By JAMES ANYANZWA

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Kenyan stockbrokers have relinquished the ownership of the Nairobi Securities Exchange to foreigners after local investors snubbed the shares following diminishing returns from the country’s stockmarket.

The stockbrokers had a three-year grace period to surrender the control of the 64-year-old exchange to the Kenyan public as part of the conditions of the demutualisation process (separation of ownership of the exchange from the trading rights of the members).

The process was effected in 2014 to improve transparency and governance in the trading of shares.

While the law limits the shareholding of the exchange by an individual investor or private company to not more than five per cent, the stockmarket is now being controlled by several foreign investors who are sensitive to political risks.

This exposes the self-listed NSE to the risk of a price dip in the event of panic sales by the foreigners.

Last week, the NSE stock was trading at Ksh17 ($0.17) per share compared with the initial public offering price of Ksh9.50 ($0.09) per share.

Of the 20 stockbrokers who held a combined 59 per cent controlling stake in 2014 when the NSE issued its IPO, 11 have either exited the stockmarket or substantially reduced their shareholding.

“Some stockbrokers have exited while others have partially sold off their stock. I think there is a significant component of foreign buyers,” said the chairman of the Kenya Association of Stockbrokers and Investment Banks, Paul Mwai.

“The market does not look promising now because of the lag effects of drought, elections and interest rate caps, but we expect a turnaround in the second half of the year.”

Stockbroker woes

Industry sources said that besides complying with the conditions of demutualisation, stockbrokers are facing the wrath of an underperforming market through losses and reduced revenue, coupled with what they termed as “over-regulation” of the market.

“We don’t know yet when the market will recover and return to the levels we last witnessed in 2006. Individual investors have left the market, new companies are not listing, new products are not exciting the market and then there is the issue of over-regulation,” said a source.

Brokers are allowed to hold a maximum combined shareholding of 40 per cent. But market intermediaries diluted their shareholding to 26.7 per cent in 2017, from a high of 59 per cent, with the stock sale benefiting foreign investors who now control 40.8 per cent of the bourse as at the second quarter of this year.

Last year, foreigners held 36 per cent of the shares on the NSE.

The government and the Capital Markets Authority’s Investor Compensation Fund each hold 3.3 per cent of the shareholding while local individual and institutional investors hold 26.9 per cent.

Among the stockbrokers still holding their original 2.7 per cent (seven million shares) share allocations are Sterling Capital, ABC Capital, Kingdom Securities, Renaissance Capital and Old Mutual Securities.

Faida Investment Bank, Dyer&Blair Investment Bank and NIC Securities have reduced their stakes. Those that have sold their stock include Standard Investment Bank, Francis Drummond & Company Ltd, African Alliance Securities and Suntra Investment Bank.

“We were required to dilute our shareholding but we decided to exit the stockmarket instead,” said the chief executive of Standard Investment Bank, James Wangunyu.

Shareholding rules

In 2016, the Kenya Capital Markets Authority restricted individual shareholding in the listed NSE to five per cent and capped shareholding by a private company at five per cent.

However public companies were allowed to own not more than a 10 per cent share of the NSE.

In 2015, Kenya abolished 75 per cent threshold of foreign ownership in listed companies and joined its regional counterparts (Tanzania, Rwanda and Uganda) in allowing investors to own as many shares in listed companies as they can buy.

In 2016, the Dar es Salaam Stock Exchange also opened up its ownership to the public, allowing individual and institutional investors, including stockbrokers, to acquire up to a 20 per cent share in the bourse.

DSE offered 15 million new shares to the public at a price of Tsh500 ($0.21) each.

Last year, the Ugandan Capital Markets Authority approved an application for demutualisation by the Uganda Securities Exchange, paving the way for the USE to be become a company limited by shares with a change in its governance and management structures.

Demutualisation of the regional exchanges is widely expected to be a major boost for the efforts towards implementation of a unified capital market within the East African Community, one that would make trading in shares quicker and cheaper.

In the six months to June this year, East African stockmarkets were hit by low activity as local investors shifted their money to risk-free government bonds while foreign investors capitalised on high US dollar returns to sell off their shares at a profit.