Home | | Contact Us

Major Amendment to Egyptian Exchang

Major Amendment to Egyptian Exchange Listing Rules: Listing Requirements, Corporate Governance and Treasury Stocks are affected by New Rules
On September 22nd, 2008, the Capital Market Authority (“CMA”) issued Decree Number 94 of 2008 introducing major amendments to the Egyptian Stock Exchange (“ESE”) Listing Rules, previously issued in 2002. The amendments come partially in response to the change introduced in June 2008 in the Capital Market Law (See July 2008 Egypt Legal Update). But the new Rules also introduce radical changes with respect to listing requirements, treasury stocks and corporate governance.
Listing Rules
The listing of securities is made by decision from the ESE Listing Committee, chaired by the ESE Chairman. The new Rules introduce the following provisions: • The new Rules explicitly allow the listing and trading of the right to subscribe in a capital increase separately from the original shares. • The company requiring the listing must enter into an agreement with ESE stating each party’s rights and obligations, especially the obligation of the company to make certain payments in cases of default. This new requirement replaces a previous provision in the Rules whereby the company provided an undertaking to pay L.E. 5000,- (Five Thousand Egyptian Pounds) if it failed to disclose information properly, and L.E. 500.- (Five Hundred Egyptian Pounds) for each day of delay in submitting financial statements. This is not to say that these fines will no longer be applicable, but rather that the new agreement with ESE will cover these and other forms of default. For companies that have already submitted undertakings under the previous Rules, these will continue to be applicable until amended or abrogated by a new agreement with ESE. • The listing application must now be accompanied by additional information, including a more detailed description of the company, of potential conflicts arising from board memberships, a certificate from the legal adviser stating major disputes in which the company is involved, and a certificate from its auditor outlining its tax situation. • An important change occurs in Article (5). Previously, a listing application was published on ESE’s daily bulletin and on its website for ten days, during which any party with potential interest could raise an objection to the listing. In the new Rules, the posting is made on ESE’s website for five days, and there is no longer a provision for objection by interested parties. The subsequent listing of securities by an already listed company (as a result of a capital increase, merger, or distribution of free shares) must be completed within two months (in¬stead of three).
Listing Conditions
This is an area where significant changes have been introduced. As a consequence of the June 2008 amendment in the Capital Market Law which eliminated the distinction between Official and Non-Official Lists, the whole system of exchange lists has been altered. Following are the key categories and conditions for listing:
A. Egyptian Securities
1. Shares: • At least 10% of the shares must be offered in public subscription or private placement. • At least 5% of the shares must be freely traded. • There must be at least 100 subscribers, & 2 million shares. • A full financial year’s audited accounts must be submitted. • All the issued capital must be paid up (at least L.E.20,000,000.i Twenty Million Egyptian Pounds). • The pretax profit for the previous year must be at least 5% of the paid up capital, provided this profit is generated from the company’s main activity. • The net shareholders rights must be no less than the company’s paid up capital. There is, however, a provision allowing a company to be listed prior to fulfilling the first three conditions above, provided they are fulfilled three months from the date of listing. 2. Government Papers (the only requirement is to provide the subscription memorandum). 3. Bonds: • The papers must be offered for public subscription or private placement. • The submission of a credit rating certificate (and renewed annually). • The submission of an undertaking to disclose material information within 15 days accompanied by a new credit rating certificate. • A “Bonds Holders Association” must be formed 4. Closed Funds Certificates: • The submission of the subscription memorandum prepared in line with Capital Market Law. • The submission by each of the investment manager, and the board of directors of the fund of an undertaking to make certain disclosures, including policies for avoidance of conflicts of interest, in addition to an undertaking by the investment manager to disclosure any revaluation of the fund certificates. 5. Index Funds: • The submission of the subscription memorandum certified by the CMA. • The submission of an undertaking by the fund manager to provide ESE with a daily report of the certificate’s net asset value prior to the trading session. 6. Egyptian Certificates of Deposit (EDRs): • The submission of a full financial year’s audited accounts by the foreign company. • The net shareholders rights must be no less than the company’s paid up capital. • The pretax profit of the foreign company for the last year must be at least 5% of the paid-up capital, provided this profit is generated from the company’s main activity. • The EDRs must be listed and the number of their holders must be no less than one hundred and fifty. • The shares represented by the EDRs must be listed in a foreign exchange subject to the supervision similar to that of the CMA. • The number of certificates must be at least 500,000 (Five Hundred Thousand) and the nominal value of the listed certificates be no less than L.E. 100,000,000.- (One Hundred Million Egyptian Pounds).
