FAQs

1. WHAT IS THE ROLE OF THE CAPITAL MARKETS AUTHORITY?
2. WHAT ARE SOME OF THE ENABLING LEGISLATION THAT THE AUTHORITY USES TO SUPERVISE AND REGULATE THE CAPITAL MARKETS?
3. WHAT ARE SOME OF THE EXISTING INCENTIVES THAT THE AUTHORITY HAS PUT IN PLACE TO FACILITATE THE DEVELOPMENT OF THE CAPITAL MARKETS IN KENYA?
4. WHAT IS THE ROLE OF CAPITAL MARKETS IN AN ECONOMY?
5. WHICH ARE THE CATEGORIES OF INTERMEDIARIES THAT THE CAPITAL MARKETS AUTHORITY LICENSES, AND WHAT ARE SOME OF THE REQUIREMENTS FOR LICENSING THESE CATEGORIES OF INTERMEDIARIES?
6. WHAT ARE COLLECTIVE INVESTMENT SCHEMES?
7. WHAT ARE SOME OF THE BENEFITS OF INVESTING IN COLLECTIVE INVESTMENT SCHEMES BY AN INVESTOR?
8. WHAT ARE SOME OF THE TIPS THAT AN INVESTOR SHOULD KNOW?
9. WHAT ARE THE REQUIREMENTS FOR ISSUING SHARES TO THE PUBLIC AND LISTING OF SECURITIES IN KENYA?
10. WHAT ARE THE CONTINUOUS REPORTING OBLIGATIONS FOR LISTED COMPANIES?
11. WHAT IS CORPORATE GOVERNANCE?
12. WHAT IS THE NSE?
13. WHAT IS A SHARE?
14. WHAT IS A BOND?
15. WHAT ARE THE ELIGIBILITY REQUIREMENTS FOR LISTING AT THE NAIROBI STOCK EXCHANGE?
16. WHAT IS THE CDS?
17. WHAT IS CDSC?
18. WHAT IS A DEPOSITORY?
19. WHO ARE THE SHAREHOLDERS OF CDSC?
20. WHO REGULATES CDSC?
21. WHAT ARE THE BENEFITS OF CDS?
22. WHAT IS A CDS ACCOUNT?
23. DO I HAVE TO OPEN A CDS ACCOUNT?
24. WHAT ARE THE BENEFITS OF HAVING A CDS ACCOUNT?
25. HOW DO I OPEN A CDS ACCOUNT?
26. WHAT DO I NEED TO OPEN A SECURITIES ACCOUNT?
27. WHAT DO I GET WHEN I OPEN AN ACCOUNT?
28. WHAT IS A CDA?
29. WHO ARE CDAS?
30. WILL I BE RESTRICTED TO HAVING AN ACCOUNT WITH ONLY ONE CDA?
31. WILL I HAVE TO KEEP ANY MINIMUM BALANCE OF SECURITIES IN MY ACCOUNT WITH MY CDA?
32. WILL SOMEONE ELSE BE ABLE TO OPERATE MY ACCOUNT ON MY BEHALF ON THE BASIS OF A POWER OF ATTORNEY?
33. WILL I BE ABLE TO OPERATE JOINT ACCOUNTS?
34. WHAT IS THE PROCESS OF DEPOSITING SHARES?
35. WHAT DO I GET TO PROVE I HAVE DEPOSITED SHARES INTO MY CDS A/C?
36. WHAT DO I DO TO CHANGE IF I NEED TO CHANGE MY ADDRESS?
37. WHAT IF I WANT MY CERTIFICATE BACK?
38. CAN I USE MY SHARES AS COLLATERAL/SECURITY FOR A LOAN?
39. HOW LONG DOES IT TAKE TO PROCESS THE PLEDGE?
40. WHAT IF I HAD ALREADY PLEDGED MY SHARES TO A BANK/LENDER AND LEFT THEM MY CERTIFICATES?
41. HOW DOES THE PLEDGE GET REMOVED FROM MY ACCOUNT?
42. WILL I BE ABLE TO CHANGE THE SECURITIES OFFERED IN A PLEDGE?
43. WILL I RECEIVE DIVIDEND ON THE PLEDGED SECURITIES?
44. WHEN DO I GET A STATEMENT FROM CDS?
45. CAN I USE A DIFFERENT BROKER FROM THE ONE I HAVE BEEN USING ?
46. HOW CAN I MOVE FROM ONE STOCKBROKER TO ANOTHER ?
47. WILL IT COST ME MORE TO USE CDS ?
48. DO I LOSE MY DIVIDENDS AND BONUSES?
49. HOW LONG DOES IT TAKE TO COMPLETE A TRADE IN CDS?
50. HOW SAFE IS CDS?
51. WHERE CAN I ASK ANY MORE QUESTIONS ABOUT CDSC AND CDS?
52. WHAT IF I HAVE ANY COMPLAINTS ABOUT CDSC’S SERVICES?

WHAT IS THE ROLE OF THE CAPITAL MARKETS AUTHORITY?
The Capital Markets Authority (CMA) was set up in 1989 through an Act of Parliament Cap. 485A Laws of Kenya . The CMA, which is a body corporate with perpetual succession and a common seal, was constituted and inaugurated in 1990. The CMA is a statutory agency charged with the prime responsibility of regulating the development of orderly, fair and efficient capital markets in Kenya . It licenses and supervises market intermediaries, conducts on-site and off-site market surveillance and enforces compliance, and promotes market integrity and investor confidence.

The role of the Authority is outlined in it’s principle objectives which are :

