Kenya’s financial market seems to be coming of age; investment banks are securing bigger deals; investor indices are ticking upwards; brokerage firms are posting higher commissions on trades while commercial banks experience double digit percent increase in earnings. Joining in the bandwagon are Investor Agents who, if current trends persist, will eventually outgrow their licensees- Brokerage Firms. Fund managers are not left out, with majority still riding on a huge untapped market potential.
With this upturn of events, something is amiss. First and foremost, there seems to be a major weakness or misunderstanding in the regulatory framework. Why is it that whenever a major deal is being negotiated, it’s only a special click of brokerage firms that seem to emerge winners? Making the issue even more complex is the fact that the investment banks that hold the brokerage licenses are still the same ones that take lead in transaction advisory.
Such a situation brings forth one lingering reality over the use of non-public information to influence deals at the market. Look at the past IPOs: each of them had a broker substantially benefiting from information that was not in the public limelight. In addition, the brokers' ability to carry out their own transactions has led to some investment banks holding chunks of shares in publicly listed firms long after the IPO.
This is what Jaindi Kisero of The East African calls “whims of vested interest.” Brokers have benefited over the past due to this double dealing that is allowed by the regulatory body, the Capital Markets Authority (CMA). This has compromised two parts: the quality of companies that go public and the assumed structure of the company after the listing.
Take for example a Director who holds position or has due influence in the operations of CMA. The same director buys into a company prior to its listing and takes part in the listing as a lead broker. The regulator does nothing about it and the usual happens; investors subscribe to the IPO en masse influenced by their broker. In actual sense, the company they are investing in is not worth the value but the fact that they have the broker’s assurance wins the day. There is no existing lock up period on the company.
Few months down the line, the major shareholders exit and the company is delisted. The CMA walks in to the rescue of the shareholders. To protect the image of the CMA, the government moves in and the whole issue is resolved. Should investors in this case blame the CMA or the broker? Going by fair judgement, NONE of the above. Then who should be blamed?
Recently, the CMA was in the headlines preaching about the plans to separate licensing from regulatory functions at the Kenyan market. If this ever works, it would mean that major brokerage firms only execute orders while investment banks concentrate in winning deals. At the same time, investment advisory firms will only concentrate on advisory functions. If this move is successful, we may experience some sanity in the industry. But for now, we can only witness few brokerage firms that excel in front running and a lot of insider trading being used at the advantage of a few while majority of the market participants lose out on their investment.
By Michael Musau
CEO Emerging Africa Capital
Licensed by The Capital Markets Authority as Investment Advisers
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