Turkey: Memorandum on Foreign Investors and on Trade of Capital Markets Instruments (Part 2 of 2)

Part 2 of 2

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III. SALE OF SECURITIES IN TURKEY BY THE PERSONS RESIDENT ABROAD:

According to the legislation for Protection of Value of Turkish Currency, the term "person resident abroad" refers to natural or legal persons who are not deemed to be resident in Turkey. In the Governmental Decree no. 32, the person resident in Turkey is defined as a natural or legal person having a domicile in Turkey or a person who resides in Turkey permanently for more than 6 months in a calendar year with the intention of residence, also including the workers, self-employed and independent business owners working abroad. In the same definition, it is stated that the natural or legal persons resident abroad who have opened a branch office or acquired capital shares in a company or founded a new company in Turkey by allocating a capital fund to Turkey in accordance with the laws of the Republic of Turkey will also be considered and treated to be resident in Turkey solely for such activities and operations.

The central point of this definition is, shortly, that a person resident abroad does not have a "residence" in Turkey. Therefore, rather than using the "Turkish" and "foreign" words, it is more proper to use the concepts of "having a residence in Turkey" and "not having a residence in Turkey". However, as generally and commonly used in the practice and for the sake of ease, the word "foreign" is mostly used in the meaning of a "person resident abroad" in the related legislative texts. In this section, we are going to deal with the conditions of issue or sale of securities by the foreigners resident abroad from abroad to Turkey.

Both the Governmental Decree no. 32 and the Circular of the Turkish Central Bank (no. I/M) associated thereto contain the following provision: "It is free to import and export securities and other capital market instruments." This principle allows the persons resident in Turkey to freely purchase the capital market instruments issued by the joint-stock companies or other entities resident outside Turkey. For clarification purposes, for instance, paragraph 2 of the Circular of the Central Bank mentions about "sale of all types of capital market instruments by the persons resident abroad". It is free to import foreign securities into Turkey and to sell them to the persons resident in Turkey, subject to the condition of "... purchase or sale of capital market instruments through banks and intermediary institutions duly authorized pursuant to the Capital Markets Legislation". Here, it is obvious that foreign securities may be freely sold by foreigners to persons resident in Turkey. The sole condition is that this trade must be realized through a "bank or intermediary institution" which is duly authorized pursuant to the Capital Markets Legislation.

Accordingly, as a banking or brokerage transaction, without any prior consent or license, a person resident in Turkey may apply to its bank, and place a purchase order for purchase of capital market instruments, such as stocks or bonds, traded in foreign financial markets, and purchase and bring such capital market instruments to Turkey, and hold in custody or cause a custodian hold in custody, and have the purchase price transferred to the seller resident abroad, and sell the capital market instruments in foreign markets at any time and in its sole discretion. At this point, the banks are not allowed to arrange a public offering for sale of foreign securities, or to put it differently, they are not licensed to make a public call for sale of them. On the part of the seller, there is no law provision preventing "private placement" (sale to individual customers) of the capital market instruments in Turkey.

Here, it is necessary to have a look at Article 19 of the "Communiqué About Principles of Quotation and Sale of Foreign Capital Market Instruments", no. 20, serial III, of the Capital Markets Board, published in the Official Gazette on 20 March 1996. This Article "Allotted Sales" provides that "the allotment and sale of foreign capital market instruments to predetermined buyers through intermediary institutions, ... without any public offering ..., will be subject to quotation in the Board". By mentioning about a foreign capital market instrument, and targeting a special/ individual customer through "allotment" concept, and excluding the "public offering", this Article may create hesitation. However, in our opinion, in a Communiqué which covers:

• public offering of newly issued foreign capital market instruments, and
• public offering of foreign capital market instruments by their owners, and
• public offering of the certificates of deposit, and
• allotted sale of foreign capital market instruments and certificates of deposit,

it is more rational to consider this Article 19 as a type of allotted sale within the frame of a "public offering model". Furthermore, in the Governmental Decree no. 32, the persons resident abroad are held liable to comply with the capital markets legislation in "issuing and public offering" of the capital market instruments, but they are not held liable to comply with the Capital Markets Legislation in "purchase and sale" of the same instruments indiscriminately.

