IMPACT OF CAPITAL MARKETS S Capital Markets Authority
OUTLINE Introduction Why Incentives Experience in other Jurisdictions Breakdown of the incentives in Kenya Impact Summary Conclusion
INTRODUCTION Several policy incentives have been granted by the Government of Kenya towards accelerating the development of capital markets in Kenya during the last 14 years. Most of the incentives that have been used thus far have been predominantly tax-based implying that the Government has been willing to pay the opportunity cost of using its tax revenues for other projects, in favour of the development of this sub-sector. Development of Policy proposals is a consultative process between the Authority & stakeholders As more policy incentives get sought in the coming years, there is need for justification of the essence of these incentives in terms of their impact on the growth and development of capital markets in Kenya.
WHY S? - I A study undertaken by the Central Bank of Kenya (CBK) in collaboration with the International Finance Corporation (IFC) in 1984 observed that there had been very few public issues of equity and debt securities since the stock market was started. Identified obstacles to issues of equity and debt included tax, which was seen as a major disincentive for companies to make public issues of equity and debt securities as it also reduced the attractiveness of such securities to investors. On the demand side, the capital gains tax and the double taxation of dividends were seen as disincentives to investing in securities.
WHY S? - II On the supply side, the main tax disincentives were: the capital gains tax, the non-tax deductibility of expenses incurred in public offerings, double taxation of income earned in the form of dividends, and the high effective company profit after tax rate caused by the limited deductions available on capital investments and loss making affiliates. As a result, the study recommended a review of tax laws and if desirable an offer of special tax incentives for issuers and investors in long-term securities. Sessional Paper No. 1 of 1986 on Economic Management for Renewed Growth appreciated the importance of capital markets in achieving meaningful economic growth and development in Kenya as a facilitator of long-term savings necessary for financing long-term investment.
WHY S? - III The paper recommended tax reforms relating to interest payments, corporate profits and dividends. These measures were envisaged to re-activate capital markets, particularly the primary market. A study undertaken by the World Bank (WB) in 2002 on the creation of an enabling environment within which the private sector could flourish emphasized among other things, the need to reduce the tediousness and cost of making public offers which was a disincentive to listing. Also, the study observed that, although most of the listing costs were tax deductible, many firms were not willing or able to make the financial commitments upfront. Further, the high costs were partly attributed to a large number of market agents in the IPO process with some having overlapping functions.
WHY S? - V The study recommended that as the market develops further, there would be need for development of new financial products such as asset backed securities. A Deloitte & Touché study on the Fiscal and Monetary Policy Environment for the East African capital markets recognized that tax incentives need to be used together with other measures in order to attract companies to list on the stock exchange. An Institute of Policy Analysis and Research study on the Capital Market policies in Kenya recognized that tax incentives need to be used together with other measures in order to attract companies to list on the stock exchange.
WHY S? - VI An in-house study conducted by the CMA Research and Market Development Department in July 2006 recommended among other things, the creation of an enabling environment for Collective Investment schemes among other investment plans to thrive through the use of appropriate fiscal incentives. All the above studies supported the establishment of a targeted incentive system aimed at facilitating the development of deep and robust capital markets in Kenya.
EXPERIENCE IN OTHER JURISDICTIONS -I Country Policy Incentive INDIA Stamp Duty regime by the government of Maharashtra to take the form of one time levy or consolidated fee payable by National Securities Depository Ltd. (NSDL). Encouraging the corporatization and merging of brokers and merchant bankers through tax incentives. Pakistan (2008/2009) Total withdrawal of Capital Value Tax (charged on purchase and sale of shares) on investors and stock brokers against their commission income; Capital Gains Tax to be exempted for another year and imposed during the subsequent years as follows: - At rate of 10% for less than one year s holding; - At a rate of 5% for more than one year holding;
EXPERIENCE IN OTHER JURISDICTIONS -II Country Policy Incentive Pakistan (2008/2009) (Continued) Provide incentives to companies seeking enlistment at stock exchanges by allowing a reduced income tax at 30% to promote investment in Pakistan and encourage corporatization. The difference between listed companies and other companies be maintained on permanent basis; Any income from the sale of shares of a public limited company in connection with corporatization or demutualization of the Islamabad Stock Exchange to financial institutions and general public by the shareholders on divestment of their holding in connection with corporatization and demutualization, should be exempt from Stamp Duty and Capital Gains tax.
EXPERIENCE IN OTHER JURISDICTIONS -III Country Policy Incentive Malaysia Establishment of the Malaysian Venture Capital Management Berhad (MAVCAP) and Kumpulan Modal Perdana Sdn. Bhd. To disburse government funds as well as undertake joint venture investments with private sector venture capitalists. In Budget 2005, the Government announced that foreign participants will be allowed to own 100% equity in venture capital and venture capital management corporations.