B. Foreign Securities
Foreign shares must be listed in a foreign exchange subject to supervision similar to that of the CMA, and their financial accounts made in accordance with international, American, or Egyptian accounting standards. In addition, they must fulfill the conditions stated above for the listing of Egyptian shares. Foreign bonds may be listed if they fulfill the same conditions as Egyptian shares above. Moreover, the new Rules state that bonds issued by international financial organizations and development funds may also be listed. Finally, foreign closed funds’ certificates may be listed with the same conditions as those pertaining to the listing of Egyptian certificates.
New Rules for Listing Holding Companies
The new Rules are intended to facilitate the process of listing holding companies which are recently established as a result of restructuring or a series of acquisitions or mergers. The conditions are the following: • The holding company must be the parent for at least two joint stock companies. • The holding company must have an issued and paid-up capital of no less than 500,000,000.- (Five Hundred Million Pounds only), and the shares constituting its capital must be no less than 50,000,000 (Fifty Million) shares. • The total shareholders rights for all the subsidiary companies must not be less than the paid-up capital of the holding company in the previous financial year. • The ownership by the founders and board members of the holding company must not be less than 25% of its capital for two years following listing. • At least 30% of the holding company’s capital must be offered for public subscription or private placement. • The number of shareholders must be no less than 150. • The freely traded shares must not be less than 15%.
The Audit Committee
Audit committees are an integral part of the governance of listed companies world wide. One of the important changes in the new Rules concerns audit committees for listed companies. Here are the new provisions: • The Audit Committee should be composed - by decision from the Board of Directors - of at least three members, all non-executive members of the Board. An important addition here is that the rules allow members to be selected from outside the Board if there are not members enough with expertise in the business. • The Committee is in charge of (i) ensuring that the company has proper internal audit procedures and that they are being observed, (ii) studying and following up on newly intro¬duced accounting standards and policies, (iii) reviewing internal inspection procedures and ensuring their application, (iv) supervising the process of issuing the company’s financial statements and prospectuses, (v) proposing the appointment and remuneration of external auditors, (vi) providing an opinion concerning the appointment of the external auditor to un¬dertake any other work for the company, (vi) reviewing the auditors’ reports, (vii) ensuring that an external financial advisor prepares a report concerning related party transactions prior to approving these transactions, and (viii) and ensuring that internal procedures are followed in order to safeguard the assets of the company. • The Committee is also responsible for ensuring that the company’s management responds to the recommendations made by the external auditors and the CMA. • The Committee submits a quarterly report to the Board, which has a duty to respond within fifteen days to recommendations made by the committee. The Chairman of the Committee then notifies the ESE and the CMA, within another two weeks, of the summary of the committees report and the management’s response thereto.
Treasury Stocks
The new Rules introduce new rules with respect to treasury stock. The most important one is that the company wishing to buy its own shares must inform both the CMA and ESE at least three days prior to the purchase. The notice of intention to buy must include the reasons for the purchase, sources of funding, the anticipated impact on the performance of the company, the process by which it will take place. Once the shares have been purchase, they must be held by the company for at least three months (there is a legal maximum of one year), unless there are otherwise compelling reasons for selling the shares prior to the end of the three months and provided it is approved by the CMA. Moreover, if the purchase is to exceed 5% of the total issued share capital, then the purchase must be offered to all existing shareholders and executed on a prorate basis from all those willing to sell. This provision was originally interpreted to mean that a tender offer process must be observed, but in practice, the CMA has relaxed the application of the rule recently and it is necessary that a tender offer be made.
Conclusion
The new Listing Rules introduce a number of positive and welcome changes, especially where listing requirements are concerned. It emphasizes corporate governance and the protection of shareholders’ rights through the supervision of related party transactions. How¬ever, some of the conditions may need to be reviewed and assessed against best market practices, especially with respect to the listing of holding companies. An important addition is that for the first time the rules provide a clear role and set of responsibilities for the Audit Committee. This will entail a significantly higher level of attention and resources by listed companies in meeting the new requirements. Companies need to take this matter seriously and provide dedicated resources and personnel for complying with the new governance rules. As to treasury stocks, developments in the last few weeks – as a result of the international fi¬nancial crisis – have shown that the new rules have not responded well to market needs and have already had to be informally relaxed. This is a good opportunity to review them again.
