<h1 style="text-align:center;">With 2020 Behind, Onwards to 2021</h1><a href="https://www.renewcapital.com/resources/blogs/2020%20in%20Review">2020</a> was a roller coaster year for many around the world, especially here in East Africa, but in the end, we all weathered the storm and now we're charging ahead with ambitious plans for 2021.Many of you have been following us for years, and in some ways, you have helped us build RENEW from a two-person team working from our apartment in Addis, into one of the most active investment firms in East Africa. Even though it hasn't been the smoothest ride - and we still have some uphill battles to go - we are dead-set on building what we believe will become one of the largest, and most successful investment firms on the continent of Africa. Everyone at RENEW embraces the mission to change the way the world sees Africa. And we know we can only do this by serving you, our stakeholders, and building success stories. We have not done that consistently, but we will never give up.During the last weeks of December and into January we worked on our RENEW Annual Management Plan for 2021. At the start of the second day, we read our 5-year strategic plan to ensure the goals we set for the year are aligned. Our plans for 2021 build on our successes and lessons learned in 2020.&nbsp;<figure class="image"><img src="/uploads/sunrise_0_d045492687.jpg"></figure>&nbsp;We wanted to share our high-level goals for 2021 with you:<ul><li>Summary of Our Corporate Goals - We aim to continue to strengthen our internal systems and strengthen our marketing and sales division.</li><li>Summary of our Development Goals - We aim to secure projects that will help improve the ecosystems, create jobs and empower women across East Africa. We also aim to continue our policy and ecosystem work in Ethiopia with an emphasis on building gender equality across management teams and in multiple segments of the private sector.</li><li>Summary of our Investment Goals - We aim to close more than 5 investments, strengthen our asset management function and exit investments. We also plan to enhance our Impact Angel Network experience and continue to grow the network.</li></ul>Of course, there are measurable targets under each one of these broad objectives for the year, and each division at RENEW develops its quarterly objectives and key results aligned to these annual goals. Then we execute!Here's to a healthy, successful, fresh and peaceful 2021. Here's to you, our stakeholders, who believe in our vision of growing businesses, building nations and leaving a legacy. Onwards!

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With 2020 Behind, Onwards to 2021

<h1 style="text-align:center;">The Ins and Outs of Investing Through an IRA</h1>Did you know accredited, entrepreneurial-minded investors from the United States can invest in companies with RENEW from an Individual Retirement Account (IRA)? An IRA is a tax-advantaged investing tool that sets aside funds for retirement savings. A special type of IRA, known as a self-directed IRA, allows you to invest in different asset classes, beyond the typical investments that IRAs can usually hold. Self-directed investments can include alternative asset classes, such as investments with RENEW and the Impact Angel Network (IAN). In order to invest with RENEW through your IRA, you’ll need to work with a custodian that can accommodate self-directed investments into alternative asset classes.For members of the IAN who wish to invest in companies through their IRA, RENEW can work with any custodian that is set up to facilitate self-directed investments into alternative asset classes. If you already have a custodian who allows this, we can work with them.Want to learn more? Here are some more resources:<ul><li><a href="https://www.investopedia.com/terms/i/ira.asp">A Guide to Impact Investing using an Individual Retirement Account (IRA)</a></li><li><a href="https://www.investopedia.com/ask/answers/102714/what-are-differences-between-selfdirected-ira-and-traditional-ira.asp">Self-Directed IRA vs. Traditional IRA: What Are the Differences?</a> (Investopedia)</li></ul>Contact us at <a href="mailto:renew@renewcapital.com">renew@renewcapital.com</a> if you have questions. And if you aren’t already a member, we invite you to apply to join the <a href="https://renewstrategies.formstack.com/forms/renew_investor_accreditation_form">Impact Angel Network</a>.<figure class="image"><img src="/uploads/sdg_b1dd846a75_d2d6e641da.png"></figure>

How Investments Work with an Individual Retirement Account

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The Ins and Outs of Investing Through an IRA

