By James Anyanzwa
NAIROBI, KENYA: One of the most high-profile scandals to hit headlines is insider trading accusation against former Kenya Commercial Bank Managing Director, Terry Dividson and Benard Mwangi Kibaru, former Uchumi General Manager.
The unsuccessful case of the two has been a reminder of the importance of ensuring that insiders with privileged access to non-public information play by the rules.
“Insider trading is bad for everyone – investors, businesses, the country,” says Hussein Ali, an investor who closely follows activities at the Nairobi Securities Exchange.
“From a company’s perspective, the business suffers in the sense that people lose respect for their management team, and the company starts losing investors.”
While the country’s securities regulators and courts see only a few cases of insider trading cases each year, there is growing uneasiness that the vice is thriving, but undetected by the regulators.
For starters, the Capital Markets Authority cannot just rely on the country’s laws.
They need to encourage companies embrace insider trading policy – something that most large companies have but is still missing in many publicly traded companies.
A proposal by the National Treasury Cabinet Secretary Henry Rotich to amend the Capital Markets Act, with a view of reining in on insider traders is a welcome move.
In his first budget statement on Thursday, Mr Rotich acknowledged that insider trading and market manipulation has continued to threaten to the stability and growth of capital markets.
He underscored the need to amend the Capital Markets Act and redefine the offence of insider trading, as an offense of ‘strict liability.’
The amendment to the Act, he reckons, would address the challenges of insider trading and safeguard the integrity of the local capital markets.
He said the amendments would also identify a range of the most common market manipulation offences, which would guide the courts and the investing public on the nature of these offences.
The capital markets are expected to play a pivotal role in the attainment of Vision 2030. It is essential that obstacles to the attainment of a fair and efficient market are examined and rooted out.
Insider trading refers to buying, selling and dealing in shares and securities of a listed company by insiders.
They inclue directors, officers of management team, employees of the company or any other connected persons such as auditors, consultants, lawyers and analysts who possess material inside information that is not available to the investing public.
The malpractice is prohibited because it favours few insiders with advantageous information while denying the same to the public.
The Capital Markets Act expressly prohibits insider trading and establishes this practice as a criminal offence.
Despite prohibition, there have been few prosecutions. None of these have been successful, partly due to challenges faced in the prosecution process.
The Capital Markets Act prohibits insider trading. It stipulates statutory defenses and sets out the sanctions for insider trading.
It also gives licensing, regulation and supervision of all capital markets participants to the CMA.
The Act also disseminates rules and regulations and is empowered to carry out enforcement and sanctions.
This was highlighted during the country’s first trials for insider trading in which Bernard Mwangi Kibaru and Terry Davidson were unsuccessfully prosecuted. These formed the basis of concern over the adequacy of existing insider trading legislation in Kenya.
The two cases of insider trading against Davidson Kibaru were dismissed in 2010 and both cleared of the charges of insider trading.
Chief magistrate Gilbert Mutembei ruled that Mr Kibaru, who had denied charges of instructing Drummond Investment Bank to sell 111,400 Uchumi shares on April 26, 2006 contrary to the CMA Act, was not guilty on the main and alternative charges of irregular trading.
He ruled that the prosecution failed to prove the accused exploited information not generally available to the public that Uchumi was performing poorly when he sold his shares.