Capital Markets Law ("CML") No. 2499, which was in force for approximately 30 years, was replaced with Capital Markets Law No. 6362 (the ''New CML'') on 30 December 2012. The new law includes regulations following new and international developments, as well as several amendments.
1. Are new capital market instruments introduced with the New CML?
The definition of the capital market instrument has been enlarged by the New CML. Under the New CML, derivative instruments and investment contracts as well as securities are regarded as capital market instruments. The New CML has also regulated in detail which derivative instruments are regarded as capital market instruments. According to this, leveraged forex transactions are included in the scope of derivatives.
Regulatory Effect:In parallel to global financial regulations on over the counter ("OTC") derivative instruments after the global economic crisis, OTC derivative instruments have - as a rule - been regulated by the New CML as a type of capital market instrument. (The CMB should regulate which derivative contracts have been outside the scope.) Additionally, as a reflection of this international trend, the central counterparty, central securities depository and the trade repositories are also regulated by the New CML.
2. What is the approval of the prospectus? Has the system of registration with the Capital Markets Board ("CMB") been abandoned? How long will the prospectus be valid?
Under the New CML, preparation of the prospectus is compulsory for public offering and trading of capital market instruments on the stock exchange. The prospectus is required to be approved by the CMB. However, this approval cannot inherently be regarded as an insurance or guarantee for the prospectus provided by the CMB. Thus, the system of registration of capital market instruments with the CMB applied since 1992 has been replaced with the system of approval of the prospectus. The CMB approval process is completed within 20 working days for initial public offerings and 10 working days for other public offerings. Prospectuses approved by the CMB will be valid for a period of 12 months and can be used for issuances made within this period.
For issuances made without public offering, issuers should prepare issue documents instead of the prospectus.
Regulatory Effect:The approval system for prospectuses has brought to companies clearer and more predictable procedures. Furthermore, the twelve-month validity period of the prospectus may provide the opportunity of issuance of different instruments with the same prospectus. Therefore, this system could reduce the cost and time spent on issuances.
3. What are the new regulations for the liability of the prospectus, financial reports and other public disclosure documents?
The New CML has introduced some regulations with respect to liability for prospectuses, financial reports and other public disclosure documents. With the new regulations the scope of liability has been expanded. On this basis, executive board members and intermediary institutions of issuers and the guarantor, if any, will be severally liable with the issuers for damage arising from wrong, misleading, or omitted information in the prospectus. Furthermore, institutions preparing the reports stated in the prospectus will also be liable within the framework of the CML. Additionally, the New CML has ensured that the executive board members of issuers will be liable for the preparation, presentation and authenticity of financial statements and reports according to the financial reporting standards determined by the CMB.
The New CML has enumerated public disclosure documents and brought joint liability for the information stated in these documents. Public disclosure documents include prospectuses, information forms prepared for offers of tender, disclosures of material events, notification texts prepared in mergers and demergers, announcements of trading on the stock exchange, financial reports and other documents determined by the CMB.
Within this scope, the new regulations enable investors to prove causality between act and harm. Also, the new law introduces presumptions of potential liability.
In order to ensure predictability in markets, claims for indemnification have become subject to a short period of limitation by the New CML (i.e., six months).
Regulatory Effect: The New CML brings significant regulations on liability of public disclosure documents for the issuers, directors of the issuers, the person and institution preparing the reports. Therefore, all market actors should act with care with regard to the preparation of these public disclosure documents. The detailed regulation of responsibilities may provide a triggering effect on investor activism.
4. What are the significant changes regarding the compulsory take-over bid?
The compulsory take-over bid known as the "compulsory tender offer" in practice has been regulated by the New CML in parallel with the former CML. Regulations related to compulsory take-over bids under the New CML are clear, straightforward and detailed in parallel with the existing communiqué.
Under the New CML, the acquisition of shares representing a certain percentage of capital and voting rights or the acquisition of shares controlling the management of the company trigger the obligation to make a bid. One of the most important new provisions in the New CML is that the voting rights of shareholders who are required to make a takeover bid are automatically frozen and that these voting rights will not be taken into account in terms of a quorum at general meetings. Another important provision is that shareholders who violate the compulsory takeover bid requirements shall be punished with a pecuniary fine of up to the total amount of shares subject to the takeover bid.
Regulatory Effect: In the practice of the former CML, compulsory takeover bids did not provide effective enforcement mechanisms for the application of regulations, since persons who did not make the compulsory takeover bid could only be punished with an administrative fine which was not a deterrent. However, the New CML has both regulated the freezing of voting rights and re-valued the administrative fine. From now on, more attention will need to be paid as to whether or not an acquisition will trigger a compulsory takeover bid.
5. What are the changes for privileges in publicly traded companies?
Under the New CML, companies must disclose all existing privileges transparently and comprehensibly to the public in the case of initial public offerings. One of the most important innovations introduced by the New CML is that privileges related to voting rights and representation in a publicly traded company which has made a loss for five consecutive years will be removed by the CMB. However, this rule does not apply in the event that the privileged shares are held by state institutions and organisations.
Regulatory Effect: Market actors should pay special attention to financial reporting and accounting treatments considering the regulation that may particularly encourage the management of publicly traded companies to more active and competitive approaches.
