Capital Markets Authority: The State of the Kenyan Capital Markets and the Restructuring of Discount Securities Limited

Capital Markets Authority
Press Statement

The State of the Kenyan Capital Markets and the Restructuring of Discount Securities Limited

October 13, 2008

The Capital Markets Authority and the Nairobi Stock Exchange would like to make the following observations on the current global financial markets crisis.

We would like investors and the general public to note that the crisis is as a result of credit problems (credit market) and is not directly due to stock trading strategies adopted in the equity market as happened in the 1987 crisis.

Basically, the global financial crisis is as a result of subprime mortgage lending; subprime mortgage lending is one given to a borrower with a low credit score. Most of these loans were adjustable rate mortgages with low rates for the first few years, and then a ridiculously high interest rates later on at the reset point. But many of the big subprime lenders had a habit of downplaying the risks when dishing out record numbers of these loans to Americans.

The lessons for Kenya includes the following

1. There is a case for highly capitalized financial institutions in line with the Finance Bill 2008-2009 for investment banks and stockbrokers and the Finance Act 2007-2008 requiring banks to inject higher capital. As a result of the credit boom in the US economy where the crisis began, asset prices were inflated. Likewise, the profits of the various financial institutions were inflated as compared to corporate profits of non-financial industry players.

2. All financial sector regulators should adopt a risk-based supervision approach; Risk management by each financial institution, with the regulator risk profiling and continuously reviewing the risks independently. Currently there is over reliance on the institutions' themselves.

3. On its part the accounting profession must more than ever before act as the beacon of public trust for the capital markets. This is because both the regulator and investors place a lot of premium on the audited accounts when assessing regulatory risks and investment choices respectively. Accountants must be vigilant and never let anything cloud their judgments about the underlying commercial realities of firms. This is crucial because the public places great trust on the stamp of approval provided in the auditors' reports.

We would like to indicate that the fundamentals for our Hsted companies are still intact while our licensees have not been affected by this global problem. So far the contagion effect has not been felt in Kenya. Ironically the low level of development of our market and it minor presence in the global context has ensured that Kenya does not suffer direct contagion effect. What may affect us if the crisis escalates is spiral effect of a depressed world economy.

It is against this background and through our continuing inspection of all licencees that it has come to our attention that Discount Securities Ltd. have been experiencing corporate governance challenges.

The Capital Markets Authority and the Nairobi Stock Exchange shall be intervening with a view to restructuring Discount Securities Limited through strengthening its corporate governance structures to ensure its business continuity in the interest of the capital markets and the investing public in Kenya. According to the Capital Markets Act section 33(A) (1) c and section 33(A) (2) c the restructuring plan is manifest in the following;

1. Appointment of an Independent Executive Managing Director; KPMG will be incorporated as the new Executive Director of Discount Securities Limited, replacing Mr. David Githaiga.

2. The Authority will not suspend or revoke the licence of Discount Securities Limited during the period of the intervention. The firm will remain open and will continue trading at the Exchange under this arrangement until such a time that the authority will determine.

3. Following a successful restructuring of Discount Securities Limited, and with a view to enhance the shareholding structure, the NSE and CMA, together with the principals of Discount Securities Limited will assist in finding viable third parties to invest into the company.

4. During the restructuring process, should the need for additional funds arise, the same will be availed within reasonable limits and in form of additional capital 5. Both the Capital Markets Authority and the Nairobi Stock Exchange wish the investing public to note that this is not statutory management but an intervention under Section 33 A (1) c and (2) c (reproduces herein).

33A. (1) This section shall apply and the powers conferred by subsection (2) may be exercised in the following circumstances;-
1(c) if the Authority discovers (whether on an inspection or otherwise) or becomes aware of any fact or circumstance which, in the. opinion of the Authority, warrants the exercise of the relevant power in the interests of investors:
2(c) Notwithstanding the provisions of any other written law, in any case to which this section applies, the Authority may appoint a competent person familiar with the business of the licensed person to its board of directors to hold office as a director who shall not be capable of being removed from office without the approval of the Authority other than by order of the High Court;

Prof. Chege Waruingi
Capital Markets Authority

Mr. James Wangunyu
Nairobi Stock Exchange

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