Regulatory reforms across numerous Kenyan sectors stimulate new activity

The telecommunications sector in Kenya has seen tremendous growth and change in the past 12 months, as industry players grapple to position themselves competitively in an increasingly saturated market. The recent exit of Essar Telecom Kenya through a unique divestment of licences and subscribers to the two largest competitors in the market left the sector with three industry players. Recognising the convergence of telecommunications services with mobile money and banking services, in April 2014 the Communications Authority of Kenya awarded the first mobile virtual network operating licence to Equity Bank, one of the largest retail banks in sub-Saharan Africa, which will ride on Airtel’s network. After successfully fighting court challenges to the use of “thin SIM” technology, Equity Bank officially launched its Equitel product, offering an overlay SIM card with value-added services like mobile money.

In an effort to keep up with market developments and the provisions of the Constitution of Kenya, the Communications Authority, in consultation with the Ministry for Information Communications and Technology, and industry stakeholders, is in the process of amending 10 out of the 16 ICT regulations under the Kenya Information and Communications Act, which is the main statute regulating the ICT industry.

Grey Matters

The ICT industry has experienced significant changes and based on the reforms being proposed in the draft regulations, it is evident that the Communications Authority wants to specifically regulate grey areas in the law, manage technological developments and promote consumer welfare. Those draft laws that contain the most significant proposals for the industry are the Licensing and Quality of Service Regulations, the Broadcasting Regulations, and the Fair Competition and Equality of Treatment Regulations.

Fewer Players

The changes being proposed to the Licensing and Quality of Service Regulations have clearly been influenced by the exit in 2014 of Essar, trading under the “Yu” brand name from the mobile telecommunications sector. Essar’s exit not only resulted in a consolidation of the mobile telecommunications sector from a four-player market to a three-player market, but also marked the first time a telecommunications company exited the Kenyan market by way of an asset sale.

Following the exit of Essar, Kenya’s second-largest mobile telecommunications company by subscriber base, Airtel, acquired the former’s subscribers, while Safaricom, Kenya’s largest telecoms company and one of East Africa’s most profitable companies, gained Essar’s spectrum and fixed assets.

At the time the transaction was taking place, some of the issues that were unclear in the existing legal provisions were (i) the procedure to be followed when transferring spectrum and licences (ii), whether the transferee gets a new licence and (iii) how consumers were to be protected post completion. To address these concerns, the Communications Authority is proposing to amend the Licensing and Quality of Service Regulations to require that (i) spectrum be surrendered to the Communications Authority for re-assignment, (ii) the transferee be granted a new licence and (iii) the transferee and transferor put in place adequate measures to protect consumers.

Questions Remain

The proposals are commendable, but shortcomings remain. For example, a transferee is not assured of being re-assigned an appropriate portion of the spectrum being surrendered. The draft regulations do not set out the factors the Communications Authority should consider when re-assigning the spectrum, and so it has a considerable amount of discretion in determining how to re-assign the spectrum. In relation to the issuance of a new licence, it is unclear if the transferee will be granted a new licence for the remainder of the transferor’s term or for a whole new term, and also what fees (if any) are to be payable by the transferee.

Dominance

In addition to the draft Licensing and Quality of Service Regulations, the proposed Fair Competition and Equality of Treatment Regulations set out one of the most contentious changes under the draft regulations: the amendment of the criteria for determining a dominant licensee. Designation of a licensee as dominant is currently provided for under the existing Fair Competition and Equality of Treatment Regulations of 2010. However, the Communications Authority is proposing to amend the dominance criteria to include a licensee controlling 51% of the relevant market segment. The implication of being declared dominant, among other things, is that it restricts a licensee’s ability to set prices independently. The question of dominance is most relevant to the mobile sector, where Safaricom is much larger than its competitors in the voice, data and mobile money transfer markets.