EXPERIENCE IN OTHER JURISDICTIONS -IV Country Policy Incentive Malaysia (Continued) Under Budget 2004, ABS was given equal tax treatment as other conventional securities. Expenses incurred in the issuance of ABS were granted tax deduction for 5 years. 100% foreign ownership for futures broking firms allowed under the 2005 Budget. Futures broking commission rates were made fully negotiable following the relevant amendments to MDEX Business Rules, effective from 28 December 2001. Islamic products-tax deductions given for expenses incurred in issuance of Ijarah, Mudarabah & Musyarakah (Budget 2003) and Istisna`(Budget 2004).
BREAKDOWN OF S IN KENYA - I 1 Incentives to encourage Issuance and Listing of securities A. Preferential corporate tax treatment. For any Newly listed Co. and approved under 2000/ the Capital Markets Act with at least 20% of its 2001 issued share capital listed, the tax shall be 27% for 3 years commencing immediately after the year of income following the date of such listing. (Third Schedule of the Income Tax Act, Cap 470 Head B 2(bb), Finance Act 2001)
BREAKDOWN OF S IN KENYA - II A. Preferential corporate tax treatment. A Company that applies and is 2000/ listed shall get a tax amnesty on its 2001 past omitted income, provided it makes a full disclosure of its assets and liabilities and undertakes to pay all its future due taxes.
BREAKDOWN OF S IN KENYA -III A. Preferential corporate tax treatment. (Continued) In the case of a newly listed company on any 2001/ securities exchange approved under the Capital 2002 Markets Act with at least 30% of its issued share capital listed, the tax rate shall be 25% for the period of five years commencing immediately after the year of income following the date of such listing (Third Schedule of the Income Tax Act, Cap 470 Head B 2(d), Finance Act 2002)
BREAKDOWN OF S IN KENYA -IV A. Preferential For a newly listed company which has at corporate tax least 40% of its issued share capital listed, the tax rate will be 20% for five years treatment. commencing immediately after the year of (Continued) income following the date of such listing. (Third Schedule of the Income Tax Act, Cap. 470,Head B 2(e) Finance Act 2005) 2004/ 2005
BREAKDOWN OF S IN KENYA -V B. Reduction of Issuance and Listing Costs C. Tax Deductibility on Issuance and Listing Costs Law Amended to reduce the listing fees by 50% i.e. from 0.3% to 0.15% for offers of equity. Exemption of stamp duty and value added tax on the transfer of listed securities. Reduction of withholding tax applicable to dividend income arising from investment on listed securities for both local and foreign investors. Foreign 15% to 10%; local 5% (Third Schedule of the Income Tax Act, Head B 5(e) Finance Act 1995) 2009/ 2010 1995/ 1996
BREAKDOWN OF S IN KENYA -VI C. Tax Deductibility on Issuance and Listing Costs (Continued) Expenditure of a capital nature incurred 1995/ in that year of income by a person on 1996 legal costs and other incidental expenses relating to the authorization and issue of shares, debentures or similar securities offered for purchase by the general public were all made tax deductible expenses;. ( Income Tax, Act Cap 470, Part IV, Section15 (2)(s))
BREAKDOWN OF S IN KENYA -VII C. Tax Deductibility on Issuance and Listing Costs (Continued) Expenditure of a capital nature incurred in 2005/ that year of income by a person, on legal 2006 costs and other incidental expenses, for the purposes of listing on any securities exchange operating in Kenya, without raising additional capital is tax deductible. (Income Tax, Act Cap 470 Part IV, Section 15 (2)(ss) (Finance Act 2006).
BREAKDOWN OF S IN KENYA -VIII D. Tax Exemption Investments by Insurance companies on 1996/ for Insurance listed securities exempted from tax arising 1997 Companies and out of capital gains on sale of shares. E. Tax deductibility for credit rating companies. Cost of rating made tax deductible in order to encourage credit rating (Income Tax, Act Cap 470, Part IV, Section 15 (2)(u) Finance Act 1997)
BREAKDOWN OF S IN KENYA -IX F. Stamp duty and Value Added Tax (VAT) exemption on share capital. G. Amnesty on past omitted Income Exemption of stamp duty and value added tax on the transfer of listed securities. 1995/ 1996 Companies that apply and are listed 2000/ shall get a tax amnesty on their past 2001 omitted income, provided they make a full disclosure undertake to pay all their future due taxes.
