EFSA Determines Rules for Issuing N
EFSA Determines Rules for Issuing Non-Rated Bonds
Background
The Minister of Investment, in his capacity as the competent authority enforcing the Law on the Supervision of Non-Banking Financial Markets, had issued Decree No. 6 of 2016 amending certain provisions of the Executive Regulations of the Capital Market Law by virtue of which new provisions were added allowing the issuance of non-rated bonds (discussed in detail in ELU February Issue).[2] The present Decision, therefore, comes to put into effect the amendments to the Executive Regulations of the Capital Market Law.The New EFSA Decision
As clarified in the February Issue of ELU, typically, bonds are debt instruments that companies and other entities use as a mean of borrowing, whereby the issuer (debtor) undertakes to pay the bondholder (owner) a pre-determined interest (or coupon) throughout the term of the bond. Such interest is paid at the end of bond period (three or six months). The issuer is also obliged to pay the par value of the bond to the bondholder at maturity. The bondholder is therefore a creditor to the company, not a shareholder. The present Decision regulates the issuance of non-rated bonds and financial instruments, rules pertaining to subscription in such instruments, as well as disclosure and listing rules. The following is an overview of the most important provisions of the Decision.- Conditions and requirements for issuing companies and entities
The Decision states all the requirements that must be fulfilled by companies or other entities that are entitled to issue non-rated bonds and other financial instruments, notably:
- For companies:
Companies wishing to issue non-rated bonds or other financial instruments must have a minimum issued and paid-up capital of one million Egyptian pounds, must have carried out its activities for at least one year, and must have issued financial statements for at least one fiscal year. The value of the bonds to be issued must not exceed the total net asset value of the company, yet the company may obtain the approval of EFSA if the issue will exceed such value.
- For entities other than companies:
According to the Decision, entities other than companies wishing to issue non-rated bonds must have in their constitutive documents provisions allowing the issuance, and the value of the issuance must not exceed their total net asset value. Nevertheless, the issuing entity may obtain the approval of EFSA if the issuance will exceed such value.
- Rules for issuing bonds and other financial instruments
The Decision provides all the rules governing the issuance of non-rated bonds and financial instruments. Most importantly, it states that the term of the bonds must not be less than 13 months; and the issuer must determine the objectives of the issuance and channels in which the amount of the issued bonds will be invested. The issuer must further provide EFSA with the resolution of the competent body at the issuer approving the issue and their terms, the term of the issue and a summary of the issuer’s expected cash flows and sources and other financial data.
Furthermore, the Decision provides for the information and disclosures that must be included in the information memorandum providing sufficient data and information about the issue. It is worth noting that the decree has listed the data to be included in the information memorandum as an example and we believe that EFSA may at its discretion request additional information should it deem the information provided as insufficient for giving investors a full disclosure about the issuer and the issue.
- Entities or persons eligible for subscribing to bonds or financial instruments
One of the most important aspects of this Decision is that it specifies certain entities and individuals as eligible to subscribe to these securities. These factors include: 1) financial institutions, indicated by the decree indicates as Egyptian banks, branches of foreign banks under the supervision of the CBE, insurance companies, reinsurance companies, risk capital companies, private equity funds, and other companies that fall under the supervision of EFSA and whose core systems allow for subscription in those types of securities 2) Persons with financial solvency, namely public juristic persons; insurance and pension funds; companies whose paid-up capital is not less than one million pounds; natural persons with experience in the field of credit and management of money; and natural persons who own securities worth more than 50,000 Egyptian pounds in at least two shareholding companies.
- Disclosure requirements
The Decision stipulates the disclosure rules that the issuer must abide by, yet, without prejudice to other disclosure rules abided by in accordance with the Company and Capital Market Laws. Issuers should at least disclose their annual and quarter financial reports, accompanied by the relevant financial indicators and fundamental decisions that could affect their funding structures. Furthermore, any amendments thereto or any loans, facilities, or mortgages concluded by the issuers within a week should also be disclosed. Also, any occurrence of any situation of violation, delay in reimbursing due amounts for instrument holders, use of bonds or financial notes on a quarterly basis should also be reported. It is the obligation of the issuer to provide a copy of these disclosures to EFSA.
- Listing regulations
One of the most important regulations to enlist bonds and other financial instruments in the Egyptian Stock Exchange to which the issuer must comply with, is that half the issuance period must have passed before the occurrence of any violation. Also, the violation should not occur when the remaining time to registration date is less than one year. Furthermore, a statement indicating commitment to the due amounts to bond and other financial instrument should be submitted with its ratification from EFSA, and provide EFSA with auditor’s certificate clarifying the company’s financial position since the issuance of bonds and securities and until the date of the listing application.
