Government should not exaggerate company assessments in order for IPO programme to succeed: EGX chairperson

Corporate structuring before an IPO is an essential step, which takes more than a few weeks or months

In an interview with Daily News Egypt, Mohamed Omran, chairperson of the Egyptian Exchange (EGX), defined the key factors for the success of the government's initial public offerings (IPOs) programme, including not exaggerating the companies' assessments in order to provide subscribers with a profit margin. He also stressed the necessity of financially, administratively, and organisationally structuring companies, which could take several months.
Omran said that the greatest challenge facing the EGX now is restoring the confidence of investors in the exchange. The EGX's trading volume declined—despite receiving new IPOs—mainly due to the fact that investment is currently injected into non-productive activities, as well as the reluctance of institutions to inject a large share of their investment into the exchange.
We are approaching the last quarter of 2016, a period in which the EGX is setting its plan for the new year. What are the key components of the stock exchange's plan for 2017?
We already have a long-term strategy. We started to apply it in 2014 and it shall resume until the end of 2017, and we are monitoring the strategy's performance and its implementation rates annually.
There are three major pillars we will focus on over the next year. The first is to attract new companies to register in the EGX. The government plans to offer companies on the exchange.
The second most challenging pillar currently is to restore the investors' confidence in the market. The EGX is trying to achieve that through abiding by global standards to protect the rights of investors.
The third component is the development of the legislative and technological infrastructure in order to keep up with the market needs.
The EGX announced in the Misr Fertilizers Production Company (MOPCO) share trading statement that it addressed many public authorities to encourage its companies to register in the exchange. Which authorities did you approach and what was the outcome?
We addressed several ministries, such as the Ministry of Investment, and entities that manage the portfolios of public companies to look into the possibility of offering their companies in the EGX and to obtain financing. The first responses came from the petroleum sector, which had already offered up MOPCO and also announced that it was assessing a number of companies for IPOs. I imagine that the success of the next offerings will be an attractive factor to encourage other entities to offer a number of new companies in the exchange.
What are the suggestions provided to governmental agencies concerning the IPO programme?
I think that the exchange will play an important role at the beginning of the offering. The most important element that should be implemented by the exchange in the government IPO programme is to start with financially successful company models, in order to achieve a success that paves the way for other offerings.
We should not exaggerate the companies' assessments, especially in the first offerings. We must leave part of the profit to subscribers at the beginning to encouraged potential followers.
Companies should be structured organisationally, administratively, and financially in order to cope with the demands of the market and investors—this of course requires a long time, not just weeks or months, as some people may think.
Leaders of those companies should be receptive and understand the importance of the IPO, or they will deal with it as a burden and pressure. They will see that transparency and governance are luxuries with no benefits, and that investors are a different team.
Finally, I do not want the issue to be exaggerated. IPOs are important for governmental companies, and will help on the long-term to improve the companies' performance and increase transparency levels. I do not want the normal citizen to raise his ambitions into thinking that by offering companies in the exchange, he will get rich in a few days, or that the company's performance will improve in days or months. This will be counterproductive.
Are there new companies communicating with the EGX to complete their IPOs?
A lot of companies are already preparing for the IPO process.
What we can we say now is that we have succeeded in changing the doctrine of the EGX, which resulted in shifting its main direction towards helping businesses grow and building their capacities, instead of just focusing on trading and price movements.
We have reduced the number of required procedures and documents, to make these measures faster. For the first time, we now survey investors and corporations to measure their satisfaction regarding various departments and administrations in the EGX, in order to ensure flexibility and simplicity.
Since 2014, the EGX has witnessed a gradual return of IPOs, yet trading remained low, nearing EGP 500m which reduces the returns on new goods in the EGX. How is the EGX planning to deal with this issue?
The activity of offerings is important for increasing the depth and liquidity of the market, but that does not mean that increasing offerings leads to increasing liquidity.
Liquidity is related to many other factors that may be related to the overall conditions of economy and investors' expectations of it, in addition to the mechanisms of entry and exit of foreign investors. Other factors are related to the conditions of the global economy and the flow of foreign investments in the world.
Generally, the weak stock trading in the exchange is related to the problem of investment in Egypt. We are suffering from low saving rates compared to what is required to achieve sustainable growth.
The larger share of income surpluses goes to non-productive activities like gold, lands, real estate. This wastes great development and growth opportunities.
Earlier this year, you said that there are 33 companies registered in the EGX with no trading activity due to the small number of their shareholders. You also said that you have held meetings with a number of these companies to explain registration rules. What are the results of EGX's efforts regarding that, especially since you have stressed that it is not possible for companies to continue in the market without trading their shares?
As of this moment, the registration committee is willing to give companies more than one deadline to comply with registration rules because we are aware that sometimes it is difficult to carry out an immediate implementation of the rules. Sometimes companies are serious but require more time to comply with the rules.
There was news about the formation of a committee to activate the bonds market and that recommendations were obtained from several agencies. What are the EGX's recommendations for activating the bonds trading market?
The main recommendation by the EGX is allocating a percentage of government bonds to investors in order to trade them in the EGX.
This will achieve two goals; the first would be helping to bring about a boom in the market's performance. The second is reducing the costs of borrowing over time, making more financing available to the government, and hence, reducing the domestic public debt.
The EGX made a proposal to the Investment Ministry to amend the presidential decision regulating the exchange. The aim was to add an article that stipulates setting a maximum of two four-year terms for the chairperson of the EGX. Why did you do that?
This proposal is still being discussed and considered. It was passed to the government after coordinating with the Egyptian Financial Authority (EFSA). It is a step that aims to coordinate the term of the chairperson with the supervisory and regulatory positions, like the EFSA and the Central Bank of Egypt's chairpersons.
This gives listed companies and the business community a vivid example of the importance of enforcing the government's rules.
If the proposal is approved, the law will be implemented in retrospect, meaning that I will not receive a new term.
The EGX has given a lot of attention to sustainability and green investments—Egypt became head of the Sustainability Committee in the World Federation of Exchanges. How will the exchange utilise these efforts to attract investments in sustainability?
We are working on this with the aim of encouraging companies to embrace sustainability in order to obtain part of green investments worth $22tr.
The United Nations has invited us to the latest meetings in Singapore in order to present the EGX's experience in sustainability to investors and decision makers.
We have also formed an Advisory Sustainability Committee that includes a group of experts and representatives of the private sector and international institutions in order to put a work plan for the EGX' sustainability, as well as work on the first pilot for companies' disclosure of sustainability, which will later be a guide for registered companies to issue sustainability reports according to global standards.
If the EGX manages to implement these steps, it will market itself internationally and attract green investments based on larger achievements and standards.