How would you describe the general state of equity capital markets in your jurisdiction, including notable recent activity and deals?
The Egyptian equity capital markets are generally healthy, benefiting from the overall increased attractiveness of investment in Egypt following the decision to float the Egyptian pound in November 2016. There are several important Initial Public Offerings (IPOs) in the pipeline. Recent IPOs include:
- Dice (an apparel and ready-made garments manufacturer and retailer);
- Ibn Sina Pharma (a pharmaceuticals distributor);
- BPE Holding for Financial Investments (a holding company with a diversified investment portfolio); and
- CI Capital (an investment banking and financial services firm).
What recognised exchanges operate in your jurisdiction, and what are the pros and cons of listing in each?
The main recognised exchange is the Egyptian Exchange (EGX). The Nile Exchange is also available, but is suitable for small and medium-sized companies only and is significantly less liquid than EGX.
Reforms and case law
Are any regulatory reforms envisaged or underway with regard to equity capital markets? Has there been any recent case law affecting the markets?
The EGX Listing Rules have been subject to numerous amendments and will continue to evolve. The rules were amended in March 2018 to (among other things):
- increase the percentage of shares required to be offered on listing;
- improve disclosure and transparency standards;
- improve corporate governance rules for listed companies; and
- provide for enhanced minority rights.
There are no recent cases or court precedents affecting equity capital markets specifically.
Have there been any notable recent developments in financial technology (fintech) which affect equity capital markets in your jurisdiction?
What primary and secondary legislation governs the issue and trade of equity securities in your jurisdiction?
The primary and secondary legislation governing the issue and trade of equity securities are:
- the Egyptian Capital Market Law 95 (1992) and its executive regulations; and
- the Egyptian Exchange (EGX) Listing Rules issued pursuant to Decree 11 (2014) of the Board of Directors of the Financial Regulatory Authority (FRA) (previously the Capital Market Authority) and their executive regulations.
Which authorities regulate equity capital markets in your jurisdiction and what is the extent of their powers?
The FRA, which has significant powers under the Capital Market Law (and its executive regulations) and the Listing Rules (and their executive regulations), regulates equity capital markets. The most notable powers of the FRA include:
- approving the pre-registration of companies wishing to list on the EGX;
- approving the public subscription notice required in connection with the offering of shares on the EGX; and
- approving the fair value study prepared by an independent financial adviser, based on which the shares are priced for the purposes of being offered on the EGX.
The EGX has significant powers under the Listing Rules, the most notable of which are monitoring compliance with the listing and the disclosure requirements listed therein.
What eligibility and disclosure requirements apply for primary listing of equity securities on recognised exchanges in your jurisdiction (eg, aggregate share value, free float requirements, trading record, working capital)?
The Listing Rules stipulate the listing requirements for different types of security, including:
- the shares of regular Egyptian companies;
- the shares of Egyptian companies established by public subscription that have not published financial statements for two financial years;
- the shares of small and medium-sized Egyptian companies;
- governmental securities;
- bonds and sukuk;
- investment certificates issued by funds;
- investment certificates issued by index funds;
- Egyptian depository receipts; and
- foreign securities.
The main requirements for the listing of shares issued by Egyptian companies are as follows:
- The shares offered upon listing must be a minimum of 25% of the company’s shares or 0.025% of the total free float capital of the Egyptian Exchange (EGX) (subject to a minimum of 10% of the company’s shares).
- There must be a minimum of 300 shareholders post-offering.
- The percentage of the company’s free float shares post-offering must a minimum of 10% of the company’s shares or 0.0125% of the total free float capital of the EGX (subject to a minimum of 5% of the company’s shares).
- There must be a minimum of five million shares listed.
- The company must submit financial statements for two full consecutive financial years prepared in accordance with the Egyptian Accounting Standards, audited by an auditor registered with the Financial Regulatory Authority (FRA) and approved by the company’s general assembly of shareholders.
- The company’s issued and paid-in capital must be a minimum of E£100 million and its shareholders’ equity must be no less than its issued capital.
- The company’s main shareholders must be subject to a lock-up on 51% of their shares in the company for two full financial years post-offering.
- The company’s net profits before tax for the financial year immediately preceding listing must be a minimum of 5% of the company’s issued and paid-in capital.
Are there any exemptions from the listing requirements?
The Listing Rules include exemptions from certain listing requirements or different listing requirements that are applicable based on the type of company (ie, companies established by public subscription that have not published financial statements for two financial years, as well as small and medium-sized Egyptian companies).
There are specific exemptions from certain listing requirements, the most notable of which pertain to the profitability requirement referred to above in specific cases.
Procedure and timeframe
What is the procedure and typical timeframe for listing?
Based on the latest amendments to the Listing Rules, the first step for listing is pre-registration with the FRA. Following pre-registration, the company must submit to the EGX for listing its shares and offer its shares on the EGX pursuant to a public subscription notice approved by the FRA within one month; this period may be extended with the FRA’s approval. The listing and offering must also be approved by the company’s general assembly of shareholders. The typical timeframe for this process is three months, in addition to time allowed for due diligence, preparation and restructuring before the commencement of procedures to ensure initial public offering-readiness – the length of this period varies between companies.
