FRA’s Newly Appointed Board Passes

Following the Prime Minister’s appointment of the Board of Directors of the Financial Regulatory Authority (“FRA”) on 24 March 2018,[1] the Board passed several decisions regulating capital market related activities and the non-banking financial sector in general. The decisions pertained to IPOs, investment fund certificates, registration and trading in relation to securities companies, and consumer protection. However, of these, the most important is the amendment to the Rules for the Listing and Delisting of Securities on the Stock Exchange (the “Listing Rules”), passed by virtue of Decision 13 of 2018 on 27 March (“Decision 13/2018”).[2] Background Listing Rules are the key regulatory instrument significantly affecting listed companies, as they set out the conditions and requirements for listing, continuation of listing and delisting of securities on the Egyptian Stock Exchange (“EGX”). While many rules pertaining to capital market operations are directly issued by EGX, rules of listing and delisting in particular are issued by FRA’s Board of Directors in accordance with Article (16) of Capital Markets Law 95 of 1992. Over past few years, the FRA has amended the Listing Rules several times. However, Decision 13/2018 passed on 27 March 2018 is one of the most significant of these amendments as it affects core listing requirements. Decision 13/2018

• General Listing Conditions

Decision 13/2018 amends FRA Decision No. 11 of 2014 comprising the Listing Rules. Article (7) of the Listing Rules contains the conditions for listing the shares of Egyptian companies. In addition, the Listing Rules also provide in Article (10), the conditions that must be maintained at all times so that a company’s shares remain listed. These include (i) the minimum threshold of number of shareholders, (ii) the minimum threshold for free floating shares, and (iii) the minimum threshold for number of shares that are requested to be listed. Companies who fail to satisfy the conditions for continuation of listing at any time subject themselves to delisting according to Chapter (6) of the Listing Rules. In this respect, Decision 13/2018 has amended Article (7) containing listing conditions for Egyptian companies as follows:

• Prior to the amendment, companies wishing to offer their securities on the EGX were required to offer at least 10% of total listed shares. The percentage was amended so that companies are now required to offer at least 25% of listed shares. Alternatively, a company may offer a lower percentage of listed shares provided that the offered shares are not less than the value of a quarter per thousand of total market free-float capitalization, as long as that value is not less than 10% of company shares.

• Whereas free floating shares were required to be at least 5% of total company shares (with market value of no less than EGP 10 million), the amendment has required that the free-floating percentage be at least 10% of total company shares. Alternatively, free floating shares could be equivalent to one eighth per thousand of total market free-float capitalization provided that their value does not fall below 5% of company shares in all cases. Companies have been given until 31 March 2019 in order to comply with the requirement to raise the percentage of free floating shares.

• The requirement that the number of shareholders does not fall below 300 now explicitly states that the threshold must be maintained after listing.

• The requirement that the company’s issued and fully paid capital be not less than EGP 50 million was raised to EGP 100 million.

It is worth noting that other listing requirements have not changed. Namely, the requirement that shares issued for listing be at least 5 million shares, and submission of two annual financial statements remain the same.

• SMEs

Article (9) of the Listing Rules sets out the conditions for listing the shares of small and medium enterprises. This included a condition that the percentage of offered shares does not exceed 20% of total company shares, that the shareholders are not less than 100, that free floating shares are not less than 10%, and that the number of issued shares to be listed is not less than 100 thousand. Under Decision 13/2018, the following changes were introduced to the rules of listing SME shares:

• The definition of small and medium enterprises in the application of the aforementioned rules was amended to be: joint stock companies with issued and paid capital of no less than EGP 1 million, and not more than EGP 100 million (up from EGP 50 million previously) at presenting a listing request for the first time; and that capital remains below EGP 200 million (up from 100 million previously) following that.

• The minimum number of offered shares must now be 25% (instead of 20%), or a quarter per thousand of total market free-float capitalization, provided that that value is not less than 10% of company shares.

• Free floating shares must not be less than 10% of company shares (unchanged). Alternatively, free floating shares could be equivalent to one eighth per thousand of total market free-float capitalization provided that their value does not fall below 5% of company shares in all cases. Companies have been given until 31 March 2019 in order to comply with the new requirement.

