It is argued that the development of the company as a form of business association was necessitated by two factors namely:-

  1. The need for large investment to enhance large scale production as demanded by the market.
  2. The need to limit the liability of entrepreneurs.

The evolution of the company is traceable as an enterprise to the feudal system under which land was the most important factor of production. The body corporate development as a mechanism to facilitate utilization of capital as a factor of production in his book on Company Law and Capitalism by Tom Hoidden says that company law is about capitalism. It provides the formal legal structure necessary to the operation of the capitalist system.

Although the idea of commercial enterprise in which risk and profit are shared between financiers and traders as joint participants is an old one it was not until the 18th century that it crystallized to a trading association and women lawyers are credited for the invention. The earlier form of business associations Commenda and Societa emerged between the 13th and 14th century. They resembled today’s partnerships with each member responsible for his business but associating at the super structural level. These associations are credited for having shaped the structure of the modern trading company in Europe. The demise of these associations saw the emergence of the gold merchants during the 14th and 15th century. These were associations of merchants to facilitate training of new traders as well as control and register membership. The associations were urban based and each trader managed his business.

The association contributed to the transportation from feudal to classical corporate capitalism but did not respond to the need/ urge of large scale investments. The gold merchants gave way to regulate companies in the 15th centuries. These associations were largely larger than the gold merchants but operated on the same principles. It was an administrative structure which brought together entrepreneurs carrying on smaller business and purposes of prescribing regulations to prevent undercutting, passing off and other malpractice. However the association failed to provide the framework and large scale production or limit liability of members. However it upheld the philosophy of Laissez Fairre where individuals determined the level of production however as the era of industrial revolution approached the case for large scale production become more and more acute and a facilitative mechanism was necessary.

This led to the emergence of the Joint Stock Co in the 16th century and for the first time there was an attempt to join efforts at the level of production. Entrepreneurs had to surrender their individual resources to the association for joint management of this resources ceased to reflect the individual character of the entrepreneur. The emergence of a joint stock co. was an acknowledgement that the 1st individual entrepreneurs were incapable of mobilizing sufficient resources for large scale production.
  1. It was necessary to join entrepreneurial skills for large scale production. The earliest forms of joint stock companies were incorporated by Charter granted by the state. This system of incorporation was lengthy, expensive and did not limit the liability of members. However the charter conferred administrative powers over the area in which the company operated. The charter system discouraged incorporation. Between 1670 – 1720, a new system of forming companies emerged.

In pace of the charter, bypass the charter this was by Deed of Settlement which was a document detailing the rights of shareholders and directors without any state intervention. The process encouraged the formation of companies and the number grew significantly from 760 in 1670 to 2500 by 1720. However this companies did not in all cases honour their obligations to members and this was demonstrated by the South Sea Company incorporated in 1690 by a deed of settlement. Its promotional papers opined that it was a successful growing concern and attracted a heavy subscription.
However, as no company existed the scorn burst in 1720 when it came it came to light that potential investors’ ad lost to avert practices as well as reduce fraud, statutory intervention was necessary and this came by way of the South Sea Bubble Act 1720 which inter alia proscribed incorporation by deed of settlement. However the statute hurriedly made the statute did not provide a cheaper and easier method of incorporation in 1825.

It was agreed that charters be granted on the basis of the quantum of business. A company expected to transact but this proved problematic and it was not until 1843 that the House of Commons appointed the Grand stone select committee on joint stock companies to inquire into the law relating to companies and provide an easier method of incorporation. The committees report led to the passage of the joint stock companies Act 1844 which inter alia provided for incorporation by registration

However the question of limitation of liability remained outstanding until 1855 when it was resolved by the Limited Liability Company Act 1855 by this year it was legally possible for entrepreneurs to pool resources, register company with case and limit liability by shares.

The origins and the case for Securities Regulations
In the words of Lows Ross in Fundamentals of Securities Regulations

“The problem which modern securities regulation is directed is as old as the cupidity of sellers and the gullibility of buyers.”

Securities regulation is historically traceable to the South Sea and other companies. The company which was incorporated in 1690 was granted monopoly to trade in South America and the pacific Islands.

The Mississippi Co of John Law was also formed at the same time. South Sea Fraud burst in 1720 ruining the investments of many. The problem was aggregated by numerous hoaxes developed by imitations for example 100 persons are said to have paid two guineas each one morning as the 1st installment of shares in a company for carrying on an undertaking of great importance but nobody to know what it is’

Right to sue in Damages
Merchants and traders whose businesses injured by such unlawful organization had the right to sue damages. The South Sea Bubble Act was repealed in 11825 and the crown was empowered in grating future charters to provide that members were personally liable for debts of the corporation to such extent as deemed fit. This is said to be the beginning of the principle of limited liability. The Joint Stock Company Act 1844 provided for incorporation of companies by registration and partnerships with n more than two persons were also registrable. However members remained liable for the debts of association of the company.

Compulsory Disclosure and limitation of liabilities

This statute introduced the principle of compulsory disclosure through the registration of prospectuses inviting subscription for shares. The Limited Liability Act 1855 introduced the concept of limitation of liabilities by shares for registered companies.  Limitation of liabilities by guarantee was introduced by the Companies Act 1882 which repealed and consolidated the previous Acts.

Memorandum and Articles of Association
The Joint Stock Companies Act 1856 introduced memorandum and Articles as the principle documents for the purposes of incorporation. The Companies Act  1867 empowered companies to reduce share capital. In 1890, the directors liability Act was enacted to modify the common law of deceit as applied by the House of Lords in Derry Vs Peek (1889) 14 AC 337 so as to subject corporate directors and romoters to civil liability for untrue statements in prospectuses. The p[rovisions of the Act were subsequently incorporated in the Companies Act. The Companies Act 1900 contained the 1st set of provisions on the contents of a prospectus compulsory Audit of Company accounts and the registration of charges with the registrar.

The Companies Act, 1907 contained provisions to regulate private companies. These developments in company law culminated in the passage of the Companies Act 1948 which makes provision for disclosure, inspection, prospectuses and statements in lieu, criminal and civil liability in respect of prospectuses etc.

However the statute did not prohibit insider trading or dealings.                                 

Case for Securities Regulations
Question has arisen as to whether dealings in securities ought to be regulated directly or indirectly. There is unanimity that some regulation is necessary in practice dealings in securities are regulated directly and marked players. Company law facilitates enterprise by enabling investors in a separate corporate entity to limit their liability or loss to the amounts invested in the securities of the company.

Additionally it makes securities fully marketable. It is argued that since the principle of maintenance of capital prevents companies from returning capital to members, there ought to be a market where securities are freely traded and investments disposed off. It therefore follows that the raising of business capital and trading or dealing in securities are the principle purposes of a public stock exchange. By making shares and other securities marketable, the stock exchange stimulates investments in companies, as well as in commerce and industry.

However for a stock exchange to operate efficiently there ought to be adequate liquidity. A sufficient number of transactions in securities to enable day-to day transaction at an appropriate price. The market price ought to be established on the basis of undisturbed supply and demand.

Regulations should therefore penalize attempts to support the price of a security artificially by misrepresentation or creating an impression of active trading. It therefore follows that holders of identical securities should be entitled to the same price for the securities.

Demand for individual securities ought to be appropriately eliminated by ensuring that the investors have access to full information about the company to enable them make investment decisions at appropriate prices.

When securities are offered to the public, a prospectus or listing particulars ought to be issued freely providing a range of specified information to enable prospective invertors decided whether or not to apply for the securities.

Regulation ensures that companies honor their continuous obligations of disclosure to facilitate a flow of information to investors. The use by the company insiders of confidential information not publicly available to make an investment decision ought to be prohibited by making insider trading a criminal offence.

Direct Regulation
Direct regulation of dealings in securities supplements self-regulation which is mostly based on individual financial integrity and competence for those operating in the market. In addition it ensures free flow of capital and facilitates investor protection by ensuring that full and accurate information is availed to tem fro decision making.

As a general rule principles which contribute to proper functioning of the market contribute to inventor protection. For large companies, the function of securities is an important way y of raising new finances as it reduces reliance on bank borrowing and may be cheaper than loan interest charges. And in certain circumstances it is an opportunity for existing security holders to create a market for as well as maximize the value of their securities.

It has been argued that the development of public regulation of stock market is a consequence of their extra-ordinary success as well as their growing significance to world economies. In Kenya the principle legislation regulating the issue of shares and other securities is the Companies Act and the Capital Markets Act. The Capital Markets Act, Cap 485A, Laws of Kenya creates the capital markets Authority responsible for maintaining confidence, promoting public awareness of the market system protecting consumers of such services and minimizing financial crime.

Regulatory Mechanisms
1.                Disclosure Principle.
The principle of disclosure has a fundamental facet of securities regulation. It is a direst consequence of the theory of Limited liability in company law. It has been observed that;

“ there is no doubt that limited liability is a privilege to be able to invest a limited sum in business enterprise and to be at no further risk, is a privilege potentially prejudicing creditors. The justification for limited liability is of course to encourage enterprise to encourage the pooling of funds in a business venture.

But there has to be a price the entrepreneurs have to pay is disclosure. It is further contended that if creditors cannot enforce against their parent wealth of major shareholders, then they need to assess how credit worthy the company in question is. They need access to a public register to ascertain who the owners and directors of the company are and obtain details of his financial position. Arguably therefore the price of limited liability is the burden of complying worth a mass of statutory disclosure requirements and the consequent loss of privacy.

The disclosure principle is traceable to the Joint Stock Companies Act 1844 which introduced formation companies by registration and other modifications to the common law. The theory of disclosure runs through the provisions of the Companies Act 1948 and companies are obliged to disclose to the public through the Memorandum and Articles, the Registrar of documents and other documents e.g. documents delivered the registrar are open to the public scrutiny.

Annual returns
In addition companies must file an annual return with the registrar as well as maintain certain documents at the offices of the company. Section 109[1] of the companies act requires every company to paint or affix and keep painted or affixed its name in legible roman letters on the outside of every place of business or registered offices, have its name mentioned in all official publications and documents including cheques, bills of exchange, promissory notes, receipts, invoices, orders etc.

More importantly a company seeking to raise capital form the public by sale of securities must issue an Information Memorandum [prospectus] giving information on itself. Section 40[1] of the Companies Act prescribes the contents of an ordinary prospectus.

