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Al-Ahram Weekly 14 - 20 September 2000 Issue No. 499 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 14 - 20 September 2000 Issue No. 499
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region Interview International Economy Opinion Culture Travel Living Sports Profile People Time Out Chronicles Cartoons Letters Rules of the game
By Aziza Sami
Recent events in the world of finance bring to mind the question of when enterprises in large numbers will turn to the capital market as a source for long-term funding. Pressures exerted on the banking sector by investors seeking credit, instances of businessmen defaulting on large loans and the recourse to bank assets to secure the issue of bonds, as was done by Rami Lakah, are just some occurrences that beg the above question.
Sameh El-Torgoman
Despite the reactivation of the stock exchange, following the initiation of the privatisation programme in 1991, the Egyptian private sector is still disinclined to seek funds through public subscription. Instead, these organisations prefer to operate as family or closed companies.
What, then, accounts for the reluctance of private sector companies to obtain funds through the capital market? Head of the Cairo and Alexandria Stock Exchanges Sameh El-Torgoman attributes this tendency to the fact that raising funds in capital markets requires "a new set of rules, totally different from those required by the banks. Shareholders expect transparency and disclosure." The results of this, El-Torgoman explained, are that "companies, whether owned by a family or individuals will lose their freedom in many matters, because they are accountable to shareholders. This constitutes a form of pressure on the companies."
Even market-leaders have needed to be prodded to do more to ensure transparency and disclosure. A noteworthy example of such a company is the publicly-traded MobiNil, an affiliate of Orascom Telecom. This telecommunications company was roundly criticised for the lack of transparency over how it calculated profits in its financial results for the year 1999-2000. Stock market authorities have received complaints time and time again about companies that do not publish their annual results, or fail to pay dividends when they are due. As such, stock market authorities eagerly await the full implementation of the Central Depository law issued in July. This law, which has begun to be executed, is directed towards enforcing transparency in the market.
Already, the establishment of a disclosure department for investors has partially alleviated this problem. "The number of such complaints has already decreased by over 60 per cent," said El-Torgoman.
"Egypt's bourses now require publicly traded companies to announce their results according to specific procedures."said El-Torgoman. In publicising its most recent results, MobiNil followed procedures to the letter. "Under these, results should be made public through the stock exchange on specific dates known to investors and companies. Only following the announcement of results through the exchange, are companies free to publicise them in the media of their choice, perhaps on the Internet or as a company-issued booklet." he added.
Another element determining whether companies look to the capital market is their strength and competitiveness. "Most Egyptian companies still do not have a strong presence in the regional market, nor have they gone into large scale projects. When they expand and have to deal with competition, they will come to appreciate the value of the lower cost [of financing through the] capital market and will definitely turn to it more."
El-Torgoman, however, expresses reservations about the ability of just any company to obtain this kind of financing. Emphasising the importance of investor relations, he explained that if a company damages investors' trust this will ultimately compromise its ability to attract capital. "These companies will not be able to obtain access to such funding, unless they understand their obligations. A company which lists itself on the exchange cannot expect to continue to operate if it fails to fulfil its obligations towards shareholders; that is, if it does not present them with a vision [of its strategy and objectives], or release the information they want."
Changing the way business is done is no easy task. "You must remember that for 40 years there was no stock exchange and so you are talking of a 'culture' which has been absent [for the same period]. Such a culture cannot be created overnight," he said.
Promising better services for investors, El-Torgoman said that before the end of this year a new electronic system will be implemented. Through this system, information on all companies traded on Egypt's bourses will be disseminated on the Web. Alongside this, a project is afoot to offer data about the top 100 companies on CD ROM's, which can be acquired by investors. "All of this will help trading through the Internet," said El-Torgoman adding that these systems will be in place before the end of this year. The final touches are currently being made to a new "wired" trading floor.
Striving for improvement, the bourses are preparing an educational programme to teach investors how to read companies' financial statements. To protect investors, transactions will be closely monitored to prevent insider trading.
In response to a question about the impact of the privatisation programme on the stock market, El-Torgoman noted the role to be played by international investment banks. In the next phase of privatisation, the Ministry of Public Enterprise will use the services of three international investment banks to promote companies. This, according to El-Torgoman, should help ensure that the valuation of the companies will be more in line with their market-value.
"The Ministry of Public Enterprise is using the services of professional institutions for IPO's , which was not the case during the first phase of privatisation. [An IPO] involves issuing a prospectus that is approved by the capital market authority," explained El-Torgoman. Emphasising the importance of fair valuations, he explained that "if part of a company is offered for subscription and this is over-valued, its value [as expressed in stock] will drop, thereby impacting on the market capital for the entire company. If however it is [valuated at a price which later rises] this will raise the market capital with it."
El-Torgoman said that in the view of investors, some companies that floated shares on the market had been overvalued. He attributed the sluggishness of the market, in part, due to investors' response to these over-valuations. He predicts that future assessments -will be more accurate and in tune with the market. El-Torgoman characterised the shift towards more accurate assessments as an "educational process which all markets pass through."
When asked if the stock market has supported the privatisation programme effectively, El-Torgoman responded that the assumptions that this question is based on are "unscientific." Elaborating on the role of the stock market, he explained that it is "the venue for executing transactions. What concerns us is that these occur correctly and without cheating or deception; this is the market's main role. Procedures for disclosure should be followed. But the term 'stock market' itself is often misused; any problem in the [wider] market is attributed to the stock market itself." El-Torgoman also emphasised the role of other institutions and actors in the success of the stock market. "The first decision-maker is the company's owner, whether the public sector or a private businessman, who has to choose an investment bank that upgrades the company in preparation for entrance into the capital market." A company owner, whether the private or public sector, might decide to offer shares for subscription, even though the market might not be receptive to them at one point, because the company has its "strategic reasons" for doing so," added El-Torgoman.
He was emphatic in his disagreement with the view that the Egyptian stock market has a low profile internationally. Regarding the recent decision to include Egypt in the Morgan Stanley Capital Markets' index, as well as other positive evaluations of the Egyptian economy El-Torgoman said that the value of these assessments lies in their real potential to increase international transactions in the country's stock markets, "The Egyptian stock market has a strong international attraction. We have relations with the New York and London stock exchanges and we must understand how investors think. They work through indices and recommendations. So whenever we are registered on the indices that have weight in investment decision-making, then we come to the attention of international investors. We are entering into competition with other markets and anything which increases our competitive edge becomes an asset."
El-Torgoman says that the stock exchange -- which he described as the "mirror of the economy" -- is awaiting measures that the government has said it will undertake to resuscitate the wider market. "Investors are affected by what is going on in the market, and we are still waiting to see how conditions will impact on their profitability- which is reflected in their transactions and trading. When investors find that there is any news, or movement, they respond. We are looking forward to the measures that the government has announced and is about to take. [We look forward] to more projects, especially the privatisation of telecommunications. With these, we hope things will start to move."
Related stories:
Revitalising credit 27 April - 3 May 2000
Taking stock 4 - 10 November 1999
