By Mohamed Ahmed
The Egyptian Finance Supervisory Authority (EFSA) plans to commission the Egyptian Stock Exchange (EGX) to create regulations on private placements.
The move is to address the exaggerated oversubscription taking place during the banknote private placements phase before the completion of companies’ initial public offerings (IPOs), according to Sherif Sami, Chairman of EFSA.
The EFSA plan comes following the request of the Capital Market Authority (CMA) to put a regulatory framework for private placement, especially as the number of times of covering the Emaar Misr placement reached 11.2 times. The number was promoted through the IPO stage as proof of the attractiveness of the offering price, but the stock then lost 13% of its value during the first three days of trading.
According to Sami, the upcoming regulations will focus on imposing obligations on the subscribers in the private placement. Among the most prominent regulations is the deposit ratio ranging between 25%-33% of the value of the required stocks, as evidence of the seriousness on the number of purchase orders registered in the IPO. This comes to face the problem of institutions registering large numbers of purchase orders without providing payment, to ensure acquiring the targeted desired proportion.
These upcoming regulations are similar to the IPO controls which include the deposit of 25% of the value of the required stock. The allocation mechanism relies on the balance of subscribers’ acquired stocks ratio and the total purchase orders registered in the name of each investor. This means that if the coverage ratio of an IPO reaches four times, each investor gets 25% of the purchase orders he registered.
In an earlier press statement, Sami had said there are proposals to allow private placements without being forced to publicise the placement two weeks prior to doing so, or reduce the IPO period to less than one month. These amendments were proposed as most of those interested in such IPOs are institutions, who can cover the IPO within a few days, reducing the need to keep the IPO for 30 days.
“This trend is already on the table among regulations that will be discussed with the Egyptian Stock Exchange,” Sami said.
The draft amendments to Capital Market Legislation, discussed by the Legislative Reform Committee, included special items related to private placements.
According to Sami, this is not an amendment, but is rather a regulation of private placements, which will take place for the first time. When the Capital Market Legislation was issued in 1992, there was not enough information on private placements, and it was therefore not included. The law will now include the definition of public placement, and will bind its implementation to a prospectus approved by the EFSA, as it is the case for general placements.
Sami added that there will not be amendments to private placements in the executive rule of the capital market, and that the same will be repeated with the rules of the acquisition. This occurred as the executive rule addressed the regulations without reference in the law, thus necessitating the need of stating rules of acquisition and imposed fines for violation of provisions of the law.
Amendments to the Capital Marker Law also establishes the Egyptian Union for Securities, specialising in providing recommendations on the activity development of capital market and raising awareness on it. It will also encourage adoption of pro-activity initiatives, and provide recommendations on regulatory legislation of member entities of the Union.
According to Sami, the authority will develop rules for the formation of the union’s board. The mechanism of formation will depend on providing different relative vote weights for each member, along the lines of what is in effect at the Egyptian Union of Microfinance. The reason behind this, according to Sami, is to prevent brokerage companies from dominating the board due to their number.
Sami added that the union will include parties present in the market, such as brokerages, custodians, investment funds, investment funds service companies, financial consulting firms, marketing firms, and IPOs coverage firms.
Bonds dominated the other larger bulk of the amendments to the Capital Market Law, as the EFSA is enacting a new bonds law and adding regulatory terms of bonds to Law 95/1992. The most prominent amendments include determining definitions related to bonds, such as speculation, Murabaha, leasing, in addition to establishing a securitisation company that receives the yield of IPOs. The company will be established with a capital of EGP 5m.
The amendments also identified cases of tax exemption, to include the registration of real estate through the process of transfer of ownership between the issuer and the securitisation company. This will be in addition to registration of mortars, assets, and benefits made between the beneficiary and the securitisation company, both when issuing bonds or returning them.
Tax exemption will further include cases of dividend yield or earnings for bond holders, in addition to registered profits when dealing with bonds, whether they were registered on the stock market or not.
After the adoption of the amendments, the authority will make some amendments to the executive rule of the Capital Market Law, according to Sami. These will include regulations for disclosures, publicising financial statements, assessment and credit rating lists.