The Communications Authority has recently signed a memorandum of understanding with the Competition Authority of Kenya, the national competition regulator. However, it is not clear how the Communications Authority and Competition Authority will work together on the issue of dominance, especially since the Competition Act does not prohibit dominance, but only the abuse of dominance. In addition, since services such as mobile money transfer require an authorisation from the Communications Authority and the Central Bank of Kenya (CBK), it is not clear if the Communications Authority has the mandate to declare a licensee dominant in mobile money transfer, which is also subject to regulation by the CBK. This is because a strong argument can be made that since it is a money transfer service, the market for mobile money transfer includes not just mobile operators, but banks and money transfer firms, such as Money Gram and Western Union, as well.

Broadcasting Sector

In the broadcasting sector, the draft Broadcasting Regulations are proposing far-reaching changes, such as increasing from one to three the number of frequencies in one site that a public broadcaster and not a private broadcaster is entitled to, requiring the surrender of analogue television broadcasting frequencies following the migration from analogue television broadcasting frequencies to digital frequencies, setting minimum local content broadcasting requirements in an effort to promote the domestic film, arts and music production industries. The draft regulation also imposes certain restrictions of the types of programmes that can be broadcast during the prime-time viewing and listening period between 5pm and 10pm.

One final amendment of interest is under the draft Universal Access and Service Regulations. The existing 2010 regulations require licensees to pay a universal service levy equal to 0.5% of their gross annual revenues. The current definition of gross revenues captures all revenues derived by a licensee. The draft regulations propose to amend this definition to restrict gross revenues to revenues from communications services. The implication of this amendment is that only revenues that are derived from licensed services are subject to the 0.5% levy. Consequently, revenues derived from asset disposals, dividends from portfolio companies, or the sales of products and services that do not require a licence from the Communications Authority – for instance the sale of mobile phones – will be excluded when computing gross revenue for purposes of calculating the government’s universal service levy.

The ICT regulations were still in a draft form as of October 2015 and awaiting submission to Parliament for debate and approval prior to coming into force. In this regard, the changes discussed in this article may not be in the final versions of the regulations once passed by Parliament.

Capital Markets 

Since it commenced operations in the 1980s, Kenya’s capital market has grown in leaps and bounds and has become an integral component of the country’s financial system and a key driver of economic growth and development. The great strides that have been taken by Kenya’s capital markets have attracted institutions and investors who now see Kenya as an ideal investment destination.

The Capital Markets Act, Chapter 485a, Laws of Kenya (the Capital Markets Act) first came into force in 1989 and the Capital Markets Authority of Kenya (CMA) was constituted in 1990. The Capital Markets Act underwent substantial reform in 2002 and again more recently in 2013 when a raft of amendments and new regulations were introduced. Following this, the CMA issued the 10-year Capital Market Master Plan (2014-23) in which it sets out its vision for Kenya to be at the heart of African capital markets.

Master Plan

The Capital Market Master Plan focuses on regional integration, with Nairobi as an East African centre. The CMA has been active in creating the Capital Markets Framework and consultations were held on the regional regulations earlier this year. There is also a focus on building capacity, expanding infrastructure and increasing liquidity in the market. The current priority is on allowing direct market access and block trading. The third limb of the Capital Market Master Plan addresses the legal and regulatory environment.

The CMA is mandated with promulgating regulation that increases innovation, opens up new markets and prevents mischief in the markets. The Capital Market Master Plan envisages that the CMA will take the “no action” approach of the US Securities and Exchange Commission, which allows firms to approach it when they are not certain of whether a product, service or action would constitute a violation of US securities law and may request a “no action” letter confirming that no action would be taken against the company based on the facts set out in the “no action” request.

Insider Trader

Following a case of insider trading in 2013, the Parliament tightened the relevant law through an amendment to the Capital Markets Act. The amendment introduced the following categories of insider trading: market manipulation, false trading, market rigging, fraudulently inducing trading of securities, use of manipulative devices and making false or misleading statements. In addition, the penalties for insider trading have been enhanced.

Corporate Governance

Following the events of 2013 and in line with the Capital Market Master Plan, the CMA is also looking to strengthen the corporate governance of listed companies in Kenya. The current corporate governance guidelines are essentially non-binding on listed companies, but operate on a “comply or explain” basis. The CMA has proposed a more robust code which is intended to be adopted this year. The new code will also largely operate on a similar “comply or explain” basis, but certain aspect of the code will now be mandatory.

