VENTURES AFRICA – Though the world of East African stock exchanges may seem confusing and mysterious to those unfamiliar with its mechanics, it has in fact never been easier to buy and sell shares in of East Africa. The Nairobi Securities Exchange in particular has undergone a major renovation that means trading in shares in the region’s business hub has never been easier. And with new regulations in place from the Capital Markets Authority (CMA), funds are more protected than ever.
The NSE 20 index has fallen by more than 40 percent over the last nine months, mainly due to factors like inflation, the weak shilling and the Eurozone debt crisis which resulted in foreign investors withdrawing to focus on domestic markets. The approaching election and the war against Somali insurgents may also have played a part. But there are still plenty of opportunities for investors to make money from trading. “Most stocks are trading at a discount,” says Samuel Gichohi, Senior Research Analyst at NIC Securities. “I would strongly advise investors to adopt a buy on dip strategy over the next 18 months.” In spite of the negativities, growth is still expected and bargain hunters can have a field day in buying underpriced stocks.
Investing in the NSE is a positive start in investing in East African stocks as a whole, as Rwanda uses exactly the same investing system as Kenya while Tanzania and Uganda’s are broadly similar. Some brokers, like NIC Securities, have formed strategic partnerships with firms in these other stock exchanges to offer clients access to shares across the region.
The first stage of the process is to find a local stockbroker, of which there are many. Prominent companies include NIC Securities, Apex Africa and Drummond Investment Bank. Gichohi says: “Corporate governance, research and efficiency are the key elements in selecting a stock broker.” Once this process, which should be a diligent one, is completed, the chosen broker will provide the investor with a CDS1 form. Once completed and returned complete with photograph, identification and recent tax return or utility bill, this is used to open a Central Depository and Settlement Corporation (CDSC) account. This is the account through which all funds invested in the NSE must pass and where all tradable shares will be held electronically. The account is active immediately, and is free to open. Prior to this system, introduced in 2004, registrars handled physical share certificates, but the new system is more transparent and efficient, meaning larger volumes can be handled with minimal errors. “Any unscrupulous behaviour can easily be detected and traced to its origin for quick action,” says Gichohi. “Plus the market can handle much larger volumes due to increased scalability in the computerised systems.”
Once this account is open, the investor is free to buy and sell shares at will. This can be done over the phone or by email to the broker, depending on individual companies’ customs and proper identification processes being followed. It is for the process of purchasing and disposing of shares that the brokers charge, and thus obtain their fee. CMA regulated commissions stand at 2.1 percent for trades less than 100,000 shillings ($1,200) in value and 1.85 percent for trades above that amount. These charges apply to both the buying and selling of shares. With some companies, such as Apex Africa, the charge can be negotiable if the investor requires the company to handle very large transactions or is a long-term client. If you plan on making large transactions, it is worthwhile to research this point before settling on a broker.
Some companies, such as Drummonds, will offer advice from analysts and experts over where best to invest but ultimately investors buy and sell shares at their own discretion. The better brokers will conduct risk management exercises on each client. “At NIC Securities we conduct risk profiling of every client so as to determine their risk level,” says Gichoni. “This is then used to structure the client’s portfolio based on their propensity for risk. We also conduct follow up profiling to ensure that investors are advised appropriately on which stocks match their ability to take risk.” Most companies will provide stock tips and recommendations tailored to clients’ needs.
Any dividends from investments, or funds from sales of shares, will be forwarded to you by your broker. The only market regulation is that dividends cannot be deposited into a trading account. While different brokers have different standard policies, funds are usually deposited in a manner of the investor’s choosing. Drummonds usually send a cheque to the investor’s address, but upon request will deposit funds directly into a current account. When signing an agreement with a broker, it is important that you specify exactly how you want any dividends paid to you.
It is not necessary to have a Kenyan bank account, as funds can be deposited in foreign accounts. However, any investor should take into account issues such as the time taken to deposit funds into foreign accounts and holding tax, which stands at 5 percent for a local individual, 10 percent for a local company and a foreign individual, and 15% for a foreign company. It is worth discussing with your broker the best way of minimising any tax you are required to pay on your dividends.
Though most brokers only provide account statements on demand, the CDSC will send account holders updates on the position of the account, dependant on how regularly the account is used. The CDSC also has an SMS facility where investors can receive current account statements direct to their mobile phone.
After the collapse of several stockbrokers in recent years, and having faced criticism for taking a back seat while investors lost money to failing brokers, the CMA has become more active in regulating the system since it was forced to take over Ngene Kariuki and Company stockbrokers in February 2010. Having introduced the automated trading system, represented by the CDSC, it has also been more stringent with its capitalisation and disclosure requirements. These reforms “should go a long way in helping to increase investor confidence and revive our stock markets to their past glory”, according to Gichohi. The increase in the minimum capitalisation requirement has resulted in some smaller brokers being acquired by larger banks. It is not just the CMA that has moved to safeguard investors’ funds held by stockbrokers. The government has plans to increase the investor compensation fund. Meanwhile, individual firms also have their own safeguards against failure, and it is important to ask what these are before opening an account. Drummonds Investment Bank encourages clients not to leave large amounts of money inactive in the account, while Apex Africa separate client and company funds. All good brokers will have some forms of safeguards protecting clients’ money, and it is vital you establish what these are before using them to invest your money.
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