Proposed amendments to increase minimum capital requirements and reduce individual shareholders' threshold for stockbrokers and investment bankers appear to be the major sticking points in the ongoing discussions on the new regulations, with just days to go before the debate closes.

The Capital Markets Authority (CMA), on May 2, brought for debate the proposed amendments to the Capital Markets Act, with stakeholders and the public expected to have given views by end of the month.

Stockbrokers and investment bankers are said to be compiling an industry response to the proposed amendments to be presented to the market regulator, but general sentiments already indicate that the debate will be centred on the two key issues.

The report is to be presented through the brokers' umbrella body, the Association of Kenya Stockbrokers (AKS).

In the comprehensive reforms meant to rebuild the dented investor confidence in the capital markets and provide structures to facilitate a safe investing environment with financially stable players in the future, the CMA has drafted new laws that will limit the maximum shareholding an individual can hold in an investment bank to 25 per cent.

The capital markets' regulator also proposes an increase in the minimum statutory capital requirement for investment banks from Sh30 million to Sh250 million.

Stockbrokers will be required to raise their capitalisation to Sh50 million from Sh5 million, while those who wish to acquire stock dealership licences will be required to add Sh20 million to their minimum capital, up from Sh10 million.

Stockbrokers are intermediary institutions that assist investors to trade shares at the stock exchange, while investment banks are also investment intermediaries, but with a wider mandate that includes authority to buy shares in their own name as per the CMA rules.

The proposed reforms capture Finance Minister Amos Kimunya's call for capital market reforms in his last Budget speech, and are generally expected to become effective in mid June after the Budget is read.

While most players are not outright opposed to the call to increase minimum paid-up capital, they say that this should be done in gradual phases to minimise the likelihood of forcing some firms that cannot immediately raise the required amounts out of business.

Others argue that parameters for setting the new capitalisation levels must be tied to existing market realities. There is a general feeling that most of the proposed regulations were borrowed from the Banking Act, which also coincidentally stipulates a minimum capitalisation of Sh250 million and limits shareholding by individuals to a maximum of 25 per cent of total paid-up capital.

The AKS vice chairman, Mr James Murigu, who is also the Suntra Investment Bank managing director, says that the new capital requirements are achievable, but players ought to be given reasonable time within which to comply.

According to the draft amendment proposals, stockbrokers and investment banks will be required to increase their capitalisation to the new minimum statutory requirements within six months after the commencement date of the new rules.

Only Dyer and Blair, Standard Investment Bank and CFC with reported capitalisation of Sh1 billion, Sh300 million and Sh250 million respectively are within the requirements of the proposed amendments.

Discount Securities passes as the only stockbroker with the required minimum paid up capital, having reported a capitalisation level of Sh54.7 million as at December 2007.

Renaissance Capital, an international investment bank that entered the Kenyan market last year, declined to disclose to Business Daily its capital base, while the capitalisation level of other less visible investment banks contained in a list published by CMA on April 25 is not publicly known.

All the other investment banks and stockbrokers, though currently in compliance with CMA minimum paid-up capital requirements, will be required to inject more cash into their businesses once the draft amendments to the Act are passed into law.

Mr Murigu says that the brokers will be putting their views on the proposed amendments before the CMA after the stakeholders meeting.

He, however, says that just like banks and insurance companies were given three years by Mr Kimunya to comply with new capital requirements last year, CMA should also give brokers adequate time to raise additional capital.

Mr Murigu, however, declined to give what an ideal compliance period would be, saying that a common brokers' position will be reached at the AKS meeting.

The minimum capital proposals fall short of earlier suggestions by the Nairobi Stock Exchange chairman, Mr Jimnah Mbaru, to increase stockbrokers' minimum capital requirement to Sh200 million and to raise investment bank's minimum capital to Sh400 million.

A CMA commissioned study released last year had recommended a minimum capitalisation of Sh25 million for brokers, and Sh100 million for investment banks.

Adequate capitalisation is generally considered crucial to a business' financial stability since management can draw from the capital account to cover for operational losses during difficult times.

Low capitalisation and poor management has been blamed for Francis Thuo and Partners collapse last year, and the financial distress suffered by Nyaga Stockbrokers, which is currently under statutory management.

The corporate finance director for Faida Investment Bank, Mr David Mataen, says that CMA ought to base minimum capital requirement for investment banks to their historical turnover levels, to avoid constraining existing players' capacity or discouraging new players from joining the industry.

Lending capacity

Mr Mataen draws a parallel between the new rules and the Banking Act, which limits the bankers' lending capacity to their level of capitalisation.

He says that such a regulation could be applied in the investment bankers' case by basing their capital requirements to their trading volumes.

Such a regulation, he says, could help in setting capital requirements that are in proportion to company size and risk exposures, while ensuring that companies do not have excess capital that is not justified by their level of capitalisation.

"Investment banks should not have excess paid-up capital that is not justified by their trading volumes," says Mr Mataen.

The limitation of individual shareholding to a maximum of 25 per cent of paid up capital for stockbrokers and investment bankers is also proving to be a contentious issue, with most players questioning the rationale for coming up with the rule, or even the Authority's capacity to enforce it.

The rule is intended to institutionalise stockbrokerage and investment banking businesses in the country, a majority of which remain as closely held family run firms.

Almost all the 25 licensed stockbrokers and investment banks are family-owned and run businesses, with the exception of a few that have over the years hired professional management teams or those that have been bought out by bigger institutions.

The latter include Renaissance Capital that last year bought the seat previously held by Francis Thuo, NIC Capital Securities that bought out Solid Investment Securities early this year, Barclays Financial Services (investment bank) and CFC Financial Services, which are publicly listed companies.

Mr Mataen does not, on principle, oppose the proposed ownership limitation rule, but says that the CMA should also look for alternative ways of safeguarding investors' interests, other than enforcing the ownership rule which could limit the number of entrepreneurs seeking to venture into the industry.

An alternative, he says, would be to tighten trading regulations and impose heavy penalties for rogue players who trade in investors' shares without being authorised.

The NSE chief executive officer, Mr Chris Mwebesa, however says that the ownership limitation rule can be enforced by requiring adequate disclosure of beneficial shareholder interests.

CMA says that the rule is aimed at limiting substantial ownership by a single person of licensees that handle clients' funds.

"In the case of a stockbroker, investment bank or fund manager, no person should control or be beneficially entitled directly or indirectly, to more than 25 per cent of the issued share capital of the licensed person," reads a section of the draft proposals.

Other proposed amendments to the Act include imposing an obligation on licensees handling Public Funds to have professional indemnity insurance of an amount not less than five times their daily average turnover, to cover losses arising from their default or negligence.

The CMA shall also, under the new law, have powers to trace and block all assets it believes were acquired through insider dealing or market manipulation, besides having other powers envisaged in the proposed amendments.