Authority Rolls Out Red Carpet for First Securities Exchange

Dec 8 , 2024. By AKSAH ITALO ( FORTUNE STAFF WRITER )

Ethiopian Capital Market Authority (ECMA) has taken its final step in establishing the foundation for the country's nascent capital market as it granted two operational licences to the first security exchange.

The two licenses granted to the Ethiopian Securities Exchange (ESX) are categorised into securities exchange and over-the-counter (OTC) market trading. The exchange will list companies meeting stringent public listing requirements, valued at over 500 million Br post-initial public offering (IPO) or other capital-raising activities. High-growth companies with a market capitalization of at least 50 million Br and strong performance metrics will be eligible for the growth market segment.

On the other hand, the over-the-counter platform will serve companies that cannot be listed or don't want to be listed.

Hanna Tehleku, director general of ECMA, expresses confidence stating the crucial step toward establishing a vibrant capital market. She stated that the new direction is a momentous step towards modernizing Ethiopia's financial ecosystem.

Estifanos Melkamu, head of the licensing and registration directorate at ECMA states that the licensing comes following the completion of a yearlong preparation of the ESX to commence operation as the first securities exchange in the country.

He noted that all the laws pertaining to licensing and operation have been ratified, while the Exchange has fully completed preparations for capital requirements, deploying technology, infrastructure, and human resources.

"It shows that the exchange has finally completed preparation," he said. ECMA has already licensed three investment advisors, including the global consulting firm Deloitte which recently reopened its Addis Abeba office after a years-long hiatus. Estifanos states more players are needed to enhance the market.

The ESX began its capital-raising activities last year, attracting interest from the private sector, including commercial banks and insurance companies. The seven-member board of directors, chaired by Hilaway Tadesse, now senior advisor to Central Bank Governor Mamo Mihretu, includes Eleni Gebremedhin (PhD), a founding and former CEO of Ethiopian Commodities Exchange (ECX), as well as Zemedeneh Negatu and Fikadu Petros.

The ESX exceeded its initial capital requirement, raising a subscribed capital of 1.51 billion Br and a paid-up capital of 800 million Br, from financial institutions and public enterprises.

The Exchange comprises 17 institutional investors with the federal government claiming a major role, holding a 25pc stake, through the Ethiopian Investment Holdings (EIH), a sovereign fund managing a portfolio of state-owned companies. State-owned enterprises under EIH have chipped in with 275 million Br subscription, with additional investments from FSD Africa, the Trade & Development Bank Group, and the Nigerian Exchange Group as foreign investors.

Ethiopian Securities Exchange (ESX) is on track to launch its real-time trading platform in the coming weeks, marking a momentous milestone for the country’s capital market. A critical component of this development was a partnership with Infotech Private Limited, a global leader in capital markets technology. It involves an electronic trading platform and a broker back office and order management system.

State-owned enterprises including Ethio telecom, Ethiopian Shipping & Logistics (ESL), and Ethiopian Insurance Corporation (EIC), as well as Birhanena Selam Printing Enterprise (ESPE), are expected to list. Tilahun Kassahun (PhD), CEO of the Exchange, pointed to the robust preparation undertaken to establish the market, rule books, deployment of human resources, technology and governance which have all gone towards fulfilling regulatory requirements to receive the operational licence.

"We are left with nothing but to launch," he told Fortune, revealing he expects the launch in a few weeks. "We will announce the exact date soon," he added.

Ethiopia's capital market history dates back to the 1960s, when the State Bank of Ethiopia (SBE) initiated share trading. The early initiates were cut short in the aftermath of the 1974 revolution with the military-Marxist regime nationalizing private properties. The current form of the ECMA began to take shape in 2021, with a team of 14 experts developing a 10-year implementation plan, outlining a roadmap, including policy reviews, market infrastructure, and capacity building.

This landmark licensing comes weeks after the milestone IPO (initial public offer) of Ethio telecom. It is expected it will participate in the secondary market on ESX, on which its shares will be listed for trading.

The initiative to set up the exchange began nearly five years ago with a dedicated project team within the National Bank of Ethiopia, supported by the UNDP, and eventually evolved into a federal regulatory body, the ECMA upon an enabling proclamation.

The Authority has been building up the ecosystem’s regulatory framework with the issuing of various directives. Offering 15 distinct license types, it is designed to support a wide variety of market participants.

Observers state the most consequential of the directives is the public offer directive which seeks to ensure transparency and investor protection. The directive mandates that all share issuing companies have to register within a year at the ECMA, where their securities will be dematerialized.

The Licensing, Operation & Supervision directive sets standards for exchanges and over-the-counter markets. Further directives pertaining to market supervisors, the setting of specific fees for market participants, and overseeing the operation of service providers have also been issued by the ECMA.

With the Exchange nearing its launch, financial institutions are yet to take up any of the licenses on offer.

Henok Kebede, president of Nib Bank reveals plans to participate in the market as an intermediary while participation as an investment banker will take time. He stated that his bank has taken a strong initiative to establish a committee to see the potential benefits of the participation. "We are preparing ourselves while keenly eying the market," he said.

He also noted that listing would require shareholder approval to trade shares on the stock market, potentially boosting capital and increasing profits and returns.

"We're assessing the market," he told Fortune.

With a no objection nod from the ECMA, the ESX is already offering its platform by serving as an inter-money market platform provider which was designed by the central bank to facilitate daily lending and borrowing among commercial banks. Tilahun notes that it has become a lucrative market where many banks are participating. On the first day of the auction, Wegagen Bank extended a 50 million Br overnight loan to Awash Bank.

Mered B. Fikireyohannes, financial advisor, expects the public sector to be a major player in the capital market, reflecting the country's economy which has been state-dominated. “The exchange will be a mirror representation of the country's economy,” he stated.

“The financial sector is widely expected to contribute immensely to the growth of the capital market,” he told Fortune. He expects brokers and dealers to also take the centre stage where he expects more companies to be listed.

He states that the licensing of ESX and entire development of the ecosystem as a major step paving the way for long-term investment which has been missing until. He recalls the short-lived Addis Abeba Share Dealing Group, a stock market undertaking during the imperial era. Until 1974, shares were flourishing, being traded in the market until nationalisation took place. "It is a rise from the ashes story after 50 years," he noted.

He expects the financial ecosystem and accurate company valuations to drive the growth of the securities market, while he advised ESX to work heavily on promotion to draw investors to the market.

"Public awareness is crucial," he stated.

PUBLISHED ON Dec 08,2024 [ VOL 25 , NO 1284]

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