Reviewing what the Egyptian Stock Exchange (EGX) went through recently and how it was affected by current events, EGX Chairman Mohamed Farid outlined the measures taken to develop and improve the Egyptian bourse, in addition to its readiness to welcome the offering of government and armed forces companies on the stock exchange as per President Abdel Fatah al-Sisi’s announcements.
In a seminar held at the headquarters of Business Today Egypt in Cairo, Farid started with a presentation on the stock exchange management efforts to develop the market in coordination with all parties. He also displayed videos of success stories of companies recently listed on the stock market, including Fawry Banking and Edita for Food Industries, and how they benefited from the stock market as positive models to motivate family-owned companies to register on the stock exchange.
Government IPO and listing of Armed Forces Companies
The initial public offering (IPO) of state companies on the stock exchange has various advantages, including expanding the ownership base and distributing economic growth among a larger number of individuals, Egyptian Exchange Chairman Mohamed Farid said.
“Companies’ incomes reflect on economic growth,” Farid stated, expressing that individuals can benefit from companies’ growth when they are offered on the stock exchange.
“Offering state-owned companies is one of the most important steps countries take to revitalize the stock market,” Farid stated, pointing to the Eastern European model, where markets have shifted from directed economies to a free economies by stimulating the money market through offering many companies on the stock exchange.
Farid highlighted Egypt’s experience in offering government companies on the stock exchange, both in the early 1990s with the reactivation of the stock exchange, and the issuance of Law 95 of 1992, which resulted in the revitalization of the stock market, and later the second wave of government offerings in 2004 and 2005.
He also referred to the latest model, the offering of Saudi Aramco, the largest oil producer in the world and a state-owned company, to stimulate trading on the Saudi Stock Exchange. “The idea of registration and offering state companies is a very important matter; it is very much needed and will yield good returns for investors in general,”Farid stressed.
Furthermore, Farid explained that offering Armed Forces’ companies on the EGX conveys a message of state transparency and strength, as well as the openness of the Egyptian economy and its ability to participate with all parties.
The EGX chairman said that offering on the stock exchange is related to governance; the state’s goal to list its companies on the stock market means that it is ready to commit to regulations on transparency, governance and audit committees, as well as to announce its financial statements and disclose ordinary and extraordinary matters. “This is a good message,” he asserts.
In December, President Abdel Fatah al-Sisi announced that Armed Forces’ companies will be offered on the EGX. On the companies’ readiness, Farid said that it is up to the IPO’s promoter and the investment banks that deal in securities.
“Generally, the market’s boom period is related to the offering of government companies, and therefore we are talking about a complete idea, as the offering results in stimulating and attracting new investor categories, and enhancing the stock market’s attractiveness,” Farid said.
Farid stressed the EGX’s readiness to accommo- date new offerings, whether from Armed Forces’ companies or companies listed in the government offerings program, reviewing numerous measures taken by the stock market during the supply side. This includes developing and improving the content of disclosure of listed companies and raising awareness concerning the importance of the stock market as a platform to finance companies’ expansions.
“The measures also include promoting the registration of new companies on the EGX, reducing delay rates in registering capital adjustments for restricted companies, as well as adjusting executive procedures to allow repeated stock splitting,” he adds.
The Stock Exchange also reportedly took measures to develop the trading environment through new trading mechanisms and financial products to diversify options for investors, in addition to developing trading control mechanisms, increasing market efficiency,and managing the risks associated with member bodies.
“Finally, the demand side has been developed to increase communication rates with all local and international institutions, shedding light on the field’s most prominent financial market efforts in particular, and the overall economy in general, through the promotion of internal and external communication and financial inclusion. This is in addition to signing agreements with various inter- national federations,” Farid concluded.
According to Farid, the Stock Exchange also worked on developing a mechanism to link back offices and the stock exchange system for initial offerings by activating the Financial Information Exchange protocol known as the Financial Initial Market.
“This mechanism allows the ability to link to back offices to verify the client’s financial adequacy, the speed of implementation of work orders, as well as the ability to list and follow-up orders directly from the client through the brokerage firm’s website for online trading,” Farid clarifies. He adds that it also allows direct listing of orders and reduces errors by diminishing human intervention at all stages, providing connectivity with other parties through brokerage companies such as investment funds and global trading networks, the speed of arrival of orders and the statement of their status to the issu- ing bodies (client - company - fund).
