As one of only two markets in the Arab world to be given emerging market status by MSCI Barra, the Egyptian stock market attracts significant capital flows from overseas funds as well as from local investors. Moreover, since the EGX 30 index has risen 4.1 per cent in the year to date, Cairo is one of the best-performing markets in the region.
The Egyptian authorities are looking to boost that status by announcing measures that pave the ground for the introduction of index-linked funds and tighten the rules of disclosure for traded companies.
“Our aim is to find the correct balance between regulatory measures and energising the market by encouraging new forms of activity,” says Ziad Bahaa El-Din, chairman of the Egyptian Financial Supervisory Authority.
The EFSA was formed only last year and Mr Bahaa El-Din, a lawyer, is its first head. The body unifies under one management team the previous regulators of the capital market and the mortgage and insurance industries.
Over the past five years, Egyptian government policies have been mostly pro-business and strongly supportive of the private sector, giving the bourse an increasingly important role in the economy.
Brokers say the introduction of index funds will increase the variety of products in a market that is still limited in the range of vehicles it offers to small investors. The measures include rules for market makers in index funds – the last step needed to allow the product to come to market.
“There are too many retail investors who do not really know how to invest,” says a managing director at a leading Cairo brokerage house. He says retail investors make up almost 60 per cent of daily trading volumes. “This type of . . . fund will be one way to absorb them,” the managing director says.
Other measures aimed at boosting activity allow same-day trading and margin-trading on a larger number of stocks. Mr Bahaa El-Din says his authority has agreed new standards that will double the number of “active” stocks eligible for such operations to more than 100. Shares of companies in which at least 10 per cent of the capital is a free float are now considered active. The previous threshold was 15 per cent.
The EFSA is also moving to introduce stricter disclosure rules. Companies will be obliged to inform the market before the start of trading about changes to their capital structure, the nature of their activity or the nominal value of their shares.
Decisions such as capital increases and share splits will have to be disclosed promptly to prevent the spread of rumours and manipulation of the market.
“We are forcing a much higher level of disclosure for corporate actions,” says Mr Bahaa El-Din.
The authority is now endowed with the range of powers exercised by regulators elsewhere in the world, including carrying out surprise inspections and taking cases to court. So far, it has brought “a handful” of cases to trial over the past year, two of which have led to criminal convictions.
“More importantly, we also have the power to settle [out of court] with wrongdoers,” Mr Bahaa El-Din says. “But I do not believe that all crimes should end with settling. I want to send a clear signal that settling is exceptional, not a right or a rule.”
To that end, the authority is building up capacity by taking on 40 staff a year. They undergo a newly introduced 16-month training programme, including a trip to a counterpart abroad, which this year will be Singapore.
More generally, Mr Bahaa El-Din wants an improvement in the quality of quarterly corporate results. “Companies need to have more research published on them. Some companies do not allow analysts enough information,” he says.
Brokers say most of the big companies traded on the Egyptian market adhere to reasonable standards, but they complain that, among small and medium cap entities, corporate governance, insider trading and failure to abide by the rules are often a problem.
“The issue is not so much regulation, but it is the enforcement of existing regulations,” says the managing director of the brokerage house.
The EFSA is also moving to tighten the over-the-counter market for stocks in companies that have been removed from the main exchange because they breached listing regulations. This part of the market is particularly chaotic and open to manipulation, according to brokers, and will now be limited to two half-hour trading sessions every week.
“This was not meant to be a fully fledged market,” says Mr Bahaa El-Din. “It was only meant to help investors exit from stocks that have been delisted.”
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