Part of the Ethiopian Government’s recent reform measure aims to correct imbalances and safeguard macro-financial stability in the country, among others. As part of the requirements for macro-economic stability, the reform program provides improvements to access to finance and the development of a capital market, where securities such as shares, bonds and derivatives are bought and sold. As a result, the National Bank of Ethiopia (NBE), which is the central bank of the country, was tasked to prepare the legal framework and came up with a draft capital markets proclamation, which was later approved and enacted by the Federal Parliament in its regular session held on June 10, 2021, as Proclamation No. 1248/2021. Consequently, actions are being taken by the government to operationalize the Ethiopian Capital Market Authority by the end of 2021 and finally the Ethiopian Securities Exchange through public-private partnership arrangements in 2022.
As share companies started to flourish in Ethiopia in the 1960s, shares were being traded by the NBE. Later on, the Addis Ababa Share Dealing Group was established to trade shares and government bonds in 1965. The Group started with the listing of 15 companies and four government bonds. The number of companies listed reached 17 the next year. The Addis Ababa Bank, Ethiopia Abattoirs, Bottling Company of Ethiopia, Indo Ethiopian Textiles, HVA Ethiopia, and Tendaho Plantation were some of the traded companies. With a socialist government coming to power, led by Derg, which overthrew the imperial regime in 1974, all the traded companies were nationalized, and consequently, the stock market was shattered.
After the fall of Derg in 1991, different attempts were made to re-establish a capital market both by the government and private players, however, the attempts remained fruitless. The adoption of the new capital market proclamation by the parliament, however, seems to have taken a big leap forward in these efforts and the establishment of the capital market in Ethiopia looks closer than ever.
What Do We Know About the New Proclamation?
The Ethiopian Capital Market Authority (ECMA), an autonomous government regulatory body that is accountable to the Parliament, was established by the Proclamation. Similar to any other capital market regulator, the main aim of ECMA is to protect investors, ensure the existence of a capital markets ecosystem in which securities can be issued and traded, ensure the integrity of the capital markets and transactions in order to reduce systemic risk, and promote the development of capital markets by creating an enabling environment for long term investments.
A person who wants to operate as a securities exchange, derivatives exchange, security depository and clearing company or undertake any other professional activity within ECMA’s jurisdiction, including activities of a securities broker, investment adviser, collective investment scheme operator, investment banker, securities dealer, custodian, market maker, and credit rating agency, will be regulated by ECMA. This excludes activities of legal practitioners, public accountants or public auditors.
ECMA is led by a Board of Directors, composed of seven directors, including the Director-General of ECMA, the Governor of NBE, and the Director of the Accounting and Audit Board of Ethiopia as permanent ex-officio members of the Board. Four other members will be appointed by the Parliament based on qualification and upon recommendation by the Prime Minister.
ECMA will be directed and its administration is supervised by the Director-General, who will be appointed by the Parliament upon recommendation of the Prime Minister. The Director will also be part of the Board of Directors, but will not have voting rights. The Director-General nominates a Deputy Director-General and other senior executives for approval by the Board.
Licensing of Self-Regulatory Organizations (SROs)
Upon application, ECMA may give recognition to a private entity that aims to operate as an SRO. Such SROs are required to make rules relating to the matters for which they have regulatory and supervisory functions, including sanction and disciplinary powers to be exercised in connection with the functions which have been delegated to them.
Establishment of Securities Exchange
The government, in partnership with the private sector and including foreign investors, aims to establish the Ethiopian Securities Exchange (ESE). The government will not have more than 25% ownership of the ESE, either directly or indirectly. The majority ownership is left to private players, however, the ownership by the government may get bumped up if there is insufficient interest from private players.
Entities are not allowed to use the terms “securities exchange” or “derivatives exchange” in connection with a business unless an exchange license is granted by ECMA. Accordingly, ECMA may grant licenses to other securities exchanges, derivatives exchanges, or over-the-counter trading platforms established as share companies.
Exchanges licensed by ECMA will be managed by a Board of Directors whose members will be elected by the shareholders of the securities exchange. The Board will be responsible for ensuring that the exchange is operated in compliance with the laws of the country. The Board of the exchange is responsible for appointing one or more CEOs to run the exchange.