In summary, foreigners or persons non-resident in Turkey may freely sell foreign capital market instruments by private placements to persons resident in Turkey, providing that they do not offer such instruments to public.

Earlier, we have said that the Capital Markets Board is entrusted with the task of "making the required legislative arrangements on issue and public offering of capital market instruments in Turkey by the persons resident abroad, within the frame of the applicable laws and regulations". The Board has fulfilled its duty and made and enacted the required legislative arrangements, namely the "Communiqué About Principles of Quotation and Sale of Foreign Capital Market Instruments", no. 20, serial III, published in the Official Gazette on 20 March 1996, and the "Communiqué About Principles of Quotation and Sale of Foreign Investment Fund Units and Shares", no. 14, serial VII, published in the Official Gazette on 06.11.1998. Now, these legislative acts and arrangements are summarized below.

The "persons resident abroad", as defined in the legislation on Protection of Value of Turkish Currency, and particularly the joint-stock companies and investment partnerships that issue the foreign capital market instruments in accordance with the legislation of the relevant country may offer to public in Turkey all and any of the securities and other papers representing rights and debts, traded in the exchange markets of the issuing country and described by the Capital Markets Board, as well as the participation certificates of investment funds (mutual funds) seated at abroad, that carry similar characteristics to the investment funds defined in the Law, as accepted and recognized by the Board. The implementation principles in respect of the foreign capital market instruments (excluding funds) may be listed as below:

In Turkey, "direct" offering to public of the foreign capital market instruments is treated differently from their "indirect" offering to public. According to the provisions of the Communiqué:

• newly issued foreign capital market instruments,
• foreign capital market instruments held by their owners,
• certificates of deposit and
• foreign capital market instruments and certificates of deposit sold on allotment basis

can be "directly offered to public", while the foreign share certificates can be "indirectly" offered to public in Turkey. To put it in other words, foreign share certificates are allowed to be offered to public in Turkey only through "certificates of deposit".

Foreign capital market instruments to be offered to public in Turkey are required to have been quoted in an exchange market in the issuing country, recognized by the Capital Markets Board, but if there is no exchange market in that foreign country, the Board may not seek for this condition of quotation in exchange market.

Foreign capital market instruments may be issued in Turkish Lira, in which case there is no problem. However, foreign capital market instruments issued in a foreign currency must have been issued in one of the foreign currencies of which daily trading exchange rates are announced and published by the Turkish Central Bank.

Foreign borrowing instruments must have been rated at least with a "medium grade" in ratings conducted by the "rating agencies" recognized and accepted by the Capital Markets Board. In order to be acceptable, the rating report must have been issued no later than 3 months before.

The process of public offering of foreign capital market instruments must be carried out through an authorized bank or intermediary institution.

The Communiqué permits a preliminary application to the Board in order to prevent and avoid any probable problem in quotation of the foreign capital market instruments and the certificates of deposit and their issuers. Such application is required to be supported by explanatory information about the legal system applicable on the capital market instrument and its issuer in their home country, and if deemed fit and necessary by the Capital Markets Board, by documents confirming and evidencing such information. Application to the Board may be made only by the relevant "intermediary institution".

Upon such an application, the Board reviews and evaluates the submitted information and documents and notifies to the intermediary information whether "the subject instruments bear the qualifications for quotation" or not. Though not being mandatory, this preliminary application is deemed useful for avoiding any loss of time and for enabling the foreigners to determine in advance whether their instruments are in compliance with the Turkish legislation or not.

In order to be eligible for offering their foreign capital market instruments to public in Turkey, the issuers are required to enter into a written contract containing the following information.

