LEGISLATION WATCH– State-owned companies face economic viability tests — and could get a special break on capital gains. Proposed changes to the Public Enterprises Act would put in place new regulations to “promote financial stability” in state-owned enterprises (SOE) and introduce new limits on board compensation, Public Enterprises Minister Hisham Tawfik said yesterday. A separate piece of legislation would give them tax new tax breaks.

The amendments would require SOEs to provide evidence that their subsidiaries are economically viable, Tawfik said. Boards will be required to call for a capital increase once any subsidiary’s losses exceed its shareholders’ equity. If the company is unable to increase its capital, it will be forced into liquidation or be merged with another public entity, he added.

Cap on board compensation: Annual bonuses would be capped at 5% of distributable annual profit for board members of holding companies and 10% for people sitting on the boards of subsidiaries, while employees will be entitled to a 10-12% share of the profits, Tawfik said. Boards will also be required to have between five to nine members and select at least one member to represent the company’s employees.

Background: The long-awaited amendments gained cabinet approval in February and received a preliminary nod from the House Economic Committee earlier this week. A pillar of the legislation, revealed by Tawfik more than a year ago, would reclassify listed companies in which the government holds up to a 75% stake and bring them within the scope of the Companies Act, granting general assemblies more power to oversee and remove boards. The bill will not go to the House general assembly until it gets committee-level approval.

A special tax break only for state-owned companies? State-owned companies could see capital gains tax they pay on the sale of land to banks as part of debt settlements become tax deductible. The measure is part of a series of amendments to the Income Tax Act that received a final committee nod yesterday, El Watan reports. Businesses in which the state holds a stake of 51% or more could get a break under the measure if it passes in the general assembly.

Background: Public Enterprises Minister Hisham Tawfik told us last summer that his ministry is planning to let go of 20 mn sqm of land held by its companies to pay off EGP 38 bn-worth of debt. At the time, several state-owned companies were in talks with investment bankers to advise them on how to divest unused land.

Tawfik’s turnaround strategy seems to be getting traction in the House: When he was sworn in as minister in 2018, Tawfik unveiled a rescue plan for loss-making state firms which at the time had racked up some EGP 7.5 bn in net losses. The plan saw the ministry undertake feasibility studies to determine each company’s financial viability to shut down those found incapable of making a turnaround.