Presentation at the EAC Legal Harmonization Conference 6 th & 7 th August 2012 Ngurdoto Mountain Lodge Arusha, Tanzania

Transcription

1 Presentation at the EAC Legal Harmonization Conference 6 th & 7 th August 2012 Ngurdoto Mountain Lodge Arusha, Tanzania JAPHETH KATTO CHIEF EXECUTIVE OFFICER CAPITAL MARKETS AUTHORITY (UGANDA) CHAIRPERSON EAST AFRICAN SECURITIES REGULATORY AUTHORITIES (EASRA)

2 A regional stock market is likely to fail if the political reason for its establishment outweighs its commercial motivation Africa is the least likely candidate for regional integration of stock exchanges Hooper Vincent, (2002). A World of Regional Stock Exchanges. Working Paper School of Banking and Finance, University of New South Wales (May 2002)

3 Snapshot of EAC Capital Markets The EAC Common Market Protocol Progress Made Towards an Integrated EAC Capital Market Barriers to EAC Capital Markets Integration Conclusion

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5 Kenya Rwanda Tanzania Uganda Equity Markets No. of Listed Companies Market Capitalization (US$ Bn) Market Turnover (US$ Mn) Market Liquidity (%) Bond Markets Value of Outstanding Gov t Bonds (US$ Bn) Value of Outstanding Corporate Bonds (US$ Mn) Source: Uganda Securities Exchange, Rwanda Securities Exchange, Dar es Salaam Securities Exchange, Nairobi Securities Exchange, Bank of Uganda, Central Bank of Kenya, Bank of Tanzania and National Bank of Rwanda

6 All the EAC Partner States have enacted capital markets legislation with the exception of Burundi. Burundi is in the process of developing capital markets framework spearheaded by the Central Bank of Burundi Capital Markets Legislation in Kenya, Tanzania and Uganda are similar since they are based on the British Common law system In consonance with the spirit of harmonization Rwanda despite having a French civil law background developed its capital markets laws in tandem with the laws of Kenya, Tanzania and Uganda

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8 The EAC Common Market Protocol provides for the following freedoms: Free Movement of Goods Free Movement of Services Free Movement of Capital Free Movement of Persons & Labour Right of Establishment

9 EASRA identified the following areas in the EAC Common Market Protocol that have a direct bearing on the EAC capital markets Article 13: Right of Establishment Article 16: Free Movement of Services Article 24: Elimination of Restrictions on Free Movement of Capital Article 29: Protection of Cross Border Investments Article 33: Prohibited Business Practices Article 47: Approximation and Harmonization of Policies, Laws and Systems

10 The work of EASRA to facilitate seamless cross border transactions in the EAC capital markets dates back to 1999 with the EASRA report on the Environment of Securities Regulation in East Africa: Towards a Common Regime. Ten (10) years later EASRA also produced another report on the implications of the EAC Common Market Protocol on EAC capital markets integration.

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13 1954 Nairobi Stock Exchange (NSE) established as a bourse of Companies in the East African British Protectorates 1977 Collapse of East African Community (EAC) leading to the delisting of Non- Kenyan companies from the NSE 1990 Capital Markets Authority (Kenya) established 1994 Capital Markets & Securities Authority (Tanzania) established 1996 Dar es Salaam Stock Exchange (DSE) established 1996 Capital Markets Authority (Uganda) established

14 1997 MOU establishing East African Securities Regulatory Authorities (EASRA) 1996 Uganda Securities Exchange (USE) established 2001 EAC Capital Markets Development Committee (CMDC) established April MOU establishing East African Stock Exchanges Association (EASEA) 2010 Adoption of an EASRA Capital Markets Integration Implementation Work plan that envisages an Integrated EAC capital market by 2015.

15 East African Securities Industry Training Institute (SITI) Established Adoption of the East African Securities Certification Programme for EAC Capital Markets Intermediaries. Adoption of the East African Regional Fixed Income Issuance Regulations (Expected to transposed into national laws by end of 2012)

16 2012 An EAC Technical Working Group established to develop EAC Securities Directives for the following: Licensing of Market Participants Conduct of Business Corporate Governance Public Offers and Listing Anti-Money Laundering & Combating of Financial Terrorism Takeovers, Mergers and Acquisitions Securities Exchanges, Securities Central Depositories & Securities Regulatory Authorities Financial Education 2012 An EAC Technical Working Group on Capital Markets Infrastructure established to map out a strategy and implementation work plan to integrate the EAC capital markets Infrastructure.

