The government has demanded that it should benefit from the adjustments made by the Egyptian Exchange (EGX) and the Egyptian Financial Supervisory Authority (EFSA) to the listing rules in 2014, which includes establishing companies through an initial public offering (IPO) and launching them in the EGX.
These calls come amid the state’s recent trend of launching a number of companies and banks in the EGX as part of the economic reform programme prepared in cooperation with the International Monetary Fund (IMF).
Experts explained that the state has greatly depended on governmental spending in order to compensate for the decline in private sector investments over the past two years. This gave it the opportunity to finance some government investments by offering companies in EGX to investors, especially local investors, after their establishment through IPO.
The EGX made drastic adjustments to the listing rules two years ago, head of the investment division in American Cartel Capital Ayman Abou Hend said. These adjustments included establishing companies through an IPO and then launching them in the EGX. These were made after the clear trend of the state to implement major projects in the fields of road works and agriculture, which are projects that require large financing to which the public can contribute through an IPO for these companies.
The state is carrying out a major project to reclaim 1.5m acres, but is facing challenges in providing the required financial allocations for the infrastructure, in addition to expanding in projects for roads and bridges.
The goal of the current offers revealed by the government is to provide liquidity that decreases the budget deficit and provides US dollar resources to bridge the financial gap between revenue and spending, according to Abou Hend. This can also be achieved by launching companies established through IPOs.
The state plans to launch the shares of the Arab African International Bank (AAIB) and Banque du Caire in the EGX, according to governor of the Central Bank of Egypt (CBE) Tarek Amer. The state also plans to study the mechanisms of launching the Food Industries Holding Company into EGX, or some of its companies.
Amer noted that the more important aspect is that the initial agreement Egypt has reached with IMF includes decreasing the deficit, which means limiting spending—including investment spending. This means that the government must find new means of financing its projects without affecting the budget. This is where the public can directly contribute to the implementation of these projects.
He said that the success of the agreement depends on the presence of accurate financial indexes according to the listing rules, in addition to a clear study of the fair value, and thorough future plans regarding the activity of the company and the target profits. This aims to prevent what happened with the Suez Canal investment certificates, which have attracted more than EGP 60bn without achieving the target revenues up until now.
The step of launching companies for IPOs in the EGX is greatly needed since the government announced its trend towards the EGX, head of the Egyptian-Arab company Themar Securities Brokerage Adel Abdel Fattah said. Governmental offerings were suspended for nearly 10 years.
The last governmental offering in EGX was in 2005. Shares of Telecom Egypt (TE), Sidi Kerir Petrochemical Company (Sidepec), and Alexandira Mineral Oils Company (AMOC) were launched.
Abdel Fattah noted that the listing rules provide the companies launched through an IPO with facilities in terms of not adhering to offering previous financial listings.
He preferred that the government begin launching existing banks and companies in order to restore the confidence of foreign and local investors. The next step would be to launch IPO companies to strengthen their chances of success.
Regarding the government not benefiting from the adjustments to listing rules, head of the Egyptian Financial Supervisory Authority (EFSA) Sherif Samy said the authority’s is to look into the financial instruments required in the market. These instruments should serve the economy without intervening in the issue of whether the state will benefit from them now or later.
He explained that the EFSA has made many adjustments to enable the government to provide financing through several instruments, including government-issued bonds to finance certain projects. Moreover, companies established through IPOs will be launched, and the Suez Canal Authority will establish contribution companies on its own. The shares of these companies will be traded once established, with the approval of the cabinet.
The listing rules of companies established through IPOs
In 2014, the EFSA and the EGX carried out adjustments in the listing rules of the stock exchange. They allow shares of Egyptian companies—established through the launching of their shares in IPOs or private offerings—to be listed, by providing a registration publication or an information note approved by the EFSA.
Amendments included exceptional controls for the offerings of these companies by exempting them from the previous regulation that stipulated their offering of financial statements for two full fiscal years. The exemption, however, remains linked to meeting several conditions; the paid-up and issued capital must be at least EGP 50m—twice the minimum capital required for listing companies on the EGX in normal circumstances.
The new controls also stipulate that the total shares owned by major shareholders shall not be less than 51% of the company’s capital and for the number of shareholders to total at least 1,000 contributors.
Moreover, the ratio of free floating shares offered to sub-investors on the EGX must exceed 15% of the total shares of the company and the market value at the time of the IPO must surpass EGP 10m.
Furthermore, the number of the company’s shares during the listing process must be above 20m shares.
The introduced regulations also stipulated that when submitting an EGX listing request, the ratio key and founding shareholders must retain at least 75% of their stake in the company. This stake must, in all cases, be equivalent to 40% of the total shares of the company—for two full fiscal years from the date of listing on the EGX, in addition to providing certified financial statements that meet the condition of profitability, which is set to equal 5% of the paid-up capital, which is sought to be listed on the EGX.
Companies also must provide studies certified by financial advisers approved by EFSA to clarify the opportunities for growth and profitability.
These studies should, at least, include the activity carried out by the company, contracts, future financial forecast, future expectations of profitability, and the adequacy of financial resources generated by the partnership activity to achieve these profits and provide fair values of the shares.
Finally, the controls obliged companies—that have been founded by offering their shares in public or private offering— to provide a report on their business models, management structure, pervious work, and the rule of governance followed after listing.