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The Joint Venture Guidelines Under the Competition Act

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The Competition Authority of Kenya to Clarify the Rules and Filing Requirements of Joint Venture Arrangements.

The Competition Authority of Kenya has published draft joint venture guidelines. The Guidelines aim to provide clarity, transparency and predictability about joint venture arrangements that require CAK approval.

The Guidelines specifically clarify the CAK’s position on what consists of a Full Function Joint Venture, a Greenfield Joint Venture; and lays out the process for notifying and filing a joint venture with the CAK, as well as how the CAK reviews a joint venture’s impact on competition.

The Guidelines are still open to review and amendment, with the CAK inviting comments by Friday, March 5th, 2021. However, the following are the main implications of the proposed Guidelines:

Full Function Joint Venture

The Guidelines define a Full Function Joint Venture as a joint venture undertaking that performs all the functions of an autonomous economic entity for ten years or more including:

i. operating on a market and performing the functions normally carried on by undertakings operating in the same market; and

ii. having a management dedicated to its day-to-day operations and access to sufficient resources including finance, staff and assets in order to conduct for a long duration its business activities within the area provided for in the joint-venture agreement.

Full Function Joint Ventures constitute a merger under the Competition Act and will require notification and filing with the CAK. However, it should be noted that a joint venture established for a purposefully finite period will not be viewed as having a long duration and will not qualify as a Full Function Joint Venture.

Greenfield Joint Venture

The Guidelines set out Greenfield Joint Ventures as joint venture undertakings in which local or foreign entities collaborate with other locally domiciled entities to develop a new product separate from the products and services provided by the parent entities.

Typical distinguishing features of a Greenfield Joint Venture include: a new joint venture vehicle formed by the parties for the purpose of the transaction, undertakings in new areas for the parties in the joint venture, and the transaction entailing entry into a new business area or enhancement of an existing business.

The Guidelines recommend that parties potentially entering into a Greenfield Joint Venture should seek the advisory opinion of the CAK as Greenfield Joint Ventures are reviewed on a case-by-case basis.

Process for Filing a Joint Venture With CAK

The Guidelines set out the registration requirements for a Full Function Joint Venture. The CAK requires the parent entities to separately submit documents relating to the transaction by filling the Merger Notification Forms as Joint Venture Parents, and if a joint venture vehicle exists as a part of the undertaking it will also be required to file the MNF.

In situations where the joint venture parties have no separate joint venture vehicle, the parent entities will only need to separately submit documents by filling the MNF as Joint Venture Parents.

Determination of Impact on Competition

The Guidelines specify how the CAK determines the competition impact a Full Function Joint Venture transaction is likely to have in a market. The CAK considers the turnover and asset figures of all the parents to a joint venture, including the entities directly or indirectly in the control of the joint venture parents and the joint venture vehicle where applicable. In addition, the CAK looks at the terms of the joint venture agreement, public interest factors and whether the efficiency benefit of the joint venture brings more economic gains compared to the competition detriment.

If the CAK makes a finding that a joint venture transaction has negative competition and public interest impacts, it may engage the joint venture parties to come up with remedies to mitigate against the harm. Additionally, the CAK will direct on which of the joint venture parties as well as the joint venture vehicle will be impacted by the mitigating factors.

The draft joint venture guidelines aim to further clarify the rules and reduce the confusion surrounding the competition regulations on joint ventures.

Opening the Floodgates to Islamic Finance in Kenya

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Africa Law Partners was founded in 2019. The law firm is a boutique practice whose area of focus is corporate and commercial law in Kenya.

In recent years, Islamic Finance has grown rapidly across the world. By conservative estimates, Islamic finance is estimated to have over $2.88 trillion of assets globally. It is offered in over 80 countries and is estimated to grow at around 10-15% a year.

Despite a significant slowdown in 2020 due to the COVID Pandemic, the market is expected to grow to $3.69 trillion by 2024.

Islamic finance also commonly referred to as Sharia-compliant finance, involves the delivery of financial services in conformity with the principles of sharia law. The fundamental principles that govern Islamic finance include the prohibition against riba, gharar and maisir, and haram industries.

Other central principles to Islamic finance include compliance with the Shariah, segregation of Islamic and conventional funds, accounting standards, and awareness campaigns.

Islamic finance deals with most financial services, including banking, insurance and capital markets. While it has been used to finance huge infrastructure projects, it has also been used to fund small and medium-sized enterprises thus having a positive impact on smaller businesses.

In view of the massively important role played by small businesses to developing nations, Islamic finance has a far-reaching impact on the economy. Other advantages of Islamic finance include:

   1. Financial inclusion

World Bank defines financial inclusion as ‘Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.’

The conventional banking system is based on paying/receiving an interest which is strictly prohibited by Shariah Law. As such, Muslims refrain from conventional banking. This has resulted in many Muslims remaining unbanked and unable to access financial products and services. Islamic finance permits Muslims to participate and benefit in the financial system.

Despite being based on Shariah, Islamic finance is not restricted to Muslims only and is available to non-Muslims. In fact, there have been innumerable occasions where an Islamic finance product has been attractive to potential investors, even when they are not motivated by religious reasons.

   2. Financial Justice

Financial justice is a fundamental requirement in determining whether a product is shariah-compliant. Islamic finance requires that risk is shared between the bank and the customer. A lender must therefore carry a proportional share of the loss of a project if it expects to receive profits from the project. This brings about equitable distribution of income and wealth.

   3. Discourages speculation

Due to the fact that speculation is prohibited, investments are approached with a slower, insightful decision-making process with thorough audits, analyses and due diligence. This has resulted in reduction of risk and greater investment ability. This was evident during the global financial crisis when Islamic finance products proved less volatile.

