Keeping the shareholders of the Kenya's Equity Bank a secret: why? Look at This: December 17, 2007: Finance minister Amos Kimunya has given Equity Bank and its largest single shareholder, Helios EB, a special nine-year exemption that will prevent Central Bank of Kenya from seeking disclosures regarding the real beneficiaries of ownership in the company. The exemption was granted on November 29 and is contained in a special Kenya Gazette supplement published on December 7. In exercise of the powers conferred by section 53 of the Banking Act, the Minister for Finance exempts Equity Bank Limited and Helios EB Investors from the provisions of section 13(3) until 12th July 2016, reads the gazette notice. Players in the banking industry said the exemption is unprecedented and in effect denies the banking sector regulator the authority to monitor both current ownership of Equity Bank and changes in its shareholders register until July 2016. Kenyas banking law requires CBK to closely monitor and ensure that individuals do not own more than 25 per cent in a bank and that directors do not have more than five per cent shareholding in a bank. This law is meant to prevent individuals from having undue influence arising from ownership of an institution that takes deposits from the public. It is also meant to prevent individuals that the Central Bank considers undesirable or not fit and proper from owning a big stake in a bank. These are people who have either looted, grossly mismanaged and caused the collapse of a bank. The rule also applies to people who have been convicted of a banking crime such as money laundering. Financial institutions are required to regularly report to the CBK any changes in their shareholders registers and disclose the identities of those behind corporate and nominee shareholders. With this exemption, anybody can buy into Equity hiding behind the veil of nominee companies without exposing the bank to any legal obligation to disclose the beneficiaries of such ownerships. Banking experts said the exemption goes against the spirit of the statute, which was enacted to bring transparency into the ownership of banks and promote corporate governance. Equity Bank told the Business Daily that the exemption is necessary since Helios -- the new shareholder -- is a private equity fund, which is the legal and beneficial owner of the shares. Section 13(3) as worded only envisages a shareholder who is a company or an individual who is a nominee for a third party, argues Equity Bank general manager and personal assistant to the CEO Alex Muhia. The provisions have not envisaged a situation where a private equity fund makes an investment in a banking institution. Equity Bank however is not the first bank that counts a private equity fund among its shareholders, but no other institution has been exempted from this rule. Private equity funds are specialist firms that invest a lot of money on behalf of rich individuals and corporations. The firms usually raise money for many funds catering to different tastes of its investors. A fund such as Helios EB has been set up to invest in a number of companies on behalf of its partners for a limited period of time -- typically 10 years. Upon the expiry of this period the fund is harvested and the money shared out among investors. Helios EB Investors is one of the funds managed by Helios Investment Partners. Image Finance Minister Amos Kimunya Among the notable investors in Helios EB are investment firms owned by the US (Overseas Private Investment Corporation) and UK (CDC Group) governments, the World Bank (International Finance Corporation) and funds owned by American billionaire George Soros. It is however not known whether Helios EB has Kenyan investors. Equity and some of its biggest investors was given permission by the Treasury and CBK to buy up to 24.9 per cent of Housing Finance and the deal with Helios is supposed to provide cash that will help pay for this deal and fund the operations of the mortgage lender. Though there are no allegations of any wrongdoing by Equity and the various people and institutions who are some of the most savvy global investors associated with this deal, players in the banking industry found this exemption favour extended by Mr Kimunya overly generous. Having set a precedent, this exemption is expected to have far-reaching implications in the banking sector. This is because it means that other banks can reasonably seek similar political favours to protect individuals behind future deals. The exemption also protects all Equity Bank and Helios shareholders from scrutiny by the bank itself, meaning that the bank has no powers to supervise its own shareholders register. Section 13 (3) of the Banking Act states: Where any share is held by a company or by a nominee on behalf of another person, the company or the nominee as the case may be, shall disclose to the institution and to the Central Bank the full particulars of the individual who is the ultimate beneficial owner of the share. Bankers and commercial lawyers confirmed that no other bank in the country currently enjoys such a privilege and expressed concern that the exemption is likely to impede CBKs supervisory role. They also expressed concern that the move was likely to open a Pandoras Box as most banks that were denied the exemption when the shareholding caps were introduced in 2005 are likely to question the Finance ministers decision. Legal experts however argue that the spirit of the statute was to unmask all individual shareholders in a financial institution for purposes of determining whether they fall under the description of a fit and proper person as defined under the Banking Act. Private equity funds that have been known to own shares in local financial institutions that fall under the Banking Act and have not sought similar exemptions include the UKs CDC Group (a fund-of-funds). CDC has held shares in Housing Finance and only sold its stake in the mortgage financier earlier this year to Equity Bank. Kenya Bankers Association (KBA) chief executive John Wanyela says that no other bank currently enjoys exemption to Section 13(3) of the Banking Act. He reckons that a unique circumstance must have informed the Finance ministers decision to exempt Equity Bank and Helios from the crucial regulatory safeguard. There must be compelling reasons that informed the ministers decision, said Wanyela in an interview. It was probably meant to regularize an earlier exemption that was granted to the banks executive director when Equity became a public company last year. Equity Banks managing director James Mwangi was temporarily exempted from the five per cent shareholding limit for executive directors when its shares were listed at the Nairobi Stock Exchange in August last year. Image Equity Banks managing director James Mwangi Mr Mwangi holds a 7.3 per cent stake in the bank though this is expected decline to about 5.49 per cent