2. DEMUTUALIZATION OF THE NAIROBI STOCK EXCHANGE LEGAL FRAMEWORK A presentation made at the Demutualization Stakeholders workshop on November 24, 2009 By Mrs. Rose Lumumba

3. OBJECTIVE To reform the ownership structure of the NSE by segregating ownership rights from trading rights. The legal status of the exchange is transformed from a mutual association into a for-profit company limited by shares. Demutualization shall not create a new legal entity or prejudice or affect the identity or continuity of the NSE

4. INCEPTION OF THE PROJECT The feasibility of demutualization of the NSE was identified through two separate studies: one by KPMG, on behalf of the Authority and the second by Ernst and Young on behalf of the NSE in 2007. Both studies outlined the benefits of demutualization including better governance and eligibility to self- listing.

5. MANAGEMENT OF THE PROJECT The project is managed by a multi-sector Demutualization Steering Committee (DSC) established by the Government of Kenya in March 2009.

6. TORs of the Legal Subcommittee To advise on issues of legal nature relating to the demutualization process. Develop the demutualization legal framework. Advise on the incorporation of the demutualized exchange.

7. Tasks undertaken by the Legal Subcommittee The legal framework for demutualization would be better achieved through a Demutualization Act as opposed to revision of the Capital Markets Act and Licensing Regulations. The Capital Markets Act has undergone several amendments in the past and the entire capital markets legal and regulatory framework is in the process of a review. It was noted that when BBK and Bank of Baroda sought to become public companies, they enacted independent Acts i.e. the BBK Act and the Bank of Baroda Act.

8. Several jurisdictions such as Malaysia, Canada, Pakistan and Singapore have stand alone statutes to cater for demutualization. The new legislation cannot be incorporated in the Miscellaneous Amendment Bill, 2009. It was noted that the intention of the Bill is to effect minor amendments to the Statute Book and was considered not an appropriate way of introducing this milestone in our capital markets.

9. The procedure of enacting a statute includes the following steps: Draft is submitted to the Ministry of Finance then to the AG’s Chambers and then to the Cabinet. After Cabinet’s approval the Bill is tabled before Parliament for debate and enactment. The process of enactment of the proposed Demutualization Act should however be fast tracked as part of the current reform agenda by Government.

10. Salient features of the Demutualization (NSE) Act, 2009 Framework for conversion of the NSE from a company Limited by guarantee to one limited by shares NSE to apply to convert from a company ltd by guarantee to one ltd by shares. The conversion follows the approval by the Minister for Finance, whereupon the Registrar will issue the Certificate of Re-registration and alter NSE’s details in the Companies Registry to reflect it new status as a company ltd by shares.

11. The Draft Act also makes provision for: Exemption from taxes, duties or registration fees payable upon any transfer or vesting of property affected by the Act; Any public officer to issue or amend any certificate or other document effecting or evidencing title as appropriate at no charge; The effect of conversion whereby the amended Memorandum and Articles will be the Memorandum and Articles of the Exchange being a company limited by shares;

12. The conversion shall not create a new legal entity or affect its identity or continuity. The Minister to make such regulations as may be expedient or necessary to better carry out the provisions of the Act.

13. That where there is a conflict between the Demutualization Act and any other Act; the provisions of the Demutualization Act will prevail. However, the Exchange, once demutualized should be required to apply to the Authority as per the existing Capital Markets Regulations.

14. Memorandum of Association. The Memorandum of Association was revised to ensure that the objects are as wide as possible to offer a suite of services in line with modern securities exchanges;

15. Articles of Association. At demutualization all directors to continue in office until the first General meeting after Demutualization. The rotation of Directors has been defined as every 3 years for a maximum period of two terms per Director.

16. Cont’ Articles of Association. The quorum necessary for the transaction of business of the Directors shall be 5, and the maximum number of Directors in the Board shall be 11. The Articles are subject to the Companies Act, the Capital Markets Act and the Regulations.

17. Amendments to the existing Law Several amendments to the Capital Markets Act and the Capital Markets (Licensing Requirements) (General) Regulations, 2002 have been recommended.

18. Way forward The NSE to embrace SRO responsibility NSE would amend its Rule Book to ensure that Self-Regulatory Responsibilities (SRO) envisaged under the demutualization plan are integrated

19. Way forward CMA and NSE would enter into a Memorandum of Agreement with regard to the demutualized exchanges SRO responsibilities. Legislation process. (Ministry, Cabinet & Parliament)

20. END Thank you.