The mandatory contents of the contract are as follows:

i. If the instruments are sold by the issuer or owner, information about the issuer or owner;

ii. Information about the intermediary institution;

iii. Information about the capital market instruments (rate of interest; nominal value; registered/bearer);

iv. Conditions of cancellation or return of instruments that cannot be sold as a result of underwriting;

v. Information about sales (price, period, place);

vi. Principles of use of the rights vested with the sold capital market instruments (date and method of payment in Turkey);

vii. Principles of transfer of payments;

viii. Principles of disclosures by the issuer about general assembly meetings, and method of disclosure of changes in the foreign laws;

ix. Principles of disclosure of information to the Capital Markets Board, and of events that may affect prices of the capital market instruments, and of sales of the foreign capital market instruments to the intermediary institution;

x. Form of non-mandatory public disclosures;

xi. Information about the obligations not performed;

xii. Principles of early termination of the contract (the warranty to comply with decisions of the Board, and the representations and warranties, and continuance of services during the transition period);

xiii. Commissions payable to the intermediary institution;

xiv. Principles of exchange rate in movements in prices of the capital market instruments;

xv. Authorized officers and communication/contact rules;

xvi. Payment of printing and disclosure expenses;

xvii. Principles of "replacement" in the case of theft and loss;

xviii. Applicability of the Turkish law and jurisdiction of the Turkish courts in resolution of the disputes arising out of the legal nature, public offering and sale of the capital market instruments and out of the representation contract;

xix. Custodian and date of delivery to custodian;

xx. Certificates of deposit being written to "bearer"; and

xxi. Principles and dates of voting rights, rights or bonus issues upon capital increase, dividends and similar other distributions and payments over and in association with the share certificates underlying the certificates of deposit.

Term of validity of the representation contract must at least be equal to the maturity of the sold capital market instruments, and the contract may be terminated and may be replaced by a new contract valid for the same term.

The principles of quotation by the Board, and preparation of prospectuses and circulars, and public offering and sales processes shall, depending on the foreign capital market instrument being:

• share certificate, or
• bond, or
• another borrowing instrument,

be subject to and governed by the communiqués of the Capital Markets Board pertaining to that capital market instrument, if any, and if not, the principles to be determined by the same Board.

According to the relevant Communiqué, the limits of issuance of the borrowing instruments in the form of bonds or other capital market instruments will be determined over the limits of issuance by the non-public joint-stock companies in Turkey.

As known, the Decree of the Council of Ministers, no. 93/ 2983, published in the Official Gazette on 27.01.1993 states that total value of the bonds, capital market instruments and other borrowing instruments that may be issued by the non-public joint-stock companies cannot exceed the amount set down in Article 422 of the Turkish Commercial Code, and Article 422 provides that this limit will be calculated by deducting the losses from the paid capital.

The Decree, no. 93/2983, further provides that the amount to be calculated by deducting the losses from the paid capital is determined as a base of calculation of the limit, and the limit may be increased up to 6 times as a result of a type of rating by the Capital Markets Board and under the terms and conditions specified in the Decree. However, the limit calculation must be relied upon financial statements issued and prepared in accordance with the international accounting standards.

The Communiqué envisages that the foreign capital market instruments and the certificates of deposit will be sold in Turkish Lira in Turkey.

At this point, we would like to stress that issuance of the foreign capital market instruments in TL or foreign currency (Art. 4/6 of the Communiqué) and sale of them in Turkish Lira (Art. 7/last paragraph of the Communiqué) are separate provisions of the Communiqué.

Intermediary institutions appointed under a representation contract by a corporation offering foreign capital market instruments or certificates of deposit to public in Turkey are held liable to apply to Exchange Market for quotation of the foreign capital market instruments offered to public. This application must be made within 15 days following the end of the period of sale and supported by the documents to be specified and demanded by Exchange Market.