The mandatory changes in the new corporate governance code are predominantly in relation to the composition, role and responsibilities of the board of directors of listed companies. These require that all directors, the chairman and the company secretary undergo an annual evaluation and that a summary of the results of these evaluations be published in the company’s annual report. In addition, a third of the directors will be required to be independent directors, and an independent director can only serve on the board of a company for nine years. Directors who are not corporate directors cannot be on the boards of more than three listed companies at any one time.

New Products

The 2013 amendments to the Capital Markets Act and the new regulations introduced a range of new products and services. Notable among these are the new growth enterprise market segment (GEMS), real estate investment trusts (REITs) and sharia-compliant Islamic bonds. In addition, a new derivatives exchange is scheduled to be launched shortly.

GEMS

The introduction of GEMS on the Nairobi Securities Exchange (NSE) was designed to make it easier and cheaper for small and medium-sized enterprises (SMEs) to list their shares and raise capital in Kenya and thereby help address the gap in SMEs’ access to funding. The GEMS market has had slow traction with only one initial listing. Despite the slow pace, there were three new listings – including the cross-listing of Atlas Development and Support Services from the London Alternative Investment Market – in the fourth quarter of 2014. The CMA is actively focused on trying to increase activity in this segment.

REITS

REITs regulations, aimed at providing Kenyan investors with an opportunity to invest in the real estate sector in a liquid manner, were promulgated in 2013. The regulations provide for income REITs (I-REITs), development REITs (D-REITs) and Islamic REITs. There is a great deal of interest in REITS in Kenya, but their implementation was hindered by the lack of clarity around their taxation.

The Finance Act 2015 has provided clarification on this issue through an amendment to the Stamp Duty Act, Chapter 480 of the Laws of Kenya, which has resulted in no stamp duty being chargeable on an instrument relating to a transaction, the effect of which is to (i) transfer a beneficial interest in property from one REIT trustee to another REIT trustee or to an additional REIT trustee; or (ii) transfer the beneficial interest in property from a person or persons for the transfer of units in a REIT. Pursuant to this clarification, at the time of publication, at least one I-REIT was in the process of being listed on the Nairobi Securities Exchange.

Derivatives Market

The 2013 amendments to the Capital Markets Act introduced a framework for a derivatives market. The CMA has since gazetted various regulations to make this market operational and the derivatives market is expected to be launched by the end of 2015. The CMA has approved the NSE’s application to operate as a futures exchange and it is expected that trading will commence in elementary derivative products, such as futures and options, immediately upon the market becoming operational.

Foreign Investment

In June 2015 Kenya removed the 75% foreign shareholding restriction in respect of listed companies. However, the cabinet secretary for the National Treasury may still prescribe the maximum foreign shareholding holding in a listed company that is considered of “strategic interest”. It is hoped that the removal of restrictions on foreign shareholding will have a positive effect on liquidity in the capital markets.

Capital Gains Tax

The start of 2015 saw the re-introduction of capital gains tax at the rate of 5% on listed shares causing trading volumes to dip significantly, with no indexation for historical gains. As a result the Treasury moved to salvage the situation by abolishing capital gains tax on listed shares with effect from January 1st 2016. This has provided certainty and predictability to the capital markets.

Movement Expected

As a result of the implementation of the changes discussed above, significant movement is expected in the Kenyan capital markets in 2015 and 2016. In addition, insurance companies are expected to look to the capital markets to raise funding as the Finance Act requires a significant increase in the core capital of banks in stages by August 2018.

Competition Law

Competition law is playing an increasingly larger role in the mergers and acquisitions horizon. Kenya’s competition framework was substantially revised by the introduction of a new competition regime under the Competition Act, Act 12 of 2010, which took effect on August 1, 2011 and created the autonomous regulatory body, the Competition Authority of Kenya. However, Kenya is also a member of the regional Common Market for Eastern and Southern Africa (COMESA).