What fees apply for an application to list equity securities?
There are different types of fee payable to the FRA and EGX for pre-registration, listing and offering, which are regularly updated based on decisions made by the FRA and EGX boards of directors and the structure of the offering. Lists of applicable fees based on the latest FRA and EGX decisions are available from local brokers or investment banks, which have regular access to such updates.
Listing versus admission to trading
Is there a distinction between listing and admission to trading in your jurisdiction?
Are there any differences in the rules, restrictions and procedures for secondary listings of equity securities?
Yes. The Listing Rules stipulate specific rules for the secondary listing of foreign equity securities on the EGX.
Are there any differences in the listing rules and procedures for foreign issuers?
Yes. However, shares of foreign issuers can be listed on the EGX only as a secondary listing following their listing on a recognised foreign stock exchange.
Under what circumstances can a company be delisted? What rules and procedures apply?
The Listing Rules provide for both voluntary and mandatory delisting.
The main requirement for voluntary delisting is the approval of the delisting decision by a 75% majority in the company’s extraordinary general assembly of shareholders. The company must also acquire the shares of the minority or dissenting shareholders based on the market value stipulated in the Listing Rules.
The EGX Listing Committee can order mandatory delisting where there has been a gross violation of the Listing Rules or failure to comply with the listing requirements. In the case of mandatory delisting, the company must acquire the free-float shares based on fair value as determined by an independent financial adviser.
Initial public offerings
What are the most common structures used for IPOs in your jurisdiction, and what are the advantages and disadvantages of each?
Initial public offerings (IPOs) in Egypt are primary, secondary or mixed IPOs. Most IPOs are mixed, meaning that they include elements of primary and secondary IPOs, which ensures the realisation of value for the shareholders that partially exit through the IPO (subject to the applicable lock-up requirements) and reassuring investors that a portion of the IPO proceeds will be invested in the company.
Mixed IPOs often take the form of secondary offerings followed by a rights issue, whereby shares are sold at the IPO valuation; a portion of the proceeds from this sale are reinvested into the company based on the rights issue allocated to the selling shareholders at the IPO valuation. This structure is favoured because it guarantees that investors will have ownership of their shares as soon as trading on the Egyptian Exchange (EGX) begins, without having to wait for the conclusion of the time-consuming capital increase formalities.
Procedure and timeframe
What is the procedure and typical timeframe for launching an IPO?
IPOs in Egypt are part of the same process as listing, as an IPO is one of the main requirements for listing on the EGX. Based on the latest amendments to the Listing Rules, the first step for listing is pre-registration with the Financial Regulation Authority (FRA). The company must then submit its shares for listing to the EGX and offer them pursuant to a public subscription notice (PSN), which must be approved by the FRA within one month – this period may be extended with the FRA’s approval. Listing and offering must also be approved by the company’s general assembly of shareholders. The typical timeframe for this process is three months, in addition to time allowed for due diligence, preparation and restructuring before the commencement of procedures, in order to ensure IPO-readiness – the length of this period varies between companies.
What due diligence is required and advised in the IPO process?
IPOs take place in Egypt pursuant to a PSN approved by the FRA. FRA approval is subject to the PSN including adequate disclosures regarding all material legal, financial and tax information pertaining to the company, which requires intensive due diligence covering all of those aspects.
Pricing and allocation
What rules and standards govern share pricing and allocation in the context of an IPO?
IPO valuation must be based on a fair value assessment prepared by an independent financial adviser (IFA), by which the shares are priced for the purposes of being offered on the EGX. This assessment must be approved by the FRA and the company’s general assembly of shareholders. The IFA valuation provides the higher end of the IPO price range.
Typically, an IPO includes a component offered by way of a private placement to qualified investors (the private component) and a component offered to public or retail investors (the public component). The IPO pricing and allocation in the private component are decided based on a bookbuilding exercise, which calculates the IPO price for the private component. The IPO price for the public component may be the same as the private component or discounted, as detailed in the PSN. Shares in the public component are allocated based on order size (ie, without bookbuilding) and in accordance with the final announced price.
Types/pros and cons
What types of follow-on offering are commonly used in your jurisdiction, and what are the advantages and disadvantages of each?
Follow-on offerings are uncommon. The most common format is a rights issue; subscription rights are tradeable in the context of rights issues.
Applicability and exemptions
When must a prospectus be filed? Are there any notable exemptions?
A follow-on offering should be made pursuant to a public subscription notice (PSN) or a disclosure report for the purpose of offering, and each much be approved by the Financial Regulation Authority (FRA).
Regarding a rights issue, the board must submit the disclosure report to the FRA for approval and publishing as a prerequisite for undertaking rights issue procedures.
What must the prospectus contain?
The PSN and disclosure report must include material legal, financial and tax information pertaining to the company. The PSN is far more comprehensive than the disclosure report.
Filing and approval procedure
What is the procedure for filing for and obtaining prospectus approval from the regulator? Can draft prospectuses be submitted to the regulator for preliminary comment?
