African Investor Relations

On its Facebook account the Nairobi Stock Exchange suggests that high coffee prices could be good for shares listed on the exchange in the coffee industry. In a comment underneath, an investor bemoans the fact that even though the coffee prices are high the shares of Sasini closed lower. This exposes the complexities of capital markets to investors and underlines the need for shareholder education initiatives in Kenya and more importantly the need for the regulator to refrain from offering investment advice.

I do not believe that regulators have any place in making such statements to the market and if accidental comments are made (which I hope this is) then the opportunity should be taken to fully brief the investor on why share prices might fall following the announcement of seemingly good news. This can be a slippery slope because the more you explain the more you need to explain and a regulator has no place doing this when an actual industry or listed company is mentioned.

My key message is that if social media is used in African markets then it should be done in a fully informed manner. Fully informed of the rights and obligations and legal requirements applicable to regulators.

This was not a serious transgression but it does underlie the need for more awareness on the NSE’s side. Consider such utterances in an IPO situation and consider the heavy speculation and extraordinary (unsustainable) price rises in previous Kenyan IPOs and the matter could become a lot more serious (when the share price comes crashing down after all the stagging).

I read a few more posts and there is an utterance about the euro crisis from the NSE. Whilst the NSE has given a disclaimer on the content of its Facebook account, and the use of Facebook is a positive move to bring investing in the mainstream, there should be supporting education initiatives for the regulators and investors to ensure that Facebook’s use is fully understood. Any comment like that relating to the share price of Sasini should be seized upon to explain in detail why share prices can go down on the release of good news. The absence of any explanation just leaves the website user frustrated and disillusioned.

In another post the NSE says this

‎”Be fearful when others are greedy and greedy when others are fearful………..’ Invest in stocks when are others are running away from the market and sell when others are running back to the market.”

It should have been attributed to Warren Buffet but was not, as was pointed out by a NSE Facebook user. Its great to see the market correct the regulator or at least raise issues with the regulator whenever a wayward post is published by the NSE – social media is such a leveller and that’s why it needs to be taken seriously by regulators.

I have previously blogged about Kenya’s absence of internationally acceptable shareholder communications practices, law and stock exchange practices. See my previous blogs here.

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The Nairobi Stock Exchange sells a broad array of data and generates close to US$100,000 a year from this activity which accounts for approximately 2.5% of total revenues. There are 7 authorised data vendors whose deposits held at the NSE total about US$8,500. These data vendors re-package the NSE data into products and services that theoretically “add-value” to the users thereof. Data vendors in most cases re-charge for this data or package it in a way that they are able to generate revenues therefrom eg portal sites, that generate advertising revenues by virtue of their website traffic.

For the larger media firms such as Thompson Reuters and Bloomberg the value add to investors is significant as the data is bundled into global databases and other products.

There is a bigger question here for the NSE and that’s whether the foregone benefits of wider information dissemination exceed US$100,000 of revenue every year? “A bird in the hand is worth two in the bush”? At the moment it would seem that its easier to justify the 100-grand-in-the-hand. Is the NSE rent seeking from data that it should not be?

The products below show what you can buy – you can buy this information from the NSE using your cell phone! Which IS progressive, but is it really necessary? As a shareholder or an active investor, is it acceptable for me to pay for basic investment data? How many people does NSE have to sell to, to add to the “bottom line” and is the “bottom line” becoming more and more important for the NSE now that it is de-mutualising? Are the long term interests of Kenya’s capital markets being prejudiced by virtue of the fact that the  NSE is a monopoly on investment data and is selling it?

An alternative view is that this investment data should only be consumed by those that understand it and can afford it and through registered investment professionals i.e brokers. Yes, there are the ignoramus investors out there being misguided all the time as a result of their ignorance, but that’s the nature of the industry (look at World markets and they are supposed to be filled with educated people). From a regulators perspective, one could argue that  no-one really understands the markets so who cares? My retort to this response is consider the power of 4 million ignoramuses (those with access to internet in Kenya and with shares but no knowledge) being misguided by their ignorance and able to express this ignorance on a global platform 24/7. Phew!! An example? IPOs whose share prices rocket to stratospheric levels and then collapse: no shortage of evidence of this in Kenya.

