GREEN BONDS IN KENYA – AN OVERVIEW.

Introduction to Bonds
Bonds are generally defined as fixed income instruments that represent a loan made by an investor to a borrower. Conventionally, the bond issuer raises a fixed amount of capital from investors over a set period of time, repaying the capital (the “principal”) when the bond matures and paying an agreed amount of interest (“coupons”) on agreed interest payment dates. The instruments offer long-term maturities to investors and as a result, are suitable for institutional investors and high net-worth individual investors. 

Green Bonds defined 
Green bonds, an emerging class of bonds, are designated as “green” by the issuer who also commits to use the proceeds of the bond in a transparent manner and exclusively to finance or refinance “green” projects, assets or business activities with an environmental benefit. Kenya’s Capital Markets Authority (CMA) Policy Guidelines on Green bonds issued in January 2019 define them as fixed income instruments approved by CMA, whose proceeds are used to finance or refinance new or existing projects that generate climate or other environmental benefits that conform to green guidelines and standards.  The green guidelines and standards comprises of various principles and standards published separately by the International Capital Markets Association, Climate Bonds Initiative, and the Kenya National Policy on Climate Change and Green Economy Strategy. 

Origin and Growth of the Green Bonds
According to the World Bank, the concept of earmarking bond proceeds for climate investments was introduced in 2007, when the European Investment Bank (EIB) launched its Climate Awareness Bond that was listed in 27 domestic markets in the European Union. In 2008, the World Bank issued its first green bond, which received strong support from pension fund investors and elicited great interest from the market.  According to a World Bank report, as of October 31, 2017, the gross green bond issuance since 2007 reached almost USD 300 billion which represents about 0.1% of the total bond market of over USD 100 trillion. 

Notably, until 2012, the green bond market was dominated by issuers like the World Bank, who already had in place processes for assessing environmental, social and governance (ESG) risks for projects. This changed in 2013, with a growing number of green bond issuances by corporates, energy and utility companies and governments and their agencies from around the world. 

In Africa, since 2010 the African Development Bank (AfDB) prides itself  with proactively supporting the green bond market with an investment grade green bond issuance of US$ 500 million issuance in October 2013. In December 2017, Nigeria became the first African country to tap into the green bond market, raising $30 million (Sh3.03 billion) to fund renewable energy and afforestation projects.

Setting the Stage in Kenya

Back home, in February 2019, the CMA and Nairobi Securities Exchange (NSE) issued guidelines setting up the legal framework for the issuing of green bonds in Kenya.  This has set the stage for the introduction of the first green bond in the market, with the Kenya Bankers Association expressing intent to issue one by end of 2019. CMA’s Policy Guidance Note on Green Bonds provides a guide on the operational regulatory environment on Green Bonds. Among the salient provisions of the Guidance notes are that issuers of unlisted or listed green bonds in Kenya will be required to appoint an independent verifier to conduct a pre-issuance review. 

Challenges and Opportunities for the Kenyan Green Bond Market

A few concerns often surround the introduction of green bonds, especially in developing markets. Key concerns in Kenya include the risk of default for investors especially given the performance of the bonds market in Kenya in the past decade attributed to among others insufficient guarantees within the Kenyan legal framework. 

The second challenge is with respect to ensuring that the use of proceeds from green bonds is strictly guided by sustainability principles to guard against “green washing”, which occurs when proceeds of the greed bonds are not used for their intended purposes or do not fund projects with positive and additional impact. Related to the above, and ironically, there are concerns among market participants that the well-intended attempts to establish stringent requirements and standards for bonds to qualify as “green” could slow, inhibit or derail the growth of the green bond market. Despite these challenges and concerns, the benefits of these bonds are immense given the available data on performance of the bonds globally. 

Conclusion 

Kenya’s development blue print emphasizes the need to address climate change and environmental issues that the country faces. Given the performance shown by the green bond market, it is important for investors and government to embrace green bonds as an innovative and unconventional way of raising finance from both domestic and external sources to attain the country’s environmental objectives. It is imperative to laud key players in the financial sector for readiness they have shown towards embracing green bonds. As at the date of this publication, media reports indicated possibility of a first green bond listing before the end of the year. With the formulation of an enabling legal framework and support from the main financial regulators, there is no doubt that Kenya is ready to tap into this market. A future article will explore the mechanics of getting the bond approved and listed. 

