Major Amendment to the Securities D

The Amendment

On the last day of May 2009 Law Number 127 of 2009 was issued and published in the Official Journal on May 31st, 2009, amending some provisions of the Central Securities Depository Law Number 93 of 2000. The amendment was made applicable as of the following day, i.e. as of June 1st, 2009. In spite of the fact that the amendment only affects three articles in the Securities Depository Law, however, the importance of these changes and of the Law in general requires that some background be given prior to reviewing the new changes.

The Central Securities Depository Law

The Central Securities Depository Law (hereinafter “the Law”) was issued in 2000 and was considered then – and actually still is – one of the most important laws to regulate the capital market in Egypt and a landmark in the institutional build up of that market. Dealing in securities takes place on the exchange, which is the meeting point of supply and demand for securities and where prices are determined. Trading on the exchange is, under Egyptian Law, transfers title in a final way, and accordingly parties to the transaction are obliged to complete the procedures necessary for registering that trade. However, as with other types of sales, this transaction requires for its formal completion that the names of the buyers and sellers be entered in the books of the company held with the central securities depository. Hence depository and settlement systems allow the completion and formalization of the transactions which take place on the exchange in a short period of time and in a manner which provides investors with the certainty and finality needed in financial transactions. The passing of the Law in 2000, however, did not just state the preceding, but in fact provided a much needed legal basis and framework by covering other related matters, including the following:

• Providing, for the first time in Egyptian Law, the definition of central securities depository and registry in a manner which gives certainty and confidence.
• Introducing – also for the first time – an important distinction between “registered owner” and “beneficial owner” of securities, and providing the legal basis for the transactions undertaken by the record owner.
• Introducing the principle of fungibility of securities.
• Organizing central depository activities and allowing the dematerialization of securities, and the issuance of global securities.
• Organizing activities of clearance and settlement.
• Providing the legal basis for the pledge of securities within the central securities depository system.
• Establishing the Securities Settlement Guarantee Fund, which has since become one of the key elements of stability in the Egyptian capital market.
• Organizing the membership of banks and securities firms in the Central Securities Depository Company.
• Organizing the central securities depository activities, including providing the basis for the equal treatment of customers, and the replacement of companies’ registries by the central registry held by the Central Securities Depository Company.
• Organizing, for the first time, the custodian activities, and stating custodians’ duties, including the separation of accounts.
• Providing the framework for the establishment of the Central Securities Depository Company and the supervision thereon, a subject discussed in more details below.

The Central Securities Depository Company

One of the most important subjects covered by the 2000 Law is the Central Securities Depository Company. And in spite of the fact that Misr Clearance and Settlement was already operating in 2000, it was actually doing so in the absence of a proper legal basis and within the general principles of Company Law. The 2000 Law, therefore, provided it with the required legal framework needed for its peculiar nature as commercial company providing a public service. The Law thus included the following provisions:

• That the Company should take the form of a joint stock company and be licensed by the Capital Market Authority.

• One aspect of the peculiarity of the Company is that the Law stated that its shares should be owned by members of the depository system in accordance with the relative size of their operations, but provided none of them exceeded 5% of ownership. In addition the Stock Exchange was also an owner of no more than 5% of the Company’s capital. It follows that with the exception of the percentage ownership owned by the Exchange, the remainder 95% could be subject to annual adjustment depending on the relative change in size of operations.
• Another peculiar aspect of the Company is that – by Law – its fees should not exceed the limits determined by the Minister of Investment, and that if the Company makes any profits, then it may allocate some of them to funding the Settlement Guarantee Fund. In other words, although the Law does not state this explicitly, it implies that the Company is not an entirely for profit entity.

The New Amendments

In light of the overall description of the Law and the Central Securities Depository Company, the amendments issued last month covered three major topics:

• The first one – in Article (37) – is that whereas the Law originally limited ownership in the Central Securities Depository Company to 5% whether for members of the Company or for the Stock Exchange, the amendment now states that the Stock Exchange should be the owner of at least 5% with no ceiling, thus allowing it to become a larger owner of the Company, while keeping the 5% ceiling on members’ ownership. It is worth noting in this regard that the amendment stated that “the transfer of ownership of the Company shares between members and stock exchanges shall be by decision of its extraordinary general assembly in accordance its Statutes”, which means that the terms and conditions of such transfer shall not be subject to general company law.
• The second amendment is that whereas the Law stated that all technical systems used by the Company were to be approved by the Capital Market Authority and – in the case of clearance and settlement systems – by the Exchange, now Article (44) requires only the approval of the new Financial Supervision Authority.
• The third amendment is that whereas the appointment of the Company’s board of directors was undertaken in accordance with general Company Law rules, i.e. by election from the general assembly, now Article (46) states that a list of nominees must be submitted and approved by the Financial Supervision Authority before the elections are held. In effect this provides the new Authority with a right to veto unsuitable candidates. Moreover, the same article requires the majority of the board, including the chair person and the managing director, to be experts not necessarily representing shareholders.

Conclusion

The said amendments will not affect the conduct of business in the central securities depository system, which have become a stable element in the Egyptian legal framework for capital markets. The amendments all deal with the Central Securities Depository Company by (a) ensuring a higher level of supervision over the Company’s board by the Financial Supervision Authority, and (b) allowing the Stock Exchange to be higher than 5% shareholder in the Company, both of which are positive developments because they reflect the special nature of the Company.