Capital markets play a significant role in an economy as one of the most powerful drivers of economic growth and wealth creation. In Kenya, particularly, capital markets play a vital role in economic development as they promote growth in the real economy by enabling access to long-term financing for producers of goods and services, and entities tasked with infrastructure development.
In Kenya, when we talk about capital markets we are talking about an industry with various industry players. These are:-
Capital Markets Authority
This entity, also known as CMA, is a government financial regulatory entity responsible for supervising, licensing, and monitoring the activities of the capital markets within the Republic of Kenya, market intermediaries, including the stock exchange and the central depository and settlement system, and all other persons licensed under the Capital Markets Act of Kenya.
The Capital Markets Authority regulates the capital markets sector by providing guidelines for corporate asset allocation.
The Nairobi Securities Exchange;
The Nairobi Securities Exchange PLC, formerly Nairobi Securities Exchange Limited, is a principal securities exchange in Kenya that offers an automated platform for the listing and trading of multiple securities.
It offers a trading facility for local and international investors and issuers looking to gain exposure to Kenya’s and Africa’s economic growth. The Company operates under the jurisdiction of the Capital Markets Authority of Kenya. For a company to be a publicly listed company it has to have its shares available for trading on the Nairobi Securities Exchange.
The Nairobi Securities Exchange provides rules and regulations that provide the framework and the policies that govern listing, trading of shares, and reporting and this ensures that they are compliant with fair trade practices and it also protects and guides investors.
Furthermore, it is also responsible for introducing trading products in line with global standards so that we have an active and trusting exchange and also for licensing of stock brokers who are member companies of the exchange.
Stock Brokers;
To buy and sell shares, a shareholder has to access the exchange which is where the shares of the public company are listed, but this can only be done through a member of the exchange as the public does not have access to the exchange.
Access is therefore granted through a member of the exchange and in this case, the licensed stock brokers or investment banks. These are companies that are licensed members of the Nairobi Securities Exchange and are authorized to access the exchange, or facilitate or book a buy and sell transaction request from the public market that wish to invest.
The CDSC or the Central Depository and Settlement Corporation;
This is another player in the market. CDSC is a private limited company that is authorized by the Capital Markets Authority – the regulator- to provide an automated platform for clearing, delivery, and settlement facilities in respect of trades that are booked.
Whereas before there would be a manual process clearing and settlement is now done automatically in the event of a successful trade on the NSE.
This means that when a trade is booked and there is a willing buyer and a willing seller, once the funds have been confirmed to have moved, that is, they have settled, then CDSC automatically moves the shares from the seller to the buyer’s CDS Account.
The CDSC holds official electronic records of all the shares that are listed and held by the shareholders on the Nairobi Securities Exchange, shares are currently held either through a Certificate or through a CDS account. (Shares still held in certificate format cannot be traded or transferred until they are converted into an electronic format through a process called dematerialization).
Regardless of the format in which the shares are held, the entire shareholding across these two formats has to match the shares capitalization or the entire amount of shares that that listed company has available on the Nairobi Securities Exchange for trading.
Shareholders who wish to trade on the exchange – as the settlement and movement is done through the CDSC platform – need to have a CDS account that is open and managed through approved stockbrokers or custodian banks.
Share Registrars;
Share Registrars sit as service providers to the listed company in the capital markets framework. They are responsible on behalf of the listed companies to keep an updated register of the listed company’s shareholders, their shareholdings, their details in compliance with the various listing rules and this register can either be used for inspection by a shareholder, for reporting purposes of the various regulatory required reports that are done through the regulators or it is used when the company wants to implement a corporate action.
The most common corporate action known in the industry is a dividend payment. If a company wishes to offer dividend payment it has to have an accurate register of the shareholder and their shareholdings so that the dividend can be effective.
Share Registrars are not involved in the trading, as the trading is done strictly through the CDSC platform and facilitated by stock brokers and investment bankers who are members of the Nairobi Securities Exchange.
Share registrars are service providers to companies, who do not have access to the exchange and do not participate in trading, however, because they have to have the details and register to be able to facilitate any corporate action or facilitate any reporting or inspection of the register, they liaise with the CDSC for the updated shareholder records of their respective issuer clients. This is to ensure corporate actions are paid to the rightful investors as at the date when the shareholder register was announced to have closed.
In addition to dividend payments, or corporate actions they facilitate the conversion of share certificates to electronic format (dematerialization) as well as manage correspondence and queries from shareholders on behalf of listed companies.
To further understand how their role differs from other players in the market, for any shares transfer that is a result of a movement on the CDSC platform, that is, a trade or transfer between own or different CDS Accounts, the facilitation is by the stockbroker.
However, in the case of a transfer or a movement of shares that involves an investor who holds their shares in a certificate format, then that transfer has to come through the share registrar for them to verify the shareholder and their shareholdings because they hold the details of the investor in their register. This shows that there is indeed a lot of interaction between the industry players.
This sums up the structure of the capital markets framework.
