is something fundamentally wrong with the way our capital markets are run. We acknowledge the stock market has come a long way since 2001, when a study by the Institute of Policy Analysis and Research found that out of 24 firms in its survey, none had ever applied to list at the stock market for a variety of reasons. Between 2003 and last year, the market has been very active and investor appetite for equities was high.


That has since changed, with the 20-share index falling below 4,000 points last week, and Safaricom’s share price decline pulling down the market. What appears not to have changed is perception of CMA’s effectiveness as a regulator.

Up to 72 per cent of the firms in Mbui Wagacha’s research rated the CMA lower than the NSE in terms of management. With yesterday’s action, and in light of the collapse of Nyaga Stockbrokers, Francis Thuo and others, the regulator is not looking good at all in the court of public opinion. The action taken looks more like a slap on the wrist to an errant player, said to have been experiencing serious "corporate governance" issues. CMA appears to have abrogated its mandate to instill discipline in market players and protect investor funds.

This role may have been ceded to an exclusive club of brokers that currently wields immense clout over the stock market, both in terms of business transacted, and decisions made. That same clout appears to extend to the regulator. As a result, serious irregularities are being swept under the carpet every day.

We expected CMA to issue a comprehensive statement on Thursday, when trading at the stock market had to be suspended for 15 minutes, after the index dropped below the red zone.

It did not.

Yesterday’s shenanigans were apparently prompted by media investigations into Discount Securities, whose cheques to clients have reportedly been bouncing. The other firm, whose lawyers may have unwittingly given reporters a heads-up on their client’s problems, will likely be next in line.

The Act gives CMA sufficient powers to get stockbrokers to toe the line, powers it has failed to exercise properly in the past. It protects it from legal action by any subject of a disciplinary case, allows it to overrule decisions by the NSE board and gives it plenty of leeway to impose sanctions on errant market players.

The CMA is not a toothless dog, far from it. It has an array of weapons it can use to ensure its subjects do not deviate from expected ethical behaviour.

These include levying of financial penalties, suspension from trading, public reprimands and disqualification of officials from employment at stockbrokerage firms.CMA can also ask the Attorney-General to prosecute those who commit offences under the Act.

It may be time for the Government to create a separate authority, something akin to the Energy Regulatory Commission to oversee the CMA and NSE.

The two institutions are apparently riddled with renegade elements that are not doing them any good.