  • The development of all aspects of the capital markets with particular emphasis on the removal of impediments to, and the creation of incentives for longer term investments in, productive activities;
  • To facilitate the existence of a nationwide system of stock market and brokerage services so as to enable wider participation of the general public in stock market;
  • To create, maintain and regulate a market in which securities can be issued and traded in an orderly, fair, and efficient manner, through the implementation of a system in which the market participants regulate themselves to the maximum practicable extent;
  • To protect investor interests;
  • To operate a compensation fund to protect investors from financial loss arising from the failure of a licensed broker or dealer to meet his contractual obligations; and
  • To develop a framework to facilitate the use of electronic commerce for the development of capital markets in Kenya .
WHAT ARE SOME OF THE ENABLING LEGISLATION THAT THE AUTHORITY USES TO SUPERVISE AND REGULATE THE CAPITAL MARKETS?
  • The Capital Markets Authority Act,
  • The Central Depositories Act, 2000 (August 2000);
  • The Capital Markets (Collective Investment Schemes) Regulations, 2001
  • The Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations, 2002
  • The Capital Markets (Licensing Requirements) (General) Regulations, 2002
  • The Capital Markets (Takeovers and Mergers) Regulations, 2002
  • The Capital Markets (Foreign Investors) Regulations, 2002
  • The Capital Markets Tribunal Rules, 2002
  • Guidelines on Corporate Governance Practices by Public Listed Companies
  • Guidelines on the Approval and Registration of Credit Rating Agencies
WHAT ARE SOME OF THE EXISTING INCENTIVES THAT THE AUTHORITY HAS PUT IN PLACE TO FACILITATE THE DEVELOPMENT OF THE CAPITAL MARKETS IN KENYA?
  • One of the most critical water-way that policymakers use to facilitate advances in innovation and investments is policy incentives both for corporations and individuals. This is in recognition of the fact that the more money that remains in the hands of the private sector, the more they will be available to investors. Indeed there is arguably a strong correlation between a strong economy and good policy incentives.
  • The Minister exempted from income tax interest income accruing from the cash flows of securitized assets. In this case the cash flows managed by the SPV will be earning interest income prior to payment of interest and principal to securities holders, and such income will be exempt from withholding tax. ( 2006 )
  • Minister exempted from income tax interest income accruing from all listed bonds with at least a maturity period of three years. ( 2006 )
  • As part of the measures to ensure such investors access their returns in future as and when they resurface in light of the limitation of Actions Act which restricts access to information after seven years and to minimize fraudulent activities arising from such unclaimed dividends, the Minister amended section 18 of the Capital Markets Act so that that unclaimed dividends outstanding in listed companies for more than seven years is paid to Investor Compensation Fund. ( 2006 )
  • To encourage employers to set up ESOPs and to make such schemes attractive to employees; The Minister directed that as part of employee benefit to only subject to tax the difference between the subscription price and the market value of securities. In this regard for instance, if company X sets up an ESOP and the subscription price is Ksh 30 while the market price is Ksh 40 at the time of granting the option, and the price at exercising the option is say Ksh 100 the then the benefit to employees is Ksh 10 (40-30). As a result the employee benefit will be subject to tax at the time of exercising the option.
  • 2006 )
  • To promote listings at the NSE the Minister proposed to extend the deduction of expenditure of a capital nature incurred by a company on legal costs, and other incidental expenses while being processed for listing without raising additional capital. ( 2006 )
  • Effective 1 January 2006 the minister increased the mortgage interest deduction limit by 50% to Kshs. 50, 000 per annum. This change is expected to impact on the demand within the mortgage industry which should precipitate demand for mortgage bonds especially so within the environment of the asset backed securities
  • As an incentive to encourage more investors at the Nairobi Stock Exchange, the Minister proposed that newly listed companies pay corporation tax at a lower rate of 20%, for a period of 5 years, provided these companies offer at least 40% of their shares to the Kenyan public ( 2005 )
  • Securitization based on bankable assets and ability to generate cash has become a viable alternative in most emerging markets, particularly for institutions providing infrastructural services to raise long term capital. In this regard, the Minister proposed to exempt investment income of Special Purpose Vehicles (SPVs) from income tax. This is to encourage institutions providing infrastructural services to set up SPVs for purposes of issuing asset backed securities. ( 2005 )
  • Foreign investors can now acquire shares freely in the stock market subject to a minimum reserved ratio of 25% for domestic investors in each listed company. ( 2002 )
  • Investment ceiling by retirement benefits schemes in fixed income securities (e.g. bonds and commercial papers) was raised from 15% to 30%. (2002 )
  • To encourage savings, collective investment schemes set up by employers on behalf of employees to invest in listed shares, will be exempted from income tax. ( 2002 )
  • Effective 1 January 2003, newly listed companies are to pay a lower corporation tax of 25% (i.e. 5 percentage points lower than the standard corporation tax of 30%) for a period of 5 years following their listing. The new legislation applies to companies that float at least 30% of their issued share capital to the public.( 2002 )
  • New and expanded share capital by listed companies or those seeking listing exempt from stamp duty ( 2000/2001 )
  • Transfers of assets involved in the issuance of asset-backed securities shall be exempt from stamp duty ( 2000/2001 )
  • Newly listed companies to be taxed at a lower rate of 27% as compared to the standard rate of 30% for a period of three years following the date of listing. This is also dependent on such companies offering at least 20% of the share capital to the public ( 2001 )
  • Companies that apply and are listed shall get a tax amnesty on their past omitted income, provided they make a full disclosure of their assets and liabilities and undertake to pay all their future due taxes ( 2001 )
  • Income accruing to registered collective investment schemes tax-free ( 1999 )
  • Licensed dealers to enjoy tax benefits, as long as they turn their portfolios within 24 months and according to laid down guidelines (1999 )
  • To encourage the transfer of technology and skills, foreign investors allowed to acquire up to 49% of local brokerage firms; and up to 70% of local fund management companies ( 1999 )
  • Investments by Insurance companies on listed securities exempted from tax arising out of capital gains on sale of shares ( 1996/97 )
  • Expenses incurred by companies in having their financial instruments rated by an independent rating agency are tax deductible. ( 1997/98 )
  • Registered venture capital funds have been accorded major tax incentives including tax holidays of up to ten years on the funds income ( 1997/98 )
  • Policy decision to facilitate the participation of foreign investors in listed securities subject to a maximum of 40% of the share capital in aggregate and 5% for individual investors, or such higher amount held by foreign investors at the time of promulgation of the regulation ( 1995/96 )
  • Reduction of withholding tax applicable to dividend income arising from investment on listed securities for both local and foreign investors. Foreign 10%; Local 10% to7.5% to 5%. ( 1995/96/97 )
  • Exemption of stamp duty and value added tax on the transfer of listed securities ( 1995 )
  • Costs of IPOs were made tax deductible ( 1995 )
  • 35% Capital Gains Tax introduced in 1975 suspended (1985 )
WHAT IS THE ROLE OF CAPITAL MARKETS IN AN ECONOMY?
  • Provides an important alternative source of long-term finance for long-term productive investments. This helps in diffusing stresses on the banking system by matching long-term investments with long-term capital.
  • Provides equity capital and infrastructure development capital that has strong socio-economic benefits – roads, water and sewer systems, housing, energy, telecommunications, public transport, etc. – ideal for financing through capital markets via long dated bonds and asset backed securities.
  • Provides avenues for investment opportunities that encourage a thrift culture critical in increasing domestic savings and investment ratios that are essential for rapid industrialization. The Savings and investment ratios are too low, below 10% of GDP.
  • Encourages broader ownership of productive assets by small savers to enable them benefit from Kenya ‘s economic growth and wealth distribution. Equitable distribution of wealth is a key indicator of poverty reduction.
  • Promotes public-private sector partnerships to encourage participation of private sector in productive investments. Pursuit of economic efficiency shifting driving force of economic development from public to private sector to enhance economic productivity has become inevitable as resources continue to diminish.
  • Assists the Government to close resource gap, and complement its effort in financing essential socio-economic development, through raising long-term project based capital.
  • Improves the efficiency of capital allocation through competitive pricing mechanism for better utilization of scarce resources for increased economic growth.
  • Provides a gateway to Kenya for global and foreign portfolio investors, which is critical in supplementing the low domestic saving ratio.
WHICH ARE THE CATEGORIES OF INTERMEDIARIES THAT THE CAPITAL MARKETS AUTHORITY LICENSES, AND WHAT ARE SOME OF THE REQUIREMENTS FOR LICENSING THESE CATEGORIES OF INTERMEDIARIES?
The Authority licenses the following categories of market players:

  • Securities Exchange ( Nairobi Stock Exchange)
  • Central Depository (the Central Depository and Settlement Corporation)
  • Investment Banks
  • Stockbrokers
  • Dealers
  • Investment Advisers
  • Fund Managers
  • Authorized Securities Dealers
  • Authorized Depositories
  • Credit Rating Agencies
  • Venture Capital Fund


Stockbroker

A stockbroker is a market professional who buys and sells securities on behalf of clients at a Stock Exchange in return for a brokerage commission.

Main requirements to be licensed and to continue as a stockbroker include:

  • Certificate of Incorporation and Memorandum and Articles of Association (must be incorporated as a company).
  • A detailed business plan.
  • Lodgment of a security of Kshs 1.5 million or such higher amount with a securities exchange or a central depository (as the Authority may determine, taking into account the financial position and settlement record of the applicant) or provide a guarantee in a form acceptable to the Authority from a bank.
  • Paid up share capital of not less than Kshs 5 million.
  • The level of shareholders funds shall not be below Kshs 5 million at any time during the licence period.
  • The minimum paid up share capital shall be unimpaired and shall not be advanced to directors or associates of the stockbroker.
  • The working capital shall not be below 20% of the prescribed minimum shareholders funds.
  • Unsecured advances, loans and other amounts to directors or associates shall in aggregate not exceed 10% of prescribed shareholders funds at any time.
  • The ratio of the stockbroker’s bank overdraft to the paid capital shall not exceed 20% at all times.


Stock Dealer

A stock dealer is a person who carries on the business of buying, selling, dealing, trading, underwriting or retailing securities as a principal (i.e. on his own behalf)

Main requirements to be licensed and to continue as a stock dealer include:

  • Certificate of Incorporation and Memorandum and Articles of Association (must be incorporated as a company)
  • A detailed business plan
  • Lodgment of a security of Kshs 1.5 million with a Securities Exchange or a Central Depository (as the Authority may determined, taking into account the financial position and settlement record of the applicant) or provide a guarantee in a form acceptable to the Authority from a bank.
  • Must be an institution willing to commit funds for investment as principal in securities dealings ?
  • Paid up share capital of not less than Kshs 20 million.
  • Set aside investment capital of not less than Kshs 20 million in cash or portfolio of listed securities ( except where a dealer is promoted by a stockbroker through a subsidiary where the minimum investment capital is Kshs 5 million).
  • The working capital shall not be below 20% of the prescribed minimum shareholders funds (paid up capital and reserves).
  • Dealer’s borrowings, except bank overdrafts, shall be for the purpose of investment in securities and such borrowings shall not exceed 40% of the shareholders funds or market value of the listed securities whichever is higher.
  • Unsecured advances, loans and other amounts to directors or associates shall be made out of shareholders funds which are in excess of the prescribed minimum provided that such loans shall not exceed 10% of the shareholders funds.
  • The ratio of the dealer’s bank overdraft to the paid up capital shall not exceed 20% at all times.


Investment Advisers / Fund Managers

An investment adviser and/or a fund manager are market professionals who promulgate analysis and research on capital markets securities, and advise investors on such securities at a commission. They also manage portfolios of securities on behalf of clients pursuant to a contract.

