IS UHURU KENYATTA FIT TO RUN THE TREASURY?

SUNDAY NATION
NAIROBI, KENYA
By MUNA WAHOME
April 11 2009

Hope for a quick fix for the Nairobi Stock Exchange’s credibility problem is slowly fading, despite earlier tough talk from Treasury.

Efforts to reconstitute the boards of Nairobi Stock Exchange and the Central Depository and Settlement Corporation by Finance minister Uhuru Kenyatta may take months to produce results.

The move was largely read as intended to defang powerful brokers infesting the NSE and entrenched at CDSC. However, a tiff between CDSC and expansionist retail bank, Equity, in which the latter was briefly ejected from the trading floor last week, was interpreted in some quarters as a sign that broker influence remains intact.

“Our articles and memorandum of association clearly state how a member of the board can be replaced,” said a board member who can’t be named for fear of antagonising the minister. In reality, Mr Kenyatta may watch from the sidelines as the board convenes to elect directors in about a fortnight. Nevertheless, his demands are set for discussion at the annual general meeting on April 30.

Practically, the minister’s wish can only be granted if there is demutualisation of the NSE which, going by the precedent of Malaysia Stock Exchange that transformed itself into Bursa Malaysia in 2004 after a two-year process, might take time.

Demutualisation is the process of opening up ownership, in the case of NSE, to non-brokers. “We expect it to be completed at least by the end of this year,” CMA chief executive Stella Kilonzo said recently. “We have set up a demutualisation committee which is something we need to fast-track. It is really urgent.”

The NSE meeting is set to discuss, and possibly approve, a report prepared by a consultant also looking at the value of the bourse, according to the non-broker director. The committee referred to by the CMA boss was set up by Treasury with funding from the UK’s Department for International Development and the World Bank long-term lending arm, the International Development Association.

Despite strong suspicion that brokers call the tune at the NSE, few actually sit on its board, and as a matter of fact, some of the characters people have in mind when talking about cartels no longer occupy board positions.

Their interest

Broker representatives include chairman James Wangunyu (Standard Investment Bank) and his deputy, Bob Karina (Faida Investment Bank), and Stanley Ngaine of Sterling Investment Bank.

Other members are Kenya Electricity Generating Company chief Eddy Njoroge, Retirement Benefits Authority CEO Edward Odundo, Investment Secretary Esther Koimett, NSE chief Peter Mwangi, Lutaff Kassam and Andre DeSimone.

The 20 members elect the board, and presumably the directors are unlikely to act against their interest, which in reality is what demutualisation seeks to address.

CDSC is a different kettle of fish from shareholding that Treasury may find harder to influence, especially with the preponderance of brokers on its board in mind. Bourse entities hold 43 per cent shared by NSE (20), lobby Association of Kenya Stockbrokers (18), Uganda Securities Exchange and Dar es Salaam Stock Exchange, 2.5 per cent each.

Of the balance of 50 per cent, 10 per cent is owned by East African Breweries with the remainder shared equally (5 per cent) among EADB, Centum, KCB, CBA, CFC, Old Mutual Asset Managers, and insurers Jubilee and Apollo.

Chaired by Charles Ogalo of fund manager, Genesis, directors include Dyer & Blair chairman Jimnah Mbaru, Mr Wangunyu, Mr Karina, Mr Mwangi, Ms Pauline Nyamweya, former CFC boss Madhabushi Soundararajan, Mr A. Shah, Tanzanian Jonathan Njau and Ugandan Simon Rutega, bosses of their respective exchanges.

In view of the configuration of both firms, it is hard to imagine what kind of reconstitution Mr Kenyatta could effect, even with the bureaucratic muscle of the Capital Markets Authority. Indeed, a solution to the confidence problem may lie in addressing the dismal failure by the regulator CMA, a parastatal under Treasury, to carry out its mandate, or NSE should be demutualised.

Those opposed to demutualisation point to the New York Stock Exchange, which has avoided this route and runs efficiently under the close watch of the Securities and Exchange Commission. “It is important that demutualisation takes place so that we can go public and allow more members to choose directors,” Mr Wangunyu told Sunday Nation.

Demutualisation would drastically reduce shares of the brokers, a good number of whom have in recent years converted into investment banks, at the NSE. The bourse depends on the commission levied on every transaction that takes place there.

A port two years ago by consultant firm KPMG suggested splitting the shareholding into four equal lots with one part reserved for brokers. That is even meaner than in the case of Malaysia where 30 per cent each was awarded three groups: brokers and remisiers (stock agents); the government; and the Capital Markets Development Fund. KPMG proposed the self-listing of the bourse and sale of some shares to the public.

Conflict of interest has characterised the NSE with its directors battling for business while making crucial decisions affecting all, including rivals. Demutualisation has become fashionable as bourses seek mergers and acquisition and expansion of their business, with technology facilitating geographically limitless and seamless operations.

Quite unsurprisingly, 89.6 per cent of market respondents in the KPMG study identified brokers as responsible for the low rate of confidence. Francis Thuo & Partners, Nyaga and lately Discount Securities have all collapsed in a heap due to mismanagement, at times including irregular sale of customer shares. The NSE share index has followed suit.