Financial Regulatory Authority

FINANCIAL REGULATORY AUTHORITY

Chairman of the Authority

Decision of the Authority's Board of Directors No. (164) of 2018 dated 31/10/2018 Regarding the Executive Rules for Corporate Governance of Companies Licensed to Conduct Leasing and Factoring Activities

The Board of Directors of the Financial Regulatory Authority

Having reviewed Law No. (159) of 1981 on Joint Stock Companies, Companies with Limited Liability by Shares, Limited Liability Companies, and Single-Person Companies; And Law No. (10) of 2009 regulating supervision over non-banking financial markets and instruments; And the Leasing and Factoring Law issued under Law No. (176) of 2018; And Presidential Decision No. (192) of 2009 issuing the Basic Statute of the Financial Regulatory Authority; And Authority Board Decision No. (84) of 2016 issuing the Egyptian Corporate Governance Guide; And Authority Board Decision No. (85) of 2018 regarding the conditions required for membership on the boards of companies under the Authority's supervision; And Authority Board Decision No. (137) of 2018 regarding licensing and renewal conditions for leasing and factoring companies; And the memorandum issued by the Central Administration for Supervision of Financing Companies on 15/10/2018; And the approval of the Authority's Board of Directors in its session held on 31/10/2018.

Decided

(Article One)

Without prejudice to the provisions of Authority Board Decision No. (137) of 2018 regarding licensing and renewal conditions for leasing and factoring companies, companies licensed by the Authority to conduct leasing or factoring activities shall comply with the governance rules set forth in this Decision, as a requirement for the continued validity of their license to conduct such activities.

(Article Two)

Leasing and factoring companies listed on the effective date of this Decision shall implement its provisions within six months from its effective date.

(Article Three)

This Decision shall be published in the Egyptian Gazette and on the Authority's website, and shall take effect from the day following its publication in the Egyptian Gazette.

Chairman of the Board of Directors
Dr. Mohamed Osman

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Smart Village, Building no. B-136, Giza
Postal Code: 12577
Tel.: (00202) 35345350 - Fax.: (00202) 35370036 www.FRA.gov.eg

Smart Village, Building B-136, Giza, Egypt
Postal Code: 12577
Tel.: 202 35345350 - Fax.: 202 35370036 info@fra.gov.eg

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Executive Rules for Corporate Governance of Companies Licensed to Conduct Leasing and Factoring Activities

(1) Board of Directors

1-1 The company's articles of association must specify the number of board members, and the board shall consist of an appropriate number of members, mostly non-executive, including at least two independent members, in a manner that enables it to perform its functions and duties, including forming its committees.

2-1 The company's articles of association must stipulate the use of cumulative voting for electing board members, a method that enables minority shareholders to have representation on the board, whereby each shareholder is granted a number of votes equal to the number of shares they own, allowing them to allocate all votes to one or more candidates when electing board members, thereby enabling proportional representation on the board whenever possible.

3-1 An independent member's tenure shall not exceed two consecutive terms, with a maximum duration of six years, and their status shall not convert to a non-executive member.

4-1 The positions of Chairman of the Board and Managing Director shall not be held by the same person unless justified, with the company required to disclose such justifications to the Authority and shareholders, subject to the Authority's approval and presentation to the company's General Assembly.

5-1 A board member of a company conducting leasing or factoring activities shall not serve on the board of a subsidiary with the same activity, but may serve on the boards of more than one company not conducting the same activity, provided the principle of non-conflict of interest is observed.

6-1 The provisions of Authority Board Decision No. (85) of 2018 regarding conditions for board membership in companies under the Authority's supervision, and Authority Board Decision No. (167) of 2018 regarding conditions for board members of companies with securities/instruments listed on the Egyptian Exchange or under the Authority's supervision, shall apply to the boards of directors of these companies.

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7-1 Upon the termination of a board member's tenure, the company must immediately notify the Authority, stating the reasons for the termination.

8-1 The company's board of directors shall meet at least once every three months upon the Chairman's summons, and the board shall appoint a secretary responsible for monitoring board meetings.

9-1 The board shall document its meetings and prepare detailed minutes of discussions and deliberations, including voting records, properly indexed and stored for easy reference.

10-1 The company's articles of association must clearly and detailedly define the board's competencies and members' obligations, and board members, when exercising their competencies, must consider the interests of the company and its shareholders.

(2) Committees Established by the Board of Directors

General Provisions:

1-1-2 The board shall form a number of committees from among its non-executive and independent members to assist it in effectively performing its assigned role, commensurate with the company's activities and needs.

2-1-2 These committees shall be formed by a board resolution based on selection criteria, committee working methods, membership duration, and the allowances and per diems of their members, which shall be approved by the company's General Assembly.

3-1-2 The board shall establish the necessary regulations for forming its committees, their competencies, duration of work, oversight mechanisms, and procedures for periodic monitoring of their work, which shall be submitted to the company's General Assembly for approval.

4-1-2 Each committee shall periodically notify the board of reports on its work results and recommendations.

5-1-2 Committees shall meet periodically, at least once every three months.

Audit Committee:

1-2-2 The board shall form an audit committee of no fewer than three members from among non-executive and independent board members, including at least one independent member with financial and accounting expertise.