<h1 style="text-align:center;">The Commercial Code of Ethiopia is Changing How the Country Does Business</h1>When investors think about Ethiopia, they often see the country as a difficult one to do business in. According to the World Bank, Ethiopia ranks 159 out of 190 in their <a href="https://www.doingbusiness.org/en/rankings">Ease of Doing Business</a> ranking. While several reasons contribute to this ranking and the challenging business environment, the country has been working to rectify this and has been progressing their laws and programs to entice more people to invest in the country. One of the major changes that happened in 2019 was the adoption of the <a href="https://www.renewcapital.com/resources/blogs/The%20Ethiopian%20Business%20Environment%20in%20Light%20of%20the%20Homegrown%20Economic%20Reform%20Program">Homegrown Economic Reform Program</a>, which aimed to transition the country’s economy and improve the country’s ranking. Since 2019, the country has been working to update outdated codes, including the most recently adopted <a href="https://www.wipo.int/edocs/lexdocs/laws/en/et/et014en.pdf">Commercial Code of Ethiopia, Proclamation No. 1243/2020</a> (the “New Code”). This repealed the Commercial Code of the Empire of Ethiopia Proclamation No. 166/1960 (the “Repealed Code”), which served the country for more than six decades.The enactment of the New Code, which happened in March 2021, has been in the works for years, even before the 2019 reform program enactment. However, with the reform program, the Ministry of Trade and Industry was given the mandate to drive the enactment process forward. As such, the Ministry submitted a draft to the Council of Ministers last year. The Council of Ministers endorsed the draft code back in June 2020 following which Parliament approved the enactment with a unanimous vote in March 2021.<figure class="image"><img src="/uploads/ethiopiapic_0_fe034a7838_feb3e07c4b.jpg"></figure>Many factors necessitated the need for a revision to the Repealed Code, which all came down to its incompatibility with the current state of doing business. Many things have changed during the past six decades which made the Repealed Code outdated and inadequate to regulate current trade developments. The New Code is expected to accommodate the current state of how businesses operate and is expected to serve the country for the next 30 years.Keep reading to find out more about the changes you can expect to see within the New Code:1. Definition of a TraderThe Repealed Code defined a trader as a person engaged in specific activities, listed under an exhaustive list, mentioned in the code. Any person engaging in a sector that is not listed in one of those areas was not considered a trader. This meant that even though a person engaged in an activity that they believed was profitable and was something they could undertake professionally, they would not be considered a trader if that activity was not explicitly listed in the code as an act of trade, and, hence, they could not enforce the provisions of the commercial code.The New Code resolved this problem in two ways. First, it expanded the number of areas considered as trade from twenty-one to thirty-seven. Second, it changed the listing mechanism from exhaustive to illustrative, which means if a certain person does an activity “professionally” and “for gain” that person can be considered a trader even though the activity is not specifically listed in the code. This allows the New Code to accommodate activities that could be introduced in the future, which are not currently anticipated as trade activities.2. Changes in the Types of Business OrganizationsThe Repealed Code classified business organizations into two broad categories: partnerships and companies. Partnerships were further classified into Ordinary Partnership, Joint Venture[1], General Partnership (GP) and Limited Partnership (LP). Companies were classified as Private Limited Companies and Share Companies.The New Code got rid of the Ordinary Partnership business organization form and kept the other three forms. In addition, the New Code introduced a Limited Liability Partnership (LLP) as a new form of partnership. The LLP is a business organization designed specifically for people who hold professional licenses, like lawyers and accountants, to render professional services.Separately, the New Code added a One-person Company in addition to the Private Limited Company and Share Company forms that were preserved from the Repealed Code. As the name implies, the One-person Company can be formed by one person, something that was not previously allowed under the Repealed Code.<figure class="image"><img src="/uploads/city_0_5beeaf3725_4054b492c2.jpg"></figure>3. Operation of Branch Offices for Foreign CompaniesEven though the opening of branch offices in Ethiopia by foreign companies is not new, it is new for the Commercial Code to incorporate the details of that under a separate title.The New Code provides details about the management of a branch and the duties and responsibilities of a branch manager.4. Getting Rid of the Articles of Association RequirementThe formation of a company is made through a public memorandum which contains the details of the company such as name, address, membership, capital contributed, etc., which is referred to as the ‘memorandum of association’. In addition to the memorandum of association, the Repealed Code required articles of association, which govern the operation of the company.However, the New Code got rid of the requirement to have articles of association as part of the formation of the company. Under the New Code, the mere adoption of