Ever since the abolition of the Addis Ababa Share Dealing Group almost half a century ago by the then military government, no capital market has been operational in Ethiopia. The nation’s short-lived stock market, under the administration of the National Bank of Ethiopia, was informally launched in the late 1950s. It was instituted in 1965 and successive attempts were made to put in place a capital market that bore little fruit.
Efforts were exerted by scholars from academia, the Addis Ababa Chamber of Commerce and Sectoral Association (AACCSA) and National Bank of Ethiopia (NBE) to also introduce a local stock market. While a slew of researchers’ findings showed establishing a capital market will have a positive impact on the economy, others doubted if Ethiopia’s growing, but vulnerable private sector was ready for such task.
Meanwhile, investors have been selling and buying shares through an unregulated informal share market as speculation moves forward on the short-term gains versus the potential misappropriation of funds and the illegal practices with no mechanism to protect those involved in it. This comes as the government turns a deaf ear to the repetitive request by the private sector to launch a stock market and the era of Prime Minister Abiy Ahmed, a liberal policy advocate is set to institute a capital market to a nation still working on old policies constructed on the era of the Derg.
Last year, the Council of Ministers approved a draft proclamation that allows the establishment of a capital market.
“The National Bank of Ethiopia looked back to the past and take a look at various studies and initiatives. We have also looked at best practices and benchmarked countries with a successful stock market,” said Melese Minale, A Senior Advisor to the Prime Minister and NBE, explaining the drafting process of the bill.
Being a part of the home-grown economic reform agenda recently adopted, the bill is expected to ease raising capital, enhance the liquidity of assets and boost the confidence of investors. While its objective is to support the development of the national economy through mobilizing capital, promoting financial innovation, and sharing investment risks, it is expected to play a big role in protecting investors.
Upon being legislated by Parliament, the draft proclamation will enable the government to establish a market where securities such as shares or equities, bonds, and derivatives are bought and sold. It also allows the establishment of both primary and secondary capital markets.
In the primary market, new entrants can mobilize capital from investors, enabling the likes of share companies to sell shares through intermediaries or by themselves. In the contrary, the secondary market will enable investors buy securities or shares from other investors, allowing existing shareholders sell their shares in a secure way publicly.
For the purpose of assisting, regulating and controlling business of buying, selling and dealing in both markets, Ethiopian Securities Exchange (ESX), which is the financial market version of Ethiopian Commodity Exchange (ECX) is to be the dominant player. In the case of ESX, the traded item is security, while it is an agricultural commodity for ECX.
Providing a physical location for investors who would like to buy and sell securities, ESX will be established by the state in the partnership with the private sector, including foreign investors, according to the bill. The maximum stake government and state-owned entities can have is 25 percent of ESX’s capital, while the rest will be under the ownership of private entities.
If the private sector is disinterested to invest in the exchange, the government will have the liberty to invest the whole amount of money needed to establish the Security Exchange and is even authorized to fully own it through a regulation that will be approved by the Council of Ministers, according to the same bill.
The Security Exchange will be regulated by the Ethiopian Capital Market Authority, an autonomous government regulatory Authority which will be accountable to the parliament. The Authority will have the mandate to grant a license to any person willing to operate as a securities exchange, derivatives exchange, securities depository and clearing company, capital markets services provider, and overthe-counter trading facility.
Most importantly, the Capital Market Authority will have the mandate to regulate and oversee the issuing and subsequent trading, both in primary and secondary markets, of capital market instruments, while supervising the listing and delisting of securities.
But there is a possibility that the Authority could delegate some of its tasks to a self-regulatory organization, which will have its own internal policies and can deal with a breach of the law or of any other applicable standards or guidelines. Avoiding anti-competitive practices, developing procedures for dispute resolutions, taking disciplinary measures against any of its members if they contravene with its rules are among its functions put in the bill.
Be that as it may, Ethiopia’s stock market, like any of its kind throughout the world, will have a security depository and clearing company that will offer securities depository, clearing, and settlement and other services upon obtaining a license from the Authority. It will also arrange for fair and effective clearing and settlement in relation to any commercial transactions of securities, while maintain confidentiality of all information and data under its possession.
The Clearing Company will be licensed if it is established as a share company, in which the private sector can invest, and meet minimum capital requirements and present evidence of competence and any other requirements to be specified by directive of the Authority after the legislation of the bill. Furthermore, upon being instituted, the capital market will create a business opportunity for securities broker, investment adviser, collective investment scheme operator, investment bank, securities dealer, and credit rating agency, all of which will be licensed by the Authority.
Understanding the probability of disputes happening among different parties, the government will establish a capital markets tribunal, which will have jurisdiction to hear and determine appeals of the decisions of the Authority or a person exercising the functions or powers of the Authority. The Prime Minister will appoint five members to the tribunal; chairperson and vice chairperson, having similar qualifications to a person who is eligible to be a judge of the Federal High Court and three other members with knowledge and experience in law, securities, commerce, finance or accountancy.
Anyone dissatisfied with the decision of the tribunal may file a notice of appeal to the Federal High Court.
Moreover, to avert market manipulation, the bill prohibits a deliberate attempt to interfere with the free and fair operation of the stock market, while it also ban creating or do anything with the intention of creating a false or misleading appearance as to avoid false trading. By the same token, aiming to circumvent fraudulent Transactions, the bill bars investors and any other players in the exchange market from making or publishing any statement, promise, or forecast that is deceptive.
A capital market offence is also considered as a crime and anyone will be charged, prosecuted, and appealed in accordance with criminal procedure code.
In case of failure of a capital markets service provider or securities exchange, the government will also establish a compensation fund, which will recompense investors who suffer pecuniary loss and paying them from collected unclaimed dividends when they resurface. The source of the fund will be all money paid to any licensed capital markets service provider or recovered by or on behalf of the authority, adding to all other sums of money accruing to the fund.