Stakeholders’ Workshop, The Sarova Stanley

Tuesday, 24 November 2009

 Agenda
g
1.Background
2 Rationale
2.Rationale
3.Strategy
4 Governance
4.Governance
5.Regulatory Role
6 Value Allocation
6.Value
7.Dilution
8 Listing
8.Listing
9.Conduct of Business
10 Regional Integration
10.Regional
2
Background

3
 Background
g
Milestones

• 1920s: Dealingg in shares and stocks

starts in the colony
g
• 1954: Registration under the Societies
Act
• 1991: Registration
g under the
Companies Act
• 2006: Intention to Demutualise

4
Rationale

5
 Rationale
• Commercial orientation – for profit company
• Strategic alliances – ability to offer equity
• Regional integration – merger of regional exchanges
• Capital raising – ability to access financing
• Investment in technology – upgrade of platforms
• Foster innovation – diversification of the product offering
• Exit option - current investors can cash out
• Incentivise employees – alignment of interest with
shareholders
• Enhanced regulatory role – reduced conflict of interest
• IImproved
d governance – separation off ownership
h ffrom
trading rights
• Improve competitiveness – more agile management
structure

6
Strategy

7
 Strategy
gy
• Five Year Corporate Plan 2010 – 2014
• Required as part of application for
demutualisation
• Five Strategic Objectives
- Grow the value of existing business lines
- Diversify into new areas of business
- Build the brand
- Build capacity
p y
- Demutualise

8
Mandate

9
 Mandate
1. For profit, commercial company under the Companies Act;

2. Licensed Exchange under the Capital Markets Act;

3. Subject to the requirements of the Demutualization Act;

4 A
4. As a licensed
li d Exchange
E h under
d theh CMA A Act, the
h EExchange
h
has certain public interest responsibilities:-
1. To provide a fair, honest and efficient market for public trading of
securities and other financial instruments;
2. To provide fair access to its facilities and services, based on meeting
the stated requirements for access;
3. To effectively regulate its authorized users and markets, in
accordance with the Act and Regulations and subject to the oversight
of the CMA;
4. To set initial and ongoing requirements to be listed for trading, and
to monitor listed entities compliance with those requirements.

10
Governance

11
 Board
NSE to adopt a mandate for its Board:-
1. Responsible for setting policy and strategy, and supervising
management;
2
2. M
Management t is
i responsible
ibl for
f operations.
ti
NSE to adopt a code of ethics (including conflict of interest policies)
for its Board.
As a general principle,
principle the NSE must comply with the corporate
governance standards for listed companies and aim to meet best
practises in corporate governance.

Transition:-
1. The first Board immediately after demutualization will be
composed
p of nominees based on prior
p discussion between NSE
and CMA;
2. The Board will take office as of the date of demutualization
approved by the Minister, and will remain until the first AGM;

12
 Board
Thereafter:-
1. Director candidates are nominated (based on fit and proper test)
by the Board’s Corporate Governance Committee and elected by
shareholders at each AGM;
2. Directors may be elected for 2 – 3 years and elections staggered;
3. Shareholders may nominate Directors in accordance with corporate
law;

Composition of the Board:-

1 11 directors.
1. directors
2. A proposed cap on the number of directors affiliated with
Members;
3
3. Chief Executive is an ex-officio
ex officio director
director.

13
 Committees
Board Committees will have a majority of independent directors:-

1. Finance Committee;
2. Audit Committee;
3. Human Resources Committee;
4
4. Ri k Management
Risk M Committee;
C i
5. Corporate Governance Committee.

14
Regulatory Role

15
 Regulatory Responsibilities
The NSE’s high level responsibilities will be set out in the CMA Act and
the Licensing Regulations:-
They will include:
1. Market regulation – trading rules & surveillance;
2. Authorized user regulation – business conduct rules & inspections;
3 Listings – listing standards & ongoing obligations of listed issuers.
3. issuers

The details of the ongoing relationship between CMA and NSE will be set out
in the MOU on self-regulation between the CMA and NSE. This will include
the implementation of specific activities delegated by CMA to NSE over time
as NSE develops its SRO capacity. If the NSE is delegated such responsibility,
it must have the necessary powers under law and regulations.

