Though Ethiopia is the first African country to make modern laws, including the stipulation of establishment of business organizations back in 1960, the concept of holding company has not been accepted by law for the last half a century.
However, with the emergence of new business operation practices and dynamics as well as the rapid growth and expansions witnessed in the sector, a new Commercial Registration and Business Licensing Proclamation, No. 980/2016, came into effect in August 2016.
The new proclamation, considering realistic circumstances in the Ethiopian business environment, has now recognized the formulation of Holding Companies in the country.
Presumably, the recognition of Holding Companies by the new proclamation is right and timely because several ‘holding company equivalent’ business firms are practical flourishing. Sister and affiliate companies such as MIDROC Ethiopia Plc, are the first to be mentioned.
I think others like East African Holdings, DH Geda Group, Kadisco Group, and Sunshine could also fall in the prospective list of holding companies.
A holding company is defined under the New Proclamation as a company incorporating two or more limited liability companies, that are issued with a special registration certificate and managed by the holder and has to do with owning stocks/shares. The holding companies and their subsidiaries can establish pyramids.
But the question is – Are we ready for the change?
Essentially, this critical question is for both the business community and the pertinent executive bodies of the government operating at various levels.
I believe we all should be prepared for the inevitably change that is coming in the near future. Appraisals and assessments of the experiences people have while doing business are clear reflections of the challenges and drawbacks.
Although, the country has successfully formulated and adopted good laws, it has failed in smoothly implementing them and knowing them to the fullest extent.
I presume both sides should take the blame for the bad experience and cumbersome bureaucratic procedures people have to deal with.
The executives should understand that their salary comes from taxes paid by the business community, and giving a quality service to the business men simply means discharging their responsibilities of building their country and contributing to development.
The business community, on the other hand, needs to be informed about the business environment including new law enactments and regulations rather than simply selling goods and services and acting accordingly.
Therefore, with the endorsement of the new Commercial Registration and Business Licensing Proclamation tough tasks are ahead.
However, it is true, when doing something new or doing things differently we are not expected to be perfect.
But, we should be able to learn from past experiences and we need to be able to study the situation and assess it well, as well as make adequate preparations for change.
On the company level, preparations like setting for structural adjustments, designing corporate governance policies for the holding and subsidiary companies, assigning/recruiting prospective managers and experts, developing various manuals and training module and the like could be the simple and foreseeable undertakings.
The other big and tough tasks also include negotiations with partners and shareholders who have stakes in the business entities. Of course, a major shareholder (holding more than 51 stocks) is entitled to form a holding company by law.
However, as people (even from the same family) are not expected to have similar interests when negotiating with business partners/shareholders and reaching a consensus would not be a simple task.
Company owners should also get ready for other tasks like assess the business needs of the company, determine a strategy for the overall business structures and make funding decisions. Doing asset valuation and preparing accounting records for the expected transactions to realize holding companies should also be considered.
The other thing prospective holding companies need to think about is other related business and financial legal developments. Such as the recent proclamation on International Financial Reporting Standards (IFRS) which requires businesses to file comprehensive and consolidated reporting on all businesses, stocks and shares. IFRS is also expected to facilitate consolidation of financial reporting of all subsidiaries of a holding company.
As part of the Financial Reporting Proclamation enacted on December 5, 2014, the Accounting and Auditing Board of Ethiopia (AABE) was established as a regulatory body for financial reporting in the country. It was aimed at the creation of centralized and acceptable financial reporting, to reduce the risk of financial crisis and to comply with international reporting standards.
AABE requires all financial institutions and public enterprises to implement IFRS commencing July 1, 2017. They are expected to make adequate preparations during the period covering May 2016 through June 2017 and then other public interest institutions are to follow.
The advantages of holding companies are vast. They include – having control over subsidiary companies, producing a consolidated reporting, holding property and using it, minimizing risks, having large capital, avoiding competition between holding and subsidiaries, and maintaining secrecy.
If prospective holding companies and government executives are ready to confront these technical and bureaucratic procedures, the formation of holding company would surely have multiple advantages for both the businesses and the state.
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