Whenever shares are floated in the market, stock-brokers almost kill one another, fighting for the opportunity to offer advisory services. Some engage in blatant undercutting.
The clique of brokers who learnt the game earlier than the rest know that you don’t waste time putting together long and expensively-bound bidding documents. All you do is quote some ridiculously low figure.
During the KenGen IPO, the transaction adviser won after quoting zero cents. And, during the Safaricom IPO, one of the brokers offered the government transaction advisory services at 5 cents.
So where is the catch? It is in the processing of the provisional allotment letters. You quote low knowing that you will mint millions of shillings in commissions.
And, the tradition was that the lead transaction adviser was the one given a provisional allotment letter. There is a second aspect to the fighting over fat commissions.
Whenever the big boys such as the National Social Security Fund (NSSF) want to sell large chunks of shares, they will approach several brokers to quote for their services.
And, since the brokerage fee is fixed at 1.5 per cent, brokers win on what is called “returnable commission”. You bargain with them and only give the business to the one who offers you the biggest returnable commission.
What I describe here is at the heart of the controversy surrounding the just-ended Kenya Airways rights offer. If you didn’t know, the Parliamentary Committee on Finance, Planning and Trade is investigating the matter right now.
The crux of the matter is the following: why was the provisional allotment letter awarded without competition? The stakes are high, indeed, because big commissions are involved.
Here is how you calculate it. The stock-broker who processes the provisional allotment letter for the rights allotted to the government in the Kenya Airways rights issue is entitled to 1.5 per cent of the monetary value of the shares allotted.
Since the allotment to the government is worth Sh4.756 billion, the total commission payable comes to over Sh71 million.
It is almost free money because the work involved doesn’t amount to much. I don’t want to over-simplify, but the truth is that all it takes is to receive the letter and stamp in the relevant box before signing.
The Kenya Association of Stockbrokers has cried foul. Their views should not be dismissed as driven by vested interests.
I say so because the practice all along has been that in such large deals, a shareholder (in this case the government) is entitled to a returnable commission from the stockbroker who processes the provisional allotment letter.
If the government wanted to be fair, it should have invited all stock-brokers and chosen the one who offered the highest returnable commission.
This is what large institutional investors such as the NSSF do all the time. Considering that neither technical nor financial ability is an issue when it comes to processing provisional allotment letters, this deal should have been subjected to some form of competition so as to protect the interest
of the taxpayer.
I hear the brokers argue that the taxpayer is not at risk because the commissions in this case will be paid by Kenya Airways. I disagree.
All the money for professional advisory services is paid from the proceeds of the issue. The Kenya Airways rights issue has given us a good opportunity to open debate on the domination of advisory services business by a clique of brokers.
Indeed, the stock-broking business in this country is organised around an oligopoly where a few companies gobble up all the lucrative businesses.
It is a tiny elite that operates more or less like a cartel. The parliamentary committee should look at all past issues, study the trends, and come up with recommendations.
My parting shot: In the past, the practice was that the “lead transaction advisor” processed the provisional allotment letter. Why did we bend the rules this time round?