Conclusion
The Decision is set to implement and activate Minister of Investment's Decision to amend the Executive Regulations of the Capital Market Law. We deem this amendment as crucial since it will revive the bonds and financial instruments market in Egypt, by reducing burdens and costs and therefore encourage small and medium enterprises to issue bonds and other debt instruments by means of securing finance required for their projects. This would positively reflect on the Egyptian economy as a whole. [1] EFSA Board of Directors' Decision No. 23/2016 on the issuing subscription and listing of non rated bonds and debt instruments, Official Gazette, Issue No. 79, 4 April 2016. [2] Ministry of Investment's Decision No. 6/2016 amending certain provisions of the Executive Regulations of the Capital Market Law issued by Minister of Economy and External Trade's Decision No. 135/1993, Official Gazette, Issue No. 37, 15 February 2016.Background
The Minister of Investment, in his capacity as the competent authority enforcing the Law on the Supervision of Non-Banking Financial Markets, had issued Decree No. 6 of 2016 amending certain provisions of the Executive Regulations of the Capital Market Law by virtue of which new provisions were added allowing the issuance of non-rated bonds (discussed in detail in ELU February Issue).[2] The present Decision, therefore, comes to put into effect the amendments to the Executive Regulations of the Capital Market Law.The New EFSA Decision
As clarified in the February Issue of ELU, typically, bonds are debt instruments that companies and other entities use as a mean of borrowing, whereby the issuer (debtor) undertakes to pay the bondholder (owner) a pre-determined interest (or coupon) throughout the term of the bond. Such interest is paid at the end of bond period (three or six months). The issuer is also obliged to pay the par value of the bond to the bondholder at maturity. The bondholder is therefore a creditor to the company, not a shareholder. The present Decision regulates the issuance of non-rated bonds and financial instruments, rules pertaining to subscription in such instruments, as well as disclosure and listing rules. The following is an overview of the most important provisions of the Decision.- Conditions and requirements for issuing companies and entities
The Decision states all the requirements that must be fulfilled by companies or other entities that are entitled to issue non-rated bonds and other financial instruments, notably:
- For companies:
Companies wishing to issue non-rated bonds or other financial instruments must have a minimum issued and paid-up capital of one million Egyptian pounds, must have carried out its activities for at least one year, and must have issued financial statements for at least one fiscal year. The value of the bonds to be issued must not exceed the total net asset value of the company, yet the company may obtain the approval of EFSA if the issue will exceed such value.
- For entities other than companies:
According to the Decision, entities other than companies wishing to issue non-rated bonds must have in their constitutive documents provisions allowing the issuance, and the value of the issuance must not exceed their total net asset value. Nevertheless, the issuing entity may obtain the approval of EFSA if the issuance will exceed such value.
- Rules for issuing bonds and other financial instruments
The Decision provides all the rules governing the issuance of non-rated bonds and financial instruments. Most importantly, it states that the term of the bonds must not be less than 13 months; and the issuer must determine the objectives of the issuance and channels in which the amount of the issued bonds will be invested. The issuer must further provide EFSA with the resolution of the competent body at the issuer approving the issue and their terms, the term of the issue and a summary of the issuer’s expected cash flows and sources and other financial data.
Furthermore, the Decision provides for the information and disclosures that must be included in the information memorandum providing sufficient data and information about the issue. It is worth noting that the decree has listed the data to be included in the information memorandum as an example and we believe that EFSA may at its discretion request additional information should it deem the information provided as insufficient for giving investors a full disclosure about the issuer and the issue.
- Entities or persons eligible for subscribing to bonds or financial instruments
One of the most important aspects of this Decision is that it specifies certain entities and individuals as eligible to subscribe to these securities. These factors include: 1) financial institutions, indicated by the decree indicates as Egyptian banks, branches of foreign banks under the supervision of the CBE, insurance companies, reinsurance companies, risk capital companies, private equity funds, and other companies that fall under the supervision of EFSA and whose core systems allow for subscription in those types of securities 2) Persons with financial solvency, namely public juristic persons; insurance and pension funds; companies whose paid-up capital is not less than one million pounds; natural persons with experience in the field of credit and management of money; and natural persons who own securities worth more than 50,000 Egyptian pounds in at least two shareholding companies.
- Disclosure requirements
The Decision stipulates the disclosure rules that the issuer must abide by, yet, without prejudice to other disclosure rules abided by in accordance with the Company and Capital Market Laws. Issuers should at least disclose their annual and quarter financial reports, accompanied by the relevant financial indicators and fundamental decisions that could affect their funding structures. Furthermore, any amendments thereto or any loans, facilities, or mortgages concluded by the issuers within a week should also be disclosed. Also, any occurrence of any situation of violation, delay in reimbursing due amounts for instrument holders, use of bonds or financial notes on a quarterly basis should also be reported. It is the obligation of the issuer to provide a copy of these disclosures to EFSA.
- Listing regulations
One of the most important regulations to enlist bonds and other financial instruments in the Egyptian Stock Exchange to which the issuer must comply with, is that half the issuance period must have passed before the occurrence of any violation. Also, the violation should not occur when the remaining time to registration date is less than one year. Furthermore, a statement indicating commitment to the due amounts to bond and other financial instrument should be submitted with its ratification from EFSA, and provide EFSA with auditor’s certificate clarifying the company’s financial position since the issuance of bonds and securities and until the date of the listing application.