The Egyptian Exchange (EGX) will hold discussions in 2016 with the government and parliament over four major issues, two of which have been oft-debated and whose outcome may shape the market’s future.
The first issue is the capital gains tax. Although the tax is frozen until 17 May 2017, the issue was raised again after EGX’s Chairman Mohamed Omran declared that he intends to discuss cancelling the tax in parliament. The parliament will hold its first session on Sunday.
The capital gains tax has taken on increased importance with the current debate over whether investment funds will be subject to the 5% Wealth Tax, which is imposed on natural and legal persons with over EGP 1m annual income.
The second issue concerns the activation of trading in bonds in the secondary market through enabling individuals to trade on them directly through brokerage firms, instead of limiting trading to the major traders: banks and insurance companies. This activation has been postponed for more than six years.
The third issue concerns the government’s decision to offer parts of public companies through initial public offerings (IPOs), after two oil companies—MIDOR and Gas Cool—retreated from their IPO plans, and the Food Industries Holding Company did not take concrete steps to offer its shares.
The Egyptian Financial Supervisory Authority (EFSA) is about to close the issue of the amendments on the Money Market Law, which has been under discussion since the first quarter of 2015. When the issue is close, the law’s amendments will be presented to parliament for ratification. The Minister of Investment will study the suggested amendments on the executive regulation of the law.
Chairman of EFSA Sherif Samy said that governmental support to any stock market in the world takes different forms, such as legislative regulation, maintaining the shareholders’ rights, especially the minority investors, and encouraging the IPOs of the public companies.
Samy explained that on the legislative level, the country made progress in supporting non-banking activities, such as issuing the Microfinance Law by the President. This allows more opportunities for small investors, in addition to increased financial reserves for small and medium companies.
The amendments include the establishment of a union for workers in the fields of brokerage, asset management, and investment banking. Additionally the amendments provide allowance for a change in fees paid for listing the stocks, that will see an increase of a maximum of 0.002%, and adding an amendment for Sukuk (Islamic bonds).
Samy noted that there will be amendments in the executive regulations of the Capital Market Law, enabling launching charity funds, covered bonds, and bonds with no credit rating, especially after the State Council revised these regulations and sent them to the Ministry of Investment.
As for government proposals, Samy ruled out any dereliction by the government in initial public offerings of state-owned companies despite the recent withdrawal of two petroleum companies. He explained that the decision to offer companies in general is not limited to only shareholding, but it also includes achieving revenues from the IPO, whether through selling shares of stock or increasing capital to a market price suitable for companies’ shareholders.
The Ministry of Petroleum decided to delay the IPOs of MIDOR and Gas Cool due to the unsuitable circumstances of the market.
The Ministry of Religious Endowments proposed names of other companies for IPO as well during the meeting with EXG chairman, including El Mahmoudia Contracting Company. The Ministry of Supply announced a year ago that there is an intention to offer the Food Industries Holding Company in the capital market.
According to Sherif Samy, law 203 of 1991, which the Holding Company is subject to, doesn’t allow the company to be offered on the EGX. Substantial amendments to the law would be necessary in order to enable the company to register its shares.
Samy recommend that questions regarding the delay to the activation bonds by providing their trading rights to individuals be directed toward the government. “We’ve made several suggestions in this regard during meetings with the finance ministry and the CBE, but none of them were implemented so far,” he added.
Debate around the activation of bonds has persisted for the last nine years. Bank traders and insurance companies have offered 5% of their shares in governmental bonds to individuals so they can directly trade them directly without resorting to securities brokerage companies.
For his part, Chairman and Managing Director of the National Fund Management Company (Al Ahly) Essam Khalifa said that the tax issue is one of the issues that saw coordinated action between the government and the EGX.
Khalifa noted that the government’s tax enforcement was arbitrary. Economic instability caused President Al-Sisi to issue a presidential decree that postponed the imposed 10% profit tax for two years, while the 10% profits distributions tax remained in force.
However according to Khalifa, this decree did not clarify the ambiguity surrounding the taxes file. All investment funds, including monetary funds are subject to the Wealth Tax, which is applied annual income exceeding EGP 1m.
Meanwhile, the controversy over the enforcement of the capital gains tax in 2015 remains. The Egyptian Tax Authority (ETA) demanded that investors pay capital gains taxes in their tax declarations of 2015. However, Samy said that taxes on trading in EGX in 2015 will not be collected.
He justified this by saying that since the legal amendments to the law was issued in the middle of a tax period (i.e. the year), they cannot apply the tax for the preceding period as it is necessary to collect taxes on a full tax year.
CEO of AT Financial Holding Khaled Abu Heif said the market needs new IPOs, adding that the decision to offer such IPOs is not only dependant on the government, but on the EGX administration’s capacity to raise the value of trading in EGX. He also highlighted that EGX failed to raise the value over 2015, despite receiving four new offerings, amounting to EGP 6.2bn, while the average of daily trading does not exceed EGP 500m.
He also believes that the management of EGX and EFSA must work together to activate the bonds market, which would contribute to raising the value of daily trading by EGP 300m.