On September 22nd, 2008, the Capital Market Authority (“CMA”) issued Decree Number 94 of 2008 introducing major amendments to the Egyptian Stock Exchange (“ESE”) Listing Rules, previously issued in 2002. The amendments come partially in response to the change introduced in June 2008 in the Capital Market Law (See July 2008 Egypt Legal Update). But the new Rules also introduce radical changes with respect to listing requirements, treasury stocks and corporate governance.
Listing Rules
The listing of securities is made by decision from the ESE Listing Committee, chaired by the ESE Chairman. The new Rules introduce the following provisions: • The new Rules explicitly allow the listing and trading of the right to subscribe in a capital increase separately from the original shares. • The company requiring the listing must enter into an agreement with ESE stating each party’s rights and obligations, especially the obligation of the company to make certain payments in cases of default. This new requirement replaces a previous provision in the Rules whereby the company provided an undertaking to pay L.E. 5000,- (Five Thousand Egyptian Pounds) if it failed to disclose information properly, and L.E. 500.- (Five Hundred Egyptian Pounds) for each day of delay in submitting financial statements. This is not to say that these fines will no longer be applicable, but rather that the new agreement with ESE will cover these and other forms of default. For companies that have already submitted undertakings under the previous Rules, these will continue to be applicable until amended or abrogated by a new agreement with ESE. • The listing application must now be accompanied by additional information, including a more detailed description of the company, of potential conflicts arising from board memberships, a certificate from the legal adviser stating major disputes in which the company is involved, and a certificate from its auditor outlining its tax situation. • An important change occurs in Article (5). Previously, a listing application was published on ESE’s daily bulletin and on its website for ten days, during which any party with potential interest could raise an objection to the listing. In the new Rules, the posting is made on ESE’s website for five days, and there is no longer a provision for objection by interested parties. The subsequent listing of securities by an already listed company (as a result of a capital increase, merger, or distribution of free shares) must be completed within two months (in¬stead of three).
Listing Conditions
This is an area where significant changes have been introduced. As a consequence of the June 2008 amendment in the Capital Market Law which eliminated the distinction between Official and Non-Official Lists, the whole system of exchange lists has been altered. Following are the key categories and conditions for listing:
A. Egyptian Securities
1. Shares: • At least 10% of the shares must be offered in public subscription or private placement. • At least 5% of the shares must be freely traded. • There must be at least 100 subscribers, & 2 million shares. • A full financial year’s audited accounts must be submitted. • All the issued capital must be paid up (at least L.E.20,000,000.i Twenty Million Egyptian Pounds). • The pretax profit for the previous year must be at least 5% of the paid up capital, provided this profit is generated from the company’s main activity. • The net shareholders rights must be no less than the company’s paid up capital. There is, however, a provision allowing a company to be listed prior to fulfilling the first three conditions above, provided they are fulfilled three months from the date of listing. 2. Government Papers (the only requirement is to provide the subscription memorandum). 3. Bonds: • The papers must be offered for public subscription or private placement. • The submission of a credit rating certificate (and renewed annually). • The submission of an undertaking to disclose material information within 15 days accompanied by a new credit rating certificate. • A “Bonds Holders Association” must be formed 4. Closed Funds Certificates: • The submission of the subscription memorandum prepared in line with Capital Market Law. • The submission by each of the investment manager, and the board of directors of the fund of an undertaking to make certain disclosures, including policies for avoidance of conflicts of interest, in addition to an undertaking by the investment manager to disclosure any revaluation of the fund certificates. 5. Index Funds: • The submission of the subscription memorandum certified by the CMA. • The submission of an undertaking by the fund manager to provide ESE with a daily report of the certificate’s net asset value prior to the trading session. 6. Egyptian Certificates of Deposit (EDRs): • The submission of a full financial year’s audited accounts by the foreign company. • The net shareholders rights must be no less than the company’s paid up capital. • The pretax profit of the foreign company for the last year must be at least 5% of the paid-up capital, provided this profit is generated from the company’s main activity. • The EDRs must be listed and the number of their holders must be no less than one hundred and fifty. • The shares represented by the EDRs must be listed in a foreign exchange subject to the supervision similar to that of the CMA. • The number of certificates must be at least 500,000 (Five Hundred Thousand) and the nominal value of the listed certificates be no less than L.E. 100,000,000.- (One Hundred Million Egyptian Pounds).
