Significant Amendments to Investmen

On 12 March 2018, the Minister of Investment issued decision No. 40 of 2018[1] amending several provisions of the Executive Regulations (“ER”)[2] of the Capital Markets Law (the “CML”)[3]. The amendment pertains to a number of significant issues in the ER, most of which are in relation to investment funds. It is worth clarifying that the House of Representatives had - on 13 February 2018 - passed wide amendments to the Capital Markets Law itself, which have not been issued or published in the Official Gazette as of yet. The amendments to the CML are likely to be followed by further amendments to the ER as they pertain to entirely different matters. Examples of some of the reported amendments to the CML are the regulation of futures contracts, sukuks, registration fees, investment fund establishment, private offering, the protection of minority rights in acquisition, and a delineation of criminal liability of company managers. The Egypt Legal Update will provide detailed coverage of the amendments to the Law once they are published. As for the most recent amendment to the Executive Regulations (indeed published earlier this week), the following is the most important provisions it covered:

1. Private Equity Companies

Article (27) of the CML defines capital market activities that require prior licensing. One of these is the activity of companies operating in the field of establishing securities companies and increasing their capital (i.e. private equity). In turn, the ER sets out the criteria that private equity companies must fulfil. This has been amended so that the definition is now companies that operate in the field of establishing non-banking financial services companies or increasing their capital. In addition, the amendment requires that the company invests half of its portfolio solely in that field. This is a significant change as prior to the amendment said activity was defined as investing more than half of the company’s capital in at least five companies - or having control over at least five companies – without being bound by a certain field of investment. This amendment means that investing in companies operating in other fields is no longer an activity that requires licensing from the Financial Regulatory Authority (“FRA”).

2. Charitable Investment Funds

In February 2016, the ER was amended in order to regulate charitable investment funds for the first time. Despite their importance, this type of funds did not generate any interest from the market because their legal framework was complicated and seemed unsuitable for the purpose for which it was designed. For instance, charitable investment funds were required to take the legal form of either a private equity fund or a real estate investment fund. The recent amendment has allowed charitable funds to take the form of any investment fund recognized by the Law. However, various other amendments are still required in order for these funds to take off. A new provision was also added to the ER giving FRA’s Board the power to bar charitable funds from taking the form of certain investment funds in the future. This is most likely to avoid the involvement of these funds in high-risk activities.

3. Subscription in Investment Certificates

The CML mandates that investment funds take the form of a joint stock company, and that its founders subscribe to a capital of no less than EGP5 million that is fully paid. This has not changed, however, whereas it had been obligatory to use the fund’s capital in subscribing to investment certificates issued by the fund, the new regulation states that investment certificates will be automatically issued in an amount that is equivalent to the fund’s capital.

4. Certificate Value

With respect to open-ended investment funds (the certificates of which can be purchased, sold, or redeemed, during the life of the fund), the ER used to state that the trading value of said certificates is computed by dividing their net fund assets by the number of certificates on the basis of the valuation undertaken at the closing of the first business day following the request for trading. Following the amendment, the valuation is undertaken in accordance with the timetable stated in the prospectus.

5. The Assembly of Certificate Holders

CML regulates the formation, management, and decision making of certificate-holder assemblies. Prior to its amendment, the ER stated that meetings of the assembly must be attended by one representative from the fund company, who expresses the opinions and interests of the founders. Following the amendment, it is now the right of each founder to attend and vote in the assembly meeting, in proportion to the value of the certificates that they hold. Moreover, the recent amendment has added a new power to the assembly that allows it to approve the voluntary delisting of the fund’s certificates from the Egyptian Stock Exchange.

6. Fund Investment in Same-Day-Trading

The ER used to prohibit funds from same-day-trading in securities, with the aim of avoiding the risks of fluctuations that are typical of this type of trading. This restriction has been removed. Investment funds may now trade in securities on a same-day basis, which is a positive development as it improves fund liquidity. Nevertheless, a limitation was placed on funds in that respect which mandates that same-day-trading does not exceed 15% of the fund’s daily market trading.

7. Rules for Real Estate Investment Funds

The ER used to allow a real estate fund to invest in the shares of unlisted real estate companies on the condition that 80% of the assets of the latter is real estate, and that the fund’s equity in any said company does not fall below two thirds of capital. This second condition has been removed, allowing a real estate fund to invest in a company 80% of the assets of which is real estate, however, with no restriction on the percentage of the fund’s equity in said companies. Furthermore, the ER limited the fund’s equity in a real estate project to the equivalent of 30% of the fund’s assets. This was amended so that the limitation is now 30% of the fund’s assets only in the event that the size of the fund exceeds EGP500 million. A fund the size of which falls below this threshold is now able to own - in a given real estate project - the equivalent of up to 50% of its assets. A new provision was added to the ER exempting privately offered real estate funds from the aforementioned limitation on equity ownership in one real estate project. Also with respect to equity, the ER used to require that the total ownership of minority certificate holders in a real estate fund does not fall below 25% of total certificates. Minority certificate holders here being those who each own less than 10% of total certificates. This restriction has been removed.

8. Conflict of Interest In Exchange Traded Funds (ETFs)

In general, the ER regulates conflict of interest in a detailed manner. This includes a prohibiting an investment manager from acquiring the certificates of another fund that it manages, unless the other fund is a holding or money market fund. A third exception was added allowing fund managers to acquire ETF certificates. This is while taking into consideration the conditions set out in the prospectus in the case of all three exceptions.

9. Bank and Insurance Company Funds

The Law and the ER allow banks and insurance companies to directly engage in the activity of investment funds without a requirement that they establish separate companies for that purpose, so long as the approval of the Central Bank of Egypt, and the FRA are obtained respectively. In this respect, the ER was amended to allow banks and insurance companies to offer more than one issuance of open-ended certificates. This aims to increase the offering of certificates in the market without burdening banks and insurance companies with the procedures of launching new investment funds.

10. The Auditors’ Register

Article (11) of the CML states that the FRA maintains a record for the registration of auditors who are authorized to audit the accounts of listed companies and those operating in the field of securities. Provisions were added to the ER in this respect to regulate that register (this is despite the fact that this power was originally vested in FRA’s Board, and not left to be subject to regulation under the ER). These new ER provisions include allowing that the register contains different schedules according to type of activity, that the register is updated electronically, and an obligation on the auditor to notify the FRA with a list of the companies that it is auditing every year, including any delays in the operations of these companies and the reasons for that.

Conclusion

There is no doubt that most of the above amendments reflect a desired upgrading of the Executive Regulations of the Capital Markets Law that offers increased flexibility to investment funds. However, since a broad amendment to the Capital Markets Law has already been adopted, albeit not yet published, which will in turn require further amendment to the provisions of the Executive Regulations, it remains unclear what has called for the haste in issuing these ER amendments prior to the publication of the amendments to the Law.   [1] Minister of Investment and International Cooperation Decision No. 40/2018 amending certain provisions of the Executive Regulations of the Capital Market Law issued by virtue of Decision No. 135/1993, Egyptian Gazette, Issue No. 59 (cont.) (a), 12 March 2018. [2] Minister of Economy and Foreign Trade Decision No. 135/1993 enacting the Executive Regulations of the Capital Market Law No. 95/1992, Egyptian Gazette, Issue No. 81 (cont.), 8 April 1993. [3] Law No. 95/1992 on Capital Market, Official Gazette, Issue No. 25 (bis), 22 June 1992.