Regulation of private equity and venture capital companies under the Finance Act 2020
The Finance Act 2020 (the Act) was assented by the President on 30th June 2020. The Act has provisions that amend various laws including the Income Tax Act, the Value Added Tax Act, 2013, the Excise Duty Act, 2015, the Tax Procedures Act ,2015, Miscellaneous Fees and Levies Act, 2016, the Tax Appeals Tribunal, 2013 and the Capital Markets Act (Chapter 485A, Laws of Kenya).
One of the notable amendments in the Act is section 30 which amends section 11 of the Capital Markets Act (Chapter 485A, Laws of Kenya) (the CMA Act) by inserting paragraph (ga) after paragraph (g). The amendment gives Capital Markets Authority (CMA) the mandate to “license, approve and regulate private equity and venture capital companies that have access to public funds.” (Emphasis is ours). It is noteworthy that prior to enactment of the Act, “registered venture capital companies” were regulated under the CMA Act.
Private equity (PE) and venture capital (VC) firms are entities that pool funds from investors and invest the same mostly in private companies or listed public companies with a goal of increasing the value of their investments and exit by disposing their stake for a profit. Whereas VC firms mostly invest in start-ups, PE firms invest in mature businesses. Registered VC companies are defined under the CMA Act to mean companies providing risk capital to small and medium sized businesses in Kenya with high growth potential, whereby not less than seventy-five per cent of the funds so invested consist of equity or quasi-equity investment in eligible enterprises. PE companies are not defined under the CMA Act.
The Act and the CMA Act do not define the term “public funds” and the Act does not introduce elaborate provisions detailing the requirements and procedure of obtaining licences by private equity and venture capital companies that have access to public funds. The Constitution, the Interpretation and General Provisions Act and other Acts of Parliament do not define the term “public funds”. Public funds are generally understood to mean funds that come into possession of, or is distributed by, a national government entity. This also would include funds held by public entities in trust for third parties and any funds that can generate liability for the Government.
The amendment to the CMA Act means that VC and PE firms that raise funds from public entities, for instance pension schemes, will be regulated by CMA hence becoming more transparent for scrutiny by the regulator. This may cause unease with other private investors who invest in such firms and who value their privacy.
As highlighted above, the Act does not define what “public funds” refers to and does not provide for the process of application of the licenses required to operate private equity and venture capital companies that have access to public funds.
It would have been expected that the drafters of the Act would also amend the following sections in the CMA Act:
- section 2 of the CMA Act to include the definitions of “public funds”, “private equity companies” or “private equity and venture capital companies that have access to public funds”;
- section 12 to grant the Cabinet Secretary powers to formulate such rules and regulations as may be required to regulate “private equity companies” or “private equity and venture capital companies that have access to public funds”;
- section 23 to provide for process of licensing of “private equity companies” or “private equity and venture capital companies that have access to public funds”.
If you have any queries regarding Capital Markets regulations, licensing, oversight and other related matters, please do not hesitate to contact Bernard Musyoka at email@example.com.