the memorandum of association by the founders is sufficient to establish a company.5. Forms of SharesThe Repealed Code recognized two forms of shares: registered and bearer shares. Bearer shares are owned by a person who has the share certificate and can be transferred by mere delivery of the certificate to another person. On the other hand, registered shares need to be registered in the name of a specific shareholder under the company’s registry, hence, any transfer needs to be registered.The New Code, compatible with other share transfer rules of the country, got rid of bearer shares. Also, the New Code came up with an incorporeal form of shares, which is a share created electronically by a financial institution licensed by the National Bank of Ethiopia, which is a reference to shares traded in stock markets.The New Code gives a grace period of three years for people who are already holding bearer shares based on the Repealed Code. These people need to convert their bearer shares to registered shares within the coming three years, after which the holder of a bearer share will not have any membership rights in a company.<figure class="image"><img src="/uploads/salt_5f088428f4_7058c63b0b.jpg"></figure>6. New Rules Concerning Share TransfersA. Mandatory Redemption by Request of Minority ShareholderThe New Code introduced a minority shareholder protection clause in which a minority shareholder holding less than 10% of the shares in a company may request a majority shareholder, holding more than 90% of the shares in a company, to redeem its shares. With the request, the minority shareholder needs to provide the basis used for determining the redemption price. If the price proposed by the minority shareholder is not acceptable to the majority shareholder, they can refer the case to court, and the court will appoint an expert to determine the price.B. Redemption by a Majority ShareholderA shareholder holding more than 90% of a company can request that the minority shareholders have their shares redeemed by that shareholder, and the request shall take effect in 5 weeks. The same rules apply, discussed above, for determining the redemption price.C. Mandatory BidIf any person wants to buy shares representing 50% or more of the total capital of a company, that person will be required to make a tender offer to all the shareholders of the company. Despite having this provision, the New Code is not clear about the circumstances and conditions in which this mandatory bidding process will occur.7. Board Related ChangesIn the ladder of corporate governance, the role of the Board of Directors is immense. Under the Repealed Code, the establishment of a Board of Directors is only recognized for share companies. Under the New Code, the following major changes are adopted concerning a Board of Directors.A. Non-Shareholder Board MembersIn the Repealed Code, only shareholders of the company were allowed to be represented in the Board of Directors. This requirement has been eliminated by the New Code, which allows companies to appoint non-shareholders as directors. This change enables independent directors to sit on the Board, bringing an outside perspective and more objective viewpoint to the company.B. Board of Directors in Private Limited CompaniesThe New Code introduces a Board for private limited companies. As discussed above, only share companies used to be required to establish a Board of Directors. However, members of a PLC have been given the option to establish a Board of Directors under the New Code.C. Introduction of a Supervisory BoardCompanies have been given an option to establish a supervisory board, in addition to a Board of Directors. The number of supervisory board members may not be less than three or more than five. Only shareholders of the company who are not already members of the Board of Directors can be appointed as members of the supervisory board.This change introduces a tiered board system to the Ethiopian company law. A supervisory board is empowered to oversee the Board of Directors and the management to ensure that directors and managers are discharging their responsibilities properly. The supervisory board also oversees the financial affairs of the company and can recommend corrective measures when they see acts that jeopardize the interest of the company. Finally, the supervisory board is empowered to undertake the role of a board of directors in the absence of directors in terms of calling general meetings of shareholders, and the supervisory board will have a non-voting seat on the Board of Directors.8. Recognition of Holding CompaniesThe New Code recognizes holding companies. Even though the commercial registration and business licensing proclamation No. 980/2016 recognized the possibility of establishing a holding company, the practicality of it has been in question as the proclamation left several gaps.The New Code fills those gaps and sets out a description of what categorizes a holding company. It recognizes the holding company’s right to access information from the subsidiary, the right of the holding company to give instructions to the management of a subsidiary, and the right to redeem the shares of minority shareholders of the subsidiary, among others.9. Detailed Rules about Merger and Division of a Business OrganizationThe New Code includes detailed rules about mergers and division of business organizations. These rules align with the current legal and institutional framework of doing business. The New Code provides details about the merger and division decision-making process, rights of different stakeholders and the practical procedures for completing these functions.

