EFSA’s decision puts financial burdens on the companies: expats

Mohamed Ahmed
9 Min Read
Chairman of the Egyptian Financial Supervisory Authority (EFSA), Sherif Sam

A number of executive directors in investment banks and security brokerage firms said that the companies listed in the Egyptian Exchange (EGX) will experience restrictions and burdens as a result of the Egyptian Financial Supervisory Authority’s (EFSA) decision that obliges the companies’ stocks to move in one direction, whether it be up or down, without justification to submit a fair value study.

EFSA’s point is to give the stockholders a clear picture upon which they can base their investment decisions.

Experts said that the supervisory practices carried out by the EGX’s administration lead to the same result EFSA is aiming for, but without putting any burdens on the companies.

The experts noted that the text of the decision gave EFSA the authority over whether or not to oblige the companies to contract with an independent financial consultant to conduct a study showing the fair value of the stock in case its price changes in an unjustified way. They considered that point as an expansion in the discretionary authority of EFSA, without providing a precise definition for the unjustified up or down changes in the stock’s prices.

Moreover, they warned of the dangers of expanding the discretionary authority because occasionally it leads to contradicting decisions on important issues, like what happened in the failed attempt of Beltone to acquire CI Capital.

The EFSA defended its decisions that aim to make things clear with regard to the stocks’ prices that change strongly in one direction without justifying these changes through the companies’ disclosures. The EFSA is arguing as well that the decision is an important step to prevent suspension of the stocks until the fair value studies are conducted, as happened in 2010.

The EFSA’s decision determined the rate of the up or down changes that require conducting a fair value study at more than 50% in three months and 75% in six months. The new rule is applied on the price changes that do align with the trends of the market indexes and/or the sector of the company and/or the financial statement of the company, and whether or not there is major news justifying these changes.

CEO of Prime investment bank Mohamed Maher expressed his reservation about EFSA’s decision due to the new burdens it puts on the listed companies. He said it is not suitable for the conditions of the market, which is putting pressure on the companies’ financial performance.

He added that the administration of EGX has created procedures to help investors make their investment decisions—without putting financial burdens on the companies—by obliging them to disclose the profits and the financial leverage in order to announce the size of debts and the rights of shareholders and to disclose the price to earnings ratio to show to what extent does the stock price suit the company’s profits.

Maher said that these measures are implemented by the EGX when the stocks’ prices change significantly or in the case of major political incidents that would affect the stock market.

He believes that the only party that will benefit from that decision is the financial consultancy firms that are licensed to conduct the fair value studies for the companies.

Head of Al-Shorouk Brokerage Hany Helmy said that the decision adds restrictions on the listed companies because it is not effective in making the picture clear for investors.

Helmy explained his opinion by saying that there is no precise definition for the unjustified price increase or decrease in the EGX’s decisions because the reaction of the stocks to major incidents is not the same every time. For example, an acquisition or capital increase may lead to a price increase of more than 100% at one time but no more than 10% at another time.

He added that, through that decision, the EFSA is expanding in the discretionary authority which sometimes does not offer fair treatment for the companies, especially under the different definitions that may be adopted by different heads of the EFSA in the future.

Helmy gave the example of what happened in the failed attempt of Beltone to acquire CI Capital. At that time, the EFSA demanded new disclosures related to the major shareholder in Beltone, Naguib Sawiris, although Sawiris had acquired Beltone months earlier through OTMT without being asked by the EFSA to submit the same disclosures that lead to the failure of the acquisition deal.

Helmy noted also that the investors were made aware that the same stock may have more than one fair value, which decreases the effect of the announced value on the investors.

On the other hand, EFSA chairperson Sherif Samy said that the decision clearly determines the definition of the stocks’ price change: moving up or down by 50% or 75%. Applying the decision is subject to the absence of a disclosure or a factor in the financial statement justifying the price change.

Samy considered the decision as a guarantee for the investors to prevent the sudden suspension of the stocks due to unjustified increases or decreases, by warning the company in advance that it has to conduct a fair value study.

As a result, said Samy, we would be able to avoid the scenario of 2010 when the EGX suspended some companies to conduct fair value studies after their stocks’ prices increased significantly.

Samy added that the decision has a different function than demanding the companies to present some information about their finances by the EGX because the exchange moves when the stocks’ prices change by 10% or 20% for example, not by 50% and 75%.

He noted that some companies send disclosures to the EGX saying that there are no major factors justifying their stocks’ price changes. In this case, the role of that decision would be making the complete situation clear for investors by announcing a fair value by an independent financial consultant registered with the EFSA.

Samy added that the features of the discretionary authority granted by the decision is clear. The EFSA will exclude companies whose stocks’ price increased or decreased by 50-75% if they submit a disclosure justifying the price change or in the case that that change aligns with the company’s financial statement or the general performance of the stock market.

Samy said the decision adds more financial burdens on the companies. He wondered why no parties objected to when the EFSA obliged two companies to assign auditors to revise their financial statements after it suspected that their data is false. At the end of the day, the EFSA does what it believes is serving the transparency of the market, said Samy.

Samy said that if the stocks continued moving in the same direction after announcing the fair value, the EFSA would not interfere, as long as there are no violations with regard to the investors’ trades.

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