The Ethiopian Stock Market

Ethiopia is one of the largest and fastest-growing economies in sub-Saharan Africa, and the second-most populous country on the continent. However, it does not have a stock exchange yet, unlike most of its peers. The creation of the ESX is seen as a historic and transformative step for the Ethiopian financial industry and the economy as a whole.

The Ethiopian Stock Market (ESM) is a planned securities exchange in Ethiopia that aims to provide a platform for businesses and investors to engage in securities trading. The ESM is expected to launch in 2024-25 with at least 50 listed companies, mainly small and medium-sized enterprises. The ESM is part of the Ethiopian government’s initiative to diversify the financial sector and attract more investment opportunities to the country. The ESM will be regulated by the Ethiopian Capital Market Authority (ECMA) and will enable trading of various financial instruments.

The ESX will be established through a public-private partnership between the Ministry of Finance, the Ethiopian Investment Holdings (EIH), and the Financial Sector Deepening Africa (FSD Africa). The EIH is a sovereign and dedicated wealth fund that was created in May 2022 to attract more international investments and support the economic privatization program.

The ESX aims to list 50 companies in its initial phase, and has the potential to attract fresh capital into the country over the next decade. The ESX will also be linked with other African capital markets through the African Linkage Project (AELP), which will facilitate investment flows and create value for shareholders.

The Requirements for a Company to be Listed on the Ethiopian Stock Market

The requirements for a company to be listed on the Ethiopian Stock Market (ESM) depend on the segment of the market. There are two segments: the main board and the SME (small and medium enterprises) board. The main board is for larger and more established companies, while the SME board is for smaller and more innovative companies.

According to the National Stock Exchange of India (NSE), which is collaborating with the Ethiopian government to set up the ESM, the eligibility criteria for the SME board are as follows:

• The company should have a post-issue paid up capital of at least 10 million birr (about 230,000 USD) and not more than 200 million birr (about 4.6 million USD).
• The company should have a positive net worth and a positive cash accrual for at least two out of the last three years.
• The company should have a track record of distributable profits for at least two out of the last three years.
• The company should have a minimum of 50 shareholders at the time of listing.
• The company should have a website and facilitate trading in demat securities.
• The company should not have any change in the promoters in the preceding one year from the date of filing the application to the ESM.
• The eligibility criteria for the main board are not yet announced, but they are expected to be more stringent than the SME board. The main board will also require a higher level of disclosure and compliance from the listed companies.

The ESM will also implement enhanced surveillance measures (ESM) on micro-small companies (on the main board with market capitalization less than 500 million birr or about 11.5 million USD) by objective parameters which are price variation and standard deviation. These measures are intended to protect the market integrity and investor interests by preventing market manipulation and fraudulent activities. The ESM framework will have two stages, with different levels of restrictions and monitoring on the securities. The list of securities under the ESM framework will be updated periodically and informed to the market participants.

The process for a company to be listed on the Ethiopian Stock Market (ESM)

The process for a company to be listed on the Ethiopian Stock Market (ESM) depends on the segment of the market and the type of securities. For the SME board, which is for smaller and more innovative companies, the process is as follows:

• The company should appoint a merchant banker as a lead manager and a market maker for the issue and listing.
• The company should prepare a draft red herring prospectus (DRHP) or a draft prospectus (DP) with the help of the merchant banker and file it with the exchange and SEBI for approval.
• The company should also obtain a credit rating from a SEBI-registered rating agency and disclose it in the DRHP/DP.
• The company should conduct a roadshow to market the issue to potential investors and collect feedback on the pricing and demand of the securities.
• The company should finalize the issue price and size based on the feedback and market conditions and file the final prospectus with the exchange and SEBI.
• The company should open the issue for subscription and allot the securities to the successful applicants.
• The company should list the securities on the SME board of the exchange and commence trading.

For the main board, which is for larger and more established companies, the process is similar to the SME board, except that the company does not need to appoint a market maker and can choose between a book building or a fixed price method for the issue. The main board also has higher disclosure and compliance requirements than the SME board. The eligibility criteria for the main board are not yet announced, but they are expected to be more stringent than the SME board.

The Role of Merchant Banker in Ethiopian Stock Market (ESM)

A merchant banker is a financial intermediary that helps companies to raise funds and access the Ethiopian Stock Market (ESM). A merchant banker performs various roles and responsibilities, such as:

• Preparing and filing the prospectus or placement memorandum for the issue and listing of securities
• Obtaining a credit rating and conducting a roadshow for the issue
• Underwriting and marketing the issue to potential investors
• Advising the company on the pricing and size of the issue
• Allotting the securities to the successful applicants and listing them on the ESM
• Providing corporate advisory services related to securities market, such as takeovers, acquisitions, and disinvestment
• Ensuring compliance with the regulatory framework and the code of conduct of SEBI and ECMA

A merchant banker also acts as a market maker for the SME board, which means that it provides liquidity and stability to the market by buying and selling the securities of the listed companies. A merchant banker has to abide by the high standards of integrity, diligence, and fairness in the conduct of its business and protect the interests of the investors.