After TAQA Arabia crisis, does EGX need to amend its listing mechanisms?

Fatma Salah
7 Min Read

After the Egyptian Exchange (EGX) had cancelled transactions on TAQA Arabia stocks in the company’s debut on the stock market, after its skyrocketing start, questions were raised about the need for amendments to the rules that govern the listing of companies on the EGX.

The current rules allow trading shares without any price limits on their first day. During their first day, TAQA’s stock hiked at astronomical rates from EGP 8.9, the fair value price, to EGP 500. This prompted the EGX to cancel all operations. On the next day, the share was also traded without price limits as well, and high purchase orders took place again, which prompted the EGX to cancel dozens of purchase orders as well.

The stock price jumped to more than EGP 20, with a growth rate of 3900% from the nominal value at EGP 0.5. It achieved an estimated growth of 124% from the fair value of EGP 8.9 per share, after re-trading it again during the Monday session.

The stock witnessed the execution of 253 operations on 801,300 shares, with a turnover of EGP 15.7m, despite the cancellation of about 50 operations of the total operations that were executed on the stock.

These sharp rises came after the stock was traded again without price limits. This incident raised concerns and questions about the direct trading mechanism applied by TAQA Arabia upon its listing on EGX, instead of a public offering, and its impact on future market offerings.

The direct listing mechanism provides an option for companies that wish to enjoy the benefits of a public offering without going through the traditional subscription process.

Trading on the stock listed in this mechanism takes place without being bound by the price limits or temporary suspension mechanisms during the first session of trading on a company’s stocks, provided that trading as of the next session happens in accordance with the mechanisms in force in the market in which it is listed.

Money market experts and dealers were divided over whether there is a need for a change in the rules, and some believe that there is a need to set price limits, while others say that cancelling abnormal transactions in them is more than enough.

An official source in the EGX said that it does not plan to submit to the Financial Regulatory Authority (FRA) a request to amend the price limits in direct trading, or any amendments related to that mechanism, provided that each case is dealt with separately.

Yasser El-Masry, Managing Director and Chairperson at the Arab African International Securities, said that the EGX’s cancelling transactions for abnormal trading on TAQA Arabia does not necessitate amending the current direct trading rules.

He pointed out that trading without a maximum limit provides a comparative advantage represented in “freedom of transactions”, which is major element of investment attraction. However, it must be carried out at a fair price with intervention being crucial in the case of manipulation.

He added that setting a maximum limit of 20% on the company’s stock is an optimal option, explaining that TAQA Arabia will accommodate the implementations and start correcting its performance to comply with the market, especially that manipulation will eventually vanish.

Amr Al-Alfy, head of the research department at Prime Securities, attributed the lack of price limits for trading shares offered on the EGX through the direct listing mechanism to the lack of a reference for the share price and reliance on the nominal value and the report of the financial advisor.

He explained that the current happenings indicate a lack of balance between supply and demand for the stock, as it has reached the price set by the financial advisor at many occurrences. 

He also stressed that the regulatory authorities must develop other solutions to ensure direct offerings reach a proper price in order to avoid manipulation. He suggested that the minimum share price be the nominal value, and the maximum be 20% higher than the price announced by the independent financial advisor.

Prime Research has set the fair value, through the discounted cash flow method, of Taqa Arabia’s stock at EGP 5.5, which means the entire company’s valuation at EGP 7.4bn, and a target price within 12 months of EGP 7.4 per share.

Mohamed Younis, head of the Egyptian Society of Technical Analysts, said that freedom of trading in the markets is the most important for investments. Additionally, setting price limits on stocks negatively affects the market’s ability to attract investors.

He stressed that the regulatory and administrative authorities must find convenient ways for protecting small-scale investors, while not affecting the freedom of share trading, as well as keep up and compete with global markets in attracting foreign investors.

He added that the ease of exiting is one of the most important features of stock markets, with the need to enforce place the necessary controls to prevent manipulation and protect dealers.

Ahmed Shehata, former president of the Egyptian Society of Technical Analysts, believes that trading without price limits on direct offering shares may have a negative impact on the stock itself and the market as a whole in attracting new investments, in the event of violent rises and falls.

He added that new offerings usually attract new investors to the EGX who do not have experience, so they must be protected by setting price limits, in addition to protecting small investors. 

He said that the EGX understands the principle of defining the price limits for shares is for companies with clear data and declared liquidity, through the availability of data and disclosures for registered companies. This makes it easier for the investor to deal with the share and protects new investors and companies from wrong assessments of shares.

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