Main requirements to be licensed and to continue as an Investment adviser/ a fund manager include :

  • Certificate of Incorporation and Memorandum and Articles of Association (must be incorporated as a company).
  • A detailed business plan.
  • Paid up share capital of not less than Kshs 2.5 million for an Investment A dviser and Kshs 10 million for a F und M anager.
  • The level of shareholders funds shall not be below Kshs 2.5 million for an Investment Adviser and Kshs 10 million for a fund manager at any time during the licence period.
  • The minimum paid up share capital shall be unimpaired and shall not be advanced to directors or associates of the investment adviser or fund manager.
  • The working capital of an investment adviser or a fund manager shall not be below 20% of the prescribed minimum shareholders funds.
  • Unsecured advances, loans and other amounts to directors or associates shall in aggregate not exceed 10% of prescribed shareholders funds at any time.
  • The ratio of the investment adviser’s or fund manager’s bank overdraft to the paid capital shall not exceed 20% at any time.
  • The aggregate maximum value of all clients’ portfolio managed under the investment adviser’s licence as prescribed shall not exceed Kshs 10 million and any amount in excess shall be managed under the fund manager’s licence.

Authorized Securities Dealers

This is a bank licensed under the Banking Act or a financial institution approved by the Authority to deal in fixed-income securities listed on the Fixed Income Securities Market Segment at a stock exchange. Authorized Securities Dealers are also required to act as market makers and dealers in this market segment; facilitate deepening of the fixed income securities market; enhance trading and liquidity in the fixed income securities market; and minimize counter party risk.

The main requirements to be licensed and to continue as an Authorized Securities dealer include:

  • Certificate of incorporation and Memorandum and Articles of Association (must be incorporated as a company).
  • A detailed business plan.
  • Commitment to invest a minimum of Kshs 200 million in FISMS turned over every 6 months either on sale or purchase.
  • Trade and dealing only in minimum lots of Kshs 5 million. Any trades below this amount shall be transacted through stockbrokers.

Investment Banks

These are non-deposit taking institutions that advise on offers of securities to the public or a section of the public, corporate financial restructuring, takeovers, mergers, privatization of companies, underwriting of securities, etc. They can also engage in the business of a stockbroker, a dealer, and fund manager of collective investment schemes and provider of contractual portfolio management services.

Main requirements to be licensed and to continue as an Investment Bank includes :

  • Certificate of Incorporation and Memorandum and Articles of Association (must be incorporated as a company).
  • A detailed business plan.
  • Paid up share capital of not less than Kshs 30 million.
  • The level of shareholders funds shall not be below Kshs 30 million at any time during the license period.
  • The minimum paid up share capital shall be unimpaired and shall not be advanced to directors or associates of the Investment Bank.
  • The net working capital shall not be below 20% of the share capital.
  • The ratio of the Investment Bank’s borrowings, including overdraft facilities, at any time shall not exceed 40% of its shareholders funds and such borrowings shall be for investment in securities.
  • Unsecured advances, loans and other amounts to directors or associates shall be made out of shareholders funds which are in excess of the prescribed minimum provided that such loans shall not exceed 10% of prescribed shareholders funds at any time.

Credit Rating Agencies

A Credit Rating Agent is a professional whose role is to give an objective and independent opinion on the general creditworthiness of an issuer of a debt instrument, and its ability to meet its obligations in a timely manner over the life of the financial instrument based on relevant risk factors including the ability of the issuer to generate cash in the future.

Main Requirements to be licensed as a Credit Rating Agency include:

  • Evidence of capacity to perform the role of a rating agency
  • Have a background and experience as well as professional expertise to provide the service of a rating agency
  • Demonstrate its independence, objectivity, and demonstrate a proven rating methodology.
  • Must be a body corporate with a preponderance of an institutional shareholding of repute and its shareholders, board of directors, management and professional analytical staff should be persons of impeccable character
  • Should partly be owned by an internationally recognized rating agency or have a contractual arrangement with an internationally recognized rating agency that provides technical and strategic support drawn from international experience.
  • The applicant shall have a stable financial base with a minimum paid up capital of Kshs 12 million.

Collective Investment Schemes

These are specialized market players licensed to mobilize savings in financial assets and to enhance access to capital markets by small investors. They include Mutual Funds, Unit Trusts, Investment Trusts and other forms of Specialized Collective Investment Schemes.

Collective Investment Schemes offer a unique opportunity to investors in terms of professional management, economies of scale and diversification of portfolio and risk.

The main requirements to be licensed as Collective Investment Schemes include :

Draft incorporation documents of the collective investment scheme; memorandum and articles of association of the promoter; memorandum and articles of association of the proposed fund manager.

  • A business plan
  • One bank reference and two professional or business references.
  • Appointment of a trustee which should be a bank or financial institution approved for that purpose by the Authority.
  • Appointment of a custodian which should be a bank or financial institution approved for that purpose by the Authority.
  • A collective investment scheme set up as an investment company must raise a minimum of Kshs 25 million.
  • An investment company will be registered as a collective investment scheme upon providing proof that it has raised the minimum amount of Kshs 25 million.

Custodians

This is a bank licensed under the Banking Act or a financial institution approved by the Authority to hold in custody funds, securities, financial instruments or documents of title to assets registered in the name of local investors, East African investors, or foreign investors or of an investment portfolio. Every investment adviser and fund manager that manages discretionary funds shall appoint a custodian for the assets of the fund.

The main requirements to be licensed as a custodian include:

  • Must be licensed to operate as a bank under the Banking Act or as a financial institution or an authorized depository .
  • A custodian shall not contract agents to discharge its functions except where a portion of the portfolio is invested in offshore investments (need to engage an overseas sub-custodian).
  • Custodian shall render custodial services to the investment portfolio in accordance with the written service agreement between the custodian and the investment adviser or fund manager.

Venture Capital Funds:

Theses are companies incorporated for purposes of providing risk capital to small and medium sized business which are new and have a high growth potential, whereby not less than 80% of the funds so invested consist of equity or quasi equity investment in eligible enterprises.

The main requirements to be licensed as a Venture Capital Fund

  • Must be a company incorporated in Kenya for the purposes of investing in a new or expanding company
  • Registered by the Commissioner of Insurance
  • A fund manager manages it.
  • 75% or more of its portfolio of invertible funds is invested in the equity shares of venture companies
  • The primary activities of the venture company in which it has invested are approved activities
WHAT ARE COLLECTIVE INVESTMENT SCHEMES?
Collective investment schemes are pools of funds that are managed on behalf of investors by a professional money manager. They are arrangements made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilized with a view to receive profits, income, produce or property, and is managed on behalf of the investors.

The manager invests the pooled money in portfolio of securities such as shares, bonds, or other securities according to specific investment objectives that have been established for the scheme. In return for putting money into these funds, the investor receives shares or units that represent his/her pro-rata share of the pool of fund assets. The fund earns income from the investments in the form of dividends, interest income and capital gains. In return for administering the fund and managing its investment portfolio, the fund manager charges a fee based on the value of the fund’s assets.

Types of Collective Investment Schemes

Mutual Funds
Unit Trusts
Employer Share Ownership Plans
Special Interest Collective Investment Schemes

A Mutual Fund

A mutual fund is a public or external company incorporated solely to hold and manage securities or other financial assets. The company accepts funds from investors and uses those funds to buy a portfolio of securities and other financial assets and employs a professional fund manager to manage the investment. The company issues shares, which represent pro-rata share of the pool of fund assets to investors. A mutual fund may either be open-ended or closed-ended.

Special Interest Collective Investment Scheme

This refers to a CIS established by a promoter for the purposes of facilitating investment by a special group of individuals with a common interest in a listed company, and may include farmers, distributors, suppliers, among others. It’s structured as a unit trust with at least three trustees. This scheme has to notify the listed company that it intends to invest in, upon approval by CMA. It will only purchase shares of listed company for which it has been established. The trustees will hold certificates representing the shares of the listed company in the trustees names’ and create corresponding units in the same denomination as the listed company and allocate to entitled unit holders.

Employee Share Ownership Plan (ESOPS) ?

An ESOP is an option to buy a company’s share at a certain price. This price can be the market price or some other price. Normally, to make an ESOP attractive, the option price is lower than the market price . The company has the freedom to specify how many shares an employee gets, which employees get them, and when the ownership is actually transferred. There also has to be a gap between the announcement of the ESOP and it’s coming into effect.

The ESOPS Unit Trust is required to have at least three trustees (or a corporation that will serve as sole trustee). For the CMA to approve an ESOP; board of directors and shareholders’ resolution and approval of establishment of the ESOP Unit Trust is required.

