The process of unmasking shadowy shareholders of listed companies has begun in earnest.
This is putting over Sh243 billion of investments in the 20 most valuable firms at the Nairobi Securities Exchange (NSE) owned through proxies on the spotlight.
By the end of this month, all registered companies are required to submit to the Registrar of Companies their substantive beneficial owners (natural persons) in what is aimed at ridding the capital markets of dirty cash.
But there are also fears that if not handled well, particularly by fixing some of the legal lacunas that came with the regulations, the process could scare away investors from the NSE.
This will add woes to a moribund stock exchange that is already grappling with a listing drought and fizzling liquidity.
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It is the scrutiny of proxies, or nominee shareholders, which is likely to cause some excitement.
Ownership of company shares through a legal third party is a path favoured by wealthy individuals and pension funds who prefer to entrust their securities to proxies even as they retain control of the company.
Some of the big companies, including Safaricom, Standard Chartered, East African Breweries Ltd (EABL), Stanbic Bank and Equity Bank have significant shares being held by nominee shareholders.
This makes their boards some of the busiest right now as they try to beat the January 31 deadline.
The regulations apply to both public and private limited companies. With the operationalisation of the Companies (Beneficial Ownership Information) Regulations, 2019, Kenya has joined 81 other jurisdictions, including the European Union, in compelling firms to reveal personal details of individual owners with a stake or voting right of at least 10 per cent.
The regulations require companies to disclose myriad details of an individual who owns a company, either directly or indirectly.
Beginning February 1, every company should have provided the Registrar of Companies with personal information of individuals with at least 10 per cent stake or voting rights in a company.
Some of this information includes the beneficial owners’ full name, current telephone number, date of birth, postal and residential address, occupation, current email address and passport number or national identification number.
Companies will also be required to reveal the nationality of the beneficial owner, the date on which any individual ceased to be a beneficial owner, nature of ownership or control, and any other detail the registrar may require from time to time.
Failure to lodge the details of a company’s beneficial owners with the Registrar of Companies will attract a penalty of Sh500,000.
Analysts project a fierce tug-of-war between the government on the one hand, which is pushing for transparency as a means to curtail financial illicit flows and investors who want to be assured of confidentiality so they can invest without the fear of any form of reprisal on the other.
For some companies, there will be the almost absurd task of combing through the breadth of the earth - a task better left to global law enforcement bodies such as Interpol - looking for millions of “natural persons” who own stakes in pension or private equity (PE) funds or development finance institutions (DFIs).
“Complications may arise in cases of private equity funds and development finance institutions, which own shares in Kenyan companies as it is likely to prove impractical or impossible to establish the natural persons who own or control a PE fund or a development finance institution,” said law firm Anjarwalla and Khana in a legal alert on the Companies (Beneficial Ownership Information) Regulations, 2020 that came into force on February 18, 2020.
“The regulations do not include a carve-out for PE funds or DFIs, and there is no procedure to seek an exemption from the registrar,” added the law firm.
ICEA Asset Management Chief Executive Einstein Kihanda said in the case of PE funds, they can invest directly, and it would be easier to identify the beneficial owners as they tend to disclose who the investors are.
“By virtue of the process they go through in terms of fund-raising, unless it is to the public, they normally disclose the investors,” explained Kihanda.
For some high-net-worth individuals, this anonymity does not only stave off the public poking their noses into their wealth or laying bare their home address, but others might also do this for commercial reasons such as wanting to keep their names off record for the benefit of themselves and the company. For example, there might be an investor who, although they see an opportunity to make some good money from British American Tobacco (BAT) Company or EABL shares, they are prohibited by some reason or another from dealing in alcohol or tobacco, which are manufactured by the two listed companies respectively. Indeed, almost all the shareholders of BAT used proxies, most likely because they did not want to be associated with a tobacco company.
Moreover, nominating a shareholder enables one to invest in a company without necessarily meeting all the legal requirements of starting a company such as having a certain number of shareholders or directors at the time of starting a company.
