THE SECURITIES EXCHANGE LAW IN KENYA

Learning Objectives
By the end of this chapter the learner should be able to:
i). Discuss the functions of the Nairobi Securities Exchange
ii). Explain the benefits and demerits of listing in the NSE
iii). Analyze the benefits of having a CDS account
iv). Explain the process of depositing shares in a CDS account
v). Explain the rationale for regulating securities market
vi). Explain the grounds for the suspension and revocation of license issued toauthorized securities
dealer
vii) Discuss the procedures for the application for admission as a trading participant or authorized
securities dealer
.

INTRODUCTION

 The Stock Exchange may be defined as an organized market where stock and shares are issued,
bought and sold through the services of stockbrokers or dealers. It is, therefore, a part of the
capital market. The stock market consists of those institutions dealing in long-term funds, and
these include the Stock Exchange. The Stock Exchange deals with new issues and second-hand
shares. The second-hand market is always extraordinarily large than the new issue market. The
shares are much more liquid, and as such they are much more attractive to invest in. This is
especially so if they can correctly be predicted that they can be readily resold for cash at a later
date.
 The Stock Exchange provides the market for such a resale where second-hand shares may be
bought or sold. The company issuing the shares has to make prior arrangements for their shares to
be traded. The importance of an optimal regulatory and enforcement matrix in enhancing
securities markets cannot be overemphasized.
 Securities regulation is historically traceable to the South Sea and other companies. The company
which was incorporated in 1690 was granted monopoly to trade in South America and the pacific
Islands.

Securities markets regulatory strategies

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According to the International Organization for Securities Commissions (IOSCO), the three interrelated
andsometimes overlapping goals of securities regulation are:
 Protecting investors,
 Reducing systemic risk and
 Ensuring that markets are fair, efficient and transparent
 Regulatory approaches to securities markets have traditionally been characterized as Government
or Governmentledand Self regulation. However, a third categorization which is a configuration of
the two variously describedas ―Self regulation with Oversight or ―Cooperative regulation‖or
―Government Supervised Self regulation‖has developed. This regulatory model combines the
attributes of government and self regulation. Because of itsflexibility it is emerging as the most
appropriate regulatory model. However, the exact configuration ofregulatory responsibilities
between the market and the government varies from jurisdiction to jurisdiction.In an authentic
Government or Government-led system, the central government is responsible for all
regulatoryaspects of the securities markets. Market participants have no role to play in the
regulatory matrix. Governmentalpowers over the markets are ordinarily exercised by a
government minister or an administrative agency or both.The government maintains power to
intervene in the day-today affairs of the markets. This regulatory system iscommon in the
recently established markets where the entire securities markets infrastructure including
thesecurities exchange was established by the government. Government regulation of securities
markets whichcommentators justify on market failure is sometimes criticized as being
paternalistic.
 The standard definition describes self regulation as a regulatory regime under which an
organization or industrysector establishes its own rules and regulates itself accordingly. It is a
system of private governance carried outby the market typically through the securities exchange
which promulgates rules that govern member’s activitiesand provides mechanisms for admission
of new members, monitors and investigates compliance and disciplinesmembers for violations.
Pure or voluntary self-regulation is characterized by no direct governmental oversight
 Self regulation is premised on the reasoningthat individuals and firms strive to uphold positive
norms, practices and standards set by the industry. It isunderpinned on the need to benefit from
the superior knowledge and expertise of the industry. Scholars justifythe self- regulatory authority
of securities exchanges on the ground that they have capacity to exercise dominantmarket power
acquired through their monopoly in securities‘ dealing. Commentators agree that self
regulationhas a long tradition in the financial services. However, it is becoming exceedingly clear
that the scope of selfregulation is decreasing inversely proportional to the development of

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 securities markets. This is attributable to itsinability to respond to investor demands and market
dynamics.
 Stock exchanges are conspicuous features of market economies and have traditionally been
organized as not-forprofitorganizations established and owned by brokers who managed them as
exclusive clubs with high entrybarriers and some monopoly.Regulating the market was an
integral part of the multifarious functions stockexchanges have discharged over the years.
 The Capital Markets Authority (Authority) that The Capital Markets Act (Cap. 485A)
established is the primary regulator of the securities markets in Kenya. The expression
"securities" is defined in the CMA and includes debentures, bonds, notes, shares or commercial
paper; any right, warrant, option or future in respect of any debenture, shares, bonds, notes or in
respect of commodities; any unit, interest or share offered under a collective investment scheme.

