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Acc & Fin. Section B, Group 3
Acc & Fin. Section B, Group 3
Acc & Fin. Section B, Group 3
Credit Hours -4
General Directions
Instruction:
Each group of students should prepare a concise note on the above topics.
The note include introduction, body and conclusion parts.
The note should cover all important concepts and topics related to the assigned area.
Each group should consist of five students only (Not more or less than 5)
Each member of the group is assigned a specific topic and is responsible for presenting it
accordingly.
The written paper will be graded out of 5 marks, and the presentation will be graded out of
10 marks.
5. The assignment is given on February 9, 2024, and the submission date is February 19,
2024.
Cognizant of the role of capital markets, the NBE issued the Capital Markets
Proclamation No. 1248/2021 in 2021 and established the CMPIT to steer the
operationalization of the Proclamation. A well-developed capital market could
help to provide a more reliable supply of long-term funding to the private
sector. The Government's effort in this respect, could strengthen the
economy’s resilience to shocks, mitigate the risk posed by an overreliance on
the bank-dominated financial sector, and impose the allocation of resources.
The Capital Market Authority would supervise related activities of the market.
The Authority would set the minimum admission criteria and conditions for
enlisting in the exchange such as preparing the prospectus upon enlisting.
Similarly, the issues of liquidity and transparency are very important to take
note of and establish as the market Roadmap is implemented. According to
Ms Martha Ibrahim, one of the presenters, capital markets are based on trust.
UNDP is supporting the development of the capital market. This included the
provision of technical advisory support, facilitating experience exchange
visits to Kenya and Turkey, setting up the CMPIT office, developing the
regulatory frameworks and directives and eventually setting up and
operationalizing the Capital Market Authority.
UNDP continues its partnership with the National Bank of Ethiopia to promote
access to innovative and inclusive finance through establishing an innovative
finance lab that would test, pilot, and scale up innovative financial
instruments. Various innovative financial instruments are developed to
ensure the inclusion of MSMEs and other key players in the capital market
ecosystem.
3.Explain the main parts of the capital market
proclamation of Ethiopia No. 1248, 2021
The actions are being taken by the government to operationalize the Ethiopian Capital Market
Authority and such actions manifest themselves in the fact that the Government has setup a project
team which has been working to draft proper directives for approval by the Board of Directors of the
Capital Market Authority to supply detailed guidance and requirements to enable the effective
implementation of the Capital Market Proclamation (cited as the proclamation hereafter).
Under the proclamation, “capital market” is defined as a market where securities are bought, sold,
issued, publically offered, deposited, taken custody of, cleared, settled, lent, pledged, or transacted in
any other form which the capital market authority considers dealing in securities (see article 2(5) and
(18) of the proclamation).
In simple terms, it is a market place where equity interests are exchanged either at par value,
premium value or for less than the par value – also called discount stock. Thus stock market allows
stockholders (shareholders) to transfer to another investor when they want to sell their stocks. It
should be noted that stocks could be sold and bought in primary capital market. In primary markets,
new business can start by obtaining funds directly from households in which new stocks are sold to
investors via the mechanism of underwriting. The selling of capital to the public through Initial
Public Offering in the primary market is an instance whereby widely held share companies under
formation offer new shares to the investors (article 2(49)).
On the other hand, it is vital not to lose sight of the fact that secondary markets play an important role
in the regulation of initial public offering of shares through the listing standards, subject to the
discretion of stock exchanges. Secondary markets are markets where investors buy previously issued
securities from other investors as opposed to the primary market, where investors buy new securities
directly from the issuer or an intermediary (article 2(61)). In the secondary market, existing stocks
are sold and bought among investors or traders in the stock market through stock exchange.
Furthermore, secondary market could be either auction market or dealer market or as some would
call it exchange based market. While the stock market is part of an auction market, over-the counter
(OTC) is part of the dealer market. The difference between stock market and OTC is that the former
exchange market operates in a structured manner and physical facility with a trading floor to which
all stock transactions are supposed to be directed. However, OTC market traditionally operates in
unstructured manner without any physical facility in which any qualified firm freely engages in the
transactions of stocks.
