[UgaBYTES] Crisis at the Nairobi Stock Exchange

[Kiringai Kamau]

Tony,
Are Nyaga in trouble or was it Mwangi Thuo that were bailed out? 
Kiringai

-----Original Message-----
From: ugabytes-bounces at lists.ugabytes.org
[mailto:ugabytes-bounces at lists.ugabytes.org] On Behalf Of Tony Munene
Sent: Friday, February 15, 2008 1:29 PM
To: publicwatchdog at eastandard.net
Subject: [UgaBYTES] Crisis at the Nairobi Stock Exchange

14th February 2008

I refer to stories covering the ongoing crisis at
Kenya's Nyaga Stockbrokers as carried on page 22 of
the "Daily Nation" of Tuesday, 12th February 2008
("Nairobi Stock Exchange bails out stock broker"),
page 15 of "The Standard" of Tuesday, 12th February
2008 ("Nairobi Stock Exchange's 100 million shillings
to rescue stock broker"), and a belated page 10 "Daily
Nation" editorial of Thursday, 14th February 2008
titled "What's with this broker?".

I am not sure if there is anything that continues to
amaze me more than the despicable and deplorable
Kenyan media. I have for the last  four years been
trying to draw the attention of the Kenyan media to
serious problems and shortcomings in the Kenyan stock
market with no success whatsoever, at least as regards
proper and thorough participation and investigations
by the so called "leading media houses" in Kenya.

See below letters for ease of reference

I am not sure whether the lack of response has been
caused by my failure to practice Kenya's despicable
"brown envelope journalism", but it is deeply
unfortunate for Kenya's "leading media houses" to
attempt to stand on "a high moral ground" and/or adopt
"a holier than thou" attitude on matters that they
have been fully aware of for a long time now.

What is unfortunate is that the crisis at the Nairobi
Stock Exchange could have been averted had the Kenyan
media been responsible

Proof of this is below

3rd June 2006

The sudden declaration of insolvency of Uchumi
Supermarkets Limited by it's Board of Directors, must
not be allowed to go unpunished. The announcement
ordering an investigation by Minister of Trade is
insufficient, and what is instead required, are  full
scale reprisals and convictions.

The Daily Nation of 2nd June 2006 reported that Uchumi
Supermarkets Limited had healthy cash reserves until
the year 2001. For a start, the Uchumi Boards between
the years 2001 and present, must immediately be
arrested and charged with deliberate misappropriation
of public funds.

In addition, the CEO of PricewaterhouseCoopers Kenya
(Uchumi's auditors), should also be arrested and
jointly charged on several counts of fiduciary fraud,
alongside the various Uchumi Boards since the year
2001, the CEO of the Capital Markets Authority, the
CEO of the Nairobi Stock Exchange and the CEO of The
Central Depositories and Settlement Corporation. The
audit firm of PricewaterhouseCoopers Worldwide must
also be cited for sterner global action, following
similar other fiduciary felonies. Only last month (May
2006), the Financial Services Agency of Japan
suspended PricewaterhouseCoopers Japan from carrying
out audits for two months, following its failure to
detect accounting fraud at Japanese cosmetics giant
Kanebo. Chuo Aoyama PwC will not be able to conduct
audits in July and August.

Former top Enron executives Ken Lay and Jeffrey
Skilling, have also just been convicted by the US
Supreme Court on several counts of fraud, and the
aforementioned top brass of Kenyan Corporations and
the Kenyan stock markets, must also be made to follow
suit. Enron auditors Arthur Andersen, were earlier
convicted in March 2006 in a lower court, for
witnessing tampering, by instructing its employees
about shredding documents. PricewaterhouseCoopers
Kenya, must not also be spared.

The ramifications of Uchumi's insolvency run deeper
than meets the eye. For instance, the shares that were
traded on the 31st of May 2006, and prior to that,
will have to be paid for in full. The Central
Depository and Settlements Corporation and Nairobi
Stock Exchange, requires that a settlement cheque be
delivered five days after the shares were traded
(T+5), at which time the buyer's Central Depository
Account is also required to be credited with full
amount of shares purchased. Uchumi has been trading
heavily of late, and settlements run into hundreds of
millions of Kenya Shillings.

