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Capital Market Law Amended in June

Capital Market Law Amended in June 2008: Changes Reflect More Flexibility but Higher Fines: Case is Now Officially “The Egyptian Stock Exchange”
On June 9th, 2008 Law Number 123 of 2008 amending certain provisions of the Capital Market Law (Number 95 of 1992), was published in the Official Gazette and came into effect on the following day (June 10th, 2008). Although the amendments do not fundamentally alter any of the key provisions in the Capital Market Law, they nevertheless introduce some useful changes which should provide more flexibility in the operational environment for capital market transactions, while tightening the penalties related to securities crimes.  
From the Operational Side
  • The minimum nominal value of a share is reduced from five pounds to ten piasters, while the maximum value continues to be one thousand pounds.
  • An interesting change has been introduced with respect to the procedures for issuing securities. Whereas Article (2) of the Capital Market Law stated that the application to issue company securities was submitted to the Capital Market Authority (“CMA”) and was deemed approved if no objection was raised by the CMA within three weeks, this was brought down in the amendment to one week. This is not of great significance since this is part of company establishment procedures (for closed companies) and in any case was being already undertaken by the Investment Authority’s One-Stop-Shop in less than three days. The more interesting aspect of this amendment is that it replaced the term “company” with the term “juridical person”, thus indicating an interest by the CMA in encouraging other forms of legal entities to issue securities. Whether this refers to public authorities, local government bodies, or other legal person’s remains to be seen.
  • The same approach is adopted in the amended Article (4) which states that “no juridical person, Egyptian or non-Egyptian, and whatever its legal form and what-ever the legal regime that it follows, may issue securities for the public except on the basis of an information memorandum authenticated by the CMA and published…”. Again the change here is that clearly the new Law envisages securities issuing by legal entities other than companies.
  • Significant changes were introduced to the Stock Ex-change listing provisions. Whereas so far, the market could list securities on “formal” and “informal” lists, both will now be abolished and the Stock Exchange will just have one listing set of rules. The new Article (16) clarifies that “a special registry shall be dedicated to foreign securities”. Accordingly, there will be various registers, but the point remains that there is no longer a legal distinction between formal and informal lists.
  • Article (16) as amended introduces a new rule, that “the listing rules may include special conditions for the ratification of decisions by general assemblies of listed companies”. This is a provision which will need to be clarified once the Stock Exchange has amended its own listing regulations to comply with the change in Law. The new rules should, however, avoid the intervention by the Stock Exchange in the business decisions of the companies, and hopefully will only impose conditions which ensure that the formalities of general assemblies’ decision have been respected.
With Respect to Auditors
A new rule will apply to auditors of listed companies, securities companies and investment funds established by banks or insurance companies. Those auditors will now have to be selected from a register kept by the CMA, and accordingly any auditor not registered therein will not be entitled to audit any of the said entities. This register shall be maintained and up-dated in accordance with regulations which shall be issued by the Board of Directors of the CMA. Although the amended article (11) of the Capital Market Law does not say so, it should be assumed that until such regulations are issued by the Board of Directors of the CMA, the current accreditation of auditors by the CMA will continue to apply. This is aimed at improving and better monitoring the quality of auditing by accredited auditors. However, it will probably raise some objections by those firms and individuals who will find it difficult to get on the registry. This, however, will become clearer when the new regulations are issued by the CMA Board of Directors.
The Egyptian Stock Exchange to Replace Cairo and Alexandria
According to Article (25) of the Capital Market Law – as amended – there shall now be one entity called “The Egyptian Stock Exchange” to replace both the Cairo and the Alexandria Stock Exchanges. In reality, both exchanges had been managed as one entity, both having the same board of directors, same Chairman, and the same rules. However, having one legal entity will facilitate some of the legal requirements – such as the same rules having to be passed twice by two boards of directors – and will permit the Egyptian Stock Exchange to begin to build a new brand. It is, however, not the usual norm around the world, as stock exchanges often carry the names of cities as opposed to countries. Moreover, those will nostalgic tendencies will remember that Alexandria – and later Cairo – became centers for securities trading more than a century ago, but will now disappear. But the practicalities of merging the two into one were overwhelming, and gradually The Egyptian Stock Exchange will acquire its own name and standing.
More Importantly, Towards a Tighter Set of Penalties
The most significant and widespread change in the Law is with respect to the whole set of penalties covered therein. The most important changes are the following:
  • Articles (63), (64), (65), and (67) are amended by increasing significantly the monetary penalties. Articles (63) and (64) cover the key crimes in the Capital Market Law; undertaking securities activities without a license, unlawfully issuing securities to the public, inserting misleading information in memorandum, forgery, price manipulation and insider trading. The penalties for these crimes were imprisonment for a period between one day and five years, or a fine ranging from twenty thousand to one hundred thousand Egyptian Pounds, or both.
