Corporate governance, common markets and investor confidence
Nigel Shaw
Kaplan & Stratton
Nairobi
Nigel Shaw (Bio)
Kenya has over time proved to be the preferred investment point in the East African region due to its strategic location and free market economy which places no significant restriction on the movement of foreign currency in and out of the market.
This guide will focus on changes to corporate finance legislation and their implications and potential challenges. The most important changes include the promulgation of the new Constitution of Kenya (the 'Constitution'), The Capital Markets Act (CMA), recently enacted legislation and other commercial bills pending before Parliament.
Within the region, the process of implementing the EAC Common Market Protocol is ongoing. Member states are yet to put in place supporting legislation to fully realise the benefits of the seamless market arrangement.
The constitution of Kenya
The new Constitution was brought into law on August 27 2010 which inter alia sets the reform agenda for better governance. In general the new Constitution will lead to the creation of new institutions that will promote good governance and in turn boost investor confidence. However, the Constitution contains articles that limit the period that a foreigner may hold land to 99 years. This includes any company which has any element of foreign shareholding. It has already been pointed out to the Government that limiting the interest period to 99 years will not be conducive to foreign investors looking to invest in Kenya. The Constitution also provides that any interest in land that is currently held by foreigners which is in excess of 99 years will have the term reduced to 99 years and freehold land will be converted to 99 years leasehold interest. There is no provision for compensation to foreigners in the Constitution. The Constitution gives Parliament a time frame of eighteen months for the enactment of legislation relating to land and it will be interesting to see if the time lines are met and the impact the legislation will have on the business environment.
The capital markets
The Capital Markets Authority (CMA), the country's capital market regulatory body, has drafted several regulations geared at safeguarding the interests of the investor and reducing the stranglehold that the stock brokers have on the Nairobi Stock Exchange (NSE).
The CMA continues the process of demutualisation of the NSE pursuant to the Demutualisation of the Nairobi Stock Exchange, Guidelines, 2011, which will see the conversion of Nairobi Stock Exchange Company Limited from a company limited by guarantee to a company limited by shares. The process has however been hampered by a row between the CMA and stockbrokers which has seen the authority fail to meet the April target for completion of the demutualisation.
The CMA has also introduced the Capital Markets (Amendment) Bill, 2011. This Bill seeks to introduce a futures market for trade in commodity derivatives. Through this Bill, the CMA will recognise self-regulatory organisations whereby a securities or a futures exchange is able to exercise primary supervision of its members, or users of its services in line with international best practices. An over the counter market for bonds will also be introduced where bonds are traded outside of the approved securities exchange.
Recently enacted legislation
Parliament passed the Competition Act, which repeals the Restrictive Trade Practices, Monopolies and Price Control Act. Significant changes as a result of the new legislation include: the creation of the Competition Authority of Kenya as an autonomous body to oversee issues related to competition; clearly defining competition laws and increasing penalties for engaging in anti-competitive practices.
The East African community
The EAC Common Market Protocol, which provides for the free movement of goods, services, persons, labour and capital, commenced on July 1 2010. However, delay by partner states in enacting legal and regulatory frameworks to harmonise national laws in conformity with the Protocol is making implementation difficult.
Regional cooperation was also emphasised at the second COMESA-EAC-SADC tripartite summit which was held on June 12 2011. Member states adopted a development approach to the tripartite integration process that will be anchored on market integration based on the tripartite Free Trade Area, infrastructure development to enhance connectivity and reduce costs of doing business as well as industrial development to address the productive capacity constraints.
Commercial bills pending before parliament
Commercial bills pending before Parliament include: the Limited Liability Partnership (LLP) Bill, the Partnerships Bill, the Insolvency Bill, Consumer Protection Bill and the Companies Bill. These bills are aimed at easing business activity and if the set of bills are passed and implemented, we will see numerous changes which will revolutionise business with a view to attracting foreign investment.
The Bills are also 'aimed at reducing 'red-tape' and making both entry and exit from business faster and less costly'. The proposed Companies Bill, 2010 allows for single member companies as opposed to the current Companies Act which sets the minimum number of persons allowed to form a private company at two. The Insolvency Bill also proposes to prioritise corporate rescue over liquidation.
Applicants under the proposed Bills would be able to incorporate businesses by filling out forms provided by the registrar instead of having lawyers prepare lengthy memoranda of understanding and articles of association. Additionally, liquidation of insolvent businesses would become a last resort and limited liability partnerships (LLP) would be allowed to continue even if the partners retire or die.
The Companies Bill also has several provisions regarding sending of resolutions by electronic means, sending of documents relating to meetings in electronic form, power to require delivery of information by electronic means and general provisions relating to electronic communication.