Washington Gikunju
17 December 2009
Institutional investors who lose money due to collapse of their stockbrokers or any other investing agent will not be entitled to compensation if proposed amendments to the Capital Markets Authority (CMA) Act are passed into law.
Any investor who loses money due to insolvency, winding up or fraud committed by a stockbroker and all other licensed investing agents is currently eligible for compensation from the Investors Compensation Fund (ICF).
But proposed amendments in the draft CMA Act 2009 exclude financial institutions, insurance companies, collective investment schemes and other categories of investors who are generally recognised as "institutional investors" from drawing compensation from the ICF kitty.
That leaves the "retail investors" as the only category of investors that can claim compensation for losses suffered due to failure or fraud by market intermediaries.
The current ICF regulations cap the maximum compensation payable per investor at Sh50,000 but the amount could also be revised.
"It is generally assumed that the professional investors have the capacity to make prudent investing decisions and can look after themselves," says Ray Astin of International Securities Consultancy (ISC) Ltd.
The Hong Kong-based ISC drafted the proposed amendments jointly with local law firm Kaplan and Stratton Advocates.
Market players have argued that it will be unfair to compel institutional investors to contribute to the ICF pool while they do not expect to get any compensation for losses incurred.
They include Ndung'u Gathinji of Drummond Investment Bank, Lucas Otieno of African Alliance Kenya Securities and Job Kihumba of Standard Investment Bank who were present at a stakeholders seminar called to discuss the new rules last week.
But Mr Astin said contribution is guided by best practice recommendations by the International Organisation of Securities Commissions (IOSCO) of which the CMA is a member.
The CMA uses allocations from new product listing charges and fees received from trading commissions in the secondary market to boost the ICF.
Though vital in restoring investor confidence in instances of market failures, critics have said the Sh50,000 compensation cap is too little and should, at least, be increased to match the commercial banks' depositors compensation ceiling of Sh100, 000.
But Mr Astin defended the limit saying regulators have to always maintain funds in the ICF kitty as "they are never sure what is coming round the corner."
The ICF has had to pay out an estimated Sh302 million to investors who lost money following the collapse of Nyaga Stockbrokers in March last year, and the kitty is also likely to come in handy in paying claims to investors who also lost following the collapse of Discount Securities Stockbrokers early this year.
About 90 per cent of the estimated 27,879 Nyaga claimants were expected to receive full compensation for their losses, but about 2,714 investors who lost over Sh50,000 only got the maximum amount allowed under the law.
The CMA estimated that Nyaga could have gone under with over Sh800 million of investors' funds, while there were allegations that Discount Securities had misappropriated Sh1.4 billion owed to the National Social Security Fund.
CMA financial statements for last year show the ICF had Sh227.5 million as at June last year up from Sh165.2 million held in 2007.
"If you are investing a lot of money please take caution to know your broker and his lifestyle," said the CMA chairman Micah Cheserem in September.
The draft law is being debated and the final document will be written and presented to Parliament.
The amendments seek to overhaul capital markets rules that were first enacted in 1989.
The capital markets will be regulated by two sets of laws, the CMA Act, which deals with establishment of the regulatory body, and the Securities Industry Act addressing trading rules.
The Central Depositories Act, which regulates custody of tradable securities such as shares and bonds, will also be amended.
Kenya's capital markets suffered a slump in investor confidence following collapse of Francis Thuo and Partners, Nyaga Stockbrokers and Discount Stockbrokers in a span of three years.
The current amendments are seen as the regulator's answer to legal loopholes that enabled brokers to sell investors' shares without their consent, a practice that is suspected to have been the main cause of the collapses.