The journey back to the stock market:

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An In-depth review of the Capital Market Proclamation

The capital market proclamation that gives a minimum of quarter share for the government has been tabled to the parliament for ratification. For foreign investors they will play on the secondary market floor.

As the reason for the formation of the secondary market, the highly anticipated proclamation at its preamble stated that it has established a capital market to support the development of the national economy through mobilizing capital, promoting financial innovation, and sharing investment risks; adopt a legal framework for the regulation and supervision of the capital market to ensure the fairness, integrity, and efficiency of the market and protect investors; legislate uniform requirements for the regulation of issuers who desire capital from public investors, and necessary to adopt a legal framework for effective monitoring and surveillance of the capital market to detect, mitigate, and prevent systemic risk to the country’s financial market, the proclamation drafted.

The draft proclamation part two, articles three, indicated that Ethiopian Capital Market Authority will be established as a regulatory body of the secondary market and it will be accountable for the Prime Minister.

The authority will have the objective of protecting investors, ensuring the ecosystem of the market, reducing systematic risk and promoting the sector by creating enabling environment for long term investment.

The authority that will have a board as a higher body shall have the funds that consist of fees payable from services, administrative fines, and grant.

The proclamation article 31 also indicated that Ethiopian Security Exchange will be formed. The exchange will be formed as a share company by the government in partnership with the private sector which also includes foreign investors.

The same article sub article 2 said that the total ownership of the government and government owned entities shall not exceed 25 percent of the exchange’s capital.

“If there is insufficient interest from the private sector, the government’s ownership of the exchange can be increased to whatever amount is needed to establish the exchange,” sub article 3 three reads.

The fourth article further added that if there is no interest at all from the private sector, including from foreign investors, the exchange shall be established as a fully government owned public enterprise by regulation of the Council of Ministers.

Under the explanation document for the proclamation, it has been indicated that the intention of the government to take share at the company is only that the upcoming capital market is new for the country and that private inventors may not have eager to take share because of different reasons including clue about the business. Besides that, the involvement of the government as a shareholder is to boost the confidence of the private sector, which is expected to take the major share.

The proclamation has also given a green light for the formation of additional trading platforms under the securities exchanges as alternative or additional. But on the explanation document that has been presented to parliament, the article that mention for the formation of other capital market is considering the possibilities in the far future not the short- and medium-term situation.

“It is not expected that the country will have more than one capital market actor up to midterm but it is crucial to put the article on the proclamation since it may be required in the future when others demand to establish a similar share company,” the explanation document said.

Article 32 sub article one said that the authority may grant license to other securities exchanges or derivatives exchanges or over the counter trading platforms which shall be established as share companies.

Under part 8 of public offering and trading of securities article 79 that is ‘offer of asset backed securities’ sub article one said that an offer of asset-backed securities shall be made only if they are issued by a special purpose vehicle.

This may give right to foreign actors to be involved on the financial sector indirectly or allowed banks to borrow from foreigner sources in other direction than the existed banking law of the country.

“Such kind of sophisticated secondary market may not in the current level be present since the initial stage will focus on easy forms of the market,” the explanation says, “the authority will have additional legal frameworks to implement the article that stated in part 8 in the future.”

It added that the proclamation at the current stage shall benefit for the trading of simple asset backed securities.

“For instance foreign development partners may not be able to provide finance for small and medium companies since the existing banking business proclamation is closed for foreigners, while asset backed securities trading rules stated under this proclamation banks who provide loans for small and medium companies can created the loan or asset backed securities and trade it for foreign investors who are interested to invest on small and medium companies,” it said and explained that such scheme shall create conducive environment for small enterprises to assess who cannot be able to access the current financing platform besides supporting the overall economic growth.

The proclamation has also given a right for collective investment scheme that mobilize fund from small shareholders to invest on different securities.

The proclamation that is divided in 14 parts has 114 articles and it is expected to be ratified in the near future to realize the scheme which is also stated as alternative financial source besides the traditional scheme not only for the private sector but the government, who access finance from the central bank to fill the budget deficit but it is stated as one of the major instruments for inflation since it is a money print.

It has also stated to modernize the monetary policy of the country with additional alternative models.

About half a century ago Ethiopia had experienced a similar stock market that was regulated by the National Bank of Ethiopia but halted when command economy become effective in the second half of 1970.