The NSE and “Devolution”

I attended the Capital Market Authority (CMA) education seminar held at Kenyatta International Conference Centre last month and was amazed at the limited knowledge or apathy Kenyans (including investors at the Nairobi Securities Exchange) project towards the bourse. It was apparent that majority of Kenyans have no idea of who are the major players in the market, what they do know and how they relate to each other. I was amazed that many did not know where to direct their inquires or questions among players like the CMA, Nairobi Securities Exchange (NSE), Central Depository System (CDSC) or the stockbrokers who participated in the event. I found this event very appropriate and relevant.

Since our theme for this edition is devolution, I will dedicate my piece to enlighten the general public in the very simple terms  what these  market players are, what they do, and their relationship and major things we expect to happen at the ‘bourse’ during this year of devolution.
The Capital Market Authority
This is the statutory authority that regulates the development of orderly, fair and efficient Capital Authority in Kenya with the view of promoting market integrity and investor confidence. In simple terms this is the “market prefect” for NSE, CDSC, investment banks, brokers, investment advisers and all other players within the stock market.  It sets the rules, licenses and punishes those in the wrong.
The Nairobi Securities Exchange
The Nairobi Securities Exchange (NSE) is a market where bonds and shares are traded. For shares and bonds to trade they have to be listed first. The only difference from other market is the type of product traded, how they are traded and how they are paid or/and transferred. In simple terms the NSE or bourse is the ‘market for brokers’. Currently there are 17 licensed member firms or stockbrokers in the market. The stockbrokers are licensed by the CMA.  
Central Depository System
This refers to the Central Depository and Settlement Corporation limited. It is the only licensed entity (by CMA) to facilitate the deposit and dealing of immobilized shares at the Nairobi Stock Exchange. It facilitates deposits and trading in the sense that the shares and bonds are in the automated form. This means that you can only trade if you have ‘a digital account’ known as CDS account. The CDSC facilitates trading at the NSE by providing the necessary data (CDS accounts and holdings) form.
These are the licensed member firms of the NSE. Currently there are 17 licensed members and they fall under two main categories. Normal stockbrokers whose main activity is trading shares and bonds and other non-listed securities trading over-the counter (OTC). The other category is investment bankers who in addition to stock broking business provide corporate, finance and advisory services especially in mergers, acquisitions, divestiture, corporate restructuring and private equity advisory and public –private partnership and other related consultancy.
Other players.
Other players include financial advisors and agents who transact through the stockbrokers and are scattered all over our country. Commercial banks also assist their customers and general public to trade at the bourse.
Market and ‘devolution’
The market is not expected to realize any major steps towards devolution but the following initiatives    are expected to be realized within the year or in the foreseeable future.
Capital Markets Master Plan (CMMP)
The CMA together with the other industry players wants a masterplan within 12 months that will guide the industry for the next 10 years.
Investor education
CMA and other markets stakeholders will continue with education seminars in the major towns of Kenya and even Diaspora to enlighten the public need to invest and the process and products available.
The Bond Market Reforms
This aims at coming up with a hybrid bond market ie formalized automated trading at the exchange and over- the-counter (OTC) or done directly between two parties. This model caters for both institutions as well as retail segments of the bond. This should be realized by year end.
A demutualised market means a security exchange whose ownership and rights to trade are separate and where the management is independent from the shareholders. The NSE largely is owned by stockbrokers but this will change when the general public will be able to buy shares and be able to vote for new directors. This will make NSE a profit making company with a benchmark from the shareholders. This is expected to happen later this year.
Specialized Products
We talk of future or derivatives when dealing with future contracts. These are contracts entered now but aimed at future occurrences like commodities price, exchange rate among other. CMA is in the process of introducing a regulated Futures and Derivates market and modalities are being worked up.  The future market will help stabilize commodities prices such as cereals by smoothening out supply fluctuations.
REITS (Real Estate Investor Trust)
This is a collective investment that has characteristics of tradable fixed income on the securities exchange and investments in real estate.
GEMS (Growth Enterprises Market Segment)
IT targets small and medium enterprises (SMEs) to list at the securities exchange and its being done in conjunction with NSE and CDSC. Conditions for listing at the bourse will be ’relaxed‘ as compared to those listed in main segment.
Islamic Capital market
This aims at widening the range of available sharia-compliant product and services.
Dematerialization occurs when a paper security is surrendered by the owner of a security in favor of an electronic record of the ownership of the security. By 30th of November this year, all securities will be held in a dematerialized and physical certificates will cease to be evidence of ownership of securities of any company quoted at the bourse. No more certificates will be issued with respect to de any dematerialized security. Perhaps this move will be more profound for it will affect many investors especially those in the rural areas. As the economy devolves so should be investment. By and large the market is dominant in Nairobi.
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