Central depository, registry law amendment prompts heated debate

Sabah Hamamou
8 Min Read

CAIRO: A proposed amendment that would allow the Egyptian Stock Exchange (ESE) to own a majority stake in the country’s central depository and registry company has stirred heated debate and accusations that this is part of a larger plan to privatize the ESE.

In mid-April, the Capital Market Authority (CMA) requested that the Ministry of Investment propose an amendment to Article 37 of Law 93/2000, which specifies the ownership structure of Misr for Central Clearing, Depository and Registry (MCDR).

“According to the [proposed] amendments of the Central Depository and Registry Law, the ESE will be able to own at least a 51 percent of MCDR’s shares, a Ministry of Investment statement released on May 11 said.

The ESE currently has a 5 percent stake in MCDR, with brokerage companies holding 45 percent and banks 50 percent.

As it stands, Article 37 stipulates that “the shares of the company [MCDR] shall be owned only by its participants, in an amount proportional to the volume of their respective dealings with the company and in accordance with the fees and charges paid.

“However, no participant or group of related participants may own more than 5 percent of the company’s capital.

According to sources in the People’s Assembly’s economic committee, the amendment entails a capital increase – to reach LE 370 million – with 51 percent going to the ESE.

“The amendments, which were discussed and approved by the People’s Assembly’s economic committee, [allow for the] effective supervision of the securities market, said Investment Minister Mahmoud Mohieldin in the statement.

Ulterior motives

The proposed amendment has prompted heated debate and even accusations that this is part of an undisclosed plan to nationalize the stock exchange.

One CEO of a brokerage company, who spoke on condition of anonymity, said that the ambiguity of placing “at least in the amended article suggests that the stock exchange could attempt to own even more than 51 percent of the company at a later time, which he described as a takeover of MCDR.

Meanwhile, Eisa Fathi, deputy head of the securities division at the Federation of Egyptian Chambers of Commerce claimed that “the real reason is a long-term plan to privatize the stock exchange.

He said, “Owning 51 percent of MCDR will increase the value of the ESE when the time comes for an Initial Public Offering (IPO). .There is no single explanation provided by the Ministry of Investment, the ESE or the CMA for the amendment. All the reasons provided have no ground.

But officials have repeatedly refuted these allegations. Mohamed Omran, deputy chairman of the stock exchange, told the official MENA news agency that recent reports linking a plan to increase ESE’s stake in MCDR and a government intention to privatize the stock exchange are utterly baseless.

Omran also denied that there are any plans to privatize the ESE. “Egypt currently has no plans to privatize the nation’s stock exchange or turn it into a private company, he told MENA.

“The main object of the amendment is not clear, said Magdy Abdel-Ma’bood, an attorney at the Cassation, Constitutional and Supreme Administrative Courts, who has handled many cases for brokerage companies.

“Most stock exchange entities in western capital markets do not own more than 5 percent of their central clearing and depository bodies, said Abdel-Ma’bood.

There are two ways the ESE can raise its stake in MCDR, explained Fathi. “It will [either] take over other partners’ sharers, and this is unconstitutional since it is considered ‘forced acquisition;’ or it will issue a capital increase and take a bigger stake, which is also unconstitutional because the other partners should have the same right to participate in the capital increase, he said.

The amendment was justified by ESE officials as a way of “improving the efficiency and financial capacity of both the MCDR and the [ESE], Maged Shawky, chairman of the stock exchange, said at a conference on May 16, according to Al-Ahram.

“The main reason for the amendment is the reorganization of the market and to increase the effectiveness of the control of the capital market instruments, Omran told MENA on May 14, noting that similar drives were taken by most major stock markets around the world.

However, Abdel-Ma’bood says that “MCDR’s performance and efficiency match international standards – the amendment is groundless.

Then and now

Founded in the early 90s as Misr for Central Clearing, Settlement and Depository (MCSD), the company was 35 percent owned by the stock exchange, 50 percent by banks and 15 percent by brokerage firms.

In December 2000, the company’s organizational structure was modified and after a capital increase, the ownership structure was reorganized to how it currently stands, “to accommodate all the central depository members, brokerage firms, custodians and settlement members as shareholders, according to the company’s website.

The objective of the MCDR is to finalize clearing and settlement for securities transactions executed at the stock exchange; manage a fund to guarantee the settlement of money and securities resulting from securities transactions; provide custodian services for financial intuitions and provide depository and registry services for the issuers of securities.

In 2008, MCDR posted LE 81 million profits, and “over LE 60 million were distributed among shareholders, said Tarek Ezzat Abdelbary, managing director of MCDR. In 2007, the company posted LE 78 million profit and increased its issued capital to LE 140 million from LE 80 million, according to Abdelbary.

Enayat El-Naggar, finance and investment advisor, said, “After the global financial crisis, it’s clear that we need well-established entities, and the proposed amendment is needed for the benefit of the [Egyptian financial] market.

Still, Abdel-Ma’bood said he expects brokerage companies to oppose the law if it is approved, and maybe even file a lawsuit against its implementation.

Mohamed Maher, deputy chairman of the board at investment bank Prime Holding and member of the board of the ESE, said: “The amendment will benefit the market as a whole, and it will lead to a decrease in transaction fees. .[However], it won’t be in the favor of other shareholders in MCDR – mainly the banks and the brokerage companies.

“The ESE will increase its shares to 51 percent acquiring the extra shares on the nominal value not the fair value.

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