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New Amendments to the Stock Exchang

New Amendments to the Stock Exchange Listing Rules
The Board of Directors of the Egyptian Financial Supervisory Authority ("EFSA") issued, in the middle of January 2015, Decision No. 170 of 2014 introducing various key amendments to the Egyptian Stock Exchange Listing and De-listing Rules (the "Rules").[1] It is worth noting that the Listing and De-listing Rules are one of the most important regulatory tools in the Egyptian capital market, because they include the main rules and requirements for listing, continuation of listing and de-listing of Egyptian securities. Whereas most rules applicable to capital market operations are issued by the Board of Directors of the Egyptian Stock Exchange, those pertaining in particular to listing are issued by EFSA's Board of Directors in accordance with Article (16) of the Capital Market Law No. 95 of 1992.
The Main Provisions
The Amendments make several key changes to the Rules, including:
  • Listing rules provide the definition of "freely traded stocks". These are the shares subject to open selling and buying. The Listing Rules eliminate from the calculation of that category certain class of shares, including those owned by Public Business Sector Companies, or those owned by founders and retracted from trade for two years, treasury shares,  shares guaranteeing board of directors membership, and shares owned by anyone restricted from trade by virtue of a contractual obligation. Previously, the Rules also eliminated from the scope of freely traded stocks 90% of shares owned by principal shareholders. In other words, the Rules deemed that only 10% of shares owned by principal shareholders would be considered part of the freely traded stocks. This was amended so that from now on all such shares will be excluded from that definition, except if they were actually traded during the previous year and only up to 3%.
  • With respect to the listing of shares of Egyptian companies, the Rules used to require that at least 10% of issued shares be listed. The new amendment has added a new requirement, by which EFSA will issue a "non-objection" to the study prepared by an independent financial advisor on the fair valuation of the shares prior to listing. Moreover, it used to be required that the number of shareholders be at least 300 and that none of them owns more than 1 per thousand of the issued capital, not exceeding a value of five thousand pounds. This has now been changed so that there still has to be at least 300 shareholders but with no specific requirement for their minimum shareholding, and now the Cairo Stock Exchange determines the requirements for ensuring that there is genuine free float. In addition, the freely traded shares had to represent at least 5% of all registered shares and have a value of no less than 10 million pounds, whereas now there is still a requirement of 5% shares but their market value has to be above ten million pounds. Finally, while the Company was required to submit a representation that the shares held by its principal shareholders will not be less than 65% of its capital, this has now been reduced to 51%.
  • The new Rules provide a new exemption from the rule that requires founders of the company to hold their shares. The new amendment allows founders now to dispose of their holdings during the retention period if the purchaser is a bank, an insurance company, a direct investment fund, or another entity specialized in investment or a juristic person with expertise, provided that such purchaser undertakes to hold those shares till the end of the initially restricted period.
  • Previously, the Rules stated that it would be possible to list shares of companies which did not fulfill the dual condition of listing 10% of the total shares and 300 shareholders, provided such companies submit an undertaking that they shall fulfill these conditions within six months, and that no trading on the listed shares may occur until such conditions are fulfilled. All of the above rules continue to apply, but now the Stock Exchange is given the powers to extend the period during which the company fulfills the required conditions.
  • Prior to the new amendment, the Rules required that the company prior to listing achieves a net profit of no less than 5% on paid capital prior to tax during the last fiscal year. There were, however, a few exemptions to this rule, provided in all cases that the principal investors retain all their shareholding in the company. This has now been reduced to 75% only, provided the total ownership of principal shareholders does not fall below 51%.
  • With regards to Egyptian companies established by public subscription, which have not yet issued their financial statements for the previous two years, the Rules prior to the amendment required that their minimum capital be two hundred and fifty million Pounds, that principal shareholders retain all their shareholding, and that the company submits to the Stock Exchange its financial statements accompanied by the auditor's report for the period since establishment as approved by its general assembly. The new Rules, however, reduced the minimum capital requirement to one hundred million Pounds, reduced the minimum required shareholding by principal shareholders to 75% of their individual ownership, provided it does not collectively fall below 40% of total shares. Moreover, the new Rules require the company in this case to submit a report on its activity, management, prior experience, and governance instead of submitting financial statements.
