Kenya's financial regulators seek to boost issuers' victim compensation
Kenya's financial sector regulators are discussing a proposal to require fund managers, investment banks and stockbrokers to make full disclosures of their clients whose funds are invested in corporate bonds.
This is in an attempt to improve the value of compensation to victims of distressed bond issuers and save the corporate bond market from further crisis of confidence.
The customer disclosures, the regulators say, will help to ensure bondholders of collapsed or defaulting issuers receive maximum compensation.
Currently, fund managers pool together resources from several clients and make investments in corporate bonds as single investments and usually in their name, without disclosing the identities of the investors. This means that in the event an issuer falls into distress, the investment will be treated as a being from a single investor—the fund manager.
Therefore, in the case of the Capital Markets Authority (CMA), the fund manager's compensation will be limited to a maximum of Ksh200,000 ($1,550.38), and this has to be shared among the many investors whose resources had been pooled to invest in the bond. Assuming the fund manager collected hundreds of millions from investors and bought a corporate bond, the investors would lose heavily.
The financial regulators believe if the identities of the investors in the pooled investment are disclosed, each of them can be treated as an independent bondholder and thus minimise losses.'I think this has been a very good discussion largely and a lot of progress has been made. So, I need to confirm where we are, but I think these discussions have been very helpful. They have involved, of course, all the parties under the joint financial sector regulators and I think they made very good progress,' CMA Chief Executive Wycliffe Shamiah told The EastAfrican in an interview.'The issues of disclosures are the ones we are trying to see how we can make it easier for those who are making these investments, and it has sort of been agreed,' he added.
He indicated that discussion among all financial sector regulators—CMA, Central bank of Kenya, Insurance Regulatory Authority, Retirement Benefits Authority and Sacco Societies Regulatory Authority—are centered on full disclosure of the investors whose money is invested by fund managers, investment banks and brokers in bond issues.'We have learnt from experience. For instance, if you find fund manager A has put Ksh100 million ($775,193.79) in a corporate bond. This fund manager is not using money from one person. There are many people who have given him money, so when the Ksh100 million goes bust there are many people who have burnt their fingers because the money was for many investors,' said Mr Shamiah.'So what we were discussing is how we can make it so that when people are being compensated you don't just look at the fund manager alone. You have a way of the fund manager sharing with the rest of the people who are the specific investors so that each of them can be seen as a separate investor,' he added.
These discussions follow public outcry over the loss of investor funds in several companies that collapsed or defaulted on their debt repayments after issuing bonds.
For instance, in 2015, Chase and Imperial banks were given the go-ahead to issue Ksh4.8 billion ($37.2 million) and Ksh2 billion ($15.5 million) bonds, respectively, only for the two lenders to be pushed into receivership in quick succession by the Central Bank as a result of financial and corporate governance issues.
Other companies that have in the past defaulted on their obligations in the corporate debt market include Nakumatt (collapsed), ARM Cement (in liquidation), Real People Kenya Ltd and Consolidated Bank of Kenya, which was later bailed out by the National Treasury.
Attempts by the CMA to amend the deposit protection law - separating fund managers' bond investments from customer deposits and other bank liabilities to protect bondholders in case of a bank collapse -have been unsuccessful.
The absence of a compensation scheme for bondholders in collapsed companies has instilled fear of investing in corporate bonds. Treasury bonds remain dominant in the Kenyan bond market, accounting for about 99.93 per cent of the debt market.
As of December 31, 2024, there were five active listed corporate bond issuers on the Nairobi Securities Exchange, with the total outstanding amount of bond issues at Ksh19.5 billion ($151.16 million).
These are East African Breweries Ltd (Ksh11 billion or $85.27 million), Real People Kenya Ltd (Ksh390.93 million or $3.03 million), Family Bank Ltd (Ksh4 billion or $31 million), Kenya Mortgage Refinance Company (Ksh1.1 billion or $8.52 million) and Linzi Sukuk (Ksh3 billion or $23.25 million).
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