Ethiopia releases stock exchange rules to woo investors

The Ethiopian Capital Markets Authority (ECMA) has released its first regulatory guidelines for the Ethiopian Securities Exchange (ESX) in a bid to attract investor confidence in the new market, which is due to be launched imminently.

The Ethiopian government has been working to launch a securities exchange for the past four years as part of its broader programme of economic reform and liberalisation, which has also involved the Ethiopian birr (ETB) being freely floated for the first time and strategic sectors such as banking and telecommunications being exposed to competition.

The launch of the exchange will also see several major state-owned enterprises being listed, such as Ethio Telecom, the Ethiopian Insurance Corporation, and the Ethiopian Shipping and Logistics Services Enterprise (ESLSE). The government hopes that by ending the decades-long domination of nationalised entities in the economy, it can boost Ethiopia’s competitiveness and attract foreign direct investment.

Local media in Ethiopia reports that ESX expects more than 90 businesses to list on the exchange in its opening weeks. The exchange has already raised around 1.6bn birr ($13m) in capital.

Now, ECMA has announced transparency and disclosure requirements in a bid to shore up this interest and reassure potential investors, domestic and foreign, that their capital is safe on the exchange.

New rules aim to boost confidence

Announcing the measures at an event in Addis Ababa last week, Hana Tehelku, director-general of ECMA, said the directive “is foundational in creating a well-regulated capital market system. The guidelines establish a series of measures designed to promote transparency, standardise processes, and protect investor interests, all while aligning with Ethiopia’s broader economic goals.”

ECMA’s directive includes measures to enhance transparency, such as mandatory disclosure standards compelling listed firms to provide annual audited statements and to maintain regular communication with shareholders. ECMA is also seeking to protect shareholders by introducing a clause on “pre-emptive rights,” under which existing shareholders are given priority when additional shares become available, allowing them the opportunity to avoid having their stake diluted.

Regulations will also be introduced requiring companies to demonstrate they have high levels of capital in reserve, a measure designed to avoid companies defaulting and shareholders losing their investments. ECMA will serve as an independent regulator responsible for enforcing these standards.

While regulations like this are standard practice on many stock exchanges, some African stock exchanges have struggled to convince investors that their capital is safe owing to a lack of transparency and weak disclosure standards.

Indeed, a 2022 report from the African Development Bank (AfDB) noted that “an international investor may be prepared to sacrifice a fundamentally good investment if the investor has little confidence in the disclosure standards of the market.”