Billions at stake as Nairobi Securities Exchange shuts down over tax dispute

NAIROBI: Starting Friday, local or foreign investors will for the next one month not be able to buy or sell their shares at the Nairobi Securities Exchange (NSE). This is after stockbrokers and investment banks threatened to boycott trading pending a court decision on whether or not they should collect Capital Gains Tax on behalf of the Government.

This decision puts at stake loss of a daily turnover worth Sh1.2 billion at the Nairobi bourse. The immediate casualties are government sponsored bonds — used to finance budget needs, foreign direct investment, and firms pushing to raise funds — all valued at billions of shillings.

The case by the Kenya Association of Stockbrokers and Investment Banks (Kasib) pits the lobby against the Attorney General (AG) and the Kenya Revenue Authority (KRA). Kasib Chief Executive Willie Njoroge said the action is meant to enable upholding of the rule of law until the case is determined. "It also allows for the creation of an avenue for consultations with the relevant authorities to find a way of complying with the law in its entirety," said Njoroge.

But the stock market regulator, the Capital Markets Authority (CMA), dismissed the suspension of trading claims, saying stockbrokers have no authority to do so as claimed in their statement.

Even as CMA held a crisis meeting last night over the issue, CMA acting Chief Executive Paul Muthaura downplayed the crisis, saying that Kasib had no mandate to suspend trading.

He said the powers are vested only in CMA and NSE, which can intervene in extreme price swings. Muthaura summoned the stockbrokers for an urgent meeting to resolve the outstanding issues around the new tax measure. "Stockbrokers can decide not to provide services as individuals but not as a group.  Suspension of trade at the NSE can only be executed by the CMA and the exchange, "said Muthaura.

National Treasury Cabinet Secretary Henry Rotich declined to comment yesterday, saying he was yet to get briefing from the regulator before issuing a statement. The dispute that has led to this latest development comes at a time when stockbrokers maintain that they do not handle the cash paid at the Central Depository and Settlement Corporation and therefore cannot collect the tax at source as required by the law.

TAX MODALITIES

Tax experts closely associated with this matter disclosed that the modalities for complying with capital gains tax for stockbrokers have not been worked out, making the law administratively impractical to implement. In addition, stockbrokers have no information on prior transactions or even adjustment costs.

The consequences of not complying with the Capital Gains Tax could see stockbrokers slapped with a tax bill of Sh100,000 per transaction. "If trading does not take place, there will be no cash for the bourse, stockbrokers and investment banks as well as other stakeholders at the capital markets. For instance, stockbrokers will be losing 1.5 per cent of daily turnover. Other big losers are the NSE and CMA, who charge various levies and fees on daily market activity," said Director at Kasib and Managing Director, Sterling Investment Bank John Kirimi.

Disruption of activities at the NSE means that local and international investors will not able to trade their shares until March 18, 2015, a situation that could see the State lose billions in revenue, halting several ongoing infrastructure projects.