• Issued and fully paid capital must be at least EGP 1 million (unchanged), and not more than EGP 100 million (as opposed to EGP 50 million previously).

• The minimum number of shareholders remains 100 at least, with explicit reference added to the number of shareholders having to be maintained after offering.

• Article 9(8) stated that small and medium enterprises wishing to list must provide undertakings that the main shareholders will retain no less than 51% of their shares in the company’s capital, amounting to at least 25% of the total shares that are to be listed. In the event that half of the shares owned by the main shareholders is less than 25%, the percentage should be completed from shares owned by board members and company founders. The amendment added that the 25% could be completed from any other shareholders (not specifically board members and founders).

Companies that exceed the new SME capital threshold must amend their registration to comply with general listing rules. In fact, EGX will change the listing of a company from being subject to SME listing requirements to the application of general listing conditions if the company’s capital reaches EGP 200 million. In addition, a company with capital falling within the range of EGP 100 to EGP 200 million, could submit a request for general listing as long as it complies with the minimum shareholder condition, and the free float percentage for general listing.

• Disclosure

• Disclosure Regarding Equity

Article (29) of the Listing Rules pertains to disclosure of transactions involving company board members, main shareholder, and related parties. It mandates that each shareholder notifies EGX whenever their – or their related party’s – equity exceeds or falls below 5% of the number of shares representing the listed company’s shares or its voting rights (where disclosure must also be made in relation to any multiples of the 5% threshold). The amendment adds that disclosure must include an account of what the shareholder or their related party owns directly or indirectly in shares and foreign deposit shares, as well as any indirect ownership reaching 25% or more of a company owning equity in the listed company in question. A similar rule is provided concerning equity owned by a board member or an employee of the listed company reaching 3% or falling below that percentage. The amendment also adds that any direct or indirect ownership of a board member, employee, or related party reaching 25% in a company owning equity in the listed company in question must also be included in the disclosure. The amendment additionally requires that above disclosures concerning equity are submitted periodically in January and July of each year.

• Disclosure on Capital Amendment or Change of Purpose

Also in relation to disclosure, Article (3) now requires that listed companies submit bi-annual disclosures on the enforcement of company decisions to apply cash increases to issued capital, and the procedures undertaken in that respect. In addition, the board of directors is required to notify existing shareholders of cash increases to capital – including a fair value determination - at least 5 days prior to initiating subscription in the following cases:

1. If the company sustains losses equal to, or exceeding, 50% of equity rights, and the capital increase exceeds 10% of capital (as long as that is not less than EGP 5 million);
2. If the capital increase is equal to, or exceeds, issued capital or equity rights according to the most recent financial statements.

• Board of Directors Report

The amendment has placed an obligation on listed companies mirroring that in Companies Law 159 of 1981 applying to joint stock and limited liability companies in general, in that the company’s board of directors must submit to company shareholders a report containing detailed information on board remuneration, salaries, bonuses and benefits. In addition, the Listing Rules now require that the board submits an annual report on compliance with FRA’s governance rules, to be submitted along with the board’s report regarding the remuneration of its members.  The governance report must be submitted starting the fiscal year ending in 31 December 2018, or 30 June 2019, as the case may be.

• Grace Period in Relation to Decision No. 122 of 2017

In 22 November 2017, FRA issued Decision No. 122 of 2017[3] setting a new rule that required companies wishing to list on the stock exchange to register with FRA prior to making a request before the listing committee at EGX. The company was then given one month in order to apply for listing at EGX. Present Decision 13/2018 states that companies that had already listed prior to the application of the amendment prescribed by Decision No. 122 of 2017 in November of last year, and which have not offered stocks yet, may approach EGX requesting an extension of the grace period for offering. EGX may extend said periods, given that the ultimate deadline for all such companies to offer their stocks concludes by 31 March 2019.   [1] Prime Minister Decree No. 541/2018 restructuring the Board of Directors of the Financial Regulatory Authority, Official Gazette, Issue 12 (bis), 24 March 2018. [2] FRA Board of Directors Decision No. 13/2018 dated 27 March 2018 amending its Decision No. 11/2014 on the Listing and Delisting Rules of Securities on the Egyptian Stock Exchange, Available through this link (Arabic). [3] FRA 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.