How Foreign Investors Participate in the NSE: Accounts, Taxes, Market Impact, and the Myths Around Their Trading Behaviour

Foreign investors have always played an important role in the Nairobi Securities Exchange (NSE). Because they trade in larger volumes than retail investors, their movements often attract attention and sometimes create unnecessary panic. However, most of the assumptions made about foreigners—why they buy, why they sell, and how they affect prices—are often based on myths rather than how the market actually works.

This article explains, in simple and factual terms, how foreigners enter the Kenyan market, the types of accounts they use, their real tax obligations, and what truly drives their decisions.

1. How Foreigners Invest in the NSE

Foreign investors can enter the NSE market through three main structures: direct accounts, nominee accounts, and omnibus accounts.

A. Direct Individual or Institutional CDS Accounts

This is similar to how a Kenyan investor opens a CDSC account. The foreign investor provides:

Passport/ID
Proof of address
Bank details
Broker account opening requirements

The investor then trades under their own name, and all dividends or corporate actions go directly to them.

Advantages:

Full transparency and ownership
Direct control

Disadvantages:

They are subject to full withholding tax
They must declare income in their home country
Administrative work is higher

This option is less common for large foreign institutions.

B. Nominee Accounts (Custodial Accounts)

This is the most commonly used structure for large foreign investors.

A custodian bank or licensed nominee holds the shares “on behalf of” the investor. Examples include Standard Chartered Custody, Equity Custody, Citibank, and others.

How it works:

The custodian appears in the shareholder register, not the actual investor
The custodial bank receives dividends, handles compliance, pays taxes, and credits the investor

Advantages:

Simplified dividend processing
Easier tax compliance
Privacy and confidentiality
Efficient for large volumes

Disadvantages:

The investor does not appear individually in the register
Slightly higher fees

This is preferred by institutions like pension funds, offshore funds, and ETFs.

C. Omnibus Accounts

This is a pooled account used by brokers or custodians where multiple clients’ shares are held in a single account. It is common for large foreign brokerage firms trading on behalf of several clients at once.

Advantages:

Lower administrative burden
Fast execution of trades
Good for high-volume foreign flows

Disadvantages:

No visibility of individual investors
Complex tax handling
Regulators need strong oversight (which Kenya has through CMA and CDSC)

2. Tax Obligations for Foreign Investors

Taxation is one of the MOST important reasons foreigners behave differently from local investors.

A. Withholding Tax in Kenya

Foreigners pay withholding tax on:

Dividends: Usually 10% or higher depending on tax treaties
Interest from bonds: 15%–20% depending on maturity

Foreigners do not pay capital gains tax in Kenya when selling shares. This is a key reason they prefer locking in price gains instead of waiting for dividends.

B. Tax Obligations in Their Home Country

Foreign investors must still declare:

Dividends received from Kenya
Capital gains made globally (depending on their domestic policies)

Some countries tax global income, meaning the investor may pay tax twice unless:

A double taxation agreement (DTA) exists
They can claim withholding tax credits

Because of this double taxation risk, dividends are NOT attractive for many foreign investors. This is exactly why many of them sell before book closure.

3. The Real Impact of Foreigners on the NSE

Foreign investors hold significant positions in large-cap stocks such as Safaricom, EABL, BAT, KCB, and Equity. Their trades can influence:

A. Market Liquidity

Foreigners provide a significant portion of daily turnover at the NSE. When they participate actively, the market is more liquid and price discovery improves.

B. Exchange Rates

Large foreign inflows strengthen the shilling. Large foreign outflows weaken it.

Massive outflows are ALWAYS visible in:

CBK weekly FX bulletins
Forex reserves levels
Interbank liquidity

If foreigners exit aggressively, CBK usually comments. This proves that foreign exits cannot be “hidden”.

4. The Myths Surrounding Foreign Investors at the NSE

Myth 1: Foreigners know something locals don’t

In most cases, foreigners rely on public data, analyst reports, and global research. Local investors often have more ground-level understanding of Kenyan companies.

Myth 2: When foreigners sell, the market must be in danger

Foreigners sell mainly because of:

Taxation
Currency risk
Global portfolio rebalancing
Corporate action cycles

Not because “they know things.”

Myth 3: Foreigners are always right

Foreign investors have made large mistakes in many markets globally, including Kenya. They simply operate with different risk profiles—not necessarily better information.

5. Why Foreign Investors Sell at the NSE

Foreign investors are often blamed for market movements at the NSE, but their behaviour is usually driven by taxation rules and portfolio strategy rather than panic or insider signals.

A. Dividend Taxation Drives Their Selling Behaviour

Foreign investors face a higher withholding tax on dividends in Kenya compared to local investors. Additionally, many must declare these dividends in their home countries and may end up paying tax again depending on international tax treaties.

To avoid double taxation, many foreign investors prefer not to hold a stock past its book-closure date.

B. Selling to Lock In Gains Before Book Closure

Rather than holding a stock for dividends, they often sell before book closure and take profit. Since capital gains are not taxed in Kenya, this is more efficient for them.

They then rotate that capital into another discounted stock expected to announce dividends soon. This strategy allows them to capture repeated price appreciation without dividend tax complications.

C. The Exception: Custodial Nominee Accounts

Some institutional foreign investors use custodial nominee accounts where a licensed custodian receives the dividend, handles compliance, and credits the investor. This simplifies tax obligations, but even then many still prefer capital gains over dividends.