Much of the trading at the Nairobi Stock
Exchange(including big trades), is conducted on a
casual and informal basis. In other words, all that it
takes on several occasions, is for a client to give
instructions to buy or sell shares via a telephone
call. It is very likely that several individuals and
corporations will disown several trades, especially
those that were conducted on 31st May 2006, and
immediately prior to that. Settlement of trades worth
millions of Kenya Shillings will therefore have to be
borne by the affected stockbrokers, otherwise they
risk being suspended or being registered by the
Capital Markets Authority, the Nairobi Stock Exchange
and the Central Depository and Settlements
Corporation.

All brokers are require to retain security deposits
worth five million Kenya Shillings with the Capital
Markets Authority, the Nairobi Stock Exchange and the
Central Depository and Settlements Corporation. This
is what the regulators are supposed to fall back on,
should a stockbroker default on payment, or become
insolvent. There are 18 registered stockbrokers,
meaning that the nominal value of security deposits
currently held by the regulators, is 90 million Kenya
shillings (approximately 1.25 million US dollars).
Shares worth approximately 23.2 million Kenya
Shillings alone, were traded on 31st May 2006, and
cash settlement of this must be made on or before
Thursday, 8th June 2006. Settlement for the equally
heavy trades of 30th May 2006 and 29th May 2006, also
have to be made on or before Wednesday, 7th June 2006
and Tuesday, 6th June 2006, respectively.

Monies owed from the most recent Uchumi trades very
likely exceed the combined value of security deposits
worth US $ 1.25 million, held by the Kenyan market
regulators, and it is possible that one or two
stockbrokers may be suspended or deregistered in the
near or not too distant future. This is part of the
immediate damage that has been caused by a very a
small group of extremely reckless individuals.

This country can no longer afford to take soft
options. Recklessness of this magnitude must also be
countered with equal brutality, to safeguard the
livelihoods of a population now estimated to stand
between 33 and 36 million people.

There is no seriousness with which the stock market is
being run in Kenya. Even the most basic of functions,
like the daily updating of trading prices on the stock
exchange website, has become a task. Some times there
are no updates as late as 7.00 p.m., despite trading
having closed at 12 noon. At close of trading on
Friday, 26th May 2006, there was no update until
Monday morning, 29th May 2006. One wonders how
investors are expected to keep track effectively.
Discrepancies also abound. For instance National Bank
of Kenya recorded a 12 month high of KShs. 48.50 on
15th May 2006, yet since then, stock exchange
tabulations have reflected a 12 month high of either
KShs. 48.00 or KShs. 48.25. Shareholder investments in
Kenya are not safe.

The mainstream media in Kenya, has also been extremely
ineffective in helping combat this fiduciary crimes,
and have instead resorted to cluttering their
publications and broadcasts with all manner of mundane
and unhelpful features, lacking completely in value. A
full two years ago on 7th May 2004 for instance, I
took the trouble to blow the whistle on some of these
fiduciary crimes through my letters below. No one,
except the Kenya Times and the alternative
press("gutter press"), bothered publish the letters in
public interest. The mainstream Kenyan media, as an
accessory after the fact, should therefore also be
jointly charged with the above perpetrators of malice
and destruction.