THENAIROBI SECURITIES EXCHANGE (NSE)

 The Nairobi Securities Exchange (NSE) was constituted as Nairobi Stock Exchange in 1954 as
a voluntary association of stockbrokers in the European community registered under the Societies
Act. It is the secondary regulator of the Kenyan securities market.The NSE is the only "securities
exchange" that the authority has approved and licensed. Securities in Kenya are to be held in
dematerialised form. The Central Depository & Settlement Corporation Limited is currently the
only central depository established under the Central Depositories Act 2000 which the authority
has licensed to operate a system for the central handling of securities.

HISTORY OF ORGANISATION

 In Kenya, dealing in shares and stocks started in the 1920s when the country was still a British
colony. However, the market was not formal as there did not exist any rules and regulations to
govern stock broking activities. Trading took place on a ‗gentleman's agreement.‘ Standard
commissions were charged with clients being obligated to honour their contractual commitments
of making good delivery and settling relevant costs. At that time, stock broking was a sideline
business conducted by accountants, auctioneers, estate agents and lawyers who met to exchange
prices over a cup of coffee. Because these firms were engaged in other areas of specialisation, the
need for association did not arise.[2]
 In 1951, an estate agent named of Francis Drummond established the first professional stock
broking firm. He also approached the finance minister of Kenya, Sir Ernest Vasey, and impressed
upon him the idea of setting up a stock exchange in East Africa. The two approached London

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 Stock Exchange officials in July 1953 and the London officials accepted to recognise the setting
up of the Nairobi Stock Exchange as an overseas stock exchange.

1954–1995

 In 1954 the Nairobi Stock Exchange was then constituted as a voluntary association of
stockbrokers registered under the Societies Act. Since Africans and Asians were not permitted to
trade in securities, until after the attainment of independence in 1963, the business of dealing in
shares was confined to the resident European community. At the dawn of independence, stock
market activity slumped, due to uncertainty about the future of independent Kenya.
 1988 saw the first privatisation through the NSE, of the successful sale of a 20% government
stake in Kenya Commercial Bank. The sale left the Government of Kenya and affiliated
institutions retaining 80% ownership of the bank.
 Notably, on 18 February 1994 the NSE 20-Share Index recorded an all-record high of 5030
points. The NSE was rated by the International Finance Corporation (IFC) as the best performing
market in the world with a return of 179% in dollar terms. The NSE also moved to more spacious
premises at the Nation Centre in July 1994, setting up a computerised delivery and settlement
system (DASS). For the first time since the formation of the Nairobi Stock Exchange, the number
of stockbrokers increased with the licensing of eight new brokers.

1996–2005

 In 1996, the largest share issue in the history of NSE, the privatisation of Kenya Airways, came to
the market. Having sold a 26% stake to KLM, the Government of Kenya proceeded to offer
235,423,896 shares (51% of the fully paid and issued shares of Kshs. 5.00 each) to the public at
Kshs. 11.25 per share. More than 110,000 shareholders acquired a stake in the airline and the
Government of Kenya reduced its stake from 74% to 23%. The Kenya Airways Privatization
team was awarded the World Bank Award for Excellence for 1996 for being a model success
story in the divestiture of state-owned enterprises. In 1998 the government expands the scope for
foreign investment by introducing incentives for capital markets growth including the setting up
of tax‐free Venture Capital Funds, removal of Capital Gains Tax on insurance companies'
investments, allowance of beneficial ownership by foreigners in local stockbrokers and fund
managers and the envisaged licensing of Dealing Firms to improve market liquidity.
 With effect from January I, 1999, Kenya adopted the International Accounting Standards (IAS) as
the local accounting standards.

