EFSA Decision on Decreasing the Siz

The Egyptian Financial Supervisory Authority (“EFSA”) has recently issued the procedures to be followed for decreasing the size of a closed investment fund.[1] The Capital Market Law and its executive regulations allow for such decrease; and they require EFSA to issue a decision detailing the procedures that funds must follow in this regard. In general, the decision requires funds to obtain the approvals of (1) the board of directors of the fund company, (2) the assembly of certificate holders, and (3) the extraordinary assembly of the fund company. Decreases may not exceed 20% of the total size of the fund and only one decrease is allowed in a year.

Background

Investment funds in Egypt are regulated by the Capital Market Law (“CML”) and its Executive Regulations (“ER”). The chapter on investment funds in the ER was fully amended in 2014 by EFSA to overcome many of the problem areas of the previous chapter. Generally speaking, there are two main types of investment funds: open-ended and closed ended funds. The capital or value of open-ended funds constantly changes as investors buy and redeem certificates on a daily, weekly or monthly basis depending on the purchase and redemption rules of each specific fund. In other words, it is within the DNA of open-ended funds that their capital decreases and increases with there being no specific procedures required for said increase or decrease in the size of the fund. On the other hand, closed funds, like companies, have a specific capital that is committed in advance by investors and paid either in whole or on traches. Such capital may be increased or decreased in accordance with the fund prospectus and the relevant regulations. In this respect, the ER requires EFSA to issue the rules and procedures for such gradual decrease.

The Current Decision

In compliance with Article (179) of the ER, EFSA issued decision No. 28 of 2017 which determines the cases, rules and procedures for decreasing the size of closed funds (the “Decision”).

• Cases Allowing for the Decrease of the Size of the Fund

The size of closed funds may be decreased in the following cases (i) if the fund realizes losses, (ii) to decrease the value of each certificate to the extent the value of the certificate is paid, (iii) if a charitable funds wishes to invest more than its realized profits in its charitable and social objectives, provided such amounts do not exceed 20% of the total value of the fund, and (iv) any other cases approved by EFSA.

• General conditions

The Decision provides for a few rules for the decrease of capital for a closed fund. Most importantly, is that the size of the fund may not be decreased by more than 20% at a time, and not more than once a year. The prospectus of the fund must also explicitly allow that the fund size be decreased, and the decrease may not cause the fund to incur liabilities which exceed the value of its investments.

• Procedures

For EFSA to approve the decrease of the size of the fund, three approvals must be obtained: (1) the approval of the board of directors of the fund company, (2) the approval of the assembly of certificate holders, and (3) the approval of the extraordinary general assembly of the fund company. The process is initiated by the fund manager, who submits a report proposing the decrease to the board. If the board approves the decrease, it is then required to prepare another report to be presented to the assembly of certificate holders, including a report from the two auditors of the fund on the significance of the reasons for the decrease. The certificate holders’ assembly is required to take its decision in a meeting attended by at least 50% of the number of certificates (reduced to 25% if quorum is not achieved in the first meeting), and by the approval of two-thirds of the certificates attending the meeting. Upon the approval of the certificate holders’ assembly, the board of directors invites the extraordinary general assembly of the fund company to convene to deliberate on the decrease of the size of the fund and amending its articles of association accordingly. The extraordinary general assembly’s decision must be reached by at least two-thirds of the attending capital. Decrease of the size of the fund may take place through one of the following means:

• Decreasing the nominal value of the fund company share and the fund certificate;
• Decreasing the number of shares and certificates provided that the shares and certificates are decreased by the same percentage of decrease of the fund size.

The board of directors is required to finalize the procedures for the decrease of the fund size within one year from the date of the resolution of the extraordinary general assembly. If the board fails to do so, it is required to obtain all the above approvals again.

• Alternative Procedures

As an exception to the above procedures, the Decision states that the board of directors may seek the approval of the extraordinary general assembly directly (without taking the approval of the certificate holders’ assembly) in the event that the prospectus provides for the right to decrease the fund size, as well as the cases where such decrease is permissible and the amount of the acceptable decrease. This right is, however, qualified by the following: (1) that such decrease takes place within one year from the date that subscription to the fund certificates is closed, and (2) the board of directors notifies the certificate holders of the decrease at least 15 days prior to presentation to the extraordinary general assembly.

• Final EFSA Approval

After obtaining the above approvals and satisfying all requirements, the fund company is required to submit all documentation reflecting the above procedures, along with the prospectus to EFSA for final approval, which the Decision states is to be granted within two weeks.

Conclusion

By issuing the present Decision, EFSA is satisfying the requirement to set the rules for the decrease in fund sizes. The aim is primarily to set out the procedures in clear terms and not add new rules – save for the 20% cap for each decrease and the one-time per year rule.   [1] EFSA Board of Directors’ Decision No. 28/2017 determining the cases, rules and procedures for decreasing the size of closed funds, Official Gazette, Issue No. 87, 13 April 2017.