Over the course of the first quarter of 2019, a number of new regulations have been introduced in relation to the Capital Markets. The Financial Regulatory Authority (the “FRA”) has issued decrees regulating the short selling of securities on the Egyptian Stock Exchange (the “EGX”), amendments to listing and delisting rules (the “Listing Rules”) and amendments to the compliance period for listed companies to incorporate cumulative voting.
Short Selling
By virtue of Decree No. 268 for the year of 2019 dated 26 February 2019 (the “SS Decree”), the FRA issued the legal framework for short selling securities on the EGX. The SS Decree introduced a new mode of investment to the Egyptian market.
Simply put, short selling allows investors (the “Investor”) to bet against securities so that they can achieve a profit when the price of securities goes down. There are a number of good guides with a more detailed explanation of what short selling is along with the benefits and risks involved.
Conditions for brokerage firms
Brokerage firms are responsible for executing transactions on behalf of Lender and the Investor. Below are the key conditions for brokerage firms to be able to undertake short selling activities:
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- Brokerage firms must be registered with the FRA and must apply for an additional approval to undertake short selling activities.
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- The equity rights of these companies must not be less than EGP 5 million and, if they wish to undertake margin trading, the equity rights must not be less than EGP 10 million.
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- The number of employees working in the department responsible for the execution of short selling must be no less than three. They must also meet certain professional criteria.
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- The templates used for contracting with the Lender and the Investor must be disclosed to the FRA.
How the risk is mitigated
The SS Decree imposes certain limitations on short selling in order to mitigate its potential adverse effects; some of the key limitations are outlined below:
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- Custodians may not offer securities in excess of 25% of a company’s shares.
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- Lenders may not offer securities in excess of 5% for any one company for lending.
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- The percentage of securities borrowed by the Investor cannot exceed 0.5% of the total shares of the company.
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- Investors must deposit sufficient cash collateral in accordance with set limits outlined in the SS Decree and brokerage firms are under an obligation to intervene in certain circumstances depending the price volatility of the shorted security.
Changes to the Listing Rules
Several amendments have been made to the Listing Rules by virtue of Board Decree No. 32 for the year of 2019. The key amendments are:
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- The extension of grace periods for listed companies that have listed their securities on the EGX before the effective date of FRA Decree No. 122 of 2017. The new deadline for finally listing such securities is now September 30th, 2019 provided that the relevant companies submit to the FRA a timeline for the offering.
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- A more lenient approach has been adopted by the FRA in the matter of companies contemplating IPOs in relation to the financial statements required upon application.
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- Foreign companies may now list their shares on the EGX if 50% of their equity rights, assets and revenues originate from an Egyptian subsidiary.
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- New regulations for the treatment of listed parent companies and demerged companies and further disclosure requirements of the disclosure report issued upon the demerger.
Cumulative Voting
Pursuant to circular No. 1 for the year 2019 issued by the FRA, companies operating in non-banking operations and companies with securities listed on the EGX may incorporate cumulative voting into their bylaws at any time, as long as the incorporation occurs prior to the board elections of the company. Prior to the issuance of this new circular, companies were required to incorporate cumulative voting into their bylaws before the 25 June 2019.
Market Reaction
The introduction of short selling is part of the EGX’s and FRA’s plan to increase investments and liquidity in the Egyptian Stock Market. It is a welcomed financing tool that has been present in foreign stock exchanges for decades and should attract new and more sophisticated investors to the market as it allows them to have long and short strategies.
