CMA lifts cap on foreign stakes amid reservations

The Capital Markets Authority is set to go ahead with its plan to lift the cap on foreign ownership of listed firms despite reservations from a cross section of players.

Last week, the regulator said it would allow 100 per cent ownership of some Nairobi Securities Exchange (NSE)-listed firms by foreigners.

“A capital markets assessment of Kenya conducted by Bourse Consult and Genesis consultants in May 2013 recommended that, for Kenya to achieve emerging market status, it needed to review the 75 per cent limit on foreign investor stakes in listing companies upwards,” the regulator said.

Some analysts have, however, expressed reservations, saying the plan will lock out many Kenyans from owning the listed firms and also expose the country to financial turmoil in case of global economic challenges.

According to Mr Bob Karina, vice-chairman of the bourse and chief executive of Faida Investment Bank, the proposal is both “good and bad” for local investors.

“We’ve been pushing hard to get many Kenyans to participate in owning listed companies by at least 25 per cent.

But, we may have no option if we are to join the international market and play in that league,” Mr Karina said.

He said it had been challenging to woo more Kenyans into the capital markets as many of them are risk averse.

“Most Kenyans would want to put their money under the pillow, wake up the following day to find it intact.

SAVING SCHEMES

A few others will put their money in savings schemes to earn interest of say two per cent. Those who are more risk averse will put their money in the capital markets for higher, long-term gains,” Mr Karina said.

“Local shareholders of listed entities might end up losing control in these firms and hence the problem of transfer pricing will be evident as a means of tax evasion, especially where majority shareholding is from a single foreign shareholder,” Old Mutual analysts said in a note to clients last Friday.

“In addition, we surmise that this might also lead to mispricing of securities and, in the event of capital flight, large local corporations would be expected to lose their value,” the analysts noted.

Increased equity portfolio

The analysts, however, indicate that given the nature and the size of Kenya’s capital markets, increased equity portfolio investment flows are likely to stabilise the exchange rate volatility in the medium term.

In a previous discourse with Smart Company, Dr Radha Upadhyaya, a development economist and research fellow at the University of Nairobi said that allowing 100 per cent ownership in listed firms will not only expose the country to global financial shocks but also lock out many locals from investing in the bourse.

Currently, foreign ownership in listed firms is capped at 75 per cent. Lifting the limit means the capital markets may now start attracting huge capital inflows, which can lead to liquidity crises. 

“After the 2007/08 cash crunch, there was the recognition, even by IMF, that some level of capital controls may be needed,” Dr Upadhyaya said.

 Africa in general was not hit by the subprime crises as we were not very connected. But it seems that the lessons of the financial crises have not been learnt at all,” Dr. Upadhyaya earlier indicated.

 The CMA has however, moved to allay the concerns, saying, it “is fully aware of the risks of fully opening up the market to foreign investors.