BREAKDOWN OF S IN KENYA -X 2 Incentives to encourage Investors A. Reduction Reduction of withholding tax applicable to of withholding dividend income arising from investment on tax listed securities for both local and foreign investors. Foreign 15% to 10%; local 5% (Third Schedule of the Income Tax Act, Head B 5(e) Finance Act 1995) Withholding tax rate on interest income arising out of fixed income securities such as bonds as well as bank deposits reduced to 15% and made a final tax. Investors at the NSE has increased from 150,000 in 1995 to 600,000 in 2006 to over 1.2 million in 2009 1995/ 1996 1996/ 1997
BREAKDOWN OF S IN KENYA -XII B. Increased Threshold of foreign shareholding of investment limits domestic companies increased from for foreign 60% to 75%. investors 2009/ 2010
BREAKDOWN OF S IN KENYA -XIII C. Mandatory investment of pension funds on debt instruments State-related companies dealing with 2009/ pension funds required to invest 90% of 2010 their funds in government bonds. The 4 infrastructure bonds issued so far oversubscribed. D. Tax exemption on Investment income of a pooled fund or 2005/ investment income other kind of investment consisting of 2006 from Collective retirement schemes registered by the Investment Schemes. Commissioner is tax exempt; (First Schedule of the Income Tax Act Cap 470, Section 13&14, Part I (50) Finance Act 2006)
BREAKDOWN OF S IN KENYA -XIV 3 / Incentives to facilitate the introduction of new products A. Tax exemption New and expanded share capital by for infrastructure listed companies or those seeking securities (Asset listing exempt from stamp duty Backed Securities Transfers of assets involved in the and Infrastructure issuance of asset-backed securities Bonds). will to be exempt from stamp duty (2000/2001). 2000/ 2001 2000/ 2001
BREAKDOWN OF S IN KENYA -XV A. Tax exemption for infrastructure securities (Asset Backed Securities and Infrastructure Bonds). (Continued) Interest income accruing from all 2006/ listed bonds used to raise funds for 2007 infrastructure and social services, exempt from income tax, provided that the bonds shall have a maturity of at least three years. Interest income earned by investors who buy listed bonds as assetbacked securities for purposes of developing infrastructure exempted from income tax
BREAKDOWN OF S IN KENYA -XVI A. Tax exemption for Exemption from the Stamp Duty Act (Cap 480) for any instrument that is infrastructure securities (ABSs and certified to be in connection with the Infrastructure Bonds). issue of asset-backed securities through a scheme approved by the (Continued) Capital Markets Authority B. Tax exemption for Instruments used in the transfer of Real Estate property to listed property investment Investment Trusts vehicles exempt from stamp duty in (REITS). order to encourage land consolidation and discourage non-productive land use 2007/ 2008 2008/ 2009
BREAKDOWN OF S IN KENYA XVII C. Tax exemption for Venture Capital Companies (VCC) Gain arising from trade in shares of a venture 1996/ company earned by a registered venture 1997 capital company, within the first ten years from the date of first investment in that venture company by the venture capital company, is tax exempt: provided that the venture company, has not been listed in any securities Exchange operating in Kenya for a period of more than two years. (First Schedule of the Income Tax Act Cap 470, Section 13&14, Part I (47))
BREAKDOWN OF S IN KENYA XVIII D. Tax exemption on investment income from Collective Investment Schemes. Investment income of a pooled fund or other 2005/ kind of investment consisting of retirement 2006 schemes, provided that it is registered by the Commissioner is tax exempt. (First Schedule of the Income Tax Act Cap 470, Section 13&14, Part I (50) Finance Act 2006)
BREAKDOWN OF S IN KENYA -IXX 3 Incentives to facilitate the introduction of new products New and expanded share capital by A. Tax exemption for 2000/ listed companies or those seeking infrastructure 2001 listing exempt from stamp duty securities (Asset Backed Securities and Transfers of assets involved in the Infrastructure Bonds). issuance of asset-backed securities will to be exempt from stamp duty (2000/2001).
