Zakaria S.G.

Hegazy: Egyptian Stock Market Efficiency: An Initial Public Offering

Perspective, Ph.D. thesis, Strathclyde University, U.K.

CHAPTER THREE
THE STRUCTURE OF THE EGYPTIAN
SECURITIES MARKET

3.0 INTRODUCTION

From the preceding chapter, a general background of the underpricing and

aftermarket performance of initial public offerings can be constructed. Such a

background should be interpreted within the institutional framework of the Egyptian

capital market. Combining the information of this chapter with the literature review

chapter, the remaining chapters can be developed and examined in detail.

Having considered the importance of the institutional environment of the

Egyptian capital market, this chapter is organized as follows. First, in section 3.1, a

historical sequence of the events and legislative actions which have had a meaningful

relation with the activities of the Egyptian capital market are outlined. Based on this

background, section 3.2 examines the microstructure of the Egyptian Stock

Exchange (ESE). In the latter we analyze several issues including: the trading

system, the trading procedure (i.e., placing orders, types of orders, transmitting

orders, execution of orders, price determination, and the participants), Egyptian stock

market indices, the mechanism of making a new issue on the ESE, and the price

mechanism of the Egyptian PIPOs market. Finally, section 3.3 provides a summary

and conclusion of the findings provided in the other sections.

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Zakaria S.G.Hegazy: Egyptian Stock Market Efficiency: An Initial Public Offering

Perspective, Ph.D. thesis, Strathclyde University, U.K.

3.1 BRIEF HISTORY OF THE EGYPTIAN STOCK MARKET

3.1.1 THE PERIOD PRECEDING THE ECONOMIC REFORM

The Egyptian stock market is one of three stock markets in North Africa (i.e.

Egypt, Tunisia and Morocco). It was originally established in 1910, and in the early

days of the First World War (1914-1918) was abrogated. Then, it was again restored

in 1931 at the request of the Government Commissioner. On December 31, 1933, a

Royal Decree was issued promulgating the General Regulations of the stock

exchanges, but was later amended in virtue of the Royal Decree issued on April 24,

1940, according to which the government approved the General Regulations

mentioned above. On July 2, 1955, Law 326 of 1953 was issued granting brokers

alone the privilege of dealing in securities whether listed on the stock exchange

quotations list or not.

In consideration of the great developments in economic conditions from

1940 to 1957 the need arose for the amendment of the General Regulations of the

stock exchanges. Accordingly the amended General Regulations were issued in

virtue of Law 161 of 1957 which conferred on the Egyptian stock exchanges (i.e.

Cairo and Alexandria) the status of general legal entities with power to administer

their funds and to litigate. However, this law subjected the stock exchanges to the

government control represented in the government commissioner who was given the

right to exercise veto against all resolutions or decisions of the General Meeting, the

stock exchange Commission and the Subsidiary Committees if issued in violation of

the laws or regulations governing the stock exchange or if they were against public

interest.

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Zakaria S.G.Hegazy: Egyptian Stock Market Efficiency: An Initial Public Offering

Perspective, Ph.D. thesis, Strathclyde University, U.K.

With the introduction of the Open-Door policy by Sadat in 1974, in order to

encourage the investment of Arab and foreign capital in economic development

projects of the country, and subsequent incorporation of joint companies under Law

43 of 1974 as amended by Law 32 of 1977, the shares of these companies were

accepted for listing and negotiation on the Egyptian stock exchanges. Consequently,

Law 121 of 1981 was issued amending certain provisions of Law 161 of 1957

pertaining to the General Regulations of stock exchanges in order to conform the

new economic legislative measures taken succeeding the adoption of the economic

Open-Door policy in Egypt.

Table 3.1 shows the market value of trading during the period 1956-1982 as

measured by the trading levels on the Cairo stock exchange. Such figures show what

happened to market activity following the nationalization of the private sector in the

early 1960s. The exchanges had continued to exist but with virtually no securities,

trading almost disappeared completely. In fact, most of the trading activity since that

time has been either in government bonds or in shares of public sector controlled

companies.

Although the stock exchange trading figures do not adequately portray the

size of the Egyptian capital market, during that period, they are a measurement of the

liquidity within that market. Since there was not a well developed over-the-counter

market in Egypt, trades executed on the stock exchanges were believed to be the best

measure of the existing secondary market.

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Zakaria S.G.Hegazy: Egyptian Stock Market Efficiency: An Initial Public Offering

Perspective, Ph.D. thesis, Strathclyde University, U.K.

Table 3-1 Cairo Stock Exchange Historical Market

Value of Bond and Share Trading (1956-1982)
Year LE Year LE Millions
Millions
1956 57.3 1970 3.8
1957 32.7 1971 3.6
1958 66.7 1972 3.9
1959 43.9 1973 4.3
1960 38.4 1974 4.1
1961 23.4 1975 7.4
1962 12.2 1976 7.6
1963 5.1 1977 5.9
1964 4.3 1978 4.9
1965 2.8 1979 6.4
1966 4.0 1980 9.8
1967 6.5 1981 9.1
1968 2.8 1982 7.8
1969 6.3 - -
Source: Cairo Stock Exchange, 1982.

Table 3-2 Market value of shares Trade (1978-1982)

Year Cairo Alexandria Total
1978 2,397 676 3,073
1979 2,438 529 2,967
1980 8,029 486 8,515
1981 5,417 395 5,812
1982 6,804 858 7,662
Source: Cairo Stock Exchange, 1982.

Moreover, Table 3.2 illustrates the market value of the shares traded during

1978-1982 for both the Egyptian stock exchanges (i.e., Cairo and Alexandria). It

should be pointed out that trading statistics did not indicate the proportion of trades

resulting from private transfers, as for example from one family member to another.

If all of these private transactions could be eliminated, it was probable that normal

share trading in 1982, for example, did not even reach LE 5 million.

In summary, during the period prior to the 1991 economic reform, the private

sector was in the early stages of development. However, it was expected that together

with an educational process headed by the Capital Market Authority, the stock

exchanges and, the establishment of securities companies, market forces on their

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Zakaria S.G.Hegazy: Egyptian Stock Market Efficiency: An Initial Public Offering

Perspective, Ph.D. thesis, Strathclyde University, U.K.

own, should create a viable operating securities market, so essential in the stage of

the Open Door Policy. However, as a matter of fact, during that period the role of the

stock exchange remained minimal.

3.1.2 THE NEW ERA OF THE EGYPTIAN STOCK MARKET

Only after the government undertook the implementations of the new reforms

in 1991, which are accompanied by the Capital Market Law 95 of 1992, Cairo and

Alexandria stock exchanges regain their importance as crucial financial vehicles for

the upcoming period. Specifically, the Egyptian stock market has witnessed major

progresses during the period from January 1994 to December 1996. Thus, a general

overview of the market during this period is outlined below.

3.1.2.1 An Overview Of The Market During 1994-96

During 1994, the General Price Index rose from 136.34 to 238.37: an 74.8 %

increase. The prices perhaps rose both as a result of companies’ enhanced

performance, reflected in increased profits, and a P/E multiple expansion. This

suggestion may be justified by average market P/E which rose to reach over 13

during September-October 1994. It is argued that the reasons behind P/E expansion,

could be: the drop in interest rates on deposits, the fact that dividend income became

tax exempt, and/or the realisation by investors that the asset value of some

companies greatly exceeded their market value.

Moreover, during 1994, four companies were privatised, namely: EIPICO,

Paints and Chemicals Company (PACIN), Ameriyah Cement and Alexandria

Cement. At the end of this period, three mutual funds were incorporated by banks:

The National Bank of Egypt, Bank of Alexandria and the Egyptian American Bank.

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Zakaria S.G.Hegazy: Egyptian Stock Market Efficiency: An Initial Public Offering

Perspective, Ph.D. thesis, Strathclyde University, U.K.

At this point, due to the fear of dramatically increasing prices, the authorities

suspended licenses for any further funds. At the same time, the government

accelerated the rate of the privatisation program, increasing the supply of shares in

the market while the inflow of funds to the market was restricted. As a result,

during 1995, the General Index dropped by 26% and several privatised companies

were trading at prices below their public offering price.

However, the second half of 1996 has been characterised by a steep increase

in prices and a fundamental shift by the government in its willingness to sell the

privatized companies via the stock exchange. This began in May 1996 when the new

Ganzouri’s government decided, for the first time, to issue a majority of public sector

companies’ shares on the stock exchange. Also, during 1996, the number of domestic

mutual funds increased, and now are investing in Egypt (Table 3.3). Such a

background, to be worthwhile, should be explained within the market capitalization

outlined in the following section.

