After a year beset with governance challenges, the Nairobi Stock Exchange is fast tracking a process that will see its ownership separated from management, affording investors a chance to own the bourse by year end.

The process will see the 19 stockbrokers who own the NSE as a limited company by guarantee cede ownership to broad interest groups while transforming the body into a public owned company.

Broad ownership separate from management is seen as a solution to issues of credibility that have dogged the bourse over the last three years amid allegations of brokers profiting from funds they hold in trust for investors.

Financial distress

Two brokerage houses -Francis Thuo and Nyaga Stockbrokers -have ceased trading after falling into financial distress while six others needed a second evaluation before being granted annual licences for this year.

NSE is currently a company limited by guarantee. Its owners are members who do not get any profits from the company although they have strong influence on its management.

The members also enjoy the advantage of using the bourse for trading purposes, a privilege which cannot be enjoyed by a non-member.

With the planned dilution of the current membership, even non-members will be allowed to use the bourse for trading as long as they meet licensing criteria.

NSE chief executive Chris Mwebesa confirmed that the bourse has forwarded request for dilution of the current NSE membership to the Capital Markets Authority (CMA) and the process will be completed by the end of the year. This process is known as demutualisation.

According to the proposed changes, no person with trading rights should be allowed to own more than 50 per cent of the bourse's shares to avoid conflict of interest. NSE is also proposing that no single individual should own more than five per cent of its shares.

Ordinarily a law allowing for the conversion of NSE into a company limited by shares would be needed but the NSE is proposing that the CMA Act be amended to avoid going through the cumbersome route. A sticking point, however, remains how the shares will be allocated during the demutilisation process.

A study commissioned by CMA and undertaken by audit firm KPMG had suggested sharing out NSE ownership to brokers (25 per cent), the Government (25 per cent), the Capital Markets Development Fund (25 per cent) and NSE employees (5 per cent).

The study further recommended the allocation of the remaining 20 per cent to the Capital Markets Development Fund (CMDF) to be held in trust for sale to the public at a future date.

A study by Ernst and Young commissioned by the NSE came up with a formula where brokers would be allocated 80 per cent, NSE employees (5 per cent), NSE directors (5 per cent) and the investors' compensation fund (10 per cent).

Proposals have been put forward that Kenya should follow the Malaysian model where shares were allocated on a 30:30:30:10 basis to the Government, the CMDF, brokers and other market intermediaries respectively.

Mr Mwebesa, however, said a steering committee composed of members from the NSE, the CMA and the Treasury has already been formed to harmonise the issue ahead of demutualisation.

To give small investors a chance in the dilution process, NSE plans to create an investment vehicle to which retail investors can pool funds and be allocated shares as was done in Malaysia.

After that the NSE would float the shares allowing for a larger ownership of the company valued at Sh1.7 billion just before the Safaricom listing was done. The NSE has an annual turnover of about six billion shillings with net profits of about Sh300 million.

The process would enable the NSE for instance to raise new capital that it will use to improve the market infrastructure and probably buy into other stock markets across the continent allowing for international alliances.

Show interest

Mr Mwebesa said on listing, NSE expects the likes of New York Stock Exchange and the Johannesburg Stock Exchange to show interest in the local bourse as they have done for others which have gone through demutualisation process.

The process of dilution of membership of the stock markets is a popular trend in the emerging and developing markets. It is seen as allowing for a governance and management structure that is insulated from members' vested interests to ensure smooth and efficient decision making process.

In the last eight years, the London Stock Exchange, Chicago Mercantile Exchange, Bombay Stock Exchange, New York Stock Exchange, Johannesburg Stock Exchange and Bursa Malaysia are some of the stock markets that have gone through this process.