Hereby signed,


Unidentified (see below for whistle blowing letter of
7th May 2004)


7th May 2004

Crisis at the Nairobi Stock Exchange :

The Nairobi Stock Exchange hopes to implement
electronic trading of equities in the year 2004 by way
of the already registered Central Depository and
Settlement Corporation (CDSC). Guidelines on the
proposed Central Depository System(CDS) of electronic
trading, have already been published for public
scrutiny. This is happening in a 16 month period of
heightened activity and speculation at the stock
market, which has brought with it huge gain and huge
loss. The risk exposure and emergence of fraudulent
trading at the Nairobi Stock Exchange (NSE) was
confirmed in late April 2004, when four individuals
working in the Deliveries & Settlement Department of
the NSE, were picked up for questioning by officers
from the Central Bank of Kenya Fraud Investigation
Department, in connection with a transaction involving
Mumias Sugar Company shares. Mumias Sugar Company
ranks top amongst the NSE listed companies that have
recorded heaviest trading. It is just a matter of time
before similar cases begin emerging rapidly.

The NSE has been operating for 50 years now, but has
only been in real existence for 16 months now, in
terms of capacity building. The Company Act relating
to share transfers has remained largely unchanged and
still allows for the delivery of a share certificate
to a purchaser after 60 days. A company registrar
therefore stands no risk of being prosecuted if he or
she delivers a share certificate to it's rightful
owner, 60 days after the shares have been traded. This
compares extremely poorly to the the ultra modern New
York Stock Exchange, where shares change ownership in
seconds. The NSE has made deliberate efforts to close
this gap over the last ten years by continually
revising market guidelines and regulations, which are
however not legally binding. Prior to August 2000, the
NSE operated market guidelines known as T+28, meaning
that company registrars were expected to deliver a
share certificate to a buyer on or before the 28th day
after the shares were transacted (T). Stockbrokers act
on behalf of buyers and sellers of shares, effectively
meaning that company registrars were expected to
deliver a share certificate to the buyer broker not
later than T+28.

In August 2000, the NSE reduced this period to T+14
and introduced heavy deterrent penalties for offending
parties. These were to be paid for all late deliveries
and were to be subjected on all players in the market
including the NSE, stockbrokers and company
registrars. Document processing was centralised at the
Deliveries & Settlement Department of the NSE for
effective administration of T+14. A rough description
of the process went as follows: shares traded on NSE
trading floor through open cry system (T); selling
broker to deliver complete and verified share sale
documents to the NSE not later than T+7; buying broker
to deliver completed purchase documents and settlement
cheque not later than T+7; NSE to match sale and
purchase documents on T+7 and deliver to the company
registrar for transfer of shares to the new owner;
company registrar to make delivery of share
certificate in the name of the new owner to the NSE
not later than T+14; buying broker to collect share
certificate from NSE on or after T+14 for onward
delivery to new owner. The T+14 trading cycle was
introduced as a prelude to the enactment of electronic
share trading and heavy revised penalties were
proposed for violating parties. The current trade
cycle has loosely come down to T+8 since August 2000,
which is still ages away from the New York Stock
Exchange trading system.

Even then, the penalties for lateness proposed in
August 2000 have never been effected, because the
biggest violater has been the NSE itself. The NSE is
currently grappling with huge backlogs of unprocessed
documents and is forever shifting blame for this to
either stockbrokers or company registrars. Staff at
the NSE are insufficiently coping with the huge
workloads and are forced to work long stressful hours
with minimal compensation. Most staff at the NSE
anyway are engaged on casual terms of employment with
no security and no benefits. The NSE has unbelievably
operated on the criminal practice of periodic mass
staff layoffs and recruitments over the past four
years. Market fraudsters have identified this and
fully exploitined it. Investments worth billions of
Kenya shillings have been entrusted to pooly trained
and poorly motivated staff.

