In the bustling Kenyan capital markets, a new chapter unfolds as the Capital Markets Authority (CMA) introduces the Capital Markets (Public Offers, Listing & Disclosure) Regulations 2023 (POLDs), setting the stage for a dynamic shift in the public offering landscape.
For more than two decades, the old blueprint, the Capital Markets (Securities) (Public Offering, Listing & Disclosure) Regulations of 2002 (“2002 Regulations”), held sway creating a stable and rational framework for the capital markets in Kenya. Various amendments have been made over the years to keep up with the growth in the economy and the global trends but the dynamic nature of the industry required an overhaul rather than piecemeal amendments. Stagnation in growth of the economy in part attributed to macro-economic issues such as interest rates, foreign exchange, GDP, inflation, dwindling capital inflows and trade imbalances have all piled pressure as reflected in the bearish performance of our stock market. Times change, and so does investors’ interest. The Capital Markets Authority (CMA) in keeping with its mandate as the Regulator led the discussions with the industry stakeholders which have now resulted in the Capital Markets (Public Offers, Listing & Disclosure) Regulations 2023 (POLDs) – a brand new approach to the capital markets in Kenya!
Debate has surrounded the POLDs core philosophy. Does it establish the market as merit-based or disclosure-based? A merit-based approach essentially requires a consideration of an issuer’s suitability to bring a security to the market assessing factors such as capital, management, performance, economy and trends amongst others prior to giving approval while a disclosure-based regime requires disclosure of certain key information disseminated to the investing public in the form provided by the law. The Regulator in the former makes the decision on the merit of an issue whereas in the latter the approval by the Regulator merely confirms that the Issuer has complied with the law in so far as disclosure is required. For the two decades the 2002 Regulations have been in force, CMA scrutiny of issues proposed for the market was mistaken for merit- based approach. Additionally, the public would often cry for its intervention in instances whether or not these losses were within its province assuming its role as Regulator to be all encompassing.
The overt statement on the face of Prospectus clearly indicates that an approval by the CMA of an issue does not amount to a recommendation for the investment thereby disclaiming any CMA liability for misrepresentations within the prospectus. Furthermore, the prospectus issuers were obligated to solicit advice from various experts, including financial and legal professionals, to ensure the accuracy of their representations. In cases of misrepresentation, the CMA would take strict enforcement action against the issuer. In the early days, the approval process often involved lengthy discussions and reviews due to the need to address multiple comments raised by the CMA.
The POLD Regulations draw inspiration from the International Organization of Securities Commissions (IOSCO). IOSCO is a global champion for investor protection and promotes well-functioning capital markets that are fair, efficient, and transparent. To achieve this, IOSCO generally recommends international best practice for capital markets to promote a risk disclosure based approach, thereby requiring issuers to focus on disclosure rather than imposing duty on Regulators to approve issues based on merit.
The revision in the POLDs clarifies and adds emphasis to the disclosure in keeping with IOSCO recommendations. Similar to the Securities and Exchange Commission (SEC) in the US, the CMA, under POLDs, focuses on ensuring companies discloses certain key information to assist investors in their decision making. This has been one of the most critical rationales in overhauling the POLDS framework.
The POLD Regulations also clarify the distinction between private and public offerings, addressing a grey area in the previous regulations. Previously, the definition of a “private offer” under the 2002 Regulations was often debated. Some argued it used a disjunctive approach (“or”), meaning an offer only needed to meet one of the criteria to be considered private while others interpreted it conjunctively (“and”), requiring all criteria to be met for a private offer exemption. In the abundance of caution issuers in certain cases of private transactions informed the CMA. There is now clarity as the chapeau of Regulation 12(1) takes a disjunctive approach, connoting that for an offer to be deemed private, it ought to meet any of the conditions outlined under Regulation 12(1). Additionally, the exemption for corporative societies has been retained.
The POLD Regulations will potentially have a great impact on the small business. Issuers will be able to raise debt capital through introduction of SME Fixed Income Securities Market Segment (SME FISMS) as well as list and trade under SME Small and Medium Enterprises Market Segment (SMEMS).
Another new concept introduced in the POLD Regulations is the Special Purpose Acquisition Vehicles (SPACs). SPACs are designed to raise capital through initial public offerings and subsequently acquiring other companies that become the resulting issuer. Moreover, acknowledging technological advancements, electronic security offers via the internet or other automated means are now regulated.
So, where does this take the market? These changes will usher in a more predictable and dynamic market environment. Investors are likely to respond positively to the enhanced regulations, driving increased market activity. To achieve this, the market will demand greater transparency and clarity, facilitated by more comprehensive disclosures. Additionally, the expedited approval timelines by the CMA will help reduce costs, benefiting all market participants. However, it is imperative for issuers to engage experienced and competent advisors, as regulatory vigilance is expected to intensify.
Author: Godwin Wangong’u and Joseph Barasa
This publication is meant for general information only and does not create an advocate-client relationship between any reader and Mboya Wangong’u & Waiyaki Advocates. For particular expert advice on any matter dealt with above, please contact us.