Table 3-3 The Egyptian Domestic Mutual Funds

Mutual Fund Asset Managed (L.E mn)
Bank Misr I 200
Bank Misr II 300
Egypt Trust (Lazard Freres) 254
Egyptian American Bank 300
Bank of Alexandria 200
National Bank of Egypt I 200
National Bank of Egypt II 300
HSBC (EIC I, EIC II) 136
Allied Investors 100
Banque Du Caire 100
Egypt Fund 170
Delta Bank 50
SAIB 100
Export Development Bank 100
(NMF)
Suez Central Bank 100
Total 2,610
Source: EFG-Hermes (March 1997:56)

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Zakaria S.G.Hegazy: Egyptian Stock Market Efficiency: An Initial Public Offering

Perspective, Ph.D. thesis, Strathclyde University, U.K.

3.1.2.2 Market Capitalization During the New Era (1994-1996)

It is noticeable, from Table 3-4, that the market capitalisation in 1996 is

approximately 3 times that of the year of 1994. However, at the present time, the

capital market in Egypt is small in relation to the size of the overall economy. Figure

3.1 below shows the evolution of market capitalization over the period of study.

Table 3-4 Total Market Capitalisation Levels for

Egyptian Equity Market Trading: Jan. 1994- Dec.
1996
Market Capitalisation (Jan. 1994=100)
Month 1994 1995 1996
Jan. 100.00 132.45 256.54
Feb. 87.73 132.45 262.19
Mar. 105.69 135.68 255.80
Apr. 115.98 170.98 250.22
May 86.37 164.80 262.18
Jun. 104.66 203.01 274.90
Jul. 104.30 218.68 301.12
Aug. 114.16 215.91 305.33
Sep. 127.66 236.09 341.16
Oct. 119.13 239.73 343.83
Nov. 118.72 240.25 399.44
Dec. 99.89 253.43 444.44
Exchange rate ($/LE.): $1 approximately = LE 3.39 as of October 1996).
Source: Securities Market In Egypt, Monthly Statistical Reports from January
1994 to December 1996.
C a p i t a l i s a t i o n

Figure 3-1 Total Market Capitalisation Levels for

Egyptian Equity Market Trading: Jan. 1994- Dec. 1996.

450
400
350
300
250
a rk e t

200
150
100
M

50
0
J a n ., 9 4 J a n ., 9 5 J a n ., 9 6

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Zakaria S.G.Hegazy: Egyptian Stock Market Efficiency: An Initial Public Offering

Perspective, Ph.D. thesis, Strathclyde University, U.K.

As capitalization has increased, Capital Market Authority has intensified its

efforts to delist companies, listed for tax reasons, which do not trade. Of the 646

companies with a total market capitilization of L.E. 56.64 billion (about US$ 16.6

billion), only 50-60 trade actively. These active companies however makeup the bulk

of market capitalization.

However, it is suggested that the stated figures of market capitalization may

understate the true market capitalization due to many factors, such as:

1) most of the public sector companies’ stocks -not yet privatised- are not listed on

the stock exchange, and

2) the non-traded listed stocks on the stock exchange are listed at their incorporation

par value. Accordingly, once these stocks start to trade at market value, the whole

market capitalization of the Egyptian equity market will expand by the difference

between stocks’ market value and par value. This, to some extent, may explain

the 1995 increase in market capitalization despite the fall in stock prices during

the year.

To sum up, in studying the current situation of the Egyptian stock market, it could be

observed that:

 total market capitalization is, to some extent, an unclear figure when we consider

the actual free float,

 most companies have much less than 100% of their shares available for active

trading,

 local institutions are not major participants in free float holdings as they lack the

internal expertise needed to make investment decisions, and

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Zakaria S.G.Hegazy: Egyptian Stock Market Efficiency: An Initial Public Offering

Perspective, Ph.D. thesis, Strathclyde University, U.K.

 the concept of a longer-term horizon geared towards holding stocks to realise

profits through capital appreciation still needs time to take hold.

