Capital Markets Authority (CMA) board chairman Mr James Ndegwa now wants the Court to throw out activist Okiya Omtatah’s petition seeking to oust him for “illegal appointment”.
In January 2020, Omtata filed a petition in the High Court seeking to oust the CMA board led by Ndegwa over irregular and unconstitutional appointments that entail conflict of interest.
Others who would exit the regulator if Omtatah’s petition succeeds include John Kipkosgei Birech, Freshia Mugo Waweru, George Mose Moibi, Thomas Nzioki Kibua, Christine Okoth and Peter Mungai, who are said to be beneficiaries of a flawed appointment process by the then Cabinet Secretary for Treasury Henry Rotich.
The petition was however silently referred to the Employment and Labour Relations Court.
In a response filed on behalf of Ndegwa and the affected board members, lawyer Waweru Gatonye says that the court lacks jurisdiction to hear the petition.
“This Honourable Court lacks the requisite jurisdiction to hear and determine the Petition in light of the provisions of Article 162 of the Constitution as read with Section 12 of the Employment and Labour Relations Court Act; the Petition touches on the powers of the President and the Cabinet Secretary for the National Treasury and Planning to appoint and remove the Chairman and board members of the Capital Markets Authority, and further seeks to question the constitutionality of Sections section 5(3) (a) a (b) of the Capital Markets Act, Cap 485A Laws of Kenya,” argued Gatonye.
However, the lawyer in his response failed to address the issue of conflict of interest, which was paramount in the petition.
In the petition filed by Omtatah, Ndegwa was accused of being a player in a market that he regulates, which amounts to conflict of interest to the “extent that he is a public official who regulates his private businesses”.
Ndegwa is the Chairman of First Chartered Securities (FCS). FCS owns ICEA Lion, which owns ICEA Lion Asset Managers, which manages the ICEA Money Market Fund, which is regulated by the CMA.
ICEA Lion recently acquired Stanlib, hence, Stanlib Money Market Fund is also under ICEA lion. Stanlib Money Market Fund is regulated by CMA. FCS and it’s afflictions own a 12 percent stake in NCBA, which is listed in the Nairobi Securities Exchange. Hence, NCBA is also regulated by CMA.
NCBA also runs NCBA money market fund, which is also regulated by CMA.
The Ndegwa family also owns a controlling 50.9 percent stake in the Unga Group which is also listed with the Nairobi Securities Exchange (NSE).
Ndegwa was re-appointed to be the Chairperson of the Board of CMA, for a period of three years with effect from April 18, 2018.
“Initially, H. E. the President handpicked and appointed him to the public office without subjecting him to a transparent, competitive, inclusive, and merit based recruitment process open to public participation,” argued Omtatah.
Ndegwa and his team have also termed Omtatah’s case as prejudicial, since there is another case in the Court of Appeal seeking to determine the question of the jurisdiction of the Employment and Labour Relations Court in matters relating to the appointment and revocation of Appointments of State Officers.
During his reign, CMA has enacted and enforced policies which are very friendly to banks and are very unfriendly to competing non-bank players, including ensuring that banks are the only ones who are trustees and banks control the business funding market making it very difficult for businesses to get loans at reasonable prices.
This is in contravention of article 75(1)(b) of the Constitution that requires state officers to avoid compromising any public or official interest in favour of a personal interest.
Under Ndegwa’s watch, Unit Trust Funds (UTF) assets recorded an annualized growth of 1.1 percent in Q1’2020, compared to listed bank deposits which grew by 14.3 percent in Q1’2020.
Mutual Funds/UTFs to GDP ratio stood at 5.4 percent, which is still very low compared to global average of 61.8 percent.
UTFs are collective investment schemes that pool money together from many investors and are managed by professional Fund Managers, who invest the pooled funds in a portfolio of securities to achieve objectives of the trust.
In his petition, Omtatah says that the board has been stifling competition from independent Money Market Funds in favour of those owned by banks.
“The chairperson and the independent members of the board are captive to vested interests, including to the point that they have literally become agents of banks. For example, the conflicted board has ensured that banks are the only ones who can be trustees and it is very unfriendly to competing non-banks,” added Omtatah.
According to the World Bank, in developed markets, capital markets make up 60 percent of business funding and only 40 percent comes from banks. In Kenya, capital markets funding is only 5 percent with 95 percent coming from banks, which has made loans expensive and harder to get.
“This anomaly is because our capital markets have been captured by a few banking interests which do not want capital markets to grow, so that the economy is dominated by banks. Big initiatives like the President’s Affordable Housing agenda cannot take off without substantial capital markets funding, so I see fixing our archaic capital markets regulatory framework as a national priority, otherwise we shall continue to have scarcity of business funding, and the little that is available is very costly ” says Cytonn Investments CEO Edwin Dande.
This comes at a time most money markets funds have been pushing to have CMA expand eligibility of Trustees of Unit Trust Funds to include non-bank Trustees such as Corporate Trustees, since most banks have UTFs, hence refuse to be trustees of other UTFs, which is a legal requirement.