Three issues dominate the Egyptian Financial Supervisory Authority’s (EFSA) agenda in 2016; at the top of which is drafting of the executive regulations of the Movable Guarantees Law, according to EFSA Chairman Sherif Samy.
Samy explained, in an interview with Daily News Egypt, that the EFSA plans to issue the executive regulations by June 2016, and send them to the Minister of Investment for approval, highlighting that the parliament has already approved the law.
He added that this law will play an important role in providing funding to companies, especially small and medium-sized companies. The law facilitates the acquisition of credit facilities or funds in exchange for providing guarantees, Samy said, highlighting that there are numerous instruments that constitute guarantees.
Among the most prominent instruments that constitute guarantees are the debts owed to the party that will obtain the fund. Other instruments can be used, such as bonds, deposits, equipment, agricultural crops, real estate, patent copyrights, or trademarks.
Samy moreover noted that the second most important issue on the authority’s agenda is the amendments to the Capital Market Law, tackling several issues, such as protecting investors, acquisitions, the regulations for the issuance of Sukuk (Islamic bonds), and the formation of an Egyptian union for companies specialised in securities.
The amendments to the Capital Market Law are under review by the cabinet, after having been discussed by the cabinet’s Legislative Reform Committee. The law is set to be submitted to the president for approval, as a prelude to its submission to parliament for approval, according to Samy.
The EFSA hopes these amendments will create important investment opportunities in the capital market – such as the Sukuk – that can attract the attention of local, regional and global financial institutions, according to Samy.
The third issue on the agenda is the amendments to the executive regulations of Insurance Law, which are still under study by the Ministry of Investment, said Samy.
He explained that among the most prominent amendments are creating new channels for distributing insurance documents to policy holders (such as the Internet), and adjusting the rates investments of the insurance companies, as well as redirecting these investments to different sectors.
Furthermore, during its next meeting, the EFSA’s board will approve the regulations for the three funding instruments that the Minister of Investment approved last month. These are the covered bonds, bonds with no credit rating, and the charity investment funds.
Covered bonds are bonds backed by cash flows, and guaranteed by assets, usually real estate assets.
As for the policy governing the charitable investment funds, it is based on not distributing profits on the “investors”. Surplus from these funds is directed to charitable and social causes in order to provide a scheme enabling non-governmental projects and organisations to benefit from the revenues, while guaranteeing more transparency in the mechanisms for managing this money.
Bonds with no credit rating aim to allow small and medium companies to benefit from the access of financing through the issuance of bonds, without the added burden of undertaking the procedures for obtaining a credit rating and renewing it annually. These bonds will be available to financial institutions and the investment funds only, not to the public.
Samy noted that the EFSA is seeking to hold continuous communications with the Tax Authority over this period to avoid a number of points of contention with capital market investors regarding the executive regulations for the amendments of the Income Tax Law.
He explained that this step came after the parliament approved the amendments to the Tax Law, which include imposing a 10% tax on the capital gains made from investing in the stock market, in addition to 10% levied on the profits distributed by companies to stock market investors.
Following the formation of parliament, Chairman of the Egyptian Exchange (EGX) Mohamed Omran said he would “discourage” the parliament from imposing taxes on companies’ profits distributions and capital gains, as such a decision would harm the investment atmosphere.
Major disagreements arose in the last year between investors and the Tax Authority on a number of topics, most notably the decision to impose three kinds of taxes on securities portfolios.
These are the 10% tax on the companies’ profit distributions, 10% on the capital gains. Moreover, a 10% to 22.5% tax was introduced on the profits distributed by the portfolios to investors, if the volume of the portfolios surpasses a certain level, which has yet to be set. However, in cases where this final tax is applied, the tax on the companies’ profit distributions is deducted from the 10% to 22.5% tax.
The points of contention also included imposing three kinds of taxes on investment funds – the 10% capital gain tax, the 10% tax on companies’ profit distributions, and 10% on the profits each fund distributes to investors.
One of the major points of dispute was the method through which foreigners would pay capital gains tax, whereby 6% of the profits of each trade operation conducted by foreign investors would be deducted by Misr for Central Clearing, Depository and Registry (MCDR).
MCDR clears all trades, whether gaining and losing, every three months. This process can lead to the discovery that investors paid more taxes than they should, due to the discovery of losing trades. In such cases, MCDR reimburses this additional value to the investor periodically, every three months.
Samy noted that during the last meeting with the Tax Authority’s officials, they agreed to postpone the collection of the capital gains tax for the period of 1 January until 17 May.
He explained that the justification for exempting investors from paying the tax is based on the president’s decision to postpone the tax for two years after the tax year had started. He noted that as the postponement of the tax took place during the tax period, the postponement decision should be applied retroactively for the whole year.
Meanwhile, the EFSA awaits the Ministry of Supply’s account regarding the nature of the commodity exchange that is set to be established. He noted that it has yet to be clarified as to whether this will be a market for trading future contracts for commodities, or simply screening the announcements for movements in prices of commodities.
Minister of Supply and Internal Trade Khaled Hanafy announced, last week, a plan to launch the first exchange for primary commodities in the Middle East in late 2016. This exchange is set to include six agricultural commodities, including corn and wheat, in addition to gold and oil.
Samy asserted that authority is current working on finalising the regulations governing financial evaluation. The most prominent aspects of these regulations are the methods of evaluation according to the nature of the company’s activity, the financial status, and the assets owned. The regulations also determine the legitimate sources for obtaining financial information.
Samy highlighted that the EFSA’s role is not to interfere in the details of the financial evaluation methods, but rather is concerned with ensuring that proper evaluation methods are being employed.