This now has been amended, so that the maximum fine is twenty million Pounds. No change in the imprisonment term or the minimum fine was introduced. The message is therefore clear; courts should rely more on fines than on jail, and should take their liberty in imposing hefty fines. In principle, this is a healthy development because it allows Egyptian regulation to converge with international best practice, in so far as monetary fines are the main tool of discipline and regulation. A forty fold increase in the maximum fine may however have overshot the target especially that the Law does not specify rules for calculating the right amount of fine. Moreover, the fact that the proceeds of the fines are one of the sources of financing the CMA budget, there could be a potential conflict in this area.
  • As for Articles (65) and (67), they deal with lesser violations of the Executive Regulations of the Law, but here again the maximum fine has been increased from fifty thousand Egyptian Pounds (Article 65) and ten thousand Pounds (Article 67) respectively, to one million Pounds. Here again the increase was excessive. For the fine to reach potentially one million Pounds as penalty for any infringement of the Executive Regulations.
  • A new crime is added to the Law by virtue of a new Article (20 bis). This Article states that: “Persons with information concerning the financial standing of listed companies, or the results of their operations, or other information which may affect those companies, may not deal in their securities for their own account prior to the announcement or disclosure of such information to the public. Moreover, those people may not disclose this information to other directly or indirectly. The Executive Regulations as well as the Listing Rules shall determine the type of information which would affect the trading of securities”. The purpose of this new Article is clearly to expand the scope of insider trading to include a wider range of people, information and abuses. It is, however, too unspecific, and a clearer picture will emerge once the Executive Regulations and Listing Rules have provided operational details.
  • Finally, a new Article (69 bis) is introduced, and it allows the CMA to settle with offenders provided they pay double the minimum fine. The effect of this new provision will be to provide the CMA with an effective power to fine offenders, therefore reducing the need to resort to full criminal investigations and prosecutions in cases which do not require such process. The fact that the proceeds of fines end up in the budget of the CMA again will be a source of a potential conflict of interest.
Taxation; No Effective Change
The new amendment to the Law abolishes two key provisions. Articles (11) and (14) of the Law previously exempted shares and bonds respectively from stamp duties as well as their proceeds from income taxation. The net effect is, however, unchanged as both matters are now covered by the general taxation laws and they lead to the same results. It is wiser to remove tax provisions from the Capital Market Law, and leave all matters of taxation to be covered exclusively by the lax laws.
On June 9th, 2008 Law Number 123 of 2008 amending certain provisions of the Capital Market Law (Number 95 of 1992), was published in the Official Gazette and came into effect on the following day (June 10th, 2008). Although the amendments do not fundamentally alter any of the key provisions in the Capital Market Law, they nevertheless introduce some useful changes which should provide more flexibility in the operational environment for capital market transactions, while tightening the penalties related to securities crimes.  
From the Operational Side
  • The minimum nominal value of a share is reduced from five pounds to ten piasters, while the maximum value continues to be one thousand pounds.
  • An interesting change has been introduced with respect to the procedures for issuing securities. Whereas Article (2) of the Capital Market Law stated that the application to issue company securities was submitted to the Capital Market Authority (“CMA”) and was deemed approved if no objection was raised by the CMA within three weeks, this was brought down in the amendment to one week. This is not of great significance since this is part of company establishment procedures (for closed companies) and in any case was being already undertaken by the Investment Authority’s One-Stop-Shop in less than three days. The more interesting aspect of this amendment is that it replaced the term “company” with the term “juridical person”, thus indicating an interest by the CMA in encouraging other forms of legal entities to issue securities. Whether this refers to public authorities, local government bodies, or other legal person’s remains to be seen.
  • The same approach is adopted in the amended Article (4) which states that “no juridical person, Egyptian or non-Egyptian, and whatever its legal form and what-ever the legal regime that it follows, may issue securities for the public except on the basis of an information memorandum authenticated by the CMA and published…”. Again the change here is that clearly the new Law envisages securities issuing by legal entities other than companies.
  • Significant changes were introduced to the Stock Ex-change listing provisions. Whereas so far, the market could list securities on “formal” and “informal” lists, both will now be abolished and the Stock Exchange will just have one listing set of rules. The new Article (16) clarifies that “a special registry shall be dedicated to foreign securities”. Accordingly, there will be various registers, but the point remains that there is no longer a legal distinction between formal and informal lists.
  • Article (16) as amended introduces a new rule, that “the listing rules may include special conditions for the ratification of decisions by general assemblies of listed companies”. This is a provision which will need to be clarified once the Stock Exchange has amended its own listing regulations to comply with the change in Law. The new rules should, however, avoid the intervention by the Stock Exchange in the business decisions of the companies, and hopefully will only impose conditions which ensure that the formalities of general assemblies’ decision have been respected.