17 Cross border listings has been one of the strategies for facilitate cross border activity within the EAC capital market. So far; 7 Kenyan Companies have been cross- listed in Uganda 2 Kenyan Companies have been cross-listed in Rwanda 4 Kenyan Companies have been cross-listed in Tanzania However there is very limited secondary trading in cross listed companies in all the EAC Partner States. Nevertheless there has been tremendous success with Initial Public Offers (IPOs) that have been marketed in the EAC Partner States with the exception of Tanzania.

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19 Different Legal Systems: Kenya, Uganda & Tanzania are common law systems while Burundi & Rwanda predominately have Civil Law systems Different Licensing categories: For instance While Kenya provides for an Investment banking license Uganda does not Different Capital Adequacy Requirements: Given the different levels of market development there are different capital adequacy requirements for the different EAC Partners Different Securities Clearing and Settlement regimes: The Securities Central Depositories (SCD) laws in the different Partner States do not permit securities clearance and settlement across the different EAC Securities Central Depositories

20 Differing Financial Reporting & Auditing Practices: Kenya, Tanzania and Uganda have professional accounting bodies which are members of the International Federation of Accountants (IFAC). Rwanda and Burundi have established professional accounting bodies but are yet to be admitted in IFAC. However, all EAC bodies have signed a Mutual Recognition Agreement. Differences in the size and management of the investor compensation funds While the capital markets laws in the EAC are similar differences in Market Supervision and enforcement practices and systems still exist. E.g. Kenya has adopted a risk-based supervision approach while other Partner States have not or have partially adopted this approach.

21 Differences in Technological landscape: Kenya and Tanzania have automated trading, clearance and settlement systems whereas Uganda and Rwanda are yet to automate trading. Differences in Governing Structures: Only the Rwanda Stock Exchange is demutualised. The rest of the EAC Partner States are just in the process of demutualization, though Kenya is in advanced stages Differences in Back-Office Systems: Only Kenya is already in the process of automating and harmonizing the back office systems of the capital markets intermediaries.

22 Differences in tax regimes for Financial Services: Kenya has a more elaborate and comprehensive tax incentive regime than the other EAC Partner States. EAC Double Taxation Agreement: While this agreement has been signed it is yet to be ratified and yet it is very critical to facilitate cross border investments. Multiplicity of Membership in different Regional Blocs (Refer to the next slide): The net result of multiplicity of commitments is a lack of clarity on the priorities within the various EAC member countries. Tanzania capital account for East Africans will be fully open by December 2012 (CMIPC Report May 2012).

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24 The Cost of Unharmonised EAC Laws The lack of harmonised legal regimes is one of the major bottlenecks to secondary trading of shares in cross listed companies on the Uganda Securities Exchange. The shares on these counters are deposited in the Kenyan Securities Central Depository which is under a different legal regime as that of Uganda. Secondary Market Trading of Cross-listed Companies at the Uganda Securities Exchange East African Breweries Ltd % of total Deals (2000 to date) % of total Share Turnover (2000 to date) % 1.8% Kenya Airways Ltd % 0.1% Jubilee Holdings % 0.002% Kenya Commercial Bank % 0.01% Equity Bank % 0.1% Nation Media Group % 0.003% Centum % 1.2%

25 The following are very critical to register quick wins: Removal of all capital account restrictions for East Africans. East Africans should be accorded domestic status in all EAC Partner States as is the case in Kenya. Harmonisation of Licensing Regimes Harmonisation of Central Securities Depositories laws to facilitate clearance and settlement of cross border transactions Harmonisation of Market Supervision and Enforcement laws and practices

26 The capital markets originally confined to domestic boundaries have increasingly become global with domestic exchanges and CSDs seeking alliances across national borders in order to remain viable in an increasingly competitive environment Thus maintaining the status-quo in East Africa is not an option. The EAC needs to aggressively pursue the integration agenda backed by a well developed and executed strategy that will yield the optimum benefits for all the stakeholders. EASRA would like to appreciate the support provided by IFC/ESMID Project, FIRST Initiative and FSDRP in the regional integration process.

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28 Japheth Katto Chief Executive Officer Capital Markets Authority 14 Parliament Avenue Jubilee Insurance Centre P. O. Box Kampala Tel: Fax: jkatto@cmauganda.co.ug Website: