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CAPITALIZING ON SUCCESS
BY REHAB EL-BAKRY
The stock market’s impressive performance
in recent years has lured thousands of new investors. But while
they’ve been closely monitoring the rise and fall of stocks,
the Capital Market Authority (CMA) has also been watching closely
to ensure that the bourse functions efficiently, transparently and
with a diversified package of investor tools. CMA chairman Hani
Sarie-Eldin explains how his agency is working behind the scenes
to create a level playing field for investors.
Hani Sarie-Eldin spends a good portion of his day watching the
movement of stocks. But he is not an investor. In fact, his contract
prohibits him from owning any securities. Instead, he is looking
for patterns and irregularities in the market. As chairman of the
Capital Market Authority (CMA), it is his job to ensure that the
bourse operates smoothly and transparently.
The CMA, the regulatory body for all capital markets in Egypt, sets
the ground rules for the Cairo & Alexandria Stock Exchanges
(CASE), issues the licenses for investment firms and brokerages,
and formulates the capital market’s growth strategy. “We
are in essence working behind the scenes,” Sarie-Eldin explains.
“[We] monitor the behavior of all the players in the market
to make sure that they are all abiding by the regulations and that
no violations are taking place. Our role is also to set a strategy
to grow the market and develop it while minimizing the risk for
investors, be they local or foreign.”
It was a role he considered deeply before accepting. When Minister
of Investment Mahmoud Mohieldin approached him to offer the post
in the summer of 2005, he paused before answering. After all, and
by his own admission, Sarie-Eldin has always been a man of law,
not commerce. Upon graduating from Cairo University’s Faculty
of Law in 1987, he completed Master’s in law at the university
before traveling to London to earn his doctorate in international
commercial law from Queen Mary College.
Upon returning to Egypt in 1996, Sarie-Eldin taught law at his alma
mater while moonlighting as a consultant for a number of government
bodies including the ruling National Democratic Party (NDP). He
also joined the legal team at Shalakany Law Firm, where he eventually
became a partner. In 2003, he was headhunted by UAE-based Majid
Al Futtaim Group to head its Egypt desk in Dubai. Just two years
later, Mohieldin tapped him to head the CMA.
“It was not an easy decision for me,” Sarie-Eldin admits.
“I’d just made the move to the Gulf, and my family had
barely been there long enough before we had to move again. But I
weighed this against the opportunity to become part of the team
of reformers that comprised the Egyptian government at the time.”
For Sarie-Eldin, it was all about the opportunity to make a real
difference. A new business-friendly cabinet and an expanding economy
were creating new opportunities for market growth. “This was
a time of changes in Egypt and I was glad to have the chance to
be part of it,” he recalls. “I’ve always been
a firm believer that one of the ways to help the Egyptian economy
grow would be by breathing life into our capital market. It’s
a great way to encourage local as well as international investors.”
When the government introduced Capital Market Law 95/1992, it was
almost as if it was starting from scratch. “The market had
in effect been dead since the late 1950s,” he says referring
to its 30-year slump following Egypt’s nationalization program.
“So when the government decided to re-establish it in 1992,
so many things had changed in the international market, the regulations
and the workings of the stock markets around the world and even
the capital markets that we were competing with.”
Sarie-Eldin says one of the key components of the CMA is assessing
the health of the market and responding to its needs. “The
regulations of the market have to reflect the needs and the patterns
of the markets; that is why setting the regulations is a [responsive]
and evolutionary process,” he says.
As an example, he notes that when the market was revamped in 1992
its regulations were designed to encourage companies to list on
the stock exchange, while promoting stocks as an alternative investment
option to a largely uninformed and distrusting public. In the late
1990s, the CMA tweaked the market’s listing and disclosure
regulations to improve transparency. By the early 2000s, it began
looking beyond Egypt’s borders, fine-tuning listing regulations
and corporate governance requirements to make the bourse more attractive
to foreign investors.
An unrelenting optimist, Sarie-Eldin looks beyond the market’s
recent ups and downs and sees the bigger picture. “There’s
no denying that the growth of the Egyptian capital market has been
one of the success stories of the past two years,” he says.
“The CASE has become one of the top-performing markets in
the emerging markets basket. This growth has seen the entry of a
large number of investors both from Egypt [and abroad]. We’ve
seen tremendous growth of around 150 percent year-on-year.”
There has also been a diversification of investor profiles, he says
of the 1.5 million new local and foreign investors the CASE attracted
in 2005. In response, the CMA has unveiled a broad strategy that
covers the capital market’s development through 2008, including
a framework for new tools and services to suit these investors’
needs.
Topping the list of changes ushered in by the strategy are new regulations
for the accreditation of brokerages and brokers. Sarie-Eldin says
that both will now have to undergo CMA-monitored training in order
to receive a license. “This decision was taken due to the
fact that so many investors, particularly individual investors,
have voiced serious concerns over the performance of their brokers,
with many arguing that their brokers were simply there to carry
out transactions on their behalf rather than fulfill their role
as advisers to their clients regardless of how much money they are
putting in,” he explains. “In response to this, we decided
to require all brokers to undergo extensive training in order to
upgrade the services they provide their clients.”
The London Institute for Securities & Investment, responsible
for licensing all brokers and firms in the UK, has been commissioned
to carry out the training, which will be delivered to brokerage
management teams, stock brokers, CASE employees and even CMA staff.
The training puts these players in the same league as their counterparts
in more established markets, with internationally recognized certification
to prove it.
While the CMA has prescribed training for brokers, it has unveiled
an assortment of services and trading tools for investors. In the
last year, the agency has set the operating parameters for margin
trading, short selling and e-trading, all of which were designed
to give investors more choices. “These are all services that
will allow each investor to find a tool that suits his or her needs,”
he says. “This comes from the recognition that no two investors
are alike or follow the same pattern and therefore there is a need
for diversified tools.”
Of these, Sarie-Eldin says e-trading was the most anticipated and
well-received tool because the majority of the CASE’s investors
are individuals for whom trading over the Internet is a lot more
convenient than dealing with a brokerage firm. It is also perceived
as being more risky.
“There is more risk associated with certain types of trading,
however the fact is [e-trading] is an option – investors can
use it or they can continue to use their brokers,” he says.
“We have a diverse profile of investors so we should have
a diverse set of tools. Then it is up to each individual to understand
the different tools, understand their benefits and risks, and then
make an educated decision to adopt one versus another.”
While investors are rushing to join the e-trading bandwagon, the
other tools introduced have received only a lukewarm reception from
the public, Sarie-Eldin admits. “So far, services such as
margin trading and short selling, etc., have not taken off, which
goes back to the fact that the public doesn’t really know
how to use them best.”
He says one of the biggest components of the CMA’s strategy
is to educate the public on the tools and dynamics of the capital
market. The CMA is working to arrange seminars and provide information
to the public, upon request. It is also working with the media to
become an “information tool,” in part by developing
public service announcements that demystify the capital market,
he explains.
Why is this important? Sarie-Eldin says it’s more than just
a matter of the public using new market tools; it’s about
making informed decisions. Reckless novice investors are largely
to blame for the panic last March 14, Black Tuesday, when the market
plummeted 5 percent in a single session. “People panicked,”
he says. “The fact is, if they knew better, they would have
bought stocks on Tuesday, when prices were down, and sold them on
Wednesday, when prices picked up, and could have made a small fortune.
But the fact is they simply didn’t know any better. That’s
why education is a very important component.”
Most recently, the CMA announced that it would lay the groundwork
for the launch of a Small Caps Market within the coming year. The
new market, which will have its own set of regulations, will be
designed to encourage small and medium enterprises (SMEs) to list
– companies that traditionally have a smaller paid-in capital
that falls short of the CASE’s minimum capital requirement.
He says that it is not unusual for a growing market, or even a developed
one, to launch a separate market for smaller companies. “Let’s
not forget that the reason why capital markets exist is to allow
companies to raise their capital,” he says. “I believe
that SMEs are the most in need of the ability to register and be
traded on the stock market because they are most in need of raising
capital and should have regulations to allow them to register and
be traded. This is a key to growth.”
But it’s not the only key. Sarie-Eldin stresses that transparency
is imperative. He says the CMA’s initiatives are designed
above all to improve the efficiency and transparency of the market.
While existing regulations are adequate, he always sees room for
improvement.
This is particularly true when it comes to white collar crime. The
capital market is a tempting target for price fixing and insider
trading. It’s the CMA’s job to prevent it. Suspected
cases are investigated and, if irregularities or crimes are discovered,
presented to the prosecutor-general for litigation.
But where are all these cases? Hints of insider trading abound –
people need only observe the buzz of activity that precedes important
company announcements, earnings reports and acquisition bids. “I’m
the first to say that it is hard to prove and even harder to prosecute,”
Sarie-Eldin confesses, noting that the CMA has carried out several
investigations into alleged capital market violations but has never
managed to secure a conviction. “Just because something seems
obvious to people [doesn’t mean it’s] easy to prove.
Being able to prove a violation is another story altogether. And
this is not something that is unique to Egypt.”
Even more established and tightly regulated capital markets rarely
see convictions, he says, pointing out that the venerable London
Stock Exchange has only had six prosecuted cases of insider trading
and price fixing in the last four years. In Egypt, he points out,
it is even more difficult to prosecute as there is no precedent
and the criminals themselves know how to exploit all the legal loopholes.
But this is one area he promises the CMA will work on in the coming
period. Egypt has come a long way in 14 years and is closing the
gap on more established markets, he says, but there is still much
more to be done. “The fact is, competition for investments
is incredible and if we plan to stay at the top, then we have to
continue to improve the market, its functions and its transparency,”
he says.
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