Turkey: Major Overhaul Of Capital Markets Law Sought

Last Updated: 17 November 2005
Article by Ayse Tümerkan

The foundations of the capital markets in Turkey were laid down during the 1980s. However, since then the development of the capital markets in Turkey has not been entirely satisfactory for a variety of reasons. Macroeconomic and political inconsistencies, the so-called shadow economy, high domestic debt 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 (“CMB”) 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 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. The basis for the accession negotiations are laid down in a document called Negotiation Framework for Turkey dated October 2005. On 3 October 2005, the negotiations were symbolically launched and, on 20 October 2005, the screening was opened for some of the 35 chapter headings. Screening is the formal process of examination of the entire body of the laws of the EU (that is known as acquis communautaire and includes all the treaties, regulations and directives passed by the European institutions as well as judgments, ) by the Commission in order to identify with, and explain to, the Turkish authorities the legal frameworks and administrative capacities that need to be adapted so as to apply EU law as a Member State. The screening will be conducted in two stages. During the first stage, the Commission would explain its acquis to Turkey, while in the second stage it would be Turkey’s turn to explain its laws. The screening process is scheduled to take about a year to complete and will be followed by negotiations between the Commission and Turkey on a chapter-by-chapter basis.2

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 would decrease the cost of capital and transaction costs, as a result growth in the market will be achieved and unemployment reduced.

Representatives of the CMB foresee that amendments to primary and secondary capital markets legislation for the purposes of integration with the EU legislation will be completed by yearend 2005. The Capital Markets Law (“Law”) is the main piece of legislation regulating capital markets in Turkey. In turn, the CMB is the independent government authority regulating and monitoring the capital market activities through issuance of regulations and communiqués, which are in line with the Law.

Integration of Capital Markets Law with the EU Legislation

The Council of Ministers decision dated 24 June 2003 sets out the primary steps that are required in many areas, as well as in the capital markets, for adoption of the EU legislation. According to this decision of the Council of Ministers, harmonization of the capital markets legislation, especially in the area of financial services, will 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 Law will be the abolition 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 will facilitate the integration of the Turkish finance sector within the EU legislation.

According to Doğan Cansızlar, Chairman of the CMB, the integration of the Law will be achieved largely by the end of 2005. The amendments sought by the Draft are a first and major step in this respect and can be summarized under seven headings: amendments relating to (i) publicly listed companies; (ii) financial instruments; (iii) brokerage houses and their activities in the capital markets; (iv) pooled investment vehicles; (v) stock exchanges and other capital markets institutions; (vi) widening the scope of investors’ protection; and, (vii) increasing effectiveness of penalties and measures. Please find below a summary of some of the most important amendments to be introduced by the Draft:

  1. Publicly Listed Companies

    The threshold triggering the mandatory application of the Law will be increased from 250 to 500 shareholders, i.e., joint stock corporations (anonim şirket) with more than 500 shareholders will be deemed to be public. Mergers and spin-offs (partial division or split-off) in publicly held companies will 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 will be limited to a maximum of five years. The scope of mandatory public disclosures (ad hoc disclosures) in case special events occur will be extended in order to increase transparency of listed companies and the level of information available to investors. The voting rights of those that do not comply with the mandatory tender offer requirements will be suspended by court decisions. Moreover, non-compliant shareholders may be fined with a penalty that is proportional to the amount of investment not incurred as a result of the omitted mandatory tender offer. 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 and holdouts may be fined with a penalty the upper limit of which is defined in the Law. Finally, the Draft will grant the CMB authority to regulate the purchases of treasury shares, which is currently prohibited both under the Turkish Commercial Code and the capital markets legislation.

  2. Financial Instruments

    The Draft introduces the new term and overarching concept of Financial Instruments to embody all types of instruments used in capital markets. The authority to define the limits for issuing debt instruments will pass to the CMB. The Draft will enable the development of novel instruments in the area of asset-backed securities and mortgage financing.

  3. Brokerage Houses and Their Activities in the Capital Markets

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

  4. Pooled Investment Vehicles

    The Draft will further the development of the mortgage-based housing finance model introduced by the recent draft law on mortgage banking3 to be expected to be enacted soon. The restrictions imposed on the incorporators of Mutual Funds (yatırım fonu) will be abolished and the conditions for incorporation of Investment Trusts (yatırım ortaklıkları) will be simplified. The principles for Mutual Fund managers and management will be re-regulated. The principles for valuation of capital in kind, invested in real estate investment trusts will be re-determined. Portfolio custody principles will be set out and the restrictions regarding securities that are traded by Mutual Funds will be abolished.

  5. Stock Exchanges and Other Capital Markets Institutions

    Stock exchanges will be allowed to be (re-)organized in the legal form of public or private law entities paving the way for a public offering of the Istanbul Stock Exchange and the Istanbul Gold Exchange. Furthermore, the terms and conditions for a listing on the Istanbul Stock Exchange will be reviewed and amended as per the terms and conditions of the EU member states.4

  6. Widening the Scope of Investors’ Protection

    All Financial Instruments will become subject to the Investors’ Protection Fund and the upper limit of the secured amount per individual investor is increased to the YTL equivalent of 20,000 Euros.

  7. Increasing Effectiveness of Penalties and Measures

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


The overhaul of the Law coincides with certain amendments to the existing tax regime. The tax system will be simplified, with special focus on the taxation of foreign corporate investors. Government bonds that used to have tax advantages over corporate bonds will become subject to same taxation principles as the corporate bonds. Since convertible bonds have not been issued by Turkish companies for the last ten years and the tax regime in 2006 is expected to level the playing field for corporate and government bonds, this may be considered as a door opener for corporate bond issuing transactions.

Turkish Capital Markets have displayed rapid progress since the 1980s, procuring transfer of significant amounts 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 will 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 corporate governance principles, adaptation of a registration system for the security instruments (dematerialization), establishment of courts with expertise on capital markets and revisions in the taxation system will increase the reliance of investors in the market.

The Draft addresses some of the loopholes of the current legislation on capital markets. As a result of the integration of Turkish Capital Markets with the EU legislation and practices, the needs of the market players will be better addressed.


  1. In August 2005, the Capital Markets Board has made available to the public on its web site its draft of the proposed amendments to the Capital Markets Law No. 2499 (“Draft”) and this article has been prepared based on the Draft.
  2. The basis for the accession negotiations are laid down in a document called Negotiation Framework for Turkey dated October 2005.
  3. See Ebru Ünal, “Mortgage Banking – The New Hope” in: Newsletter, Winter 2005 Edition, p. 10.
  4. Please note that the transition from physical shares to dematerialized shares will become effective as of 28 November 2005, which will lead to electronic record keeping of the shares of listed joint stock companies.

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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