B. Foreign Securities
Foreign shares must be listed in a foreign exchange subject to supervision similar to that of the CMA, and their financial accounts made in accordance with international, American, or Egyptian accounting standards. In addition, they must fulfill the conditions stated above for the listing of Egyptian shares. Foreign bonds may be listed if they fulfill the same conditions as Egyptian shares above. Moreover, the new Rules state that bonds issued by international financial organizations and development funds may also be listed. Finally, foreign closed funds’ certificates may be listed with the same conditions as those pertaining to the listing of Egyptian certificates.
New Rules for Listing Holding Companies
The new Rules are intended to facilitate the process of listing holding companies which are recently established as a result of restructuring or a series of acquisitions or mergers. The conditions are the following: • The holding company must be the parent for at least two joint stock companies. • The holding company must have an issued and paid-up capital of no less than 500,000,000.- (Five Hundred Million Pounds only), and the shares constituting its capital must be no less than 50,000,000 (Fifty Million) shares. • The total shareholders rights for all the subsidiary companies must not be less than the paid-up capital of the holding company in the previous financial year. • The ownership by the founders and board members of the holding company must not be less than 25% of its capital for two years following listing. • At least 30% of the holding company’s capital must be offered for public subscription or private placement. • The number of shareholders must be no less than 150. • The freely traded shares must not be less than 15%.
The Audit Committee
Audit committees are an integral part of the governance of listed companies world wide. One of the important changes in the new Rules concerns audit committees for listed companies. Here are the new provisions: • The Audit Committee should be composed - by decision from the Board of Directors - of at least three members, all non-executive members of the Board. An important addition here is that the rules allow members to be selected from outside the Board if there are not members enough with expertise in the business. • The Committee is in charge of (i) ensuring that the company has proper internal audit procedures and that they are being observed, (ii) studying and following up on newly intro¬duced accounting standards and policies, (iii) reviewing internal inspection procedures and ensuring their application, (iv) supervising the process of issuing the company’s financial statements and prospectuses, (v) proposing the appointment and remuneration of external auditors, (vi) providing an opinion concerning the appointment of the external auditor to un¬dertake any other work for the company, (vi) reviewing the auditors’ reports, (vii) ensuring that an external financial advisor prepares a report concerning related party transactions prior to approving these transactions, and (viii) and ensuring that internal procedures are followed in order to safeguard the assets of the company. • The Committee is also responsible for ensuring that the company’s management responds to the recommendations made by the external auditors and the CMA. • The Committee submits a quarterly report to the Board, which has a duty to respond within fifteen days to recommendations made by the committee. The Chairman of the Committee then notifies the ESE and the CMA, within another two weeks, of the summary of the committees report and the management’s response thereto.
Treasury Stocks
The new Rules introduce new rules with respect to treasury stock. The most important one is that the company wishing to buy its own shares must inform both the CMA and ESE at least three days prior to the purchase. The notice of intention to buy must include the reasons for the purchase, sources of funding, the anticipated impact on the performance of the company, the process by which it will take place. Once the shares have been purchase, they must be held by the company for at least three months (there is a legal maximum of one year), unless there are otherwise compelling reasons for selling the shares prior to the end of the three months and provided it is approved by the CMA. Moreover, if the purchase is to exceed 5% of the total issued share capital, then the purchase must be offered to all existing shareholders and executed on a prorate basis from all those willing to sell. This provision was originally interpreted to mean that a tender offer process must be observed, but in practice, the CMA has relaxed the application of the rule recently and it is necessary that a tender offer be made.
Conclusion
The new Listing Rules introduce a number of positive and welcome changes, especially where listing requirements are concerned. It emphasizes corporate governance and the protection of shareholders’ rights through the supervision of related party transactions. How¬ever, some of the conditions may need to be reviewed and assessed against best market practices, especially with respect to the listing of holding companies. An important addition is that for the first time the rules provide a clear role and set of responsibilities for the Audit Committee. This will entail a significantly higher level of attention and resources by listed companies in meeting the new requirements. Companies need to take this matter seriously and provide dedicated resources and personnel for complying with the new governance rules. As to treasury stocks, developments in the last few weeks – as a result of the international fi¬nancial crisis – have shown that the new rules have not responded well to market needs and have already had to be informally relaxed. This is a good opportunity to review them again.