Executives in companies that have issued securities in Kenya’s capital market are set to come under renewed scrutiny as the regulator seeks increased supervisory powers in rules meant to boost Kenya’s quest to be a global financial hub.

Through the Capital Markets (Amendment) Bill, 2013 that came up for debate in parliament on Thursday, the Capital Markets Authority is seeking to tighten the noose on insider trading and other market abuses by sealing legal loopholes that made it almost impossible for the regulator to prove cases of insider trading in court.

A generally opaque regulatory framework in Kenya was said to be scaring away potential investors and financiers, who opted for other markets like Malaysia, where investor protection laws are tighter.

CMA boss Paul Muthaura said the Authority is also banking on a new surveillance system and an electronic financial reporting platform to be deployed in the next two months to help the authority track trading activities by insiders, while providing quality information to CMA.

It will, among other things, monitor trading for each shareholder and for company insiders like directors and senior managers.

Insider trading and other market abuses have now been defined in detail and broken down into items — such as market manipulation, false trading, market rigging, fraudulently inducing trading of securities, use of manipulative devices and making false or misleading statements — with enhanced penalties.

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This means insider trading will now be treated as an offence of strict liability with the new law identifying a range of the most common market manipulation offences to guide the courts and the investing public.

Mr Muthaura said that cases brought against insiders in past years failed because the laws were vague, making it difficult to prove that an insider had traded based on information that had not yet been made public.

“We identified the weaknesses in the law at that time and did a lot of international benchmarking so we could align our rules accordingly,” said Mr Muthaura.

Three years ago, the High Court dismissed insider trading charges against former Kenya Commercial Bank managing director Terry Davidson and former Uchumi Supermarkets general manager Bernard Mwangi Kibaru.

The two had been accused of instructing their brokers to trade their shares before the supermarket chain collapsed and had its shares suspended from trading at the Nairobi Securities Exchange in 2006.

The CMA approved Uchumi’s re-listing in April 2011, but issues surrounding its collapse and subsequent court cases brought current laws, corporate governance practices and the powers of CMA under scrutiny.

In his budget speech this year, Henry Rotich, Cabinet Secretary for the National Treasury, said insider trading and market manipulation continued to pose a threat to the stability and growth of the capital markets.

“What the provisions are saying is that once you are shown to be an insider, if you trade, you are deemed to have ‘insider traded’ unless you can prove otherwise. It is strict liability, you give evidence to show that the reasons to trade have nothing to do with the insider information,” said Mr Muthaura.

He said that issuers are currently putting in place controls on trading activity so that board members, those with significant shareholding and others considered insiders can be aware when and how they can trade.

Individuals found guilty of a first offence will be subject to a fine of not more than Ksh2 million ($23,529) or go to jail for two years and repay the gain made or loss avoided while companies will be subject to a fine of up to Ksh5 million ($58,824) and repay the gain made or loss avoided.

Subsequent offences for individuals will attract a fine of not more than Ksh5 million ($58,824) or imprisonment of seven years and payment of twice the gain made or loss avoided while companies will be subject to a fine of up to Ksh10 million ($117,647) and repayment or twice the gain made or loss avoided.

Investors will be able to sue issuers, investment banks, stockbrokers, auditors, lawyers and anybody else who approved a prospectus if it was defective or misleading.

The Bill allows investors who suffer loss as a result of any untrue or misleading statement or an omission in the prospectus as required by law to seek legal redress. The proposed law will also put in law the framework for the establishment of futures markets and clarify rules on asset-backed securities, opening the door for investments backed by projects such as roads and loans.

The Bill has however put CMA and stockbrokers on a collision course.

The Kenya Association of Stockbrokers and Investment Banks (KASIB) said that the Bill was not disclosed to the public as required by law and there was no input from the industry.

“This Bill went to parliament through the back door. When they fail to expose it to the public, it raises doubts as to what they are up to.

We are still deciding the route to take,” said Willy Njoroge, the chief executive officer at KASIB.

The sticking point for the market intermediaries is the role of investment banks in deals such as privatisation and provisions on penalties against insider trading.

Efforts to tighten regulation of the capital markets sector came after the Financial Action Task Force (FATF), a group of 34 mostly Western countries, put Kenya on a watch list demanding it tighten its regulations and enforce anti-money laundering and terrorism financing laws.

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Stockbrokers, like commercial banks, will be required to report any transaction greater than $10,000 (Ksh837,000) to the Financial Reporting Centre for investigation.

“The CMA must be cautioned against regulation that risks the growth of the industry,” said Job Kihumba, executive director at Standard Investment Bank.

The proposed law also puts in place more protection for investors who risk their money and also gives the CMA powers to quickly respond to the needs of issuers, particularly those who want to introduce new products without having to wait for a legislative process.

The CMA expects that the new laws will help create an environment for a wide variety and more complex products, leading to a vibrant capital market that will be able to compete for capital with other international markets such as Poland, Thailand, Malaysia, Indonesia and Chile.