Is this sort of ignoramus behaviour acceptable to the regulators whose core obligation is to protect investors?  ”An informed investor is a protected investor” I believe.

Whether African regulators like it or not, the growth of social media is changing the landscape for everyone. Social media is full of ignoramuses. In the absence of wide and engaging education efforts by the regulators (now) there is significant scope for the ignoramus market to completely dominate (over-positively or over-negatively) the general public’s perception. In that situation the regulator can’t do anything its too late. So they have to be pre-emptive. One could argue that the listed companies should bear some responsibility for educating investors and enabling them to make informed investment decisions – but that’s a different conversation.

My view is this:-

- the NSE should review the products below and make free the ones that are not well subscribed. Charge the top data vendors for the value add data / systems / feeds. Don’t charge for anything else (the basic products) but make it freely available to anyone who wants to sign up.

- engage the market as widely as possible with an online shareholder education course (linked to social media) – charge US$20 for it (enable payment by M-Pesa) and if you get 3,000 people signing up then that’s US$60,000 of the US$100,000 that you might have forgone above. Investors become more “informed” and “protected”. These education initiatives deal specifically with irrational exuberance in IPO situations and ignoramuses are learning things rather than buying data.

There’s a degree of intuition needed here in deciding the way forward for the NSE and I don’t have the stats to be able to say much more. The fact is that they have been selling data now for some time and know what the market does and doesn’t want. They need to reflect on this and amend their strategy to achieve both objectives.

Why is this relevant?

Well with the World melting at the moment, with Africa being seen as the last investment frontier, and with foreign investment at risk, there should not be any barriers to getting hold of timely information. The bigger picture is that the way the web is developing, all of this information is going to be available for free anyway in the future to almost everyone, by phone,iPad, PC, whatever and its only the likes of Thompson Reuters and Bloombergs that can justify the need to pay to re-package packaged real time data on account of their professional investor bases.

All of this debate is all so terribly over-intellectual isn’t it?

BUT, ask yourself whether 10 years ago you would have predicted that so much information and functionality could be available on the web FOR FREE. So really at the end of the day the future for African capital markets is whether the regulators that run them have a vision, a long term vision that embraces how the web is changing the world. A vision that does not involve US$100,000 now, vs benefits that are intangible and in the future and for the greater good. Like investor education. Mmmmm….