By Cornelius Kipkurui and Enock Mulongo

Protecting Intellectual Property Rights in the Digital Space: Part I

 

It is not in doubt that technology has changed the way we live, the way we purchase products, the way we communicate, the way we travel, the way we learn and the way we do business in general. In the world of business, recent advances in technology have changed not just the way that people do business, but also the types of products that businesses are able to produce and sell to their customers, both in Kenya and around the world. These technological advancements have helped businesses and organizations save time and cost of production as well as widen their customer base.

Worth noting, there have emerged digital products, a set of intangible assets that can be sold repeatedly without exhausting the seller’s inventory. These include streamable media, software and other digital literary works. In addition, the emergence of the digital era has brought about the practice of e-Commerce, i.e. electronic transactions that are initiated and completed digitally. E-Commerce relies on intellectual property (IP) in at least two ways. First, it often involves trading in IP-based digital products and, second, the entire e-Commerce industry is based on an amalgamation of technologies, hardware, software and other assets, the use of all of which has various IP implications. 

Consequently, at the heart of these technological developments and the resulting business opportunities is the issue of protection and utilisation of IP rights. IP consists of new ideas, technological innovations, original expressions, distinctive names, new distinctive designs, and appearance that make a business’ products unique and valuable. IP is, via digital products, often traded (or licensed) in its own right without trading in the value of an underlying product or service.

The use of IP to create and trade in new products and in new digital ways has, therefore, presented entrepreneurs and innovators with two major legal issues, namely, (a) how do they ensure that IP in their skill and investment is fully protected in the digital space and (b) how do they ensure that they do not infringe on other peoples’ IP rights in the course of conducting their business in the digital space.

Kenya has a relatively well-developed, albeit new, legal regime for the protection and utilisation of IP in the context of commerce and entrepreneurship. This legal regime may be utilised to provide IP entrepreneurs and innovators with a degree of control of their main asset – IP. The Industrial Property Act protects IP resulting from technological and design innovations. The Copyright Act, in turn, protects original expressions of literary works (such as computer programs, works of literature, audio and audio-visual content). The Kenya Information and Communications Act recognizes transactions initiated and concluded electronically as legally valid and enforceable.

Importantly, Kenya’s legal regime seeks to protect the rights of not only IP owners but also those of duly licensed/permitted third-party users. The importance of this two-pronged approach to IP protection to business operating in the digital space cannot be overstated. 

In the coming days, we will publish on this platform a series of articles that will unravel the current and emerging IP issues in digital business. Have you ever stopped to think about how you can utilise IP belonging to you and to other people to create value for your business and your customers? How can you minimise the legal risks to you and your business that may result from the use and mis-use of IP in the digital era? Please look out for this series of articles, as we will shed light on the law and practice governing e-Commerce and other aspects of carrying on business in the digital space. 

Article by George Kinyua

Please note that 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.

The Energy Act, 2019: Opportunities to the Private Sector

Introduction 

For a long time, Kenya Power and Lighting Company (“KPLC”), has monopolized the distribution and retailing of electricity in Kenya. As a result of the inefficiencies arising therefrom, energy sector reforms began in 1997 with the dismantling of the three critical functions of energy generation, transmission and retail then held by KPLC. This led to the creation of Kenya Electricity Generating Company (“KenGen”), the largest power producing company in Kenya producing about 69% of the electricity consumed in the country and the subsequent licensing of twenty independent power producers (IPPs) and Kenya Electricity Transmission Company, (“KETRACO”) a limited liability company which acts as transmission system operator in Kenya. 

The reforms culminated into the enactment of the Energy Act 2019 (the “Act”) which as assented to by on 12th March, 2019 and came into force on 28th March, 2019. The Act, which repeals the Energy Act No. 12 of 2006, establishes the Energy and Petroleum Regulatory Authority (the “Authority”)  formerly known as the Energy Regulatory Authority whose main role is to regulate the day to day activities in the energy sector in Kenya. 