PSNs and disclosure reports are officially filed with the FRA, which often (especially in the case of PSNs) provides comments or requests information and documentation. FRA comments are addressed in subsequent filings until the FRA gives its final approval.
What types of prospectus liability can arise (eg, statutory, contractual, tort)? Which parties may be held liable?
Including false or inaccurate information in a PSN or a disclosure report is a criminal offence punishable by a fine and/or imprisonment under the Capital Market Law. The main parties that may be held liable are the issuing company and its relevant directors and officers.
What defences are available for liable parties?
A party’s main defence is to include adequate disclosures and accurate information as far as possible based on thorough due diligence.
What methods are commonly used to market equity security offerings in your jurisdiction?
The public offering and marketing of securities in Egypt must be made pursuant to a Financial Regulatory Authority (FRA)-approved public subscription notice or disclosure report. As an exception, research and marketing materials may be distributed on a one-to-one basis to qualified investors.
Rules and restrictions
What rules and restrictions (if any) apply to the marketing of equity securities?
No marketing materials may be published or made available to the public without the prior approval of the FRA. Research and marketing materials may be distributed only on a one-to-one basis to qualified investors.
To what extent is bookbuilding used in your jurisdiction, and how does the process customarily play out? What are the advantages and disadvantages of using this process?
Bookbuilding is permissible in the context of initial public offerings (IPOs) but only in relation to the private component (ie, among qualified investors).
The bookbuilding process is not tightly regulated and the issuer and underwriter may allocate shares as they deem fit. This process is common and ensures that the private component is properly allocated, in order to achieve the desired combination of investors and determine the IPO price within the range dictated by the qualified investors.
Role of advisers
Adviser roles and responsibilities
Describe the role and responsibilities of the following advisers in the context of equity securities offerings, including how their relationship with the issuer is formalised (eg, through terms of agreements):
In the context of an initial public offering (IPO), an underwriter with an investment underwriting and promoting licence is required to undertake an IPO. The underwriter is responsible for several aspects of the IPO, including:
- managing the IPO process and coordinating the process with the company and all external advisers;
- promoting and marketing the shares offered (including organising the roadshow which is often required);
- managing the bookbuilding process; and
- managing the stabilisation transactions that are commonly included in IPOs in the Egyptian market.
The roles, responsibilities, rights, obligations and fees of the underwriter are typically included in an underwriting agreement concluded with the issuing company and/or the selling shareholders.
Any Egyptian joint stock company must have a qualified auditor auditing its financial statements. The auditor is appointed by the company’s general assembly of shareholders, which determines the auditor’s fees each financial year. In the context of listing and IPOs, the auditor must be registered with the Financial Regulatory Authority and must audit the financial statements required for the listing purposes, which are also included in the public subscription notice. Further, the auditor must issue a report on the independent financial adviser (IFA) fair value study.
The listing and IPO processes typically involve legal advisers to both the issuing company and the underwriter through engagement letters.
(d) Any other relevant advisers?
The IFA is important to the listing and IPO processes, as the fair valuation study prepared by the IFA forms the basis of the IPO valuation. A licensed broker is also hired by the selling shareholders in the IPO and is typically an affiliate of the underwriter.
What continuing obligations apply to issuers of equity securities? What are the penalties for non-compliance?
The Listing Rules include mandatory provisions regarding the maintenance of the listing of listed companies. They mainly relate to maintaining the listing requirements and complying with specific rules regarding disclosure and governance. The penalties for non-compliance with the relevant provisions of the Listing Rules are fines or mandatory delisting.
Market abuse provisions
Rules and restrictions
What rules and restrictions are in place to combat market abuse and insider trading? What are the penalties for breach of these rules?
The Capital Market Law (and its executive regulations) and the Listing Rules include specific rules to combat market abuse and insider trading. The rules stipulate specific blackout periods and include detailed provisions regarding the disclosure of material information and the shareholdings of main shareholders, directors and related parties. The penalties for non-compliance with the relevant provisions of the Listing Rules include fines or mandatory delisting. Further, market abuse and insider trading are criminal offences punishable by fines and/or imprisonment under the Capital Market Law.
What tax liabilities arise in relation to the issue and trade of equity securities in your jurisdiction?
Pursuant to the Stamp Duty Law 111 (1980), stamp duty is to be borne by the seller and the buyer equally on the transfer of listed or unlisted shares at the following rates:
- 0.25% until 31 May 2018;
- 0.3% as of 1 June 2018 until 31 May 2019; and
- 0.35% as of 1 June 2019.
Further, according to the Income Tax Law 91 (2005) and its executive regulations, capital gains realised from the sale of Egyptian shares listed on the Egyptian Exchange by both resident and non‑resident shareholders are subject to 10% capital gains tax. However, the application of this tax was suspended for two years from 17 May 2015 (ie, the date of the official announcement made by the Cabinet of Ministers regarding this exemption). On 2 November 2016 the Egyptian Higher Committee of Investment decided to delay the introduction of the capital gains tax on listed shares for a further three years from 16 May 2017.
How can these tax liabilities be mitigated?