The draft Ethiopia's Public Offering and Trading of Securities Directive, recently introduced by the Ethiopian Capital Market Authority (ECMA), marks a significant milestone in the nation's financial landscape. This new directive, shared for public comment and consultation, is designed to establish a structured framework for public offerings of shares, aiming to stimulate financial market development and bolster investor protection. While the new law represents a crucial step in Ethiopia's financial evolution, it also could benefit from further refinement to enhance its effectiveness and impact. After careful review of the document, Growth Capital Analytics (GCA) have identified key areas for consideration by the authority. You can access the detailed review of GCA
First, unlike established capital markets where institutions like investment banks and credit rating agencies play a pivotal role, Ethiopia's market currently lacks these critical entities. These institutions are essential for risk assessment and imbuing credibility into public offerings. The current iteration of the directive, by not addressing the absence of these entities, inadvertently places a moratorium on public offerings. A suggestion for the directive would be to adopt a phased approach to cultivate these institutions, drawing inspiration from early-stage market developments in countries like Vietnam and Indonesia.
Regarding new companies entering the market, the directive could benefit from incorporating stringent criteria for public offering eligibility. For instance, taking a cue from India's regulatory environment, which mandates a minimum operational history and profitability for IPO eligibility, Ethiopia could ensure that only financially stable and proven companies access the market. Alternatively, Ethiopia could consider establishing a separate market for new, growth-oriented companies, similar to the UK's Alternative Investment Market (AIM). This would foster entrepreneurship while protecting investor interests.
Furthermore, while the directive has made IPOs through underwriters optional, it did not provide a clear approach for Direct public offering. Clarity in the provisions for direct public offerings is also crucial. The directive should outline well-defined and transparent requirements for these offerings, enabling companies to make informed and confident decisions. This would promote market fairness and efficiency.
The third and crucial area of concern is the scope and width of the role assigned to the authority and the operational capacity of the ECMA, given its nascent status. To enhance its effectiveness, In the interim, outsourcing the review process to qualified independent entities could ensure efficiency and maintain investor confidence.
Fourth, Investor protection in the directive could be further strengthened by emphasizing financial literacy and market experience in classifying investors. This approach, akin to the Monetary Authority of Singapore's model, would offer a more nuanced and effective way of safeguarding investor interests, particularly factoring in the low level of financial literacy in Ethiopia.
The directive’s approach to credit ratings for debt securities could also be revisited. Given the general level of financial literacy in Ethiopia, mandating credit ratings for all debt and equity securities, as practiced in many other countries, might be more suitable. This would enhance market transparency and foster investor trust, creating a more secure investment landscape.
Lastly, the directive could allow exchanges more autonomy in tailoring their listing and disclosure standards, acknowledging the diverse needs of different market segments. This would mirror successful practices in markets like the UK’s AIM and the Singapore Exchange (SGX), benefiting various market participants.
In conclusion, while the Ethiopian Draft Public Offering and Trading of Securities Directive is a commendable step towards a robust capital market, its potential could be maximized through these suggested improvements. Addressing these areas could significantly enhance the directive's impact, ensuring a more stable, transparent, and efficient market.
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