The Act further consolidates all the laws relating to energy sector, provides for national and county government functions in relation to energy and establishes the powers and functions of the energy sector entities. We highlight in this article, salient provisions in the Act. 

Salient Provisions in the Act

Some of the salient provisions in the Act include:

  1. A requirement to put in place energy consumption benchmarks upon which any person or public body shall not be allowed to exceed. The Authority is required to call upon any individual or public body that exceeds the limit to submit to it a report on the same as well as a remedial plan.
  2. Collaboration between the National and County Governments on most matters in the energy sector which is highlighted more prominently through the establishment of energy centers in the counties.
  3. The Act does not affect the right, privilege, obligation or liability acquired by any Licensee or other person in any contract or under any written law prior to the commencement of this Act.
  4. County governments are required to establish a fund for the purpose of promotion of efficient use of energy and its conservation within the county.
  5. Transfer of licenses without the consent of the Authority is prohibited. The Authority must satisfy itself of the legal, financial and technical ability of the transferee. The transferee must be qualified and must undertake in writing to comply with the conditions set out in the license or permit as a condition for consent. The Authority shall not unreasonably withhold any consent to any application of a transfer of a license.
  6. Licensees who shall have outstanding uncollected billings attributable to the National Government, county government or any government agency shall report such billings to the cabinet secretary  for the national treasury who shall in turn ,report the same to parliament for appropriation. This ensures that Licensees are paid.
  7. Section 166 of the Act on the Liability of licensee to compensate for outages is missing.

Opportunities for the Private Sector.

The Act has explicitly provided for various opportunities in the energy sector to private investors. Previously, liberalization removed the transmission and power generation function from KPLC creating opportunity for KenGen and IPPs. Further, due to the massive capital required in transmission, KETRACO has remained the only undertaker in this function. This may however change with global power transmission companies considering the opportunities presented by limited national infrastructure in an economy which is yet to complete its rural electrification program.  Competitors in the distribution and retailing of electric energy will be looking to take advantage of the Government’s confirmed intent to fully liberalize this sector. 

The most significant change introduced by the Act is in distribution of electricity. The ability to sell off grid will introduce new players who will take advantage of the high industrial and institutional demand as well as dissatisfaction with the aging monopoly. Purchase of power, retailing, metering, selling and billing by private power companies, it is expected, will spur massive growth in this industry. These provisions are in line with international industry standards and practices. This will attract more capital from the private sector investors and increase confidence in Kenya’s energy sector as the Act brings with it certainty and modernity. 

 

Authors: Godwin Wangong’u and Kipkurui Cornelius.

LEGAL ALERT

THE FINANCE BILL, 2019 – PROPOSED CHANGES ON CAPITAL GAINS TAX

WE wish to update you on two changes proposed through the Finance Bill, 2019, relating to the above.

  1. The Bill proposes to increase the rate of Capital Gains Tax (CGT) from 5% to 12.5%.
  2. It is proposed that when calculating the capital gains tax payable, no gain shall be included in the computation of income in the case of a transfer of property that is necessitated by a transaction involving restructuring of a corporate entity. This change will apply in transfers in transfers made (a) in order to comply with a regulatory requirement or directive (b) in the course of compulsory acquisition by the government (c) as a result of an internal restructuring within a group which does not involve transfer of property to a third party and (d) in the public interest.

The above changes shall come into force on October 1, 2019 if passed into law.

By: Enock Mulongo

 

Unclaimed Financial Assets: Obligations of Holders of Assets

Introduction

Unclaimed assets are those assets which have been presumed abandoned or in respect of which there are conditions raising a presumption of abandonment. For example, unpaid wages, which include unpresented payroll cheques, allowances, bonuses and terminal benefits, will be presumed to be abandoned if they remain unclaimed for more than one year after becoming payable. Unclaimed property laws have origins in the common law in England. At common law, the concept of escheatment was applied whereby land held in tenure (i.e. occupied by someone other than the owner) was reversed back to the Lord when the immediate tenant died without heirs. The modern rationale for unclaimed property laws is that the state is best placed to preserve and protect the interest of the rightful owner.