WHAT ARE SOME OF THE BENEFITS OF INVESTING IN COLLECTIVE INVESTMENT SCHEMES BY AN INVESTOR?
Continuous professional management of the Investments

Collective investment schemes are managed by a team of experienced professionals who manage the fund in a structured and organized manner as opposed to the individual investor who may invest in random fashion.

Low costs of Investments

Due to the large amount of funds that the Fund manager manages, very low costs accrue per investor. The Fund achieves economies of scale in research, transactions and investments. It lowers the cost of brokerage, custodial and other charges.

Diversification

Investors in Unit Trusts can access a broader range of securities than they would when investing on their own. A common investor has limited money, which he can invest only in a few securities, and faces a great risk. But when that sum of money is pooled with that of other investors, it gets spread out over other companies. The loss made by a few counters can be absorbed by the gain made in other counters. The risk is therefore reduced and the investor can further reduce risk by investing in several funds.

Convenient record keeping and administration

Fund managers take care of all the record keeping including paperwork. It also deals with the problem of bad deliveries, broker’s commission etc.

Various types of Schemes

CIS offer various types of schemes such as regular income plan, growth plan, equity Funds, debt Funds, and balanced Funds. An investor can therefore select a plan according to his needs.

Liquidity

There is an ease in selling and buying the units compared with investing directly in shares of companies where prices and opportunities to transact depends on the supply and demand at that time.

Scope for good return

Fund managers invest in various industries and sectors; therefore, the portfolio gets diversified, resulting in CIS generating equitable returns.

Access to a broader array of financial assets

Unit Trust Fund Managers can trade in investment products that are normally inaccessible to the individual investor, such as government bond and corporate bonds, which may be restricted to institutional investors. Some of these products are traded in large a amount, which limits the individual investor even when he has the opportunity.

Tax Benefits

The Collective IS income is tax exempt, and this can be extended to unit holders in form of better returns.

WHAT ARE SOME OF THE TIPS THAT AN INVESTOR SHOULD KNOW?
Understand the Risks

A fundamental principle of investment is the risk reward trade-off associated with every instrument decision made. The higher the risk, the greater the return but the reverse is also true

There are generally, three basic types of investment risk:

  • General market risk that relates to a broad ranges of investments and is largely dependent on economic conditions and international markets. This form of risk is a tough one to control, short of opting out of the market totally.
  • Market sector risk that relates to a particular sector of a market, for example finance stocks will perform better than plantation stocks at a particular period of time. This form of risk can be managed by carefully monitoring the economic scene with a view to identifying the winners and losers.
  • Specific risk that relates to the performance of a particular security or property in an investment portfolio for example, the performance of a specific company’s share. The specific risk that one investment will not perform, over another can be minimized by carefully investigating and researching before buying and by performing regular ongoing checks.

Invest Wisely

Each investor has different goals, needs and constraints. Yet there are a number of general rules that every investor should follow for his or her protection.

Read the prospectus carefully. Make sure you understand where and how your money is to be invested and the risks involved. You should be aware of how a Unit Trust works, the charges and the fees involved and your rights as a unit holder.

Make sure that you deal only with collective investment schemes licensed by the Capital Markets Authority. By so doing will help the Authority assist you incase of a problem.

Do not rush into a decision. Take time before deciding whether to invest in the units.

Keep good records of your investments and check any statements or certificates you receive to make sure they are correct.

Remember, the higher the expected rate of return, the higher the risk. Do not choose a fund just because its performance has been good – it may have achieved that performance by taking on more risk than you might be willing to accept.

WHAT ARE THE REQUIREMENTS FOR ISSUING SHARES TO THE PUBLIC AND LISTING OF SECURITIES IN KENYA?
Public Offer of Shares

To issue shares to the public, the following information needs to be disclosed to all stakeholders:

Other parties involved

Background information of the Promoters of the issue.
Names and addresses of the issuer’s External auditors for the last three years.
Name and address of the issuer’s bankers, legal advisors, sponsors, reporting accountants and any other expert involved.

Key information on the issuer

  • Name and registered office.
  • Date and country of incorporation.
  • Legislation under which the issuer operates.
  • Place and date of registration.
  • Issuer’s principal business.
  • The issuer’s authorized and issued share capital.
  • Classes and rights of shares in issue.
  • The amount, the specific class of shares to be issued and their respective rights.
  • A summary of changes in the amount of issued capital in the last three years.
  • Names of persons who could exercise control over the issuer.
  • Details of ownership structure after the issue.
  • Identity of any parent or subsidiary companies.
  • A summary of principal contents of material contracts entered into either by the issuer or any party specified in 12 above within the last two years.
  • Details of material changes in business in the last five years.
  • Legal or arbitration proceedings having significant financial effect
  • Full names, age and address of the directors, senior management and founders of the issuer
  • Directors’ remuneration for the last two years and any interest in the issuer.
  • Directors who own directly or indirectly over 3% in the issuer
  • Loans to and guarantees provided for the benefit of the issuer’s directors.
  • Details of any scheme involving staff in the share ownership.
  • Amounts due to issuer’s directors and details of the existing or proposed service contracts.
  • Shareholders with beneficial ownership in excess of 3% in the issuer.
  • A statement that the annual accounts have been audited for last five years.
  • The Accountant Report on the financial statements.
  • Financial statements for at least three preceding years.
  • The dividend policy, the amount of dividend, the dividend per share and the dividend cover for each of last three financial years. Indicate time limit for dividend to lapse.
  • Audited interim accounts for six months where the last audited accounts are over six months old but less than nine months. If not six months old, append un audited accounts for the period preceding the application
  • Details of material loans to the issuer.
  • Details of any property disposed off in the last five years.
  • Name and address of vendor of any asset acquired by the issuer in the preceding five years.
  • Any indemnities, guarantees or warranties given by the vendors in (32) above

Details of the issue  

  • State the total amount of issue.
  • The expected issue price and the method of determining the price.
  • Number of securities expected to be issued.
  • Where and to whom purchase or subscription applications are to be addressed.
  • Specify whether purchase period can be extended or shortened.
  • Method for paying up for the Securities.
  • Method for delivery of securities to subscribers or purchasers.
  • Description of how results on distribution of securities are to be made public.
  • The manner of refunding excess amounts paid by applicants.
  • Transferability of the shares.
  • Name and address of the issuer’s registrar.
  • The minimum amount to be raised by the issue to materialize.
  • Allotment criteria to be used.
  • Itemize the major categories of expenses to be incurred and give an estimate of the floatation costs.

Expected timetable

The anticipated sequence of activities in the issue procedure should be given, including:

  • Submitting the issue prospectus to the Capital Markets Authority, Nairobi Stock Exchange and the Registrar of Companies.
  • The period during which the offer will remain open
  • Time limits for paying up for the securities.
  • Time limits for delivery of securities to subscribers or purchasers.
  • When the Capital Markets Authority approves the issue for listing on either the Main or Alternative Investment Market Segments at the Nairobi Stock Exchange.
  • The date of listing at the Nairobi Stock Exchange.
  • The date of first trading at the Nairobi Stock Exchange.


Public Offer of Fixed Income Securities

To issue fixed income securities (Bonds, commercial paper, notes etc) to the public, the following information needs to be disclosed to all stakeholders :

Other parties involved  

  • Background information of the directors of the issue.
  • Names and addresses of the issuer’s External auditors for the last three years.
  • Name and address of the issuer’s bankers, legal advisors, sponsors, reporting accountants and any other expert involved.

Key information on the issuer

  • Name and registered office.
  • Date and country of incorporation.
  • Legislation under which the issuer operates.
  • Place and date of registration.
  • Issuer’s principal business.
  • The issuer’s authorized and issued share capital.
  • Classes and rights of shares in issue.
  • Names of persons who could exercise control over the issuer.
  • Identity of any parent or subsidiary companies.
  • A summary of principal contents of material contracts entered into either by the issuer or any party specified in 9 above within the last two years.
  • Details of material changes in business in the last five years.
  • Legal or arbitration proceedings having significant financial effect.
  • Description of main investments.
  • Any occurrence, which could affect the position of the issuer negatively.
  • Policy on research and development of new products
  • Directors’ remuneration for the last two years and any interest in the issuer.
  • Directors who own directly or indirectly over 3% in the issuer.
  • Loans to and guarantees provided for the benefit of the issuer’s directors.
  • Details of any scheme involving staff in the share ownership.
  • Amounts due to issuer’s directors and details of the existing or proposed service contracts.
  • Shareholders with beneficial ownership in excess of 3% in the issuer.
  • A statement that the annual accounts have been audited for last three years.
  • The Accountant Report on the financial statements.
  • Financial statements for three preceding years.
  • A table showing the changes in financial position of the Group over the last three years.
  • Borrowing powers of the issuer.
  • Details of material loans to the issuer.
  • Details of all off-balance sheet financing by the issuer and any of the subsidiaries.
  • Any person other than the Directors who directly or indirectly has interest of 10% or more in the issuer’s capital.
  • Major ratios:
  • Total indebtedness including the new issue not to exceed 400% of the company’s net worth as at the latest balance sheet.
  • The funds from operations to total debt for the three trading periods preceding the issue to be kept at a weighted average of at least 40%.
  • A range of other ratios to be certified by the issuer’s external auditors