Daily FIX Log File (flf)Contains all the day’s trading activity (both equity and debt) in electronic form.	Kshs.50000(monthly subscription)+/- US$6,480 p.a.
End of Day Listed Equity Securities Data (eded)Listed equity data, which is published no sooner than sixty (60) minutes after the close of trade on each trading day.Available in excel format	Kshs.7200(monthly subscription)+/- US$936 p.a.
Historical daily Price lists for bond data (hdpl-bond-market)Historical daily market reports for equity and debt data. Available in excel format.Data Available From 24th Feb 2011 to 13th Oct 2011	Kshs.30(per day’s price list)+/-US$71 p.a.
End of Day Listed Debt Securities Data (eddd)Listed debt data, which is published no sooner than sixty (60) minutes after the close of trade on each trading day. Available in excel format	Kshs.7200(monthly subscription)+/- US$940 p.a.
Historical daily Price lists for equity data (hdpl-equity-market)Historical daily market reports for equity and debt data. Available in excel format.Data Available From 4th Jan 2010 to 13th Oct 2011	Kshs.30(per day’s price list)+/- US$71 p.a.
Historical weekly Price lists for equity data – weekly market statistics (hwpl-equity-market)Historical weekly market reports for equity and debt data. Available in excel formatData Available From 4th Jan 2010 to 16th Sep 2011	Kshs.100(per weekly report)+/- US$56 p.a.
Historical weekly Price lists for debt data – weekly bond statistics (hwpl-bond-market)Historical weekly market reports for equity and debt data. Available in excel formatData Available From 4th Jan 2010 to 2nd Sep 2011	Kshs.100(Per weekly report)+/- US$56 p.a.
Historical monthly trading equity volumes (hmev)Historical trading volumes per month in excel formatData Available From 2010 to 2010	Kshs.1000(cost per annum)+/- US$11 p.a.
Historical monthly trading equity deals (hmed)Historical equity traded deals per month in excel formatCurrently No Files	Kshs.1000(cost per annum)+/- US$11 p.a.
Historical monthly trading equity turnovers (hmet)Historical equity traded turnover per month in excel formatCurrently No Files	Kshs.1000(cost per annum)+/- US$11 p.a.
Historical monthly debt traded deals (hmdd)Historical debt traded deals per month in excel formatCurrently No Files	Kshs.1000(cost per annum)+/- US$11 p.a.
Historical monthly debt traded volume/turnovers (hmdv)Historical debt traded volume/turnover per month in excel formatCurrently No Files	Kshs.1000(cost per annum)+/- US$11 p.a.
Historical monthly foreign investors trading data (hfid)Historical monthly trading summary of foreign investors. Information consists: purchases, sales, total turnover, percentage to total equity market turnoverAvailable in excel format.Data Available From 2009 to 2010	Kshs.3000(cost per annum)+/- US$33 p.a.
Historical Annual equity turnovers (historical-annual-equity-turnovers)Historical equity traded turnover per year in excel formatData Available From 1992 to 2011	Kshs.1000(cost per annum)+/- US$11 p.a.

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The Companies Bill in Kenya 2008 has a few progressive parts to it, and when its finally adopted, say in 2032, it will impact Kenya’s capital markets significantly. However, there is a disconnect however between what is achievable and practical in Kenya and what the new Companies Act says.

Take for example the following sections of the act regarding the electronic storage of company records. The use of the word “may”, without saying “how” is dangerous from a practical perspective. There is no 5 year definitive road-map for the development of Kenyan capital markets, one that adopts a technology platform, indicates how it’s to be embedded in current practices and evolves from there. The Companies Act has just been dumped and the mess will be sorted as we go along.

The initiatives to de-mutualise the NSE may go well, but unless the market knows what its final goal is, Kenya’s market will remain fragmented and imperfect.

The growth of the market will be driven by bringing Kenya’s uninformed retail shareholder base becoming an informed retail shareholder base. At the moment there is nothing to suggest that this is happening in a structured and meaningful manner. Legislation that adopts electronic platforms without considered advice on the implications is set for failure and the end user, the investor, is likely to suffer.

618 Meaning of “company records”

In this Part “company records” means any register, index, accounting records, agreement, memorandum, minutes or other document required by the Companies Acts to be kept by a company.

619 Form of company records

(1)        Company records—

• (a)        may be kept in hard copy or electronic form, and
• (b)        may be arranged in such manner as the directors of the company think fit, provided the information in question is adequately recorded for future reference.
• (2)        Where the records are kept in electronic form, they must be capable of being reproduced in hard copy form.
• (3)        If a company fails to comply with this section, an offence is committed by every officer of the company who is in default.

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Shareholders can force listed companies in Kenya to publish their shareholder concerns over the audit, or cessation of an auditors services on a website. The threshold at which this can be mandatorily implemented is 5% of the issued share capital or 100 shareholders. Given the high number of shareholders in Kenya and the high number of Facebook users getting the 100 shareholders in line could be easy to line up some rather disruptive PR for a listed company. What’s the purpose of this, really?

