MOUNT KENYA UNIVERSITY

SCHOOL OF LAW

COMPANY LAW TWO

GROUP 4

GROUP MEMBERS

NAME REG.NO

BIKO STEVE OYUGI BLAW/2016/56949

WINNIE OGINGA BLAW/55108/2016

NJOGU JAMES KARUGIA BLAW/2015/30805

IVY MUTINDI YVONNE BLAW/54272/2016

 CAPITAL MARKETS IN KENYA

INTRODUCTION

Capital market is defined as part of the financial market that provides funds for long term
development. It brings together lenders, borrowers and investors of capital in trading of
securities. It can also be defined as the part of a financial system concerned with raising and
capital by dealing in shares, bonds and investment1

Capital markets in Kenya date back to 1950s.

In 1950- establishment of Nairobi Stock Exchange by British colonial government in Kenya

which was to serve the entire East African British protectorates.

In 1954- Nairobi Stock Exchange was the first securities exchange to be registered under the
Societies Act of 1954 as a private company limited by shares2.

In 1977- the collapse of East Africa Community saw Nairobi Stock Exchange remain a business
outfit in Kenya with Uganda, Rwanda, Burundi and Tanzania being delisted from Nairobi Stock
Exchange.

In 1988- Kenyan government set up Capital Markets Development Advisory Council to draft a
Bill establishing Capital Markets Authority.

In 1989- consequently, the Bill was passed and assented to, establishing CMA through Act of
Parliament cap 485A, Laws of Kenya.

In 1990- The Authority was constituted.

In 1994- An amendment to the Act effected changes of all stock exchange companies approved
by CMA from companies limited by shares to those limited by guarantee.

In 2011- Nairobi Stock Exchange changed its name to Nairobi Securities Exchange.

TYPES OF CAPITAL MARKETS

Stock exchanges are market places for issuing securities and then facilitating trading of those
securities via the trading market and market making activities of their member firms. Securities
Exchange provide both primary and secondary markets. When a company seeks listing for its
shares, the process is described as: becoming listed or quoted, going public, floating on the stock
market or making an Initial Public Offer (IPO). The regulatory framework for primary and
secondary markets is under the Capital Markets Act, and for a trading firm to obtain stock market
listing, there must be approval of requisite documents by CMA.
1Blacks law dictionary 2nd edition

2 Societies Act of 1954

I. PRIMARY MARKETS

They are also called the 'new issue' markets and exclusively deals with new securities whereby
new investors sell their securities at the securities exchange. The main function is capital
formation for stock brokers or investors by raising funds.

Companies raise money in the primary markets through securities like shares, debentures, loans
and deposits through listing. This helps investors invest savings and extra funds in companies
that are starting new projects or enterprises that are seeking expansion of their businesses.

II. SECONDARY MARKETS

Also known as stock market where investors purchase securities or assets from other investors.
This may take place either on approved Exchanges or in over the counter transactions and are
commonly known as OTCs. A bulk of exchange trading occurs between two market participants
or for illiquid securities. The CMA may authorise the transfer of a listed security outside the
Securities Exchange if satisfied that the security trades over the counter and such trade is subject
to trade reporting rules.

DIFFERENCES BETWEEN PRIMARY AND SECONDARY MARKETS

In the primary markets, prices are often set forehead whereas in secondary markets the only basic
force of supply and demand determine the price of securities.

For primary markets only new securities are issued whereas for secondary markets trading is
only for existing securities.

To enable the CMA to undertake its objectives and functions, it regulates the issue of capital
market instruments, and the undertakes supervision of trading in the secondary markets.

ROLES AND FUNCTIONS OF CAPITAL MARKETS

1. Economic function- Most important function where money is effectively

transferred from savers to borrowers. This aids in terms of wealth distribution and
increases mobilisation of savings, therefore, improving efficiency and volume of
investments for economic growth and development.

2. It provides equity capital and infrastructure development that has strong socio-
economic benefits like roads, water and sewer systems, housing, energy,
telecommunications, public transport, ideal for financing through capital markets via
long-dated bonds and asset-backed securities.

3. Indicates the price in the market as a 'moment by moment' which offers potential
benefits for the securities of investors. The market participants get up to date information
with the continuous function of capital markets.
 4. Providing access to capital for growth as buying and selling of securities enables
companies to raise finance both at admission time and through further capital raisings.

5. It Enhances efficient financial intermediation of all key players in the capital

markets.

6. Creating a market for a company's shares or instead broadening the shareholder

base.

7. Innovation- where market participants introduce new products and services in the
capital markets.

CAPITAL MARKET SECURITIES

I. Equity

Refers to a stock or any other security that represents an ownership interest in a limited liability
company. Equity can be obtained through Initial Public Offer, right issue and purchase through
Nairobi Securities Exchange.

II. Bonds

A bond is a debt instrument in which an investor loans money to an entity for a defined period at
variable or fixed rates. Bonds are usually used to raise money and finance a variety of projects
and activities of issuance. Owners of bond are now creditors of issuance.

In Kenya, there are two main categories of bonds issued in the markets:

Treasury Bonds- These are debt instruments issued by the government of Kenya to finance
budgetary goals and are issued on a monthly basis.

Corporate Bonds- These are long-term at least one year and above debt instruments issued
by the private sector. Issuance of these instruments targets high network investors who
understand technical information about pricing, valuation and yields.

Fixed coupon Bonds- These are the most commonly traded bond securities at NSE.

III. Collective Investment Scheme- Sec 2 of the Capital Markets Act defines Collective
Investment Scheme as "Includes an investment company, a unit trust, a mutual fund or other
schemes whether or not established in Kenya which:

-collects and pools funds from the public or a section of the public for the purpose of
investments,
-is managed by or on behalf of the scheme by the promoter of the scheme in return for putting
money to this fund, the investor receives shares or units that represent their pro-rata share of the
pool of fund market3

As at 31st March 2018, there were 26 fund managers and 23 collective investment schemes
licensed by the capital market authority.

IV. Real Estate Investment Trust

These are pooled investment typically designed to enable the investor benefit from investment in
large scale in the real estate enterprise through property or mortgages offers trade on securities
like stock.

Real Estate investment is categorized into two ;

Income real estate investment trust- primarily derives its revenue from its rentals. It owns and
manages income-generating real estate benefits of its investors.

Development real estate investment trust- it is involved in the development and construction of
property for sale and rental.

3 Capital Market Act Cap 485

 REFERENCE

Capital Markets Act CAP 485 [Revised edition 2017]

Companies Act no. 17 of 2015

Capital Markets Authority website. The role of Capital Market. https://www.cma.or.ke/