EFSA Board Decision No. 129 of 2014 on Regulations for Subscribing to Investment Fund Documents in Exchange for In-Kind Shares (Latest Amendment)

Egyptian Financial Supervisory Authority (EFSA)

Board of Directors Secretariat

Decision of the Board of Directors of the Egyptian Financial Supervisory Authority No. (129) for 2014, dated 14/09/2014 Regarding the Regulations on Subscribing to Investment Fund Documents in Exchange for In-Kind Shares (According to Latest Amendment)

The Board of Directors of the Egyptian Financial Supervisory Authority:
Having reviewed the Capital Market Law issued by Law No. (95) of 1992, its executive regulations, and the decisions issued in implementation thereof; and the Law No. (10) of 2009 regarding the regulation of supervision over non-banking financial markets and instruments; and Presidential Decree No. (192) of 2009 issuing the Basic Law of the Egyptian Financial Supervisory Authority; and the approval of the Authority's Board in its session held on 14/09/2014.

Has Decided:

(Article One)¹
Subscribing to investment fund documents in exchange for in-kind shares shall be permitted only for private equity funds not offered to the public, index funds, and real estate investment funds, all in accordance with the regulations set forth in this Decision.

(Article Two)
The following conditions apply to the in-kind share submitted in exchange for issuing investment fund documents:

1. The in-kind share must be one of the investment instruments that the fund may invest its funds in, according to the limits and regulations in the executive regulations of the Capital Market Law.
2. The in-kind share must not belong to companies under liquidation or subject to a bankruptcy declaration judgment.
3. It must be consistent with the conditions and limits specified in the prospectus or information memorandum, including the investment policy stated therein.
4. The provider of the in-kind share is obligated to submit all documents evidencing ownership of the share and all associated rights and privileges, confirming that it is free from any mortgages or encumbrances. In the case of real estate assets, documents must be provided confirming that it is:
   a. Registered in the Real Estate Registry or subject to an effective allocation decision from one of the competent authorities in the country. b. Not subject to judicial dispute or litigation.
   c. Approved for planning or construction by a certificate from the competent authorities.
5. The provider of the in-kind share submits a commitment to provide all information and documents that may be requested from them subsequently for valuation purposes.
6. The owner of the in-kind share provides an initial valuation of its fair value at the time of submission to the fund, utilizing one of the expert firms or specialized valuation authorities.

¹ The Decision was amended by EFSA Board Decision No. 63 dated 19/04/2017.
² Article One of the Decision was amended by EFSA Board Decision No. 63 dated 19/04/2017.

(Article Three)
Obligations of the Fund Manager regarding in-kind shares submitted to fulfill subscription for investment fund documents:

1. Ensuring compliance with the conditions stipulated in Article Two of this Decision.
2. Preparing an economic and financial study on the feasibility of acquiring the proposed in-kind share, including the number of documents to be issued against the submitted in-kind share and the issue price prepared by the management services company, accompanied by a report evaluating the targeted in-kind share as follows:
   a. If the in-kind share is listed on the stock exchange and represents more than 10% of the issuing company's capital, the share shall be valued by an independent financial advisor accredited with the Authority. b. In the case of an in-kind share in the form of unlisted shares, or lacking announced market prices at valuation time, or where three months have passed since the last announced price, or with limited and inactive trading, two independent financial advisors accredited with the Authority must be engaged to estimate the fair value of the in-kind share.
   c. If the in-kind share is a real estate asset, two licensed real estate valuation experts accredited by the Authority and possessing sufficient expertise in the relevant real estate activity and the area of the in-kind share shall be engaged to estimate its fair value, with each working independently and adhering to the regulations issued by the Board of Directors Decision No. 57 of 2014 regarding the minimum contents of a real estate valuation expert report.
   It is required that full independence exists in the external entities entrusted with the valuation process, whether from the provider of the in-kind share, the fund company, any related parties, members of their boards of directors, or their auditors, and that no common interests link them. Furthermore, no more than three months may have passed since the valuation date.

