FRA and EGX eye law change to let LLCs and partnerships set up investment funds

More companies could soon be allowed to set up and manage investment funds in Egypt. The Financial Regulatory Authority (FRA) is working with the EGX on amending Article 29 of the Capital Market Law (pdf) so that limited liability companies and simple limited partnerships can get licensed to form funds, two government officials tell EnterpriseAM. Right now, that license is reserved for joint-stock companies and partnerships limited by shares. The change is one of a set of legislative and executive tweaks the two regulators are studying to deepen the market and make it more attractive to local and regional investors, the officials say.

The change is about who runs the funds. It would widen the pool of companies that can get licensed to set up and manage them, while the funds themselves would still have to take the form of joint-stock companies with cash capital under Article 35 of the law, unless regulators amend that too, which the officials didn’t address.

The goal is to keep Egyptian money at home. “This amendment will increase the local market’s ability to compete and attract the investment funds it’s targeting,” the officials tell us. Many companies have been setting up their funds in neighboring markets instead of Egypt since the current law doesn’t allow them to, and “the amendment will improve the market’s ability to keep hold of Egyptian capital by letting those companies set up locally,” they say.

The tax breaks come next. The EGX also wants these new funds to be able to tap the tax exemptions already on the books for certain fund types, one of the officials says. Right now, only five types get them under the Income Tax Law: real estate, debt, venture capital, charitable, and listed-equity funds. The bourse has been lobbying to expand that list to 38 categories, adding gold and precious metals funds, along with funds that invest in transferable assets, such as mortgage receivables and lease-backed portfolios. The Tax Authority is studying the request, and the finance minister can sign off on it by decision, without needing a change to the law.

The push comes as funds are having a moment. The investment fund industry’s net assets reached EGP 471 bn at the end of June, up from EGP 411 bn at end-March, with the number of funds rising to 224, helped by FRA rules requiring ins.ers to put a minimum share of their money into equity funds. Regulators have kept the momentum going since then. The EGX tightened the rules for index funds in June, and the FRA’s first hedge fund rulebook took effect last month, letting licensed funds short stocks, trade derivatives, and borrow to invest. They will have more to work with soon: EGX70 futures and options are next in line after this year’s EGX30 and single-stock contracts, and a central system that lets short sellers find shares to borrow goes into a pilot in November.

Why it matters for the market: Funds are one of the best tools for bringing liquidity into the EGX and drawing in new investors, especially individuals who don’t have the experience to trade stocks directly, capital markets analyst Safaa Fares tells EnterpriseAM. Because they spread their money across stocks, corporate bonds, and T-bills, funds give investors a longer-term, lower-risk way into the market, she says. More funds focused on specific sectors, such as industry, real estate, and precious metals, would get more money moving through the bourse, she adds.

There’s more to fix, though. Fares wants more flexible rules for setting up funds, including opening up subscriptions to a wider base of investors, as long as governance and disclosure standards stay high. Licensing takes too long, she says: setting up a fund can currently take several months, and the money waiting on the sidelines loses value to inflation in the meantime. She also wants clearer legal and tax rules on how funds are managed so managers aren’t left guessing, and transparent tracking of how funds aimed at key sectors actually perform.

What’s next: The officials didn’t give a timeline. Any change to the Capital Market Law would need to go through the House, while the expanded list of tax-exempt funds only needs a decision from the finance minister.