The Capital Markets Authority (CMA) issued Circular No.06/2024, providing essential clarifications on key governance issues following the gazettement of the Capital Markets (Public Offers, Listings and Disclosures) Regulations, 2023 (POLD Regulations, 2023) and the Capital Markets (Collective Investment Schemes) Regulations, 2023 (CIS Regulations, 2023). These regulations, which became effective on December 15, 2023, aim to bolster the integrity, transparency, and development of the securities market in Kenya.
Key highlights:
- Enforceability of the Corporate Governance Code:
The POLD Regulations, 2023 reaffirm the mandatory nature of the Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015. This settles any previous debates over whether compliance with the Code was voluntary or obligatory.
The CMA intends to harmonise the Code with the new regulations to ensure consistency. In cases of conflict between the POLD Regulations, 2023 and the Corporate Governance Code, the former will take precedence.
- Independent directors:
The maximum tenure for independent directors has been reduced from nine years to six years. After this period, an independent director must be re-designated as a non-executive director. Note that a director who was previously designated as an independent director does not automatically lose their seat nor are they required to resign, but they will not be designated as an independent director (which has an impact on board composition).
This provision will apply prospectively to new appointments, with existing directors under the old regulations allowed to complete their current terms.
It should be noted that this provision may conflict with provisions for independence of certain types of issues e.g. banks.
Issuers will therefore be required to monitor their board composition and where re-designations are expected have procedures to maintain a sufficient number of independent directors as part of the normal expiry of terms.
- Non-executive directors:
Non-executive directors must not hold executive or employee positions in any related entities to avoid conflicts of interest, thus ensuring their independence and objectivity in decision-making.
Such a director cannot have a formal day-to-day responsibility in another company/entity that is closely connected or affiliated with the issuer in order to maintain the integrity of the board’s decision-making process and enhance trust among shareholders and other stakeholders.
However, independent non-executive directors and non-executive directors of related entities can fall within the defined scope of non-executive directors of the issuer. For example, a non-executive director elected to a subsidiary board can also qualify as a non-executive director in the board of the issuer, but a chief financial officer of a subsidiary will not qualify as a non-executive director of the issuer.
- Executive directors:
Defined as board members who also hold managerial roles within the company, thus playing a dual role in both strategic decision-making and day-to-day operations. This continues to align with the way this term is generally understood and applied in the market.
- Independence of fund managers from custodians or trustees:
The CIS Regulations, 2023 mandate the independence of fund managers from trustees and custodians, with a focus on preventing conflicts of interest. The general rule is that the three entities should be separate corporate entities. However, there is an allowance for the trustee and the custodian to be a single entity, provided adequate measures are in place to address and mitigate conflicts.
- Transition period for existing collective investment schemes:
All collective investment schemes operating under the previous regulations must transition to comply with the new regulations within 12 months from their commencement.
Conclusion:
The CMA’s Circular is a welcome clarification of the position and should lay to rest the recent debate over the interpretation of the regulations.