The common law doctrine of constructive notice is an integral part of the philosophy of disclosure. Under this principle, third parties who deal with the company are deemed to know the contents of the company’s public documents. They are deemed to appreciate its capacity. This doctrine put third parties on inquiry, however the doctrine operates negatively.

Rama Corporation Ltd v Proved Tin & General Investments Ltd
[1952] 1 All ER 554
Categories:    COMPANY; Directors
Lord(s):          SLADE J
Hearing Date(s):       21, 22, 23, 24 JANUARY, 5 FEBRUARY 1952

Company – Director – Authority – Ostensible authority – Provision in article permitting delegation of powers to one director – Unauthorised agreement made by director – Ignorance of other party to agreement of provision in article – Company not estopped from setting up director’s absence of authority.
By the articles of association of the defendant company the board of directors were empowered to delegate powers to a committee consisting of a member or members of their body. Without the authority of the other members of the board a director of the defendant company purported to enter into an agreement on the company’s behalf with an agent of the plaintiff company who had no knowledge of the contents of the articles of association of the defendant company or of the board’s right to delegate powers to a committee. On a claim by the plaintiff company arising out of the purported agreement.

Held – As at the time of the making of the purported agreement the plaintiff company, through their agent, had no knowledge of the defendant company’s articles of association and the powers of delegation contained therein, the plaintiff company could not rely on those articles as conferring ostensible or apparent authority on the director of the defendant company to make the agreement on behalf of the defendant company, and, therefore, the defendant company were not estopped from establishing that there was no authority in the director to enter into the agreement on their behalf and so were not liable under the agreement.

Justification of the philosophy of Disclosure.
The general philosophy of disclosure adopted by companies and securities law may be justified on various policy grounds.

  1. It leads to a better informed and efficient stock market.
  2. It minimizes the risk of fraud.
  3. It prevents excessive secrecy.
  4. It facilitates equality of opportunity.
However these grounds notwithstanding, it is generally agreed that disclosure by itself is an insufficient regulator of the securities markets.

  1. Firstly, direct regulation is therefore necessary as individual investors are likely or may have insufficient economic interest to motivate them to act. It is argued that public availability of information on the quality of performance of business enterprises provides interested sectors of society with necessary facts to comment or condemn such performance. In addition disclosure ensures that the management of such enterprises is appraised of the facts for action.

It has been observed that steps taken within an enterprise to ensure compliance with standards acceptable to the general public are more effective than any judicial or quasi judicial regulation imposed to enforce such standards.

  1. In the second place, a requirement of frequent or periodic disclosure generally minimizes the likelihood of corporate scandals or inappropriate corporate behavior. This contributes to the enforcement of law by facilitating detection of improper behavior at an earlier stage.

  1. Thirdly, since society is generally secretive, unavailability of information brings distrust and full disclosure is critical as it dispels fear. It therefore follows that one of the principles of nay general disclosure requirement is too reinforce public acceptability of societal institutions by providing information to refute changes of unacceptable behavior otherwise such allegations are given more credence.

  1. The fourth Purpose of Disclosure is equality of opportunity which otherwise means that a person should not take advantage of information of a confidential nature. Equality of opportunity prohibits the taking advantage of a situation of which others if they have knowledge of the facts are equally entitled to take advantage but are precluded or denied by reason of their ignorance. These arguments sufficiently justified statutory requirements of general disclosure by business enterprises as it is essential to investors.

Equally important to the question of disclosure are dimensions of disclosure namely;

  1. The information to be disclosed.
  2. The recipients of the information.
  3. Dissemination techniques.
  4. Regularity of disclosure.
  5. Consequences of disclosure.

The extent of information to be disclosed must be balanced against two fundamental principles namely.
  1. Competing value and
  2. Cost
There are certain values in society which protect the non-disclosure of certain information or require disclosure on the basis of restraint on the use of the information by others e.g. trade Secrets, unneeded matters may be kept confidential. Similarly, where complete disclosure is likely to place an enterprise at a disadvantage in relation to competitors, the principle of disclosure often yields, to the equality of opportunity principle.

Secondly the cost of the public obtaining each required item of information at the minimum be equal to the anticipated value of the information obtained,. Although companies are not required to conduct a cost benefit analysis for the individual items of information disclosed, in certain circumstances the cost of obtaining the information is significant. However it is critical to appreciate that the public ultimately bears the cost of any required disclosure as businesses are intermediaries which obtains funds from the public through sales to customers of their products and expend the same on employees, security holders or though taxes to the state.

If costs rise it follows that either the consumer pays more for the products or the wages of the employees or returns on invested capital or taxes decrease.

The cost of disclosure may be described as inflation has no extra consumer product is produced for the extra cost involved. However, these factors [cost and secrecy] ought not to discourage disclosure or confine it to a bare minimum. Equally important to the extent of disclosure is the focal point to which the information is disclosed. It is argued that general public disclosure may be obtained by filing the material in a central depository with an indexing system e.g. registry of companies, the repository of the information should be obliged to ascertain the facts disclosed to ensure that disclosure complies to or with the prescribed standards.

If the information disclosed precipitates action by the recipient, the information may be limited to the interests of the recipient to discourage irrelevancy. It is also posted that the amount of information should vary with the ability of the recipient to understand the same. This is the concept of the differential disclosure which is generally accepted in some jurisdictions.

This concept of differential disclosure may be justified on the premise that furnishing of excess information to an uninterested or incapacitated person amounts to mis-allocation of resources. Hence disclosure should be put in the terms that the recipient can understand. Closely associated with the question to whom the information/ disclosure is directed and in particular the question of differential disclosure is the question of dissemination technique to be employed.

Traditionally, material is disseminated by means of a written communication. A medium which relies on the recipients reading ability. Whereas persons whose livelihood require them to digest such material may have the required inspiration. It would be unrealistic to expect, the public to be equally motivated. There is a general consensus that investors seldom read lengthy disclosure documents e.g. company prospectus are less fashioned to capture attention.

Admittedly many investors lack the expertise required to read financial statements, it therefore follows that the less motivated the recipient, the more ingenious the enterprise, if there is to be effective communication. However ingenuity has a price. It is suggested that a company may disclose to selected audience which in turn has access to the media for disclosure to the public. In all circumstances, disclosure by business enterprises must be evolutionary [ongoing].
Timeliness of disclosure.
This is of critical importance. This is manifested by the requirements for increased frequency of financial reporting and in requirements of regulatory authority including stock exchanges for immediate disclosure of material information. However, immediate disclosure must be balanced against two policies.
  1. Premature disclosure – may raise expectation unlikely to be disclosed. In security markets, premature disclosure is likely to exaggerate fluctuations in prices which ordinary hurt the small investors
  2. Reactions by other enterprises especially where the disclosure suggests a large potential for a profit may lead to insufficient allocation of resources on ensuring scrabble for participation.

In the realms of securities it is argued that slow disclosure may provide an opportunity for those with advance knowledge to make unfair gains but this may be prevented by adequate insider dealing rules. It is also argued that lack of disclosure can prejudice any person dealing directly with the enterprise or its securities e.g.

Additional credit might be unavailable if negative prospects were announced promptly. In summation, it is posted that the effects of disclosure are far reaching.

  1. It leads to increased efficiency in the overall system.
  2. Disclosure reduces improper behavior and this may justify the effort.
  3. It is argued that the society may psychologically feel better equipped to deal with changing economic realities.

19th November 2004

Under section 30[A]1 of the Capital Markets Act provides that:
30A (1) No public company shall, in Kenya, offer its securities information for subscription or sale to the public or a section of the Memorandum public unless prior to such offer, it publishes an information memorandum signed by or on behalf of its officers and files a copy thereof with the Authority. [Capital Markets Authority]

     (2)   Every information memorandum shall comply with such requirements as may be prescribed by the Authority:

Provided that nothing in this section shall be construed to apply to an information memorandum issued by a co-operative society incorporated under the Co-operative Societies Act for the purpose of raising capital from its members.
Cap 490                                             

Under Section 20 of the Companies Act, prospectus means any prospectus, notice, circular, advertisement or other invitation offering to the public for subscription or purchase any shares or debentures of the company.

Section 2 of the Capital Markets Act provides that an “information memorandum“ means any prospectus or document, notice, circular, advertisement, or other invitation in print or electronic form containing information on a company or other legal person authorized to issue securities or a collective investment scheme calculated to invite offers from the public or a section of the public to subscribe for the purchase of securities.

The definition in Section 2[1] of the Companies Act, Cap 486 Laws of Kenya is implicit that a prospectus may take various forms. Any invitation to avail securities to the public for subscription qualifies as a prospectus. It distinguishes characteristics are the contents and intention of the party issued by it.

Re South of England Natural Gas and Petroleum Co. Ltd [1911] 1 Ch. 573.
A newly formed company issued 3000 copies of a document which offered for subscription shares in a company and which was headed “for private circulation only”.  These copies were then circulated to the shareholders of a number of gas companies and the question arose Was this a prospectus?

The court held that the distribution of a document entitled, “For Private Circulation only” offering the company shares was an offer to the public and the document was a prospectus. The term offering used in the definition is used in a non-technical sense as prospectus invites offers. The term public is not restricted to the public at large. It includes a section thereof.

In the words of Viscount Summer in ‘

Nash Vs Lyde
(1929) AC 128

“The public in the definition is of course a general word, no particular number are prescribed. Anything from two to infinity may serve perhaps even one if he is intended to be the first of a series of subscribers but made further proceedings needless by himself subscribing the whole. The point is that the offer is such as to be opened to anyone who brings his money and applies in due from, whether the prospectus was addressed to him on behalf of the company or not”

In the words of Windeyer J. in

Lee Vs Evans
[1964] 112 Commonwealth Law Reports 276
“The essence of an invitation to the public is not in the manner of its communication or in the number of the persons to whom it is communicated. The criteria are rather -are the recipients of the invitation persons chosen at members of the general public, the public at large, or in sundry or are they a select group to whom and to whom alone the invitation is addressed so that if an outsider sought to respond to it, he will be told that he was not one of those invited to come in? ”

The contents of a prospectus are prescribed by the provisions of the Companies Act 40[1]. Under section 43[1] of the Companies Act, a copy of the prospectus must be delivered to the registrar for registration on or before the date of publication. Question has arisen as to when a prospectus is deemed to have been issued. In the words of Viscount Summer in,

Nash Vs Lyde
“ I do not think that the term is satisfied by a single private communication between friends even f they are business friends or even though preparations have been made for other documents to be used in other communication if none such takes place. In the present case, all that constituted the issue was that one of the directors in the cause of a general endeavour to file money was furnished with some copies of this type written documents and gave one of them to a friend who also requested passed it on to a friend of his own. I cannot belief that anyone in business will call this the issue of a prospectus.”