While Islamic finance has been vibrant in Muslim-majority countries particularly in South-East Asia and the Middle-East, it has, in recent times, gained traction throughout the rest of the world particularly in the United Kingdom since the UK Government took a keen interest in the industry.

Noting the benefits of Islamic finance, the UK Government developed a work programme to make the United Kingdom’s financial services regulations compatible with Islamic Finance.

One such way was to accommodate Islamic finance products in existing legislation and regulations governing conventional financial instruments and putting Islamic products on the same tax footing as their conventional counterparts.

The latest Islamic Finance Country Index ranks the UK 17th of 48 countries in terms of its overall Islamic finance offering. This puts it in first place in Europe and in first place among non-Muslim-majority nations. Many firms, Islamic and non-Islamic, see London as an important Islamic finance global centre to such a great degree that products developed in London are being marketed in Muslim majority countries in the Middle East.

Kenya’s Islamic finance industry is regarded as somewhat developed with immense potential for growth. Kenya has made some legislative amendments and new regulatory frameworks that have brought about the development of Takaful Retirement Benefits Schemes, shariah-compliant finance products and taxation exemption for Islamic finance products.

However, it seems that Kenya needs to do more to further stimulate the market. Per the Islamic Finance Country Index 2019 rankings, Kenya ranks 24th of the 48 countries. This is a drop from the 2018’s rankings which had Kenya at 21st. This appears to be a noteworthy setback as Kenya, East Africa’s largest economy, would want to position itself as the region’s Islamic banking hub to profit from its apparent benefits and provide its 5.2 million Muslims with better access to Islamic finance services.

Further, in order to meet the Big 4 Agenda and Vision 2030, Kenya should hasten structural, legal and regulatory reforms to further enable Islamic finance services and also begin issuing sukuks at the earliest possible time. Sukuk also referred to an Islamic bond, is an instrument for raising capital and is tradeable on the securities exchange. Sukuk may be used to finance projects around Vision 2030 and the Big 4 Agenda, such as infrastructure and health projects.

Enabling an Islamic finance environment will enable Kenya consolidate its status as the leading trade hub in the region and the gateway to East Africa. Kenya has already made significant strides at enhancing the ease of doing business in the country. The World Bank’s Ease of Doing Business Index 2020 ranked Kenya at number 56. This is an improvement from 2019, 2018, 2017 and 2016 where Kenya was ranked 61st, 80th, 91st and 108th respectively. Mauritius, Rwanda and Morocco are the only African countries ranked ahead of Kenya.

There is need to open the floodgates to Islamic finance in Kenya. Industry stakeholders and regulators ought to collaborate to demystify Islamic finance by way of regular training and workshops on Islamic finance concepts.

Kenya also requires supportive Government policies to create a fiscal and regulatory framework to broaden the market for Islamic finance products.

The Nairobi Securities Exchange Launches New Trading Platform

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The Nairobi Securities Exchange was established in 1954 as the Nairobi Stock Exchange, based in Nairobi the capital of Kenya.

On 17 December 2020, the Nairobi Securities Exchange launched an Unquoted Securities Platform. The USP will function in accordance with its operational guidelines published on 11 December 2020.

The USP is an over the counter securities platform that utilises broker-dealer networks for the trade of securities. It has less stringent listing requirements and issuer obligations have opened a viable alternative for unlisted companies to access capital markets and long-term funding as issuers are enabled to raise finance through private placements.

The USP also provides a boost to institutional and retail investors as it provides investors on the platform an accurate free-floating price of the securities of unlisted companies.

Key Considerations for Issuers

For admittance onto the USP, prospective issuers of the USP securities must meet the eligibility requirements of the Management Committee appointed by the NSE. The eligibility requirements are listed in the Guidelines, with the key requirements being, among others, the incorporation status of the issuer, articles of association amenable to USP securities and details of the board and management of the issuer.

However, the eligibility requirements are non-exhaustive and the Management Committee may request further criteria as deemed necessary.

A prospective issuer will also need to appoint a registrar, to maintain a record of beneficiary holders of securities, and a custodian for the safekeeping of USP securities, cash and other assets on behalf of the investors. Once the application documents have been submitted, the Management Committee will relay their decision to the prospective issuer within twenty-one days.

If an application is accepted by the Management Committee, the issuer will have continuing obligations to the NSE, including disclosure requirements, which entail the disclosure of all material information in relation to the issuers business, financial statements and copies of notice of AGMs and EGMs. Additionally, issuers will be under an obligation to avoid the events of default under the Guidelines, such as: failure to distribute declared dividends and non-payment of interest of USP securities in accordance with the published timetable.

Failure to meet continuing obligations may result in the suspension or expulsion of the issuer from the USP.

Key Considerations for Investors

To start trading on the USP, investors must be registered to an NSE authorised USP Trading Participant Agent. In order to register with a broker, individual investors will be required to provide the broker of their choice with their full name, identity documents, contact details and passport.

Investors that are entities will need to provide the broker with documents, such as, among others, the legal status and constitutive documents of the entity, board resolutions allowing the entity to invest and the identities of the directors.

Each investor authorised to trade on the USP is furnished with a unique USP securities trading account with a unique Trade Identification Code. The USP is open for trading on working days from 0900Hrs to 1500Hrs and investors can trade freely within this period. Trades made after the closing of the USP will be transacted at the next opening of the platform.

Investors will need to consider the maximum order size as trades over this limit will require prior disclosure with the NSE.

In accordance with the Guidelines, trade volumes that exceed 20% of the total free float of an issuers USP securities will have to be disclosed to the NSE a day prior to the transaction.