By Muluken Yewondwossen

The Ethiopia Capital Market Authority (ECMA) discloses that registration activities are in the pipeline and will begin to on board investment banks in the coming few weeks. In compliment, the highly anticipated share sales directive is said to take effect at the start of the upcoming year.

The regulatory body tasked with overseeing the Ethiopian Securities Exchange (ESX), a soon-to-be securities exchange, and market participants disclosed that it will begin licensing investment banks that have interest in participating. These banks are anticipated to be significant players in the secondary market.

A draft directive to license securities brokers, investment advisers, operators of collective investment schemes, investment banks, securities dealers, custodians, market makers, and credit rating agencies was released by the authority during the previous fiscal year.

Since its release in recent months, the proposed law has been the subject of extensive discussion among pertinent parties. Now that the order has been passed, the authority stated that it would be starting the registration process for investment banks in the upcoming weeks.

The capital market formation proclamation states that international investment banks interested in participating in the emerging capital market may apply for licenses.

Foreign investment banks are interested in taking part in the impending trading, according to senior legal advisers at the ECMA Sirak Solomon and Solomon Bekele. “We expect some companies shall apply for registration,” they said.

It is anticipated that less than a handful of companies would register for investment banking services.

According to the capital market proclamation of 2021, an investment bank is a type of non-deposit financial institution that helps governments, businesses, and other entities raise capital by means of underwriting, serving as a middleman between securities issuers and the investing public, assisting in mergers and other corporate reorganizations, and serving institutional clients as a broker or financial adviser.

With respect to potential local operators acting as investment banks, the National Bank of Ethiopia and ECMA have reached a consensus that the current legislation requires financial institutions to form subsidiaries in order to function as investment banks.

According to the authorities, when the securities exchange opens for business, these local banks will have the expertise and ability to handle tasks including underwriting, investment advising, and other tasks.

Nevertheless, it’s unclear if a directive allowing financial intuitions to establish subsidiaries was issued by the financial regulatory bank.

The capital market service providers licensing and supervision directive, section VII, article 47, states that investment banks are required to act as brokers or financial advisers for institutional clients, facilitate mergers and other corporate reorganizations, act as a middleman between securities issuers and the investing public, and facilitate the issuance of securities by businesses, governments, and other entities through underwriting.

It is anticipated that the public offering and trading of securities directive, which has been subject to public consultation for the past two weeks, will be ratified within the next two months after passing the legal ratification process and taking into account pertinent feedback from the general public and governmental entities.

Due to its potential to greatly control the market, which is now very ambiguous and highly manipulated, the impending share sale directive is eagerly awaited. It is anticipated that the new guideline would reduce potential risk and increase buyer trust.

Prerequisites for the offer procedure also include the appointment of an investment bank and the acquisition of an external, impartial legal opinion.

Businesses that are just getting started must choose a compliance adviser and have ten percent of their funding come from core investors.

Once the resource mobilization was completed, the transitional provision for those who are presently selling shares should have registered at ECMA.

According to the legislation, such already-existing share firms must report to the ECMA on their activities in accordance with the public offering and trading of securities directive.

Solomon stated that there will be a one year transitional period for “Existing companies who may offer the existed share to the market,” and that the authority would thereafter oversee their operations.

The proposed directive also specifies the offer term, which is six months for newly formed firms and ninety days for established ones. In contrast, the commercial code specifies a five-year share sales period.

In reference to the matter at hand, article 80 sub article one of the draft directive stipulated that, in the event that a company is still in the formation stage, the offer period may be as long as five years, as long as the issuer or offeror satisfies the necessary requirements. Additionally, if the offer period determined by the issuer or offeror exceeds a year, the offeror or issuer is required to disclose this fact in the prospectus’s “risk” section, warning potential investors of additional risk.

The same sub-article continues, “That the issuer or offeror shall provide to the Authority update on its capital raise activity on a six-monthly basis; that the prospectus shall be valid for a period of one year; and that the issuer or offeror shall file with the Authority a new prospectus and have such prospectus approved before the current prospectus expires.” The guideline is quite severe with regard to advertising, which is one of the contentious concerns on the experience that now exists.

No issuer or investment bank may publicize the offer or sale of securities before the prospectus has been approved, according to Article 31.

“Unless it states that a prospectus is or will be published, as the case may be, and indicates where investors can obtain or will be able obtain it, no advertisement, notice, poster, or documents relating to a public offer for which a prospectus is or will be required under these directives shall be issued to or caused to be issued to the public,” it continued.

Certain business related exemptions exist, such as those for government offers, investments under five million birr, and mobilization of high-net-worth individuals, but not more than fifty persons.