Section 40[1] of the Companies Act. Every prospectus issued by or on behalf of a company or by or on behalf of any person who is or have been engaged or interested in the formation of the company shall state the matters specified in part one of the 3rd schedule and set out the reports specified in part II of that schedule.

The object of the Companies Act is to compel a company to disclose in a prospectus all the necessary information which will enable a potential investor in deciding whether or not to subscribe for a company shares or debentures. The provisions in part II of the 3rd Schedule are designed mainly to provide information about the following matters:
1.                  Number of founders of deferred money paid shares.
2.                  Director’s qualification for shares if any and their remuneration.
3.                  Names, occupation and postal addresses of directors or proposed directors. What benefits they will get from the Directorship;
4.                  Minimum subscription. Time of opening of the subscription list.
5.                  Amount payable on application and allotment.
6.                  Particular options on shares and debentures.
7.                  Particulars of shares and debentures issued otherwise than for cash.
8.                  Names and postal addresses of persons who have sold assets to the company.
9.                  The amount paid or payable to such persons for the property or other items.
10.              Preliminary expenses.
11.              Promoter’s remuneration if any.
12.              Particulars of material contracts.
13.              Names and postal addresses of auditors if any.
14.              Directors interest if nay in the promotion and property proposed to be acquired by the company.
15.               Voting and class rights.
16.              Commission paid or payable.
17.              Length of time the company has carried on business if less than three years.
18.              the amount of capital required by the company to be subscribed, the amount actually received or to be received, the precise nature of the consideration which is not paid in cash;
19.              In the case of an existing company, what the company’s financial record has been in the past?
20.              the company’s obligations under any contracts it has entered into;
21.              the voting and dividend rights of each class of shares;
22.              If a Prospectus includes any statement by an expert, then the expert must have given his written consent to the inclusion of the statement and the prospectus must state that he has done so as per Section 42 of the Companies Act.[Additional information not given in class]

Part II of the third schedule embodies the following reports
  1. An auditors report on the companies, first profit and loss in each of the last five years, second, rate of dividend in the last five years, preceding the issue, assets and liabilities as at the last date of account. If the company has subsidiaries, the auditors report must specify the subsidiaries profit and loss and assets and liabilities.
  2. If the proceeds of the issue or part thereof is to applied directly or indirectly to the purchase of nay business, a report by named accountants on such business’s profit and loss in each of the five years preceding the issue and assets and liabilities as at the last date of accounts.
  3. If the proceeds of the issue or any part thereof is being applied directly or indirectly in the acquisition of shares in a subsidiary
    • Profit and loss in each of the last five years preceding the issue.

Other Contents.
  • There has to be date Section 39 of the Companies Act. Under this section a prospectus must be dated and unless otherwise proved, such date is taken to be the date of publication.
  • Documents [Annextures and endorsements] to be attached Section 43 of the Companies Act. Every prospectus must on the face of it specify or refer to statements included in the prospectus which specify any document.
  • Under Section 43[3] of the Companies Act a prospectus must state on its face that a copy has thereof been delivered to the registrar for registration.

{Missing notes on Registration of prospectuses and remedies on prospectuses to be inserted}     

Insider Trading Regulation
In the words of two writers Barry and Michael in Insider Crime, The New Law;

“To many, if not most people the phrase insider trading conjures a picture of a slick and rather smooth ‘city type’ making a killing of stock exchange on the basis of a tip some a chum has given him over lunch. This picture has an element of justification in a good deal of prejudice.”

Traditionally insider abuse has invoked individuals connected with management of companies as opposed to the smooth operator conjured up by the press. To some extent what is considered to be insider dealing is influenced by the philosophical basis upon which it is sought to distinguish such conduct from other normal conduct.
To ordinary persons, if such a dealing can be described as involving the deliberate exploitation of information by dealing in securities or other property to which the information relates, having obtained that information by virtue of some privileged relationship or position. It involves taking advantage of an opportunity to profit which is not available to others.

The phrase insider trading is used to denote purchases or sales of securities of a company effected by or on behalf of a person whose relationship to the company is such that he is likely to have access to relevant material information concerning the company not known to the general public.

Whereas it is accepted that insider trading should not be barred from dealing in their corporation securities, it is improper for them to profit by such dealing, if it is based on or motivated by confidential information about the corporation.

What is insider trading?
Insider dealing takes place when a person buys or sells securities while knowingly in possession of some piece of confidential information not generally available and which is likely if made available to the general public to materiality affect the price of securities.

It has been observed that insider trading prescribes the use of confidential information by people who as company officers or employees or a civil servant avail themselves knowledge in the course of their work or by reason of their office to deal in their own profit in the securities of the company. The challenge posted by insider dealing has an odd history. As early as 1934, a report of the United States Senate, Banking and Currency Committee observed that,

“ …among the most vicious practices unheard for the fragrant betrayal of the fiduciary duties by directors and officers of corporation who use their positions of trust and the confidential information which came to them in such position to aid them in their market activities. Closely allied to this type of abuse was the unscrupulous employment of insider information by large stock dealers who while not directors or officers, exercise sufficient control over the destinies of their companies to enable them acquiring profit by information not available to others.”
Whereas it is generally accepted that to make use of insider information is importable and does occur, there is less unanimity on the most appropriate formula to address the challenge.

In his article In Events of Insider Trading [1966] Harvard Business Review 113, Prof Henry Mann argues that, insider trading should not be regulated in that is serves certain purposes.

  1. Long  term investors suffer no loss from it as they select stocks on the basis of fundamental factors e.g. dividend history, earning potential, growth prospects etc. the investors do not generally buy and sell on the basis of shrt swing fluctuations in the price of securities.
  2. There is no substantial relation between rigorous insider trading registration and public confidence in the markets.
  3. Insider trading compensates entrepreneurial achievements of investors which would otherwise be necessary expense f the corporation. He argues that profits from insider trading constitute the only effective compensation scheme for entrepreneurial services in large corporations.
  4. There is an increase in capital market efficiency in that new information about a corporation is reflected in its securities more rapidly and accurately if insiders are permitted to use it.

However these arguments nay be faulted in the following ways.

  1. Insider trading does not reward efficient management as such. It rewards the possession of confidential insider information, whether the information is favourable to the prospects of the corporation.
  2. It leads to loss of efficiency due to the incentives that are created fro the insider to conceal information or disseminate missed information above the corporation while he engages in trading.
  3. Managers and others with confidential information would have n incentive to manipulate its disclosure so as to produce sharp changes in crisis.

It is generally agreed that insider trading is improper in itself as it damages the confidence of investors and the integrity of the securities markets. As aptly observed, the stock exchange is a market place for buying and selling company shares and other securities. Like any market place people would be more inclined to use it if they believe the prices in it correctly represent the value of what is bought and sold.
A person who buys something that turns out to be less than the price in the market he paid for it will feel aggrieved. So will be a person who sells something for less than its real value. It follows that deals in a market are ore likely to be at a price correctly reflecting value.
If all the information used in valuation is available to both buyers and sellers i.e. information bout the economy world trade, the particular market and the company itself.

The Case for Insider Trading Regulation
It has been argued that the moral or ethical reason for prohibiting insider trading is that the user of insider trading is unfair to those who deal with the insider. However other reasons for regulation have been propounded, the effectiveness of regulating insider trading is determined by the policy selected to justify the intervention.
  1. It is argued that insider trading injure the proper interests of the company in whose securities the insider dealing takes place, if a person takes advantage of the information as a director or officer of the company or in a clearly defined relationship involving confidence and trust within the company, the potential injury is even greater.
  2. It is disadvantageous for a company to acquire the reputation of being an insider’s company. Such a company is likely to have problems in securing finance on competitive terms. In addition it suffers in the market as a consequence of loss of respect in the integrity of its management.

It is also argued that if insider trading is permitted, there is a temptation for those responsible for ensuring prompt disclosure of prices sensitive information to delay or manipulate the disclosure. Judicial authority has it that the injury occasioned by such conduct justifies legal liability.

  1. It is argued that where a person in a position of trust abuses the confidence reposed in him, of duty.

The injury is in the breach of trust. In the words of Fulo C.J. in,it is proper that he required to yield up any benefits obtained by virtue of the breach

Diamond Vs Oreamun [1969]248 NE 290

“It is a well established as a general proposition that a person who acquires special knowledge or information by …..insider trading is free to exploit that knowledge or information fro his own personal benefit but must account to his principal for the profit derived therefrom. The primary concern in a case like this is not to decide whether the corporation has been damaged but to decide as between the corporation and the individual who has a higher claim derived from the exploitation of the information.

In our opinion there can be no justification for permitting officers and directors such as the defendant to retain for themselves profits which it is alleged they derive solely from exploiting information gained by virtue of their inside position of corporate officials.”

The fiduciary Approach.
However while this appropriate to what the law regards as fiduciaries the vast majority of those likely to be involved in insider trading are not in the so called fiduciary relationship. This argument can only justify the control of insider trading in circumstances in which there is a pre-existing relationship of stewardship and hence an increasing obligation of trust.
The fiduciary approach justifies the private fiduciaries of unauthorized profits but is of limited application. In the alternative the information may be regarded as belonging to the company and hence its misuse for insider trading involves a misappropriation or theft, this approach is therefore limited to cases of definite fiduciary obligation.
  1. It is further contended that the primary justification for insider regulation is equality of information for those in the market. However whereas this notion comports with the proper desire to draw into the market, as much information as possible to allow investors make informed and sensible decision it has been criticized as naïve in that many investment decisions are made on the basis that the investors considers that he has superior information.
  2. The most convincing justification for controlling insider trading is that it has a perceived adverse effect on confidence. It is immaterial that insider dealing ha s a detrimental effect on the operation of the market or the fortunes of the corporation in that if enough opinion forming persons consider it wrong it has the effect of alienating investors as well as potential investors and this has adverse consequences fro the society as a whole.
It is generally agreed that stock markets operate effectively and without inhibition in allocating capital and to do so they require confidence and respect from their own societies and the international community.

