Law to protect investors in Kenya capital market

 

A trader uses the automated trading system. Law in the offing to enhance monitoring of stockbrokers’ activities. Photo/FILE  Nation Media Group

By DAVID MUGWE The EastAfrican  

In Summary

• Through the Capital Markets (Amendment) Bill, 2013, the CMA is seeking to tighten the noose on insider trading and other market abuses by sealing legal loopholes that made it almost impossible for the regulator to prove cases of insider trading in court.
• A generally opaque regulatory framework in Kenya was said to be scaring away potential investors and financiers, who opted for other markets like Malaysia, where investor protection laws are tighter.
• CMA is also banking on a new surveillance system and an electronic financial reporting platform to be deployed in the next two months to help the authority track trading activities by insiders, while providing quality information to the authority.

Executives in companies that have issued securities in Kenya’s capital market are set to come under renewed scrutiny as the regulator seeks increased supervisory powers in rules meant to boost Kenya’s quest to be a global financial hub.

Through the Capital Markets (Amendment) Bill, 2013 that came up for debate in parliament on Thursday, the Capital Markets Authority is seeking to tighten the noose on insider trading and other market abuses by sealing legal loopholes that made it almost impossible for the regulator to prove cases of insider trading in court.

A generally opaque regulatory framework in Kenya was said to be scaring away potential investors and financiers, who opted for other markets like Malaysia, where investor protection laws are tighter.

CMA boss Paul Muthaura said the Authority is also banking on a new surveillance system and an electronic financial reporting platform to be deployed in the next two months to help the authority track trading activities by insiders, while providing quality information to CMA.

It will, among other things, monitor trading for each shareholder and for company insiders like directors and senior managers.

Insider trading and other market abuses have now been defined in detail and broken down into items — such as market manipulation, false trading, market rigging, fraudulently inducing trading of securities, use of manipulative devices and making false or misleading statements — with enhanced penalties.

READ: Creative accounting: Are Kenyan firms padding out their profits?

 This means insider trading will now be treated as an offence of strict liability with the new law identifying a range of the most common market manipulation offences to guide the courts and the investing public.

Mr Muthaura said that cases brought against insiders in past years failed because the laws were vague, making it difficult to prove that an insider had traded based on information that had not yet been made public.

“We identified the weaknesses in the law at that time and did a lot of international benchmarking so we could align our rules accordingly,” said Mr Muthaura.

Three years ago, the High Court dismissed insider trading charges against former Kenya Commercial Bank managing director Terry Davidson and former Uchumi Supermarkets general manager Bernard Mwangi Kibaru.

The two had been accused of instructing their brokers to trade their shares before the supermarket chain collapsed and had its shares suspended from trading at the Nairobi Securities Exchange in 2006.

The CMA approved Uchumi’s re-listing in April 2011, but issues surrounding its collapse and subsequent court cases brought current laws, corporate governance practices and the powers of CMA under scrutiny.

In his budget speech this year, Henry Rotich, Cabinet Secretary for the National Treasury, said insider trading and market manipulation continued to pose a threat to the stability and growth of the capital markets.

“What the provisions are saying is that once you are shown to be an insider, if you trade, you are deemed to have ‘insider traded’ unless you can prove otherwise. It is strict liability, you give evidence to show that the reasons to trade have nothing to do with the insider information,” said Mr Muthaura