Details of the issue 

Debt Issue  

  • A cautionary statement that the application has been made to the Capital Markets Authority for the securities to be listed (where applicable) in the Fixed Income Securities Market Segment.
  • State the total amount of issue.
  • The issue, redemption and nominal prices.
  • Nature, number and denominations of securities expected to be issued.
  • Where and to whom purchase or subscription applications are to be addressed.
  • Specify whether purchase period can be extended or shortened.
  • Method for paying up for the securities and currency.
  • The final repayment date and any earlier repayment dates.
  • The date from which interest becomes payable and the due dates for interest.
  • Time limit on the validity of claims to interest and repayment of principal.
  • The procedure and time limits for delivery of the debt securities.
  • Name and address of the issuer’s registrar.
  • The nature and scope of the guarantees, sureties and commitments intended to ensure that the loan will be serviced.
  • Details of any arrangements for transfer of securities and any restriction.
  • If underwritten/guaranteed, description of the underwriters/ guarantors and the amounts involved. A letter of no objection to guarantee may be required from the parent regulator of the guarantor.
  • Estimated net proceeds and the purpose of the issue.
  • Rights conferred upon the holders of the units.
  • In case of convertible debt securities disclose the nature of shares offered by way of conversion, exchange or subscription, rights attached and details of the circumstances to conversion.

Expected timetable

The anticipated sequence of activities in the issue procedure should be given, including:

  • Submitting the issue prospectus to the Capital Markets Authority, Nairobi Stock Exchange and the Registrar of Companies.
  • The period during which the offer will remain open
  • Time limits for delivery of securities to subscribers or purchasers.
  • When the Capital Markets Authority approves the issue for listing on either the Main or Alternative Investment Market Segments at the Nairobi Stock Exchange.
  • The date of listing at the Nairobi Stock Exchange.
  • The date of first trading at the Nairobi Stock Exchange.
WHAT ARE THE CONTINUOUS REPORTING OBLIGATIONS FOR LISTED COMPANIES?
General Continuous obligations

To continue listing securities on any of these boards, the following eligibility criteria need to be adhered to

Change in activities

Major developments in an issuer’s nature of activities or expectation of performance that may have effect on the financial position or general course of business that in turn may impact substantially on the prices of its securities should be disclosed.

Information in strict confidence

An issuer may give such information to its advisers and persons with whom it is negotiating with a view to effecting a transaction or raising finance. In such case an issuer must advise, preferably in writing, the recipients of such information that it’s confidential.

Price sensitive information

  • Where it is proposed to announce such information in a meeting of holders’ of an issuer’s listed security, it should be published to the stock exchange and the market so that the announcement at the meeting comes after it has been published to the market and forwarded to the Capital Markets Authority.
  • An issuer must publish, by way of cautionary announcement, information, which could lead to material movement in prices of its securities if confidentiality levels required couldn’t be maintained.
  • Where an issuer’s securities are listed on various stock exchanges, such an issuer should ensure that equivalent information is available at the same time to the market at all such securities exchanges.


Disclosure of periodic financial information

Dividend and interest 

  • Payment should be notified to the Nairobi Stock Exchange, Capital Markets Authority and the securities’ holders within twenty-four hours following the board’s resolution/recommendation by means of a press announcement.  Such resolution/recommendation is required to be at least 21 days prior to book closure date and should state:
  • The closing date for determining entitlements;
  • Payment date of dividend/interest;
  • The cash amount to be paid for dividend/interest
  • Where shareholders decline to approve a recommended dividend at an annual general meeting, the board should make an announcement through a notice within 24 hours following the annual general meeting. Interim dividends declared by an issuer should be paid within 90 days of the date of books closure and 90 days of the date of approval by shareholders in the case of final dividend.
  • Intention not to pay dividend should be disclosed in the interim or annual financial statement or by way of a press announcement.


Financial reports

Quarterly reports

Covers 3 months and issued in the course of the year on a best practice basis

Interim reports

Half year financial reports published and issued by every issuer of securities to the public within sixty days of the interim reporting date. Such interim financial reports at minimum should have the following components (not necessarily audited):

  • Condensed balance sheet;
  • Condensed income statement;
  • Condensed cash flow statement;
  • Condensed statement of changes in equity;
  • Selected notes.

The above components should be prepared in full compliance with the International Accounting Standards.

Interim reports should be simultaneously submitted to the Nairobi Stock Exchange and the capital markets Authority at the time of release to the public.

Annual Financial Statements (Final reports)

Every issuer of securities to the public is required to prepare an annual report containing audited annual financial statements within four months of the close of its financial year. The components of such a report include:

  • Balance sheet;
  • Income statement;
  • Cash flow statement;
  • Statement of changes in equity;
  • Accounting policies and explanatory notes.

The above components should be prepared in full compliance with the International Accounting Standards (IAS).

Every issuer should notify the Nairobi Stock Exchange, the Capital Markets Authority and media of its annual results within 24 hours following approval of the issuer’s directors for submission to shareholders.

Every issuer is required within six months after the financial year end, but at least 21 clear days before the annual general meeting date to distribute to all securities’ holders

A notice of the annual general meeting and the relevant year’s annual financial statements. The auditor’s report on the issuer’s financial statements.

Notification relating to capital 

  • An issuer is required to make a public announcement and notify the Nairobi Stock Exchange and also the Capital Markets Authority of the following:
  • Alteration to capital structure
  • New issues of debt securities
  • Changes of rights attached to securities
  • Basis of allotment
  • Issues affecting conversion rights
  • Results of new issues


Shareholding

  • An issuer is required at the end of each calendar quarter to disclose to the Nairobi Stock Exchange every person who holds or acquires 3% or more of the issuer’s ordinary shares and publish in the annual report the following key information:
  • Distribution of shareholders
  • Names of the ten largest shareholders with their respective ownerships
  • Name and address of the company secretary
  • An issuer is required to inform the Nairobi Stock Exchange and the Capital Markets Authority in writing when it becomes aware that the proportion of its securities in the hands of the public has fallen below the minimum prescribed of 25%.

Communication with shareholders

  • Any meeting of shareholders (other than adjourned meeting) should be called by a 21-day notice in writing. All notices convening such meetings should specify the place, hour and agenda of the meeting.
  • A proxy form must be sent with the notice convening a meeting of holders of listed securities to each person entitled to vote at the meeting.
  • An issuer is required to forward to the Nairobi Stock Exchange and the Capital Markets Authority.
  • All circulars, notices, reports, announcements or other documents at the same time as they are issued.
  • All resolutions passed by the issuer at any general meeting of holders of listed securities within 10- days after the relevant general meeting.

Miscellaneous obligations

  • An issuer is required to disclose all material information and make public announcement of:
  • Any change of address of the registered office or of any other office, which the register of the holders of listed securities is kept.
  • Any change in the directors, company secretary or auditors of the issuer
  • Any proposed significant alteration of the memorandum and articles of the issuer
  • Any application filed in a court of competent jurisdiction to wind up the issuer or any of its subsidiaries.
  • The appointment or imminent appointment of receiver manager or liquidator of the issuer or any of its subsidiaries
  • Any profit warning whether there is a material discrepancy (25% lower) between the projected earnings for the current financial year and the level of earnings in the previous financial year.
WHAT IS CORPORATE GOVERNANCE?
Corporate Governance refers to the manner in which the power of a corporation is exercised in the running of the corporation’s total portfolio of assets and resources with the objective of maintaining and increasing shareholders’ long-term value while taking into account the interest of other stakeholders. Corporate governance seeks to ensure that leaders act in the best interests of the corporation and its stakeholders. Good corporate governance enhances effectiveness, competitiveness and sustainability of the corporation. Arising from the import of good corporate governance the CMA has developed corporate governance guidelines to be practiced by listed companies in Kenya .

