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Investment Bank Licensing Requirement: Ethiopian Capital Market Authority

The Ethiopian Securities Exchange (ESX) is poised to revolutionize the financial landscape of Ethiopia by providing a regulated platform for securities trading. As the exchange prepares to go live, understanding the role and regulations governing investment banks becomes crucial for prospective market participants. This article explores the eligibility criteria, licensing requirements, authorized activities, and operational guidelines for investment banks within the Ethiopian Securities Exchange.

Investment Licensing Requirements

To qualify for an Investment Bank License in Ethiopia, a company must either be a share company or a private limited company with a valid certificate of commercial registration or an investment permit issued by the appropriate government authority. This foundational requirement ensures that only legitimate and properly registered entities can participate in the securities market.

Broker Approval

Investment banks intending to act as brokers must provide evidence of obtaining an Approval-In-Principle for a trading membership from a recognized securities exchange or over-the-counter trading facility in Ethiopia. This stipulation ensures that only qualified and vetted entities can operate as brokers, enhancing market integrity.

Pre-Certification Inspection

Before granting a license, the Authority may conduct a pre-certification inspection to verify compliance with the necessary requirements. This step is crucial in maintaining high standards and ensuring that applicants meet all regulatory criteria.

Approval for Broker Activities

If an investment bank did not specify its intention to act as a broker at the time of obtaining its Services License, it must seek prior approval from the Ethiopian Capital Market Authority before providing brokerage services. This ensures that all brokerage activities are properly regulated and authorized.

Authorized Activities of Investment Banks

Investment banks in Ethiopia are non-deposit taking financial institutions authorized to perform several key functions:

Securities Broker, Dealer, and Financial Adviser: Facilitating transactions and providing expert financial advice.

Underwriting: Assisting in the issuance of securities by companies, government, and other entities.

Intermediary Role: Acting as a bridge between securities issuers and the investing public.

Corporate Reorganizations: Facilitating mergers and other corporate reorganizations.

Additional Services: Any other services as defined by the Authority over time.

 

Underwriting in the Ethiopian Securities Market

Mandates and Agreements

Investment banks can act as underwriters in public securities issuances. Every underwriting mandate must be documented in an underwriting agreement between the issuing company and the investment bank. This agreement, along with any sub-underwriting agreements, must be filed with the Authority.

 

Key Provisions in Underwriting Agreements

Underwriting agreements must contain:

  • Names of the parties involved
  • Type of underwriting commitment.
  • Authorization clause.
  • Underwriting commission details.
  • Responsibilities in case of default.
  • Time of deal closure.
  • Covenants and obligations.
  • Indemnity clauses.
  • Subscription conditions.
  • Dispute resolution provisions.
  • Terms regulating relationships between multiple underwriters.

These detailed provisions ensure clarity and legal compliance in underwriting activities.

Appointed Representatives of Investment Banks

Trader Licensing

Investment banks acting as brokers must have at least one licensed Trader as an Appointed Representative, excluding the Chief Compliance Officer. This representative must be skilled in corporate finance activities to ensure competent handling of financial operations.

Client Account Management and Discretion

Authorization and Discretion

Investment banks and their appointed representatives cannot exercise discretionary power on any client’s account or accept orders from anyone other than the client without written authorization. This rule protects clients' interests and ensures transparency in account management.

Investment Objectives

When discretionary power is authorized, any transactions must align with the client's documented investment objectives. This requirement ensures that the investment bank acts in the best interests of the client.

Relinquishment of an Investment Bank License

Process and Requirements

An investment bank seeking to relinquish its Services License must:

  • Enter into an agreement with a succeeding investment bank detailing terms of succession and outstanding obligations.
  • Provide the Authority with records of all clients' accounts and arrangements for their transfer.
  • Notify clients to transfer their accounts within 14 days after a one-month notice period.
  • Appoint a succeeding investment bank if clients do not specify a target bank.
  • Execute all pending client mandates before exiting the market.
  • Ensure the seamless transfer of documents and client assets to the succeeding investment bank within 90 days.

Notification to Central Securities Depository

The investment bank must notify the Central Securities Depository of its intention to exit the market, accompanied by the application filed with the Authority. The succeeding investment bank must conduct enhanced due diligence on the transferred accounts, confirming their status with the respective clients.

Conclusion

The launch of the Ethiopian Securities Exchange marks a significant milestone in the country's financial sector. The precise requirements and comprehensive regulations governing investment banks aim to foster a transparent, efficient, and secure market environment. By adhering to these guidelines, investment banks can play a pivotal role in the development and growth of Ethiopia's securities market. Whether acting as brokers, dealers, financial advisers, or underwriters, these institutions will be integral to the successful operation and integrity of the Ethiopian Securities Exchange.

Refrence: Please refer the Capital Market Service Providers Licensing and Supervision Directive No-980-2024  of Ethiopian Capital Market Authority which can be accessed from here

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