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 In August 2000, NSE implements a new trading cycle, (T+5). The Central Depository System
(CDS) Act and the amended CMA Act (which covers Collective Investment Schemes (CIS)) are
passed by Parliament and receive presidential assent, paving the way for the full implementation
of the CDS and for the introduction of collective investment schemes in the Kenyan market.
 Following the signing of a partnership agreement with the Association of National Numbering
Agencies (ANNA) in September 2000, the NSE was appointed as the National Numbering
Agency (NNA) for Kenya. The NNA is responsible for issuing the ISIN for financial securities
issued under Kenyan jurisdiction in accordance with the ISO 6166 guidelines issued by ANNA.
 In October 2000 NSE becomes a member of the Association of National Numbering Agencies
(ANNA), the global securities numbering agency.
 In April 2002 CMA announced the approval of the new NSE trading and settlement rules. The
amount for block trades was revised upwards from Kshs. 3.0 million to between Kshs. 50.0 –
200.0 million. The block trade rules now apply to trade values of above Kshs. 50.0 million but
less than Kshs. 200.0 million. Lastly, the brokerage commissions‘ regime was liberalised.
 July 2002 saw the foreign investor regulations amended, providing for a 25% minimum reserve
of the issued share capital for Kenyan citizens, while the balance of the 75% becomes a free float
for all classes of investors. Within this 75% share holding available to all classes of investors,
there is no restriction on the amount to be held by a single foreign investor.
 The signing of the shareholders‘ agreement for the Central Depository and Settlement
Corporation (CDSC) was done in August 2002. The shareholders consisted of the Nairobi Stock
Exchange (20%), the Association of Kenya Stockbrokers (18%), the CMA Investor
Compensation Fund (7%), and 9 institutional investors through the Capital Markets Challenge
Fund (50%) who collectively invested in the Central Depository and Settlement Corporation
(CDSC). The CDSC being the legal entity that owns and runs the clearing, settlement, depository
and registry system for securities traded in Kenya's capital markets.
 As of November 2002, the NSE became the sole NNA in Kenya, responsible for allocating the
unique code for quoted and unquoted securities domiciled in Kenya.
 In March 2003 the CDSC in collaboration with the NSE commenced the CDS Education
Campaign in preparation for the market automation. The first CDS Education Workshop, with the
theme ―The CDS Legal & Regulatory Framework‖ kicked off.
 For the year ending 31 December 2003, the exchange recorded an equity turnover exceeding
Kshs. 15.25 billion, more than the combined equity turnover recorded in the previous five years.
 The NSE celebrated its Golden Jubilee in 2004, and also had the privilege of hosting the 8th
ASEA conference. In this celebration, the first NSE magazine dubbed "The Exchange" and, The

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 Central Depository & Settlement Corporation (CDSC), which manages Central Depository
Systems, were both launched.
 For the year ending 31 December 2004, the exchange recorded an equity turnover exceeding
Kshs. 22.32 billion; an increase of 46.37% over the corresponding period for 2003.
 For the year ending 31 December 2005, the exchange recorded an equity turnover exceeding
Kshs. 36.52 billion (a 63.61% increase over the previous year's performance of Kshs. 22.32
billion),