BREAKDOWN OF S IN KENYA -XXI A. Tax exemption for infrastructure securities (Asset Backed Securities and Infrastructure Bonds). (Continued) Interest income accruing from all listed 2006/ bonds used to raise funds for 2007 infrastructure and social services, exempt from income tax, provided that the bonds shall have a maturity of at least three years. Interest income earned by investors who buy listed bonds as asset-backed securities for purposes of developing infrastructure exempted from income tax
BREAKDOWN OF S IN KENYA XXII A. Tax exemption for infrastructure securities (Asset Backed Securities and Infrastructure Bonds). (Continued) Exemption from the Stamp Duty Act for any instrument that is certified by the Capital Markets Authority to be, connection with the issue of asset-backed securities. 2007/2008
BREAKDOWN OF S IN KENYA -XXIII B. Tax exemption for Real Estate Investment Trusts (REITS). Instruments used in the transfer of 2008 property to listed property investment /2009 vehicles exempt from stamp duty in order to encourage land consolidation and discourage nonproductive land use
BREAKDOWN OF S IN KENYA XXIV C. Tax exemption for Venture Capital Companies (VCC) Gain(s) arising from trade in shares of a 1996/1997 venture company earned by a registered venture capital company, within the first ten years from the date of first investment in that venture company by the venture capital company, is tax exempt: provided that the venture company, has not been listed in any securities Exchange operating in Kenya for a period of more than two years. (First Schedule of the Income Tax Act Cap 470, Section 13&14, Part I (47))
BREAKDOWN OF S IN KENYA XXV D. Tax exemption for Dealers Licensed dealers to enjoy tax benefits, as long as they turn their portfolios within 24 months and according to laid down guidelines. 1999/ 2000
BREAKDOWN OF S IN KENYA XXVI 4 Incentives to remove impediments to market development A. Investor A mendment of the Capital Markets Act to 2007/ Compensation recognize unclaimed dividends outstanding 2008 Fund in listed companies for more than seven years as income to Investor Compensation Fund; and to establish an Investor Compensation Fund Board to administer investor compensation fund.
BREAKDOWN OF S IN KENYA XXVII B. Professional indemnity for market intermediaries Entities that collect money from the public to secure professional indemnity to cover losses that may arise from their default or negligence. 2009/ 2010 C. Increased capitalization levels for market intermediaries Increase of the share capital for stockbrokers and Investment Banks from Kshs. 5m and Kshs. 30m to Kshs. 50m and Kshs. 250m respectively. 1/1/2011 2009/ 2010
BREAKDOWN OF S IN KENYA XXVIII D. Increased corporate governance levels of listed companies Limiting a stockbroker, investment 2008/ bank or fund manager controlling or 2009 having beneficial interest in excess of 25% of capital or voting right and appointing more than 25% of the board of directors
BREAKDOWN OF S IN KENYA IXXX D. Increased corporate governance levels of listed companies. (Continued) Limiting a stockbroker, investment bank or 2008/ fund manager receiving more than 25% of 2009 aggregate dividends and interest in shareholders loans, from being appointed as executive director or to a senior position in the company s management.
BREAKDOWN OF S IN KENYA XXX D. Increased corporate governance levels of listed companies. (Continued) Barring any individual or corporate other than those licensed by banking, insurance, pensions or securities regulator from controlling or having beneficial interest directly or indirectly of more than 25% of issued share capital or voting rights. 2008/ 2009 The same individual or corporate is not entitled to appoint more than 25% of the Board of Directors or receive more than 25% of the aggregate dividends and interest on shareholders loans.
BREAKDOWN OF S IN KENYA -XXXI D. Increased corporate governance levels of listed companies. (Continued) Publishing notice of Annual General Meetings containing a summary of both the annual financial statement and auditors report, in at least two local daily newspapers with national circulation for at least two consecutive days. 2008/ 2009 Notices sent to members through the electronic media should contain a summary of both the annual financial statements and auditor s report.
IMPACT SUMMARY -I The impact has been mixed, some incentives have led to the market registering significant gains, whereas in others there has been little impact if any. Among the positive effect(s) include: A very significant growth in infrastructure bond issues and amounts raised there from (approx. Kshs. 82.5bn raised from government infrastructure bonds thus far + Ksh 32.5 bn Corporate bonds), Marked increase in foreign investor participation in the local capital market, Improved Corporate Governance for Market Intermediaries, Increased transparency in market intermediaries operations, Increased participation of Investors at the NSE from 150,000 in 1995 to over 1.2 million in 2009.
IMPACT SUMMARY -II Positive effect(s) (continued): 11 CISs registered managing a portfolio of over Kshs 41.8 bn as at March 2009, Growth in the number of Stock Dealers; there are currently fourteen investment banks with operational dealing divisions. However, most of these dealing arms do not actively participate in the stock market. One is licensed Venture Capital Company (VCC) operating in the country. Growth in market cap as a result of rights issues, stock splits and Share Ownership Plans (ESOPs) Little or no effect(s) of incentives: No significant rise in number of listed companies, No significant rise in new product listings (no ABS has been issued, only one VCC, only one Credit Rating Agency, No REITs),
CONCLUSION Pronounced incentives have been partially successful. An evaluation should be done so that those that have been successful are enhanced, but those that have not had the desired impact re-assessed and possibly revised and new ones brought on board.