CLARITY ON LOCAL EQUITY PARTICIPATION REQUIREMENTS IN KENYA’S ICT SECTOR

Equity participation refers to the ownership of shares in a company. There has been changes in the Kenyan equity participation over the years. In 2006, it was required that companies providing broadcasting and telecommunication services have 30% local equity participation. In 2008, the local equity participation requirement for ICT firms reduced to 20% but was retained at 30% for broadcasting companies.

The Government’s aim was to encourage Kenyans to participate in the Information Communication Technology (ICT) sector through equity ownership. The 2020 ICT Policy introduced a rule stipulating that only companies with at least 30% substantive Kenyan ownership would be licensed to provide ICT Services (Equity Participation Rule).

This increased the local ownership requirement from the previous 20%. The change, however, will not affect broadcasters who are already required to have 30% local ownership by the Communication Authority.

The term “ICT Services” is not defined under the Kenya Information and Communications Act 1998 (KICA) or the ICT Policy, although “information and communication technologies” is defined under KICA as “technologies employed in collecting, storing, using or sending out information and include those involving the use of computers or any telecommunication system”. This is a broad definition that could cover all services that require a license under KICA. Any ICT entity that falls under the ambit of KICA and requires licensing for their operations will be required to comply with the Equity Participation Rule.

The Amendment

The National Information Communication and Technology Policy Guidelines, 2020 (the Policy) was unclear on timelines within which existing licensees are required to increase their Kenyan shareholding percentage to 30%, how existing licensees with waivers are to be treated and specifically how the 3-year grace period granted under the Sector Policy is to be applied.

Through Gazette Notice Number 3192 of 9 April 2021 (the Notice), the Sector Policy has been amended to provide the timelines for compliance. As such:

  1. An existing licensee with less than 20% local equity ownership and has not exhausted its three-years grace period will be required to meet the 30% local equity ownership at the end its grace period. The grace period refers to the 3-year period from grant of the licence.
  2. An existing licensee that had met the 20% local equity ownership before 7th August 2020 will have two years to meet the 30% local equity ownership threshold with effect from the said date (7th August 2020).
  3. An existing licensee that had a waiver granted under the ICT Sector Policy Guidelines of 2006 will have three (3) years to meet the local equity ownership threshold with effect from the date of the Notice (25 March 2021), meaning the deadline for compliance will be 24 March 2024.
  4. A new applicant for a licence will have three (3) years to meet the local equity ownership threshold from the date of issue of the licence.
  5. A company registered to exclusively offer Business Process Outsourcing (BPO) Services will be exempt from equity participation requirements.

Notably, the Policy also allows licensees to apply to the Cabinet Secretary for extension or exemption. This is an amendment of the previous provisions of the Sector Policy, removing the one (1) year exemption period limitation. Discretion is now left to the Ministry to determine the period of the exemptions granted.

We recommend that all companies in the ICT sector initiate steps to comply with the local equity participation requirements even though the Notice provides comfort to investors in this sector as they continue to explore ways to restructure their businesses in a manner that ensures compliance with the Sector Policy.

By Dennis Kachero

We are available to assist and advise companies on innovative and best practice structures that will facilitate compliance with the policy. Kindly reach out to us on info@mmsadvocates.co.ke            praxcy@mmsadvocates.co.ke or kachero@mmsadvocates.co.ke.

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