2006–2008

 In May 2006, NSE formed a demutualisation committee to spearhead the process of

demutualisation. A demutualisation consultant (Ernst and Young) was appointed to advice on the
process.
 In September 2006 live trading on the automated trading systems of the Nairobi Stock Exchange
was implemented. The ATS was sourced from Millennium Information Technologies (MIT) of
Colombo, Sri Lanka, who are also the suppliers of the Central Depository System (CDS). MIT
have also supplied similar solutions to the Colombo Stock Exchange and the Stock Exchange of
Mauritius. The NSE ATS solution was customised to uphold the spirit of the Open Outcry
Trading Rules in an automated environment.
 In the same breadth, trading hours increased from two (10:00 am – 12:00 pm) to three
(10:00 am – 1:00 pm). Other innovations included the removal of the block trades board and
introduction of the functionality for the trading of rights in the same manner as equities. Besides
trading equities, the ATS is also fully capable of trading immobilised corporate bonds and
treasury bonds.
 An MoU between the Nairobi Stock Exchange and Uganda Securities Exchange was signed in
November 2006 on mass cross listing. The MoU allowed listed companies in both exchanges to
dualist. This will facilitate growth and development of the regional securities markets.
 In February 2007 NSE upgraded its website to enhance easy and faster access of accurate, factual
and timely trading information. The upgraded website is used to boost data vending business.
 In July 2007 NSE reviewed the Index and announced the companies that would constitute the
NSE Share Index. The review of the NSE 20‐share index was aimed at ensuring it is a true
barometer of the market. A wide area network (WAN) platform was implemented in 2007; this
eradicated the need for brokers to send their staff (dealers) to the trading floor to conduct

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 business. Trading is now mainly conducted from the brokers' offices through the WAN.
However, brokers under certain circumstances can still conduct trading from the floor of the NSE.
 In 2008, the NSE All Share Index (NASI) was introduced as an alternative index. Its measure is
an overall indicator of market performance. The Index incorporates all the traded shares of the
day. Its attention is therefore on the overall market capitalisation rather than the price movements
of select counters. In April 2008, NSE launched the NSE Smart Youth Investment Challenge to
promote stock market investments among Kenyan youth.
 The objective of the challenge is threefold:

 To occupy the minds of the youth positively and draw them away from the negative
energy created by the current political, economic and social situation in the country;
 Encourage the culture of thrift and saving funds amongst the university students;
 Encourage the youth to invest their savings in the capital markets.

 After the resignation of Chris Mwebesa, the NSE Board appointed Peter Mwangi to be the new
NSE chief executive in November 2008.
 The Complaints Handling Unit (CHU) was launched in August 2009 to bridge the confidence gap
with NSE retail investors. CHU provides a hassle-free and convenient way to have any concerns
processed and resolved. Investors — local and in the diaspora — can forward their issues via
e‐mail, telephone, fax, or SMS and have the ability to track progress on‐line.

2009–2013

 The Nairobi Stock Exchange marked the first day of automated trading in government bonds
through the Automated Trading System (ATS) in November 2009. The automated trading in
government bonds marked a significant step in the efforts by the NSE and CBK towards creating
depth in the capital markets by providing the necessary liquidity.
 In December 2009, NSE marked a milestone by uploading all government bonds on the ATS.
Also in 2009, NSE launched the Complaints Handling Unit (CHU) SMS System to make it easier
for investors and the general public to forward any queries or complaints to NSE
 In July 2011, the Nairobi Stock Exchange Limited, changed its name to the Nairobi Securities
Exchange Limited. The change of name reflected the strategic plan of the Nairobi Securities
Exchange to evolve into a full service securities exchange which supports trading, clearing and
settlement of equities, debt, derivatives and other associated instruments. In the same year, the
equity settlement cycle moved from the previous T+4 settlement cycle to the T+3 settlement

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 cycle. This allowed investors who sell their shares, to get their money three (3) days after the sale
of their shares. The buyers of these shares, will have their CDS accounts credited with the shares,
in the same time.
 In September 2011 the Nairobi Securities Exchange converted from a company limited by
guarantee to a company limited by shares and adopted a new Memorandum and Articles of
Association reflecting the change. In October 2011, the Broker Back Office commenced
operations. The system has the capability to facilitate internet trading which improved the
integrity of the Exchange trading systems and facilitates greater access to the securities market.
 In November 2011 the FTSE NSE Kenya 15 and FTSE NSE Kenya 25 Indices were launched.
The launch of the indices was the result of an extensive market consultation process with local
asset owners and fund managers and reflects the growing interest in new domestic investment and
diversification opportunities in the East African region.
 As of March 2012, the Nairobi Securities Exchange became a member of the Financial
Information Services Division (FISD) of the Software and Information Industry Association
(SIIA).
 In March 2012 the delayed index values of the FTSE NSE Kenya 15 Index and the FTSE NSE
Kenya 25 Index were made available on the NSE website www.nse.co.ke. The new initiative
gives investors the opportunity to access current information and provides a reliable indication of
the Kenyan equity market‘s performance during trading hours.
 In May 2013, the Nairobi Securities Exchange moved to the Exchange, 55 Westlands Road,
Westlands, Nairobi.