The obligations of the Board of Directors of a Company

  • The Board of Directors shall exercise all the powers of the company subject only to the limitations contained in the law and articles of incorporation.
  • In this regard, it is expected that the Board of Directors shall fulfill the following functions:
  • Exercise leadership,, integrity, and sound judgment in directing the corporation so as to achieve continuing prosperity and to act in the best interests of the enterprise while respecting the principles of transparency;
  • Ensure that through a managed and effective process, board appointments are made that provide a mix of proficient directors, each of whom is able to add value and bring independent judgment to bear on the decision-making process;
  • Determine the corporation’s purpose and values;
  • Monitor and evaluate the implementation of strategies, policies, management performance criteria and business plan;
  • Serve and balance the interests of the corporation, shareholders and stakeholders;
  • Regularly review processes and procedures to ensure the effectiveness of its internal systems of control, so that its decision-making capability and the accuracy of its reporting and financial results are maintained at a high level at all times; and
  • Ensure that all technology and systems used in the corporation are adequate to properly run the business and for it to remain effectively competitive.

The rights of shareholders

  • It is important that shareholders participate fully in major decisions of the Company.
  • Basic shareholder rights include:
  • They should be made aware of procedures governing the acquisition of corporate control in the capital market, and extraordinary transactions such as mergers and sales of substantial portions of corporate assets;
  • Obtain relevant information on the corporation including quarterly, half-yearly, year-end financial statements on a timely and regular basis;
  • Participate and vote in annual general meetings;
  • Entitlement to distributed profit in the form of dividend and other rights for bonus shares, rights issue as applicable in the proportion of shares one holds;
  • Right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes e.g. amendments to governing documents of the company, the authorization of additional shares and extra-ordinary transactions that affect results in the sale of the company;
  • The annual reports and accounts to shareholders should include highlights of the operations of the company and financial performance;
  • Have a duty and are well advised to exercise the supreme authority of the company in general meetings to hold the Board accountable for the stewardship of the company; and
  • All shareholders shall be treated equitably.

However, as shareholders exercise their rights at the annual general meeting, they should not act in a manner that will undermine the company’s interests .

How the Capital Markets Authority protect investors in the stock market

The Capital Markets Authority is empowered by an Act of Parliament, Cap 485A and the regulations there under to regulate and facilitate the development of the capital markets in Kenya . The Authority by enforcing the requirements of both the Act and the regulations by its licensees on a routine and regular basis through a systematic compliance mechanism with the view to ensuring adequate disclosure of information by intermediaries. One important mandate of the Authority is the protection of investors. Cognizance of this fact the Authority operates an investor compensation fund whose purpose is to compensate investors who suffer loss resulting from the failure of a licensed broker/investment banker or dealer to meet its contractual obligations.

WHAT IS THE NSE?
The Nairobi Stock Exchange is a Market, and commonly known as the NSE.


A Market?

Yeas a market, very similar to Marigiti, Gikomba, Karatina, Kibuye, Sigalagala, Suneka, Kondele, Makutano, Wamunyu and other similar markets in Kenya.

What is different the difference between a stock market and any other market?

The main difference about the Stock Exchange market from other local markets is in the types of products traded, how they are traded and how they are paid for and transferred.

What products are traded at the Nairobi Stock Exchange?

The products traded at the NSE are Shares and Bonds. Shares and Bonds are money or financial products. Another name for Shares is Equities, while Bonds are also known as Debt Instruments. Products traded at the NSE are in one name called Securities.

At the moment, there are over 50 different types of shares and over 60 of bonds at the NSE.

What is the importance of this market to the economy?

For an economy to grow, money needs to shift from les to more productive activities. In other words, idle money and savings should be invested in productive activity for the economy to grow. The Nairobi Stock Exchange makes this possible by:

Enabling idle money and savings to become productive by bringing the borrowers and lenders of money together at a low cost. The lenders (all savers) become the investors. They lend/invest and expect a profit/financial reward. The borrowers also known as issuers in the markets borrow and promise to pay the lenders a profit. We therefore encourage savings and investments.

Educating the public about the higher profits in shares and bonds; how to buy and sell; when and why to buy and sell. We also educate the public on how to invest together as a group.

Facilitating good management of companies by asking them to give periodic reports of their performance.

Providing a daily market reports and price list to ensure that investors know the worth of their assets at all times.

Providing financial solutions to common problems. Shares and bonds are accepted guarantees for Co-operative Society’s and bank loans. Shares and bonds can be planned, with the help of a money manager, to pay for school fees, medical, car and other insurance schemes, pension or retirement plans etc.

Through shares and bonds, the government, small and big companies, cooperatives societies and other organizations can raise money to expand their business activities, make a profit, create employment and generally help the economy to grow.

How is the nse market organized?

Market days.

The market is open Monday to Friday from 8.00 a.m. to 5.00 p.m. trading activities start at 10.00 a.m. and continues until 12 noon . Members of the public can view the market from the public gallery at any time while the market is open. The market is closed during public holidays.

Display Boards.

Shares and bonds are displayed on white boards. Shares of companies are displayed in groups according to sectors, while Bonds are displayed according to issuers.

Display of Shares

Shares are grouped into 4 sectors namely Agriculture, Commercial and Services, Financial and Industrial & Allied sectors. The shares are displayed in alphabetical order in each group for easy location by investors viewing trading from the public gallery. There are 47 company shares in the market.

Display of Bonds

Bonds are in two groups namely: Treasury Bonds – issued by the government; and Corporate Bonds – issued by companies.

They are displayed as and when the government or a company issues one. There are over 60 bonds in the market.

What Amounts Can an Investor Buy?

An investor can buy as little or as much as he or she can afford. It is also possible to invest very little money in groups of small investors pooled together by money managers in the market.

Minimum number of shares.

Share are bundled in minimum lots of 100 shares and above in the main market boards. Fewer shares that 100 are available on the odd lots board.

Minimum number of Bonds.

Bonds are sold in minimum bundles of KShs. 50,000.00. Small investors can pool their money together and buy a bond with the help of a money manager.

Internal Market Operations

Trading Floor

The trading floor is the market place where stock brokers meet everyday to buy and sell shares and bonds through an auction system. Through the auction system, buyers and sellers offering the best prices are enabled to trade.

Public Gallery

This is a special place from where investors and members of the public view live trading as it takes place. All members of the public are welcome.

Delivery & Settlement .

This is where share certificates and bond accounts are transferred from one investor to another and payments completed. It is also here that shares and bonds of deceased persons are transferred to beneficiaries at a small administrative fee.

Information Centre.

Here, investors and members of the public get answers to their questions about the stock exchange. An individual or group can also register to attend a free educational session organized by the Nairobi Stock Exchange. The NSE also gives free lectures to groups in their own premises through invitation. There are other operational structures in the market which include Market Research and Development, Compliance, Legal, Accounting and Administration.

Our History

This market was started in the 1920’s by the British as an informal market for Europeans only. In 1954, the market was formalized through incorporation into a company.

In 1963, Africans were allowed to join and trade in the market. For many years, the market operated through the telephone with a weekly meeting at the Stanley Hotel. In 1991, this market mover to IPS building and was opened to the public. In 1994, the market moved to its current location, on the 1 st Floor of the Nation Centre, with the introduction of the Central Depository and Settlement Corporation (CDSC) investors will open share and bond accounts, in electronic accounts similar to their bank accounts. Buying and selling of shares and bonds will be made much easier and quicker. All the benefits of shares and bonds will remain the same. For example, an investor will still be able to use a Share Account or Bond Account as a guarantor for a Co-operative loan or as collateral for a bank loan.

More About Us.

More information about the NSE can be found at the Nairobi Stock Exchange Library; website: www.nse.co.ke ; Handbook; NSE Annual Report; Brochures; Free Education Sessions; Newspapers; Television and Radio. You can also speak to Stockbrokers; Money Managers; Browse Company Annual Reports and Accounts and talk to other investors in the market.

WHAT IS A SHARE?
A share is a piece of ownership of a company or enterprise. When you buy a share, you become an investor and thereby an owner of a piece of the company’s profit or losses.

By buying a share, money which could have been idle or otherwise held in low interest earning savings, moves to a more productive economic activity. The profitability of investing in shares however depends on the good management of the company, avoidance of wastage and a conducive business environment.

Why do companies sell shares?

Companies sell shares to raise (borrow) money from members of the public to expand their business activities in order to make more profits. They invite members of the public to buy shares and by so doing have a say in the running of the company as lenders of money and owners.

Shareholders expect a profit as a reward from lending their money to expand the business of the company.

Who is a shareholder?

A shareholder is an investor who buys shares with an expectation of profit. Profits in shares are through dividends, gains in share prices, bonuses, rights etc.

A shareholder owns a piece of the company and its profits equal to the number of shares he/she owns.

What are the benefits of owning shares?

