Amendment of the Stock Exchange Lis

On 12 November 2017, the Egyptian Gazette published Decision No. 122 of 2017 by the Egyptian Financial Supervision Authority ("EFSA") introducing a wide amendment to the Egyptian Stock Exchange Listing and Delisting Rules (the “Amendment”).[1] The latest Amendment includes various changes relating to the concept of offering securities, treasury stocks, and comparing company results with independent financial advisor reports. However, the most significant of those changes is the expansion in EFSA's powers in approving the listing of securities issued by companies and other entities entitled to issue securities (the "Listing Applicant(s)"), which comes at the expense of the Egyptian Stock Exchange. 

Background

Listing and delisting rules are the set of requirements issued by EFSA that determine the conditions and procedures for listing securities on the Egyptian Stock Exchange, and the continuation of such listing, as well as the requirements and procedures for delisting. Whereas the Capital Market Law No. 95 of 1992 explicitly delegates the issuance of listing rules to EFSA, the power of effecting the listing process and following up on the continuation of listing was in effect with the Stock Exchange. Specifically, this power lied with the Listing Committee formed at the Stock Exchange, in a manner similar to the standards applied by stock exchanges worldwide. This is based on the understanding that the supervisory authority is responsible for monitoring the sound implementation of the listing rules and undertaking disciplinary procedures against the violation thereof. The most recent Amendment therefore, in transferring a portion of the supervisory powers in relation to listing to EFSA, changes that balance which has been in place since the enactment of the Capital Markets Law in the early 90s, as it grants a bigger role to EFSA in effecting the listing of securities.

The Amendment

Prior to this Amendment, the listing rules stated that the listing of securities issued by a Listing Applicant is according to a request that is to be made to the Listing Committee formed at the Stock Exchange. The Amendment sets a new rule which mandates that the Listing Applicant registers with EFSA prior to making that request before the Listing Committee, following which it has one month to apply for listing before the Listing Committee. This is a material change in the listing system as it transfers the power of approving the listing of securities from the Stock Exchange to EFSA by mandating that Listing Applicants register with EFSA before commencing any procedures with the Stock Exchange. In addition, the most recent Amendment states that EFSA is the entity to certify the model using for preparing prospectuses, and special disclosure reports, where prior to the Amendment this was a task for the Stock Exchange. Furthermore, the new rules require that the Listing Applicant obtains EFSA’s prior certification of the prospectus and disclosure report containing the outcome of the fair value assessment prepared by the independent financial advisor and the auditor. Previously, only EFSA’s “non-objection” was required for the independent financial advisor’s report, and not a EFSA’s ratification of the prospectus or the full disclosure report. Moreover, the Amendment contained a new provision which mandates that the Stock Exchange conducts a review of discrepancies between a listed company’s performance and what was forecast in the independent financial advisor’s report regarding the fair value of the company. The Exchange is to then inform EFSA of any material differences in this regard so that EFSA may undertake necessary procedure. Whereas the provision is not clear as to what exactly this procedure is, it seems obvious that EFSA shall consider the company, the financial advisor, or both, responsible for said discrepancies. Finally, the new Amendment also stated that company’s general assembly must approve an acquisition of treasury shares if said acquisition leads to an increase in control by the main shareholders above tender offer limits, in which case the main shareholders must also abstain from voting on the general assembly’s decision for acquisition.

Conclusion

There is no question that it is in the best interest of the market that the offering and listing of securities and their trading remains subject to strict and clear controls which reduce any room for tampering, and protect the rights of minority shareholders. Furthermore, the monitoring and supervision of the stability and soundness of the market is one of the core duties of the Egyptian Financial Supervisory Authority. Nevertheless, with respect to the implementation of listing rules, it is common practice in the Egyptian market – since the enactment of the Capital Market Law in 1992 – and in leading financial markets around the world, that the implementation processes lie with the stock exchange, where the listing and trading actually takes place. It is also common practice that the regulatory authority is in charge of monitoring and supervising the good application of these rules, and undertaking disciplinary measures against violators. In this context, the most recent Amendment of the listing and delisting rules disrupts that balance and the good distribution of labour by granting the authority in effect the powers to ratify listing processes prior to a request being made before the Stock Exchange. In addition, this prolongs the listing procedure and limits the independence of the Stock Exchange and its subordinate Committees in implementation.   [1] EFSA Board of Directors Decision No. 122/2017 amending certain provision of its Decision No. 11/2014 on the Listing and Delisting Rules of Securities on the Egyptian Stock Exchange, Egyptian Gazette, Issue No. 255 (cont.) (c), 12 November 2017.