Issuance of the Egyptian Enterprise

For the first time the Egyptian Financial Supervisory Authority (“EFSA”) issued the Egyptian Enterprise Valuation Standards (the “Standards”)[1] thereby annulling EFSA’s previous professional performance standards for companies carrying out financial advisory activities. The Standards aim at regulating the entire financial valuation process for enterprises in terms of the conditions that have to be met by the valuer, the different valuation methods, and the preparation and presentation of the valuation report.

Background

The Capital Market Law No. 95 of 1992 and its executive regulations as well as the rules of listing and delisting of securities in the Egyptian Stock Exchange ("Listing Rules") require – in several cases – that a financial valuation determines the economic value of a business. In 2007, financial advisory was added to the list of activities carried out by companies working in the field of securities.[2] Thereupon, EFSA issued decision No. 121 of 2010 on the professional performance standards for financial advisory companies preparing valuation reports. Most recently, and specifically within the last two years, EFSA embarked on a modernization process fort its financial and real estate valuation standards by adopting two decisions, namely decision No. 39 of 2015 on the Egyptian standards of real estate valuation[3] and its newly issued decision on the Egyptian Enterprise Valuation Standards. Consequently, these two decisions form an integrated system of valuation standards.

Provisions of the Decision

The Standards apply to all cases in which the Capital Market Law, its executive regulations and/or the Listing Rules require a valuation for companies, securities or other assets that takes the form of an enterprise or a project, e.g. the case of capital increase through issuance of new shares or other cases of tender offers or swaps. EFSA’s decision provides all standards applicable to the financial valuation process:

1. Professional Conduct and Professional Competence Requirements

The professional conduct standard defines the requirements applicable to valuers, for example integrity, honesty, independence and avoidance of conflict of interest. For example, a valuer is prohibited from dealing on securities or assets relying on information not known to the public. The Standards also set out the professional competence requirements that must be met by the valuer in terms of educational and professional requirements as well as continuing education and skills development.

2. Scope of Work

The scope of work standard determines the valuation framework, including the conditions to be met in the engagement letter between the valuers and the client, including the definition of the client, the addressees of the valuation report, the purpose of the valuation, the valuation commencement date and the nature and sources of information, etc.

3. Implementation of the Valuation Process

The valuation process is divided into five phases: 1) understanding the nature of the activities of the enterprise, 2) speculating the future performance of the enterprise, 3) determining the valuation method, 4) assessing the valuation results, 5) reaching the final opinion and preparing the valuation report. The Standards set the implementation process of each of these stages in detail. Furthermore, it clarifies the various valuation methods.

4. Reasonableness of the Assumptions

The valuation process is based on future assumptions whether financial or nonfinancial by measuring the business’s reaction towards them. Thus, the Standards require that the valuer verifies the reasonableness of these assumptions by obtaining sufficient evidence and information from credible sources taking into account the enterprise's historic growth levels, its ability to generate revenues, and the fluctuation risks of the business, industry and the market as a whole.

5. Financial Valuation Approaches

The Standards explain the different valuation methods, including the income approach, the asset approach and the market approach. It also stipulates that valuers should choose the appropriate approach in light of several considerations, among which is the business nature and most common approaches used in the market. In addition, the valuer needs to give an appropriate explanation when they choose a different approach from those stated in the Standards. Thus, it gives the valuer the flexibility needed and takes into account the transparency required by the valuation users.

6. Valuation Report and its Contents

Finally, the Standards explain how to draft a valuation report in terms of language and data scrutiny. It also includes a list of contents that must be included in any report including the executive summary, the valuation objective, the representations of the valuer, etc.). These in return will ensure the comprehensiveness of the valuation process.

Conclusion

EFSA was keen on presenting the Standards in a comprehensive and thorough way in order to safeguard the rights of investors and shareholders in the market, and to reach the maximum degree of transparency. Furthermore, EFSA stated that the criteria were based on best international practices in this field. Consequently, EFSA needs to ensure that the new Standards are complied with by all concerned parties.   [1] EFSA’s Board of Directors Decision No. 1/2017 issuing the Egyptian Enterprise Valuation Standards, the Egyptian Gazette, Issue No. 23 (cont.) (a), 29 January 2017. [2] Minister of Investment’s Decision No. 101/2007 adding financial consulting for securities to the list of activities that carried out by companies operate in securities, Egyptian Gazette, Issue No. 98, May 3, 2007. [3] EFSA’s Board of Directors Decision No. 39/2015 on the Egyptian standards of real estate valuation, Egyptian Gazette, Issue No. 130 (cont.), 7 June 2015.