Flaws in law expose East Africa’s bourses to insider trading

Monday November 5 2018

A trader monitors stocks at the Nairobi Securities Exchange.

A trader monitors stocks at the Nairobi Securities Exchange. FILE PHOTO | NATION 

By JAMES ANYANZWA
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East African capital markets regulators are facing an uphill task combating unscrupulous stock trading due to inherent weaknesses in the law.

The region’s capital-markets regulatory framework has loopholes that have allowed insider trading to thrive, compromising the integrity of the stock exchanges.

Studies have shown that the financial markets laws in Kenya, Uganda, Tanzania and Rwanda have gaps that have made it difficult to win court cases against insider traders.

Kenya has so far lost two court cases on insider trading and a fortnight ago its Capital Markets Authority flagged what it suspected to be insider trading on the Kenolkobil counter a day before French oil firm Rubis Energie announced a takeover bid for the regional oil marketer on October 24.

Insider trading occurs when a person buys or sells the shares of a certain listed company while in possession of confidential information not generally available to the public, thus making unfair profit while also impacting the price of the share.

For instance, in Kenolkobil’s case, the share price jumped more than 30 per cent to Ksh21.75 ($0.21) per shares, with the volume of share traded rising to 373.46 million from 29.51 million a day earlier.

Although Kenya’s CMA has frozen the suspicious accounts to allow for investigations, court rulings on previous cases of insider trading in the country have seen offenders being acquitted due to lack of evidence more often than not.

In 2013, National Treasury Cabinet Secretary Henry Rotich, in his budget statement for the 2013/2014 fiscal year, recommended amendments to the Capital Markets Authority Act to deal decisively with unscrupulous stock traders, arguing that is a threat to Kenya’s ambition of transforming into an international financial hub.

Failed cases

Kenya’s first trials for insider trading involved former Uchumi general manager Bernard Mwangi Kibaru and former KCB chief executive Terry Davidson in 2010.

The two individuals were acquitted.

KCB was the bank of the listed retailer Uchumi Supermarkets and Mr Davidson was accused of being privy to crucial information on the financial health of the company when he instructed his stockbroker to sell Uchumi shares just a few days before the retail supermarket chain collapsed in 2006.

Similar claims were made against Mr Kibaru, who sold his shares in Uchumi just a few days before the retailer collapsed.

The two directors were acquitted after it emerged that the concept of inside information is vague and ambiguous and that conceptual difficulties arise in determining what information is non-public and price-sensitive.

While the CMA Act specifies punitive sanctions for financial crimes, such as banning the suspects from financial markets and imposing hefty financial penalties, the prosecution of the offenders has proved difficult due to lack of evidence of insider trading. Insider trading is always very difficult to prove, even in the developed world. To prove the flow of the sensitive information is always the most difficult part, analysts say.

"The law is a protector of such suspects in that insufficient evidence is presented before the court or court cases drag on for too long," said Daniel Kuyoh, an analyst at Alpha Africa Asset Managers.

Flawed mechanisms

In Tanzania, the legal framework governing insider trading provides strong enforcement mechanisms, including remedies and measures against trading malpractices.

But a study by the University of the Western Cape in South Africa, found that flaws in areas of prohibition, enforcement and defence make the Tanzanian legislation more symbolic than real in terms of its efficiency.

Tanzania’s legal regime on trading in securities dates back to 1994, when the first legislation on trading in securities was enacted.

According to the Capital Market and Securities Act, Chapter 79 of 1994, insider trading is considered both a civil and criminal offence.

But analysts argue that the legal framework on insider trading in Tanzania is characterised by gaps, duplications, and ambiguities and is not effective in combating insider trading malpractice practices in the stockmarket.

Uganda introduced anti-insider trading rules in 2008, that provide that any transaction that is suspected of being a case of insider trading be stopped immediately if settlement has not been effected. The securities that are the subject of investigation are automatically frozen.

In addition, where the person involved is an employee or member of the exchange, the USE shall commence disciplinary proceedings against such person and any person involved in the insider trading shall pay a penalty be commensurate with the amount of money that he/she has made as a result of the insider trading.

A study by the global research firm Social Science Research Network in 2016 however noted weaknesses in the law regulating insider trading in Uganda.

According to the study, there ought to be legislative intervention in areas such as the definition of securities, which should specify that these include securities of a company traded on a regulated market in Uganda, and beyond its borders.

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