In Kenya, for many years, firms held unclaimed assets as they struggled to locate their rightful owners or beneficiaries and were liable in any claims arising in respect of the assets. Following a recommendation by the taskforce on Unclaimed Financial Assets for a framework to govern unclaimed financial assets in Kenya, Parliament passed the Unclaimed Financial Assets Act (the “Act”) in 2011.  The Act established the Unclaimed Financial Assets Authority (the Authority”) which began operations in 2012. By November 2018, the Authority reported that it held cash amounting to Kshs. 13 Billion and 555.5 million shares. Notably, only 2.5% of the said assets collected had been claimed.

In this article, we set out in brief the obligations imposed on a holder of unclaimed assets in Kenya under the Act.

Essential Obligations

Of critical importance, holders of unclaimed assets have a duty to make reasonable efforts to locate and notify owners of their assets before reporting the unclaimed assets to the Authority. They, in addition, have a duty to report and deliver assets presumed abandoned under the Act to the Authority and provide information as the Authority may require within such times and such intervals as may be specified.

Upon delivering unclaimed assets to the Authority, the Authority assumes custody and responsibility for safekeeping of the assets and the holder is relieved from all liability, in respect of the assets, to the extent of the value of the assets paid or delivered for any existing claim(s) which may arise. Also as a consequence, the Authority will defend and indemnify the holder from any claim of the assets by another person or country under its escheat laws.

Another ancillary role expected of the holder is with respect to record keeping. Generally, a holder of unclaimed assets should maintain the name and the last known address of the owner (where it is known) of the unclaimed assets for ten years after they become reportable.

Whether obligations are Mandatory

One would ask whether these obligations are merely prescriptive or mandatory. Under the Act, failure to deliver unclaimed assets with the Authority or to perform an obligation imposed by the Act attracts various sanctions depending on the nature of the offence committed. For example, a holder who willfully fails to render a report or perform their duties under this Act is be liable to pay a penalty of Kshs. 7,000 but not more than Kshs. 50,000 for each day the failure continues.

Retrospective effect of the Act

The Act applies to all assets that would be deemed to be unclaimed assets under its provisions including those that would have been presumed abandoned before the coming into force of the Act. This means that this Act will apply to all holders of unclaimed assets even those that held such assets prior to this Act and these holders are required to meet their obligations as prescribed by the Act.

Conclusion

In summary, compliance with the Act , by holders of unclaimed assets, not only avails the advantages discussed above with respect to shifting of liability but also helps to reunite and reactivate missing owners with their assets and clients with their deposits, reduces operating expenses/overheads for the holders and eliminates regulatory/non-compliance risks. Worth noting is also the fact that delivery of unclaimed assets to the Authority and performance of obligations imposed under the Act are mandatory obligations and holders of such assets should comply with the provisions of the Act in a timely manner. Failure to do this attracts undesirable sanctions which can be avoided. A future article will discuss effectiveness of the legal framework in easing access to the unclaimed assets by the rightful owners.

Article Ivyn Makena

Disclaimer

This article is intended for general knowledge only. For substantive legal advice on this, please contact the authors through the following addresses: pwaiyaki@lexgroupafrica.com or imakena@lexgroupafrica.com.

SEVERANCE PAY: WHAT YOU NEED TO KNOW

Introduction

For various reasons, layoffs commonly happen. Downsizing too. Mergers and acquisitions occur and whenever they do, they create overlap problems, and employees are cut. “Must we offer compensation to employees who are terminated involuntarily?” That is a question that employers frequently ask.

Kenya’s Employment Act recognizes that such situations, which lead to what in legal parlance is termed redundancy, do arise. For that reason the law seeks to cushion affected employees from the immediate loss of income. The Act does so by providing for severance pay – an amount of money to be paid to an employee whose employment has been terminated following a redundancy exercise. In this brief article, we share our thoughts about severance pay under Kenyan law.

Option or Obligation?

Under Section 40 of the Act, an employer can only terminate a contract of service on account of redundancy after having paid to the affected employee declared redundant severance pay.  

