On 9 April 2021, Kenya published a gazette notice that amends the National Information Communications and Technology ("ICT") Policy Guidelines (the "Policy"). This notice makes some significant changes to equity participation requirements in the ICT sector.
Equity participation requirements
Historically, the Kenyan equity participation requirements have been subject to various changes over the years. In 2006, the equity participation requirements in companies providing broadcasting and telecommunication services was 30%. In 2008, the local equity participation requirement for firms providing communication services was reduced to 20% while 30% was retained for broadcasting companies. The Cabinet Secretary was allowed to exceptionally grant a waiver within reason and all circumstances in each case.
The 2020 Policy increased the Kenyan equity participation requirement from 20% to 30%, requiring at least 30% of the shares in all licensed companies in the ICT sector to be held by Kenyan citizens. All companies licensed to provide broadcasting services must continue to comply with the 30% local equity requirements. The Policy required licensees to comply with the new local equity participation requirements within three years. However, it was unclear when such a three-year period commences given that there are existing licensees issued with waivers or under the previous grace period for compliance.
What has changed?
In the gazette notice published on 9 April 2021, the Cabinet Secretary shed light on compliance with the local equity participation requirements as follows:
- an existing licensee with less than 20% local equity ownership and has not exhausted its three-years grace period will be required to meet the 30% local equity ownership at the end of its grace period;
- an existing licensee that had met the 20% local equity ownership before 7 August 2020 will have two years to meet the 30% local equity ownership threshold with effect from the said date;
- an existing licensee that had a waiver granted under the ICT Sector Policy Guidelines of 2006 will have three years to meet the local equity ownership threshold with effect from the date of this Notice;
- a new applicant for a licence will have three years to meet the local equity ownership threshold from the date of issue of the relevant licence;
- for the first time, a company registered to exclusively offer business process outsourcing services will be exempt from this rule; and
- for a listed company, the equity participation rules will conform to the extant [sic] rules of the Capital Markets Authority. This new provision is not clear and ENSafrica will be seeking clarity on it. Previously, the local equity ownership requirements did not apply to listed companies. We would expect this to be the case provided that the local capital markets requirements on equity participation are followed.
Compliance with the Policy
The Kenya Information and Communications (Licensing and Quality of Service) Regulations, 2010 (the "Regulations") require a licensee to ensure that they are at all times compliant with the government communications sector policies.
The Policy also allows licensees to apply to the Cabinet Secretary for extension or exemption. This gives the Cabinet Secretary wide powers on extension as this was previously limited to a one-year extension with acceptable justification. In the past, the Cabinet Secretary has issued waivers and extensions of up to two years where licensees have demonstrated that they are new entrants in the market, are unable to get suitable Kenyan investors and are inexperienced in such new market. We expect that future exemptions will be based along similar lines.
We recommend that all companies in the ICT sector initiate steps to comply with the local equity participation requirements. ENSafrica Kenya's fintech lawyers are available to assist and advise companies on innovative and international best practice structures that will facilitate compliance with the Policy.
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