  • A source of profits;
  • A guarantor for borrowing loans from Cooperative Societies and Banks;
  • A way of saving your money for the future;
  • An easy and quick asset to buy and sell;
  • A new business activity that is beneficial in many ways. An investor can trade in other markets trade in maize, bananas, potatoes, tomatoes, onions, mangos etc.
  • Buying at low prices and selling at high prices to make a profit;
  • A solution that increases financial activity and economic growth.

What are the qualities of a good share?

  • Frequent and generous dividends
  • The company is managed productively, transparently and is accountable to shareholders
  • No wastage in the use of resources
  • Respect of shareholders and their opinions
  • Shares that are easy to buy and sell quickly in the market
  • The company abides by the rules, regulations and laws
WHAT IS A BOND?
A bond is a loan between a borrower and a lender. The borrower promises to pay the lender some interest quarterly or semi-annually at some date in the future. The borrower also promised to repay the initial money invested by the lender. The lender lends and expects to make a profit. The profit from a bond is gained in the form of an interest. At the moment some bonds in the market have an interest rate of 14%, 12%, 10%,8% depending on the type of bond it is, and when it was issued.

I OWE YOU.

At the Nairobi Stock Exchange, the lender is called an investor and the borrower the issuer.

Who can Buy Bonds?

Any individual, Co-operative Society, Women Group, Kiama, Youth Club, Church, School, College, University, Investment Group, Insurance Company, Bank, Pension Scheme, and many other can buy bonds.

Can a Bond be sold before Maturity?

Yes. In times of need or emergencies, an investor can sell his or her bond easily and quickly in the market. The interest on a bond grows on a daily basis and so a bond has new value and price every day. An investor can therefore buy or sell a bond on any day of his or her choice. There are no penalties for selling a bond before the maturity date.

For example, an investor can buy a bond of 5 years and expect an interest of 12%. The interest is paid after every 3 or 6 months. Such an investor can sell the bond at any time of his or her choice at the current market price. The market price of a bond will depend on the number of other willing sellers and buyers in the market on that particular day. When there are many sellers in any market, prices go down and vice versa.

Who Borrows Money through Bonds?

In Kenya , it is the government and companies. In other Stock Markets, Municipal Councils, Cooperative Societies, Hospitals, Universities, Schools and other organizations can borrow money from the public through bonds. All that is required is that the organization has a good reputation and members of the public have trust in the other lending situations, a lender must trust the borrower before he or she can lend any money. The borrower must therefore be creditworthy in the eyes of the lenders or investors.

Bonds are therefore a very easy, quick and transparent way of raising money. For example, trusted and credit worthy Municipal Councils can borrow money from the public with a promise to pay a reasonable interest rate. The Council can borrow money from public with a promise to pay a reasonable interest rate. The Council can use the money to build roads, improve security, cleanliness, water supply and streetlights. A Co-operative Society can do the same and build a milk cooling and processing factory or a food processing factory. These and many more money solutions are available with the help of money managers.

What are the benefits of buying bonds?

  • A bond is a very convenient asset to own;
  • Accepted guarantors for may types of loans by Cooperative Societies and Banks;
  • A sure source of income;
  • A good money planner to meet specific needs. For example an investor can buy a bond whose interest matches payment of school fees, car or medical insurance, rent, pension allowance and much more;
  • Easy and quick to sell in the market in times of need;
  • A way of saving money for the future;
  • Convenient and confidential;
  • Easily transferable.

What is the difference between a bondholder and a shareholder?

  • A Bondholder
  • A bondholder is only a lender to a company
  • Expects a profit in form of an interest at a specific agreed date in future
  • Does not vote or participate in the management of the company
  • Invests to earn a reasonable return at a low risk
  • A watchdog of the borrowers activities

A Shareholder

  • A shareholder is a lender and an owner
  • Expects a profit in form of a dividend, gain in share price, bonuses and cheaper shares (right issues)
  • Attends Annual General Meetings, gives personal pinions about the company and votes thereby participating in the running of the company
  • Invests expecting the highest return possible
  • Accept risk as part of any business
  • A watchdog of the management and company’s activities
  • An influencer of the company’s performance

Can one be Bondholder and a Shareholder at the same time?

Yes. This gives an investor the opportunity to diversify and enjoy a balance between reasonable and very high profits.


More about Bonds

More information about bonds can be found at:

Nairobi Stock Exchange Library;
Website: www.nse.co.ke
NSE Handbook;
NSE Annual Report;
NSE Brochures;
Free Education Sessions;
Newspapers, Television and Radio.

You can also:

Speak to Stockbrokers;
Speak to Money Managers;
Browse Company Annual Reports and Accounts;
Talk to other investors in the market.

WHAT ARE THE ELIGIBILITY REQUIREMENTS FOR LISTING AT THE NAIROBI STOCK EXCHANGE?
There are three investment market Segments at the Nairobi Stock Exchange namely:

Main Investment Market Segment (MIMS);
Alternative Investment Market Segment (AIMS); and
Fixed Income Securities Market Segment (FISMS).

To list securities on any of these boards, the following eligibility criteria must be satisfied:

REQUIREMENT
Main Investment Market Segment (MIMS)
Alternative Investment Market Segment (AIMS)
Fixed Income Market Segment (FISMS)
Incorporation status The issuer must be a public company limited by shares and registered under the Companies Act (Cap 486) The issuer must be a public company limited by shares and registered under the Companies Act (Cap 486) The issuer must be a public company limited by shares and registered under the Companies Act (Cap 486) or any other corporate body.
Share Capital The minimum authorized, issued and fully paid up capital must be Kshs. 50 Million.

 

The minimum authorized, issued and fully paid capital should be Kshs.20 Million The minimum authorized, issued and fully paid up capital must be Kshs. 50 Million
Net Assets The net assets should not be less than Kshs. 100 Million immediately before the public offer.

 

Net assets immediately before the public offer should not be less than Kshs.20 Million The net assets should not be less than Kshs. 100 Million immediately before the offer.
Transferability of shares The shares to be listed shall be freely transferable.

 

The shares to be listed shall be freely transferable. May or may not be transferable.
Financial records. The audited financial statements of the issuer for five preceding years be availed. The audited financial statements of the issuer for three preceding years be availed. The audited financial statements of the issuer for three preceding years be availed (except for the government)
Directors and Management The directors of the issuer must be competent persons without any legal encumbrances.

 

The directors of the issuer must be competent persons without any legal encumbrances. The directors of the issuer must be competent persons without any legal encumbrances
Track record The issuer must have declared positive profits after tax attributable to shareholders in at least three years within five years prior to application. The issuer must have been operating on the same line of business for at least two years one of which it must have made profit with good growth potential. Not a requirement.
Solvency The issuer should be solvent and have adequate working capital. The issuer should be solvent and have adequate working capital. Not a requirement
Share ownership structure

 

 

At least 25% of the shares must be held by not less than 1000 shareholders excluding employees of the issuer. At least 20% of the shares must be held by not less than 100 shareholders excluding employees of the issuer or family members of the controlling shareholders.

 

Not a requirement
Certificate of comfort May be required from the primary regulator of the issuer if there is one. May be required from the primary regulator of the issuer if there is one. May be required from the primary regulator of the issuer if there is one.

 

Dividend policy The issuer must have a clear future dividend policy The issuer must have a clear future dividend policy

 

Not a requirement
Debt ratios Not a requirement Not a requirement Major ratios:

Total indebtedness including the new issue not to exceed 400% of the company’s net worth as at the latest balance sheet.

The funds from operations to total debt for the three trading periods preceding the issue to be kept at a weighted average of at least 40%.

3. A range of other ratios to be certified by the issuer’s external auditors.

Issue lots Not a requirement Not a requirement Minimum issue lot size shall be:

1.Kshs. 100,000 for corporate bonds or preference shares

2.Kshs. 1,000,000 for commercial paper programme.

Issue lots Not a requirement Not a requirement Minimum issue lot size shall be:

1.Kshs. 100,000 for corporate bonds or preference shares

2.Kshs. 1,000,000 for commercial paper programme.