Ethiopia

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The Commercial Code of Ethiopia is Changing How the Country Does Business

<h1 style="text-align:center;">It Just Got A Lot Better for Investors in Ethiopia…If You Export</h1>In an effort to incentivize exports from Ethiopia and replenish the desperately low hard currency reserves that have held back the country’s growth for years, the National Bank of Ethiopia (NBE) has issued a directive allowing exporters and recipients of inward remittance to open a foreign exchange retention account at the bank of their preference. But not every foreign exchange remittance entitles a company or individual to open a remittance account. The directive is focused on: resident companies, institutions, individuals and government organizations, other than a diplomatic mission, who receive foreign exchange regularly from abroad. This is good news for a lot of exporters. Here’s how it works:There are two types of foreign exchange retention accounts, i.e. “Foreign Exchange Retention Account A” and “Foreign Exchange Retention Account B”. These accounts will be credited from the export of goods and services and incoming transfer made for inward remittance. Of the total foreign exchange earnings, 30% of the account balance will be deposited in Retention Account A for an indefinite period of time and 70% of the account balance will be credited to Retention Account B for up to 28 days. At the end of the 28 days, the balance will automatically be converted into the local currency, Ethiopian Birr (ETB). The funds in Account A and B can only be used to finance direct business-related and current payments, the details of which are listed in the directive.&nbsp;<figure class="image image_resized" style="width:72.66%;"><img src="/uploads/addis_city_fotor_d30a657494.jpg"></figure>&nbsp;Before this directive, this was not the case. Most exporters used their influence at banks to finance their other import businesses. This, through time, distorted the export sector and created something called commodity dumping. Here, exporters buy up anything they can export (sesame, mung beans, coffee) and sell it on the international market for below-average prices and quality, simply to get access to their forex. Next, they use their influence at the banks to open up letters of credit to purchase items like flat-screen TVs, mobile phones, computers, etc., which is where they generate their real profits. The imports handsomely compensate for any losses they realized on their exports. This ultimately came to the detriment of the country’s reputation in the international markets. Because exporters only cared about the forex they generated, their quality and reputation for the products they sold were second to closing the deal. The millions of farmers that were at the start of that value chain also suffered, as they did not always get the best prices and also had the long-term impact of bad branding which hurt their future development and growth. Also, the forex generated wasn’t regularly used for tractors and machines, new seeds and fertilizer that could improve the commodities which these exporters sold. Rather, it was used to import luxury goods that most Ethiopians never get to buy.[<a href="https://www.renewcapital.com/blog/2020/it-just-got-lot-better-investors-ethiopia-if-you-export#item1">1</a>}The new NBE Directive No. FXD/66/2020, which repealed Directive No. FXD/48/2017, seems to balance the strict regulations of the past with practical current realities and falls somewhere in between. According to the new directive, exporters who have a balance in Retention Account A, in addition to financing their export business, can also use their foreign exchange to import pharmaceuticals and pharmaceutical products, agricultural inputs and pieces of machinery amongst other items. The details surrounding these