In diamond Vs Oreamune [1969]
Directors of accompany were aware that due to an increase in expenses, profits had fallen drastically and they sold their shares at 4 25 per share before the information was made public subsequently, the price of the shares dropped to 411. The directors were held liable to account to the company for the difference for breach of their fiduciary duties, although the company had suffered no loss.

In the words of Fuld C.J.

“Although the corporation may have little concern with the day to day transactions in its shares. It has a great interest in maintaining a reputation of integrity, an image of probity wisdom for its management and in ensuring the continued public acceptance and marketability of the stocks. When officers and directors abuse their position, in order to gain personal profits the effect may be to cast a cloud on the corporation, name, injure stock holder relations and undermine public regard for the corporations’ securities. 

Regulatory Framework
The significance of protecting the proper functioning of markets has long been recognized and the law is deemed to be a proper tool to achieve this. The importance of protection of protecting the markets as opposed to the individuals within it has also been recognized and legislative intervention is justified on the premise that insider trading harms the market and those who depend on it.

Judicial Intervention.
At common law company officers are free to hold and to deal in it s securities. However, the use of certain confidential information of the company is actionable e.g. trade secrets, list of customers.

1.      British Industrial plastics Vs Terquson [1938] 4 ALL ER 50
2.      Cramleigh Preussion Engineering Vs Bryant [ 1965] 1 WLR 1293.

In addition, if a director or officer of the company has made use for his own purpose of price sensitive information acquired in his capacity as such, amounts to a breach of his fiduciary obligations and is liable to the co which is entitled to recover any profit made..
1.      Industrial Development Consultants Ltd Vs Cooley
The Defendant who was an architect was appointed the company’s Managing Director.  The company’s business was to offer design and construction services to industrial enterprises.  One of the defendant’s duties was to obtain new business for the company particularly from the gas companies where he had worked before joining the Plaintiff.  While the Defendant was still so employed by the Plaintiff a representative of one gas company came to seek his advice on some personal matters.  In the course of their conversation the Defendant learnt that the gas company in question had various projects all requiring design and construction services of the type offered by the Plaintiff.  Upon acquiring this information and without disclosing it to the company, the Defendant feigned illness as a result of which he was relieved by the company from his duties.  Thereafter, he joined the gas company and got the contract to do the work.  Two years previously, the Plaintiff had unsuccessfully tried to obtain that work.  After the Defendant acquiring the contract, the company sued him alleging that he obtained the information as a fiduciary of the company and he should therefore account to the company for all the remuneration fees and all dues obtained.

The court held that until the Defendant left the Plaintiff, he stood in a fiduciary relationship to them and by failing to disclose the information to the company, his conduct was such as to put his personal interests as a potential contracting party to the gas company in conflict with the existing and continuing duty as the Plaintiff’s Managing Director.

Roskill J.
“It is an overriding principle of equity that a man must not be allowed to put himself in a position where his fiduciary duty and interest conflict.  It was the defendant’s duty to disclose to the plaintiff the information he had obtained from the Gas Board and he had to account to them for the profits he made and will continue to make as a result of allowing his interests and duty to conflict.  It makes no difference that a profit is one which the company itself could not have obtained.  The question being not whether the company could have acquired it but whether the defendant acquired it while acting for the company.”

2.      Canadian Aero Services Ltd Vs O’Malley

The misuse of such information by officers of the company during and after termination of employment may be actionable. However it is contended that one of the reasons why the common law imposed no clear prohibition on the use of insider information in share dealing is the decision in Percival Vs Wright [1902] Ch 421.

Where joint holders of some shares in an unlisted company offer them for sale to the company chairman and other directors, the price at which they were offered was determined by an independent valuer at £12 10s each. The sale of shares was concluded but it was subsequently discovered while negotiating the purchase of shares the chairman had been discussing the sale of all the company shares at a price that would have made each share in the company worthy considerably more than £12 10s

The company shares however were never sold and evidence showed that the directors of the company had not intended to sell the shares. Percival and his company shareholder applied for the sale of shares to the chairman had failed to disclose that he was negotiating for the sale of the company at a higher price.

It was held that the chairman had no such duty. This case is authority for the proposition that directors awe their fiduciary duties to the company as opposed to individual members. In the words of Swifen Edd L.J.;

“ …I am unable to adopt that view. I am therefore of he opinion that the purchasing directors were under no obligation to disclose to their vendors shareholders the negotiation which ultimately proved abortive. The contrary view will place directors in a most insidious position, as they could not buy or sell shares without disclosing negotiations, a premature disclosure of which might well be against the best interests of the company.”

Percival v. Wright (1902) 2 Ch. 421

Certain Shareholders wrote to the Company’s Secretary asking if he knew anyone willing to buy their shares.  Negotiations took place and eventually the company chairman and two other directors bought the Plaintiff Shares at £12 10s per share.  The Plaintiff subsequently discovered that prior to and during their own negotiations for sale, the Chairman and the Board of Directors had been approached by 3rd Party with a view to the purchase of the entire company’s assets at more than the price of 12 pounds 10 shillings per share.

The Plaintiff brought an action to set aside the share sales on the ground that the directors owed them a duty to disclose the negotiations with the 3rd Party.

It was held that the Directors were not agents for the individual shareholders and did not owe them any duty to disclose.  Therefore the sale was proper and could not be set aside.  However, if the Directors are authorised by the members to negotiate on their behalf e.g. with a potential purchaser then the Directors will be in a position of agents for such members and will owe them a duty accordingly.

There is no question of unfair dealing in this case. However in Allen Vs Hyatt [1914] 30 TLR 444
Directors of a company found potential buyers for all its shares. They obtained form the company’s other shareholders to purchase their shares by representing that this will facilitate the sale to potential buyers. In fact the price at which the directors exercised their opinions was lower than the price they had agreed with the purchaser.
Consequently the directors made enormous profits. It was held that, since the directors were agents of the shareholders for the purposes of the sale of their shares, they were liable for breach of the duty and had to account to them for the profit made unless some special relationship of piece type can be shown so as to establish a legal duty of care to disclose all relevant information.
An officer of the company is entitled to retain any profit made.

1.      Munro Vs Bogie [1994] BCLC 415
2.      Tett Vs Phoenix Property Investments Co Ltd [1984] BCLC 599.
3.      Multinational Gas and Petrol Co. Ltd Vs Multinational Gas Petrochemical Services [1983] Ch. 258.
4.      Coleman Vs Myers [1977] 2 NZLR 225.
For many years the only constraints in relation to insider trading were those imposed extra legally by self regulated agencies and the possibility of civil liability in certain cases e.g.

Regal [Hastings] Ltd Vs Gulliver [1942] 1 ALLER 378
Where the directors benefited from the sale of shares they previously held in their capacity as directors, it was held that they were liable to account. In the words of Lord Sankey,

“As to the duties on liabilities of those occupying a fiduciary position… in my view the respondents were in a fiduciary position and their liability to account does not depend upon prove of “mala fides”. The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect. If he holds any property so acquired as trustee, he is bound to account for it”
Regal Hastings v. Gulliver (1942) 1 All E.R. 378

The company owned a cinema and the directors decided to acquire two other cinemas with a view to the sale of the entire undertaking as a going concern.  Therefore they formed a subsidiary company to invite the capital of 5000 pounds divided into 5000 shares of 1 pound each.  The owners of the two cinemas offered the directors a lease but required personal guarantees from the Directors for the payment of rent unless the capital of the subsidiary company was fully paid up.  The directors did not wish to give personal guarantees.  They made arrangements whereby the holding company subscribed for 2000 shares and the remaining shares were taken up by the directors and their friends.  The holding company was unable to subscribe for more than 2000 shares.  Eventually the company’s undertakings were sold by selling all the shares in the company and subsidiary and on each share the Directors made a profit of slightly more than two pounds.  After ownership had changed the new shareholders brought an action against the directors for the recovery of profits made by them during the sale.

The court held that the company as it was then constituted was entitled to recover the profits made by the Directors.  Lord Macmillan had the following to say:

            “The directors will be liable to account if it can be shown that what they did is so related to the affairs of the company that it can properly be said to have been done in the course of their management and in utilization of the opportunities and special knowledge and what they did resulted in a profit to themselves.”

The question of liability on the part of directors for use of information obtained in the course of their employment was addressed in;

Boardman and another Vs Phipps
[ 1965] 3 WLR 1009

Boardman was a solicitor to the trust of the Phipps family.  The trust held some shares in the company.  Boardman and his colleagues were not satisfied with the company’s accounts and therefore decided to attend the company’s general meeting as representatives of the Trust.  At the meeting they received information pertaining to the company’s assets and their value.  Upon receipt of the information, they decided to buy shares in the company with a view to acquiring the controlling interest. 

Their takeover bid was successful and they acquired control.  Owing to the fact that Boardman was a man of extraordinary ability, the company made progress and the profits realised by Boardman and his friends on the one hand and the trusts on the other were quite extensive.  One of the beneficiaries of the Trust brought an action to recover the profits which were realised by Boardman and his friends.

The court held that in acquiring the shares in the company, Boardman and his friends made use of information obtained on behalf of the trust and since it was the use of that information which prompted them to acquire the shares, then the shares were also acquired on behalf of the trust and thus the solicitors became constructive trustees in respect of those shares and therefore liable to account for the profits derived therefrom to the trust.
Lord Upjohn observed thus;

“ The relevant rule for the decision of this case is This case is the fundamental rule of equity that a person in a fiduciary capacity must not make a profit out of his trust, which is part of the wider rule that a trustee must not place himself in a position where his duty and his interest may conflict.”

Additionally the decision in Seagor Vs Copydee Ltd
[1967] 2 ALL ER 415
demonstrates the possibility of liability for breach of confidence as an equitable remedy in its equitable sense. However it has been observed that in all these possible claims it is arguable that in those cases, the company was not the real loser and did not have the necessary incentive to pursue the wrongdoer.
The decision in Percival Vs Wright appear to bar the development of claims based on breach of duty between directors and other insiders and the persons to whom the directors has sold or bought securities.
These duties except where expressly stipulated in the Companies Act are not restricted to directors alone but apply equally to any officials of the company who are authorized to act as agents of the company and in particular to those acting in a managerial capacity.  This is particularly so as regards fiduciary duties.

