The Law No. 7222 on Amending the Banking Law and Certain Laws ("Law No. 7222"), published in the Official Gazette on February 25, 2020 and entered into force on the same date, has introduced "Article 61/B - Project finance, project finance fund and project-based security" to the Capital Market Law No. 6362 ("Capital Market Law"). The Capital Markets Board ("CMB") announced a draft Communiqué on Project-Based Securities (III-61/B.1) ("Draft Communiqué") to elaborate on implementation of Article 61/B and introduce relevant secondary legislation in accordance with market needs and expectations with an announcement dated July 24, 2020 and requested relevant opinions and suggestions.

Article 61/B defines project finance as providing financing for the projects such as infrastructure, energy, industry or technology investments that entail a large amount of capital with long-term need through project finance funds.

"Project finance fund" and "project-based security" are new and innovative concepts for Turkish capital markets. In accordance with Article 61/B and its recital, basic functions and mechanism of project finance funds could be summarized as follows: (i) to issue project-based securities for investors regardless of the risks of the issuers to the extent possible and (ii) to raise money and/or acquire assets for financing of large-scale projects. Accordingly, the financing is directly allocated to the projects, not to the issuers, and proceeds and other rights arising from projects are assigned to project finance funds in order to minimize and ease potential risks of the investors (owners of the project-based securities). It is expected by lawmakers that these concepts would create secured, alternative and attractive instruments for both local and foreign investors and provide long-term financing opportunities for public projects as well.

Project finance funds can be incorporated only by duly authorized investment (intermediary) firms. These funds do not have a legal personality similar to typical funds; however, for certain transactions including registration, amendment and annulment to be conducted before official registries (e.g. land registries, trade registries), it is deemed and stipulated that project finance funds would have limited legal personality. In other words, any right or asset may be registered before relevant official registries on behalf of duly incorporated and managed project finance funds.

It is also worth noting that assets and rights of project finance funds cannot be disposed, pledged, provided as warranties, seized even for public debts or included in bankrupt's assets in any way until redemption of the project-based securities.

Article 61/B of the Capital Market Law provides a general structure on project finance, project finance funds and project-based securities for introductive purposes. Therefore, it is stated in fourth paragraph of the article that the procedures and principles regarding assets and rights, founders, incorporation process, activity conditions and requirements, management and termination of project finance funds as well as issuance procedures of project-based securities are to be determined and introduced by the CMB. It is expected that the CMB will introduce final and developed version of the Draft Communiqué until the end of 2020 or at the beginning of 2021.

The Draft Communiqué requires that project finance funds to be incorporated in Turkey and bear "project finance fund" phrase in their titles. In addition, the incorporation process would be subject to prior approval of the CMB. The Draft Communiqué also stipulates that there must be a fund committee in project finance funds and it shall consist of three (3) members and at least one of these members should have relevant qualifications of independent members of board of directors in public companies in accordance with the corporate governance regulations of the CMB. In this respect, fund committees would be generally responsible for the duties of representation, management and supervision of audit processes.

Given the roles, duties and liabilities of members of fund committees, it could be inferred fund committees would have general characteristics of board of directors in joint stock companies. It should be noted that the Draft Communiqué also includes other tight rules and requirements with regard to activities of project finance funds to establish a transparent and reliable platform for the investors. These are basically related to issuance principles of project-based securities, features of assets that could be included in the funds' portfolios, allowed expenditures of the funds, procedures and principles of public disclosures, financial reporting and independent audits.

Considering the growing need for financing in various projects, the entry into force and implementation of the communiqué would initiate a new era for project finance and capital markets in Turkey, and also serve as win-win situation for both issuers and investors.

This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in September 2020. A link to the full Legal Insight Quarterly may be found here

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.