From 2014

 On June 27, 2014, The Capital Markets Authority proved the listing of the NSE stock through an
IPO and subsequently self-list its shares on the Main Investment Market Segment. The IPO was
set to open on July 24, 2014 and would run up to August 12, 2014. The listing will make the NSE
join the of the Johannesburg Stock Exchange in being the only exchanges in Africa that are self-
listed.
 The NSE IPO was oversubscribed by 763.92% making it the most oversubscribed share offer in
the NSE‘s 60 year history. The NSE shares started trading on the Main Investment Market
Segment of the exchange on September 9, 2014

FUNCTIONS OF THE NAIROBI SECURITIES EXCHANGE

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  It enables mobilization of savings for investment in productive enterprises as an alternative in
putting savings in bank deposits, real-estate investment or outright consumption.
 It gives room to the growth of related financial services sector e.g. insurance pension schemes,
which nurture the spirit of savings.
 It makes it easy to check against the flight of capital that occurs due to local inflation and
currency depreciation.
 It permits the owners of capital to ―divorce‖ from managing their capital. This is a very crucial
process because the owners of capital may not necessarily have the expertise to manage the
capital investment efficiently.
 It encourages high standards of accounting and management of resources. It also allows public
disclosure that gives effective efficiency in the capital growth process.
 It facilitates equity financing. Equity financing is preferred to debt financing. Most countries,
both developed and undeveloped, have been trying to do away with debt financing - especially
during recessions.
 It enhances improved access to finance both to new and small companies, which might otherwise
find it hard to access finance.
 It enables futuristic funding in most of the developing countries, where venture capital in mostly
unavailable.
 It encourages public flotation of private companies, which in turn allows greater growth. This is
an asset that is available for long term investments.
 Easy marketability of securities facilitates the flow of new capital into the industry.
 Saving in order to invest is encouraged.
 The title to any quoted security is transferable speedily and cheaply.
 International dealings in securities may be affected.
 Investors are protected by reason of the rules and discipline of the exchange.
 Companies seeking capital are advised and guided at all stages leading up to the issue of
prospectus. The trend of business on the exchange provides an important barometer for the
business throughout the community.

IMPORTANCE OF THE NSE IN 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:

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  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.

Powers of the NSE

The NSE has promulgated rules and regulations which are binding on all its members, known as The
Nairobi Stock Exchange Limited, Rules and Regulations of March 21, 1997.
 The NSE rules and regulations empower the NSE to order an investigation into the affairs of any
broker, dealer, authorised representative and executive director who are suspected of having
violated any of the provisions of the articles of association of the NSE or the NSE rules and
regulations.
 maintain or restore the fair, efficient and transparent trading in securities or any class of securities
or exchange-traded derivative contracts or any class of exchange-traded derivative contracts; or
 Liquidate any position in respect of any securities or any class of securities or exchange-traded
derivative contracts or any class of exchange-traded derivative contracts.
 suspending trading on a securities market or derivatives market or trading of a specific security;

Benefits of Listing
Listing provides an exclusive privilege to securities in the stock exchange. Only listed shares are quoted
on the stock exchange. Stock exchange facilitates transparency in transactions of listed securities in

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perfect equality and competitive conditions. Listing is beneficial to the company, to the investor, and to
the public at large.