It is thus not for the employer to choose whether or not to pay severance pay; each employee declared redundant is entitled to severance pay as a matter of right.This position has been affirmed in our Courts, which have demonstrated that they frown upon employers who use their bargaining power to shortchange employees during redundancies. Simply put: the employee does not have to demand severance pay from the employer; the obligation is on the employer to pay the employee at the rate set under the Employment Act or the contract of employment.

Computation of Severance Pay

Under the Act an employee who has been declared redundant should be paid fifteen (15) days’ worth of pay for every complete year of service. To compute the severance pay due, courts divide the employee’s monthly pay by thirty (30) days to get the pay for per day. The pay per day is then multiplied first by fifteen days and finally by the total number years of service.

If, however, the contract of employment provided for higher severance pay than the one under the Act, the employer must pay that higher amount. If the contract did not provide for such pay at all or provided for a lower one, the employer must pay at the rate stipulated under the Act.

So, should the rate under the Act be applied on gross salary (i.e. basic salary and allowances) or on basic salary? Kenyan courts have been confronted with this question and have determined that it is the latter. Allowances are therefore not factored in. Where an employee has been receiving varying amounts as monthly pay during his term of employment, the amount paid as the last monthly salary is the one to be used in calculating severance pay.

Illustration

Mr. Chapa Kazi was employed as an office messenger with a basic salary of Kshs. 25,000/= per month and worked for eight years without a variation in his basic salary.  The total severance payable to him in the event of redundancy shall be as follows (15/30 x 25,000) x 8 = 100,000.

Conclusion

In sum: severance pay is not optional; it is an obligation which every employer must fulfill if they declare a redundancy. The rate to apply is fifteen days’ pay for every complete year of service unless a higher pay is provided under the contract of employment. The basic salary is the one used to calculate the pay and allowances are not included. Anything short of these may lead to legal action by the employee resulting in additional costs for the employer.

Article by CG Mbugua & Makau Kithuka

Disclaimer

This article is intended for general knowledge only. For substantive legal advice on this, please contact the authors through cgmbugua@lexgroupafrica.com or pmakau@lexgroupafrica.com

The Data Protection Bill, 2018: A Move towards Tangible Regulation

Introduction

On nearly a daily basis, you often are required to provide information about yourself that is personal. You walk into an office of a service provider, or download a form from their website which you then fill and submit so that can you receive certain services. You give this information without really knowing whether that information will be used for purposes other than those you gave it for or who else will see or receive it.

Privacy International, a UK-based charity that promotes the right to privacy across the world notes that despite increasing recognition and awareness of data protection and the right to privacy across, there is still a lack of legal and institutional frameworks, processes, and infrastructure to support the protection of data and privacy rights. At the same time, the increasing volume and use of personal data, together with the emergence of technologies enabling new ways of processing and using it, mean that an effective data protection framework is more important than ever.

Cognizant of this need, the Kenyan Parliament is considering a bill called the Data Protection Bill which when passed, will regulate how your personal data can be collected, stored, used or processed by another person while observing your right to privacy. You may also be the person on the other side of the scale – the one receiving other people’s personal information most likely because you need it as part of your due diligence for a commercial deal, or to enable you provide the services you do to clients or customers. The Bill is relevant to you too because if passed, it will regulate how you should collect, store, use or process the information.

In this article, we highlight salient features of the Bill, which if when passed, may apply to you.

What Kind of Personal Information is covered?

  • Race, gender, sex, pregnancy, marital status, national, ethnic or social origin, colour, age
  • Physical/mental health, disability, religion, conscience, belief, culture, language and birth
  • Education, medical, criminal or employment history of the person
  • Identifying number, symbol assigned to the person
  • Fingerprints or blood type
  • Contact details
  • Correspondence to or from the person that is of a private or confidential nature
  • Information given for a grant, award or prize proposed to be made to the person

What Principles Would Apply When Handling the Information and/or Data?

  • Its collection, storage, use or processing must be necessary for a lawful, explicitly defined purpose
  • It must be collected directly from and with the consent of the person
  • It may only be released to another person and put to a different use with the consent of the person
  • Steps must be taken to ensure it is accurate, up-to date, complete and that it is safeguarded against the risk of loss, damage, destruction, or unauthorized access
  • The person has a right to access to the personal information

What Specific Steps are required to be taken by the Data Recipient?