It is our opinion that this provision of the Communiqué must be considered together with the rule of Article 37 of the "Regulation About Principles of Foundation and Operation of Securities Exchange Markets" specifying that: "quotation of securities of foreign issuers in the Exchange Market is subject to a prior license to be received from the Ministry to which the Capital Markets Board is affiliated".

One of the important conditions of public offering by the foreign issuers in Turkey is that the foreign issuers are also subject to all obligations of the issuers resident in Turkey in respect of public disclosures.

Some of the information and documents required to be disclosed to public pursuant to the Communiqué may be listed as follows:

• financial statements and reports of the issuer prepared in accordance with the laws and regulations of the country of origin;
• versions of financial statements and reports prepared in accordance with the international accounting standards;
• independent audit reports and
• rating reports

are required to be submitted to the Board and the Exchange Market within one week following the date of preparation. Some of these information and documents are published and announced in accordance with the pertinent legislation.

Agenda and minutes of the general assembly meetings of the issuers will also be published and kept at a place easily accessible.

All information and documents disclosed to public in Turkey must be given to the buyers of foreign capital market instruments in Turkey at the same time with the other countries. This obligation is assumed by the "intermediary institution" which has managed the public offering process pursuant to and under a representation contract.

Payments of:

• principal,
• interests and
• profit shares/dividends

to the buyers of foreign capital market instruments and certificates of deposit in Turkey are made in the currency of the relevant capital market instrument (Article 11 of the Communiqué). If this provision is considered together with the last paragraph of Article 7 stating that "foreign capital market instruments and certificates of deposit are sold in Turkish Lira), it is obvious that "sales are made in TL", while other payments, including principal, are made "in the currency of the relevant capital market instrument".

In the payments to the Turkish savers/investors:

• first, the expenses incurred for payments will be deducted and set off; and
• the intermediary institution initiates payment process in the first business day following the date of collection of the proceeds of the amount to be paid; and
• the intermediary institution publishes and announces the amounts and places of payments no later than one week before start of payments.

Rights of buyers of foreign share certificates associated to such share certificates will be granted through the newly issued certificates of deposit. The required notices and communications must be made duly, and the law provisions pertaining to the rights associated to share certificates and the credited purchase of securities and the short sale of shares must also be taken into consideration.

In conformity to the principle of "equality" between local and foreign capital market instruments, some certain data and information must be given on the foreign capital market instrument or in an exhibit thereof. This information will be as stipulated in the regulations of the Capital Markets Board pertaining to the capital market instruments traded in Turkey. Furthermore, it is a must to provide the saver/ investor with a Turkish translation of the share certificate offered to public in Turkey. In order to avoid any confusion or misunderstanding, this translation will contain a phrase: "It is not a capital market instrument and cannot be sold".

As per the law, "certificates of deposited securities", written to bearer, identical to and giving the same rights with the deposited securities, may be issued for the purpose of facilitating circulation in the national or international markets.

In the relevant Communiqué, the Capital Markets Board has used the abbreviation of "certificate of deposit" for the concept of "certificate of deposited securities" used in the Law. That Communiqué defines the certificate of deposit as "a type of capital market instruments, representing foreign securities deposited in the custodians authorized by the Clearing Bank or the Capital Markets Board, and written to bearer, and identical to and giving the same rights with the represented foreign securities, and bearing a nominal value expressed in the same currency with the represented foreign securities".

Certificates of deposit are issued by the Clearing Bank to the name of the intermediary institution. These certificates represent the foreign securities deposited in a custodian in the name of the intermediary institution upon a "quotation application".

The Communiqué indicates the information to be inserted in the text of the certificates of deposit, showing their relation with the represented foreign securities.

The buyer of a certificate of deposit will, in his sole discretion, have the right to exchange his certificate of deposit with the foreign securities represented thereby.

Method and duration of exchange will be determined in advance by the intermediary institution and specified in the prospectus and circular.