  • With respect to the listing of small and medium companies, the Rules previously stated that the number of shareholders should not fall below one hundred shareholders provided that none of them owns more than 1per thousand of total issued shares and does not fall below one thousand pounds. Moreover, the Rules stated that principal shareholders and members of the Board retain at least 51% of the total shares for two years from the date of listing and 25% for the following three years. These requirements have been amended whereby the minimum requirement of 100 shareholders is still required, but with the Stock Exchange determining the conditions thereof. As to the requirement that principal shareholders and board directors retain certain shares, this has been amended so that principal shareholders are required to hold 51% of their shares, with that being at least 25% of total company shares. If this is not fulfilled, it may be completed by shares owned by board directors and company founders. Moreover, the retention time is now two financial yeas and 25% for a further one year only.
  • With respect to foreign companies’ shares, the new amendment allows foreign shares to be listed on the Egyptian Stock Exchange and in Egyptian currency, whereas in the past the Rules required that such listing be in a convertible currency. Moreover, the listing procedures have been simplified, whereby EFSA may now issue a preliminary approval while the documents and requirements are being completed.
  • Finally, the new Rules also include an important amendment pertaining to disclosure, whereby shareholders are not required to disclose related party transactions that are below 1%.
Conclusion
All of the recent changes in the listing and de-listing rules ultimately share the same goal, namely facilitating the procedure for listing and reducing the restrains imposed on founders, principal shareholders and board members with respect to retention of shares. At the same time, other supervisory rules remain in place to provide protection to minor shareholders. In this respect, the recent changes are welcome. On the other hand, however, recent years have seen the introduction of many changes related to the stock market, especially with respect to listing and disclosure. This requires a holistic review of both areas, in order to provide necessary clarity and to avoid confusion.   [1] EFSA Board of Directors' Decision No. 170/2014 amending the Egyptian Stock Exchange Listing and De-listing Rules, Egyptian Gazette, Issue No. 10, 14 January 2015.
The Board of Directors of the Egyptian Financial Supervisory Authority ("EFSA") issued, in the middle of January 2015, Decision No. 170 of 2014 introducing various key amendments to the Egyptian Stock Exchange Listing and De-listing Rules (the "Rules").[1] It is worth noting that the Listing and De-listing Rules are one of the most important regulatory tools in the Egyptian capital market, because they include the main rules and requirements for listing, continuation of listing and de-listing of Egyptian securities. Whereas most rules applicable to capital market operations are issued by the Board of Directors of the Egyptian Stock Exchange, those pertaining in particular to listing are issued by EFSA's Board of Directors in accordance with Article (16) of the Capital Market Law No. 95 of 1992.
The Main Provisions
The Amendments make several key changes to the Rules, including:
  • Listing rules provide the definition of "freely traded stocks". These are the shares subject to open selling and buying. The Listing Rules eliminate from the calculation of that category certain class of shares, including those owned by Public Business Sector Companies, or those owned by founders and retracted from trade for two years, treasury shares,  shares guaranteeing board of directors membership, and shares owned by anyone restricted from trade by virtue of a contractual obligation. Previously, the Rules also eliminated from the scope of freely traded stocks 90% of shares owned by principal shareholders. In other words, the Rules deemed that only 10% of shares owned by principal shareholders would be considered part of the freely traded stocks. This was amended so that from now on all such shares will be excluded from that definition, except if they were actually traded during the previous year and only up to 3%.
  • With respect to the listing of shares of Egyptian companies, the Rules used to require that at least 10% of issued shares be listed. The new amendment has added a new requirement, by which EFSA will issue a "non-objection" to the study prepared by an independent financial advisor on the fair valuation of the shares prior to listing. Moreover, it used to be required that the number of shareholders be at least 300 and that none of them owns more than 1 per thousand of the issued capital, not exceeding a value of five thousand pounds. This has now been changed so that there still has to be at least 300 shareholders but with no specific requirement for their minimum shareholding, and now the Cairo Stock Exchange determines the requirements for ensuring that there is genuine free float. In addition, the freely traded shares had to represent at least 5% of all registered shares and have a value of no less than 10 million pounds, whereas now there is still a requirement of 5% shares but their market value has to be above ten million pounds. Finally, while the Company was required to submit a representation that the shares held by its principal shareholders will not be less than 65% of its capital, this has now been reduced to 51%.