  • Notify the person of the use to which the information will be put to;
  • Notify the person that if they waive their rights they will have permitted you to collect it
  • Take necessary steps to ensure the integrity of personal data you have or control
  • Take steps to correct or delete false or misleading data
  • If you reject the person’s request, inform them in writing the reasons for the rejection.
  • Do not keep data for a longer period than necessary or as provided under any law.
  • Do not transfer the data outside Kenya unless under specific outlined circumstances.
  • No profiling: making a decision based on automated processing of the data which has a legal implication on or significantly affects them without any human intervention. Notably however, profiling is legal where necessary for maintenance of law and order by any public entity.
  • Notify the person and the Kenya National Commission on Human Rights and take steps to ensure the restoration of the integrity of the information system as soon as possible after you discover unauthorized access or processing of the data.

Conclusion

As of January 2018, statistics showed that over 100 countries around the world had enacted comprehensive data protection legislation, and around 40 countries were in the process of enacting such laws. Kenya is in the latter category. Once the Bill is passed into law, businesses will need to be aware of what their rights and obligations will be in order to handle personal data in compliance with the law. That said, the Bill – as is – does point you and I in the direction that regulation of personal data in Kenya is taking. Are you ready for it?

 

By Miriam Maina and Pauline Njau

All You Need to Know About the Housing Levy

Introduction

Decent and affordable housing in Kenya is important as it affords dignity, security and privacy to Kenyans. The Constitution of Kenya, 2010 mandates the State to take legislative, policy and other measures to achieve the progressive realization of among others, the right to adequate and accessible housing. Kenya has made considerable strides in addressing decent housing but more is required to be done, as has been recommended by recent studies.

Among the aspirations in the President’s Big Four Agenda is a goal of delivering Five Hundred Thousand affordable homes before the year 2022. On a broad scale, the President seeks to pursue partnerships with private developers to unlock land for development, reduce construction cost and grow the mortgage finance market. 

However, more relevant for this discussion is the proposal to introduce payments to the National Housing Development Fund (the “Fund”), which is the subject of this article. The Fund, which is proposed to be under the control of the National Housing Corporation (NHC), is established under the Housing Act.

Contributions and Returns

Contributions to the Fund were introduced by way of amendments to the Employment Act, 2007 (in the Finance Act of 2018). Employers and employees are required to each make a contribution of 1.5% of the employee’s monthly basic salary to the Fund provided that the combined contribution does not exceed Kshs. 5,000/ per month. Persons who are not in formal employment or who are non-citizens may contribute a minimum of Kshs. 200 per month. Gazetted Housing Regulations (the “Regulations”) allow for contributions above the statutory minimum. NHC is required to specify on a yearly basis the return applicable on members’ contributions.

Benefits to Employees

According to the Finance Act, 2018, the Employees who contribute to the Fund shall benefit through several ways that include:

  1. Obtaining financing for purchase of a home under the affordable housing scheme, at an interest rate of up to 7%per annum on a reducing balance basis (or other rate gazetted by NHC from time to time). The financing is available on application and satisfaction of the set criteria.
  2. For employees who cannot qualify for affordable housing, transferring their benefits to a pension scheme or to a person registered in the affordable housing scheme or their spouse or children.
  3. Through cash distributions.

 Affordable Housing Relief

Under the Income Tax Act, any Kenyan resident making the said contribution and who  has applied for  a house under the affordable housing scheme is entitled to a tax relief equal to 15% of the gross salary up to Kshs. 108,000 per annum. Therefore, when computing the tax payable by the contributor, the said relief is deducted from the gross tax computed hence lowering the tax liability of the contributor. However, a contributor who has been allocated a house under the affordable housing scheme and who has enjoyed the affordable housing relief is not be eligible for a similar relief in any subsequent purchase of a house under the affordable housing scheme.

Offences and Penalties for Contravention

The Regulations further prescribe various offences and penalties for non-compliance. For instance, it is an offense under the Regulations for an employer to fail to register with the Fund, to make contributions and/or to keep proper records.