(Article Four)³
Procedures for accepting the in-kind share submitted to fulfill subscription for investment fund documents:

1. The fund company's board of directors must approve presenting the investment proposal to the document holders' assembly, and for the validity of the assembly's meeting, a quorum of two-thirds must be met after excluding any related parties to the in-kind share who are not entitled to vote on the presented proposal, with approval by a two-thirds majority of attending eligible voters.
2. The provider of the in-kind share undertakes not to transfer the fund documents acquired against the in-kind share for two years or until disposed of by the fund, whichever is earlier. Any transfer contrary to this condition shall not be recognized, and these documents may be mortgaged provided that the mortgage does not result in the transfer of these documents to parties other than the mortgagee within the aforementioned period. In case the documents are listed on one of the stock exchanges, the investment manager is obligated to notify the exchange and the Central Depository and Registration Company of the restriction imposed on documents issued against in-kind shares.
3. Ownership of the in-kind share is transferred to the fund, and this is publicized in the Commercial Register or Real Estate Registry if the in-kind share is real estate.
4. The valuation report, all information, documents, and records related to the valuation process must be retained by the custodian in accordance with Article 165 of the executive regulations of the Capital Market Law, which applies to funds other than real estate investment funds, where the management services company performs this role in accordance with Article 183 bis 4 of the aforementioned executive regulations.
   In all cases, the acceptance procedures for the in-kind share shall not proceed until all papers, reports, and documents are submitted to the Authority and no objections are raised within 15 days from the submission date.

³ Item 2 of Article Four was amended by EFSA Board Decision No. 63 dated 19/04/2017.

(Article Four Bis)⁴
In cases where subscription to the fund documents is made via in-kind shares during the first issuance of the fund's documents, the provisions of Articles Two and Three of this Decision, Items (2, 3, 4), and the last paragraph of Article Four must be observed, in addition to the following: - First: Obtaining approval from both the Board of Directors and the Extraordinary General Assembly of the fund company to accept that owners of in-kind shares subscribe to the fund documents against these shares, based on the investment manager's report regarding the submitted in-kind share. It is required that a two-thirds attendance quorum is met at the General Assembly meeting, and approval by a two-thirds majority of attending assembly members after excluding related parties to the in-kind share who are not entitled to vote on the proposal presented to the Extraordinary General Assembly. Second: Including in the prospectus or information memorandum complete disclosures regarding these in-kind shares and the documents to be issued against them, specifically as follows: -

1. Comprehensive information about each of these shares, their owners, and their value, along with the number of documents to be issued against each share.
2. A summary of the valuation reports regarding these shares or an independent financial advisor's study - as applicable - with a reference that the reports are available for review at the fund and management company.
3. The fund board's recommendation and its justifications, approved by the Extraordinary General Assembly for owners of in-kind shares to subscribe to fund documents against these shares, and the targeted return for document holders thereof.

⁴ Article Four Bis was added by EFSA Board Decision No. 63 dated 19/04/2017.

(Article Four Bis 1)⁵
The provider of the in-kind share from legal persons is obligated to obtain all necessary approvals from the competent authority regarding the transfer of ownership of the in-kind share to the fund against subscription to fund documents for these shares and the number of documents to be issued against them, prior to presentation to the Extraordinary General Assembly of the fund company in accordance with Articles (Four and Four Bis) of this Decision.

⁵ Article Four Bis 1 was added by EFSA Board Decision No. 63 dated 19/04/2017.

(Article Four Bis 2)⁶
Independent financial advisors or licensed real estate appraisers, when valuing the in-kind shares against which fund investment documents will be issued, must adhere to the Egyptian Real Estate Valuation Standards or the Financial Valuation Standards for Enterprises issued by the Authority - as applicable - and include this in their issued valuation reports.

⁶ Article Four Bis 2 was added by EFSA Board Decision No. 63 dated 19/04/2017.

(Article Five)
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
Sherif Samy