The Ministry of Justice recently approved groundbreaking guidelines from the Ethiopian Capital Markets Authority (ECMA), which has focused on public offerings and trading of documented investments. Announced at the 2024 Capital Markets Summit in Addis Ababa, this directive has represented the first formal document guiding investment provisions in Ethiopia, setting the stage for a structured, secure, and transparent investment landscape.
Ethiopian Capital Market Director General, Hanna Teklu reflected her thought that this directive can be a basis for creating a well-regulated capital market system. The guidelines have established a series of measures designed to promote transparency, standardized processes, and protect investor interests via making it well aligned with Ethiopia’s broader economic goals.
One of the directive’s core elements is the registration process for document holders, who are individuals or entities issuing investment securities. To be eligible, document holders must undergo rigorous verification to confirm legal standing, financial health, and compliance with Ethiopian commercial law. This process is intended to build a dependable market infrastructure by ensuring that all players are verified and accountable. ECMA has aimed at creating an environment, where only credible and financially sound entities participate in the capital market, by standardizing these eligibility requirements.
In an effort to enhance transparency, the directive has been introducing mandatory disclosure standards. Companies offering investments are required to provide annual audited financial statements and are expected to maintain regular communication with investors through customer interest disclosures. This includes detailed statements regarding investors’ rights, risks associated with their investments, and any material changes that could impact their interests. The disclosure requirements ensure that investors receive timely, accurate information which has helped them make informed decisions thereby fostering a culture of accountability.
The directive includes protections for existing shareholders through a clause on preemptive rights. Under this provision, existing shareholders are given priority in purchasing additional shares, particularly when a company issues new stock. This priority helps prevent dilution of their ownership stake and guards their investment against changes that might reduce its value. The preemptive rights provision is intended to build trust among shareholders by offering reassurance which has reflected that their initial investments will be respected and protected even as new capital is introduced.
According to Hanna, ensuring financial soundness is a critical focus of the directive. Companies issuing investment documents must meet rigorous capital adequacy standards, demonstrating that they have the necessary financial backing and risk management processes to honor their obligations. For example, companies that issue loan securities must establish a clear repayment schedule and provide detailed financial forecasts. Risk assessments are also required, with companies needing to disclose any potential risks associated with their offerings. This requirement is designed to prevent defaults and protect investors, particularly for those who are new to the Ethiopian capital market.
The directive establishes an independent oversight framework to enforce compliance and maintain market integrity. External auditors approved by the ECMA must review the financials of companies participating in the market to check whether they meet the required standards or not. The ECMA has the authority to impose penalties on companies that fail to comply with these transparency requirements, including suspensions or cancellations of trading rights so as to maintain market discipline. This independent oversight is a critical step in building a stable and trustworthy investment environment, where both local and foreign investors can participate confidently.
Under the directive, companies are obligated to meet continuous reporting standards. This includes timely updates on any changes in their financial position, management decisions, or risks that may impact investors. The directive also mandates that all disclosures need be made available to the public with a view to fostering an information-driven market environment where stakeholders have access to real-time updates. Continuous reporting requirements are expected to create a standardized investment environment to help Ethiopia move closer to international capital market standards.
The ECMA’s directive signals Ethiopia’s commitment to establishing a robust, fair, and investor-friendly capital market. By promoting transparency, enforcing compliance, and setting clear standards, these guidelines are a foundational step in building investor confidence and attracting both domestic and international capital. With increased regulation and structured guidelines, Ethiopia’s capital market is poised to become a key player in Africa, supporting sustainable economic growth and opening up new financial opportunities for businesses and individuals alike.
Melese Minale is an economist working at National Bank of Ethiopia as an advisor of capital market. As to him, in the countries built advanced economy and other developing countries, capital market plays key role as the source of finance. For long many macro economy professionals advised the government to establish such market system.
Finally their effort bear fruit and three years ago the House of Peoples Representatives endorsed the law which allows the establishment of capital market. To process of the establishment the professional group is working to lay the ground for making it a vibrant business venture. The authority has the mandate to provide document based exchange of commodities. It is also established based on the public –private partnership. The government will have a 25 percent share in the capital market and the rest 75 percent let to the private sector.
As the National Bank of Ethiopia is a policy institution it has no mandate to have share in the capital market on behalf of the government. In this regard the Ethiopian investment holding is the correct institute which has the mandate to have share in the market on behalf of the government. The capital market establishing proclamation clearly indicates that the Ethiopian Investment Holdings has the mandate to administer the government wealth and participate on various investment ventures on behalf of the government. As it is known the Ethiopian Investment holding is engaged on facilitating the establishment of the Ethiopian capital market.
As to Melese, the capital market functions in the complicated eco system and there are intermediaries work closely with the Authority, investment banks, credit facilitator agencies, standard setting agencies for obtaining loans, share transfers, brokers, market transaction providers are vital. These all need skills and knowledge.
Obviously, there are shortages of professionals in Ethiopia who can engage in such profession because the country dis not came across capital market except in the imperial era for brief period of time.
To close the gap, more than 600 professionals have obtained training regarding capital market function. Trainees get education in accordance with their tendency and interest. The capital market authority on its part will set criterion to employ workers based on their experience.
For example, fund administrator’s required to have highly qualified skill. Brokers who want to participate in the market are required to fulfill the fundamental criterion. Until sufficient skilled labor obtained from local market personnel with qualified skill can bring from outside countries. Professional who obtained training with the certified professional employed from local market will work together with foreign professionals and in such a way knowledge transfer can be realized.
He further said that, the capital market establishing proclamation allows different actors in the market without discrimination including, both local and foreign investors, professionals, investment banks, standard setting agencies, retailers, brokers, asset developers and others.
The license provision requires that competitors who fulfill the criterion can join the capital market business.
According to Hanna, the National Bank has the mandate to decide on the amount of paid capital when commercial banks are established. But unlike this, the capital market authority has a mandate to decide the capital amount of the capital market. After its establishment among the criteria to establish capital market, deciding the paid capital amount is a priority issue the amount of paid capital is decided based on vulnerability of the business transaction and after the evaluation of the vulnerability the paid capital amount will be decided. In addition to this, it depends on the participant companies share, the number of investors. The technology that is going to be used in the capital market, service provision and managing the market can be part of the capital amount.
BY ABEBE WOLDEGIORGIS
THE ETHIOPIAN HERALD FRIDAY 22 NOVEMBER 2024
