13 February 2010
Nairobi — The full extent of the financial deficit at stockbroker Ngenye Kariuki Stockbrokers is emerging as the stockbrokerage fraternity went for a rare public brawl with the regulator, the Capital Markets Authority (CMA).
A day after lobby Kenya Association of Stockbrokers and Investment Bankers (Kasib) issued a clearly belligerent statement against the CMA's move to put the ailing intermediary under statutory management, the regulator also appeared to be digging in for a fight.
Communication seen by the Sunday Nation indicates that CMA thinks the problems at the broker, one of a few not to convert into a so-called investment bank, runs deeper than media reports suggest.
By November 2009, Ngenye Kariuki, going by the regulator's assessment, was "insolvent and illiquid" by a whopping Sh227 million. That meant the firm could not meet its financial obligations to its customers and creditors.
CMA for the first time admits that subsequent to the November assessment, the firm was thrown out of the automated trading system (ATS): "As a result, and to forestall any potential risks to investor funds, the Authority suspended the company from trading, a position that was maintained until the appointment of a statutory manager [February 5, 2010]."
For several days, fellow brokers had maintained studious silence when asked whether Ngenye Kariuki was trading -- claiming it was hard to tell after the ATS was put in place eliminating physical presence at the Nairobi Stock Exchange (NSE) floor.
The lobby group held a cocktail party hours before the CMA action and proclaimed stability in the industry. Thereafter, the association issued a timid statement acknowledging the statutory management but would take nearly a week before taking up the cudgels on behalf of one of the oldest fraternity members.
Some influential members have been known to hold extremely hostile positions the CMA's intrusive regulation.
"What should surprise any observer, though, is that at the time of this action there appears to be no evidence to support the necessary conclusion that the firm is unable to meet its continuing obligations to its clients," said the blunt statement Kasib issued Thursday.
It came after Mr Kariuki, the ill-fated firm's CEO, was quoted in the media asking for the lifting of the receivership, saying he was negotiating with K-Rep Bank for the settlement of an overdraft facility that could have amounted to Sh90 million, according to our sister publication, the Business Daily.
Owed clients
CMA records show that in addition to the insolvency, by November, Ngenye Kariuki owed its clients some Sh60 million. It notes that this debt was over three months old.
The working capital ratio stood Sh68 million in the red. CMA requires stockbrokers to maintain a minimum working capital of Sh1 million. The Corner House, Nairobi-based broker, was operating an overdraft of 135 per cent of the paid up capital at the time.
The regulator requires a minimum of 20 per cent.
CMA has also charged that the broker had failed to pay a penalty to the regulator arising from issues detected in 2008. It wants the family firm to comply with January 1, 2010 25 per cent individual holding cap.
"Moreover, the authority notes that the check issued by the Authority in January 2010 in respect of the year 2010 licence application fee was dishonoured by your bank," said CMA in part of its communication.
Mr Kariuki did not answer our calls and messages.
In the early 1980s and 1990s, Ngenye Kariuki was one of the few firms that never missed major roles in share issues at the NSE.
However, with Mr Kariuki going into politics and gradually losing the status of an NSE authority, the firm equally disappeared from this hallowed list and in the past few years the firm has become a bit player.
The crunch
As others converted to investment banks, the firm largely retained its old retail clientele estimated by CMA at 88,000.
The crunch, as Mr Kariuki and Kasib are quick to point out, seems to have come with the Safaricom IPO. The IPO done in May 2008 was delayed for months, after brokers had invested billions in systems and manpower in preparation.
Ngenye Kariuki had earlier moved from UTC Building opposite City Hall, taken more floors at Corner House and employed more staff. Citibank, the issue's main bank, was subsequently overwhelmed by the refunds which ended messing brokers and banks.
In 2009, the firm's operating licence was extended, and subsequently CMA issued a conditional licence citing "imminent strategic purchase transaction". That turns out to be negotiations with Tsavo Securities which seem to have collapsed in June of the same year.
The next month, the firm engaged in negotiations with Equatorial Investment Bank, which was seeking to buy part of the stake and bolster its financial position.
These failed, compelling CMA to issue notice that it would suspend Ngenye Kariuki from trading. The firm was then depending on trading commissions and the regulator subsequently barred it from trading citing potential risk.
The firm was then ordered to raise additional capital or select a Central Depository Agent to bulk transfer the client shares.