Unlike the period prior to the economic reform program of 1991, the most important

conclusion which might be drawn concerning the new era is the revival of the

Egyptian capital market, which is regarded as vital to the development of the

Egyptian economy. The Egyptian stock market has achieved a high level of success,

reflected in the flow of privatization shares and the resulting increase in the volume

of traded shares, the increase in the efficiency of securities companies working in the

capital market, and increasing overall stock market efficiency. Finding solutions to

obstacles to trading activity has contributed greatly to this success. We notice that

after the issuance of Law No. 95 of 1992, a law that was designed to modernize the

capital market, the total volume of traded shares increased dramatically during the

period of study (1994-1996).

This increase in activity can be explained by the acceleration of the

privatization program in the first half of 1996, when many public company shares

were offered for sale and were oversubscribed. The intention of the Egyptian

government is to offer as much as 70% of companies for sale in order to anchor

investors or a group of investors by direct sale methods [see Table 3.5]. This will

also enhance demand for such companies, thereby raising their share prices.

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Zakaria S.G.Hegazy: Egyptian Stock Market Efficiency: An Initial Public Offering

Perspective, Ph.D. thesis, Strathclyde University, U.K.

Table 3-5 Law 203 Companies Shares Sold Offered Through Egyptian Stock Market
to the Public and Employees: 1993-97
Enterprise Year of % of sold Size of
Privatisation Shares Transactions
Commercial International Bank 1993 37.50 390,000,000
Misr Chemical Industries CO 1993 51.00 53,920,000
EPICO (Pharmaceuticals) 1994 17.20 39,732,000
Paints & Chemical industries 1994 10.00 25,000,000
Alexandria Portland Cement 1994 20.60 52,800,000
Torah Portland Cement 1994 35.50 93,000,000
Uniarab Spinning & Weaving 1994 4.24 N/A
Alexandria Spining & Weaving 1994 15.60 N/A
Ameriya Cement 1995 22.50 54,000,000
Helwan Cement 1995 29.6 170,000,000
El Nasr Clothing & Textile Co. 1995 8.16 25,000,000
Egyptian Elector Cables 1995 30% 27,000,000
Extracted Oil Co. 1995 20% 24,104,000
North Cairo Flour Mills 1995 20% 50,400,000
Alexandria for Pharmaceuticals & Chemicals 1995 21% 26,460,000
Nile for Pharmaceuticals & Chemicals 1995 20% 17,010,000
Heliopolis for Housing and Development 1995 20% 25,959,990
Middle Egypt Mills 1996 23.53 39,600,000
Nasr City Housing & De. 1996 70.00 182,000,000
Egyptian Fin. & Ind. Co. 1996 70.80 69,000,000
Southern Cairo Mills 1996 39.92 31,137,600
Egy. Starch & Glucose 1996 30.00 48,300,000
Ameriya Cement 1996 12.50 115,000,000
Kafr El Zaiat for Insecticides & Chemicals 1996 69.69 24,252,120
El Naser Deyhydrated 1996 58.96 17,922,700
Nile Match Co. 1996 54.58 29,470,770
Misr Oil and Soap 1996 52.93 98,442,980
Middle and West Delta Flours 1996 61.02 183,048,000
Development and Popular Housing 1996 62.60 63,543,495
Telemisr 1996 66.27 26,508,000
Upper Egypt Flour Mills 1996 61.00 170,800,000
MI Bank 1996 10.00 116,250,000
East Delta Flour Mills 1996 61.00 113,460,000
Arab Cotton Ginning 1996 62.65 37,923,255
Mamphis Pharmaceuticals 1996 40.00 50,005,700
General Co. for Silos and Storage 1996 51.03 115,440,000
Cairo Pharmaceuticals 1996 30.00 48,852,000
Al-Ahram Beverages 1996 15.00 40,500,000
Helwan Cement 1996 31.00 465,000,000
Al-Ahram Beverages 1997 75.00 231,187,500
Ameriyha Cement 1997 17.00 241,400,000
Nile Cotton Ginning 1997 20.00 50,400,00
PACIN 1997 13.13 170,625,000
Uniarab 1997 10.00 42,780,000
Egypt Free Shops 1997 30.00 42,000,000
Source: Hassan, A.W., Stock Exchange and Its role in Achieving the Objectives of Transferring
Projects of Business Sector to Private Ownership, Cairo: Dar El-Nahda, 1996, pp. 410-12, and EFG-
Hermes 1997, pp. 37.(N/A= not available).

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