The Communiqué contains the provision: "Process of exchange of the certificates of deposit traded in the Exchange Market will be conducted in accordance with the provisions of the current regulations of the Exchange Market".

The intermediary institution will inform the Clearing Bank about the foreign securities demanded to be exchanged, and will request an explanatory letter. Upon receipt of this letter, the intermediary institution will demand the related "custodian" to return the securities, and will deliver the securities to the owner.

Certificates of deposit may be issued for all of the foreign securities, subject to the pertinent provisions of the Communiqué. However, we would like to repeat that foreign "share certificates" may be offered to public only through certificates of deposit.

This type of certificates may be issued, providing that a minimum period of 2 years has passed since the foundation of the related foreign corporation and the foreign corporation must have "earned profit" in accordance with international accounting standards. Another condition is that the related foreign security must have been quoted in a foreign exchange market no later than one year in advance and must have been traded therein for at least 100 days. Here, the "foreign corporation" term refers to the companies and investment partnerships that are resident at abroad and issue foreign share certificates in accordance with the legislation of the relevant foreign country, as defined in the legislation on protection of value of Turkish currency.

In the Turkish capital markets system, in addition to the capital market instruments directly issued and offered to public by the corporation, the corporation partners or the owners of borrowing instruments are also permitted to offer their securities for sale through "public offering process and procedure". In short, "disinvestment of portfolio" by the owners or partners has been accepted also for foreign capital market instruments.

Public offerings by foreign owners are subject to the same rules and principles applicable on the persons resident in Turkey. Accordingly, we are of the opinion that sales of foreign share certificates through certificates of deposit must be executed in compliance with the provisions of the "Principles on Methods of Sale in Public Offering of Capital Market Instruments" and other relevant laws and regulations. It is further stipulated in the Communiqué that the same rules and procedures will be applied also in sales of the borrowing instruments that are in the form of capital market instruments. In sales through public offering in Turkey, the methods of "collection of demands over fixed price" and "collection of demands through price biddings" and "sales in Exchange Market" or if and to the extent the conditions permit, "sales without collection of demands" are applied.

In public offering of foreign capital market instruments by their owners, the representation contract must be signed by and between the owner and the intermediary institution. The Communiqué states: "... provided, however, that the contract has to be signed also by the issuer". As "issuer" is defined as the "person who is founder or manager of a foreign corporation or foreign investment fund", the condition of "signature of the contract also by the issuer" may mean that the foreign owner cannot make public offering without a prior consent of the corporation issuing the capital market instrument.

However, the provision is in the form of "... provided, however, that the contract has to be signed also by the issuer". It is debatable whether this phrase is a "mandatory law provision" or not. In our opinion, in this provision, the Capital Markets Board has reserved and retained a "right of discretion". That is why the Communiqué provides that where the issuer is not a party to the contract, or to put it in other words, in the case of public offering by owners as stipulated in the legislation, a written commitment given by the issuer to the intermediary institution in Turkey may be deemed sufficient by the Board.

As a conclusion, if and when a person resident in Turkey wishes to disinvest his portfolio by the public offering method, although the condition of "obtaining consent of the issuing corporation" has been repealed in our national law, a certain type of consent/permission is still requested for the foreign partnerships, at a minimum.

In the reasons of the amendments made to the Capital Markets Law by the Law 3794, it is said that: "... use of the rights of option and the allotted capital increases are also held subject to a prior consent". By virtue of the power of the Board to make required legislative arrangements on public offering of foreign capital market instruments in Turkey, and in the light of the thoughts in the reasons of the Law, it is provided in the Communiqué that: "allotment and sale of the foreign capital market instruments and certificates of deposit to predetermined buyers through intermediary institutions (without any public offering) will be subject to the condition of quotation in the Board". As seen, the allotment constitutes a legal exception to public offering procedure.

According to the laws, the principles applicable on the capital market instruments issued by the foreign states and their local administrations and intended to be offered to public in Turkey will be determined by the Capital Markets Board, depending on the nature of the application.