Challenge to the Implementation of the Levy

Notably, in September 2018, the Central Organization of Trade Unions (COTU) filed a suit challenging the implementation of the housing levy which was to take effect on January 1, 2019. The court issued orders stopping the implementation until the case is determined. The matter is scheduled to be heard in court on 26th February 2019. However, as at the date of this publication, reports in the media indicated that the Government had reached an agreement with COTU and parties had agreed that the case would be withdrawn to pave way for the implementation of the levy.

Article by Judy Marindany & Audrey Seur

The Law on Venture Capital in Kenya

Introduction

Venture capital may be defined as long-term risk capital typically provided by professional investors to new and expanding businesses which are usually high risk, but offer the potential for above-average returns. Venture capitalists pool their resources including managerial abilities to assist new entrepreneur in the early years of the project. Once the project reaches the stage of profitability, they sell their equity holdings at high premium. The concept has its roots in the US. The common projects in which such capital is invested are usually in Information Technology (IT), Biotechnology or Clean Technology.

Governing Law

In Kenya, this type of investment is governed by the Capital Markets Act (“the Act”) and Regulations made under it. The Act contemplates registration of venture capital companies (VCCs) and defines a registered venture capital company as a company approved by the Capital Markets Authority (CMA) and incorporated for purposes of providing risk capital to small and medium sized businesses in Kenya with high growth potential, whereby not less than 75% of the funds so invested consist of equity or quasi-equity investment in eligible enterprises.

The Act empowers the CMA to grant approval to entities to operate as registered VCCs. In addition, it bestows upon the CMA the power to issue guidelines and rules governing VCCs. Pursuant to this power, the CMA issued the Capital Markets (Registered Venture Capital Companies) Regulations in 2007.

Approval of Venture Capital Companies

In order to operate as a registered VCC, one has to obtain approval to the CMA. When one applies to be registered, they are required to provide details in respect of such matters as the capital structure, shareholding, subsidiaries and affiliated companies, the nature of venture capital financing to be undertaken, particulars of directors, shareholders, auditors and company secretary, amongst others.

Additionally, so as to be considered for approval, the applicant must meet the eligibility criteria set out in the Regulations. For instance, the applicant must be duly incorporated under the Companies Act as a company limited by shares, have as its principal object the provision of risk capital to SMEs, have a minimum paid up share capital of Kshs. 100M, have a minimum fund of Kshs. 100M and have a demonstrable track record as a VCC.

To enable CMA make a decision on the application, the law requires one to furnish the CMA with certain information and documents, which include details of the investment policy in respect of each fund to be operated, prescribed evidence of appointment of a licensed fund manager and details of the corporate governance structures of the applicant.

It is imperative to note that under the Act, without the approval of the CMA, it is unlawful to carry on business as a registered VCC or to hold oneself out as a registered VCC and carry on business as such.

Benefits of Registration

Once registered, VCCs enjoy certain tax incentives under the Income Tax Act. For instance, there are exemptions in respect of dividends received by registered VCCs. In addition, there are exemptions on gains arising from trade in shares of a venture company enterprise earned by a registered venture capital company within the first ten years of the date of first investment in that venture capital enterprise. This is subject to meeting the criteria that the venture company enterprise in which the investment is made has not been listed for a period of more than two years at the date of the trade.

Limitations imposed on Registered VCCs

The flipside is that the Regulations limit investment that can be made by registered venture capital companies. They require that investment may only include investment in a company or person associated with a venture capital enterprise.
The enterprises that they may invest in (venture capital enterprises) are limited to companies that do not trade in real property, banking and financial services, and retail and wholesale trading services.
In addition, registered VCCs are only allowed to raise money through private placements and are prohibited from making offers to the public.

Conclusion

Statistics indicate that the in 2018, annual venture capital invested surpassed $100 billion. Approximately $130.9 billion was invested across 8,948 deals recorded in 2018. These statistics suggest that venture capitalists will have capital to fund innovation for years to come. Venture capital has great potential to spur growth of SMEs in Kenya. With an enabling legal framework, we hope that the relevant players can tap into the potential which we believe will have a lasting social and economic impact in the country.

