Turkey: Major Overhaul of Capital Markets Law Sought*

Last Updated: 22 September 2005

Article by Ayse Tumerkan

The foundations of the capital markets in Turkey were laid down during the 1980’s. However, since then the development of the capital markets in Turkey have not been entirely satisfactory for a variety of reasons. Macroeconomic and political inconsistencies, shadow economy, high domestic debts, stocks and real interest rates are some of the external factors that may obstruct the development of fully-fledged capital markets with sufficient depth in the country. In addition to these external factors, the market also suffered from more specific securities-related problems, such as lack of a corporate and individual investor platform and lack of diversity in the capital market instruments.

However, present conditions indicate that the Turkish capital markets are poised to emerge. The high-standard legal framework of the capital markets in Turkey, along with the well-operating institutional structure of the Turkish Capital Markets Board enable the Turkish capital markets to have great potential for new developments that will lead to an increase in investment. Recent developments such as the renewal of private pension funds also bolster the liquidity of the markets in Turkey. Finally, the sheer possibility of Turkey acceding to the European Union (the "EU") has triggered an influx in foreign capital.

The proposed accession of Turkey to the EU requires harmonization of domestic legislation with the EU legislation in many areas, including capital markets. Such harmonization is not only vital for Turkey’s accession to the EU, but also important for Turkish capital markets to become global in terms of economic development and fair competition grounds.

While the regulatory authorities in the Turkish capital markets are working on integration to the EU legislation, the EU legislation is leading the way to a harmonized capital market within the EU member states. It is assumed that an integrated capital market throughout the EU shall decrease the cost of capital and transaction costs, as a result growth in the market shall be achieved and unemployment reduced.

Representatives of the Capital Markets Board foresee that the amendments on primary and secondary capital markets legislation for purposes of integration with the EU legislation will be completed by yearend 2005. This article aims to provide with information on the envisaged amendments on the Turkish capital markets legislation in general and on the Law on Capital Markets No. 24991 (the "Capital Markets Law") in specific.

The Capital Markets Law is the main piece of legislation regulating capital markets in Turkey. In turn, the Capital Markets Board is the independent government authority regulating and monitoring the capital market activities through issuance of regulations and communiqués, which are in line with the Capital Markets Law.

1. Integration of Capital Markets Law with the EU Legislation

The Ministry of Council’s decision dated 24 June 2003, sets out the primary steps that are required to be taken in many areas, as well as in the capital markets, for adoption of the EU legislation.

According to the said decision of the Ministry of Council, harmonization of the capital markets legislation, especially in the area of financial services, shall be among the main objectives of the regulatory authorities. This will be followed by the strengthening of supervision powers of the regulatory bodies, resulting in structural independence..

Another crucial amendment to the Capital Markets Law shall be the abolishment of restrictions imposed on the EU-based foreign investors preventing them from investing in different Turkish industries. In this regard, public offering of foreign securities in the Turkish market and unrestraint of foreign financial service providers shall facilitate the integration of the Turkish finance sector within the EU legislation.

According to Dogan Cansizlar, the Chairman of the Capital Markets Board, the integration of the Capital Markets Law shall be achieved largely by the end of 2005. The amendments that are envisaged to be implemented into the Capital Markets Law can be summarized under seven headings: amendments relating to (i) publicly listed companies; (ii) brokerage houses and their activities in the capital markets; (iii) corporate investors; (iv) private pension funds; (v) stock exchanges and other capital markets institutions; (vi) taxation in the capital markets; and (vii) effects of penalties and measures.

a. Publicly Listed Companies

As a result of the new amendments in the Capital Markets Law, application of corporate governance principles shall become widespread among the publicly listed companies. A Corporate Governance Principles Index shall be used whereby companies will be rated according to their compliances with corporate governance principles. As a result of this, investors will be able to detect which companies are corporate governance friendly. Mergers and spin-offs in publicly held companies shall be governed in compliance with the EU legislation. Furthermore, the authority of the board of directors under the authorized share capital system to increase the capital of public companies shall be limited to a maximum of five years. The scope of public disclosure in case special events allow shall be extended and the voting rights of those that do not comply with the mandatory tender offer requirements shall be suspended by court decisions. Currently, persons who acquire 25% of the voting stock of public companies are compelled to launch a mandatory tender offer for the remaining shares outstanding. Finally, it has been stated by the Chairman that the Capital Markets Board shall be granted an authorization to regulate the purchases of treasury shares, which is currently prohibited under the capital markets legislation.

b. Brokerage Houses and Their Activities in the Capital Markets

Individuals shall be entitled to be involved in capital markets activities within a framework to be determined by the Capital Markets Board. Moreover, the activities in the capital markets shall be divided into two groups that will be classified as primary and secondary activities.

c. Corporate Investors

The anti-trust drawbacks imposed on corporate investors shall be abolished during the integration process.

d. Private Pension Funds

The restrictions imposed on the incorporators of private pension funds shall be abolished and the conditions for incorporation of pension funds shall be simplified. The principles for valuation of capital in kind, invested in real estate investment trusts shall be re-determined. Portfolio custody principles shall be set out and the restrictions regarding securities that are traded by investment funds shall be abolished.

