FRA’s Farid on introducing SPACs, carbon credits, and more to the Egyptian market: Since assuming his position as Financial Regulatory Authority chairman in August 2022, Mohamed Farid has overseen the introduction of a handful of new financial instruments, as well as regulatory overhauls designed to create a deeper, more digitally-enabled market in Egypt. Speaking at EFG Hermes’ annual conference in London last week, Farid touched on the different regulatory changes the authority has introduced over the past several years and the changes seen across the country’s IPO market, ins. sector, and the digitization push.

From EGX to FRA: Transitioning from the bourse to the FRA allowed Farid to bring an inside perspective on the regulatory priorities for the agency, including facilitating the process for companies to IPO on the bourse, he said. “We discovered that in Egypt, for companies to get fully ready to be able to trade their shares on the market through a complete IPO, they need lots of time,” Farid said. To facilitate that process and encourage the introduction of new paper on the EGX, the FRA introduced in September 2022 amendments to listing rules that allow companies to temporarily list on the EGX while seeking regulatory approvals from the FRA. The amendments also granted companies a longer window to meet listing requirements.

The FRA also recently introduced changes to the listing rules for special purpose acquisition vehicles (SPACs), Farid noted. The regulator had first greenlit a proposal to allow SPACs in Egypt back in 2021. In introducing SPACs to Egypt, the FRA looked at the model introduced in the US and modified it to fit the local market. “We took a slightly different approach whereby the traditional model of SPACs that’s in the US is allowed, but there’s also a complementary model that also exists in Saudi and the UAE that introduces an SME platform,” Farid said. This setup allows VC funds themselves to get listed.

The rationale: “If we allow companies to be listed with a minimum capital requirement of EGP 1 mn, and we’re allowing investors to take this risk, it doesn’t make any sense for us to not allow VC funds to be listed as well,” Farid said. The new model is “named SPACs for marketing purposes but it’s more about listing private equity and venture capital funds” and eventually create a path for limited partners (LPs) in startups to have a clear exit scenario, he said.

The Egyptian SPAC model takes heed of multinational institutions’ guidance that encourage the increased transparency that comes from listing a VC fund, Farid said, pointing to research from the European Bank of Reconstruction and Development, among others. “These institutions found that the performance of listed private equity and VC firms is by far superior to unlisted or ‘opaque’ peers,” Farid said.

This model is also designed to “enable different asset management firms with the aim of investing in startups and companies with newly developed ideas,” while still providing investors with a clear exit mechanism, Farid said.

Besides SPACs, the introduction of a voluntary carbon market with carbon credit trading was another major development in the Egyptian market. Egypt officially launched Africa’s first carbon market last month, which Farid stressed made Egypt “one of the very few [countries] that decided to put in place a full-fledged regulatory framework” for the market and to trade carbon credits. Egypt already had several different green and sustainability-linked debt instruments, including green bonds, brown bonds, and transition bonds, but “another sweetener that adds returns to those types of investments is to issue carbon credits,” Farid said.

Carbon credits: Commodities or financial instruments? The idea of launching a regional platform for carbon credit trading originated at COP27, which Egypt hosted in Sharm El Sheikh, Farid said. “But the difficulty was that we needed to decide how to treat carbon credits in a regulatory sense,” he said. The US’ model considers carbon credits as a commodity, whereas in the EU, they are considered to be financial instruments. “For the credits to be treated as a commodity, you need to not see significant deviations in the prices — but in reality, there were huge price differences.”

Not all carbon credits are born equal: “A carbon credit issued by a project that only put a filter on a factory chimney to reduce CO2 had one price, while another carbon credit that was issued for slashing CO2 in addition to addressing other SDG components — such as women’s empowerment, poverty alleviation, etc. — had a much higher price. Accordingly, given that you have this significant price deviation, we had to treat it as a financial instrument, not a commodity, and we had to create the regulations accordingly,” Farid explained.

“As it currently stands, we have 16 projects that are registered with the FRA with carbon credits eligible for trading,” Farid said. These projects — which are studied and verified and have the proper ISO certifications related to carbon credits — are primarily in the agriculture space, Farid noted. Out of the 16 projects currently listed, 15 of them are agricultural projects “where farms have invested in swapping out their diesel-powered machinery to run on solar panels” and introducing other sustainable practices, he said.

It’s not just Egyptian projects: The 16th project currently registered with the regulator is from India, Farid said, noting that the real idea behind launching Egypt’s carbon market “is to create a regional platform where Egypt, Morocco, Tunisia, Kenya, and other countries can register these projects and start seeing an aggregated trading platform for these players in the market.”

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