The important advantages of listing are listed below

 Fund Raising and exit route to investors

Listing provides an opportunity to the corporates / entrepreneurs to raise capital to fund new
projects/undertake expansions/diversifications and for acquisitions. Listing also provides an exit
route to private equity investors as well as liquidity to the ESOP-holding employees.
 Ready Marketability of Security
Listing brings in liquidity and ready marketability of securities on a continuous basis adding
prestige and importance to listed companies.
 Ability to raise further capital
An initial listing increases a company's ability to raise further capital through various routes like
preferential issue, rights issue, Qualified Institutional Placements and ADRs/GDRs/FCCBs, and
in the process attract a wide and varied body of institutional and professional investors.
 Supervision and Control of Trading in Securities
The transactions in listed securities are required to be carried uniformly as per the rules and bye-
laws of the exchange. All transactions in se¬curities are monitored by the regulatory mechanisms
of the stock exchange, preventing unfair trade practices. It improves the confidence of small
investors and protects them.
 Fair Price for the Securities
The prices are publicly arrived at on the basis of demand and supply; the stock exchange
quotations are generally reflective of the real value of the security. Thus listing helps generate an
independent valuation of the company by the market.
 Timely Disclosure of Corporate Information
The listing agreement signed with the exchange provides for timely dis¬closure of information
relating to dividend, bonus and right issues, book clo¬sure, facilities for transfer, company related
information etc by the company. Thus providing more transparency and building investor
confidence.
 Collateral Value of Securities
Listed securities are acceptable to lenders as collateral for credit facilities. A listed company can
also borrow from financial institutions easily as it is rated favorably by lenders of capital; the

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 company can also raise additional funds from the public through the new issue market with a
greater degree of assurance.
 Better Corporate Practice
Since the violation of the listing agreement entails the de-listing/suspension of securities from the
rings of the exchange, the listed companies are ex¬pected to follow fair practices to the advantage
of investors and public.
 Benefits to the Public
The data daily culled out by the stock exchange in the form of price quotations and others;
provide valuable information to the public which can be used for project and research studies.
The stock exchange prices can be an index of the state of the economy. Financial institutions,
NRl, individual investor‘s etc. can take wise decisions before making investments.
 Subdivision and Consolidation of Holdings
Stock exchange bye-laws provide for explicit rules for sub division and consolidation of
securities as desired by the investors. There is special trading sessions in the exchange for
conversion of odd lots into market lots arranged by financial and institutional investors. Thus
listing helps to provide flexibility to investors in the subdivision and consolidation of their
holdings with speed and earnestness.

The Disadvantages of Listing

The benefits of listing come at a cost. If listing were free and easy you could trade shares in your local
milk bar. In many cases the directors of a privately held business will decide against floating the company
to avoid the extra responsibilities and expense. Here's a summary of the disadvantages:

 Control - An IPO automatically implies a change in the structure of ownership. A private

business owner may have complete control over a business but as soon as it becomes a public
company, other organisations and individuals have the right to express an interest and in some
cases, to direct decision making. For business people more used to giving rather than taking
orders, it can be a galling prospect.
 Director's responsibilities - Holding office in a publicly listed company carries duties and
responsibilities, and transgressions can result in severe penalties, including a stint in the 'big
house'. However, mandatory sentencing certainly hasn't reached the world of white-collar crime
just yet. Nevertheless, the regulations are designed to ensure company directors understand and
act in the interests appropriate to the company's ownership structure and its shareholders.

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  Disclosure - A public company has an obligation to inform the public, through the authorities, of
what's going on although this doesn't always work as well in practice as it does in theory. Any
developments that may affect the share price must be disclosed. While this means the market is
kept informed, it can be a pain in the posterior for a company. For a small, under-resourced
business it can be an unhealthy distraction from day-to-day management. And being a listed
company means it's more difficult to hide information from competitors.
 Cost - Listing a company isn't cheap either. There's the extra cost of disclosure, the annual and
other reports to shareholders, not to mention the costs involved with listing. These additional
expenses need to be carefully considered when analysing a prospectus as they can consume a
substantial portion of the amount being raised.
 Market fluctuations - your business may become vulnerable to market fluctuations beyond your
control - including market sentiment, economic conditions or developments in your sector.
 Cost - the costs of flotation can be substantial and there are also ongoing costs of being a public
company, such as higher professional fees.
 Responsibilities to shareholders - in return for their capital, you will have to consider
shareholders' interests when running the company - which may differ from your own objectives.
 The need for transparancy - public companies must comply with a wide range of additional
regulatory requirements and meet accepted standards of corporate governance including
transparancy, and needing to make announcements about new developments.
 Demands on the management team - managers could be distracted from running the business
during the flotation process and through needing to deal with investors afterwards.
 Investor relations - to maximise the benefits of being a public company and attract further
investor interest in shares, you will need to keep investors informed.
 Employees may become demotivated - if shares are only offered to selected employees, there
could be resentment. Shareholding employees could feel that there is little left to work for if they
are sitting on valuable shares