It has been observed that disclosure is one of the principle approaches to regulating insider trading. It is contended that by ensuring that price sensitive information which is withheld from the market is kept to minimum is les opportunity fro those decisions of exploiting it. Insiders are likely to manipulate events to avoid prompt disclosure of information so as to exploit it for personal gain. This is a problem where those in a position to influence the management of a company are also substantially interested in securities.

Hence it is critical to encourage disclosure of as mush relevant information as possible to facilitate sensible investment decisions. Companies should be required to disclose through appropriate procedures or information which might be reasonably considered to have an impact on the price of their securities. As promotional and continuous disclosure relies significantly on the medium of financial statements which are inherently historical in perspective, prompt disclosure is critical.

A further important role that disclosure has in regulating insider abuse is in obligation placed upon certain insiders to report promptly dealings which may give rise to subscription e.g. under the Companies Act, 1948 directors are required to disclose there interest in contracts entered into on behalf of the company. The disclosure principle in the Act is inadequate and not able to offer any protection. Section 200 of the companies Act, Cap 486 Laws of Kenya.


Section 32[A], Capital Markets Act, Cap 485A Laws of Kenya

Prohibition against use         32A.(1)         No insider shall
of unpublished insider
(a)        either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information; or
                                   (b)        communicate any unpublished price sensitive
                                                             information to any person, with or without his
           request for such information, except as required    
in the ordinary course of business or under any       law; or

                                               (c)      counsel or procure any other person to deal in securities of any company on the basis of unpublished price sensitive information.

(2)        Any insider, who deals in securities or communicates any information or consults any person dealing in securities in contravention of the provisions of subsection (1) shall be guilty of insider trading.

Insider trading               33  (1)         A person who is, or at any time in the preceding
Prohibited                                         six months has been, connected with a body corporate
shall not deal in any securities of that body corporate if by reason of his being, or having been, connected with that body corporate he is in possession of information that is not generally available but, if it were, would be likely materially affect the price of those securities.

(2)        A person who is, or at any time in the preceding six months has been, connected with a body corporate shall not deal in any securities of any body corporate if by reason of his so being, or having been, connected with that first mentioned body corporate he is in possession of information that -

(a)        is not generally available but, if it were, would be likely materially to affect the price or value of those securities; and

(b)       relate to any transaction (actual or expected) involving both bodies corporate or involving one of them and securities of other.

(3)        Where a person is in possession of any such information referred to in subsection (2) which if made generally available, would be likely materially  affect the price of securities but is not precluded by that subsection from dealing in those securities, he shall not deal in those securities if -

(a)        he has obtained the information, directly or indirectly, from another person and is aware, or ought reasonably to be aware, of facts or circumstances by virtue of which that other person is himself precluded by subsection (1) from dealing in those securities; and

(b)         when the information was so obtained, he was associated with that other person or had with him an arrangement for the communication of information of a kind to which that subsection applies with a view to dealing in securities by himself and that other person or either of them.

(4)        A person shall not, at any time when he is precluded by subsections (1), (2), or (3) from dealing in any securities cause or procure any other person to deal in those securities.

(5)        A person shall not, at any time when he is precluded by subsection (1), (2), or (3) from dealing in any securities by reason of his being in possession of any information, communicate that information to any other person if -

(a)        trading in those securities is permitted on any securities exchange; and

(b)       he knows, or has reason to believe, that the other person will make use of the information for the purpose of dealing or causing or procuring another person to deal in those securities.

(6)        Without prejudice to subsection (3), but subject to subsections (7) and (8), a body corporate shall not deal in any securities at a time when any officer of that body corporate is precluded by subsections (1), (2), or (3) from dealing in those securities.

(7)        A body corporate is not precluded by subsection (6) from entering into a transaction at any time by reason only of information in the possession of an officer of that body corporate if -

(a)        the decision to enter into the transaction was taken on its behalf by a person other than the officer;

(b)       it had in operation at that time arrangements to ensure that the information was not communicated to that person and that no advice with respect to the transaction was given to him by a person in possession of the information; and

(c)        the information was not so communicated and such advice was not so given.

(8)        A body corporate is not precluded by subsection (6) from dealing in securities of another body corporate at any time by reason only of information in the possession of an officer of that first mentioned body corporate, being information that was obtained by the officer in the course of the performance of his duties as an officer of that first mentioned body corporate and that relates to proposed dealings by that first mentioned body corporate in securities of that other body corporate.

(9)        For the purpose of this section, a person is connected with a body corporate if, being a natural person -

(a)        he is an officer of that body corporate or of a related body corporate;

(b)       he is a substantial shareholder in that body corporate or in a related body corporate; or

(c)        he occupies a position that may reasonably be expected to give him access to information of a kind to which subsections (1) and (2) apply by virtue of -

(i)        any professional or business relationship existing between himself ( or his employer or a body corporate of which he is an officer) and that body corporate or a related body corporate; or

(ii)       his being an officer of a substantial shareholder in that body corporate or in a related body corporate.

(10)      This section does not preclude the holder of a stockbroker’s or dealer’s licence from dealing in securities, or rights or interests in securities, of a body corporate, being securities or rights or interests that are permitted by a securities exchange to be traded on the stock market of that securities exchange, if -

(a)        the holder of the licence  enters into the transaction concerned as agent for another person pursuant to a specific instruction by that other person to effect that transaction;

(b)       the holder of the licence  has not given any advice to the other person in relation to dealing in securities, or rights or interests in securities, of that body corporate that are included in the same class as the first  mentioned securities; and

(c)        the other person is not associated with the holder of the licence .

(11)      For the purpose of subsection (8), “officer”, in relation to a body corporate, includes -

(a)        a director, secretary, executive officer or employee of the body corporate;

(b)       a receiver, or receiver and manager, of property of the body corporate;

(c)        an official manager or a deputy official manager of the body corporate;

(d)       a liquidator of the body corporate; and

(e)        a trustee or other person administering a compromise or arrangement made between the body corporate and another person or other persons.


(12)      A person who contravenes this section shall be guilty of an offence and shall be liable -

(a)        on a first offence -

(i)        in the case of a body corporate, to a fine not exceeding five million shillings;

(ii)       in the case of any other person, including a director or officer of a body corporate, to a fine not exceeding two million five hundred thousand shillings or to imprisonment for a term not exceeding five years or to both;

(b)       on any subsequent conviction -

(i)        in the case of a  body corporate, to a fine not exceeding ten million shillings; or

(ii)       in the case of any other person, including a director or officer of a body corporate, to a fine not exceeding five million shillings or to imprisonment for a term not exceeding seven years or to both.

(13)      An action under this section for the recovery of a loss shall not be commenced after the expiration of six years after the date of completion of the transaction in which the loss occurred.

(14)      Nothing in subsection (12) affects any liability that a person may incur under any other section of this Act or any other law.

(15)      This section shall apply without prejudice to the generality of section 32A.

Section 2 of the Capital Markets Act defines an insider as any person who, is or was connected with a company or is deemed to have been connected with a company, and who is reasonably expected to have access, by virtue of such connection to unpublished information which if made generally available would be likely to materially affect the price or value of the securities of the company, or who has received or has had access to such unpublished information.
Section 33 of the Act is the operative provision in so far as the prohibition of insider trading is concerned. It identifies the persons who must not deal in securities by virtue of their connection with a body corporate in the preceding 6 months. In addition, it embodies exceptions, the general rule and prescribes harsh criminal sanctions for offenders or conflicts.

Arguably, the statutory framework for regulating insider dealing appear sufficient to meet the challenge of insider trading/dealing. However as the case in other jurisdictions, the principle challenge remain detection of the crime and securing a conviction e.g. in

R v Fisher
[1988] 4 bcc 360
The accused was charged with contravening Section 1[3] and [4] of the Company Securities [Insider Dealing] Act of 1985. The accused had sought to buy a block of shares in a public company but the negotiations with the seller failed through an employee of the merchant bank which was advisor to the seller informed the accused that the information was price sensitive and confidential as the deal had not been, made public. Despite the warning the accused purchased shares on the market before the public announcement of the sale and later sold them at a profit.

At the trial he argued that he had no case to answer by submitting that he did not obtain any information from the merchant banks employee but had merely received it. The court was of the view that on that basis of the statutes considered in other cases the words “obtain” had been strictly construed to mean procure, or gain as the result of purpose and effort or by request.

The accused was held not guilty as he had not taken any step whatsoever directly or indirectly by word or conduct to secure, procure or acquire the information given to him.

R Vs Goodman
[1994] BCIL 349
The accused was a chairman of a public company. He had disposed of his entire shareholders in the company and resigned as chairman a few days after the company’s results were published. The results showed a loss of $ 9000 as opposed to the profit which was expected. The accused was convicted for insider trading and sentenced to imprisonment and was in addition disqualified from acting as a director for 10 years.

It has been observed that the best counter   insider trading is of course to ensure that information which is likely to affect share prices reaches the market as soon a possible[ within 24 hours.]

See the Capital Markets [Securities, Public Offers and Disclosure Regulations 2002

In the words of Lowis Loss;
“It is generally believed that the securities markets are an important economic purpose. They provide a mechanism by which businesses obtain equity capital and long term loan from the public. These markets[ primary] in which companies typically issue securities to the public through syndicate dealers and under writers and ht trading markets in which these securities may be bought and sold after they have been issued.”
In most jurisdictions, capital markets are regulated at two levels, namely;

    1. Self-regulation by self regulatory organizations e.g. NSE, LST, NYSE, ASKB, ICPAK etc.
    2. Direct regulation or public regulation by the state bodies e.g. The Capital Markets Authority, FSE UK, Financial Exchange Commission etc.
A regulatory framework of a securities market must fulfill certain objectives;

    1. Efficiency- the framework must enable capital markets operate efficiently and in an economic way.
    2. Competitiveness- the market must be competitive both domestically and internationally. The framework must stimulate competitiveness and encourage innovation. It must be responsive to international developments.
    3. Confidence – it must inspire confidence in issuers and investors by ensuring that capital markets are in a clean place to do business i.e. no vices such as corruption.
    4. Flexibility – the framework must be clear enough to guide but not crump structural and other changes in the industry. In addition it must be resilient not to be overrun by events.