Sales of fund units/shares with or without public offering in Turkey are regulated by the Communiqué on Principles of Quotation in Board and Sales of Foreign Investment Fund Units, no. VII/4, published in the Official Gazette on 06.11.1998.

As will also be understood from the preceding paragraph, the "certificates of participation" which the local investment funds are obliged to issue are not required for the foreign investment funds, and the foreign investment fund sales may be made with certificates issued as "fund units/shares".

Another important criterion is related to the "concept of sale". The Communiqué has specifically used the concept of sale. It is noted that this concept of sale covers (i) sale of fund units/shares against payment of a price, and (ii) PROMOTION of fund units by "individual" or "collective" mailings and all other means of communication for marketing purposes, and (iii) all kinds of ACTIVITIES of contacts with potential investors.

• At least THREE YEARS must have passed since the foundation of the Fund and the value of the Fund units offered for sale current as of the date of application must not be less than the minimum value specified in the regulations of the Board for the investment funds in Turkey (minimum value specified by the Capital Markets Board for the investment funds in Turkey is 2 trillion TL for the year 2003).
• Fund shares/units will be expressed and sold in Turkish Lira or any one of the foreign currencies "daily" rates of which are published by the Turkish Central Bank.

• Laws of the home country of the issuer must not contain any restriction on sales of the fund units in Turkey and on conduct of the transactions and payments relating to the financial rights associated thereto in Turkey.
• The fund units must have been offered to public in the home country, and total present value of the fund units in circulation must be minimum 1,000,000 (one million) USD.
• The fund must invest at least 80% of its portfolio in the assets other than Turkish public borrowing instruments and capital market instruments issued by issuers resident in Turkey.
• If the fund receives portfolio management services from another corporation, that other corporation must own and hold a portfolio management authorization certificate in the country where it is organized.
• The fund must not invest more than 10% of its portfolio in the securities issued by a single corporation (except for the capital market instruments issued by the states).
• The fund must alone not hold more than 9% of capital shares or all voting rights in any corporation.
• The principles applicable on the Fund in respect of its borrowing and asset lending transactions must comply with the laws and regulations applicable on the investment funds organized in Turkey.
• The financial statements of the Fund prepared in accord with international accounting standards must be subject to independent audit at least once a year.
• A letter of undertaking must be issued and given by the authorized body of the Fund to the Board, so as to assure that all information and documents for public disclosure as listed in Article 16 of the Communiqué and all other information and documents that may be requested by the Board will be furnished to the Board, and that the persons or entities designated by the Board will be given access to the Fund for auditing the Fund in the cost of the Fund.

Foreign investment fund must have a representative in Turkey and must enter into a certain written contract with its representative in accordance with the conditions stipulated in the pertinent legislation.

The representative may only be a bank or an intermediary institution authorized to organize and manage funds in Turkey.

The representative is held liable:

• for timeliness of the public disclosures and the notices and statements to be submitted to the Board, and accuracy of all documents appended to applications and of all data and information given in prospectuses and circulars and disclosed to public; and
• to buy back the sold units in the name of the Fund in accordance with the principles determined by the Fund; and
• where the Fund fails to make the required payments for any reason whatsoever in buyback of the Fund units sold through public offering, to buy such Fund units back from the relevant investors by paying the price thereof fully in cash within maximum 2 business days following the end of the period of buyback of the Fund units; and
• where the Fund units are issued in the form of share certificates, in the case of theft, loss, deterioration or tearing of share certificates, to replace the share certificates in Turkey; and
• to ensure that the Fund unit holders have equal rights with the unit holders resident abroad, and that payments for the Fund units are made in Turkey; and
• for keeping accurate records of identity of the Fund units sold in Turkey and the buyers thereof, and of value and amount of Fund units traded, and of trading dates.