16
 SRO Unit
The SRO Unit must be functionally and physically separate from the
business operations of the NSE:-
1. Due to potential business conflicts, the SRO unit will bear responsibility for
dealing with listing applications and the monitoring and administration of
the ongoing listing rules;
2. The NSE business operations shall have a separate “Listings Business
Development and Services Unit.
Unit It shall continuously interface with the
Listing Compliance Division to provide services to listing applicants and
existing listed issuers;
3. The SRO unit shall report to the Self-Regulation Committee of the Board
andd th
the Chi
Chieff Executive;
E ti
4. The Self-Regulation Committee is comprised entirely of independent
directors;
5. The Self-Regulation
g Committee shall consider all proposed
p p rule changes
g
concerning compliance matters, and decide whether to recommend them
to the Board;

17
 SRO Unit
6. The Board of Directors shall approve all NSE rules, including rules on
market conduct, business conduct and listing;
7. The CMA has an oversight responsibility over NSE SRO operations, which
in l de regular
includes eg l reporting
epo ting to CMA
CMA, andnd other
othe protocols
p oto ol set
et out
o t in the MOU
on self-regulation between the CMA and NSE;
8. SRO unit staff must not be compensated based on the business
performance or financial results of the NSE;;
p
9. A disciplinary tribunal will hear disciplinary cases and approve settlements
of actions brought by the NSE SRO Department. The decisions of the
tribunal shall be final, subject only to an appeal to the CMA (at the option
of either NSE or the defendant)
defendant).

18
Value Allocation

19
 Value Allocation
1. On demutualization of the NSE:-
1. On conversion of NSE:-
1. Shares to be issued and reserved for the Members;
2 Shares
2. Sh t b
to be reserved
d for
f ththe IInvestor
t C Compensation
ti FFund d
(ICF); and
3. Shares to be reserved for the Government of Kenya.
2. The shares to be allocated amongst Members based on a formula
to be proposed by the Members;
3. This share ownership structure is transitional. It will remain in
place for between 1 and 3 years;
4
4. After demutualization the voting rights of authorized user/Member
shareholders should be restricted.

20
Dilution

21
 Dilution
1. Members will undertake to reduce their aggregate shareholding to
below 40% through either:-

1. Private Placement; or

2. IPO and Self-listing.

22
Listing

23
 Listing
1. Timing: Within 1 to 3 years after demutualization, unless the CMA
grants an extension.
2. Approvals: CMA must approve:-
1. The application to list and an information memorandum to raise
capital (if applicable);
2. The transaction advisors;
3 Along with the sale of equity by the initial shareholders
3. shareholders, the NSE
could undertake a primary offer to raise capital.

24
Conduct of Business

25
 Conduct of Business
The NSE’s business shall operate under the auspices of its Board and
be administered by management. NSE business initiatives and new
products are not subject to CMA approval, but the CMA’s jurisdiction
and regulatory responsibilities may require specific legal and
regulatory changes or approvals. These include:
1. The CMA is responsible for ensuring that the NSE is financially viable (a
condition of license)
license).
2. The NSE should be required to report any proposed material changes in
its business operations to the CMA.
3. All p
products must be in compliance
p with the principle
p p of the Capital
p
Markets Act;
4. CMA must approve any general regulations and disclosure standards
required for a product class;
5
5. NSE must approve any prospectus required to introduce and sell a
specific product, except for when the issuer is the NSE, then CMA will
approve the product.

26
 Conduct of Business
7. The NSE should set its own fees and prices for products, subject to a
maximum fee formula or price for core services set by CMA on
application of NSE. (This regulation is justified by the fair access
p in iple as long as NSE is
principle i effectively
effe ti el a monopoly
monopol service
e i e provider.)
p o ide )
8. Core services include:-
1. Authorized usership fees;
2. Trading g fees;;
3. New listing fees;
4. Continued listing fees and fees for real-time market data;
9. All other prices for products and services should be unregulated.

27
Regional
g Integration
g

28
 Regional Integration
• Guided by the existing framework:
Roadmap to Political Federation;
-Roadmap
-EAC Treaty; and
-Common Market Protocol

• Endgame is a single EA Exchange with trading platforms

in each Partner State

• Demutualisation is the first step

• Merger discussions after all regional Exchanges are

demutualised

29
Questions?

30
Stakeholders’ Workshop, The Sarova Stanley
Tuesday, 24 November 2009