Treasury secretary Henry Rotich has bowed to pressure from the private sector to revoke a law requiring foreign companies setting up shop in Kenya to cede a third of their shareholding to locals.
Mr Rotich has changed a provision in the Companies Act that compelled all foreign companies registering in Kenya to reserve at least 30 per cent of their shareholding to Kenyans.
The change is contained in the Finance Bill 2016 which has been cleared to become law from this month. “Section 975 of the Companies Act is amended in subsection (2 by deleting paragraph (b),” reads Section 85 of the Finance Act (2016).
Private sector players had termed the rule as draconian in Kenya’s liberal market economy, while Industrialisation Cabinet Secretary Adan Mohamed admitted in November last year that the rule was an “error” and would be rectified.
The repeal of the local ownership rule comes as a great relief to foreign investors who faced a fine of Sh5 million for non-compliance.
“This quiet repeal of the 30 per cent local ownership rule will be very welcome to foreign investors wishing to invest in Kenya,” Shitul Shah, a partner at Daly & Inamdar Advocates, told the
Business Daily.
The government’s U-turn comes after Attorney-General Githu Muigai chose June 15, 2016 as the date to totally enforce the Companies Act, which was being implemented in phases, effectively ushering in the ownership clauses.
Kunal Ajmera, chief operating officer at consultancy firm Grant Thornton, said even though the clause was meant to promote local investors, it “was not simply feasible.”
“It baffled most foreign businesses and created unnecessary confusion among prospective investors. In today’s global economy where people, money and ideas flow freely such restrictive practice was never going to work,” said Mr Ajmera in an interview.
Analysts had expressed fears that Kenya’s local ownership rule would spur the activities of government wheeler dealers and corrupt power brokers to acquire stakes in foreign firms coming to Nairobi using taxpayers’ cash.
The local chapter of American Chamber of Commerce, a lobby of US investors in Kenya, had termed the rule as “expensive, if not impossible.”
The process of carrying out due diligence in a company from another jurisdiction to effect a share sale or allotment is not only time-consuming but also expensive, warned the club of American investors in Kenya.
Source: Business Daily.
That law was full of it, u just seat and wait for foreign investors, once they shows up, u get your 30%.
The so called investor have struggled to build up his business over the years, some starting from scratch, failing numerous time, and standing back up, to a point of building an international entity.
Then u wait for this Guy at JKIA wearing cheap Cologne and demand 30%. WTF?
What baffles me is that, in the countries those ‘‘investors’’ come from,this types of laws exist and are enforced to the bone…case in point a Kenyan professional cant practice let alone design a chicken house in China or Uganda for that matter yet we are flooding our market with Chinese designs without even the consultation of the professional bodies involved… let them restructure the Act basi to have at-least 80% of the workforce (both professional and laborers) to be local…
The Chinese government prefers the enterprise be established as a Joint Venture with a local Chinese partner. Rules, regulations and access to the domestic market clearly favor this method.
Wholly Owned Foreign Enterprises(WOFE)
A WOFE is an enterprise in China which is 100% owned by a foreign company or companies. Establishment as a WOFE allows the foreign firm to retain complete control and direction of the operation. It also tends to maximize return as a second party investor is not involved. But, a WOFE can be more difficult at startup as the foreign firm may have no expertise in operating in China and little knowledge of the local area.
WOFEs are generally established as manufacturing or assembly operation for the purposes of export. WOFEs in China enjoy the benefit of low cost labor. A WOFE is not allowed to sell it’s products into the Domestic market. WOFEs that sell into the domestic market use creative importation methods or export and re-import. Under either of these methods significant additional costs are incurred either as payments to a third party or in sizable duty rates.
WOFEs are often but not always, located in a Special Economic Zone(SEZ)where they can take advantage of special tax rates, improved infrastructure, and a variety of local suppliers and services which have grown in and around the zone in support of the SEZ.
Joint Venture(JV)
Joint Ventures are businesses where a foreign firm takes on a local Chinese partner. The ownership usually is 51%-49% with the foreign firm owning the majority. This is no hard and fast rule and various different proportions can be established depending upon the desires of the two parties.
Foreign companies often enter into JVs for a number of reasons. The most common reason is to gain access to the domestic market. Without forming a JV, foreign firms find it all but impossible to gain market access. A Chinese national has, by nature, the rights to sell domestically and without incurring duties or other charges. As long as the business is profitable and sales in China are incremental, JVs can be an excellent choice. Certainly, when faced with the option of no access to the domestic market, it becomes the only choice.
A second major reason for entering into a JV is to utilize the knowledge and expertise of the local partner in doing business in China and the local area. This is especially true if it is the first endeavor into China for the foreign company. The local partner can be extremely valuable in expediting the startup of the business, gaining government approvals, lining up local services and and suppliers or domestic distribution channels. They can also help to teach the foreign nationals how to do business in China, covering everything from rules and regulations to personal issues such as how to obtain expat housing and other needs.
The disadvantage to a JV is that another partner shares in the profits of the business. If this is incremental business, then it can be good for both parties. If the business is strictly export, one must question why enter into a JV and share the profits as low cost labor can be obtained in any one of a number of countries in Asia or even Latin America. (Do not forget availability of infrastructure in this equation) Along with the sharing of profits, however, comes the sharing of the investment risk as the local partner contributes funds or assets into the enterprise. Sometimes the contract assures the local partner a return on investment, mitigating business risk to him
Shapes of JVs
Joint Ventures can take a variety of shapes in term of ownership, contributions, participation and involvement of the partners.They can be 50-50 or 90-10. The local partner may be asked to be participative in running the day to day operations or he may be a silent partner who was acquired by the foreign firm simply to gain domestic market access. In some cases, the partner may be provided guaranteed return on investment regardless of the profitability of the JV. This allows the foreign firm more control over the direction and investment options of the JV.
The two partners will enter extensive negotiations prior to business startup to work out the details of the JV. Successful conclusion of the negotiations results in a workable JV which benefits he needs and wants of both parties.
You don’t just pick any local you meet at the airport you analyze their capacity first that’s what attaché 's at the embassies and Chambers of Commerce are there for