e. Stock Exchanges and Other Capital Markets Institutions

The Istanbul Stock Exchange and Istanbul Precious Metals Exchange shall be reorganized to become suitable for the competition grounds to be established throughout the integration process. Furthermore, the terms and conditions for quotations at the Istanbul stock Exchange shall be reviewed and amended as per the terms and conditions of the EU member states. Finally, transition from physical shares to registered shares shall become effective, which will lead to electronic record keeping of the shares of joint stock companies.

f. Taxation in the Capital Markets

The tax system shall be simplified, with special focus on the taxation of foreign corporate investors. Government bonds that used to have tax advantages over corporate bonds shall become subject to same taxation principles as the corporate bonds.

g. Penalties and Measures

Measures for insider trading activities shall be harmonized with EU legislation. Public prosecutors shall only be able to examine defendants and witnesses in the presence of supervisors from the Capital Markets Board. Those who engage in capital markets activities without obtaining the required permits shall become individually subject to bankruptcy proceedings. Furthermore, it has been stated that monetary penalties shall be applicable to financial crimes. The Capital Markets Board shall be granted the authority to request from the courts the deposition of joint stock company directors whom infringe on the relevant laws and regulations and shall be entitled to request appointment of new directors from the courts. The Capital Markets Board shall further be granted the authority to fine those that fail to fulfill the public disclosure requirements imposed by the Capital Markets Law. Finally new penalties shall be incorporated with respect to joint stock companies that proceed with public offerings without fulfilling the registration requirement of the Capital Markets Board.

Amendments to Secondary Legislation:

Throughout late 2003 and 20042, there have been many amendments on the capital markets secondary legislation, such as an increase in free float on the stock exchange, defining of investor groups in public offerings, extension of the scope of public disclosure requirements so as to procure provision of more information to investors, improvement in the offering circular standards, acceptance of real persons as incorporators of portfolio management companies, regulation of mergers of publicly listed companies, acceptance of International Financial Reporting Standards for publicly listed companies, securities companies and portfolio management companies and revisions on the public offering and sale shares in state owned entities.

The CMB promulgated a number of new regulatory acts for governing the above matters with the aim of providing a better investment environment and ensuring compliance with the acquis communautaire3 which is a requirement according to the Ministry of Council’s decision dated 24 June 2003, for the coordination of the adoption of the EU legislation.

In order to ensure compliance with the acquis communautaire, the CMB has amended eight communiqués:4

Communiqué on Principles Regarding Public Disclosure of Material Events Series VIII No. 39 was amended to improve the definition of "controlled undertaking" and introduced an additional disclosure requirement related to rights attached to shares to be obtained as a result of converting the convertible bonds.

Communiqué on Principles Regarding Issuers Exemption Conditions and Deletion From Board’s Registry Series IV No. 9 was amended to grant an exemption to the issuers from publishing a prospectus in certain cases (e.g. private placement, merger, issuance of convertible bonds, etc.).

Communiqué on Principles Regarding the Registration of Bonds with the Board Series II No. 13, Communiqué on Principles Regarding Registration of Profit and Loss Sharing Certificates with the Board Series III No. 27, Communiqué on Principles Regarding Registration of Asset Backed Securities and Establishment and Activities of General Finance Undertakings Series III No. 14, Communiqué on Principles Regarding Registration of Commercial Papers with the Board Series III, No. 13, Communiqué on Principles Regarding Issuance of Publicly Offered Dividend Right Certificates Series III No. 10, Communiqué on Principles Regarding Registration of Gold, Silver, Platinum Bonds with the Board Series III No. 26 were amended to oblige the mandatory use of a broker company during the public offering of the above stated securities.

Turkish Capital Markets have displayed rapid progress since the 1980’s , procuring transfer of significant amount of funds to the real sector. However, especially with adverse effects of macroeconomic inconsistencies, the Turkish capital markets failed to meet its huge potential.

In order to increase the demand for security instruments in the market, the platform for individual and corporate investors should be developed. Provision of financial awareness to investors via disclosures is crucial for the direction of investments to the capital markets. For this purpose, a national campaign shall be organized to provide information to the public on every aspect of the capital markets.

On the other hand, capital markets in Turkey have a fast operating and well-organized structure. Use of high technology enables speedy and safe transactions and safe record keeping in relation to such transactions. The capital markets employees are well educated, open minded and visionary. Moreover, the legal structure of the capital markets is suitable for any integration attempts with the EU legal framework.

Implementation of the corporate governance principles, adaptation of a registration system for the security instruments, establishment of courts with expertise on capital markets and revisions in the taxation system shall increase the reliance of investors in the market.

The amendments to the Capital Markets Law and the secondary legislation shall address the loopholes of the current legislation on capital markets. Finally, as a result of the integration of Turkish Capital Markets with the EU legislation and practices, the needs of the market players shall be better addressed.


* While the Capital Markets Board has not yet made available to the public its draft of the amendments to the Capital Markets Law No. 2499, this article has been prepared taking into account the different comments and opinions of various market players and organizations and, of course the Capital Markets Board.

1. Published in the Official Gazette No: 17416 on 30 July 1981. (www.spk.gov.tr).

2. This article summarizes legal developments throughout 23 September 2004.

3. The entire body of the laws of the EU is known as acquis communautaire. This includes all the treaties, regulations and directives passed by the European institutions as well as judgments. (http://europa.eu.int/comm/development/body/legislation/index_en.htm ).

4. Published in the Official Gazette No: 25515 on 7 June 2004.

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.

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