Amendment of the Capital Market Law

Last week saw the issuance of an amendment to Capital Market Law No. 95 of 1992 (the “Law”) that is the biggest since the Law’s enactment over 25 years ago. Issued under Law No. 17 of 2018,[1] the “Amendment” addresses several topics, the most important of which are: (i) a completely new regulation of Islamic bonds “sukuks”,  (ii) regulation of a futures market for the first time, (iii) establishing a federation for securities companies, and (iv) several amendments to the provisions covering the issuance and offering of securities, investment funds, protection of minority shareholder rights, and the harshening of criminal penalties for the violation of the provisions of the Law. The following are the most important changes introduced under this recent amendment to the Capital Markets Law.

1. Regulation of Sukuks

Similar to bonds, Sukuks are securities issued by companies and other authorized entities in order to raise finance from those wishing to subscribe. However, since sukuks are different from other bonds in that they are in compliance with sharia, they do not represent a direct debt. Rather sukuks represent a share of specified cash flows or returns from specific assets owned by the company/issuing entity and assigned to the subscribers of these sukuks. In the face of great demand for investment in financial instruments that are Sharia compliant, the market for sukuks has grown exponentially around the world over the past two decades. However, the regulation, issuance, and trading of sukuks in Egypt has struggled for various reasons, some legislative and some political. Therefore, although Law No. 10 of 2013 was issued a few years ago to regulate sukuks, it has nevertheless not accomplished its purpose. This can be mainly attributed to its provisions not being very clear. The Amendment thus repeals the old sukuks law and replaces it with new provisions in the Capital Market Law [articles (14) bis to (14) bis-19]. The Law now defines sukuk as “nominal securities of equal value issued for a specified period that may not exceed 30 years; each representing a common share in the ownership of assets, benefits, rights, or a defined project its rights or cash flows”. Another distinction between sukuks and bonds in general, is that the former are not directly issued by the company/entity wishing to raise finance. Rather, sukuks are issued by a company called the “taskik company”, the sole purpose of which is to own the assets and rights being financed, and issue sukuks. In that, the taskik company resembles companies that issue securitization bonds. Furthermore, the Law defines sukuk ‘al-mudaraba’, ‘morabaha’, ‘mosharaka’ and ‘ijara’. Whereas the Law does not describe sukuk as “Islamic”, it nevertheless sets out the conditions that an issuer wishing to explicitly pronounce their sukuk as “Islamic” or “sharia compliant” must fulfil. The most important of these conditions is that the issuer appoints a sharia monitoring committee in accordance with rules that are to be issued by the Financial Regulatory Authority (“FRA”) upon the approval of Al Azhar. The approval of said committee must then be obtained for all stages of issuance, registration, and offering. The new provisions also determine entities that are allowed to issue sukuks – through a taskik company – and these are joint stock companies, banks, public authorities and public enterprise, and international financial institutions. Moreover, the FRA Board of Directors is to set the minimum and maximum thresholds of sukuk values that these entities issue. In addition, the Law delineates the rules of registration and deposit of sukuks with the central depository company, the formation of a sukuk owners association, the responsibilities of the taskik company and the sukuk underwriter. As for the procedures for issuance, registration, trading, and disclosure, these are left for the executive regulations.

2. Regulation of Futures Markets

This is another topic that has been visited a few times over the past few years without any tangible results, even with the regulation of futures markets being the cornerstone of leading capital markets globally. The Amendment therefore sets out a full new chapter for the regulation of this matter in the Capital Market Law, titled “Futures Markets” and comprising articles (26) bis to (26) bis-17. A futures market is an exchange for trading “contracts the value of which is derived from financial assets, tangible assets, price indices, securities, commodities, financial instruments, or other indices that FRA determines, whether they are future contracts or options, swap contracts, or other standardized contracts.” Futures markets are established by virtue of a decree from FRA’s Board. Furthermore, the Law allows the Egyptian Stock Exchange to establish a separate futures market, as long as its issued and paid capital is not less than 20 million Egyptian pounds, and the FRA Board sets out the rules defining who the other shareholders can be. In addition, FRA Board also sets out the rules for trading on futures markets. As for clearance and settlement of contracts on the futures market, these are to be regulated according to Central Depository Law No. 93 of 2000, and a company other than Misr for Central Depository and Clearing may be authorized by the FRA for that purpose. Since some of the contracts traded on that market may be settled by physical delivery, the Law has created a special unit at the Ministry of Supply and Internal Trade called the “unit for the monitoring and supervising of certified commodity warehouses”. The latter is to be an entity for certifying and licensing warehouses where commodities are to be delivered and kept. Finally, the Law provides that the execution of trades on the futures market be undertaken by dealers in brokerage companies provided that the company obtains licensing from FRA for the undertaking of brokerage services in future contracts. Securities brokerage companies are allowed to obtain licensing from FRA to practice that new activity. Finally, the Stock Exchange is to set out the rules for undertaking the activity of brokerage in future contracts and FRA is to ratify it.