THE LEGAL FRAMEWORK OF THE SECURITIES EXCHANGE in KENYA

The Nairobi Securities Exchange is licensed and regulated by the Capital Markets Authority. It has the
mandate of providing a trading platform for listed securities and overseeing its Member Firms.

Regulations and Rules

 NSE Trading Participants Business Conduct and Enforcement Rules 2014

 NSE Trading Participant Rules 2014

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  NSE Listing Manual CMA Final Approved June 27 2013 
 NSE Fixed Income Securities Trading Rules CMA FINAL APPROVED JUNE 27 2013 
 NSE Equity Securities Trading Rules CMA FINAL APPROVED JUNE 27 2013 
 Capital_Markets_Securities_Public_Offers__Listing_Amendment_Regulations_2012 
 The Nairobi Securities Exchange (Nominated Advisors) Rules 2012 

The Licensing Process

 Under the Capital Markets Act (Cap. 485A), anyone wishes to carry out capital market activities
(unless a registered person) is required to be appropriately licensed. The Capital Markets
Authority is the sole licensing authority that approves licences for capital market intermediaries
to be engaged in the regulated activities.Under the CMA single licensing regime, capital market
intermediaries that are fit and proper is issued with only one licence that will enable them to carry
on one or more regulated activities.The CMA is entrusted with the responsibility of ensuring an
efficient and transparent licensing process and that the licensed intermediaries and its
representatives are competent and professional in providing their services the investors. the
CMA‘s Authorisation & Licensing Department undertakes the assessment of licence applications
under its purview within the time frame stipulated in accordance with its ISO performance
standards
Application for securities exchange approval
An application for securities exchange or derivatives exchange approval shall be made to the Authority in
the form and manner prescribed by the Authority and shall be accompanied by the prescribed fee.
The Authority may by notice in writing, approve a person as a securities exchange or derivatives
exchange if it is satisfied –
a. the applicant is a limited liability company whose liability is limited by shares, or as may
be prescribed by the Authority;
b. that the applicant‘s board of directors is constituted in a manner prescribed by the
Authority;
c. the applicant has made and adopted rules in compliance with the Act and any Regulations
made thereunder.

Qualifications for Admission as a Trading Participant or Authorized Securities Dealer

An applicant seeking to be admitted as a Trading Participant or an Authorized Securities Dealer of the
Exchange shall:
i) be a body corporate; and

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 ii) be licensed by the Authority as a stockbroker, dealer, investment bank, authorized securities
dealer or other license category as may be prescribed by the Authority from time to time as being
eligible to be a Trading Participant or an Authorized Securities Dealer;
iii) pay the Market Access Fee as prescribed by the Board and approved by the Authority; and
iv) Attain such certifications as maybe prescribed by the Board or the Authority.

Application for Admission as a Trading Participant or Authorized Securities Dealer