imports are exhaustively listed in the new directive. These items are given priority in the allocation of foreign exchange by the government. Hence, if properly implemented, the government will be able to incentivize proper exporters, while simultaneously managing the foreign exchange needs of those sectors, which are not being directly financed by export retained earnings but are actually necessities.The manner of utilizing the foreign exchange in Retention Account B remains unchanged. This account can only be used to finance direct business-related and current payments like the import of goods and related services. In addition, it can be used to settle external loans and supplier’s credit, and to settle service payments.Another unchanged item from the previous directive is that companies with retained earnings can freely negotiate with their banks and sell their foreign exchange at a price that is not exceeding the selling exchange rate prevalent on the date. Currently, as a rule, the NBE sets the daily buying rate of foreign exchange for banks (i.e., the price at which banks are allowed to buy foreign exchange). However, banks do have the liberty to decide the selling exchange rate but cannot exceed a 2% margin from the buying rate set by the NBE. The retention directive puts an exception to this rule and allows banks to freely negotiate with exporters who have foreign exchange in their retention account. It allows banks to buy the exporters’ foreign exchange at a favorable price rather than using the daily buying rate set by the NBE. They will still need to remain within the 2% margin since that is the selling rate cap. This incentivizes exporters who have more than enough foreign exchange in their accounts to meet their import needs.The new directive seems to have two overarching purposes. The first one, as discussed above, is to incentivize exporters by allowing for favorable use to meet their import needs and to also get higher exchange rates if they decide to convert their foreign exchange to Birr. Secondly, this helps in channeling the foreign exchange earned from exports to priority areas. Even though the repealed directive had a similar arrangement with even stricter regulations, it was not effective when it came to enforcement. The new directive, if supported with proper enforcement mechanisms, will provide a certain degree of flexibility and channeling of foreign exchange into key import areas such as materials required for export packing and labeling; service payments; settlement of external loans; import of agricultural inputs and pieces of machinery; manufacturing inputs; and machinery and equipment.Overall, this is a good step in the right direction for Ethiopia and for those looking to invest here. Any efforts to increase the country’s foreign currency reserves are welcomed advances. We hope, and may see, further reforms on the horizon.For more information on RENEW or to speak with one of our investment analysts, please visit <a href="https://renewcapital.com/">www.renewcapital.com</a> or email us at <a href="mailto:info@renewcapital.com">info@renewcapital.com</a>. RENEW also holds monthly calls for members of the Impact Angel Network (IAN), which is an educational network for investors seeking to make financial returns and a positive social impact by investing in SMEs in Africa. If you’re interested in applying to the network, you can fill out the IAN application form <a href="https://renewstrategies.formstack.com/forms/renew_investor_accreditation_form">here</a>.&nbsp;1. According to the Minister of the Ministry of Trade and Industry in an interview with Ezega available at: <a href="https://www.ezega.com/News/NewsDetails/7345/Ethiopia-Introduces-New-Directive-to-Halt-Fraud-in-Export-Business">https://www.ezega.com/News/NewsDetails/7345/Ethiopia-Introduces-New-Directive-to-Halt-Fraud-in-Export-Business</a>