6. What are the new regulations for institutional investors?
The New CML has described institutional investors as collective investment corporations in accordance with EU regulations. The New CML enables investment trusts and investment funds to be more flexible in determining the securities to be bought for their portfolio. For the first time, an open ended investment company with variable capital whose net asset value is equal to the capital is regulated in our legal system.
One of the most significant changes brought about by the New CML is that founders of investment funds can only be portfolio management companies. Moreover, the New CML has cancelled the condition that bylaws of investment funds must be notarised. Also with the New CML, related party transactions of collective investment undertakings have been included in the scope of the restriction on disguised dividend distribution. Investment funds and investment companies established before the publication date of the New CML must apply to the CMB within one year from the effective date of the new secondary legislation in order to revise their bylaws or articles of associations as well as their structures and organisation in accordance with the relevant regulations.
Regulatory Effect: The institutional investment sector is expected to have a more professional, sophisticated and competitive structure according to the New CML. The new regulation stating that investment funds can only be founded by portfolio management will revitalise the portfolio management sector. On the other hand, it can be said that the sector will go through a busy period considering the number of investment funds and investment companies that will be required to comply with the new regulations.
7. What are the investment services? Which corporations will be able to provide these services?
In the light of the New CML and the MiFID regulations of the EU, investment services have been considered as capital market activity, and it has been stated that these activities will be carried out by investment firms. Under the New CML, investment services and activities are subject to the approval of the CMB, providing that these services and activities are performed as an ordinary business, commercial or professional activity. Furthermore, operation of multilateral trading systems and depository services has also been regulated by the New CML. Intermediation for trading in securities and public offerings, which were considered capital market activities in the former CML, are also regulated in the New CML by classifying more than one activity. The New CML also enables investment firms to provide the activities that are defined as ancillary services. Moreover, the New CML has determined the investment services which can be provided by banks, and has given authorisation to the CMB to regulate these services on an instrument basis.
Regulatory Effect: The framework of the investment services that will be provided by banks and brokerage houses will be clarified by the secondary legislation. Due to the new regulations and policy to be followed by the CMB, the intermediation sector can be expected to enter into a new restructuring process.
8. What are the regulations for related party transactions and restriction on prohibition on impairing a company by RIT?
The New CML brought detailed regulations with respect to transfer pricing transactions, and collective investment undertakings. Their affiliates and subsidiaries are included within the scope of the distribution prohibition on the impairing of a company by the related party as well as publicly traded companies. According to the New CML, these companies cannot reduce or prevent the increasing of their profits/assets by making agreements or through business practices which have a different price or terms that are not in accordance with the arm's length principle, market practices and the rules of prudency and honesty in business life. Furthermore, companies also cannot increase their related parties' profits or assets by not performing the activities they are expected to perform in order to protect or increase their own profits/assets as per market practices and the rules of prudency and honesty rules in business life. Under the New CML, documents regarding related party transactions must be preserved for at least eight years. Moreover, transferred funds must be paid back to the related company with legal interest. Violation of the prohibition on impairing a company by related party rules may cause criminal activity under the Turkish Criminal Code.
Regulatory Effect: The risks arising from related party transactions carried out by publicly traded companies, collective investment undertakings and their affiliates and subsidiaries have increased. On this basis, companies should establish their own policies for related party transactions in compliance with capital markets legislation.
9. What are the amendments for administrative fines? Has the scope of crimes in capital markets been changed?
The amount of administrative fines has increased considerably and has been determined as ranging between TRY20,000 – 250,000. Furthermore, for some matters such as violation of the compulsory takeover bid requirement and predatory practices, the new law introduces higher amounts as administrative fines. Regulations regarding liable persons, the right of defence and resorting to administrative justice for administrative fine decisions have been introduced with the new legislation.
A new systematic has been enhanced concerning capital market crimes in the New CML. According to this new systematic, insider trading is labelled "abuse of information", and market manipulation is labelled "market fraud". These criminal activities have been widely regulated both in the former law and in accordance with the European Union Acquis. The amount of the penalty has remained the same.
Another important change in the New CML is that the act against the prohibition on impairing company funds by related party transactions will cause the major crime of abuse of confidence under the Turkish Criminal Code.
In addition to this, the New CML regulates that a Specialised Court will be determined, which will be in charge of the trial of capital markets crimes.
Regulatory Effect:The increase of the amount of administrative fines is an important risk factor. Furthermore, new regulations about the violation of compulsory takeover bid requirements and market abusive practices calls for a higher degree of obligation.
A more effective public enforcement of capital market regulations will be expected with the introduction of Specialised Courts.
10. When will the secondary legislation come into force? For how long will the current communiqués be implemented?
The provisional articles of the New CML have introduced certain regulations for the transition period. Accordingly, the secondary legislation of the New CML will come into force within one year from the publication date of the New CML. Until the new regulations come into force, existing regulations which are not contrary to the provisions of the New CML will continue to be applied. Additionally, under these provisional articles, principles and procedures for the implementation of collective investment institutions, investment services and activities, and ancillary services will enter into force within six months. Recently, the CMB has brought drafts of several Communiqués to public attention.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.