Securities Depository and Clearing Company
Securities depository and clearing companies, offering securities depository, clearing, and settlement services except for government securities and commodities, will need to get a license from ECMA. Such companies offer custody and safekeeping for securities, clearing, and settlement of securities.
The Capital Markets Tribunal is established under the Proclamation to hear appeals against decisions made by the ECMA or against a person exercising the functions or powers of the ECMA.
The Tribunal shall be composed of five members, who are all to be appointed by the Prime Minister. The chairperson and the vice-chairperson are required to have the qualifications to be a judge of the Federal High Court and the remaining three members need to have knowledge and experience in law, securities, commerce, finance, or accountancy. The decisions of the Tribunal are not final. Any person aggrieved by the decision of the Tribunal can appeal against the decision of the Tribunal at the Federal High Court.
Regulation and Ethics
A person with inside information is prohibited from trading in securities if the securities are price sensitive in relation to the inside information. A person is considered as an insider if he/she is in possession of inside information by being a director, employee, or shareholder of an issuer of securities, or having access to information by virtue of his or her employment, office or profession, or the direct or indirect source of the information falls under any of the persons above.
In addition to the prohibition against insider trading, market manipulation, false trading, fraudulent transactions, use of manipulative devices, false or misleading statements, front running, and other trading practices or restrictions on the selling of securities are the types of activities that are considered improper trading practices in the capital market and are subject to capital market offense.
A capital market offense is considered a violation of the criminal law of the country. As such, any offense and act of improper trading practice is punishable with a fine not exceeding 1 million birr and rigorous imprisonment not exceeding 15 years.
One of the major requirements for going public is having more than 50 shareholders. This implies, per the current Commercial Code of Ethiopia, only share companies are allowed to go public, as that is the only company type with more than 50 shareholders. An issuer that fulfills the membership requirement is required to get registered with ECMA prior to the offer. For that, the issuer is required to sign and file a statement of registration with a prescribed fee. Consequently, the issuer is required to submit a prospectus to ECMA that meets its requirements before issuing an advertisement to offer securities to the public. The issuer is also required to make the prospectus available to the public free of charge.
Besides the information that is included in the prospectus, the issuer will have disclosure obligations to ECMA, its own shareholders, and other holders of its securities which will include all information relating to the issuer or its subsidiaries that are necessary to enable those parties and the public to appraise the financial position of the issuer to avoid the establishment of a false market in its securities.
An issuer’s disclosure obligation will continue post-listing, and the issuer will have an obligation to keep the public informed of all matters which affect the value of the securities. This could be done by placing an advertisement in a newspaper, or by reports from ECMA and the securities exchange that the issuer’s securities are listed at. Once listed, it will become illegal to deal in any listed, registered securities other than through a registered securities exchange and through a licensed dealer. Similarly, it will be illegal to deal and trade unlisted securities through a registered securities exchange.
Similar restrictions apply to the private placement of securities. As the case is with public offerings, private placement is also required to be registered with ECMA prior to placement. In addition, similar disclosure obligations are required to be met including providing a copy of the prospectus.
What Does This Mean to Ethiopia and What is Expected?
The reestablishment of the capital market is expected to serve as a platform to raise long-term funds for a business environment that has been highly reliant on bank financing. Having Africa's second-highest population and being one of the world’s fastest-growing economies, the establishment of the capital market poses a great opportunity. It is expected to support sustainable private sector development, which is directly tied to the development of the country’s economy. While the economic growth may be explained by a number of factors, those countries with resilient capital markets are usually associated with faster economic growth.
The establishment of the capital market, especially the securities exchange, will offer financing options for companies and an easy entry and exit opportunity for investors. It provides an opportunity for a shareholder to easily sell its shares at a quoted price. Similarly, it will also provide individuals with an opportunity to invest their money. In addition, for companies, who have for long been reliant on bank financing, the establishment of a stock market will offer a new opportunity to get finance.
Considering the size of companies in Ethiopia currently, we might not expect numerous companies and operators in the capital market in the first few years. Financial institutions like banks and insurance companies are expected to be the first ones to be actively engaged considering their size and since they are already well regulated. Big state enterprises are also expected to surface in the market.
The ECMA, once it becomes operational, is expected to come up with different directives that will help the provisions of the proclamation be put into effect. Directives in relation to licensing of the different market operators, listing and delisting of securities exchanges, and disclosure about securities transactions are the highly anticipated ones.