Sifting the chaff

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Egypt's stock exchange delists firms in a move to put quality over quantity

The Egyptian Stock Exchange (EGX) delisted 14 companies at the start of the year. According to a statement on the EGX’s website, the firms’ shares were transferred to the Over the Counter (OTC) Board (Orders Market) for two weeks starting January 3. This move gave individual investors time to leave the companies before they were transferred to the OTC Market (Deals) two weeks later.

Requirement changes

The 14 companies were: BLOM Bank Egypt, Pens & Plastic Industries (Sicep), National Investment & Reconstruction Company, El Obour Metallurgical Industries (Galvametal), Egyptian Sponge, International Hotel Holdings, Egyptian Real Estate Company, National Navigation, Pharco Pharmaceuticals, Amoun Pharmaceuticals, Suez Canal Automotive Repair & Maintenance, Delta Industries (IDEAL), National Glass & Crystal Company, and Nile Matches.

Several changes to the EGX listing requirements were publicly announced in September 2008. Maged Shawky, chairman of the EGX said the 14 companies were delisted after failing to meet these requirements, which include ensuring that average net profits over three years must not be less than 5 percent of the capital the company plans to issue, and ensuring that new standards on the stocks’ par values versus the number of stocks issued are set in such a way that guarantees that any company board member does not hold less than 0.05 percent of a company’s traded capital.

In an exclusive phone interview with Executive, Shawky said that by September 2008, some 230 of the 330 listed companies were found to be non-compliant with the new listing requirements, which he said were designed to increase corporate governance and improve disclosure.

The 230 companies were given three different deadlines by which to comply: March, June and December 2009. When questioned as to why the companies were given such extended grace periods, Shawky cited last year’s global financial crisis.

“There was no way that non-compliant companies could restructure themselves, increase their capital and receive approval from their boards [of trustees] and the general assembly during 2009,” said Shawky. He explained that it was impossible to increase capital or free float part of a company’s ownership in the market — which was what the companies needed to do.

“There was no appetite to invest,” he said. “Investors were questioning growth prospects, therefore, why would any of them inject more money into the market?”

In spite of the tough economic times, many of the companies complied with the requirements within the second half of 2009. Shawky said that these companies sought capital increases when the market started to recover, split stocks and free floated part of their founders’ holdings.

Yet by the third and final deadline of December 31, 60 companies remained non-compliant with the EGX listing requirements.

“Forty-six of the 60 companies delisted voluntarily,” he said, noting these companies were held by families.

“It is not an issue for them to delist,” Shawky explained, noting that many of them opted for this to restructure themselves, to focus on corporate governance and capital ownership structures so as to return later with Initial Public Offerings (IPOs) and be listed again. Such was not the case for the remaining 14.

“These companies have a bad history of disclosure,” said Shawky. He also cited too little capital and a history of negative equity as other causes for non-compliance.

“They can return to the EGX if they manage to restructure and comply,” he said. “But realistically, this will take quite a long time [for the 14 companies]. If they are very ambitious in their efforts [to increase capital and receive] the necessary approvals from their boards, perhaps they can become compliant and [be listed again] within three months.”

Shawky remained skeptical that such action could be accomplished in such a short time frame.

“It is difficult to restructure when you do not have one profitable statement,” he said, commenting on the 14 companies’ lack of positive financials. In his most optimistic opinion, these companies will not see any positive earnings until the second quarter of 2010, making their listing impossible until the end of this year or later.

Quality comes first

In rebuttal to his critics, Shawky confidently insisted that today’s exchange is a real reflection of the state of Egypt’s economy.

“Six or seven years ago, the EGX had about 1,200 listed companies, but only 30 to 40 were actually traded. They were happy with market capitalization,” said Shawky. “Now, the EGX is worth [$91.8 billion], less than the [$146.9 billion] from previous years, but 100 percent of that is traded. It represents the real value of the exchange. Ninety percent of the listed companies are traded frequently.

“Quality on the EGX comes first,” said Shawky.

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The EGX Disclosure:

Egypt is the pioneer in the Middle East and North Africa Region in terms of Corporate Governance. It was the first country to introduce a Code for Corporate Governance for the private sector in 2005, and another Code for State Owned Enterprises in 2006 that was well acknowledged by the OECD. The Code was not a copy and paste operation; it took into account international best practices as defined by World Bank, OECD, etc. and it was then also drafted to be relevant to the Egyptian context. Both codes are voluntary. The first Institute of Directors in the region was established in Egypt in 2004; one of its main priorities has from the start been to enhance corporate governance in Egypt.

Even prior to the launch of the Code in 2005, EGX took the initiative to change its listing rules in August 2002, in order to enhance its disclosure and implement best corporate governance rules. Before these rules were in place, companies usually listed on EGX because of a tax advantage, not to raise equity or trade. The tax advantage was abolished by the government in 2005 after reform was undertaken in the tax code, whereby the corporate tax rate was reduced to 20%, down from 42%.

Due to the implementation of the new listing rules, the number of listed companies was reduced from 1,153 companies in August 2002 to 219 by end of March 2010. Market capitalization, however, increased from $ 26 billion in 2002 to $ 88 billion over the same period, and other trading indicators were equally positive. Hence, the de-listing did not impact negatively on the market; on the contrary,   it reinforced the strong branding of EGX and the volume of the public regulated exchange with its standards.

EGX introduced another new set of listing and disclosure rules end of 2008 to further enhance its listing and disclosure rules. It gave the listed companies a one-year grace period to comply with the new rules. Rules come into effect starting in January 2010.

EGX expects further de-listings, and to end up with around 150-200 listed companies by end of 2010, taking into account new IPOs to be launched in the second half of 2010. One of the main success factors of EGX was its vigorous implementation of its listing and disclosure rules. Non-compliant companies were first warned, then fined, suspended and finally delisted.

EGX in cooperation with the Institute of Directors and Standard & Poor’s, launched the first ESG Index in the Middle East and North Africa Region, on 23 March 2010. The index is designed to raise the profile of EGX-listed companies that perform well on environmental, social and corporate governance indicators when compared to their peers, and is expected to raise the level and quality of disclosure on ESG issues in Egypt for investors. It includes 30 stocks drawn from a universe of the top 100 Egyptian companies by total market capitalization, which have passed an innovative, two-stage, score-weighted screening process. It is worth noting that the performance of EGX 30 Index, the exchange’s benchmark, on a YTD basis increased by 20.2% whereas the EGX ESG index was up by 22.4%, a slightly better performance. The EGX ESG index included only 13 constituents of EGX 30 index. It is early days, but the start has been encouraging.

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