The Palestine Exchange, from a different angle

By: Omar Shaban .

The modern state strives to found markets, “exchanges”, for selling and buying securities and shares of their multiple kinds, with the goal of attracting external and internal investments, and specifically those of the small savers, in a way that contributes to stimulating the economy. The financial markets have become an indicator relied upon and taken into account by the makers of economic and financial policies. The financial markets perform a double role: as an instrument for investment and development in the event of their being regulated, and as a gateway to collapse in the opposite case — as happened during the financial crisis in East Asia in the year 1997, when the economies of many states, among them Thailand and Indonesia, collapsed overnight. Given this double role, the state resorts to regulating the capital market with a set of laws organising it, and intervenes in its work, especially in times of crisis, as happens in Egypt, particularly after the rise of the revolution.

The Palestine Exchange was founded as a private profit-seeking joint-stock company in the year 1995, to be the first Arab exchange wholly owned by the private sector. It took the city of Nablus as its headquarters and began its first sessions in February of the year 1997. By the end of the year 2012, the number of companies listed within its frame reached 48 companies with a market value approaching 2.86 billion American dollars. The ownership of the investment in the listed companies is distributed between 95% of Palestinian shareholders with a value of 59% of the shares, while 5% of the foreign shareholders own a proportion of 41% of the value of the listed shares. The companies listed on the market achieved profits in the year 2012 whose value reached 120 million dollars.

The capital-market company, a caesarean birth

The Palestine Exchange was founded after the passage of only one year from the organising of the first legislative elections in the Palestinian territories — that is, before the newborn council could possess the experience necessary for dealing with similar complex structures, whereas the class of businessmen and the monopolistic companies had already possessed wide experience before their coming to Palestine, with the establishment of the Palestinian Authority in the year 1994. The Palestine Exchange continued working by virtue of an operating agreement between it and the Palestinian National Authority, represented by the Ministry of Finance, for a period of eight years, until the year 2004, when the Palestinian Authority became alert to that unhealthy situation. It issued the securities law, which carried the number 12 for the year 2004, in addition to the law founding the Palestine Capital Market Authority as a supervisory and oversight body over the securities market, which carried the number 13 for the year 2004.

The Palestine Exchange company had created for itself a set of laws and regulations to order its work — such as the membership of companies, the systems of trading and listing shares, the disclosure process, and other organising regulations — before the formation of the capital-market authority, which is the body supposed to do that. The latter had no choice but to ratify those systems and regulations. This is a matter indicating that the large-companies sector preceded the political system and the legislative structures in founding part of the economic and investment structure in the Palestinian territories. This unlawful situation has reflected on many other cases and fields: some Palestinian businessmen in the diaspora, in partnership with their counterparts at home, hastened to found private joint-stock companies that obtained long-term monopolistic contracts from a newly formed political and legislative authority that had no experience — and that in many fields, among them the communications, electricity, and industrial-zones sectors and others, exploiting thereby the immaturity of the Palestinian political and legislative system.

The capital-market authority, a late birth

The Palestine Capital Market Authority was founded based on article number 2 of the capital-market authority law number 13 for the year 2004, which the president of the Palestinian Authority ratified on the first of December 2004, as a body enjoying juridical personality, financial and administrative independence, and legal capacity. The Capital Market Authority works on preparing the suitable climate for achieving the stability and growth of capital, as well as organising, developing, and overseeing the capital market and protecting the rights of investors. The Capital Market Authority is entrusted with supervising the securities market, the insurance companies, the financial-leasing companies, and the mortgage companies — although one of the capital-market authority's tasks provides for completing the legal and administrative environment organising the sectors of mortgage, financial leasing, and non-banking financial activity. But the legal status of the securities-market company has undergone no change. The law forming the capital-market authority provides that it be administered by a council composed of seven members, whereas the current board of directors is composed of six persons only, in contravention of the law. As for its first board of directors, it was formed in the year 2006 — that is, two years after its founding and ten years after the founding of the securities-market company.

The nature of the ownership and the administration

• The number of owners of the Palestine Exchange company is 19 shareholders with a paid-up capital whose value is ten million dollars. Among these shareholders is the Palestine Development and Investment Limited company, known by the name “PADICO Holding”, which holds 67.69% of the shares, and it is a foreign limited-liability holding joint-stock company registered in Liberia.

• The Palestine Exchange company is administered by a board of directors composed of seven persons, among them six persons representing the PADICO company itself in its capacity as the largest owner of the company — with the note that two of these six do not hold Palestinian nationality. Likewise some members of the board of directors hold administrative and executive posts in other large companies whose shares are listed for trading on the same market, a matter that points to a dangerous overlap between the two functions of the supervisor and the supervised, weakens the role of oversight, and strikes at the principle of equal opportunity before the listed companies.

• The PADICO company is one of the largest companies operating in Palestine, as it owns shares in most of the companies present on the Palestinian lands, which work in many fields such as the communications companies, the banks, electricity, the hotels, the industrial zones, and others. PADICO Holding and its subsidiary and allied companies likewise own about 74% of the capital of the Palestine Exchange company — especially as the shares of the PADICO company, the owner of the market itself, are listed by name for trading.

Questions awaiting an answer

Without diminishing the importance of the existence of a securities market in Palestine as an instrument for encouraging investment and as one of the manifestations of sovereignty and development in the economic structures necessary at the present time, there are many reforms required to be implemented to complete the legal situation. And the questions are raised:

• How can a private, foreign, profit-seeking company obtain a franchise to found a securities company and call it “the Palestine Exchange”, in a form indicating that it is a public company, whereas it has not given room for a public subscription despite its announcing its intention to do so several times?

• Why has the Palestinian National Authority not owned a share in it — a matter that would achieve for it a large income rescuing it from its financial crisis?

• What are the criteria on which the Palestine Exchange company was granted the franchise of operating the Palestinian capital market, without that taking place through a public tender giving an opportunity of participation to individuals and other companies? Moreover, what is the financial value the capital-market company paid to the Palestinian National Authority in return for obtaining the licence to operate the securities market? And what is the duration of the franchise granted to the company, and when is it renewed! And at what value? And is it a fixed or a variable value?

• What are the legal, financial, and economic justifications for granting a franchise of a monopolistic character in a strategic field to a private profit-making company over which the political or legislative authority has no oversight, and outside the frame of the oversight of the registrar of companies?

It remains that the securities market must be a public company with juridical personality that does not seek profit, as is the case in Egypt and Jordan for example, where the law in the two countries provides for that, with the possibility of licensing many securities companies specialised in a specific sector so that no competition occurs between them.

http://www.al-monitor.com/pulse/ar/contents/articles/opinion/2013/05/palestinian-stock-exchange.html