Legal framework

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Created by
Ruhama Markos

Cards (79)

  • AAU, School of Commerce, Capital Market Project Office
  • FUNDAMENTALS OF FINANCIAL MARKETS & SECURITIES ANALYSIS
  • PART IX: THE LEGAL FRAMEWORK OF ETHIOPIAN CAPITAL MARKET
  • Addis Ababa

    August, 2023
  • Training Outcomes

    • Knowing the main documents setting the legal framework & Identifying other pertinent laws relevant to capital market's operations
    • Conceptualizing & understanding some of the major items in the general provisions of Proclamation No 1248/2021
    • Explaining the structure, power & authorities of ECMA
    • Knowing Self Regulatory organizations & their Recognition Requirements
    • Understanding how the exchange(ESX) and Security Depository & Clearing Companies(SDCCs) recognized and licensed
    • Identifying the various Capital Market Service Providers(CMSPs) and their Licensing Requirements
    • Understand the main purpose for the establishment of the CM Tribunal & the way how it operates
    • Outline how public offering & Security Trading is governed & Conducted
    • Understanding important provisions related to disclosure of interest, minority protection, CISs, prohibited trading Practices and other relevant provisions from the rest of the proclamation(Part IX to XIV)
  • Legal Framework

    A legal framework for a given authority/task is usually set by statutory laws and accompanying regulations, directives & other instruments depending the type of activity and jurisdictions
  • The Ethiopian capital market legal framework is set by the Federal Democratic Republic of Ethiopia Capital Market Proclamation 1248/21
  • The market is going to be regulated by the provisions of this proclamation and accompanying regulations and directives to be issued pursuant to it
  • Some three of these have already passed the public hearing stage and now are at the final stage of approval
  • These are

    • LICENSING AND OPERATING SECURITIES EXCHANGES AND TRADING PLATFORMS
    • Capital Market Service Providers Licensing and Supervision
    • Recognition of Self-Regulatory Organizations
  • The CMP establishes the Ethiopian Capital Market Authority (ECMA)
  • ECMA can use different instruments that may affirm the sprit/intent of the law in having strong regulatory environment that facilitate the creation of vibrant capital market in Ethiopia
  • In this part, we focus on the proclamation as the accompanying directives are not yet publicly issued
  • Why capital Market?

    Establishment of capital market in Ethiopia will support the development of the national economy through Mobilizing capital, Promoting financial innovation, and Sharing investment risks
  • Why Capital Market Proclamation No. 1248 /2021?
    • Because it is necessary to adopt a legal framework for the regulation and supervision of the capital market to ensure the fairness, integrity, and efficiency of the market and protect investors
    • To legislate uniform requirements for the regulation of issuers who desire to raise capital from public investors
    • To adopt a legal framework for effective monitoring and surveillance of the capital market to detect, mitigate, and prevent systemic risk to the country's financial system
  • Parts of the Capital Market Proclamation
    • PART I: GENERAL PROVISIONS
    • PART II: CAPITAL MARKET AUTHORITY
    • PART III: RECOGNITION OF A SELF-REGULATORY ORGANIZATION
    • PART IV: SECURITIES EXCHANGE
    • PART V: SECURITIES DEPOSITORY AND CLEARING COMPANY
    • PART VI: LICENCEING OF CAPITAL MARKET SERVICE PROVIDERS
    • PART VII: CAPITAL MARKETS TRIBUNAL
    • PART VIII: PUBLIC OFFERING AND TRADING OF SECURITES
    • PART IX: DISCLOSURE OF INTERESTS
    • PART X: AQCUISITION AND PROTECTION OF MINORITY INTERESTS
    • PART XI: COLLECTIVE INVESTMENT SCHEMES
    • PART XII: PROHIBITED TRADING PRACTICES TRADING PRACTICES
    • PART XIII: COMPENSATION FUNDFUND
    • PART XIV: MISCELLANEOUSE PROVISIONS
  • Part I: General Provisions
    • Full Title/name: "THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA CAPITAL MARKET PROCLAMATION"
    • Short Title: "CAPITAL MARKET PROCLAMATION No.1248/2021"
  • Art 2/5 "Capital Market"

    A market where securities such as shares or equities, bonds, derivatives, or other related securities are bought and sold
  • Art 2/6 "Capital Market Participants"

    Capital market service providers, issuers of securities (companies, government, etc), investors, securities exchanges, eligible counter parties to eligible contracts, and securities depository and clearing companies
  • Part II: The Capital Market Authority
    • An autonomous Federal Government regulatory Authority
    • Accountable to the PM
    • Head Office: Addis Ababa
    • Reduce systemic risk by ensuring the integrity of the capital market and transactions
    • Promote the development of the capital market by creating enabling environment for long term investments
    • Protect Investors
    • Ensure the existence of a capital market environment in which securities can be issued and traded in an orderly, fair, efficient & transparent manner
  • Powers & Duties of the Authority(Art.6)
    • Grant license to any person to operate as a securities exchange, derivatives exchange, securities depository and clearing company, capital market services provider, over-the-counter trading facility or any other activity deemed by the Authority as a regulated activity under its jurisdiction
    • Determine and collect reasonable levies and fees from capital market participants for its services or to cover the cost of its operations
    • Develop a framework to facilitate the use of information technology
    • Take administrative measures for breach of provisions
    • Approve the appointment of external auditors of licensed and authorized market participants
    • Give recognition to and oversee self-regulatory organizations
    • Regulate the use of electronic trading platforms
    • Regulate primary and secondary markets
    • Supervise the listing and delisting of securities
  • Organizational Structure