458 Members’ power to require website publication of audit concerns

(1)        The members of a quoted company may require the company to publish on a website a statement setting out any matter relating to—

(a)        the audit of the company’s financial statements (including the auditor’s report and the conduct of the audit) that are to be laid before the next financial statements meeting, or

(b)        any circumstances connected with an auditor of the company ceasing to hold office since the previous financial statements meeting, that the members propose to raise at the next financial statements meeting of the company.

(2)        A company is required to do so once it has received requests to that effect from—

(a)        members representing at least 5% of the total voting rights of all the members who have a relevant right to vote, or

(b)        at least 100 members who have a relevant right to vote and hold shares in the company on which there has been paid up an average sum, per member, of at least 1,000 shillings.

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Nation Media, a listed company on the Nairobi Stock Exchange, has cross-listed on the Rwanda Stock Exchange. It is also cross-listed on the Uganda Securities Exchange and the Dar es Salaam Stock Exchange.

As a cross listed company what are the basic investment data information tools to employ?

1. Online charts of the share prices and volumes for the shares traded in each country in the currency of the country and volumes related to the shares traded in THAT country. WHY? if investors are going to trade shares they need to know what the likely market is.
2. Share chart with prices and volumes for the whole company in the home currency.
3. Liquidity statistics of trading in each market.
4. Full implications of how the trading system works cross border – what to do when and how and who to see and when
5. A summary of the communications practices employed to ensure that information is released broadly and simultaneously in each market.
6. Statistics on cross border trades in shares – volumes and dates.
7. A website APP that provides an indication of the arbitrage opportunities implied from the differing share prices in each market.
8. An overview of the number of shareholders in each market (this information is available at the click of a button for share registrars).
9. An overview of the operations in each market of the listed company.
10. The contact details of the registered brokers and share registrars to contact in case of a query.
11. Physical address where annual reports (physical ones) can be requested or collected.
12. An overview of the primary reporting regulations applicable to the company. For example Kenya now permits listed companies to ignore sending annual reports to shareholders but Tanzania does not allow this – which country rules?

There is no evidence to suggest that the cross-listings in East Africa have any substance to them from a market trading or capital markets perspective. I may be wrong but wouldn’t it be nice to have some stats.

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The 2010 Company of the Year Awards in Kenya sponsored by the Kenya Institute of Management failed to recognise investor relations in its award criteria. This is at a time when there is no firm legislative environment and the Companies Bill 2008 has yet to be promulgated because Kenya’s legislators are very busy.

Companies have set their own standards of shareholder communications. This is not good because none of them are doing a good job in the regulatory vacuum. Kenyan companies are missing out on an opportunity to shine.

The winners of the Kenyan Companies of the Year Awards are:-

The criteria for the COYA awards are everything except investor relations. That’s all you need to know.

As you are aware the standards of corporate governance have regressed in Kenya because of the obligation of shareholders to locate their shareholder proxy materials rather than have their company obligated to provide them. It all started when Safaricom sought exemption from sending out annual reports to its shareholders and the regulators did not put in place a quid pro quo. That started a trend. An unnecessary one.

Companies are able to determine their own standards of shareholder communications and this means that the majority shareholder (the one with the votes) determines what this should be. Director ignorance and apathy and an uninformed public and some sleepy regulators means that listed companies in Kenya have a unique opportunity to shine in this area of governance.

It’s an opportunity lost.

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I spoke to a Kenyan listed company yesterday. It’s starting to happen as I predicted. Shareholders are demanding hard copy annual reports.

Listed company directors in Kenya have sat back content with saving US$20,000 of printing costs now that the hard copy  annual report distribution requirement has been dropped by the regulatory authorities. But they have not invested in any PR or any additional resources to ensure that shareholders get the information that they are looking for.

But shareholders want their “book”. The annual report is a tangible product of their investment in the company. I think the issue is emotional for a retail investor. No “book” means something is wrong. A “book” means that they can read the pictures and get a nice warm feeling and touch the pages and smell the ink.