The development of public regulation of stock market follows the extra-ordinary success of the markets throughout the last century and their growing significance to economies. Regulation is closely linked to market performance and although it presupposes state intervention, it is undeniable that market regulation is strongest in liberal economies where capital markets are thinking and is generally weak capital markets are less developed.

Capiatla markets remain a major source of external financilng for corporation by issuing equity or bonds. The spectacular growth of the Capital market during the 20th century has literally called for regulation. Hover public regulation of the capital markets has been gradual in growth. Its aim is to reinforce public trust in the correct functioning of the market place whereas self regulation has proved insufficient. In most cases regulation has followed market crises to restore public trust. The spirit and content of legislative regulation of Capital markets ahs been based on two ideas.

    1. Issues must inform investors the truth about their businesses, the securities and the risks involved.
    2. Market players’ must treat investors fairly and honestly. These ideas epitomize the task of regulation namely;
·   To impose minimum standards of information disclosed by companies issuing securities, control of the quality, policy of the market place etc.
The central role of public regulation of the capital markets by a statutory ordained body is recognized and accepted. Until recently regulation of securities markets in East Africa was to a large extent in the hearts of self regulatory agencies e.g. stock exchange, association of Kenya Stock Brokers, Institute of Certified Public accountants with some informal vacuum from distant bodies e.g. the Central Bank of Kenya.

For enforcement of their rules, these bodies had to rely almost entirely on extra-legal sanctions such as the disciplinary powers exercisable of the over their Members e.g. the stock brokers who acted as intermediaries in securities dealings. These sanctions were generally effective but only because the self regulatory bodies had virtue monopoly control of access to securities markets.

However in less than a decade, the self regulatory system has almost been replaced by an all embracing statute based regime e.g. under the Capital Markets Act, Cap 485A, self regulation continues but is supplemented by statutory regulation./ all investment businesses must be licensed by the capital markets authority and are generally accountable to the authority.

It has draconian powers and breaches of its rules carry legal sanctions. Self regulation ahs a continuing and critical contribution to make in a securities market. It means commitments by practitioners to the maintenance of a high standard as a matter of integrity and principle. Regulation should encourage the commitment of individuals in the financial services industry to high standards.

This is necessary to minimize opportunities for theft, fraud, and deception in dealings in securities. Self regulatory bodies in Kenya include:

  • The NSE.
  • AKSB.
The principles or rules governing these bodies must exhibit the attributes of good corporate governance, transparency and accountability. Under Section 7 of the Accountants Act, Cap 531 Law of Kenya, on of he functions of ICPAK is to promote standards of professional members of the institute.

Section 28 of the Act enumerates acts or omissions which amounts tom professional misconduct.

The phenomenon growth of the Nairobi Stock Exchange from a small voluntary Association of stock brokers in 1954 to a company limited by guarantee in 1994 and in a state divested channel demonstrated that the stock market had become an important sector of the economy that required an appropriate policy, legal and regulatory framework. This was inevitable as a regulated securities market engenders confidence as it enhances fairness, orderliness, efficiency and investor protection.
There was a need for a legally sanctioned institutional framework with the market and international standards to streamline the industry.

A Summary of Capital Markets Development in Kenya
1920: In Kenya, dealing in shares and stocks started in the 1920s when the country was still a British colony. There was however no formal market, no rules and no regulations to govern stock broking activities. Trading took place on gentlemen's agreement in which standard commissions were charged with clients being obligated to honour their contractual commitments of making good delivery and setting relevant costs. At that time, stock broking was a sideline business conducted by accountants, auctioneers, estate agents and lawyers who met to exchange prices over a cup of coffee. Because these firms were engaged in other areas of specialization, the need for association did not arise.
1951: An Estate Agent by the name of Francis Drummond established the first professional Stock broking firm. He also approached the then finance minister of Kenya Sir Ernest Vasey and impressed upon him the idea of setting up a stock exchange in East Africa.
1953: The two approached London Stock Exchange officials in July of 1953 and the London officials accepted to recognise the setting up of the Nairobi Stock Exchange as an overseas stock exchange.
1954: The Nairobi Stock Exchange was constituted as a voluntary association of stockbrokers registered under the Societies Act. The business of dealing in shares was then confined to the resident European community since Africans and Asians were not permitted to trade in securities until after the attainment of independence in 1963. At the dawn of independence, stock market activity slumped due to uncertainty about the future of independent Kenya.
1963: In the first three years of independence marked by steady economic growth, confidence in the market was once again rekindled and the exchange handled a number of highly oversubscribed public issues.
1972: The growth was however halted when the oil crisis introduced inflationary pressures in the economy, which depressed share prices.
1975: A 35% capital gains tax was introduced in 1975 (suspended since 1985), inflicting further losses to the exchange which at the same time lost it's regional character following the nationalisations, exchange controls and other inter-territorial restrictions introduced in neighboring Tanzania and Uganda. For instance in 1976 Uganda compulsorily acquired a number of companies, which were either quoted, or subsidiaries of companies quoted on the Nairobi Stock Exchange.
1980: The Kenyan Government realized the need to design and implement policy reforms to foster sustainable economic development with an efficient and stable financial system. In particular, it set out to enhance the role of the private sector in the economy, reduce the demands of public enterprises on the exchequer, rationalize the operations of the public enterprise sector to broaden the base of ownership and enhance capital market development.
1984: IFC/CBK study, "Development of Money and Capital Markets in Kenya" became a blueprint for structural reforms in the financial markets which culminated in the formation of a regulatory body 'The Capital Markets Authority' (CMA) in 1989, to assist in the creation of a conducive environment for growth and development of the country's capital market s.
1988: The first privatization through the NSE is successful with the government selling 20% stake in Kenya Commercial Bank.

1991: NSE was registered under the Companies Act and phased out the "Call Over" trading system in favor of the floor based Open Outcry System.
1994: The NSE 20-Share Index an all-record high of 5030 points on Feb. 18, 1994. The NSE is rated by the International Finance Corporation as the best performing market in the world with a return of 179% in dollar terms. Extensive modernization exercise is undertaken, including a move to more spacious premises at the Nation Center in July 1994, setting up computerized delivery and settlement system (DASS) and a modern Information Center. For the first time, the number of stockbrokers increases with the licensing of 8 new brokers.

1995: The Kenyan Government relaxed exchange in locally controlled companies subject to an aggregate limit of 20% and an individual 2.5%. These were doubled to 40% and 5% respectively in June 1995 budget to help encourage foreign portfolio investments. The entire Exchange Control Act was repealed in December 1995. Seven more stockbrokers are licensed, bringing the number to twenty from the original six (one which still survives) at it's inception 1 954. Commission rates, which were once among the highest, were reduced considerably from 2.5% to between 2% and 1 % on a sliding scale for equities and 0.05% for all fixed interest securities for every shilling.
1996: The largest share issue in the history of NSE, the privatization of Kenya Airways, comes to the market through which the stock exchange enabled more than 110,000 shareholders to acquire a stake in the airline. The Kenya Airways Privatization team is awarded the World Bank Award for Excellence for 1996 for being a model success story in divestiture of state-owned enterprises.

1998: The government expands the scope for foreign investment by introducing incentives for capital markets growth including the setting up of tax-free Venture Capital Funds, removal of Capital Gains Tax on insurance companies' investments, allowance of beneficial ownership by foreigners in local stockbrokers and fund managers and the envisaged licensing of Dealing Firms to improve market liquidity. The enactment of the CDS Act is also expected to clear the way for the setting up of the long overdue Central Depository System.

1999: Kenya adopts the International Accounting Standards (IAS) as the local Accounting Standards with effect from January I, 1999."

March 2000
On 17 March 2000, African Lakes Corporation, a technology company listed at the London Stock Exchange, issued four million shares at Kshs 94.50 (raising Kshs 378 million), and as result secured a secondary listing at the Nairobi Stock Exchange.
June 2000
In the budget for the financial year 2000/2001, the Government provided the following additional incentives to capital markets investments:

Withholding tax on dividend income has been reduced from a high of 15% to 7.5% (for foreign investors) and 5% (for local investors). It has also been made the final tax. New and expanded share capital by listed companies or those seeking listing will now be exempt from stamp duty. Transfers of assets to a special purpose vehicle for the purposes of issuing asset backed securities will be exempt from stamp duty and VAT. Expenses incurred by companies in having their financial instruments rated by an independent rating agency are tax deductible.
Registered and approved venture capital funds now enjoy a 10-year tax holiday.
Income accruing to registered collective investment schemes is exempt from tax. Dividends are subject to 5% withholding tax. Interest received from deposits, government debt securities or corporate debt securities is subject to a withholding tax of 15%. Gains arising from sale of shares are exempted from tax. These are the final tax.
Licensed dealers enjoy tax benefits, as long as they turn their portfolios according to laid down guidelines. In order to encourage the transfer of technology and skills, foreign investors are now allowed to acquire upto 49% of local brokerage firm; and upto 70% of local fund management companies.
July 2000:
Central Depository System. The Central Depository System (CDS) Act was passed by Parliament in July 2000, and assented to by the President in August 2000.
Regulatory issues. The Capital Markets Authority Act was amended and renamed the Capital Markets Act. New provisions in the amended Act are:
  • Provisions relating to the establishment of collective investment schemes (CIS).
  • Provision for the establishment of a Capital Markets Appeals Tribunal.
  • Expanded powers for the Authority to intervene in the management of a licensee by way of appointing a statutory manager.
  • Powers for the Authority to license approve or accredit new institutional players in the market, including investment banks, authorized securities dealers, credit rating agencies and registered venture capital funds.
  • Tightening of the provisions dealing with insider trading.
  • Powers for the Authority to regulate e-commerce activities relating to securities.
  • Separation of the functions of general investment advisers and fund managers.
  • Powers for the Authority to issue its own rules, regulations and guidelines, except for those relating to its fees and on participation of foreign investors, which shall be issued by the Minister for Finance.
  • Powers for the Authority to institute special audits on listed companies to serve investors and public interest.
August 2000
CFC Financial Services the first institution to be licensed dealer on the Nairobi Stock Exchange and commenced operations.
An international credit rating agency (Duff and Phelps of South Africa) was accredited to offer rating services within the East African Community region. It is expected to commence operations in the course of the year 2001.
February 2001
Fundamental reorganization of Kenya's capital markets into four independent market segments: the Main Investments Market Segment (MIMS), the Alternative Investments Market Segment (AIMS), the Fixed Income Securities Market Segment (FISMS) and at a later stage a Futures and Options Market Segment (FOMS).
Main Investment Market Segment (MIMs)
Brooke Bond Ltd Ord. 10.00
Kakuzi Ltd. Ord. 5.00
Rea Vipingo Plantations Ltd. Ord. 5.00
Sasini Tea and Coffee Ltd. Ord. 5.00

