New Rules for In-Kind Subscription

New Rules for In-Kind Subscription to Investment Funds
In Egypt, Capital Market Law No. 95 of 1992 regulates investment funds, one of the main pillars of the Egyptian capital market. Investment funds are used worldwide to accumulate investors’ capital and direct it towards generally long-term investments, broadening the participation in capital markets and expanding ownership of companies, as well as other financial assets. Since the enactment of the 1992 Capital Market Law, investment funds have grown greatly and have become an essential facet of the Egyptian economy. Subscription to investment funds is generally monetary. As such, investors must purchase shares in the amount they intend to own and pay a specific amount of money and may not purchase through in-kind payment. This seeks to prevent any manipulation in the evaluation of assets, and avoids the long and complex process of determining the value of such assets, especially in cases of sizeable investment funds open for public non-specialized subscribers. On the other hand, monetary subscription is easier and offers more protection for those dealing in such funds. As such, Article 152 of the Executive Regulations of the Capital Market Law stipulates that investment funds will not accept subscription via any kind of non-monetary consideration.
Subscription through In-Kind Contributions
In a departure from this general rule, the Board of Directors of the Egyptian Financial Supervisory Authority ("EFSA") has issued a decision[1] organising the way in which investors can subscribe to investment funds in-kind, meaning that investors can acquire a percentage of the fund’s shares in consideration for an in-kind contribution. However, due to the risks that could arise as a result of this decision, including manipulation and threats to the rights of the other investors in the fund, the resolution includes several requirements that must be abided by. These are as follows:
  • In-kind subscription shall only be permitted for private (closed) funds, not investment funds open to the public, as well as for real estate investment funds and index funds.
  • In-kind subscription shall only be permitted when new shares are issued, not when acquiring old shares.
  • The value of shares in-kind shall not constitute more than 50% of the investment fund’s overall shares, after calculating the newly offered shares.
  • That the in-kind shares pertain to the fund’s area of investments.
  • That the in-kind contribution is not offered by a company under liquidation or already insolvent.
  • That subscription in-kind is in accordance with and within the limitation provided by the subscription announcement or the information memorandum of the investment fund.
  • That the subscriber must provide all documentation proving that the contributed asset is under his or her complete ownership and free of any charges or obligations.
  • In the case of the asset being a real estate property, the subscriber must provide evidence that the property is registered and not the subject of any judicial order.
  • The owner of the in-kind contribution must provide a preliminary evaluation of the asset by an expert.
It is the responsibility of the company managing the investment fund to ensure that the above requirements are met, and that a study is made in order to assess the benefit of possessing the asset and the process by which it should be valued by independent consultants. The in-kind contribution will not be accepted unless the Board of Directors of the investment fund approves it, and unless the approval of the shareholders is obtained; at least two thirds of the shareholders must be present at the shareholders meeting, and at least two thirds of those in attendance must approve the in-kind contribution. Following shareholder approval, the owner of the share in-kind must agree that the share will remain in the possession of the investment fund for at least two years, unless the investment fund sells or otherwise deals with it before the expiry of that period. Before the finalization of the process, a file containing all the documentation and information regarding the in-kind contribution must be provided to EFSA. If EFSA approves or does not object to the transaction within 15 days of submission, the in-kind subscription is to be deemed accepted. A copy of the complete file will be retained by the custodian of the investment fund.
Conclusion
This new resolution is among the most important and influential recent decisions in the field of capital markets as it offers great freedom to increase investments in a manner previously prohibited by Egyptian Law. The ability to contribute to an investment fund with shares in-kind will provide a wider margin for benefiting from and employing assets and attaining an increased economic return on them. Moreover the rules placed above avoid the more complicated means traditionally used by investors to achieve the same result. In this sense, EFSA’s decree to implement such regulations must be seen as a positive step. Moreover, EFSA’s decree places several conditions on such transactions; this, too, is positive, since there is a need to avoid putting well-intentioned investors at risk of possible manipulation of valuations of in-kind shares. This also explains EFSA’s decision to limit such transactions to closed private funds, in which investors are generally deemed to be sophisticated, with expertise in the capital market. Nevertheless, the main weakness of this decree is that it does not make any reference to the penalties section set out in Articles 63-69 of the Capital Market Law. This is so, despite the fact that the risks of manipulation are great and deserve a strict criminal penalty. While this is understandable, given that the decree is of an administrative nature and may not include any penalties, it would be beneficial for EFSA to suggest an amendment to the Capital Market Law in order to ensure a strict and enforceable crime for manipulation of the valuation of shares in-kind.   [1] EFSA Board of Directors' Decision No. 129/2014 organising the way in which investors can subscribe to investment funds in-kind, Egyptian Gazette, Issue No. 228, 11 October 2014.