Therefore, Kenyan mergers and acquisitions may also be subject to COMESA Competition Regulations and Competition Rules where the merger involves companies from two or more COMESA member states. COMESA’s competition regime took effect in early 2013 when the COMESA Competition Commission (CCC) was established. In addition, the East African Communities (EAC) Competition Act of 2006 is expected to become operational in 2016.

The Competition Act

The Kenyan Competition Act, modelled on South Africa’s Competition Act, regulates mergers, abuse of dominance and unwarranted concentrations of economic power, consumer welfare, cartels and other restrictive trade practices and exemptions. Mergers cannot be implemented in Kenya without the Competition Authority’s approval. Failure to obtain approval prior to the implementation of a merger can lead to a maximum penalty of 10% of the combined turnover of the merging parties. In addition, the merger will not have any legal effect. The Competition Act gives the Competition Authority substantial investigative powers in respect of anti-trust investigations, including the power to conduct “dawn raids” on corporations for the purposes of obtaining evidence.

Mergers

For listed companies, a merger is notifiable to the Competition Authority in any case where a takeover offer (an offer for 25% or more of the share capital of a listed company) is made. For non-listed companies, a merger occurs where there has been a direct or indirect change of control in the whole or a part of the business of another company. A change of control occurs where there has been an acquisition of more than 50% of the voting shares of a company, where the buyer has the ability to appoint or veto the appointment of a majority of the board of directors of the company, or has the ability to materially influence the policy of the company. The Competition Authority has issued the Consolidated Guidelines on the Substantive Assessment of Mergers under the Competition Act, which state that where the majority of the voting shares are not acquired or the majority of the board cannot be appointed or vetoed, the Competition Authority will consider whether decisive influence can still be exercised over the target to consider whether there is a deemed change of control.

In these cases, the Competition Authority will examine whether the acquirer can veto rights or determine the appointment of senior management, the strategic commercial policy, and the budget or business of a company. Therefore, even where an acquisition or investment in a Kenyan company results in the acquirer owning less than 50% of the share capital, the acquisition may require approval. Helpfully, the authority has clarified that were the acquisition is for less than 25% of the voting capital of a company and where the shares are acquired solely for investment purposes or in the ordinary course of business, such a merger is not notifiable. However, an application for exclusion from notification must be made. There are no block exemptions for mergers so transactions are reviewed on a case-by-case basis.

Thresholds

A merger is only notifiable if it meets certain thresholds. Otherwise, parties can make an application for exclusion from notification. If the combined turnover or assets of the merging parties in Kenya is between KSh100m ($1.1m) and KSh1bn ($11m), then it falls below the notification thresholds. In the case of the health care sector, the threshold is between KSh50m ($550,000) and KSh500m ($5.5m).

In the carbon-based mineral sector, if the value of the reserves, rights and associated exploration assets held as a result of the merger is below KSh4bn ($44m), then it falls below the notification threshold. These merger thresholds have been issued as non-binding guidelines by the Competition Authority and may be subject to change once they go through the parliamentary process.

Fees

In 2014 the Competition Authority introduced filing fees for merger applications from August 1, 2014. For notifications where the combined turnover or assets of the merging parties is between KSh500m ($5.5m) and KSh1bn ($11m), the filing fees are KSh500,000 ($5500). Where the combined turnover or assets exceeds this range but is below KSh50bn ($550m), the filing fees are KSh1m ($11,000) and where the combined turnover or assets are above KSh50bn ($550m) the filing fees are KSh2m ($22,000).

Merger Assessment

For each merger the Competition Authority considers whether it is likely to prevent or lessen competition or create or strengthen a dominant position and whether there are any consumer welfare concerns. The Competition Authority has recently begun imposing conditions on its merger approval, particularly in relation to the retention of employees. In general, approvals for applications for exemptions are granted within a month and approvals are typically received within 60 to 75 days, although in some cases this timeline can be significantly longer. As part of the assessment process, the Competition Authority may conduct a site visit to the target company’s premises and may contact its customers, suppliers and distributors.