Commercial and Services
African Lakes Corporation PLC Ord. 5.00
Car and General (K) Ltd. Ord. 5.00
CMC Holdings Ltd. Ord. 5.00
Hutchings Biemer Ltd. Ord. 5.00
Kenya Airways Ltd. Ord. 5.00
Marshalls (E.A) Ltd. Ord. 5.00
Nation Media Group Ord. 5.00
Tourism Promotion Services Ltd. Ord. 5.00 (Serena)
Uchumi Supermarket Ltd. Ord. 5.00

Finance and Investment
Barclays Bank Ltd. Ord. 10.00
C.F.C Bank Ltd. Ord. 5.00
Diamond Trust Bank Kenya Ltd. Ord. 4.00
Housing Finance Co. Ltd. Ord. 5.00
I.C.D.C Investments Co. Ltd. Ord. 5.00
Jubilee Insurance Co. Ltd. Ord. 5.00
Kenya Commercial Bank Ltd. Ord. 10.00
National Bank of Kenya Ltd. Ord. 5.00
NIC Bank Ltd. Ord. 5.00
Pan African Insurance Ltd. Ord. 5.00
Standard Chartered Bank Ltd. Ord. 5.00

Industrial and Allied
Athi River Mining Ord. 5.00
B.O.C Kenya Ltd. Ord. 5.00
Bamburi Cement Ltd. Ord. 5.00
British American Tobacco Kenya Ltd. Ord. 5.00
Carbacid Investments Ltd. Ord. 5.00
Crown Berger Ltd. Ord. 5.00
Dunlop Kenya Ord. 5.00
E.A Cables Ltd. Ord. 5.00
E.A Portland Cement Ltd. Ord. 5.00
East African Breweries Ltd. Ord. 10.00
Firestone East Africa Ltd. Ord. 5.00
Kenya Oil Company Ltd. Ord. 5.00
Mumias Sugar Company Ltd. Ord. 2.00
Kenya Power and Lighting Ltd. Ord. 5.00
Total Kenya Ltd. Ord. 5.00
Unga Group Ltd. Ord. 5.00

Alternative Investment Market Segment
A. Baumann and Company Ltd. Ord. 5.00
City Trust Ltd. Ord. 5.00
E.A. Packaging Ltd. Ord. 5.00
Eaagads Ltd. Ord. 1.25
Express Ltd. Ord 5.00
Williamson Tea Kenya Ltd. Ord. 5.00
Kapchorua Tea Company Ltd. Ord. 5.00
Kenya Orchards Ltd. Ord. 5.00
Limuru Tea Company Ltd. Ord. 20.00
Standard Newspapers Group Ord. 5.00

Fixed Income Securities Market Segment
Preference Shares
Kenya Power and Lighting Ltd. 4.0% Pref. 20.00
Kenya Power and Lighting Ltd. 7.0% Pref 20.00
Marshalls (East Africa) Ltd. 7% Pref 20.00
Standard Newspapers Group Pref 5.00
Kenya Planters Co-operative Union 10% Unsec. Red Loan Stock 1996 -2000
East African Development Bank (TB + 0.75%) 2003
Government of Kenya Treasury Bonds (Government Securities).

At the same time, the following firms were de-listed or suspended from trading due to failure to meet the new listing requirements or continuous reporting obligations.
Suspended companies for non-compliance with continuous reporting obligations:
Hutchings Biemer.

De-listed companies for non-compliance with listing requirements:
Pearl Dry Cleaners
Lornho Motors
Theta Group
Regent Undervalued Assets

Fixed income securities de-listed for non-compliance with minimum listing requirements:
Kenya Hotels
Chancery Investments
Standard Newspapers
Hutchings Biemer

June 2001
In the budget for the financial year 2001/2002, the Government provided the following additional incentives to capital markets investments:
To encourage more listings on the Nairobi Stock Exchange, newly listed companies approved under the Capital Markets Act will be taxed at reduced corporation tax rate of 27% as compared to the standard rate of 30%. This will be for of three years following the date of listing. However, such companies should offer at least 20% of their share capital to the public; and
The companies that apply and are listed shall get a tax amnesty on their past omitted profits subject to them making a full disclosure of their incomes and assets and liabilities during the year commencing at the date of listing and undertaking to, henceforth, pay their due taxes in full.

24 September 2001
Mumias Sugar IPO: Mumias Sugar Company had an offer for sale of 300.0 million shares as part of the Government privatization/divestiture programme. The issue price was Kshs. 6.25. The total proceeds of the sale amounted to Kshs. 1.12 billion being a subscription rate of 60%.

20 November 2001
The NSE Alternative Investments Market Segment (AIMS) had its first rights offer following the market recategorization implemented in February 2001, when the Standard Newspaper Group launched a rights issue on 20 November 2001.

20 December 2001
ICDC Investments: ICDC Investments had on offer to the public 13,908,908 shares at an issue price of Kshs. 37.00. It recorded a 64% level of subscription translating to Kshs. 331.0 million as the amount raised.

Debt securities: There were three issues of medium term notes, namely Shelter Afrique Kshs. 350.0 million, Safaricom Kshs. 4.0 billion and East African Development Bank (EADB) Kshs. 2.0 billion, bringing the total corporate bonds issued to Kshs. 6.35 billion.
In terms of Government of Kenya bonds, a total of Kshs. 64.87 billion face value of treasury bonds were processed and approved by the Authority for listing, out of which the Government raised Ksh s. 47.1 billion raised during the year 2000. This was a 71.2% increase in the issued amount, and a 64.1% increase in the amount raised.


17 April 2002
The CMA announced the approval of the new NSE trading and settlement rules with amendments:
Block Trades: Revised upwards from Ksh. 3 million to Ksh. 50 - 200 million. The block trade rules now apply to trade values of above Ksh. 50 million but less than Ksh. 200 million.
A liberalized commissions regime.

1 May 2002
CFC Financial Services Limited as an Investment Bank shall be a non-deposit taking, institution with the purpose of conducting:
The business of investment advisory Services;

  • Corporate finance;
  • Restructuring;
  • Fund management and underwriting.
    This follows CFC's satisfactory performance as a dealer and its compliance with the requirements for licensing of Investment Banks.
    CFC also owns the entire shareholding of Equity Stock brokers.
26 July 2002
New Foreign Investor Regulations:
There is a 25% minimum reserve of the issued share capital for locals while the balance of the 75% becomes a free float for all classes of investors.
The 25% minimum reserve also applies during initial public offerings (IPOs) and Government of Kenya privatisations.
On the capital markets, there are now three categories of investor; local, East African and foreign. Definitions of the classes of investor are as follows:

Local Investor: An individual, means a natural person who is a citizen of Kenya;
A body corporate, means a company incorporated under the Companies Act in which Kenya citizens or the Government of Kenya have beneficial interest in 100% of its ordinary shares for the time being or any other body corporate established or incorporated in Kenya under the provisions of any written law.
East African Investor: An individual, means a natural person who is a citizen of the East African Community Partner states of Tanzania or Uganda.
An institution means a corporate person incorporated or registered in the East African Community Partner States of Tanzania or Uganda in whom 100% of the beneficial interest lies with the citizens of Tanzania or Uganda.

5 August 2002
Shareholder Agreement for the Central Depository and Settlement Corporation (CDSC)
5 August 2002, the Nairobi Stock Exchange, the Capital Markets Authority of Kenya, the Association of Kenya Stockbrokers, the CMA Investor Compensation Fund, and 9 institutional investors through the Capital Markets Challenge Fund have come together as investors in the Central Depository and Settlement Corporation (CDSC). The CDSC being the legal entity that will own the clearing, settlement, depository and registry system of the capital markets will be automated and operated.

Of the Kshs. 100.0 million initial funding obtained for the project, the Nairobi Stock Exchange has committed Kshs. 25.0 million, with the other investors collectively contributing the balance of Kshs. 75.0 million.
The other 9 partners:
  • Apollo Insurance
  • Jubilee Insurance
  • Kenya Commercial Bank
  • Commercial Bank of Africa
  • Old Mutual
  • CFC Bank
  • East African Breweries Ltd.
  • East African Development Bank
  • ICDC Investment Company Ltd.
The Nairobi Stock Exchange is also holding in trust 2.5% of the shareholding in the CDSC for the Uganda Securities Exchange and an equal portion of 2.5% shareholding in the CDSC for the Dar-es-Salaam Stock Exchange to be transferred at a future date yet to be determined.
The Central Depository and Settlement Corporation Board is to commence negotiations with the technology supplier of the automated system before the end of September 2002. The same vendor is also providing the Nairobi Stock Exchange with an automated trading solution.
4 October 2002
Transformation of a Stockbroker to an Investment Bank
Hak Securities a licensed stockbroker and a member of the Nairobi Stock Exchange applied to the Authority to transform its operations into an Investment Bank under the name Apex Africa Investment Bank Ltd. with effect from January 2003. Hak Securities was granted approval having satisfied the requirements prescribed under the Capital Markets Act and Regulations in terms of management and professional capacity as well as prescribed capital for Investment Banks. Investment Banks are expected to play a leading role in the emerging sophistication and deepening of financial services within the capital markets.

Acquisition of Kenya Wide Securities by African Alliance Limited
The Capital Markets Authority announced the approval of acquisition of the membership of Kenya Wide Securities Limited, a licensed stockbroker at the Nairobi Stock Exchange by African Alliance Limited, which was recently licensed as an investment bank. Following this acquisition, African Alliance Limited will take over the membership of Kenya Wide Securities Limited at Nairobi Stock Exchange and will operate as an investment bank with effect from January 2002.

