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Capital markets to tighten noose on insider trading

FINANCIAL STANDARD
By By JAMES ANYANZWA | November 26th 2013

By JAMES ANYANZWA

NAIROBI, KENYA: The Capital Markets Authority (CMA) will prosecute and revoke licences of those who manipulate the securities market and deal in insider trading.

This comes barely six months after Treasury Cabinet Secretary Henry Rotich proposed amendments to the CMA Act to rein in insider traders.

The move is part of efforts by the monetary authorities to bolster investor confidence and grow the local capital market.

“Insider trading is not serious in this market but when you talk of making Kenya an international financial hub, then we have to ensure investors coming to the market have confidence,” said Paul Muthaura, acting CMA chief executive.

“What we are doing is to put in place the right platform to grow and deepen the market.”

The Capital Markets Act prohibits insider trading and establishes this practice as a criminal offence. However, despite prohibition, there have been very few prosecutions and none of these have been successful partly due to challenges faced in the prosecution process.

The two cases of insider trading against former Kenya Commercial Bank (KCB) Chief Executive Terry Davidson and former Uchumi General Manager Bernard Mwangi Kibaru were dismissed in 2010 and both cleared of the charges.

Court case

Chief Magistrate Gilbert Mutembei ruled that Kibaru, who had denied charges of instructing Drummond Investment Bank to sell 111,400 Uchumi shares on April 26, 2006 contrary to the Capital Markets Authority (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.

It is the breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, non public information about the security.

The vice happens when people who by virtue of their relationship with the company have privileged access to information about the company and its affairs that are not generally known to the public or securities market.

 This information may be used by a person either to buy securities at their current price before the information becomes public and causes prices to rise, or to sell securities at the  current price before the price falls when that information becomes public.

 Illegal insider trading occurs when someone buys or sells stock in a company based on information he received that is not known, or should not be known, by the general public.

Ruling on the issue

 In his first budget statement in June this year National Treasury Cabinet Secretary Henry Rotich said insider trading and market manipulation has continued to pose a threat to the stability and growth of capital market.

He underscored the need to amend the Capital Markets Act in order to redefine the offense of insider trading as an offense of ‘strict liability. He said amendment of the Act would address the challenges of insider trading and safeguard the integrity of the local capital markets.

Rotich said the amendments would also identify the most common market manipulation offences, which would guide the courts and the investing public on the nature of these offences

According to statistics, from the sector, foreign equity flow hit an all time monthly high of Sh9.8 billion in August 2013 – a first in Kenya’s capital markets.

Monthly average bond turnover in the year-to-September 2013 has been in the region of Sh39 billion, a marked increase when compared to the Sh9 billion annual bond turnover figures in 2009.

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