Ethiopia Proposes 30% Cap on Foreign Holdings in Listed Companies

Ethiopia is proposing to cap the combined holdings of foreign portfolio investors in a listed company at 30 percent of its paid-up capital, under draft rules that would establish how overseas investors participate in the country’s developing capital market.

The proposed Foreign Portfolio Investment Regulation would also limit a single foreign portfolio investor, including its affiliates and persons acting in concert, to 10 percent of a company’s paid-up capital. The Ethiopian Capital Market Authority (ECMA) could allow Category I institutional investors to hold up to 15 percent with prior approval.

The ownership limits form part of a wider framework designed to bring foreign capital into Ethiopia’s securities market while giving regulators greater control over foreign ownership, capital flows, foreign-exchange exposure and market stability.

The draft, issued for public consultation, would allow eligible foreign investors to purchase shares, corporate and government debt securities, money-market instruments, units or shares in collective investment schemes, derivatives and other securities approved by the Authority.

The proposed rules would apply to foreign nationals, enterprises with foreign ownership, companies incorporated outside Ethiopia and joint enterprises formed by eligible foreign investors. Ethiopians permanently residing abroad could also qualify if they choose to be treated as foreign investors.

However, foreign portfolio investment would have to originate outside Ethiopia. The draft requires such investments to be funded exclusively in eligible foreign currency and transferred through banking channels authorised by the National Bank of Ethiopia (NBE).

The proposed ownership ceilings would apply across direct, indirect and beneficial interests, with holdings by affiliates and persons acting in concert aggregated for the purpose of determining compliance.

If a foreign investor exceeds the permitted limit because of a restructuring, merger, acquisition or corporate action by the issuer, it would have to notify the Authority and its custodian within five business days. The investor would then have 15 business days to reduce its holding to the applicable threshold.

The Authority could grant a one-time extension of up to 30 business days where market conditions or liquidity constraints make immediate divestment impractical.

Market infrastructure operators would also be required to monitor foreign holdings and suspend further foreign purchases once the applicable ownership ceiling is reached.

The draft seeks to prevent portfolio investment from becoming a route for foreign investors to exercise corporate control.

Foreign portfolio investors would retain ordinary shareholder rights, including voting at general meetings and submitting shareholder proposals, but would not be permitted to participate in company management.

Taking a board seat with voting rights, exercising day-to-day executive authority, obtaining veto rights over core business decisions or controlling the appointment of senior executives would constitute management participation under the proposed rules.

Such involvement could lead to the investment being treated as foreign direct investment under Ethiopia’s investment framework rather than as portfolio investment.

The proposed ownership restrictions would operate alongside a minimum holding period of one year for foreign portfolio investments.

ECMA would have the power to adjust, waive, differentiate or eventually remove the holding-period requirement through directives, taking into account factors such as market liquidity, the type and maturity of an instrument, its currency denomination and the investor’s risk profile.

The draft says the requirement would be reviewed periodically and progressively removed once the conditions that justified it no longer exist.

Foreign investors would generally be entitled to repatriate proceeds from the sale or transfer of securities, dividends, interest, capital gains and other lawful investment income after meeting the applicable holding period, settlement, tax and reporting requirements.

The NBE, however, could temporarily restrict or delay repatriation during severe foreign-exchange shortages, systemic financial stress, a balance-of-payments crisis or other shocks that pose a material threat to financial stability.

Any such measures would have to be proportionate, transparent and time-limited, with restrictions generally lasting no more than 180 days unless renewed under applicable law.

The proposed framework would require all foreign portfolio assets to be held through a designated custodian licensed by ECMA.

Foreign investors would need to maintain a securities account with the Central Securities Depository, a trading account with a licensed broker or trading member, a foreign-currency account and non-resident birr account with a licensed commercial bank, and a custody account with their designated custodian.

Commercial banks could provide custody services if they obtain a no-objection from the NBE and a licence from ECMA, while meeting requirements covering capital, liquidity, technology, internal controls and segregation of custody activities from their banking operations.

The framework would also permit global custodians to serve foreign investors through locally licensed sub-custodians or branches and subsidiaries.

The draft would introduce a five percent disclosure threshold for foreign holdings in listed companies.

A foreign portfolio investor reaching or exceeding five percent of an issuer’s paid-up capital would have to disclose the holding through its custodian. The disclosure would include the securities held, the percentage of ownership, the beneficial owner and the nature of any control or influence.

Custodians would also be required to submit regular reports to ECMA. Category II investors would be subject to monthly reporting, while Category I investors would be covered by quarterly reporting, alongside annual reporting requirements.

The proposed system would divide foreign investors into two categories. Category I would include governments, multilateral organisations, sovereign wealth funds, central banks, pension funds and major institutional investors such as banks, insurers and asset managers. Category II would cover other eligible investors, including companies, foundations, family businesses and individuals.

Source: FSX Business News