Sporting clubs on the EGX
Answering question related to attracting sports clubs to be floated on the bourse, Farid notes that the Sports Law has been amended to allow clubs to be offered on the stock exchange, which is wel- comed, especially since there are many clubs in England, Germany and France that are established as a company and are listed on stock markets.
“Currently, there are [sporting] clubs in Egypt that are founded in the form of companies, and ready to be offered, and we are working on 2 or 3 companies to be floated, which are Misr Lel Makkasa Sporting Club, Wadi Degla and Football Club Masr (FC Masr),” he states.
Egypt’s economic reform program
On another note, Farid said that investing in the financial market is linked to macroeconomic performance, because any investor who wants to invest in a financial market in a particular country monitors the performance of macroeconomics at first. More recently, the results of Egypt’s economic reform program reflected on the stock exchange, such as net foreign purchases on the stock market, which amounted to LE 20 billion after the start of the pro- gram in November 2016 compared to LE 2 billion in the same period before the program began.
Moreover, market capital increased by 60%. “New proposals will not take place without macro- economic reforms,” he states.
The EGX chairman clarifies that a foreign investor in the stock market is a long-term investor, as he enters to buy shares of companies and invests in them for a year, two years or more, due to his confidence in managing the overall economy and the reflection of this economy’s performance on companies.
Interest rates, trading volumes, and the Aramco IPO on Tadawul
Regarding interest rates, there is an inverse rela- tionship between interest rates and levels of invest- ment and consumption, Farid says. When inflation rates increased significantly, it was necessary to raise interest rates; whereas after inflation rates fell to a single digit, interest rates began to decline, pro- spectively yielding an uptick in an investment activity in general, be it direct investment to set up factories or establish companies or at the level of the capital market, he explains.
Because of the low supply of companies listed on the Egyptian Stock Exchange, where we witnessed throughout the year various companies exiting as a result of the rules of registration or acquisition or the presence of outstanding problems with them, this reduced the investor supply for investment, Farid states.
Regarding how could Saudi Aramco’s IPO affect trading on the EGX, Farid said that there is no direct and immediate impact of Aramco’s offering on the Egyptian Stock Exchange.
“Aramco’s offering is the largest in the world, with a value of $25 billion, but it will have an indirect impact on the companies’ weights in global financial market indicators such as the Morgan Stanley Index. This is not limited to Egyptian companies, but to all companies around the world,” he contends.
Stamp Taxation and the Client Relationship Management (CRM) unit
As for the stamp tax and its effect on the bourse’s performance, Farid said that there is a committee including the market’s parties and the Ministry of Finance, to discuss the impact of the stamp tax on the stock exchange, and to devise and fully elaborate this tax. The aim is to achieve two goals: the state’s right to collect taxes to increase its resources, in return creating a balance on the stock exchange, awaiting this committee’s results.
Client Relationship Management (CRM) unit
On another note, the EGX Chairman revealed that the bourse seeks to promote listing new companies, saying that the Stock Exchange established a department for promotion in July 2018 as part of the Egyptian Stock Exchange’s plan to increase market depth and increase the base of listed companies. In turn, this has a positive impact on the number of investors, and gives a positive image of Egyptian Stock Exchange’s performance.
“The offering of Fawry on the bourse came as a result of effective communication of the Client Relationship Management (CRM) unit, which provided all aspects of support to the company in each of the registration and offering steps,” he refers.
In Farid’s view, the mechanism of the CRM’s work is to follow up on targeted companies to list their shares on the stock exchange is through collecting data on companies that carry out transfers of ownership in over the counter (OTC) markets, companies registered in the Central Custody Company of Misr for Central Clearing, Depository and Registry (MCDR), and companies registered at the General Investment Authority. This results in identifying the targeted companies and working to address them and promote the listing of their shares, whether in the main market or the market for small and medium-sized companies, keeping all aforementioned data in the CRM system.
He announced that the CRM contacted 235 com- panies, where 67 revealed their desire to list their shares on EGX but are considering the timing of this step, 81 companies showed no interest, 24 companies are mulling the step, and 14 companies have already begun studying the enrollment and offering process.
Efforts to develop the market
“Since assuming management of the Egyptian Stock Exchange in August 2017, we have worked on developing 3 axes. First, there’s the supply side, through developing and improving the content of disclosure of listed companies and raising awareness of the importance of the stock market as a platform to finance companies’ expansion through developing disclosure rates and content, and promoting listing new companies on the Egyptian Stock Exchange,” he said.