At this juncture, it is also vital to differentiate bond and stock. Bond is a security instrument which is
used either by the government or any other corporation to raise funds in the bond market. Unlike
stock which as indicated before is an equity instrument, bond is a debt security evidencing that a
promise has been made by a government such as Treasury Bills (T-Bills) or by corporation such as
debenture to pay a specified amount of money in recognition of a loan to the business. Like stock, a
bond is another way of obtaining funds but this time “representing funds borrowed by the corporation
or the government from the holder of the debt obligation”. It should be noted that both stock markets
and bond markets are categories of capital market. Like stock market, bond market helps bond
holders to transfer their bond to third party when they want to sell it in the secondary market or use it
as collateral to get loan from banks.
In a nutshell, a stock market is an open market place which provides facilities for stock brokers,
investors and corporations to trade in stocks. Stock markets generally provide the means by which
companies raise capital to start new business or expand the existing business by offering new stocks
to the public. It also provides a trading facility for investors to sell their share
ownership in corporations. Unlike the bond market, stock market provides an opportunity for
companies to finance their business through equity investment.
d) Compensation Fund
Compensation fund is established by the Proclamation for the purpose of granting compensation to
investors who suffer pecuniary loss resulting from the failure of a capital market service provider or
securities exchange to meet his contractual obligations and paying beneficiaries from collected
unclaimed dividends when they resurface (article 103).
e) Capital Market Tribunal
The Capital Market Tribunal is established by this Proclamation to hear appeals against decisions of
ECMA (articles 64-73). The Tribunal has the jurisdiction to hear and determine Appeals over the
decisions of the authority or persons exercising the functions and powers of the authority. A party
who is dissatisfied by the decisions of the authority may within 28 (Twenty Eight) days after being
served with notice of the decision, file an appeal to the Tribunal. A party to a proceeding before the
Tribunal who is dissatisfied with decision of Tribunal may within 30 (Thirty) days after being served
with the notice of the decision, file a notice of appeal, on questions of law only, to the Federal High
Court.
f) Settlement of Disputes
Without prejudice to the Tribunal’s appellate jurisdiction over matters arising from the decisions of
the authority or other persons exercising the powers and functions of the authority and the federal
high court’s power to review the Tribunal’s decisions on questions of law, disputes among parties
involved in the capital market concerning any civil matter arising under the Proclamation shall be
resolved by mediation first and then by arbitration. The decision of the arbitration panel shall be final
and binding on the parties.
Capital formation or real investment is an essential ingredient for economic development and growth.
It is also widely believed that capital markets have the potential to be powerful engines of economic
growth in developing nations such as Ethiopia. Efficient capital market provides the public with
investment opportunities and mobilizes savings, as well as international capital, for productive
corporate financing.
One aspect of the Ethiopian Government’s recent reform measure aims to correct imbalances and
bring about macro-financial stability in the country, inter alia. With this in mind, the reform program
provides improvements to access to finance and the development of a capital market, where
securities such as shares, bonds and derivatives are bought and sold. As a result, the Capital Market
Proclamation No. 1248/2021 was adopted with the goal of establishing a capital market to support
the development of the national economy through mobilizing capital, promoting financial innovation,
and sharing investment risks.
Consequently, actions are being taken by the government to operationalize the Ethiopian Capital
Market Authority and such actions manifest themselves in the fact that the Government has setup a
project team which has been working to draft proper directives for approval by the Board of
Directors of the Capital Market Authority to supply detailed guidance and requirements to enable the
effective implementation of the Capital Market Proclamation (cited as the proclamation hereafter).
4. CONCLUTION
GENERALLY, Ethiopia has taken a significant step towards economic
growth and development with the enactment of a proclamation to
establish a capital markets system. This landmark legislation, voted
into law in 2021 by the Ethiopian House of People’s Representatives,
paves the way for transparent and inclusive financial markets. The
proclamation emphasizes transparency, accountability, and investor
protection, fostering a conducive environment for businesses and
individuals to access capital and contribute to Ethiopia’s economic
progress.