when Helios becomes part of the banks shareholding structure. Mr Mwangi has an additional 0.74 per cent beneficial interest in the bank through his shareholding in British American Investments (K). The temporary reprieve from the regulators was supposed to end in July next year but the exemption by Mr Kimunya extends to 2016. Mr Wanyela said that CBKs involvement in granting such an exemption is crucial as it limits the regulators supervisory powers over the bank. Senior partner at Hamilton Harrison and Mathews (HH&M) Mr Richard Omwela said the exemption raises potential legal issues. He argued that the import of the rule requiring disclosure of beneficial interest is to determine that persons holding significant ownership in banks are fit and proper. But with the exemption this is not possible - particularly considering that Helios, which is in the process of acquiring a 24.99 per cent stake in the bank -- is an unknown entity locally. The exemption impedes the regulator in carrying out its legal duty of establishing the character behind not only Helios but any other corporate shareholder in Equity Bank. It also puts minority Equity shareholders who bought their stake in the firm through the NSE at an awkward position as they will not be able to know who the shareholders in their company are. We are exempting an entity which we know nothing about, said Mr Omwela. Despite the fact that the exemption may be well intended, it may only serve to attract unnecessary negative attention to an institution whose business model has been the envy of many in the banking sector. Mr Omwela also cautions that the regulator may be exposing himself to accusations of political favoritism -- especially from other financial institutions that were denied similar exemptions when the rule limiting shareholding in banking institutions to 25 per cent for individual shareholders and five percent for executive directors was introduced. Many shareholders who exceeded CBKs limits in 2005 when the caps were first introduced requested for exemptions or even a grace period within which to off-load their shares but were denied, said Mr Omwela. Equity Bank is the largest bank in Kenya by customer base with an estimated 1.8 million account holders out of an estimated total banked population of just over 3 million. The bank has received numerous local and international awards for its unique micro-finance business model that has placed it on a steep and unprecedented growth curve. However, Equity recently suffered negative publicity when documents were tabled in parliament alleging serious malpractices and questionable shareholding amongst its directors. CBK Governor Njuguna Ndungu, assistant Finance minister Peter Kenneth and Parliaments Departmental Committee for Finance, Planning and Trade chaired by former MP Dr Oburu Odinga later cleared the bank and all its officials from the allegations. Related story: Editorial: Why is Kimunya currying political favours for Equity? In any country, commercial laws are made to ensure the orderly conduct of affairs. For the commercial system under free market capitalism to operate smoothly, the law should be applied equally for all parties. Exemptions to the law, which weaken legislation should be avoided and can only be granted under special circumstances that meet a clearly defined criteria. But one firm has caught public attention for the many exemptions it has received in the cause of its business deals starting mid last year. Equity Bank stands out as the first company to have been listed on the Nairobi Stock Exchange through introduction, without the need to sell shares to the public, not that this broke the law, but it was unprecedented. The firms managing director, Mr James Mwangi, is the only significant shareholder in a bank who is also the chief executive, thanks to an exemption from the Central Bank of Kenya on a rule that individual investors who own more than five per cent of a bank should not be involved in its day to day running. Last month, the bank sealed two major dealsestimated at Sh12 billion without being required to follow established mergers and acquisition rules, again courtesy of exemptions from regulators. Indeed, it seems what Equity wants from this government it gets as a matter of course. It is now emerging that Equity has been granted another exemption by Finance minister Amos Kimunya. The waiver granted by Kimunya essentially bars Central Bank of Kenya from requiring Equity Bank to disclose who are the real people who own shares through nominee accounts and other vague instruments until 2016. The broad waiver also bars CBK from requiring one particular firm, Helios EB Investors, from disclosing who the real investors behind this private equity fund are. Equity argues that this kind of waiver is necessary because its biggest investor now is a private equity fund, but we argue that given the opaque manner that these funds are operated, it is all the more reason why this exemption should not have been granted to uphold the need for transparency in the ownership of local banks. This exemption smacks of political favouritism and as the experts have argued in our lead story today, it will open a dangerous precedent with other banks demanding equal treatment. It has potential for promoting poor corporate governance. It is in this spirit that we remember all the banking flame-outs and fraud that went under with the savings of the citizens. What if CBK was not empowered to know who the real owners of Trade Bank or Exchange Bank were? Could future Anglo Leasings and Goldenbergs also claim similar treatment under a law we pay little attention to when it comes to government procurement? When a keenly watched and much admired institution like Equity Bank takes such a consistent path of operating outside the laid down procedures, the whole essence of having the stipulations in place is lost. Indeed, questions on exemptions have dominated the market over the last year as decisions that encroach on the rights of small investors in listed companies get passed with administrative intervention from regulators. But rather than dwell on the beneficiaries of such contentious decisions and their clout with public offices, the myriad exemptions urgently call for a rethink in the way they are sought and granted. For one, it is important that any entity seeking exemption to a certain law should be made to publicize such an intention. Presently, all exemptions are made through backroom deals with no scrutiny from citizens, regulators or Parliament. For purposes of transparency, this secretive nature needs to be discarded. Secondly, a public response time needs to be put in place, probably for a period of two months, during which objections should be received. Our view is that any rules that are not pro business should not be there in the first place, hence there would be no need for exemptions from them. Source: Business Daily 17.12.2007.