A look at the new National Bank of Ethiopia export directive

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It Just Got A Lot Better for Investors in Ethiopia…If You Export

<h1 style="text-align:center;">A Small but Important Step in Ethiopia's Relationship with its Growing Private Sector</h1>Since the mid-1970s, Ethiopia has gained the reputation of being a challenging country to do business in. Despite the amazing progress the country has made over the last 20 years, the country still ranks 159 out of 190 in the World Bank’s <a href="https://www.doingbusiness.org/en/rankings">Ease of Doing Business</a> ranking. Different reasons have contributed to this challenging environment, including the lack of transparency and the inconsistency in the application of the country’s laws by the different administrative bodies of the government, and what some refer to as a communist hangover - the government has traditionally viewed the private sector as a corrupt enemy versus the engine that drives prosperity. As a foreign investor operating in Ethiopia, RENEW has had firsthand experience dealing with these challenges, directly or indirectly, through our portfolio companies. In addition to these challenges, the lack of a formalized grievance handling mechanism has created uncertainty in our day to day operations.<figure class="image"><img src="/uploads/tsegablogimage_0_95eb967b0c.jpg"></figure>However, following the government’s adoption of an economic policy in favor of the private sector (see our recent blog on the <a href="https://www.renewcapital.com/resources/blogs/The%20Ethiopian%20Business%20Environment%20in%20Light%20of%20the%20Homegrown%20Economic%20Reform%20Program">Homegrown Economic Reform Program</a>) and the enactment of new investment laws (<a href="https://www.africalegalnetwork.com/ethiopias-new-investment-law-key-changes/#:~:text=New%20Rules%20on%20Work%20Permit,the%20operation%20of%20its%20business.&amp;text=In%20addition%2C%20the%20New%20Proclamation,a%20work%20permit%20in%20Ethiopia">LINK</a> to the major changes), which followed the Reform Program, the government introduced an investor grievance and an investment dispute resolution mechanism. As per the new investment laws, an investor with any kind of grievance, related to his/her investment in Ethiopia, against the decision of any Federal Government executive body, is entitled to submit a complaint to the Ethiopian Investment Commission (EIC) to get it resolved.Despite the enactment of this privilege under the investment proclamation, the implementation has remained unclear until recently. The EIC, in the presence of the Commissioner and other stakeholders, developed and launched a systematic and formalized investment grievance handling mechanism referred to as the Investment Grievance Management Procedure (IGMP), which has been informally operational since 2019, but was formally launched in December 2020. According to the Investment Commission, IGMP is an early warning and tracking mechanism to identify problems that arise from decisions made by the federal government in relation to changes of laws, breach of contracts, expropriation, and/or inaction of the government in case of third party interventions. This allows the federal government to respond to grievances in a timely manner as per the country’s laws, regulations and international investment agreements.ProcedureSo how would an investor use this new service? The team at RENEW met with the EIC to learn how the process works. Here’s what we know.First, a complaint must be submitted to the IGMP against any final decision made by a Federal Government executive body, and the following three cumulative requirements need to be met:<ul><li>The complaint must be submitted by an established or operational investor in Ethiopia;</li><li>The complaint must be directed towards a Federal Government agency in regards to a potential violation of the rights and protections guaranteed to investors in domestic laws or international investment treaties;</li><li>The issue has become a grievance and a policy, regulation or administrative intervention is needed to address it.</li></ul>Next, once a grievance is filed to the IGMP against a decision made by the EIC or any other Federal Government executive body, the unit undertakes a technical and problem-solving session involving consultation and engagement with the relevant Federal Government executive agency/agencies. If the unit is unable to resolve the investor’s grievance through its technical and problem-solving session, it refers the case to the Ethiopia Investment Board.If the grievance goes to the Investment Board, which is chaired by the Prime Minister, it is reviewed and a final decision is made.All of this sounds well and good, but how long will this process take? Will the government really act as an honest broker, accusing itself of wrongdoing? If found that the grievance is legitimate, who will pay for the lost revenues and damage the government inflicted wrongly on the company? While we see this process as a great step forward in Ethiopia’s goal to improve its doing business environment, like many things, the process needs to be streamlined, tested, and the people working in it need to be empowered to make decisions. Otherwise, it becomes yet another bureaucratic step that the private sector must go through to fight a government that doesn’t support its growth.The introduction of a grievance mechanism, if it actually works effectively, will be a huge relief for investors whose investments have been put at risk by the different arbitrary and obscure administrative decisions undertaken by the different government agencies. RENEW has first-hand experience of such decisions impacting our companies. This will provide a platform for foreign investors already registered in Ethiopia to have their complaints heard and resolved, which could result in the reinvestment of their returns. It can also be considered a step forward in the country's attractiveness for foreign investors and could serve as a hook to attract new investors to the country.

Ethiopia’s investor grievance mechanism

Investment Insights

The Ins and Outs of Investing Through an IRA

The Commercial Code of Ethiopia is Changing How the Country Does Business

It Just Got A Lot Better for Investors in Ethiopia…If You Export

A Small but Important Step in Ethiopia's Relationship with its Growing Private Sector