The art of driving investors away

05-04-2013 03:19 PM

Fady Labib

“During the years of the pre-2011 Revolution regime of Hosni Mubarak, reputable companies and financial and banking institutions set up shop in Egypt, ” Economic and capital market expert Mustafa Badra told Watani. “Today, it is unfortunate that many of them are being sold off to foreign investors. Local investors, many of whom might have profited from the deals, are not buying.”
The most recent of these deals, and one which has been riddled with problems because of the confusion of laws regulating its taxation, is the takeover of the National Société Générale Bank (NSGB) by the Qatar National Bank (QNB). The French Société Générale Bank owned 77.17 per cent of the shares of the Egyptian NSGB, Egypt’s second largest publicly traded bank, and  Egyptian and Arab private investors held the remaining 23 per cent.

Deal goes through
Qatar National Bank QNB announced that it had acquired a controlling 97.12 per cent stake of NSGB. The acquisition included the 77.17 per cent of the shares held by its parent company Société Générale in addition to 19.95 per cent of individual investors and investor funds.
QNB had made a bid to buy 443,535,902 shares, representing 100 per cent of the shares, at a share price of EGP38.65 and a total value of EGP17.142 billion. The deal was finalised, according to a statement by the Egyptian Stock Exchange, for 430,782,421 of NSGB’s shares at a share price of EGP38.65 and a total value of EGP16.6 billion. The remaining 2.88 per cent of NSGB’s shares is still owned by private shareholders who have not yet decided to sell them.
After the deal was completed, the Egyptian Tax Authority (ETA) suddenly announced it would levy a 10 per cent capital gains tax on the transaction. The investors who hold the 23 per cent of NSGB’s shares were given a one-day notice to rethink their selling decision as they will now be required to pay a 10 per cent tax on their capital gains.

No double taxation
Dr Badra explains that capital gain taxes are not usually levied on the stock market. ETA claims that this decision came in accordance with a law that was issued by President Mursi in December 2012, which also included major tax increases on 100 strategic commodities. This law was “frozen” a few hours after it was issued, due to wide public disapproval. But freezing a law does not annul it; this can only be through a new law. In this case, according to Dr Badra, the partial activation of a frozen law created much confusion, and resulted in plummeting confidence in the Egyptian financial market.  
Not all investors, however, are required to pay the tax, economic expert Hany Tawfiq says. Société Générale, a French company paying taxes in its homeland, is exempted because of a tax agreement between Egypt and France to avoid double taxation. Consequently, the 10 per cent tax will only be imposed on the 23 per cent of the shareholders who sold to QNB. It will be levied on the profits made as the result of the difference between the buying and selling prices of shares. As prices of shares fluctuate over time, the tax will vary according to the date and price at which the shares were bought.

Applying the law retroactively
Mr Tawfiq explains that in accordance with the laws issued prior to December 2012, the acquisition of a company listed on a stock exchange to another listed company was tax exempt. This was the case with the Lafarge acquisition of Orascom Building Materials Holding (OBMH) in 2007. Now the State requires that taxes be levied on this transaction retroactively, which deeply disgruntles investors who had made their decisions based on a totally different set of laws and regulations that were then in place.
Société Générale is a major European multinational group headquartered in France offering banking, financial and investment services. The group had decided to sell some of its international subsidiaries as a result of the increasing European financial crisis.
Qatar National Bank is a leading financial institution in the Middle East. Established in 1964, it is 50 per cent owned by Qatar Investment Authority and 50 per cent by private investors. It has become Qatar’s leading banking institution after its acquisition of 45 per cent of local banks.

WATANI International
7 April 2013

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