With Respect to Auditors
A new rule will apply to auditors of listed companies, securities companies and investment funds established by banks or insurance companies. Those auditors will now have to be selected from a register kept by the CMA, and accordingly any auditor not registered therein will not be entitled to audit any of the said entities. This register shall be maintained and up-dated in accordance with regulations which shall be issued by the Board of Directors of the CMA. Although the amended article (11) of the Capital Market Law does not say so, it should be assumed that until such regulations are issued by the Board of Directors of the CMA, the current accreditation of auditors by the CMA will continue to apply. This is aimed at improving and better monitoring the quality of auditing by accredited auditors. However, it will probably raise some objections by those firms and individuals who will find it difficult to get on the registry. This, however, will become clearer when the new regulations are issued by the CMA Board of Directors.
The Egyptian Stock Exchange to Replace Cairo and Alexandria
According to Article (25) of the Capital Market Law – as amended – there shall now be one entity called “The Egyptian Stock Exchange” to replace both the Cairo and the Alexandria Stock Exchanges. In reality, both exchanges had been managed as one entity, both having the same board of directors, same Chairman, and the same rules. However, having one legal entity will facilitate some of the legal requirements – such as the same rules having to be passed twice by two boards of directors – and will permit the Egyptian Stock Exchange to begin to build a new brand. It is, however, not the usual norm around the world, as stock exchanges often carry the names of cities as opposed to countries. Moreover, those will nostalgic tendencies will remember that Alexandria – and later Cairo – became centers for securities trading more than a century ago, but will now disappear. But the practicalities of merging the two into one were overwhelming, and gradually The Egyptian Stock Exchange will acquire its own name and standing.
More Importantly, Towards a Tighter Set of Penalties
The most significant and widespread change in the Law is with respect to the whole set of penalties covered therein. The most important changes are the following:
  • Articles (63), (64), (65), and (67) are amended by increasing significantly the monetary penalties. Articles (63) and (64) cover the key crimes in the Capital Market Law; undertaking securities activities without a license, unlawfully issuing securities to the public, inserting misleading information in memorandum, forgery, price manipulation and insider trading. The penalties for these crimes were imprisonment for a period between one day and five years, or a fine ranging from twenty thousand to one hundred thousand Egyptian Pounds, or both.
This now has been amended, so that the maximum fine is twenty million Pounds. No change in the imprisonment term or the minimum fine was introduced. The message is therefore clear; courts should rely more on fines than on jail, and should take their liberty in imposing hefty fines. In principle, this is a healthy development because it allows Egyptian regulation to converge with international best practice, in so far as monetary fines are the main tool of discipline and regulation. A forty fold increase in the maximum fine may however have overshot the target especially that the Law does not specify rules for calculating the right amount of fine. Moreover, the fact that the proceeds of the fines are one of the sources of financing the CMA budget, there could be a potential conflict in this area.
  • As for Articles (65) and (67), they deal with lesser violations of the Executive Regulations of the Law, but here again the maximum fine has been increased from fifty thousand Egyptian Pounds (Article 65) and ten thousand Pounds (Article 67) respectively, to one million Pounds. Here again the increase was excessive. For the fine to reach potentially one million Pounds as penalty for any infringement of the Executive Regulations.
  • A new crime is added to the Law by virtue of a new Article (20 bis). This Article states that: “Persons with information concerning the financial standing of listed companies, or the results of their operations, or other information which may affect those companies, may not deal in their securities for their own account prior to the announcement or disclosure of such information to the public. Moreover, those people may not disclose this information to other directly or indirectly. The Executive Regulations as well as the Listing Rules shall determine the type of information which would affect the trading of securities”. The purpose of this new Article is clearly to expand the scope of insider trading to include a wider range of people, information and abuses. It is, however, too unspecific, and a clearer picture will emerge once the Executive Regulations and Listing Rules have provided operational details.
  • Finally, a new Article (69 bis) is introduced, and it allows the CMA to settle with offenders provided they pay double the minimum fine. The effect of this new provision will be to provide the CMA with an effective power to fine offenders, therefore reducing the need to resort to full criminal investigations and prosecutions in cases which do not require such process. The fact that the proceeds of fines end up in the budget of the CMA again will be a source of a potential conflict of interest.
Taxation; No Effective Change
The new amendment to the Law abolishes two key provisions. Articles (11) and (14) of the Law previously exempted shares and bonds respectively from stamp duties as well as their proceeds from income taxation. The net effect is, however, unchanged as both matters are now covered by the general taxation laws and they lead to the same results. It is wiser to remove tax provisions from the Capital Market Law, and leave all matters of taxation to be covered exclusively by the lax laws.