Renewal date Not a requirement Not a requirement Every issuer of commercial paper to apply for renewal at least three months before the expiry of the approved period of twelve months from the date of approval.
WHAT IS THE CDS?
CDS stands for the Central Depository System. This is a computer system operated by The Central Depository and Settlement Corporation (CDSC) that facilitates holdings of shares in electronic accounts, opened by shareholders and manages the process of transferring shares traded at the Stock Exchange.
WHAT IS CDSC?
CDSC stands for the Central Depository and Settlement Corporation Ltd a company incorporated under the Companies Act and approved to establish a central depository under the Central Depository Act, 2000.
WHAT IS A DEPOSITORY?
A depository is like a bank, which holds securities (like shares, bonds, Government Securities among others) for investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities.
WHO ARE THE SHAREHOLDERS OF CDSC?
  • NSE – 20%
  • AKS Nominees Ltd– 18%
  • Capital Markets Investor Compensation Fund – 7%
  • Capital Markets Challenge Fund Ltd – 50%
  • Uganda Securities Exchange Ltd – 2.5%
  • Dar es Salaam Stock Exchange Ltd – 2.5%
WHO REGULATES CDSC?
The Capital Markets Authority (CMA)
WHAT ARE THE BENEFITS OF CDS?
CDS assures you of safer faster and easier trading in your securities. You do not have to wait for the issue of certificates before you can trade again as your shares are credited to your account 5 days after the date of trade.
WHAT IS A CDS ACCOUNT?
It is an electronic account that holds shares only.
DO I HAVE TO OPEN A CDS ACCOUNT?
Yes, if you intend to trade in shares that are listed on the Nairobi Stock Exchange. Soon, bonds will also be deposited into the CDS
WHAT ARE THE BENEFITS OF HAVING A CDS ACCOUNT?
  • Immediate transfer of securities
  • Elimination of risks associated with physical certificates such as bad delivery, fake securities among others
  • Reduction in paperwork involved in transfer of securities;
  • Reduction of transaction cost
  • Nomination facility
  • Change in address recorded when CDA gets registered electronically with all companies in which investor holds securities eliminating the need to correspond with each of them separately
  • Transmission of securities is done by CDA eliminating correspondence with companies
  • Convenient method of consolidation of CDA accounts
  • Holding investments in equity, debt instruments and Government securities in a single account
  • Automatic credit into securities account, of shares, arising out of split or a consolidation or a merger among others.
HOW DO I OPEN A CDS ACCOUNT?
By completing and signing a securities account opening/maintenance form with your CDA. The form is called CDS 1.
WHAT DO I NEED TO OPEN A SECURITIES ACCOUNT?
You need two recently taken passport size photographs, original National ID or passport. In the case of a company you need the original certificate of incorporation, and if you are an organization registered in any other way you need the certificate of registration. Directors of a company will also need to provide their ID Cards and passport size photographs.

You need to sign the form (CDS 1) before your Central Depository Agent (CDA)

WHAT DO I GET WHEN I OPEN AN ACCOUNT?
You will obtain from your CDA a CDS account number together with a duplicate copy of the account opening form for your records. You will also agree a secret question and answer with your CDA for purposes of identifying you. Please keep the question and answer confidential.
WHAT IS A CDA?
CDA means Central Depository Agent. It is either a Stockbroker, an Investment Bank or a Custodian Bank who has been authorized by CDSC to open accounts in CDS on behalf of investors.
WHO ARE CDAS?
All Stockbrokers are CDAs. In addition, Barclays Bank, Stanbic Bank, Kenya Commercial Bank, National Bank of Kenya, Co-operative Bank and National Industrial Credit Bank (through their custodian services departments) are CDAs.
WILL I BE RESTRICTED TO HAVING AN ACCOUNT WITH ONLY ONE CDA?
No. There are no restrictions on the number of CDAs you can open accounts with.
WILL I HAVE TO KEEP ANY MINIMUM BALANCE OF SECURITIES IN MY ACCOUNT WITH MY CDA?
No. The depository has not prescribed any minimum balance. You can have zero balance in your account.
WILL SOMEONE ELSE BE ABLE TO OPERATE MY ACCOUNT ON MY BEHALF ON THE BASIS OF A POWER OF ATTORNEY?
Yes. If you authorise any person to operate you’re account by executing a power of attorney and submitting it to your CDA. This is a matter between your CDA and yourself.
WILL I BE ABLE TO OPERATE JOINT ACCOUNTS?
Yes.
WHAT IS THE PROCESS OF DEPOSITING SHARES?
  • Visit a CDA with the certificates you want to deposit.
  • Be sure you have already opened an account or are ready to do so.
  • You will be issued with and assisted to complete a Security Deposit Form (CDS 2).
  • Sign your form with the signature used when buying the shares.
  • Return the form to the CDA together with the certificates you have included on the form to be deposited.
  • You will be given a duplicate copy of the completed and signed form, after the CDA has countersigned as evidence of your deposit.
  • The CDA will forward the form and the certificate to CDSC
  • CDSC will forward the certificates and forms to the company’s shares registrar for verification.
  • When the registrar confirms the certificates as genuine, the shares will be deposited in your account.
  • Once the shares are in your account you can trade in them.
WHAT DO I GET TO PROVE I HAVE DEPOSITED SHARES INTO MY CDS A/C?
  • You get the duplicate copy of the deposit form (CDS 2)
  • You get a monthly statement from CDSC if you have a trade that month.
  • You get a quarterly statement if you have not had a trade for three months.
  • The statements are issued directly to your address as indicated on the form.
WHAT DO I DO TO CHANGE IF I NEED TO CHANGE MY ADDRESS?
You will complete and submit Securities Account Maintenance Form (CDS 1) to your CDA with the new address or indeed any other changed details.
WHAT IF I WANT MY CERTIFICATE BACK?
You complete a withdrawal form (CDS 3). Kshs.500 is chargeable for every certificate you may wish to withdraw. However, if you wish to trade again, you will need to re-submit the certificate for immobilization.
CAN I USE MY SHARES AS COLLATERAL/SECURITY FOR A LOAN?
Yes. You and the lender will complete a Pledge Form (CDS 5) and deliver it to your CDA. The lender will forward the forms to CDSC through your CDA. CDSC thus marks the shares as pledged to the lender and confirms this to the lender and yourself. When shares are pledged you cannot sell them.
HOW LONG DOES IT TAKE TO PROCESS THE PLEDGE?
Within 24 hours of the documents reaching CDSC.
WHAT IF I HAD ALREADY PLEDGED MY SHARES TO A BANK/LENDER AND LEFT THEM MY CERTIFICATES?
You can agree with the lender to have the shares immobilized and immediately marked as pledged in the CDS.
HOW DOES THE PLEDGE GET REMOVED FROM MY ACCOUNT?
When you pay the loan, the lender completes the necessary Form (CDS6) instructing CDSC to remove the pledge.
WILL I BE ABLE TO CHANGE THE SECURITIES OFFERED IN A PLEDGE?
Yes. If the pledgee [lender] agrees, you will be able to change the securities offered in a pledge.
WILL I RECEIVE DIVIDEND ON THE PLEDGED SECURITIES?
The pledgor will continue to receive dividend on the pledged securities. The pledgee will get the benefits only if the pledge is invoked and on record date the shares are in the pledgee’s account.
WHEN DO I GET A STATEMENT FROM CDS?
If you have had activity in your account, you will receive a statement from CDS at the end of that month otherwise you will receive it on quarterly basis (every three months) if your account is not active.

You can request for an interim statement of your account any time you wish. You will be charged a fee of Kshs.50 per interim statement.

It is mandatory to fill in your address code and town on the Account Opening Form (CDS 1) in order for you to receive your statements promptly.

CAN I USE A DIFFERENT BROKER FROM THE ONE I HAVE BEEN USING ?
Yes, you can open accounts through as many stockbrokers as you want. However, when an account is opened suing one stockbroker, only that stockbroker can transact on that account
HOW CAN I MOVE FROM ONE STOCKBROKER TO ANOTHER ?
By completing and signing the Securities Transfer Form, (CDS 4(A) + CDS 4(B) supplied to you by your stockbroker. The form must be signed also by your current CDA (CDS 4A) and your new CDA (CDS 4B)
WILL IT COST ME MORE TO USE CDS ?
No. There is absolutely no increase in cost for the CDS accountholders.
DO I LOSE MY DIVIDENDS AND BONUSES?
No, you will still get your entitlements without any change. Bonus shares are credited directly into your CDS account.
HOW LONG DOES IT TAKE TO COMPLETE A TRADE IN CDS?
A maximum of 5 days. Your stockbroker can arrange for a shorter period if you want.
HOW SAFE IS CDS?
CDSC has taken measures to ensure the security of your shares. The company has offsite back up facilities and procedures that would ensure business continuity in the event of anything happening either to the computer system or its usual premises. CDSC has taken precautions to ensure its system is not interfered with.

CDSC has employed staff of high integrity and keep very high levels of confidentiality. Where appropriate and available the Company has taken insurance.

WHERE CAN I ASK ANY MORE QUESTIONS ABOUT CDSC AND CDS?
Please feel free to contact our helpdesk at 253079 ext 311 or 0723171997. Or email us at helpdesk@cdsckenya.com.
WHAT IF I HAVE ANY COMPLAINTS ABOUT CDSC’S SERVICES?
Please write to us at cdsckenya@cdsckenya.com or visit our offices at Nation Centre 10 th floor.