New Charitable Investment Funds and

Introduction

Last week, the Minister of Investment, in his capacity as the Minister concerned with the application of the provisions of the Law regulating the Supervision of the Non-Banking Financial Markets and Instruments[1], issued Decree No. 6 of 2016 amending some provisions of the Executive Regulations of the Capital Market Law[2]. The amendments of the recent Decree have three effects: 1) introducing covered bonds, 2) introducing a new type of investment funds "Charitable Investment Funds", which do not distribute dividends, and 3) permitting the issuance of non-credit rated bonds. It is worth noting that the Decree has not been published yet neither in the Official Gazette, nor on the website of the Ministry of Investment or the Egyptian Financial Supervisory Authority. However, the entire text of the Decree has been published in Egyptian press, hence this ELU commentary.

First: Introducing covered bonds

Typically, bonds are debt instruments that companies use as a means of borrowing, whereby the issuer (debtor) undertakes to pay the bondholder (owner) a pre-determined interest (or a coupon) throughout the term of the bonds. Such an interest is paid at the end of a fixed period (three or six months). The issuer is also obliged to pay the nominal value of the bonds to the bondholder on its maturity date. The bondholder is therefore a creditor to the company, not a shareholder. In an attempt to increase the activity of the bonds market in Egypt, which represents an additional financing channel for businesses and companies, the recent Decree introduced a new type of bonds, which is known as "covered bonds''. The Decree defined such bonds as a type of bonds that is supported by cash flows or proceeds of mortgage finance agreements or other financial rights. The bondholder shall have preference over other creditors in the case of the company's default. Covered bonds are distinguished from other types of bonds as being issued in conjunction with, and guaranteed by an independent portfolio of the debtor's financial assets. In addition, holders of covered bonds enjoy further guarantees; indeed, such bonds constitute non-disposable assets that cannot be traded unless all due obligations in favor of bondholders are met (repayment of bond yields and bond value). Finally, bondholders enjoy the right of priority over the portfolio of the long-term financial rights, as well as its guarantees.

Second: Allowing the Issuance of non-credit Rated Bonds

The Decree allows the issuance of non-credit rated bonds so that corporations, especially small and medium ones, can secure funds from different entities, without having to go through the sophisticated procedures of obtaining a credit rating and renewing it on an annual basis. The Decree limits the issuance of such bonds to financial institutions and sophisticated investors, but not to the public. Indeed, the lack of rating of such bonds requires limiting the ability to trade such bonds to qualified investors who are able to assess the risk, and on the condition that the bonds are issued in a private subscription. The Decree assigned EFSA to set rules for regulating issuance of such bonds. These rules include the determination of entities allowed to deal in such bonds, and the necessary disclosure requirements. The amendment also prohibits the registration of this kind of bonds in Egyptian stock markets without prior consent of EFSA, and in accordance with the regulations set by the Board of Directors of EFSA. All these limitations aim to setting rules that ensure safe disclosure, and protection of entities dealing and investing in such bonds. It should be noted that the Chairman of EFSA confirmed in press reports the capital market in Egypt would remain inefficient so long as Sukuk remain unavailable, as they constitute an important financing tool in many countries that cannot remain in-existent in Egypt.

Third: Charity Investment Funds

Recently, Egypt witnessed the launching of various initiatives that aim at collecting individual donations, with the purpose of financing national projects through depositing such amounts in bank accounts or funds. Despite wide public support for these initiatives, there has been a need to ensure transparency of administration and of spending allocation. The Decree, hence, established a new type of investment funds that does not lead to distribution of returns amongst holders of investment certificate, as such returns would be allocated for charitable and social ends, through allocating such returns for civil society organizations and charity projects. This process is accompanied with considerable level of transparency, as to the means of managing such returns, through the funds' periodic disclosure and publication of financial statements. Transparency would also be reinforced by enabling holders of investment certificates to monitor the performance of the fund and determine the allocation of spending. Finally, the Decree also prohibited the registration of the certificates of these funds in stock markets, with a view to protecting them from risks of trade and speculation. The Executive Regulation of the Capital Market Law had unanimously defined the “Investment Fund” as a joint investment pool that takes the form of a joint stock company. It aims at allowing investors to invest collectively in limited fields, and is run by an investment manager (a company) for fees. The Executive Regulation also defined the “Private Equity Fund” as a direct and closed-end investment fund that invests in the purchase of securities that are either registered or non-registered in the stock market. It has the right to practise the operations of risk capital, and its documents can have special offerings and get registered in the stock market. The Decree now defined the “Charity Investment Fund” as one that takes the form of a private equity or a real estate investment fund. The distribution of profits and investment returns is confined to spending on social or charity purposes through registered charity organizations, civil society organizations, government entities, or affiliated entities that are concerned with charity activities. It is worth noting that the remaining provisions included in the chapter on investment funds in the said Executive Regulation apply to such charity funds. The most important of which are the provisions pertaining to supervision of funds, auditing their records, managing them through a licensed manager, depositing their securities and funds at independent entities, and other supervisory provisions that regulate their activities. The Decree assigned the Egyptian Financial Supervisory Authority (EFSA) to provide licenses for entities to establish charity investment funds, and to issue the mechanism for this new kind of funds. Furthermore, it is has the authority to identify the entity that collects the value of its investment certificates upon recovery, or the assets of the fund when terminated, either for maturity, or for achievement of objectives, or if faced by any circumstances that could prevent it from continuing its operations. In the latter case, the entity that gets the value of certificates or fund assets shall be either a government entity or a registered civil society organization concerned with social or charity activities. It is noteworthy that the Decree did not confine utilization of fund money to government entities, however, gave the chance to non-government entities to utilize those funds and serve the community; pertaining to EFSA’s approval, and confirmation of their soundness, seriousness, real need for such funds, and ability to use the money for the benefit of the community. The Chairman of EFSA stated that to date, this kind of funds is non-tax exempted according to provisions of the Income Tax. Law No. 91 of 2005. This however should be amended to provide tax exemptions to such entities, since any profits or returns incurred by them would be directed to public benefit. [1] Prime Minister Decision No.2573 of 2015, delegating the authorities of the Competent Minister concerned with the application of the provisions of the Law regulating the Supervision of the Non-Banking Financial Markets and Instruments to the Minister of Investment, Official Gazette, Issue 39 (bis), 30 September 2015. [2] Minister of Economy and Foreign Trade Decision No.135 of 1993 with the Executive Regulations of the Capital Market Law No.95 of 1992, Official Gazette, Issue 81 (cont), 8 April 1993.