    • The Authority shall have: Board of Directors, A Director General and deputy Director Generals as necessary, The necessary staff
    • Composition and Appointment of Board of Directors: The Governor of the National Bank of Ethiopia, The Director of the Accounting and Audit Board of Ethiopia, Four other individuals to be appointed based on qualification, The Director General of the Authority
  • Part III: Recognition of Self Regulatory Organizations
    Self-Regulatory Organization: An entity that is recognized under this Proclamation to regulate its own members through the adoption and enforcement of rules of conduct for fair, ethical, and efficient practices in the capital market; with a view to promoting the protection of investors and the public interest
  • Self Regulatory Organizations

    • Security exchange
    • Security Depository and clearing Company (SDCC)
  • Application for Recognition(Art.22)

    • An entity under the jurisdiction of the Capital Market Authority which intends to be recognized and operate as a self-regulatory organization shall apply to the Authority, in the prescribed form
    • An exchange and a securities depository and clearing company shall be recognized as self-regulatory organization without submitting an application
  • Requirements for Recognition(Art.23)

    • The Authority may recognize a self-regulatory organization where it is satisfied that the organization has internal rules and policies which are consistent with this Proclamation or related regulations and directives, has the financial capacity and administrative resources necessary to carry out its functions, is fit and proper, has competent personnel for the carrying out of its functions, and satisfies such other conditions as may be determined by a directive to be issued by the Authority
  • Appointment and Change of Senior Personnel (Art.27)
    • A self-regulatory organization shall not appoint or change its senior personnel except with the prior written notification to the Authority of such intention to appoint or change
  • Removal of a Senior Personnel(Art.28)

    • The Authority may remove a senior personnel, if it reasonably believes that a senior personnel of a self-regulatory organization is not a fit and proper person to be an officer of the organization
  • Reporting Requirements(Art.29)

    • A self-regulatory organization shall, within four months after the end of every financial year, submit its annual report to the Authority
    • The report shall include a report on the corporate governance policy and practices, financial statements prepared and audited in accordance with the accounts and audit requirements for regulated persons, and such other requirements as may be specified by directive of the Authority
    • An external Auditor who, in the course of his audit, has reason to believe that there is or has been an adverse change in the risks inherent in the business of a self-regulatory organization, the self-regulatory organization may be in contravention of any provisions of this Proclamation, a financial crime has been or is likely to be committed, or serious irregularities have occurred shall report the matter, in writing, to the Authority
  • Part IV: Securities Exchange

    • Prohibition of Unlawful Securities Exchange: A person shall not establish or launch a business as a securities exchange or a derivatives exchange or over-the-counter trading facility, or hold himself out as creating a securities market except with an exchange license granted by the Authority
  • Establishment of the Ethiopian Securities Exchange(Art.31)
    • The Ethiopian Securities Exchange ("Exchange") shall be established as a share company by the Government in partnership with the private sector, including foreign investors
    • The total ownership of the Government and government-owned entities shall not exceed 25% of the Exchange's capital
    • If there is insufficient interest from the private sector, the Government's ownership of the Exchange can be increased to whatever amount is needed to establish the Exchange
    • If there is no interest at all from the private sector, including from foreign investors, the Exchange shall be established as a fully Government owned public enterprise by regulation of the Council of Ministers
    • The Authority shall grant an exchange license to the Exchange upon its establishment and meeting minimum capital requirements, fit and proper criteria, conditions of work and management, evidence of competence, and any other requirements to be specified by directive of the Authority
  • Share company

    A company owned by shareholders
  • Government ownership of securities exchange
    • The total ownership of the Government and government-owned entities shall not exceed 25% of the Exchange's capital
    • If there is insufficient interest from the private sector, the Government's ownership of the Exchange can be increased to whatever amount is needed to establish the Exchange
    • If there is no interest at all from the private sector, the Exchange shall be established as a fully Government owned public enterprise
  • Licensing of securities exchange

    The Authority shall grant an exchange license to the Exchange upon its establishment and meeting minimum capital requirements, fit and proper criteria, conditions of work and management, evidence of competence, and any other requirements to be specified by directive of the Authority
  • Other relevant provisions of the commercial code shall have an effect on the securities exchange
  • Licensing of other securities exchanges or derivatives exchanges or over-the-counter trading platforms
    • They shall be established as share companies
    • The Authority shall determine minimum capital requirements, fit and proper criteria, conditions of work and management, evidence of competence, and any other requirements for licensing
  • Administrative measures against a securities exchange or trading platform
    1. The Authority may direct the exchange to be closed for a specified period in case of major market disruption, threatened or actual market manipulation, or if it is necessary or beneficial in the public interest or for investor protection
    2. The Authority may suspend the license of an exchange if it carries out activities outside the scope, fails to comply with license conditions or Authority directions
  • Management of a securities exchange
    • The affairs of the exchange shall be managed by a board of directors whose members shall be elected by the shareholders, subject to consent of the Authority
  • Rules of a securities exchange
    The exchange shall make rules or procedures for the proper and efficient regulation, operation, management and control of the exchange and the securities market, subject to approval of the Authority
  • Responsibilities of a securities exchange
    • Monitoring, surveillance and supervision of the exchange
    • Ensuring suitable trading control mechanisms
    • Providing equitable access to market rules and procedures
    • Providing real-time pre- and post-trade information to members
    • Prioritizing public interest over exchange's interests
    • Issuing rules for providing pre-trade, post-trade and transaction information equitably to all participants