A NEW DAWN FOR FOREIGN INVESTORS IN THE ICT SECTOR IN KENYA

The Information and Communications Technology (ICT) Sector Policy Guidelines 2020 in Kenya introduced a requirement for foreign firms licensed to provide telecommunications services to have at least 30% of their shares held by locals within a three-year grace period.

The rationale behind the 30% local shareholding requirement was to ensure national security, attract foreign investment, and create employment for Kenyans. The policy aimed to equip Kenyans with sufficient knowledge to help local ICT firms flourish. However, it did not achieve its mandate as the number of foreign investors in the ICT sector declined significantly. Foreign companies found the policy prohibitive and were reluctant to find local partners, making it harder for existing startups to increase their stake beyond the 30% equity threshold.

Consequently, President William Ruto proposed the removal of the mandatory local shareholding requirement as part of the fiscal policy changes expected in the Finance Bill 2023 and the Budget Policy Statement. This proposal was made during the American Chamber of Commerce (AmCHAM) Summit held on March 29th and 30th, 2023, in Nairobi. In a Cabinet dispatch dated July 18th, 2023, the Kenyan Cabinet approved the President’s proposal. The dispatch stated that the rationale for scrapping the 30% requirement is “part of the reforms to enhance Kenya’s overall ease of doing business index while also fortifying legislative consistency in the governance framework for foreign investments. The policy shift is geared towards facilitating technology and knowledge transfer as well as aiding the expansion of the digital economy by positioning the country for increased foreign investments in technology as envisioned in the Administration’s Bottom-Up Economic Transformation Agenda (BETA).”

Following Kenya’s Cabinet approval of abolishing the mandatory local shareholding requirement in the ICT sector, Elon Musk launched his satellite Internet firm, Starlink, in Kenya on July 19th, 2023. Starlink partnered with a local internet company, Karibu Connect, as its first authorized distributor in Kenya. The launch made Kenya the sixth African country to be explored for business by Starlink after Nigeria, Mozambique, Mauritius, Rwanda, and Comoros. Shortly after the launch of Starlink, United States (US) Ambassador Meg Whitman attended the 8th Devolution Conference in Eldoret. In her address, she strongly pitched Kenya as Africa’s best investment destination for the international community. The envoy did not hide her enthusiasm about Kenya’s investment prospects and climate, describing the country as the region’s ICT Hub and gateway to East Africa.

Local Shareholding Requirements in Other Sectors:

Engineering: The Engineering Technology Act No. 23 of 2016 requires a foreign firm to be incorporated in Kenya and have a minimum local shareholding of 51% to be registered as an engineering consulting firm.
Aviation: Regulations 5 and 12 of the Civil Aviation (Licensing) require a prospective licensee to be a Kenyan citizen or, if a body corporate or a partnership, to have at least 51% of its voting rights held by the Kenyan government, a Kenyan citizen, or both.
Private Security: The Private Security Regulation Act, 2016 mandates a prospective license holder to have a minimum of 25% local shareholding.
Pension Funds/Schemes: The Retirement Benefits Act, 1997 requires at least 60% of the paid-up share capital of a scheme administrator to be held by Kenyan citizens unless the administrator is a bank or an insurance company.
Shipping: The Merchant Shipping (Maritime Service Providers) Regulations, 2011 require an applicant for a license to be a Kenyan citizen or, if a body corporate, to have at least 51% of its share capital held by Kenyan citizens.
Insurance: The Insurance Act (CAP 487) stipulates that not less than one-third of the paid-up share capital of an insurance company must be owned by citizens of the states forming the East African Community or wholly owned by the Kenyan government.
Mining: Under the previous Mining Act, a mining license applicant needed 35% local shareholding for a mineral right. The 2016 Mining Act allows the Cabinet Secretary to set capital expenditure limits. If a licensee’s planned spending surpasses this limit, they must list 20% of equity on a local stock exchange within three years of production start. Small-scale operations tied to mineral rights are limited to Kenyan citizens or bodies corporate with 60% local shareholding.
Capital Markets: The Capital Markets (Foreign Investors) Regulations require every legal entity that offers securities to the public or a listed company to reserve at least 25% of its ordinary shares for investment by Kenyan citizens.
Financial Institutions: The Banking Act (CAP 488) also imposes specific local shareholding requirements.

We hope this information is helpful in understanding the 30% local shareholding requirement in the ICT sector and the effects of its abolishment in Kenya. Please note that the contents of this newsletter are intended to provide a general guide to the subject matter and should not be relied upon without legal advice on its contents.

For further information or legal assistance on compliance or any other legal issue, please contact us at info@wka.co.ke, www.wka.co.ke, +254 798 03 580, Nairobi Hub: Parklands, Valley View Business Park, 6th Floor, City Park Drive, Off Limuru Road.

Authors:

Founding Partner: William Karoki
Lawyer: Florence Mwende