DEMUTUALISATION What it means for the NSE Stakeholders

DEMUTUALISATION What it means for the NSE Stakeholders’ Workshop, The Sarova Stanley Tuesday, 24 November 2009

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

Background 3

Background Milestones • 1920 s: Dealing in shares and stocks starts in the colony • 1954: Registration under the Societies Act • 1991: Registration 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 • Improved governance – separation of ownership from trading rights • Improve competitiveness – more agile management structure 6

Strategy 7

Strategy • 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 - 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. As a licensed Exchange under the CMA Act, the Exchange 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. 2. Responsible for setting policy and strategy, and supervising management; Management is responsible for operations. NSE to adopt a code of ethics (including conflict of interest policies) for its Board. As a general 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 of nominees based on prior 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. 2. A proposed cap on the number of directors affiliated with Members; 3. Chief Executive is an ex-officio director. 13

Committees Board Committees will have a majority of independent directors: - 1. 2. 3. 4. 5. Finance Committee; Audit Committee; Human Resources Committee; Risk Management Committee; 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. 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. 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 and the Chief Executive; 4. The Self-Regulation Committee is comprised entirely of independent directors; 5. The Self-Regulation Committee shall consider all proposed rule changes 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 includes regular reporting to CMA, and other protocols set out 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; 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). 18

Value Allocation 19

Value Allocation 1. On demutualization of the NSE: 1. 2. 3. 4. On conversion of NSE: 1. Shares to be issued and reserved for the Members; 2. Shares to be reserved for the Investor Compensation Fund (ICF); and 3. Shares to be reserved for the Government of Kenya. The shares to be allocated amongst Members based on a formula to be proposed by the Members; This share ownership structure is transitional. It will remain in place for between 1 and 3 years; 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, 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. 2. 3. 4. 5. The CMA is responsible for ensuring that the NSE is financially viable (a condition of license). The NSE should be required to report any proposed material changes in its business operations to the CMA. All products must be in compliance with the principle of the Capital Markets Act; CMA must approve any general regulations and disclosure standards required for a product class; 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. 8. 9. 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 principle as long as NSE is effectively a monopoly service provider. ) Core services include: 1. Authorized usership fees; 2. Trading fees; 3. New listing fees; 4. Continued listing fees and fees for real-time market data; All other prices for products and services should be unregulated. 27

Regional Integration 28

Regional Integration • Guided by the existing framework: -Roadmap to Political Federation; -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

DEMUTUALISATION What it means for the NSE Stakeholders’ Workshop, The Sarova Stanley Tuesday, 24 November 2009