If you wish to know more about venture capital, please contact us:

 

By Peter Waiyaki and Pauline Njau
pwaiyaki@lexgroupafrica.com and pnjau@lexgroupafrica.com

Management Companies in Residential Properties in Kenya: An Overview

Concept of Management Companies

The term “Management Companies” can be used to describe companies that are used in managing housing units, such as apartments, located in multi-unit developments. They are common in situations where residential housing units comprise the entirety of the development, or a substantial component of it. The developments are usually constructed with the intention that the developer would retain the reversionary interest in the land, but upon registration of all subleases over the units, he/she will hand over management of the estate and ownership of the reversionary interest to an entity owned by the purchasers of the various units constructed (“Unit Holders”). Thus, when one purchases a unit in the development, they purchase also a share in the entity and enjoy two legal interests; as the owner of the individual unit, and as a part owner of the entity. It is that entity that takes over management of the estate and ownership of the reversionary interest that is called the Management Company.

Why Management Companies?

Save for developments done pursuant to the Sectional Properties Act, incorporating Management Companies in multi-unit developments is not a requirement of the law. Indeed, there are developments in which, upon a developer selling the units, they retain the role of maintaining the estate and retain ownership of the reversionary interest (duties ordinarily carried out by Management Companies). Management Companies are therefore largely a creation of industry practice. The idea behind their establishment is that where a group of persons individually own all the apartments in a multi-unit development, they ought also (at least after the multi-unit development has been fully completed by its developer) to be the members of a company which owns the common areas associated with their individual units, and which ultimately controls the extent, quality and cost of the shared services from which individual units benefit.

Several advantages flow from establishment of Management Companies, both for the developer and for the Unit Holders. For the Unit Holders, they are able to maintain an input into decision-making as regards their development and controlling the costs of having common services provided for their collective benefit. This they do by periodically electing the persons to serve as the management company’s directors. In addition, as an advantage to both to the developer and the Unit Holders, it is a convenient way of dealing with management of the estate once the units are sold out. Unless the multi-unit development is very small, it would normally be impractical for the common areas to be co-owned by all the unit-owners in their personal capacities, and for arrangements in relation to the provision of common services to be dealt with by contracts under which each of the owners was jointly and severally liable in their personal capacities.

Ownership and Control of Management Companies

The ownership and control of Management Companies varies depending on the phase of the development and the registration of the units. At the point of incorporation, the developer has only just begun to build the property and therefore they (directly or through their nominees) own and control the company. At this stage, the company is inactive, and the developer is responsible for all the operations of the residential property. During letting out of units in the development, the management company may be owned by the developer and Unit Holders whose units have already been registered. After registration of all sub-leases in the development and upon transfer of the reversionary interest in the underlying land to the management company, the developer finally hands over the ownership and control of all operations to the management company. From amongst them, the members appoint a board of directors who run the company and contract the services and persons needed such as a management agent.

Role of Management Companies

Generally, the duties of a management company include maintaining the common areas and associated facilities, contracting third parties to provide services or advice, procuring insurance to cover risks in the development determining the amounts of service charge payable by members and applying for renewal of the reversionary interest from the Government upon expiry of the term of the main lease from the government.

Where a Management Company fails, refuses or neglects to perform its duties or does so in a way that leaves Unit Holders aggrieved, the members of the company can seek appropriate means of redress available in the documents governing the subleases and in law. For instance, as shareholders, the Unit Holders have recourse to various remedies available under company law.

Conclusion

In sum, the benefits that accrue from use of Management Companies are numerous and perhaps this explains why developers have embraced them. It is however important for developers to seek appropriate legal advice on structuring of the Management Companies as circumstances vary from each development to the other. It is important for purchasers to understand the role of Management Companies, right from the point they sign agreements for sale, as these end up being the entities that determine the quality of services in the estate as well as other fundamental issues governing the estate.

Article by: Enock Mulongo and Pauline Njau

Please note that 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. Readers are advised in all circumstances to seek particular advice on any issue dealt with herein.