Baker & McKenzie: Kazakhstani International and Domestic Securities Offerings May be Substantially Affected by Recent Legal Amendments
By Edward A. Bibko
With its large natural resources and relatively transparent legal regime, Kazakhstan has long been a destination for international companies. In addition, its domestic companies have been attracting international capital for years. Within the CIS, the country has been one of the most active in terms of cross-border listings, particularly those involving the listing of a Kazakhstani business in London through a newly formed topco in a tax-neutral jurisdiction such as the Isle of Man. However, recent changes in law may significantly impact future cross-border listings from Kazakhstan.
On 28 December 2011, Kazakhstan adopted amendments to its Securities Market Law. The express purpose of these were to streamline the legal framework for the offering and placement of securities and provide stronger investor protection. However, these amendments included, among other things, significantly increased penalties for conducting an international securities offering without a domestic listing and a sizeable domestic tranche. They also appear to provide a basis for enforcement against companies who used a popular, but noncompliance issuance structure. Most of the amendments came into effect on 1 February 2012, including those relating to international and domestic capital markets transactions. The main features of the amendments are described below.
“… recent changes in law may significantly impact future cross-border listings from Kazakhstan.”
For several years Kazakhstani companies looking to “place securities in a foreign state” have been required under Article 22-1 of the Kazakhstani Administrative Code to obtain the consent of the National Bank of Kazakhstan and to also list the securities on a Kazakhstani stock exchange. For purposes of this requirement, a Kazakhstani company is one which is managed from Kazakhstan or has at least two-thirds of its assets within Kazakhstan. In addition, the prevailing view is that the “placement of securities in a foreign state” covers placing securities by way of listing and placing on a foreign stock exchange. Article 22-1 also required, for equity securities, that at least 20% of the securities be offered through a Kazakhstani securities market.
Although these obligations existed, it was never clear how they could be enforced against a foreign topco issuing securities under its home jurisdiction, outside of Kazakhstan. Under law, the financial regulator could seek cancellation of the state registration of securities issued in breach of applicable regulations. However, this enforcement mechanism was of no use where the topco’s securities were issued under the foreign law and not registered in Kazakhstan. The only other available sanction was a provision under the Administrative Code which authorised modest fines against issuers breaching requirements relating to the issuance and placement of securities. As a result Kazakhstani businesses often ignored the provisions of Article 22-1 in listing shares abroad.
Explicit Listing Requirement; Substantially increased administrative liability
The amendments introduced a new requirement providing that securities issued by Kazakhstani companies may be listed and remain so on a foreign stock exchange provided that there is consent from the NBK and the relevant securities are also listed, and remain listed, on a Kazakhstani stock exchange. This in effect makes explicit the prior interpretation that these requirements would apply to foreign listings as these would constitute “foreign placings” under the old wording.
The recent amendments also sought to address noncompliance by significantly increasing the applicable administrative penalties. Now, the placement of securities made in breach of the applicable legislative requirements is punishable by a fine of up to 50% of all of the proceeds of such placement. Authority to levy this fine rests with the National Bank of Kazakhstan.
The amendments also seemingly clarify that compliance is measured at initial issuance and so long as the foreign listed securities remain listed abroad. This suggests that the National Bank of Kazakhstan (NBK) could enforce penalties against companies that had issued securities prior to the amendments without complying with the local listing and offering requirements.
20% Local Offering Requirement Extended to Bonds
The Amendments extended the local offering requirement, previously applicable to share offerings and offerings of derivative instruments such as global depositary receipts (GDRs), to bond offerings. Now, under Article 22-1 of the Securities Market Law, an issuer an issuer placing bonds outside of Kazakhstan must offer at least 20% of the bonds through the local securities market in addition to obtaining the permission of the financial regulator for the foreign offering.
Although it is not absolutely clear, based on the 2012 NBK Rules (discussed below), it is likely that the above requirements would apply to a foreign special purpose vehicle issuing bonds which is (a) at least 50% owned by a Kazakhstani company, or (b) which benefits from a guarantee provided by a Kazakhstani company.
2012 NBK Rules
On 24 February 2012, the National Bank of Kazakhstan (NBK) issued new rules specifying procedures for giving consent for issuance and placement of securities outside of Kazakhstan. The new Rules establish certain additional requirements which the issuer must meet before being legally able to obtain the Financial Regulator’s consent for issuance and/or placement of securities in a foreign state. The additional requirements include that the: issuer must not have defaulted on its previously issued debt securities; debt securities previously issued by the issuer and currently in public circulation have not been de-listed; and the leverage ratio of the issuer must not exceed 2:1. These requirements existed previously for bonds issued under Kazakhstan law, but did not apply to foreign-law-governed securities.
With respect to shares and derivatives representing shares, the new Rules introduced a new requirement that these securities may be issued in a foreign state only if the issuance will not trigger an event of default and acceleration of debt securities previously issued by the issuer. In particular, equity securities may not be issued in a foreign state if: the issuer has outstanding debt securities; the prospectus of the relevant debt securities contains a change of control restriction that would be triggered by such issuance; or the new securities will result in breach of this restriction and acceleration of debt securities.
Domestic Bond Issuances
The Securities Market Amendments make a number of changes concerning domestic securities issuances. For example, they impose new obligations on issuers of bonds regarding preservation and disposal of assets. Now an issuer of domestic bonds is obligated by law: not to dispose of assets with a value more than 25% of its total assets; not to be in default with respect to more than 10% of its assets; not to change its legal form; and to redeem the bonds when delisted.
Under the amendments the issuer is obliged to engage a “representative agent of bondholders” when it issues domestic that are in public circulation. The Amendments also exempt holders of domestic bonds from the requirement to pay a state duty in a legal action in connection with the issuer’s default on bonds. Prior to this change, the state duty was 3% of the value of the claim.
Finally, the amendments introduced the concept of “Qualified Investors” which are defined to include Kazakhstani and international financial organisations and other entities recognised as such by Kazakhstani brokers and dealers in relation to the National Bank of Kazakhstan’s regulations. To be recognised as Qualified Investors these entities need to meet certain criteria showing they are sophisticated in dealing with financial instruments.
Accompanying this change, certain securities and financial instruments are designated for purchase only by Qualified Investors, these include: securities and other financial instruments of foreign issuers issued under foreign law and not admitted to trading on the Kazakhstani stock exchange; and derivative securities and instruments not admitted to trading on the Kazakhstani stock and commodity exchanges.
The changes created by the Securities Market Amendments clarify longstanding rules relating to foreign listings and provide real teeth for their enforcement. In the past issuers have often ignored the requirement to make a local offering and listing because of the additional burden and cost to the transaction or for other practical reasons. It remains to be seen whether having to strictly comply with these requirements will dampen enthusiasm for cross-border listings involving Kazakhstani companies. In addition, it is unknown whether the NKB will impose penalties for past non-compliance or otherwise force Kazakhstani companies with a foreign listing to list their shares locally as well.
About the Author
Edward Bibko is a partner in Baker & McKenzie’s International Capital Markets Group based in London. He joined Baker & McKenzie’s London office in February 2001. Prior to joining Baker & McKenzie, Edward practiced in New York and Chicago law firms and worked as a financial analyst for IBM. Edward is ranked as a leading capital markets practitioner in Chambers Global 2009 and currently serves as a member of the Firm’s International Capital Markets Group. Mr Bibko specialises in international equity and debt capital markets transactions. He received a doctorate from Syracuse University.
About Baker & McKenzie
Baker & McKenzie is the world’s leading law firm, with 3,750 lawyers who “speak” 75 languages in 71 offices worldwide. The company had $2.27 billion in revenue in 2011.