The assets of investment funds are kept in custody of separate custodians. Assets of a foreign investment fund may be kept in custody of a custodian organized in the country where the Fund is seated, having a minimum paid capital of ONE MILLION UNITED STATES DOLLARS, or in custody of one or more custodians authorized in Turkey.

Whether sold through or without public offering, the Fund units are required to be quoted in the Capital Markets Board by issuing a prospectus and a circular upon application of the Representative. Public offering process starts upon registration of the circular in the Trade Registry.

The fund shares may also be allotted and sold to certain investors.

Investors to whom the Fund units/shares are allotted and sold must be persons and entities who have access to adequate information as may be required for taking correct decisions, in terms of their organization structure and financial situation.

They are determined as follows:

• Banks,
• Insurance companies,
• Intermediary institutions,
• Pension funds and charitable organizations,
• Special financial institutions,
• Investment funds,
• Investment partnerships,
• Portfolio management companies, and
• Natural or legal persons owning and holding Turkish and/ or foreign capital market instruments worth at least TL 1,150,000,000,000 (one trillion and one hundred and fifty billion Turkish Lira) (for the year 2003) as of the date of purchase of the Fund units.

Within the frame of the Legislation for Protection of Value of Turkish Currency, the relevant intermediary institutions are obliged to provide the Capital Markets Board with all information about trading of the Fund units on monthly basis within 6 business days following the end of each month.

IV. PURCHASE OF CAPITAL MARKET INSTRUMENTS IN TURKEY BY THE PERSONS RESIDENT ABROAD:

The persons resident abroad are desired to enter into and make investments in the Turkish market, thereby bringing foreign capital into Turkey.

According to the Governmental Decree no. 32, purchase of capital market instruments in the primary and secondary markets and sale of capital market instruments by persons resident abroad are not subject to any restriction.

The question "what can be purchased" is replied by the Governmental Decree as "securities and other capital market instruments". As known, according to the capital markets legislation, the term "capital market instruments" covers "securities" and "other capital market instruments".

A person resident abroad cannot directly purchase capital market instruments in the Turkish market. The "purchase" must be made through a bank or an intermediary institution. And this bank or intermediary institution must be authorized in accordance with the Turkish capital markets legislation.

While the banks and intermediary institutions are authorized on purchase and if required sale of the capital market instruments in the market, the banks and special financial institutions are authorized on transfer abroad of the price and proceeds/revenues of the capital market instruments.

The obligation of the persons resident abroad to use an "intermediary" in purchase of capital market instruments and in payment of price thereof may be important in order to determine and monitor the size and targets of investments of capital market instruments made by the foreigners or other persons resident abroad.

Pursuant to and under the 4875 Direct Foreign Investments Law and other legislation associated thereto, the persons and entities resident abroad may freely:

• make investments,
• found companies for commercial operations,
• participate in the existing companies and partnerships,
• open branches and liaison bureaus and
• enter into the license, know-how, technical assistance, management and franchise agreements

in Turkey.

Share certificates acquired and held in foreign capital companies have no difference from the share certificates of local companies and partnerships. Today, there are many Turkish companies with foreign capital, and some partners of these companies are naturally resident outside Turkey. It is necessary to emphasize that the share certificates acquired and held by the persons resident abroad pursuant to the foreign capital investments legislation are not subject to and governed by the conditions of the Governmental Decree no. 32.

However, we would like to state that last paragraph of Article 15, pertaining to capital market instruments, of the Governmental Decree no. 32 has been repealed by the Frame Decree on Foreign Capital Investments (published in the Official Gazette on 23.7.1995). Before that Decree, the investors resident abroad were allowed to participate in the management and in the general assembly meetings of the company as a holder of capital shares therein, subject to the condition of registration of their capital shares in accordance with the foreign capital investments legislation.

Now, there is no difference between the powers vested by the capital shares acquired through foreign capital investments and the capital market instruments purchased in the market by the persons resident abroad pursuant to and under the Governmental Decree no. 32. Briefly, as regards the results thereof, at present, there is no difference between "portfolio investment" and "foreign capital investment".

