An Amendment to the Rules of Invest

The Financial Regulatory Authority (“FRA”) issued decision No. 40 of 2019 according to which an amendment was introduced to the investment rules of real estate funds (the “Decision”).[1] The Decision also stated that holding companies may be established to incorporate investment fund companies.

Background

Article 183 (bis) of the executive regulations of the Capital Market Law requires investment funds to comply with certain investment rules. One of these rules is that the percentage of return generating assets is not less than the percentage of the total assets of the fund as determined by the board of directors of FRA. FRA was also to determine the definition of “return generating assets”. In this respect, FRA issued decision No. 34 of 2014[2] regarding the investment rules of real estate funds and it amended it in March 2016. According to the 2014 decision, the percentage of assets generating periodical return must not be less than 70% of the total assets of the fund. Further, this decision defined “revenue generating assets” as assets that generate periodical revenue during the period that such assets are held by the fund, and where the sale of which is not required to generate income. The decision goes an extra step of providing an exhaustive list of these assets to the exclusion of others. They include real estate that is owned or built or developed and that generate or is expected to generate revenue, real estate backed securitization bonds, bonds issued by real estate finance companies, securities issued by companies the majority of whose assets are in real estate, investment certificates of real estate funds, and other assets.

The New Decision

In its new Decision, FRA introduces two amendments to the above. First, it limits the scope of application of the percentage of revenue generating assets to total fund assets to “real estate funds that aim to invest in revenue generating assets” after it used to apply to all real estate funds. Although this might mean that all real estate investment funds will be allowed to invest all their monies in non-revenue-generating-assets (for a temporary period at least), the executive regulations still require FRA – as mentioned above – to determine a minimum percentage of revenue generating assets to total fund assets. Second, in the definition of the term revenue generating assets, FRA has removed the phrase “during the period for which such assets are held by the fund”. Accordingly, the definition of “revenue generating assets” is now the assets that generate periodical revenue and the sale of which is not required to generate income. It is worth noting that the list of defined revenue generating assets provided in this Article has not been amended.

An Unrelated Provision

In the second Article of the decision, FRA added a stipulation that allows the establishment of holding companies that undertake the activity of incorporating or participating in incorporation of investment fund companies, given that said company does not undertake the fund activity itself. From a legal perspective it is not clear why this provision was inserted in this particular decision. It is also not clear why FRA is explicitly stating this provision, since the definition of companies working in the field of incorporating companies issuing securities or participating in their capital increases, provided under Article 122 of the executive regulations of the Capital Market Law, does not prohibit – at least explicitly – these companies from establishing several investment fund companies which are companies that issue securities. This is in addition to the available possibility of establishing a holding fund (fund of funds), which may establish investment funds or invest in existing ones.   [1] FRA Board of Directors Decision No. 40/2019 amending certain provisions of the rules of investment funds, available through this link (in Arabic). [2] FRA Board of Directors Decision No. 34/2014 on the investment rules of real estate funds, Egyptian Gazette, Issue No. 82, 9 April 2014.