FRA Amends NBFC Related Rules 

The last ten days of the previous month saw the issuance of three amendments by the Financial Regulatory Authority (“FRA”) concerning non-banking financial companies (“NBFCs”) through its board of directors’ decision No. 74 of 2019 (“Decision 74/2019”)[1] and circular No. 4 of 2019 (“Circular 4/2019”).[2] While the former excludes holding companies and credit rating agencies from the 50%-corporations ownership structure required of companies wishing to undertake non-banking financial activities, the latter sets the compliance deadline for NBFCs to incorporate ‘cumulative voting’ in their bylaws to close of business on 31 December 2019. 

• Holding Companies: Ownership Structure Amendment

As per the March 2018 amendments of the Executive Regulations (the “ER”) of the Capital Market Law (the “CML”), “companies that operate in the field of establishing companies that issue securities or increasing their capital” i.e. privately-owned holding companies (“holding companies”) encompass (1) companies operating in the field of establishing NBFCs or increasing their capital, and (2) companies with half of their securities portfolios invested in NBFCs. Following this legal redefinition, FRA issued decision No. 105 of 2018 with regulations pertaining to holding companies (as stipulated in the CML, its ER, and other relevant FRA decisions) and the rules of exit for companies that no longer fall under this new definition. The new Decision 74/2019 amends the regulations for establishing and licensing holding companies such that they are no longer required to have at least half of their capital held by legal persons/corporations (with at least 25% being held by financial institutions) to obtain either an initial approval on establishment or a license for undertaking non-banking financial activities. This puts holding companies with other NBFCs not required to have legal persons/corporations in their capital structure — which include financial advisory companies, insurance brokerages, damage experts, insurance consultants, real estate appraisal companies, and real estate brokerages — and it is aimed at facilitating the establishment of holding companies and thus their contribution to the national economy as clarified in an FRA statement[3] on the decision.

• Credit Rating Agencies: Ownership Structure Amendment

Decision 74/2019 also amends the required ownership structure of credit rating agencies such that they too are no longer required to have at least half of their capital held by legal persons/corporations. In line with this, said agencies are now required to have at least a tenth of their capital held by an international credit rating agency.

• All NBFCs (as well as Listed Companies): New Compliance Deadline for Incorporating Cumulative Voting

Since the issuance of FRA Decision No. 53 of 2018 that put forth a new licensing regime for NBFCs, there has been a series of following decisions and circulars by the regulator with regards to the configuration of “cumulative voting” for NBFCs and their compliance with it. Setting aside the change in the definition of cumulative voting and its relationship with proportional representation – which was covered in the previous Egypt Legal Update Issue of October 2018, Week 5 – the deadline for incorporating the newly defined governance standard of ‘cumulative voting’ into NBFCs’ bylaws has been the subject of recurring (and sometimes inconsistent and vague) revisions as can be seen in the table below, and the new Circular 4/2019 is a new addition to this list of amendments. In particular, Circular 4/2019 brings back the set timeframe for the compliance of companies with listed securities on the Egyptian Stock Exchange and NBFCs – which was removed by the previous circular No. 1 of 2019 and pegged instead to each company’s board elections rather than a set date – anchoring it this time to close of business on 31 December 2019. As such, said companies must undertake the necessary procedures to include a provision on cumulative voting in their bylaws prior to the end of this year.   [1] FRA Board of Directors Decision No. 74/2019 amending its Decision No. 53/2018 regulating the issuance of licenses to companies undertaking non-banking financial activities and the rules for trading their shares, available through this link (in Arabic). [2] FRA Circular No. 4/2019 extending the compliance deadline for incorporating cumulative voting into the bylaws of companies with listed securities on the Egyptian Stock Exchange and non-banking financial companies, available through this link (in Arabic). [3] Financial Regulatory Authority, “FRA’s Chairman issues an executive decision to facilitate the procedures of establishing Holding Companies”, 25 June 2019, available through this link. [4] FRA Board of Directors Decision No. 53/2018 regulating the issuance of licenses to companies undertaking non-banking financial activities and the rules for trading their shares, Egyptian Gazette, Issue No. 136 (cont.) (a), June 13, 2018. [5] FRA Board of Directors Decision No. 93/2018 amending its Decision No. 53/2018 regulating the issuance of licenses to companies undertaking non-banking financial activities and the rules for trading their shares, Egyptian Gazette, Issue No. 136 (cont.) (a), June 13, 2018. [6] FRA Board of Directors Decision No. 155/2018 amending its Decision No. 53/2018 regulating the issuance of licenses to companies undertaking non-banking financial activities and the rules for trading their shares, Egyptian Gazette, Issue No. 240, 25 October 2018. [7] FRA Circular No. 7/2018 on the cumulative voting and proportional representation of capital in the board of directors of companies with listed securities on the Egyptian Stock Exchange and of companies undertaking non-banking financial activities, available through this link (in Arabic). [8] FRA Circular No. 1/2019 on the cumulative voting in the election of board members of companies with listed securities on the Egyptian Stock Exchange and of companies undertaking non-banking financial activities, available through this link (in Arabic).