Capital Markets Authority Provides Guidance

Legislative Developments
Credit Rating Agencies
Licensed Dealers

Legislative Developments

The Capital Markets Authority Act (Cap 485A), which was passed in 1989, was the first legislative instrument to regulate capital markets in Kenya. The enactment of the Capital Markets Authority Amendment Act 2000 in August last year amended this statute comprehensively for the first time. The amendments were formulated on the basis of experience drawn from the Capital Markets Authority's first decade of capital markets regulation in Kenya. They cover many regulatory aspects, including the following:

• the introduction of a new legislative framework for collective investment schemes comprising unit trusts, mutual funds and investment companies;
  
  
• the extension of the scope of the insider trading prohibition and the introduction of stiffer penalties;
  
  
• a new power enabling the authority to appoint a statutory manager in respect of any person licensed under the act;
  
  
• the establishment of a Capital Markets Tribunal to hear an appeal by any person or a reference made to it by the authority; and
  
  
• a new requirement that an information memorandum be published by every public company proposing to offer securities to the public or a section thereof.

Credit Rating Agencies

The authority also recently released guidelines for the establishment of credit rating agencies in Kenya to provide an independent assessment of the credit risk of issuers of securities and financial instruments.

All issuers of commercial paper and corporate bonds must now be rated on the basis of an

"objective and independent opinion on the general creditworthiness of an issuer of a debt instrument and its ability to meet its obligations in a timely manner over the life of the financial instrument, based on relevant risk factors including the ability of the issuer to generate cash in the future."

The authority has issued the following criteria for an applicant to be licensed as a credit rating agency. The applicant must:

• be a body corporate with a "preponderance of an institutional shareholding of repute";
  
  
• be partly owned by an internationally recognized rating agency or have a contractual arrangement with such an agency;
  
  
• have a minimum paid-up share capital of Ksh1.5 million or $150,000;
  
  
• produce evidence of its capacity to perform the role of a credit rating agency;
  
  
• have no association (directly or indirectly) with anyone who has conflicting interests in the area of a rating business;
  
  
• have a proven rating methodology;
  
  
• have a rating process which is based on quantitative and qualitative review of facts; and
  
  
• have a system of maintaining on a confidential basis the information supplied strictly for the purpose of rating by issuers.

At present the authority has licensed only one credit rating agency (a subsidiary of Duff and Phelps) and is interested in further applications. The following names have been specifically referred to in the guidelines as being the kind of agencies the authority is interested in: Standard and Poor, Moody's, Thomson Bank Watch and Fitch IBCA.

Licensed Dealers

The authority has also published guidelines on the licensing of dealers as market specialists at the Nairobi Stock Exchange. Previously, stockbrokers were allowed to perform the dual role of dealers, but due to the potential for conflict of acting as an agent on behalf of clients as well as acting as principals in trading on their own account, the Capital Markets Authority Act was amended.

Dealers are now being promoted as independent market markers whose activities at the Nairobi Stock Exchange, be they selling or buying, will be exclusively on their own account.

Licensed stockbrokers will be allowed to form dealing subsidiaries with a maximum shareholding of 25%. However, fund managers and collective investment schemes including cooperative societies will not be allowed to promote dealer companies.

The incentive to licensed dealers is that capital appreciation or gains on trading of securities made by them will be exempt from tax.

For further information on this topic please contact Karim Anjarwalla or Sonal Sejpal at Kapila Anjarwalla & Khanna Advocates by telephone (+254 2 337 625) or by fax (+254 2 337 620) or by e-mail ([email protected] or [email protected]).