3. Amendments to the Rules of Investment Funds

The Capital Market Law requires that investment funds take the form of joint stock companies with cash capital. Prior to Amendment, the Law also required that the majority of the fund’s board members are not shareholders in the fund, persons who deal with it, relate to it, or are otherwise interested; and that the fund assigns its management to an authorized entity according to the rules and conditions set out in the executive regulations of the Law. The provision after Amendment provides that FRA’s Board s is to set out the rules for the structure of the fund’s board based on the fund’s activity. The Law also provides terms for the fund’s issuance of investment certificates against its paid capital, and it used to require that subscription in those certificates is undertaken through a bank. The Amendment has opened the door to securities companies to also play that role, provided that they are authorized by the FRA in accordance to rules to be determined at a later point. The Amendment further defined that banks that may retain the securities in which the fund invests are those specifically authorized by FRA as custodians, where the old provision only generally provided that they be a bank that is subject to the supervision of the Central Bank of Egypt. In addition, prior to Amendment, the provision merely required that the custodian bank is not an owner or shareholder in the fund company or the fund management company. The Amendment has added a requirement in that respect that neither the bank nor any of its related parties is in control of the management fund or is a shareholder therein with a share exceeding a threshold to be determined by the FRA Board (i.e. the threshold is not known at this point).

4. Establishing a Federation of Securities Companies

The Amendment provides for the establishment of an “Egyptian federation of securities” as a civil entity comprising all companies operating in the various activities of the capital market. The federation is to represent the interests of these companies and collaborate with FRA in market regulation and the support and respect of professional rules.

5. Other Amendments

In addition to the aforementioned, the following has been amended:

• Bearer shares were abolished. All bearer shares must now be transferred into nominal shares in accordance to an FRA Board decree to be issued in the next 60 days, given that said transfer must take place within a year from the issuance of the decree. The issuance of new bearer shares has also been prohibited.
• FRA Board has been given the authority to set out the rules for companies wishing to offer their securities in a private offering where said obligations only pertained to public offerings previously.
• Provisions requiring companies to disclose and publicize now allow that to be through “publishing means in accordance to the rules determined by the FRA Board”, instead of requiring that it be in two daily newspapers.
• Allowing that the company’s board of directors rather than its general assembly approves the issuance of bonds, sukuk, and short-term securities (not exceeding two years).
• Registration of securities can now be on more than one exchange upon an FRA approval. This was prohibited in the past.
• Granting FRA Board, the power to issue the rules and regulations governing the trading of non-listed securities, and rules for the transfer of their ownership.
• Prior to Amendment, the Law regulated a fund for insuring traders against non-commercial risks arising in relation to the activities of securities companies. An Amendment to that provision provides that the same fund shall also insure against the activities of listed companies.
• The Law allows the establishment of exchanges with a corporate personality, registration and trading in which is to be limited to one or more types of securities. For that, the old provision used to require prior approval of the minister in consultation with the FRA Board. The Amendment made the issuance of said license possible through an FRA Board decision alone. It also determines that the exchange must take the form of a joint stock company and obtain a license to perform exchange activities from FRA.

6. Harsher Penalties

Some of the provisions related to the main penalties provided under the Law have been amended. This includes the penalty of a five-year prison sentence and/or a fine ranging between EGP50,000 to EGP20 million. This was modified to be a five-year prison sentence and/or a fine ranging between EGP50,000 or the amount in which the perpetrator has benefited or avoided loss, whichever is greater; and (as a maximum fine) EGP20 million or double what they have benefited or avoided in loss, whichever is greater. The above penalty was also extended to a number of new violations which include: (i) intentionally refraining from executing the undertakings of minority investors and sukuk holders, (ii) intentionally violating FRA rules of financial reporting, (iii) the issuance or offering of sukuks for trading in violation of the Law, (iv) refraining from settling the value of sukuks at the end of their term, (v) fraud in valuing assets or their benefits. Moreover, the same penalty was extended for violating the rules of private offering, where it only applied to public offerings in the past. Stricter penalties were extended to include a number of other violations such as (i) the divulging of secrets, (ii) personal gain from prohibited activities for the person, their spouse or children, (iii) entering incorrect information or omitting data that influences the result of reports that are required by Law, (iv) trading in securities or financial instruments in violation of the Law, (v) failing to notify FRA of board appointments, (vi) suspension of company operations or liquidation without board approval, or ensuring that the company has settled its dues, (vii) failing to provide FRA with semi-annual reports on company activities and results as determined in the Law, (viii) trading of listed securities in an exchange other than that in which they are registered, (ix) failing to provide FRA or its authorized officers with the data required by Law, (x) disposal or securities in a manner other than those outlined, (xi) acquisition of securities without undertaking a mandatory offering in the cases required by Law. Finally, a new clause was added to the provision relating to penalizing the company officer in charge of actual management for the violation of the provisions of the Law. The new clause requires that it be proven that the officer in question had known of the violation, and that it had taken place as a result of the officer’s failure to discharge the duties of their job. Furthermore, the text providing that the company guarantees the settlement of any financial fines ordered under the Law has been omitted.

Conclusion

The Minister of Investment had issued various amendments to the executive regulations of the Capital Market Law on the 12^th of this March. The amendments pertained to private equity funds, charitable funds, real estate investment funds, subscription in investment certificates, computing of certificate value, the assembly of certificate holders, fund investment in same-day trading, conflict of interest in ETFs, bank and insurance company funds, and the FRA’s auditors register. (We have covered these amendments in detail in the Egypt Legal Update Issue of March Week 2, 2018.) In as far as they represent an attempt to catch up with international financial markets, the most recent amendments to the Capital Market Law are worthy of appreciation. While it might have been prudent that the amendments to the Law be issued first, and then followed by those of the executive regulations so that they are easier for the market to absorb, the introduced legislative changes can be generally termed as positive. It is now hoped that these recent amendments have a positive effect on the growth of investment fields and financial markets in Egypt, in addition to Egypt’s rank on international indices in relation to minority rights, disclosure requirements, and conflict of interest.   [1] Law No. 17/2018 amending certain provisions of the Capital Market Law No. 95/1992, Official Gazette, Issue No. 10 (bis) (h), 14 March 2018.