New measures on stocks

Sherine Abdel-Razek , Tuesday 16 Nov 2021

A package of measures to support the local stock market was introduced last week, but will it be enough to improve its global position?

New measures on stocks
New measures on stocks

The government revealed a set of measures aiming at supporting the Egyptian Stock Market last week and cutting the costs of investment in traded shares.  

“The package of incentives aims at supporting the Stock Market in a way that improves its position on global indices and thus its appeal to foreign portfolio investments,” said Nader Saad, the cabinet spokesman, in a statement.  

Fees paid on trading and clearance and those paid to the market regulator the Egyptian Financial Regulatory Authority (EFRA) will be reduced. Obligatory contributions to the Investors Protection Fund established to compensate investors for losses resulting from possible malpractice by brokerage firms are also to be slashed.

The statement did not specify the value of the reduction but noted that the above-mentioned fees will be considered as expenses and thus will be deducted from investors’ taxable incomes, decreasing taxes paid.

The government also decided to abolish the stamp tax paid by resident investors in order “to guarantee the fairness of the system if losses are incurred”, according to the statement. Parliament amended the capital market law in July reducing the stamp duty on transactions for residents to 0.5 per thousand on listed and non-listed securities.

While it seems that the new and controversial capital gains tax will still be enforced, according to the July amendments, the cabinet’s new decisions have changed the way capital gains are calculated so that the burden of the tax is less.

Rather than imposing the tax on the difference between the selling and buying price of the shares concerned, it will now be calculated on the difference between the selling price and either the price of acquiring the shares or when the measure came into effect, whichever is higher.

Thus, if an investor bought a share for LE10 five years ago and wants to sell it now when it is trading at LE18, and the value when the regulation came out was LE16, the tax will be applied on LE6 of profits and not LE8 of gains.

According to the July amendments, the capital gains tax of 10 per cent will be imposed starting in January. Many observers and lawmakers have opposed the introduction of the tax out of fears that it will further weigh on foreign investment on the bourse.

In the first three quarters of 2021, foreign investors were net sellers in the market, with their overall transactions representing only nine per cent of total activity. This is compared to 25 to 35 per cent in the case of some neighbouring markets, such as Dubai and Saudi Arabia.

“The amendments are definitely welcome, but they are not enough to attract more investors. The market lacks liquidity and attractive shares, and this is translated into the weak value of transactions, hardly passing LE1 billion daily on average. Meanwhile, bourses like those of the Saudi Arabia, Abu Dhabi, and Dubai witness tenfold this sum on a daily basis,” one observer said.

The Saudi stock exchange, which has allowed foreign ownership in traded shares recently, saw $557 billion in shares changing hands during 2020. The 204-member Tadawul All Share Index was up about 32 per cent in 2021. Egypt’s EGX30 Index has been up by six per cent in the year to date.

The market has been in the doldrums for the last couple of years due to the Covid-19 pandemic. Except for the e-finance initial public (IPO) offering last month, the market has not received any new blood for a while.

“What the market needs is new offerings and more incentives for the private sector, as represented in traded shares, in the economy,” the observer said.

International financial institutions have been calling for a greater role to be given to the private sector in the Egyptian economy. As part of its reform programme, Egypt has informed the International Monetary Fund (IMF) of its intention to relaunch its IPO programme, IMF Mission Chief for Egypt Celine Allard told Reuters in June after the fund had allowed the release of the final installment of a $5.4 billion loan.

The state has retained a “relatively significant” role in the economy, and “sometimes state-owned enterprises have benefited from advantages,” Allard said.

The government has been planning to offer a handful of profitable state-owned entities like Banque Misr, Ennpi, and Sidi Kerir Petrochemicals for sale, but turbulent market conditions have been holding it back.

The newly announced amendments also include a 50 per cent decrease in the taxes imposed on gains from trading shares in companies that have recently been offered as IPOs in the market. The move aims at supporting newly traded shares by increasing their liquidity and encouraging more companies to be traded.

The decisions also include cancelling the tax on capital gains on shares when these are used to finance a company’s capital expenditures — the funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, and buildings.

This decision was made in order to encourage companies to expand.  

The amendments come only a couple of months after the EFRA introduced new regulations aiming at reducing the minimum capital to be floated in an IPO as a way to encourage companies to depend more on the bourse as a means of financing their activities.  

*A version of this article appears in print in the 18 November, 2021 edition of Al-Ahram Weekly

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