Whilst retail investors may not understand the contents, the receipt of the annual report is an important act of transparency that investors have come to expect and I suspect that even if listed companies in Kenya had zooty websites and email alerts, there would still be a concern from retail shareholders if they did not receive a hardcopy.

This points to the obligation of listed company directors to make use of all resources available to them – websites, hard copies etc. Its the management of this that needs attention otherwise a company doing all of the right things (wrongly) may still have a poor corporate reputation.

Where the regulators in Kenya went wrong is that they acceded to the requirements of Safaricom who needed  to drop the requirement to sent annual reports to all of their shareholders – all +/-800,000 to “save costs”. What should have happened is that the share registrars should have been required to record whether a shareholder could opt-in to receiving electronic communications (as defined – no-one has defined the content for this so far). Its a simple mailing list management function. The opt in should have been permanent.

At the moment this opt in function has not been functional in Kenya. The the USA the market moved from a physical to an opt in electronic regime, and then the default became electronic and the hard copy opt in was offered. But only after experience showed that this was working.

Kenya is part of Africa and so we can ride rough shod over retail investors because there are no consequences. They are uneducated, have no reasonable recourse to any law, to capability of representation, no support from the regulators.

But they are humans and they have emotions and this needs to be managed. At minimal cost to listed companies.

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The traditional model for the establishment of a stock exchange in Africa for smaller markets from scratch is to beef up the finances of a single private sector broker with development finance. Give them a fixed term monopoly in return for undertakings to carry out market development and shareholder education initiatives. It’s a quid pro quo.

This business relationship would also restrict the operations of the broker to that of trading in equities and directly related activities, say trading in T bills or bonds to ensure that the party was solely focused on developing the market.  Furthermore, the broker’s role would also to be to assist putting in place the regulatory framework.

Do I know what I am talking about? Yes, actually. I did this for the Malawi Stock Exchange, with the wise guidance of people that know African capital markets better than anyone: Mark Tunmer and Bill Picken.  I was the first CEO and Secretary of the Malawi Stock Exchange. The model worked well and should have been used in more start up markets.

There are no less than 7 brokers in Rwanda. There isn’t (or does not appear to be) the critical mass of prospective listings to enable these people to make a living from commissions. There isn’t the critical mass of corporate advisory work to enable these people to make a living out of fees. They are not there for free. So what is the motivation?

Rwanda has allowed too many brokers,  which dilutes their overall commitment to the market. it dilutes the resources available to investors and infrastructure.

I assume that the submission of business plans in licencing applications was done – so where is the critical mass of transactions that’s going to enable the Rwanda Stock Exchange to flourish? Membership to the trading platform on the Rwanda Stock Exchange should be restricted by some means, say capitalisation or undertakings to assist the Government with shareholder education initiatives.

As with most markets its up to Government to provide the supply of equities – this is what was responsible for the growth of the Malawi Stock Exchange and many others including Kenya – and with this comes a big responsibility to educate shareholders which most markets have failed to do. Especially Kenya. On the private sector front, the east African cross listings appear to have heralded a new era of economic and investment unity. In truth, the structure of the cross listings and the manner in which equities are traded is so inefficient and costly as to render the initiative meaningless. I challenge you to get any statistics on the value of shares that trade cross border.

The prospect of cross listing of East African equities on the Rwandan Stock Exchange is a political one and not a private sector one, for those companies that are considering it. For the same reasons I mention above, cross listings are not going to support the myriad of brokers in commissions and large bonuses. Why the depositary receipt structure was not adopted I don’t know.

So I don’t get it. But perhaps I am not in the loop on these things.  What is interesting though is Rwanda’s commitment to be a “cyber land-locked island” and have a computer on every desk. This is an ideal opportunity to permit electronic communications for listed companies and implement a comprehensive shareholder education programme. And make it available to Kenyans and Ugandans and Tanzanians. They need it.

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