“Secondly, the development of the trading environment through new trading mechanisms and financial products to diversify options for investors, developing trading control mechanisms to increase market efficiency, and manage risks associated with member entities. As a result of the development, the total cash dividends of companies listed on the stock exchange reached LE 23.5 billion in 2019,” he added.
As for the third axis, Farid referred to developing the demand side to increase communication rates with all local and international institutions to shed light on the most prominent efforts in financial markets in particular and the overall economy in general through the promotion of internal and external communication and financial inclusion. This is in addition to signing memorandums of understanding (MoUs) with various international federations.
“The Egyptian Stock Exchange is one of the longest exchanges in the world in stopping stocks,” the EGX Chairman stated.
He clarified that the EGX was indeed one of the longest stock exchanges in the world to suspend shares, and after one month since assuming responsibility, the board began issuing a decision to reduce shares’ suspension to 15 minutes instead of 30 minutes.
“Two months later, we issued another decision on the basis for calculating the pauses and price limits based on cash dividends in order to prevent the security from being stopped due to the price of the security falling at a value higher than the value of the pauses limits. This is due to the fact that the price decline is a product of natural dividends and not a result of negative news,” he notes.
Introduction of new trading mechanisms
“We have put the introduction of new trading mechanisms and financial products at the top of the stock exchange priorities, and indeed, we issued the first decision regarding allowing trading on the index fund documents through the mechanism of purchasing securities by margin to increase trading rates and diversify investment channels in front of all investors,” Farid says.
Moreover, criteria was modified, allowing the practice of specialized activities in accordance with the approval of the General Authority for Financial Supervision of the decision of the Board of Directors of the Egyptian Stock Exchange, in aims of increasing the number of securities permitted to deal with the system of specialized activities to enhance liquidity and diversify investment options.
Since the beginning of 2019, the EGX has re- leased the rules of the market maker’s work on securities listed to include the market maker’s registration of one or more shares and the criteria for choosing shares that the market maker is allowed to trade on. The market maker’s obligations include quantities of offers, orders and price differences, which are determined according to the liquidity categories, share activity rates and determinants that may temporarily exempt the market maker from fulfilling all or some of its obligations, he states.
Decree No. (39) of 2019 was issued regarding amending membership rules on the EGX to comply with the rules of the market maker’s work on listed securities’, and resolution No. (487) was issued to amend Resolution No. (3) for the year 2019 regarding the rules of the market maker’s work on securities listed on EGX to organize the mechanism of the practice of borrowing securities for the purpose of selling. This allows the implementation of large scale operations without their being bound by the controls related to offers and requests.
According to Farid, “The stock market concluded the year by activating the short-selling securities borrowing mechanism, as well as updating the trading directory by adding the rules for that mechanism; activating these mechanisms is related to their experimentation first and then it will be spread.”
The bidding unit and stock exchange management
“The Stock Exchange issued a decision in September 2018 regarding amending the bidding unit on shares to be ‘one in a thousand’ of the Egyptian pound or from the foreign currency in which the security is registered. This is for securities that have a market value of less than LE 2 or from any another currency, with the aim of keeping up with global best practices and providing greater flexibility in trading on low-priced stocks,” he said.
Regarding the number of newly registered on EGX, Farid stated that the number of newly registered investors on the Egyptian Stock Exchange is more than 30 thousand codes, distributed between 29,284 thousand codes for people and 1,710 entities. This is up from 22,515 thousand codes for people and 1,685 entities in 2018, and about 20,802 natural people and 1,499 legal persons in 2017.
The Egyptian Stock Exchange launched a new interactive website displaying the development of indicators and the latest market news, and added a section for the new website under the name infographics to display the development of the stock market’s performance, in an effort to display data and information in a more attractive way, Farid says. The bourse also launched an electronic map to dis- play the sites of brokerage companies on its website clarifying the sites of brokerage companies. “This step aims to support the stock exchange management efforts in improving the quality of services and information provided to investors and various parties to the capital market,” he tells Business Today Egypt.
The Egyptian Stock Exchange in 2020
Farid hopes to achieve two goals in the new year, the first of which is the restructuring of the SME market, in cooperation with the European Bank for Reconstruction and Development (EBRD). During the first quarter, works will aim to design a structural reform program to develop this market, and then the EGX will consult with the Financial Supervision Authority to discuss the possibilities of implementation.
The creation of the financial derivatives market, futures and options will be made available to Egyptian and foreign investors, because achieving this requires the establishment of a settlement company for this type of security in cooperation with the Misr for Central Clearing, Depository and Registry (MCDR), and training workers in the brokerage companies, Farid also tells Business Today Egypt.