Kenya has beaten a swift retreat from a new law that makes it compulsory for foreign investors seeking investment to surrender 30 per cent shareholding in their businesses to locals or risk paying a fine of Ksh5 million ($48,171).

If enforced, the law would have choked foreign direct investment in the country.

It has now been suspended pending a review in six months after Attorney General Githu Muigai blamed parliament for inserting the clause in the Companies Act 2015, to which President Uhuru Kenyatta assented on September 11.

It had ruffled the feathers of foreign investors looking to set up shop in East Africa’s biggest economy, casting doubt on the competitiveness of the country as an investment destination.

The executive says the move by parliament deviated from the government’s policy on foreign investments.

 “This provision did not form part of the original Bills that were submitted to the National Assembly. From all indications it was inserted at the committee stage. It does not represent the current government policy on foreign investments,” he said.

Mr Muigai said the alteration arose during scrutiny by the Justice and Legal Affairs Committee, adding that the controversial provision would remain suspended pending further consultations.

“Under the Act, the AG has powers to suspend the coming into force of any or some provisions of the Act. For the time being and until there has been further consultation on the matter, this particular provision will not be brought into force,” Mr Muigai said.

The EastAfrican has learnt that the Cabinet Secretary for Industrialisation and Enterprise Development Adan Mohamed and representatives from the private sector and the legal fraternity are meeting in Nairobi on November 9 to review the contentious 30 per cent shareholding requirement for foreign companies.

They will also analyse the entire Companies Act 2015 to assess its impact on business operations and  time frame for its enactment.

Samuel Chepkonga, chairman of the Parliamentary Committee on Justice and Legal Affairs, acknowledged that the contentious provision was introduced by one of the legislators during the third reading. Mr Chepkonga said the controversial clause would be amended in six months.

“This is one of the provisions we are recommending to be removed so that we are not just creating barriers to doing business and creating employment. This is not a capital markets issue but an operating business environment issue,” said Paul Muthaura, acting chief executive of Kenya’s Capital Markets Authority.

Attempts by the government to enforce the local ownership rule in the telecoms industry had earlier hit a snag after it was discovered that foreign firms were facing difficulties in securing local partners with the right expertise and financial muscle to support the business.

The law was relaxed in 2009 allowing foreign telcos to start operations without local partners but with a three-year window to identify one. For instance, the licensing of the Zimbabwean Econet Wireless, the third mobile phone operator was delayed as a result of the shareholding issue.

Local partners were also not able to raise the required equity financing in India’s Essar Group, which traded under the Yu brand name.

Under this rule foreign companies investing in the telecom sector were required to reserve at least 30 per cent of their shareholding for local partners. This shareholding was reduced to 20 per cent and eventually reviewed for discouraging foreign capital flows in the country.

Econet Wireless Kenya (EWK) which was first licensed to roll out a mobile phone network in 2004   had to wait until November 2008 to start operations after securing a new investor — Indian firm Essar. This is because the local partner Kenya National Federation of Co-operatives (KNFC) could not   raise its portion of the required licence of $27 million ($260,126). This together with legal battles with the government over the operating license delayed the firm’s operations.

Airtel that entered in Kenya  through the acquisition of Kuwait’s Zain in April 2010 faced difficulties in finding local partners to purchase a 15 per cent stake  estimated at Ksh5 billion ($48.17 million).

The firm was seeking to comply with the 20 per cent local ownership rule given that businessman Naushad Merali had purchased a five per cent stake in the firm.

Airtel did not find a suitable buyer until 2012 when the firm won an exemption on the rule, leaving India’s Bharti Airtel fully charge of the firm.

Deputy President William Ruto said the new Companies Act should serve the interest of both local and foreign investors.

“We will look for a way of correcting the situation so as to create a favourable climate for investments,” said Mr Ruto.

German investors said they have found it difficult to put money in Kenya because of the proposed mandatory joint ventures with Kenyan citizens. Through their ambassador to Kenya Jutta Frasch, the investors noted that the new business regulation has made the country less attractive for investment.

“German investors have a lot of interest in this country but the regulation is making it less favourable,” said Mr Frasch.

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