Capital markets channel savings to the most productive investments, driving economic growth. Kenya has the most developed capital market in East Africa, backed by a strong legal and regulatory framework. This article provides an overview of the key laws and regulations governing the capital markets in Kenya.
Capital Markets Act
The Capital Markets Act (Cap 485A) is the main enactment regulating capital markets in Kenya, establishing the Capital Markets Authority (CMA) as the regulator and providing for its powers and functions. Its main provisions are:
Section 11: Creates the CMA as a body corporate with the powers to license, approve, regulate, and supervise capital market intermediaries and issuers.
Section 12. Power to issue guidelines, notices, and circulars Section 12 provides that the CMA may issue guidelines, notices, and circulars to regulate capital market operations.
Section 30A: All public securities issues must first be approved by the CMA and comply with disclosure requirements.
Section 34: Prohibits insider trading and market manipulation.
Section 35A: Provides for investor compensation in case of licensee default.
It is followed by the Capital Markets (Licensing Requirements) Regulations, which set out the licensing requirements for market intermediaries, such as brokers, dealers, and investment advisers.
Nairobi Securities Exchange Listing Rules
The Nairobi Securities Exchange (NSE), Kenya's major stock exchange, manages the trade in equities and debt securities. The NSE Listing Rules specify the requirements for listing, ongoing disclosure, and trading securities on the exchange. Summary of the rules:
1) Shares must have a minimum par value of 50 cents.
2) Initial public offerings (IPOs) must have at least 30 shareholders and 100,000 shares.
3) To list derivatives, the underlying must be jewelry, stocks, indices, bonds, money markets, currency, commodities, interest rates, property, foreign exchange, indices, or international securities.
4) Derivatives must be issued in a format that is compatible with NSE settlement and clearing requirements
3: (outlines the minimum requirements for the initial listing of securities to be traded on the exchange, including minimum share capital, track record, and the extent of shareholder spread)
Rule 8: Requires continuous disclosure of material information by listed companies.
Rule 12: Regulates trading in securities, including provisions relating to price stabilization and market making.
Rule 16: Gives the exchange power to suspend and delist securities if they aren't in compliance with the listing rules or at the issuer's request.
Listing Rules compliance is a core responsibility for companies listed and their directors.
Central Depositories Act
The Central Depositories Act 2000 provides for the establishment, operation, and regulation of central depositories for the electronic holding and transfer of securities, and the Central Depository and Settlement Corporation (CDSC) is the operator of the central depository system. The Act's key provisions are summarised as follows:
Section 5: All issuers of securities listed on an exchange authorized by the CDSC must deposit those securities with the CDSC.
As the securities become dematerialized, the CDSC has improved the country's effectiveness, transparency, and security.
Collective Investment Schemes Regulations
The regulations with specific reference to the setting up, operations, and sales of collective investment schemes such as unit trusts and mutual funds are the Capital Markets (Collective Investment Schemes) Regulations 2001. The most important of these regulations include:
Regulation 5: Requires all collective investment schemes to be licensed by the CMA.
38. - (1) This regulation specifies the investments that collective investment schemes are allowed to carry out, listing as examples the acquisition of real estate, listed securities, and money market instruments.
58. Schemes - annual and semi-annual reports to be published in the prescribed manner, containing audited financial statements and portfolio holdings.
They are intended to prevent misconduct and to ensure the responsible management of collective investment schemes.
Recent Legal Developments
Derivatives Markets Regulations
In 2020, the CMA promulgated the Capital Markets (Derivatives Markets) Regulations, establishing derivatives trading and clearing in futures and options. These rules aim to deepen Kenya's capital markets and introduce new risk management.
Sandbox Guidance
In 2021, the CMA also published its Guidance Note on Regulatory Sandbox to Support Financial Technology and Innovation in the Capital Markets. This note provides the framework for testing innovative fintech products in a live setting with regulatory oversight, reflecting the CMA's willingness to accommodate fintech innovation.
Corporate Governance Code
The CMA's 2015 Code of Corporate Governance Practices for Issuers of Securities to the Public lays out best practices for the governance of listed companies. In 2021, the CMA began aligning it with emerging international standards and addressing issues such as sustainability, diversity, and stakeholder engagement.
These developments illustrate the adaptability of Kenya's capital markets legal regime to new products, technologies, and governance norms.
Conclusion
The Capital Markets Act, NSE Listing rules, and other regulations that underpin Kenya's capital markets legal framework have helped to create a stable enabling legal environment for raising and investing capital.
The framework thus balances the competing objectives of investor protection, market integrity, and efficiency while at the same time providing room for innovation. The CMA's forward-looking regulatory approach (as evident in regulations relating to derivatives and the sandbox) augurs well for the market's future development.
However, challenges remain in improving market liquidity, creating a wider product base, and deepening investor participation. This will require more legal and regulatory reforms, as well as the development of market infrastructure and investor education.
As capital markets grow in Kenya and as Kenya's economy becomes more integrated with the region and the global economy, a sound and flexible legal framework for capital markets will be needed to attract investment and finance growth, structure and manage risk, and support sustainable development. Refining current laws and regulations and updating them to reflect international best practices and local needs will be essential to capital market development in Kenya.