1. A trading participant or an Authorized Securities Dealer shall make an application for admission to the
Exchange for consideration by the Board.
2. An applicant for admission as a Trading Participant or an Authorized Securities Dealer shall submit the
following information to the Exchange:
i) Details of its operating systems in place to conduct its business; and
ii) The business systems and procedures in place to properly conduct its business; and
iii) The amount, composition and breakdown of beneficial ownership of the applicant‘s capital and
its most recent annual financial statements, where applicable; and
iv) A statement that it does not own, directly or indirectly, or in concert with any Associate, any
shares in any other Trading Participant of the Exchange and whose shares are not owned, directly
or indirectly, or in concert with any Associate, by any other Trading Participant of the Exchange;
and
v) The composition of its board of directors and Key Personnel; and
vi) A statement that it does not have as any of its directors or officers a person who was a director or
officer of a Trading Participant whose rights as a Trading Participant has been revoked or
currently suspended by the Exchange; and
vii) That it has made, or is in the process of making, satisfactory arrangements to comply with the
requirements of CDSC; and
viii) That it has subscribed to or is in the process of subscribing to such Professional
Indemnity Cover or such other insurance policy as may be required by the Exchange; and
ix) A statement disclosing its multiple licenses if any and the procedures in place to mitigate possible
conflicts of interest arising from such; and
x) Copies of its risk manuals, procedures and code of ethics
3 An applicant shall also submit to the Exchange:
A duly completed application form in the form set out in Appendix A of these Rules;
i) The Application Fee as provided in Appendix B of these Rules;
ii) A certified copy of its Certificate of Incorporation;

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 iii) A certified copy of its Memorandum and Articles of Association;
iv) A certified copy of the License issued to it by the Authority; and
v) Such other document or information as may be reasonably required by the Exchange.
4. The applicant shall pay the Market Access Fee within thirty (30) days from the date of approval of its
application by the Exchange.
5 As from the date of payment of the Market Access Fee, the applicant shall be duly admitted as a
Trading Participant and entitled to all the benefits accorded to Trading Participants.
6. Should the applicant fail to make payment of the Market Access Fee within the thirty (30) day period
referred to in above, the applicant‘s application shall automatically lapse, unless the Board in its absolute
discretion extends such period.
7. Every Trading Participant or Authorized Securities Dealer shall register with the Exchange the name
under which it is licensed as a Trading Participant or Authorized Securities Dealer by the Authority.
8. A Trading Participant or Authorized Securities Dealer shall register with the Exchange no more than
one principal business address held for the purpose of dealing in securities. A Trading Participant or
Authorized Securities Dealer may however register branch offices. All offices shall be notified to the
Exchange.
9. A Trading Participant or Authorized Securities Dealer shall give at least (30) days advance notice of
commencement or re-commencement of business to the Exchange

Suspension and Revocation of License

The Authority may suspend or revoke a license, for such period or until the occurrence of such event as
the Authority may specify if a licensed person -
a. goes into liquidation or an order is issued for the winding up of the licensed person;

b. carries out any activity outside the scope of the licensed or approved activities;

c. has a receiver or a manager appointed on all or a substantial part of the property of the
company;

d. ceases to carry on the licensed business for a period of more than thirty days unless it has
obtained the approval of the Authority to do so;

e. any of its directors or key employees has not, in the opinion of the Authority, performed
their duties honestly and fairly;

f. has contravened or failed to comply with any condition applicable in respect of the
license;

g. fails to comply with a direction of the Authority;

h. fails to provide the Authority with such information as it may require;

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 i. provides false or misleading information;

j. for any other reason, is no longer fit and proper person to hold a license; or

k. is in breach of any other provision under this Act.

CENTRAL DEPOSITORY AND SETTLEMENT CORPORATION (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. The CDSC operates the Central Depository System (CDS) which is a computer system that
facilitates holdings of shares in electronic accounts, opened by shareholders and manages the process of
transferring shares traded at the Securities Exchange.

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 the companies in
which investor holds securities
 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.

Requirements of Having a CDS Account

 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.
 A signed form (CDS 1) before your Central Depository Agent (CDA)

Process of Depositing Shares

1) Visit a CDA with the certificates you want to deposit.

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2) Be sure you have already opened an account or are ready to do so.
3) You will be issued with and assisted to complete a Security Deposit Form (CDS 2).
4) Sign your form with the signature used when buying the shares.
5) Return the form to the CDA together with the certificates you have included on the form to be
deposited.
6) You will be given a duplicate copy of the completed and signed form, after the CDA has
countersigned as evidence of your deposit.
7) The CDA will forward the form and the certificate to the company's share registrar for
verification
8) When the registrar confirms the certificates as genuine, they will forward the verified forms to
CDSC and the shares will be deposited in your account.
9) Once the shares are in your account you can trade in them.

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