In a bid to impress the financiers of the proposed
electronic trading system, the management of the NSE
are continually exerting pressure on the stockbrokers
and company registrars to make prompt delivery of
documents, regardless of the consequences. Little care
and caution is paid to ascertaining the legitimacy of
transactions and genuineness of documentation. This
has resulted in massive fraud and it is not clear who
or how the cost of this fraud shall be met. The NSE
has not placed any equal effort in instituting safety
controls to counter fraud. The Central Bank of Kenya
has for several years been conducting awareness
campaigns on how to detect forged Kenyan currency
notes. The NSE has not followed suit, and the equities
market is now awash with fake share certificates. With
the pressure to meet NSE instituted guidelines by
market players, a depressed economy, and the evolution
of a breed of highly skilled and highly motivated
fraudsters, the NSE is an exposed lame and sitting
duck. The mechanisms to counter this are highly
inadequate. There are no precedents in Kenyan law to
go by and a prosecutor would have to rely on
precedents outside Kenya such as Freeman vs. Cooke
(1848), South London Greyhound Racecourses Limited Vs.
Wake (1931), In Yeung and Another vs. Hong Kong and
Shanghai Banking Corporation (1981) and Commissioner
of Inland Revenue vs. Maxse (1919). These are cases
that have helped shape stock markets in the developed
world, and phenomenon that the Kenyan stock market is
only about to experience the hard way.

To also hasten trades, the NSE has an instrument known
as a Letter of Hold (LOH). In finance, an LOH can be
compared to a cheque, while a share certificate can be
compared to cash. Processing of Letters of Hold at the
NSE is in a huge mess and can be compared to cheque
kiting, a dubious process of money transfers that many
Kenyans have gotten to learn about in the ongoing
Goldenberg commission of enquiry. The abuse of share
trading has led to LOH kiting and there are numerous
unresolved cases of ghost shares at the NSE.

The NSE proposes to introduce electronic trading in
shares in a severely undeveloped market that has
difficulty making a clear distinction between a bonus
share certificate and a dividend cheque and in a
market where shareholders attend Annual General
Meetings more for the gift packs and bitings on offer,
than the presentation and analysis of the Annual
Report and Accounts. The NSE intends for the Kenyan
public to read and understand lengthy legal CDSC
documentation punctuated generously with Latin, in a
country where locals hardly grasp the national
language of Swahili. The NSE is about to install user
friendly software for use in electronic trading of
shares, yet it has failed miserably in a user friendly
awareness campaign to educate the Kenyan public on
equities. The NSE continues to closely administer
Reports and Accounts of publicly quoted companies in
Kenya without publicly releasing Reports and Accounts
of it's own dealings and operations. The Surveillance
Department of the NSE has not deemed it fit to advise
it's very own board to publicly release a statement of
it's Reports and Accounts.

In essence, the NSE is biting much more than it can
bite. It is an unregulated regulator, a monster's
monster. The Minister of Finance is called upon to
take quick remedial action to avert a terrible crisis
and to arrest complete erosion of limited public
confidence in the Kenyan stock market, still in it's
infancy. The one area where the NSE can be compared
with the New York Stock Exchange, is in the looming
likelihood that it may crush irreparably as did the
New York Stock Exchange did in 1929, 1987 and 1997.


Anonymous (See earlier article of 5th January 2004
below)

5th January 2004


How to create 3 billion shares at NSE


I refer to Jimnah Mbaru's articled titled "How to
create 3 billion shares at NSE", appearing in the
"Sunday Nation" of 4th January 2004 and take this
opportunity to comment on some of the issues raised by
Mr. Mbaru. I also beg not to disclose my identity, as
I am an employee of a company that is directly engaged
in the Capital Markets.

2003 was certainly a very good year for the equities
market in Kenya. I work in a department that processes
transaction documents and it was a very busy year for
us. Working Saturdays and Sundays was routine all year
round and this trend appears set to continue in the
year 2004. Mr. Mbaru states that an approximate amount
of KShs. 60 billion was introduced into the economy
after the dwindling fortune of treasury bill interest
rates. A significant amount of this money found it's
way to the stock exchange according to Mr. Mbaru.
Stockbrokers charge a 2% commission on the value of
shareholdings for both purchases and sales. Part of
this 2% commission accrues to the Capital Markets
Authority and the Nairobi Stock Exchange as levies.
The Capital Markets Authority, the Nairobi Stock
Exchange, and the sixteen brokerage houses can
therefore be said to have made combined revenues of
approximately KShs. 2.4 billion in the year 2003 if a
commission of 4 % (sales and purchases), is computed
on the KShs. 60 billion mentioned in Mr. Mbaru's
article. This is modern day gold mine which should
theoretically translate into a modern day gold rush.