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2-2-2 The audit committee shall be responsible, at a minimum, for the following:

• 1 Studying the internal control system and preparing a written report with its observations, recommendations, and proposed amendments to ensure its efficiency and effectiveness.
• 2 Studying internal audit reports and establishing corrective measures.
• 3 Making recommendations to the board regarding the appointment and dismissal of the external auditor, determining their fees, and establishing controls ensuring their independence and continuity.
• 4 Reviewing the audit scope with the external auditor, providing comments, and expressing an opinion on assigning any other non-audit work to them, proposing fees for such work in compliance with Egyptian audit standards without compromising independence.
• 5 Reviewing draft final financial statements before presenting them to the board for onward submission to the external auditor.
• 6 Reviewing the external auditor's report on the financial statements, discussing its observations and reservations, following up on actions taken, and working to resolve disagreements between company management and the external auditor.
• 7 Preparing a periodic report every three months on the committee's work results and presenting it to the board.
• 8 Ensuring the company's compliance with laws and decisions governing its activities.

Risk Committee:

1-3-2 The board shall form a risk committee of no fewer than three members, with a majority being non-executive board members, including at least one independent member.

2-3-2 The risk committee shall be responsible, at a minimum, for the following:

• 1 Establishing regulatory frameworks, procedures, and rules necessary to handle all types of risks other than strategic risks managed by the board, such as operational, market, credit, reputation, information systems, and sustainability-affecting risks.
• 2 Assisting the board in identifying and assessing the company's acceptable risk levels and ensuring the company does not exceed these limits.
• 3 Verifying the existence of an effective records and information retention system operated efficiently.
• 4 Preparing a periodic report at least every three months, or whenever necessary, on the committee's work results for presentation to the board.

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Governance Committee:

1-4-2 The governance committee shall be formed from non-executive and independent board members.

2-4-2 The governance committee shall be responsible for the following:

• 1 Periodically evaluating the company's governance system and drafting internal guides, documents, and policies on how to apply governance rules within the company.
• 2 Preparing an annual report on the company's compliance with corporate governance rules, along with appropriate procedures to complete their implementation.
• 3 Reviewing the company's annual report and the board's report, particularly regarding disclosure items and other provisions related to corporate governance.
• 4 Archiving, documenting, and monitoring reports related to board performance evaluations.
• 5 Reviewing regulatory authorities' observations on the company's governance application, taking them into consideration, and following up on actions taken.

(3) Conflict of Interest and Related-Party Transactions

1-3 The company shall not grant financing or any related services and activities to its board members, company management, or their relatives up to the second degree.

2-3 A board member shall not have any direct or indirect interest in transactions and contracts conducted on behalf of the company, except with annual approval from the General Assembly. The board member must notify the board of any personal interest in transactions and contracts conducted on behalf of the company, record this notification in the board meeting minutes, and shall not participate in voting on the related decision. The chairman may request the member's absence from discussions on matters concerning them, and the board chairman shall notify the General Assembly of any personal interest of a board member in transactions and contracts, attaching a special report from the external auditor.

3-3 A board member shall not, except with General Assembly approval, participate in any activity that competes with the company or branches of the activity it conducts, and conflicts of interest must be disclosed even if no transactions are executed.

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(4) Disclosure and Transparency

1-4 The board must disclose to the Authority and shareholders any material events affecting the company.

2-4 The company's board must notify the Authority of any changes to the board's composition or its committees immediately upon approval of the changes.

3-4 The company must provide the Authority with its shareholder structure, board composition, and senior management structure, accompanied by a recent official extract from the commercial register annually, and must notify the Authority of any changes to this data immediately upon occurrence.

4-4 The company must provide the Authority with minutes of ordinary and extraordinary general assembly meetings, as well as board meetings, within ten days of their holding.

5-4 The company must submit annual financial statements to the Authority, accompanied by the board's report and the external auditor's review report, within a period not exceeding three months from the end of the financial year, and at least 21 days before the general assembly meeting date.

6-4 The company shall submit quarterly financial statements to the Authority, accompanied by a limited review report from the external auditor, within a maximum of 45 days from the end of the period to which the financial statements relate.

7-4 The company shall prepare a board management report according to the data in Annex No. (1) attached to the Executive Regulations of Law No. (159) of 1981, including a detailed schedule of all amounts received by the chairman and each board member, including other material and non-material benefits, as well as bonuses and all other material and non-material benefits, and their details, along with other obligations specified in Article (20) of the Executive Regulations of Law No. (159) of 1981. This schedule shall be made available to shareholders for their private review at least three days before the general assembly meeting convened to consider the company's board report, at the company's premises and the meeting venue.

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(5) Regulatory Environment

Internal Control System

1-5 The company must have an integrated internal control system to mitigate risks, establish rules of assistance and accountability within the company, and protect its resources and assets against loss and misuse. The company must also implement internal control procedures to prevent the leakage of insider information.

2-5 The company's board shall appoint an internal auditor responsible for monitoring the implementation of governance rules and the company's and all employees' compliance with governing laws, as well as the company's internal policies and regulations, and shall submit periodic reports to the audit committee or the company's board of directors.

(6) Internal Audit Department

1-6 The company must have a dedicated internal audit department to establish and evaluate internal control procedures to verify their effectiveness.

2-6 The head of the internal audit department shall present their scope of work, plans, programs, and reports to the audit committee, and the audit committee may invite the head of the internal audit department to attend its meetings.

3-6 The appointment and dismissal of the head of the internal audit department and the determination of their financial remuneration shall be decided by the company's board of directors, following the audit committee's approval. The board shall issue a decision determining the objectives, duties, and authorities of the internal audit department, along with the names of its head and deputies.

4-6 The head of the internal audit department shall submit a quarterly report to the audit committee regarding the company's compliance with laws and regulations governing its activities, as well as its compliance with governance rules, in coordination with the internal auditor.

5-6 The internal control system and procedures shall be established based on a study of risks facing the company, utilizing the opinions and judgment of the board of directors, external auditors, and company managers, with periodic updates to monitor and evaluate those risks.