For pension funds, said Kihanda, it is a legal requirement that they hold their investments through custodians because of the need to separate the functions and to ensure proper governance.
“For instance, if a pension fund has shares in Safaricom, you will not see those shares under the name of the pension fund. They are actually under the name of the custodial bank that the trustees of the pension scheme have appointed,” he said.
But there are also fears that nominee shareholding has been a breeding ground for crooks such as drug dealers, child traffickers, tax evaders, terrorist financiers and other miscreants who might have taken advantage of this anonymity to sneak dirty money into the capital market.
The value of blue-chip shares held through nominee shareholders is slightly over 10 per cent of the total wealth at the NSE and two per cent of the country’s gross domestic product (GDP), or the value of all the goods and services produced in the country. Safaricom, the company with the largest market capitalisation at the NSE and the most profitable firm in the region, has the largest chunk of nominee shareholding, at Sh58.6 billion.
It is followed by Standard Chartered Bank with Sh41.5 billion and EABL with Sh31.8 billion.
Stanbic Bank, whose majority shareholder is a nominee shareholder, has Sh26.8 billion of shares. Equity Bank’s nominee shareholders have close to Sh23.6 billion, while KCB’s have Sh17.7 billion.
However, by the end of this month, all firms operating in the country will be required to prepare a register of their key shareholders and lodge it with the Registrar of Companies.
It is a tall order for the State, which is keen on curbing illicit financial flows by requiring identification of all natural persons who ultimately own or control a legal person on whose behalf transactions are conducted.
In the case of the nominee shareholder, there will be more complicated layers to be peeled, beginning with the revelation of the legal person in the first place. Fortunately for beneficial owners who own assets through nominee shareholders, the beneficial ownership is prohibited from being revealed to the public, except for communication, in compliance with regulations, a court order or where the beneficial owners themselves have given written consent.
“The impact of these regulations is that companies with shareholders who have nominee shareholding will need to disclose details of the ultimate shareholders and investigate nominee structures that not only depict ownership arrangements, but also control arrangements,” said Jacob Ochieng of Oraro and Company Advocates.
A financial analyst who preferred to remain anonymous noted that the biggest fear for most of the high-net-worth individuals in revealing their wealth is that it could see the taxman come up with new taxation measures against them.
Most of the wealthy individuals may also resist the latest move due to concerns relating to confidentiality and data protection.
“Just how safe will information relating to beneficial ownership be? Will such individuals be willing to take the disclosure risks? It’s highly doubtful,” said Juliet Mazera, a commercial lawyer, in an earlier interview with The Standard.
Business Registration Service (BRS) – which is housed by the Attorney General’s office – expects the Companies (Beneficial Ownership Information) Regulations, 2020 to help in the fight against corruption, money laundering and other illicit financial undertakings.
Director General Kenneth Gathuma noted in an earlier interview that with anonymity, one can access funds from suspect sources and use Kenyan systems to clean it up.
This risk is, however, significantly reduced when the government knows who the owners of businesses operating in the country are, explained Gathuma.
“This is simply about creating transparency of who the real owners of these particular companies trading within the Kenyan regulated environment are. We have international obligations and local aspirations that guide the need to have these beneficial ownership register,” said Gathuma. “It is critical that whoever is gaining any form of benefit from the trading of a company is known. One key issue we are trying to address is the funding of illicit activities. If you do not know who is the ultimate beneficiary, you end up with a situation where one is able to obtain funds and do illegal activities, and these have been quite detrimental to the welfare of Kenyans.”
Some beneficial owners, experts argue, might employ such tricks as lowering their stakes so that they own less than the 10 per cent that the regulations put as the threshold for a shareholder’s details to be lodged with the Registrar of Companies.
The development also comes at a time when the US Congress has passed the Corporate Transparency Act into law, effectively banning anonymous shell companies in the country.