It is imperative therefore that  equities be marketed
aggressively to the public at a time when there is
dire need for opportunities in this country. The stock
exchange has never been sufficiently marketed to a
distressed public at a time when this country is
saturated with numerous traditional investment avenues
such as micro enterprises known as "exhibitions",
cyber cafes, fast food restaurants, hair salons, bars
and public service vehicles ("matatus").

For instance, several shrewd speculators acquired
shareholdings in the Kenya Power and Lighting Company
in November 2002 when they were trading at around
KShs. 9 per share. Three months later in February
2003, the same shares peaked at KShs. 44 per share, a
return of just under 5 times. Several Kenyan
millionaires were created in the year 2003 evoking
memories of the American economic boom of the 1980s. I
myself lost out on a prime opportunity to cash in
on maximum returns similar to that of the Kenya Power
and Lighting Company shares by making a rash decision
and selling too quickly. Even then, the returns I made
would have enabled me to make a cash purchase of a
used matatu, a typical line of investment in Kenya as
mentioned. I didn't re-invest in a matatu, but it
clearly illustrates the tangible returns that were
available in equities in 2003.

Numerous Kenyans stand to benefit from this
developments. For instance, several players in the
informal sector have not been lured as participants in
the lucrative equities market. Semi-literate, shrewd,
very hard working and variously known as "mama
mbogas", they dominate commerce in this country. Their
influence and wealth is widespread, though it is a
sector still treated with derision, and enjoys only
fringe support from the government. Many of the
contemporary housing units across the country are
owned by players in the informal sector. The
simplistic front associated with "mama mbogas"
conceals vast interests and economic power. Many older
generation "mama mbogas", shrewdly acquired properties
in down town Nairobi around the period of independence
in 1963, while others ventured into alternative real
estate by purchasing huge tracts of land in and around
the major towns of today. This foresight speaks for
itself today.

The informal sector has always however related to the
formal sector, the equities market included, with
suspicion and equal derision. This has denied the
Nairobi stock exchange vast opportunities for growth
and expansion. The roots of discord between the formal
and informal sectors is historical, though the players
in the equities market have not been aggressive enough
in bringing down this barrier of conflict, on their
part. The funds controlled by the informal sector in
Kenya rival and surpass those controlled by local fund
managers. The Capital Markets Authority and the
Nairobi Stock Exchange therefore need to devise a
simplistic long term campaign to entrench
participation of the vast and powerful informal
sector. Towards the end of the 1990s the Nairobi Stock
Exchange conducted nationwide road shows which do not
appear to have borne fruit, and which have since been
abandoned. Brokerage firms Suntra Stocks Limited under
the stewardship of James Murigu and Jimnah Mbaru's
Dyer and Blair Limited, must also be credited for
striving to make a presence in the community
over the years, through friendly campaigns.
Nevertheless, Mr. Mbaru, a former chairman of the
Nairobi Stock Exchange and a seasoned professional in
his own right, can only hope to further entrench the
equities market, by returning the
cause back to the streets.

The formal sector also has considerable potential
arising out of loan schemes that are available to
individuals in the employment of the formal sector. It
is out of this that I was able to be a beneficiary. A
certain number of pensioners and retrenchees were also
beneficiaries of the stock market boom of 2003.

Kenya has a vast potential of growth in equities at a
time when the government is embarking on ambitious
micro and macro economic changes. The prospect of the
return of foreign investors indicated in Mr. Mbaru's
commentary is further good news for Kenyan
speculators. The growth of the Nairobi Stock Exchange
is of communal benefit and will help in alleviating
many of the social ills associated with poverty in
this country today.

I once again beg forgiveness for concealing my
identity because of my direct involvement in the
equities market in Kenya, and request that this
contribution be attributed to "contributor",
"commentator", "correspondent" or otherwise.



Contributor




 
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