The Central Bank of Egypt (the “CBE”) has recently issued a circular dated 14 May 2023 (the “Circular”) by virtue of which it has updated the regulations governing the licensing, operations, and regulatory supervision of foreign exchange companies (“FX Companies”) in the Arab Republic of Egypt (the “ARE”). The Circular is issued as part of the CBE’s mandate of enhancing the efficiency, performance and security of the Egyptian financial sector and its key players.
The Circular addresses FX Companies and sets out a detailed regulatory framework governing the setting up, licensing, operations and governance of FX Companies operating in the ARE.
The Circular provides that persons wishing to incorporate an FX Company must obtain preliminary approval from the CBE prior to receiving the final license. The preliminary approval may only be granted by the CBE if certain conditions are satisfied, including but not limited to, that the concerned entity (i) is an Egyptian joint stock company; (ii) has an issued and paid capital of no less than EGP 25 million; and (iii) has the sole purpose of undertaking foreign exchange activity.
Once the relevant entity has obtained the CBE’s preliminary approval and has undertaken the incorporation procedures, it must apply for the final license from the CBE. Such final license request must be accompanied by, inter alia, the following documents: (i) a certificate of deposit demonstrating that EGP 25 million has been deposited in the capital account of the company; and (ii) a copy of the contract concluded with a bank for the purpose of publishing the relevant currency prices. Furthermore, licensed FX Companies are required to apply for registration in the relevant registry maintained by the CBE to commence operations. It should be noted that FX Companies are required to notify the CBE of any amendments introduced to any documents submitted to the CBE during the incorporation, licensing and/or registration procedures.
The Circular sets out various instances where the CBE may revoke a license granted to an FX Company. Such instances include, inter alia, (i) cessation of activities without having obtained the CBE’s prior approval, (ii) failure to fulfil obligations or declare bankruptcy, and (iii) failure to abide by the terms of the license or the regulations set out in the Circular.
The Circular outlines the rules and regulations which govern the (i) merger of an FX Company with another company; and (ii) acquisition of the capital of FX Companies.
Mergers
The Circular clarifies that it is permissible for FX Companies to merge into another company, or to merge with another company to create a new company, provided that the prior approval of the CBE is obtained. Accordingly, the relevant FX Company must submit a preliminary approval request to the CBE. The CBE’s approval shall be based on a study by the CBE of the impact of such a transaction on the competition levels in the foreign exchange industry. Once the CBE issues the preliminary approval, the CBE reserves the right to stipulate any further requirements/procedures that the FX Company and the company it intends to merge with must comply with.
After the aforementioned preliminary approval is obtained, the FX Company must submit a request for final approval to the CBE, which must be accompanied by, inter alia, (i) a report from a financial valuation office; and (ii) a copy of the merger contract.
Acquisitions
The Circular provides that the acquisition (by natural or juristic persons) of the capital of FX Companies requires the CBE’s prior approval. Accordingly, FX Companies wishing to amend their shareholding structure must provide the CBE with a request, accompanied by the required documentation, to that effect.
Furthermore, the Circular further details additional documents that must accompany the aforementioned request depending on whether the purchaser of the shares is a natural person or a juristic person. In the case of a natural person, a document detailing the companies in which such natural person holds ownership (whether directly or indirectly) must be submitted to the CBE, amongst other things. As for the case of a juristic person, a document demonstrating their existing credit facilities must be submitted to the CBE, amongst other things.
It is worth noting that in the event of an acquisition transaction that would lead to a change in the effective control of the FX Company, the CBE must study the impact of such an acquisition on the competition levels in the foreign exchange industry.
The Circular clarifies the activities an FX Company may pursue and those that such companies are prohibited from pursuing. Permissible activities include, amongst other things, (i) the sale and purchase of foreign currencies; and (ii) concluding cash transactions in the main premises of the FX Company. By contrast, prohibited activities include, inter alia, (i) pursuing any activity other than the foreign exchange activity; and (ii) lending, borrowing, or pledging any of its assets, as the financing of the FX Company must only be limited to its resources.
The Circular further regulates the pricing mechanisms used by FX Companies. According to the Circular, the FX Company may not set the sale and purchase price of foreign currencies by itself, rather, it is obliged to contract with a bank for the purpose of publishing the bank’s foreign currency prices and ultimately use such prices in the transactions concluded with its clients.
The Circular sets out the requirements that must be met when appointing the chairman of the FX Company or any of its board members. Such requirements include, amongst other things, (i) adequate experience and qualifications; and (ii) reputability and trustworthiness. Furthermore, the Circular also clarifies that the FX Company must obtain the CBE’s approval prior to appointing any board members.
As for the composition of the FX Company’s board of directors, the Circular mandates that it comprises an appropriate number of executive and non-executive members. The Circular further requires the complete separation of the responsibilities and roles of an FX Company’s chairman and managing director.
Importantly, the Circular stipulates the responsibilities of the board of directors of the FX Company, and such responsibilities include, but are not limited to, (i) approving the primary goals and directions of the FX Company; and (ii) the appointment of the upper-level management.
By virtue of the Circular, FX Companies are also tasked with establishing an internal audit and risk committee to assume, for example, the responsibility of ensuring that the FX Company complies with its internal rules and regulations.
As outlined in the Circular, FX Companies are obliged to cooperate with the CBE and its officers entirely and, accordingly, are required to, amongst other things, (i) provide the relevant data and documentation that outline the FX Company’s reserves of both foreign currencies as well as EGP; and (ii) provide the CBE, monthly, with the details of the transactions it has concluded.
It is also worth noting that the Circular clarifies the procedures the CBE may take in the event of non-compliance by an FX Company. Such procedures are (i) issuance of warnings; (ii) temporary cessation of activity for no more than a year; (iii) application of a financial penalty which must be proportionate to the non-compliance event; and (iv) the termination of the license.