Enforcement

The Competition Authority has begun clamping down on mergers of which it was not notified prior to implementation. In the case of Tusker Mattress and Ukwala Supermarkets, two prominent chain stores, the merger occurred without prior approval and the Competition Authority unwound certain aspects of the transaction as well as issued a fine. The Competition Authority can impose a fine of up to KSh10m ($110,000) and up to 10% of the combined annual turnover or assets of the merging parties in Kenya. The Competition Act also provides for a prison sentence, which currently would have to be imposed by the High Court although the Competition Authority has indicated that it is proposing the removal of criminal sanctions from the Competition Act. The Competition Act envisages the creation of a Competition Tribunal to weigh in on these cases, which is currently in the process of being formed.

COMESA

The COMESA Council of Ministers meeting in March 2015 adopted new rules, which happily addressed the two controversial aspects of the COMESA competition regime regarding thresholds and fees. In terms of thresholds, to fall within the scope of the COMESA Competition Regulations, either or both of the acquiring firm and the target firm must operate in two or more COMESA member states. Furthermore, the merger participants must meet two additional criteria: (i) the combined annual turnover or combined value of assets, whichever is higher, in the common market of all the parties to the merger must equal or exceed $50m; and (ii) the annual turnover or value of assets, whichever is higher, in the common market of each of at least two of the parties to a merger must equal or exceed $10m, unless each of the parties to a merger achieves at least two-thirds of its aggregate turnover or assets in the common market within one and the same member state. In terms of costs, the fee cap for COMESA mergers has been reduced to $200,000. Merging parties should factor in that COMESA notifications are laborious to complete and have to be submitted within 30 days of the decision to merge. Therefore, where there is a COMESA angle, it is important that the COMESA filing forms be prepared concurrently with the transaction documentation. The CCC has up to six months within which to approve a merger notification, which time-line may be extended by the CCC.

Unlike the Kenyan regime, the CCC parties can implement the merger while awaiting approval. However, this exposes parties to the risk that the CCC approves the merger with conditions or does not allow the merger, in which case the merger would have to be unwound potentially after six months or more after being implemented. Failure to notify the CCC of a transaction can also lead to penalties of a maximum of 10% of the combined turnover of the merging parties in COMESA. The COMESA competition regime envisages a one-stop shop to facilitate the procedures for merging businesses. However, currently Kenya requires that notifications be made to the Competition Authority as well as to the CCC. When the EAC Competition Act becomes operational, there is a potential that three notifications would have to be made in parallel to each of the three authorities. The three regulators are currently in discussions on how to streamline this process.

Increased Capacity

The Competition Authority significantly increased its capacity at the beginning of 2015 and has commenced several investigations this year. The Competition Act prohibits agreements which have as their object or effect the prevention, distortion or lessening of competition in Kenya. Specifically, it prohibits any practices that involve directly or indirectly fixing prices or trading conditions; dividing markets by allocating customers, suppliers, areas or specific types of goods or services; collusive tendering; minimum price maintenance; limiting or controlling production, market outlets or access, technical development or investment; applying dissimilar conditions to equivalent transactions with other trading parties; making the conclusion of contracts subject to acceptance of supplementary conditions; and for intellectual property where the use goes beyond the limits of fair reasonable and non-discriminatory use. The Competition Authority has signed a number of memoranda of understanding with other regulators and is expected to commence cartel investigations in 2015. The Competition Act was amended at the end of 2014 to introduce a leniency provision so that where an anti-competitive agreement is voluntarily disclosed, the Competition Authority has the authority to waive all or some of the penalty on the disclosing party.

Exemptions

There are currently no block exemptions, although certain block exemptions are expected to be published in 2016. Therefore, all investors presently engaging with an exclusive distributor or franchisee in Kenya are expected to apply for an exemption. Thus far, only a limited number of exemptions have been granted.

Mergers and anti-trust regulation have become increasingly central to the Kenyan investment climate and investors are advised to seek competition advice in the early stages of the investment process. In addition, investors are advised to closely review any and all existing arrangements to ensure that they do not include exclusivity or any price-fixing considerations.

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The Report: Kenya 2016

The Guide

Table of Content

Legal Framework chapter from The Report: Kenya 2016

Legal Framework chapter from The Guide

Legal Framework chapter from Table of Content

The Report: Kenya 2016

The Report

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