  • The new Rules provide a new exemption from the rule that requires founders of the company to hold their shares. The new amendment allows founders now to dispose of their holdings during the retention period if the purchaser is a bank, an insurance company, a direct investment fund, or another entity specialized in investment or a juristic person with expertise, provided that such purchaser undertakes to hold those shares till the end of the initially restricted period.
  • Previously, the Rules stated that it would be possible to list shares of companies which did not fulfill the dual condition of listing 10% of the total shares and 300 shareholders, provided such companies submit an undertaking that they shall fulfill these conditions within six months, and that no trading on the listed shares may occur until such conditions are fulfilled. All of the above rules continue to apply, but now the Stock Exchange is given the powers to extend the period during which the company fulfills the required conditions.
  • Prior to the new amendment, the Rules required that the company prior to listing achieves a net profit of no less than 5% on paid capital prior to tax during the last fiscal year. There were, however, a few exemptions to this rule, provided in all cases that the principal investors retain all their shareholding in the company. This has now been reduced to 75% only, provided the total ownership of principal shareholders does not fall below 51%.
  • With regards to Egyptian companies established by public subscription, which have not yet issued their financial statements for the previous two years, the Rules prior to the amendment required that their minimum capital be two hundred and fifty million Pounds, that principal shareholders retain all their shareholding, and that the company submits to the Stock Exchange its financial statements accompanied by the auditor's report for the period since establishment as approved by its general assembly. The new Rules, however, reduced the minimum capital requirement to one hundred million Pounds, reduced the minimum required shareholding by principal shareholders to 75% of their individual ownership, provided it does not collectively fall below 40% of total shares. Moreover, the new Rules require the company in this case to submit a report on its activity, management, prior experience, and governance instead of submitting financial statements.
  • With respect to the listing of small and medium companies, the Rules previously stated that the number of shareholders should not fall below one hundred shareholders provided that none of them owns more than 1per thousand of total issued shares and does not fall below one thousand pounds. Moreover, the Rules stated that principal shareholders and members of the Board retain at least 51% of the total shares for two years from the date of listing and 25% for the following three years. These requirements have been amended whereby the minimum requirement of 100 shareholders is still required, but with the Stock Exchange determining the conditions thereof. As to the requirement that principal shareholders and board directors retain certain shares, this has been amended so that principal shareholders are required to hold 51% of their shares, with that being at least 25% of total company shares. If this is not fulfilled, it may be completed by shares owned by board directors and company founders. Moreover, the retention time is now two financial yeas and 25% for a further one year only.
  • With respect to foreign companies’ shares, the new amendment allows foreign shares to be listed on the Egyptian Stock Exchange and in Egyptian currency, whereas in the past the Rules required that such listing be in a convertible currency. Moreover, the listing procedures have been simplified, whereby EFSA may now issue a preliminary approval while the documents and requirements are being completed.
  • Finally, the new Rules also include an important amendment pertaining to disclosure, whereby shareholders are not required to disclose related party transactions that are below 1%.
Conclusion
All of the recent changes in the listing and de-listing rules ultimately share the same goal, namely facilitating the procedure for listing and reducing the restrains imposed on founders, principal shareholders and board members with respect to retention of shares. At the same time, other supervisory rules remain in place to provide protection to minor shareholders. In this respect, the recent changes are welcome. On the other hand, however, recent years have seen the introduction of many changes related to the stock market, especially with respect to listing and disclosure. This requires a holistic review of both areas, in order to provide necessary clarity and to avoid confusion.   [1] EFSA Board of Directors' Decision No. 170/2014 amending the Egyptian Stock Exchange Listing and De-listing Rules, Egyptian Gazette, Issue No. 10, 14 January 2015.