Jaindi Kisero: Let’s free the Capital Markets Authority so it can do its job

JUST HOW SAFE IS THE MONEY which you leave with a stockbroker to buy you shares? Which of these brokers is trustworthy and how can an ordinary mwananchi differentiate between a financially solid firm and one about to disappear with his money?

These are pertinent questions, indeed. The collapse of Nyaga Stockbrokers and the news that more such brokers may be facing difficulties has sent shockwaves among investors.

Market confidence has been dealt a severe blow. It is saddening to see panic-stricken folk queuing for days on end in front of the offices of Nyaga Stockbrokers, seeking to know the fate of the hard-earned savings they had entrusted with this troubled house.

How were these ordinary folks to know that they were dealing with a broker they shouldn’t have trusted?

Nyaga Stockbrokers was not one of those upstart brokerages that popped out the other day. The firm was among what is known as the “original six” — the members of a cartel that used to meet in a hotel lobby in Nairobi to trade shares without having to disclose prices to their principals.

The managing director of Nyaga Stockbrokers, Mr Patrick Gikiavi, is not your ordinary bloke. He is a director of the Nairobi Stock Exchange (NSE) where he sits on key committees.

He is a member of the trading and compliance committee, a member of the finance committee, and former member of the central depository system implementation committee.

How was the ordinary man from Thika, Nyeri, Kiambu or Kisumu to know that such solid credentials meant nothing, and that the man they were entrusting their hard-earned savings with would abuse that trust?

And, if you looked at the audited accounts of Nyaga Stockbrokers, there was nothing to warn you that the financial health of the company was in doubt.

Stockbroking firms have over the years perfected the art of masking their blemishes by employing accounting gimmicks. Millions of shillings illegally owed to wananchi are hidden away in their books by simply disguising it as money owed to creditors.

Lately, the preferred gimmick has been to include the value of the seat they own at the floor of the NSE in the books to shore up their balance sheets.

Who is to blame for all this mess? The watchman of the market, Capital Markets Authority (CMA), has been in deep slumber. Yet I choose not to accuse Mr William Chelashaw, Mr Paul Melly or Mr Edward Ntalami, the previous chief executives of the authority in that order.

Nor do I accept the argument that the laws are inadequate. Indeed, the existing legal framework for regulating the capital markets has all the required elements — requirements for licensing, minimum capitalisation, and disclosure.

THE ISSUE HERE IS NOT JUST individuals. Regulation of the capital markets has failed mainly because we have not allowed the CMA to operate autonomously.

We have made this important institution subject to an anachronistic corporate governance that makes it impossible for the CMA to exercise the influence and clout that the Central Bank of Kenya wields over commercial banks.

The CMA is treated and regarded by the Government as any other parastatal. Both its chief executive and board members are political appointees, serving in office at the whim of individuals.

The chief executive accounts not only to its board, but also to the permanent secretary of the parent ministry, in this case, Finance.

And, under the State Corporations Act, the chief executive is responsible to the Office of the President.

In that position, you can wake up one morning and find out that the Inspectorate of State Corporations, the Efficiency Monitoring Unit, or the Results Office — all under the Office of the President — have appointed auditors to conduct an impromptu special audit of your books, ready to recommend your sacking.

I need not belabour the point. If the CMA is to be effective, it must be exempted from the State Corporations Act. A regulatory body that accounts to multiple Government departments cannot operate effectively.

Once this is done, we can then work on strengthening its capacity to enforce the law by allowing it to recruit enough top-notch auditors to conduct on-site and off-site inspections.

Without doubt, Nyaga Stockbrokers has damaged the reputation of the stock exchange. But all is not lost. Several years ago, we went through a banking crisis when several commercial banks collapsed one after another.

We tightened the Banking Act, introducing high capitalisation requirements, new capital-to-deposits ratios, and rules to deal with risk concentration and insider lending. We amended the Central Bank Act to introduce security of tenure to the Central Bank Governor.

Stockbrokers operate with money collected from the public. I don’t see why they should not be subjected to such strict rules.

We must force weak ones to merge with stronger institutions, and eliminate those owner-occupier stockbrokers that thrive on selling people’s shares behind their backs.

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