Washington Gikunju
5 March 2010
The Nairobi Stock Exchange on Thursday moved closer to public ownership after the brokers, who currently control it, agreed on an ownership structure that will enable them to sell shares to investors in the planned initial public offering.
The long awaited removal of the bourse from the hands of the 20 brokers will see the government gain a 20 per cent shareholding in the bourse leaving the brokers with a collective 80 per cent stake.
A stakeholders' meeting held in Nairobi agreed to Treasury getting a 10 per cent stake in the bourse and an additional 10 per cent to be held by the Investor Compensation Fund (ICF) - another State-owned agency that is managed by the market regulator the Capital Markets Authority.
Under the new ownership structure that should pave the way for sale of shares to the public, brokers will get 80 per cent of the Sh200 million bourse and divide it equally among themselves in readiness for the planned IPO.
This means that each broker or investment bank will get an estimated 4 per cent of the market but will remain with much smaller stakes after the public share sale.
Each broker is expected to have ceded at least half of their stake in the next two years, according to the regulations meant to take the market public.
The new ownership structure is largely in line with the structure that the CMA had tabled before the brokers as a pre-condition to the planned transfer of the market's ownership into the hands of the investing public under a process commonly known as demutualisation.
NSE, which is ranked as the fifth biggest stock market in Africa by total value of listed shares, has existed as a mutual company owned by stockbrokers since its formation in 1954.
But this ownership structure has emerged as a major drawback for the smooth operation of the bourse as the brokers have found it hard to punish rogue counterparts resulting in the collapse of four intermediaries in as many years.
Smaller players
NSE has been grappling with the ownership structure for nearly three years with some of the big brokers insisting that the market-share should be used as the basis of share allocation but the smaller players have argued that credibility is the value that is being shared and can only be divided equally among all players.
The proposal settled on leaves out former directors of the NSE and employees who had jointly been proposed for a 10 per cent stake in a proposal commissioned by the bourse.
The agreed ownership structure may see the government get up to 32 per cent stake in the market to become the single largest shareholder after the brokers agreed that Treasury will be the sole custodian of the shares that will be allocated to the three market intermediaries who are currently under statutory management.
The three brokerages Nyaga Stock Brokers, Discount Securities and Ngenye Kariuki were placed under statutory management in as many years.
CMA said the brokers were facing financial distress and could not meet their market obligations.
Demutualisation is expected to curtail stockbroker's influence on the day-to-day running of the exchange and convert it into a public limited company with an independent board to oversee the bourse's role as a self regulating organisation (SRO).
"The exchange must continually adapt itself to the changing realities of the economy and the market," said NSE board chairman, Eddy Njoroge.
Upon demutualisation, the NSE will change its name to Nairobi Securities Exchange and will have an approved share capital of Sh1 billion.
The formula for splitting ownership interest between government and stockbrokers has been a most contentious issue in the long-drawn demutualisation debate.
Both the CMA and NSE have incurred millions of shillings in consultation fees paid to consultants to advice on how the stock exchange assets should be shared, but a consensus has remained elusive.
The brokers rejected an earlier proposal by consulting firm KPMG that the government gets a quarter of the stake.
The firm had been commissioned by the CMA for the study.
Stockbrokers have all along argued that the government does not deserve to get any direct stake in the demutualised exchange.
"The current value of the NSE is attributable to existing members as NSE has not received any direct government funding," stated an Ernst and Young demutualisation study report commissioned by the stock exchange.
The Ernst & Young report proposed that NSE's assets should be shared in an 80:5:5:10 ratio between stockbrokers, NSE staff, previous directors and the investors compensation fund.
But the government has on the other hand argued that it has facilitated development of the stock market over the years by setting up a regulatory body, the CMA, and privatising state corporations through the bourse thereby increasing the number of listed companies.
A parallel demutualisation study report prepared by KPMG in 2007 suggested that the government should own at least a quarter of the exchange, drawing fierce opposition from the then chairman of the bourse, Jimnah Mbaru, who said "the government had never given NSE even a cent."
But the brokers sought to downplay past differences with the State, with Mr Njoroge declaring "the decisions made today by the members reflect the negotiated position arrived at after extensive consultations."
All the 20 members of the exchange are to receive an equal number of shares, suggesting a breakthrough had been reached in what was previously also a hotly contentious issue.
According to the Ernst and Young report, the bourse's assets were supposed to be shared amongst brokers in the proportion of the value of business transacted since 1997.
The report argued that this was the only time during which transaction records were available.
Gain value
Mr Njoroge said that the ownership separation process will commence as soon as the demutualization Bill currently before Parliament is passed into law.
Brokerage firms currently under statutory management got a reprieve after brokers agreed to have them take their proportion of ownership, but Mr Njoroge said their financial benefit could be transferred to the creditors if the go into liquidation.
"We expect the bourse to gain value over time before the IPO is done," said Mr Njoroge. Mr Job Kihumba, a member of the NSE board, said the transitional period after demutualisation will allow time for the bourse to realise its value before selling to the public.