V. PURCHASE OF SECURITIES ABROAD BY THE PERSONS RESIDENT IN TURKEY:

First, it must be emphasized that it is free to purchase and sell securities traded in the foreign "financial markets" and to transfer the price thereof to abroad. Purchase and sale of securities not traded in the foreign financial markets are not permitted.

Secondly, the instruments purchased by the persons resident in Turkey from the foreign financial markets must by nature be "securities". In our opinion, instruments which by nature are "other capital market instruments" cannot be purchased. It is necessary to describe the securities by considering the Turkish capital markets legislation and to consult to the Treasury Undersecretariat in the case of a doubt or hesitation.

According to the provisions of the Governmental Decree no. 32, three types of institutions may serve as mediator in purchase of foreign securities by the persons resident in Turkey. They are:

• banks,
• special financial institutions and
• intermediary institutions authorized according to the capital markets legislation.

Fund transfers will be executed through banks and special financial institutions. It is believed that authorization of the special financial institutions, which are not a member of the Exchange Market, only and solely for purchase of foreign securities by the persons resident in Turkey, is a stillborn provision.

VI. SALE OF SECURITIES TO ABROAD BY THE PERSONS RESIDENT IN TURKEY:

The legal entities resident in Turkey may freely issue and sell securities and other capital market instruments at abroad, subject to the condition of registration in the Capital Markets Board.

There is no need to say that the legislation of the related foreign country will be applicable on foreign sales either in the form of private placements or in the form of public offering.

For sales of securities in foreign markets by the persons resident in Turkey either as the issuer thereof or as the owner thereof for the purpose of portfolio disinvestment, if the sold securities belong to a non-public corporation, there is no need to receive a license or consent pursuant to the Governmental Decree no. 32 or other legislative acts. However, in sales of share certificates of a public joint-stock company in foreign markets, as such sales may make an effect on the value of the shares previously acquired and held by the local investors, such foreign sales are required to be disclosed to public and to the official authorities in accordance with the relevant laws and regulations.

If the capital market instrument is traded in the Exchange Market, it is a must to make the required disclosures to the Exchange Market. In addition, a sale which may increase the transaction/trading volume in the market must absolutely be disclosed, because the share certificates sold at abroad may at any time return to Turkey and be again subject to trading in the Exchange Market.

In the event that a local intermediary institution is hired for foreign sales, such intermediary institution assumes very important functions on informing the persons who are not resident in Turkey.

In such cases, pursuant to Article 30 of the Communiqué of Principles About Mediation Activities and Intermediary Institutions, no. V/46, and in accordance with principles pertaining to mediation activities in the foreign markets, the intermediary institution must render its services by opening a branch or a liaison bureau or appointed as its agent a foreign intermediary institution authorized pursuant to and under the legislation of the related foreign country.

Among the methods of "collection of demands" specified in the Communiqué relating to the methods of sale, the method of "collection of demands through price biddings" is valid for the foreign markets and is accepted mostly for public offerings to be made by the persons resident in Turkey to the foreigners in the foreign markets.

If a joint-stock company organizes a public offering in a foreign country through capital increase, the procedures specified in the Turkish national law must be completed. In the case of "public offering" at abroad of the share certificates held by the company shareholders, it is a must to register such shares in the Capital Markets Board pursuant to Article 15/b of the Governmental Decree no. 32. The new legislation does not contain obligation to obtain consent for public offering from the joint-stock company that has issued the share certificates.

VII. CONCLUSION:

This memorandum summarizes the legislation and practices in respect of trade of capital market instruments in Turkey, where a "foreign component" is involved therein as buyer, seller or capital market instrument.

The great share of the transactions of foreigners in the total transaction volume of the Istanbul Securities Exchange Market reveals to us that Turkey also keeps in step with the "globalization" concept.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specofic circumstances.