Reluctant shareholders stand to lose voting power
As Ethiopia’s maiden stock exchange nears fruition, regulators are preparing to leave behind an outdated paper-based securities documentation system in favor of a modern electronic depository.
Led by newly appointed director general Hana Tehelku, the Ethiopian Capital Market Authority (ECMA) has published a draft ‘Dematerialization of Private Securities’ directive in a bid to guide the transition. The legislation proposes to scrap paper-based documentation at the Federal Document Authentication and Registration Service and transfer the information to the Central Securities Depository (CSD), an institution dedicated to recording and verifying securities data electronically.
The directive also proposes the designation of ‘Central Securities Depository and Clearing Services Provider’ (CSDCSP) to entities licensed to provide clearing services in accordance with Article 54 of the capital markets proclamation.
If approved, all documentation pertaining to settled and pledged securities will be dematerialized and transferred to an electronic registry. The dematerialization will be mandatory for firms looking to be listed on the stock market, as well as those selected by the Authority.
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“It is necessary to transition from physical paper-based securities to an efficient, secure, and transparent electronic system that enhances market operations, promotes investor confidence, and improves the capital markets’ overall functioning. It is necessary to provide for a dematerialization regulatory framework to efficiently transition from a physical paper certificate system of holding securities to an electronic system of holding securities to facilitate electronic issuance and transfer of securities,” reads the directive’s preamble.
Dematerialized securities are legally recognized, valid, and enforceable financial instruments subject to identical legal rights and obligations as physical certificates. Their ownership, as well as data related to transfers and sales, will be evidenced by CSD electronic records.
The dematerialization process will require a stringent verification and registration process prior to transfer to electronic records using a computerized entry system.
The Authority is set to determine a deadline for the transition, after which paper certificates will cease to be valid for trading or settlement purposes. The directive proposes that securities still represented by physical certificates a decade following the deadline be transferred to a special account under the compensation fund managed by the Authority.
It also seeks to bar shareholders who fail to make the transition from holding voting power in their respective companies until they do so.
“A securities holder’s voting rights to such securities shall not count toward the calculation of the quorum and during general shareholder meetings and holders of these securities shall not be admitted to the general shareholder meetings,” reads the directive.
Securities holders will be required to open an account with the CSD through a clearing service provider, which they will then use to present their physical certificates or evidence of securities ownership for verification and digital registry.
All fully paid-up shares shall be dematerialized and credited into the CSD account, according to the draft.
The Authority will also hold the power to declare non-publicly offered securities as dematerialized securities upon request by an issuer of such securities, according to the directive.
The legislation proposes to levy fines of between 500,000 and one million birr on shareholders, issuers, and clearing service providers who fail to comply with its terms.
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