In Egypt, Capital Market Law No. 95 of 1992 regulates investment funds, one of the main pillars of the Egyptian capital market. Investment funds are used worldwide to accumulate investors’ capital and direct it towards generally long-term investments, broadening the participation in capital markets and expanding ownership of companies, as well as other financial assets. Since the enactment of the 1992 Capital Market Law, investment funds have grown greatly and have become an essential facet of the Egyptian economy. Subscription to investment funds is generally monetary. As such, investors must purchase shares in the amount they intend to own and pay a specific amount of money and may not purchase through in-kind payment. This seeks to prevent any manipulation in the evaluation of assets, and avoids the long and complex process of determining the value of such assets, especially in cases of sizeable investment funds open for public non-specialized subscribers. On the other hand, monetary subscription is easier and offers more protection for those dealing in such funds. As such, Article 152 of the Executive Regulations of the Capital Market Law stipulates that investment funds will not accept subscription via any kind of non-monetary consideration.
Subscription through In-Kind Contributions
In a departure from this general rule, the Board of Directors of the Egyptian Financial Supervisory Authority ("EFSA") has issued a decision[1] organising the way in which investors can subscribe to investment funds in-kind, meaning that investors can acquire a percentage of the fund’s shares in consideration for an in-kind contribution. However, due to the risks that could arise as a result of this decision, including manipulation and threats to the rights of the other investors in the fund, the resolution includes several requirements that must be abided by. These are as follows:
  • In-kind subscription shall only be permitted for private (closed) funds, not investment funds open to the public, as well as for real estate investment funds and index funds.
  • In-kind subscription shall only be permitted when new shares are issued, not when acquiring old shares.
  • The value of shares in-kind shall not constitute more than 50% of the investment fund’s overall shares, after calculating the newly offered shares.
  • That the in-kind shares pertain to the fund’s area of investments.
  • That the in-kind contribution is not offered by a company under liquidation or already insolvent.
  • That subscription in-kind is in accordance with and within the limitation provided by the subscription announcement or the information memorandum of the investment fund.
  • That the subscriber must provide all documentation proving that the contributed asset is under his or her complete ownership and free of any charges or obligations.
  • In the case of the asset being a real estate property, the subscriber must provide evidence that the property is registered and not the subject of any judicial order.
  • The owner of the in-kind contribution must provide a preliminary evaluation of the asset by an expert.
It is the responsibility of the company managing the investment fund to ensure that the above requirements are met, and that a study is made in order to assess the benefit of possessing the asset and the process by which it should be valued by independent consultants. The in-kind contribution will not be accepted unless the Board of Directors of the investment fund approves it, and unless the approval of the shareholders is obtained; at least two thirds of the shareholders must be present at the shareholders meeting, and at least two thirds of those in attendance must approve the in-kind contribution. Following shareholder approval, the owner of the share in-kind must agree that the share will remain in the possession of the investment fund for at least two years, unless the investment fund sells or otherwise deals with it before the expiry of that period. Before the finalization of the process, a file containing all the documentation and information regarding the in-kind contribution must be provided to EFSA. If EFSA approves or does not object to the transaction within 15 days of submission, the in-kind subscription is to be deemed accepted. A copy of the complete file will be retained by the custodian of the investment fund.
Conclusion
This new resolution is among the most important and influential recent decisions in the field of capital markets as it offers great freedom to increase investments in a manner previously prohibited by Egyptian Law. The ability to contribute to an investment fund with shares in-kind will provide a wider margin for benefiting from and employing assets and attaining an increased economic return on them. Moreover the rules placed above avoid the more complicated means traditionally used by investors to achieve the same result. In this sense, EFSA’s decree to implement such regulations must be seen as a positive step. Moreover, EFSA’s decree places several conditions on such transactions; this, too, is positive, since there is a need to avoid putting well-intentioned investors at risk of possible manipulation of valuations of in-kind shares. This also explains EFSA’s decision to limit such transactions to closed private funds, in which investors are generally deemed to be sophisticated, with expertise in the capital market. Nevertheless, the main weakness of this decree is that it does not make any reference to the penalties section set out in Articles 63-69 of the Capital Market Law. This is so, despite the fact that the risks of manipulation are great and deserve a strict criminal penalty. While this is understandable, given that the decree is of an administrative nature and may not include any penalties, it would be beneficial for EFSA to suggest an amendment to the Capital Market Law in order to ensure a strict and enforceable crime for manipulation of the valuation of shares in-kind.   [1] EFSA Board of Directors' Decision No. 129/2014 organising the way in which investors can subscribe to investment funds in-kind, Egyptian Gazette, Issue No. 228, 11 October 2014.