The panel was made up of Dr. Adano Roba (Acting Director General, Competition Authority of Kenya), Josephine Kang’ong’a (Head of Legal and Regulatory Framework, Capital Markets Authority- Kenya), Michael Koome Mburugu (Regional Tax Partner, PKF International), Hope Wandera (VC Investor, VU Venture Partners) and was moderated by Ribin Ondwari (Partner, Ashitiva Advocates LLP).
While Kenya’s regulatory environment is fairly supportive of investment, there is room for improvement. Some hurdles facing both investors and investees include constraints on ownership, tax inefficiencies, slow licensing processes, bureaucratic hurdles, insufficient public private collaboration, infrastructure gaps and other factors that can negatively impact private equity and venture capital investment.
Kenya can design a responsive and favourable framework that fosters investor confidence and supports sustainable economic growth.
This panel considered the designing of a responsive and favourable policy, tax and regulatory framework that fosters investor confidence and supports growth of entrepreneurship.
Tax certainty and fairness are crucial for investor confidence.
In response to what investors look for in a tax environment, Micheal Mburugu shared that investors search for certainty and fairness in a country’s tax regime. Investors will avoid investing in a jurisdiction with an unpredictable tax regime. PE and VC have a long-term investment horizon, and uncertain tax regimes discourage investment decisions.
Investors also look for jurisdictions with fair tax regimes that optimise revenue collection across the country’s taxpayer base as opposed to the application of disproportionate tax increments on a segment of the taxpayer population. This could lead to unintended consequences such as informalization, reduced economic growth and reduced
competitiveness.
Collaboration on policy and regulatory development is needed to create a favourable
environment for PE and VC investment.
Josephine Kang’ong’a shared that the Capital Markets Authority (Registered Venture Capital Companies) Regulations (the “Regulations”) were established as a regulatory tool intendedto promote VC set up and investments in Kenya. The Regulations allowed for some tax benefits on dividends associated with VC financing transactions. For example, the Income Tax Act Kenya, under the Income Tax (Venture Capital Enterprise) Rules, 1997, provided for tax exemption on the income of Acacia Fund Limited on the dividends and gains arising from trade in the shares of any of its venture companies, which was earned during the first ten (10) years of first investment in any of those companies, subject to compliance with any rules or regulations governing venture capital companies as may be made by the
Commissioner of Income Tax.
Regrettably, the Regulations failed to achieve their objectives due to limited VC investment activity in the country at the time of the Regulations coming into force. Additionally, these Regulations exclusively applied to VC entities organized as companies, overlooking the fact that partnerships have been the more favoured model for VC legal structures.
In a different example, the Start-Up Bill 2022 Kenya (the “Bill”), does not adequately respond to market realities and could fail to achieve its intended objective. Hope Wandera observed that the Bill’s definition of a startup does not capture the distinct characteristics that differentiate startups from small and medium-sized enterprises (SMEs), and whose legislative architecture could potentially fail to address the real needs of startups.
It is therefore imperative to establish a more robust and coordinated regulatory development approach involving regulators and all relevant stakeholders to ensure regulations are responsive to sector needs.
Regulation should be used as a tool to promote PE and VC investment.
Dr Adano Roba, highlighted the importance of regulators playing both a facilitative and enforcement role to promote investment. For example, the Competition Authority of Kenya (the “CAK”) is mandated to investigate restrictive trade practices on horizontal, vertical and abuse of dominance cases that could lead to market distortion. This is crucial in fostering fair competition, creating market transparency, and encouraging innovation which consequently attracts investments.
He shared that the CAK has adopted a well-balanced regulatory approach that finds a middle ground between dealing with anti-competitive behaviour and permitting legitimate business to thrive including approval of M&A deals.
Dr Adano also shared that despite the availability of a robust legal and institutional competition framework, the dual notification process involving CAK and the COMESA Competition Commission in relation to regional cross border transactions could potentially dampen PE/VC interest. Dr Adano suggested the importance of re-evaluating this dual
notification process to avoid dissuading PE/VC investors from participating in M&A deals within Kenya and the broader region.
Josephine Kang’ong’a added that there needs to be an effective legal framework that allows PE and VC investors to smoothly exit through the capital markets. Presently, Kenya has not experienced any exits through the capital markets. However, if the legal and policy frameworks are favourable for exit for example the application of fair tax treatment and availability of effective dispute resolution mechanisms, such legal and policy measures would contribute to the growth of the PE and VC sector whilst simultaneously deepening the capital markets.
