The Capital Markets Law regulates the capital markets in Egypt.
Under the Capital Markets Law, any company intending to issue securities must notify the Capital Markets Authority (CMA), which then has three weeks in which to review the proposed securities issuance.
For a public issuance of securities, a company must prepare a prospectus approved by the CMA and must provide the CMA with periodic reports and information relating to such a public issuance.
A Company offering part of its shares in a public offering, or trading a minimum of 30% of its shares on the stock exchange, must inform all shareholders owning at least 1% of the company’s capital of any other shareholder wishing to increase its shareholding above 10%.
The Capital Markets Law also allows the issuing company to set a return on securities that exceed the limits established to other laws (i.e. 7% ceiling in the Civil Code)
The Capital Markets Law provides that securities transactions may only be undertaken by financial services companies licensed by the CMA. Board members of such companies must have a minimum of five years’ experience in the field of securities or must have four years’ experience and have participated in a training course set up by the CMA
[i] Areas Covered by the Capital Markets Law
The Capital Markets Law regulates both companies that offer their shares to the public as well as companies that deal in securities. In particular, it regulates activities of companies engaged in the following six types of securities related activities:
• Promoting and underwriting investments in securities;
• participation in the formation of companies that issue securities, or in the increase of their capital (Egyptian equivalent to the Holding Company);
• venture capital;
• securities clearing and settlement activities;
• the creating of securities portfolios and investment funds and portfolio and investment fund management; and
• securities brokerage activities.
Any other activities relating to the field of securities may be added to this list by a decision of the Minister of Economy after obtaining the approval of the CMA
Joint Stock Companies must register with Cairo and Alexandria stock exchange. A joint Stock Company’s securities can be listed in either the official or the unofficial register. The following securities may be listed in the official register:
• A public issuance of a securities that represents no less than 30% of the Joint Stock Company’s nominal shares and that is subscribed to by no fewer than 150 persons; and
• A public issuance of a securities by the government or a public–sector company.
• Securities that do not meet the criteria for listing in the official register (including foreign securities) could be listed in the unofficial register. Investors dealing in securities listed in the official register are exempt both from stamp duties ordinarily due at the time the securities are issued and from the annual stamp duties.
[iv] Investment Funds and ESOPS
The Capital Markets Law stipulates that an investment fund must take the legal form of a Joint Stock Company. The CMA board of directors has the authority to review and object the members of an investment fund company’s Board of Directors as well as the fund managers. An investment fund must be managed by an experienced investment management company.
The Capital Markets Law provides that an investment fund must maintain a ratio between its paid –in capital and its financial resources. Only banks that have been authorized by the Minister of Economy may deal in the subscription to investment fund shares.
Banks and insurance companies may establish investment funds without having to create a separate Joint Stock Company if they have received authorization to do so from both the CMA and either the CBE (in the case of banks) or the General Organization for Insurance Supervision (in the case of insurance companies).
The Capital Markets Law also introduced the concept of Employee Share Option Plans (ESOPs) whereby employees of a Joint Stock Company may form an association that owns shares in the Joint Stock Company’s capital on behalf of the employees.
[v] Brokers Obligations and Restrictions
The Executive Regulations of the Capital Markets Law set out the obligations of, the restrictions on, brokerage companies.
Brokerage companies are bound by fiduciary duties of honesty and integrity regarding their clients. Therefore, brokerage companies are required to disclose any conflict of interest that may exist. Also included in their fiduciary duty is the obligation not to disclose any information regarding their clients prior to there written agreement.
Insider trading rules have been established in accordance with which brokerage companies, their directors and employees are expressly prohibited from engaging in insider trading by using non-public information in accordance with, among other things, these rules:
• Brokerage companies may not execute transactions on behalf of their clients, without sufficient evidence justifying their advice and the resulting transactions;
• brokerage companies are prohibited from “churning” (i.e. entering into transactions for clients participating in excessive trading, with the aim of increasing commissions, expenses or other fees);
• brokerage companies may only deal on behalf of their clients in transactions for which they have been granted specific instructions. These instructions should be recorded by the broker;
• the client must be informed of the completion of a transaction within 24 hours; and
• transactions on behalf of the brokerage companies’ directors, employees or relatives are permitted only through with the explicit written consent of the Board of Directors of the Brokerage Company.