Consequently, Kenya Wide Securities Ltd will cease to be a licensed stockbroker and a member of Nairobi Stock Exchange, following the acquisition by African Alliance.

There is an institution called the Association of Financial Analysts started in 1998, to train financial analysts in the market, however it has not reached the critical mass was envisioned during its set up and faces administrative and financial difficulty. See Appendix 4.

The proposed changes are crucial to the business of running an Exchange, in order to enhance the market neutral position and value of the reputation of the Exchange for fairness and transparency in the conduct of trading through:
Improving staff operations and competency.

  • Rewriting rules as know how, technology, products, and opportunities change and evolve.
  • Enhancing surveillance and control functions in an environment of growing complexity.
  • Improving the information disclosed on companies and market data; diffusing of market data to a wide public.
  • Investing reserves strategically.
  • Assuring a good return on capital.
The ultimate objective being to translate to volume growth and reduced spreads.
We believe the following outlined Training Programme will go a long way in building the human resource capacity of the regional capital markets thus enabling the capital markets to face up to globalization and fulfill its mandate of facilitating mobilization of capital for the development of the private sector in the region, stimulating economic growth, employment and wealth creation for all East Africans

In 1984 the Government of Kenya commissioned study of money and Capital markets and the report became the basis for structural reforms in the financial markets. This report and other developments led to the enactment of the Capital Markets Act in 1989 Cap 485A. This statute created the Capital markets Authority. It came into force in December 15th 1989. The authority was inaugurated and commenced operations in March 1990. The objectives of the Capital Markets Act, Cap 485A are set out in its preamble as to establish a Capital Markets Authority for the purpose of promoting, regulating and facilitating the development of an orderly, fair and efficient Capital Markets in Kenya and for connected purpose”
The title of the Statute has since changed to the Capital Markets Act.

The authority is empowered to appoint a statutory manager to assume the management control and affairs and business of a licensed person and exercise all powers of the license to the exclusion of its Board of directors. It is empowered to remove any officer or employee of a licensed person if in its opinion; the person is responsible for any contravention of the provisions of the Act or any regulations or is responsible for the deterioration inn the financial disability of the licensed person or ha been guilty off conduct detrimental to the interests of investors.
It may appoint a competent person familiar with the business of a licensed person to the board of directors to hold office as a director is not capable of being removed from office without approval of the authority or a high court order. These powers are exercisable if:

    1. A licensed person’s licence or approval in suspendiung.
    2. A winding up petition has been presented to the court.
    3. A resolution for winding up has been proposed.
    4. A receiver or manager has been appointed.
    5. The authority discovers or becomes aware of facts or circumstances which in its opinion warrant the exercise the relevant powers in the interests of investors.

Functions of the stock exchange.

  1. Easy marketability of securities facilitates the flow of new capital into the industry.
  2. Saving in order to invest is encouraged.
  3. The title to any quoted security is transferable speedily and cheaply.
  4. International dealings in securities may be affected.
  5. Investors are protected by reason of the rules and discipline of the exchange.
  6. Companies seeking capital are advised and guided at all stages leading up to the issue of prospectus. The trend of business on the exchange provides an important barometer for the business throughout the community.




 The capital market is part of the financial system that provides funds for long-term development. This is a market that brings together lenders (investors) of capital and borrowers (companies that sell securities to the public) of capital.

Establishment of the Capital Markets Authority

In the 1980s the Government of Kenya realized the need to design and implement policy reforms to foster sustainable economic development with an efficient and stable financial system. In particular, it set out to enhance the role of the private sector in the economy, reduce the demands of public enterprises on the exchequer, rationalize the operations of the public enterprise sector to broaden the base of ownership and enhance capital market development. It had become evident that the commercial banks could not support and sustain a desirable economic development because they could not offer the necessary long-term credit.  
In 1984, a study on the Development of Money and Capital Markets in Kenya was jointly undertaken by the Central Bank of Kenya and the International Finance Corporation with the objectives of making recommendations on measures that would ensure active development and strengthening of the financial sector. This became a blueprint for structural reforms in the financial markets. The Government further re-affirmed its commitment to the creation of a regulatory body for the capital markets in the 1986 Sessional Paper on “Economic Management of Renewed Growth”.
In November 1988, the Government set up Capital Markets Development Advisory Council and charged it with the role of working out the necessary modalities including the drafting of a bill to establish the Capital Markets Authority (the Authority).
In November1989, the bill was passed in parliament and subsequently received Presidential assent (The Capital Markets Authority was set up in 1989 through an Act Parliament (Cap 485A,Laws of Kenya). The Authority was eventually constituted in January 1990 and inaugurated on 7th March 1990.  The Authority is a body corporate with perpetual succession and a common seal.


The mission of the Authority is to promote the development of orderly, fair, efficient, secure, transparent and dynamic capital markets in Kenya within a framework which facilitates innovation through an effective but flexible system of regulation for the maintenance of investor confidence and safeguards the interest of all market participants.


The principle objectives of the Authority are:
  1. The development of all aspects of the capital markets with particular emphasis on the removal of impediments to, and the creation of incentives for longer term investments in, productive activities;
  2. To facilitate the existence of a nationwide system of stock market and brokerage services so as to enable wider participation of the general public in stock market;

  1. To create, maintain and regulate a market in which securities can be issued and traded in an orderly, fair, and efficient manner, through the implementation of a system in which the market participants regulate themselves to the maximum practicable extent;
  2. To protect investor interests;
  3. To operate a compensation fund to protect investors from financial loss arising from the failure of a licensed broker or dealer to meet his contractual obligations; and
  4. To develop a framework to facilitate the use of electronic commerce for the development of capital markets in Kenya.


The board of directors of the Authority consists of  -
  1. A Chairman appointed by the President on the recommendation of the Minister of Finance;
  2. Six other members appointed by the Minister;
[The chairman and the six members are persons who have experience and expertise in legal, financial, banking, accounting, economics or insurance matters, serve for a period of three years and are eligible for re-appointment for another three years.]
  1. The Permanent Secretary to the Treasury or a person deputed by him;
  2. The Governor of the Central Bank of Kenya or a person deputed by him;
  3. The Attorney General or a person deputed by him;
  4. The Chief Executive of the Authority, who serves for a four-year term and is eligible for re-appointment for another four-year term.


Main Acts:
  1. The Capital Markets Authority Act, (Cap 485A, December 1989);

  1. The Capital Markets Authority (Amendment) Act, 1994, (Kenya Gazette Supplement No 4 of January, 1995);

  1. The Capital Markets Authority (Amendment) Act, 2000 (August 2000);

  1. The Central Depositories Act, 2000 (August 2000);

Regulations and Rules:
  1. The Capital Markets (Collective Investment Schemes) Regulations, 2001
  2. The Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations, 2002
  3. The Capital Markets (Licensing Requirements) (General) Regulations, 2002
  4. TheCapital Markets (Takeovers and Mergers) Regulations, 2002
  5. The Capital Markets (Foreign Investors) Regulations, 2002
  6. The Capital Markets Tribunal Rules, 2002

  1. Guidelines on Corporate Governance Practices by Public Listed Companies
  2. Guidelines on the Approval and Registration of Credit Rating Agencies


The Authority licenses the following categories of market players:
  1. Securities Exchange (Nairobi Stock Exchange)
  2. Central Depository (the Central Depository and Settlement Corporation)
  3. Investment Banks 
  4. Stockbrokers
  5. Dealers
  6. Investment Advisers
  7. Fund Managers
  8. Authorised Securities Dealers
  9. Authorized Depositories
  10. Credit Rating Agencies 
  11. Venture Capital Fund


In September 2002, the Authority launched the Capital MarketsStrategic Plan: Vision 2002-2005 representing a comprehensive plan of actions aimed at strategic positioning, broadening and deepening the capital markets and making Kenya a leading financial center in the region. 
The strategic plan outlines a seven-prong reform agenda, highlights of some main milestones realized and a sequence of the reform measures and action plan for the period 2002-2005. 
The seven-prong reform agenda includes the following: -
  1. Establishment of a robust and scalable capital markets infrastructure;
  2. Enhancement of the  capital markets institutional arrangement;

  1. Establishment of a robust and facilitative legal and regulatory framework;
  2. Development of new financial products and strengthening of the market structure;
  3. Creating an enabling and facilitative environment for the capital markets;
  4. Training and investor education; and
  5. Establishing an integrated East African capital market.


Taxation Measures

  • Newly listed companies are taxed at a lower rate of 25% as compared to the standard rate of 30% (or 32.5% for foreign companies) for a period of five years following the date of listing. This is subject to such companies offering at least 30% of their share capital to the public.
  • Newly listed companies get a tax amnesty on their past omitted income, provided they make a full disclosure of their assets and liabilities and undertake to pay all their future due taxes.
  • Withholding tax on dividend income has been reduced from a high of 15% to 7.5% (for foreign investors) and 5% (for local investors) and made a final tax.
  • Expenses related to issuing shares to the public are fully tax deductible.
  • New and expanded share capital for companies approved for listing or already listed are exempted from stamp duty charges.
  • Transfer of assets to a special purpose vehicle for the purposes of issuing asset-backed securities are exempted from stamp duty.
  • Expenses incurred by companies in having their financial instruments rated by an independent rating agency are tax deductible.

  • Registered and approved venture capital funds now enjoy a 10-year tax holiday.
  • Income accruing to registered collective investment schemes is tax-free.
  • Licensed dealers enjoy tax benefits, as long as they turn their portfolios within 24 months and according to laid down regulations.
  • Transfer of listed securities is exempt from stamp duty and VAT.
  • Investment ceiling by retirement benefits schemes in fixed income securities (e.g. bonds and commercial papers) has been raised from 15% to 30%.
  • Individuals will now enjoy a tax relief of 15% subject to a maximum of Kshs 3,000 per month on the premium paid on Life and Education Policies of at least ten years maturity.
  • To encourage savings, collective investment schemes set up by employers on behalf of employees to invest in listed shares, will be exempt from income tax.

Other Policy Measures

  • Foreign investors can now acquire shares freely in the stock market subject to a minimum reserved ratio of 25% for domestic investors in each listed company.
  • In order to encourage the transfer of technology and skills, foreign investors are now allowed to acquire up to 49% of local stockbrokers and up to 70% of local fund managers. 


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