GRATA FINANCE & SECURITIES GROUP

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1 GRATA FINANCE & SECURITIES GROUP LEGAL ALERT 1 (JANUARY MARCH 2012) In keeping with GRATA s practice of informing clients regarding important legal developments that might influence their business, we draw your attention to the following recent changes in Kazakhstani financial legislation that occurred during the period of January - March IN THIS ISSUE: 1) Law to Recover Competitive Enterprises 2) Law on Minimisation of Risks 3) Currency Regulation 4) Law on People s IPO 5) Law on State Support for Industrial and Innovative Activities 6) Project Finance Law 7) Amendments to Investment Law 1) LAW TO RECOVER COMPETITIVE ENTERPRISES The Law of the Republic of Kazakhstan No. 564-IV ЗРК of 17 February 2012 "On amendments to some legislative acts of Kazakhstan regarding the recovery of competitive enterprises (the Law ) 1, came into effect on 12 March 2012 (apart from certain provisions). The main purpose of the Law is to implement the Post-Crisis Recovery Program approved by the Government of Kazakhstan Resolution dated March 4, 2011 and improve bankruptcy legislation in Kazakhstan. It is envisaged that it would be used mainly for the recovery of Kazakh competitive enterprises affected by financial crises, whose debts exceed KZT 4.5 bln. 2 Finance & Securities Group What we do: Bank Lending Capital Markets Project Finance & PPP Bankruptcy & Restructuring Asset Finance & Leasing Financial Services Regulation & Derivatives Foreign Direct Investments in Kazakhstan Financial Institutions M&A Banking Litigation Islamic Finance Insurance & Reinsurance For further information, please contact Please note the following provisions of the Law: Introduction of Accelerated Rehabilitation The main innovation of the Law is the introduction of the so-called accelerated rehabilitation as a new pre-insolvency procedure 3, which in essence is a simplified procedure for enterprise rehabilitation. Shaimerden Chikanayev Partner, Finance & Securities Group M E. schikanayev@gratanet.com 1 The Law introduced changes to the Law of the Republic of Kazakhstan dated 21 January 1997 no. 67-I On Bankruptcy, as well as other laws, 2 According to the Kazakh Prime Minister s press service, backbone Kazakh enterprises will undergo a recovery process by Current Bankruptcy Law provides for the following non-financial insolvency procedures: (i) rehabilitation, (ii) external supervision and (iii) bankruptcy. Finance & Securities Group s achievements Chambers Global: The team is noted for its strength in banking and finance matters. Legal 500: The team has particular expertise in banking and finance. Best Capital Markets 1 Team of the Year Corporate Lawyers Forums (2010 and 2011).

2 Bankruptcy Law, as amended, now allows a commercial entity (if no bankruptcy or rehabilitation proceedings have started yet and if it is either (i) insolvent or (ii) unable to meet its monetary obligations upon due date in the next twelve months) to file an application to the relevant Kazakh state court and ask for the initiation of the accelerated rehabilitation procedure. A mandatory prerequisite for the accelerated rehabilitation process is that the debtor be able to improve its financial position. The following are among the major legal implications resulting from an initiation of the accelerated procedure: (i) stay of enforcement of court decisions and/or arbitration awards issued earlier upon claims of creditors, that are so-called homogeneous creditors 4, whose claims are stipulated in the rehabilitation plan and (ii) these homogeneous creditors whose claims are stipulated in the rehabilitation plan cannot file for bankruptcy of the debtor. The Law also introduced the concept of so-called measures of state support to be determined on a case-by-case basis by the Government of Kazakhstan. The accelerated rehabilitation procedure can be initiated against a debtor who is a recipient of these measures of state support. The main difference between the accelerated rehabilitation procedure and the standard rehabilitation procedure is that the former is a fast-track procedure (it will generally not last more than 2 years) and, generally, requires prior approval by a simple majority of the affected creditors. Improvement of the Rehabilitation Procedure The Law also introduced, inter alia, the following changes to the regulation of the existing (i.e. standard) rehabilitation procedure under the Bankruptcy Law: The introduction of rehabilitation is now possible only upon application to the court by the debtor himself, if he is either (i) insolvent or (ii) unable to meet his monetary obligations upon due date in next twelve months. A mandatory prerequisite for the rehabilitation is that the debtor must be able to improve his financial position. The consent of the creditors committee or authorised state body for granting rehabilitation is no longer required. The Law requires that the rehabilitation plan be developed by the debtor and the creditors within three months of the date that the court decision on the initiation of the rehabilitation procedure takes legal effect. Once the rehabilitation plan is approved by the state court, any transactions with the assets of the debtor which are conducted outside the ordinary course of business and which are not stipulated in the rehabilitation plan require the prior approval of the creditors meeting. Importantly, the rehabilitation procedure can now last up to 5 years (before it could last up to 3 years). An insolvent debtor is now entitled to apply to the court for the suspension of the bankruptcy proceedings and the introduction of the rehabilitation procedure, within 10 4 The group of creditors with homogeneous claims means, basically, the group of creditors with identical claims to the debtor, and such creditors shall not have priority over each other within one group. Examples of the groups of creditors with homogeneous claims are: the group of secured creditors, the group of tax creditors, the group of creditors financial organizations with claims under unsecured loans etc. 2

3 days of the date it received a copy of the court ruling on the initiation of bankruptcy proceedings. Interestingly, the Law allows a so-called pledge lender (i.e. secured creditor) at any time during the rehabilitation procedure to apply to the relevant state court for in-court foreclosure, if (i) there is a breach of any provision of the Bankruptcy Law which poses a risk to its legal interests; (ii) there is a breach of its debt repayment schedule; (iii) there is a decrease in the value of its pledge property which infringes upon its interests; or (d) the pledged property is not required any more for the borrower to continue its business activities or for the realisation of the rehabilitation plan. Extending Creditors Competence The Law introduced the concept of a creditors meeting which henceforth can be convened under the accelerated rehabilitation procedure and the rehabilitation procedure. The exclusive competence of the creditors meetings under the accelerated rehabilitation framework includes, among other things, the right to approve members of the creditors committee and approve any amendments to the rehabilitation plan. The exclusive competence of the creditors meeting under the rehabilitation procedure is even broader. The Law abolished the limitation on the maximum number of creditors in the creditors committee and significantly extended the authority of the creditors committee. The Law requires that the representative of a creditor (creditors) with claims exceeding 50% of the total claims of the particular group of creditors with homogeneous claims be included in the creditors committee (before only creditors with the largest claims had a right to be a member of the committee). 2) LAW ON MINIMISATION OF RISKS The Law on Minimisation of Risks 5 came into effect on 1 February 2012 (apart from certain provisions). The main purpose of the Law is to separate Kazakh banks from expressly or impliedly affiliated structures. In addition the Law has introduced further improvements of IPO regulation and legislation relating to securities. The most noteworthy of the provisions concerning securities regulation include the following: Central Registrar From 2013 all existing corporate registrars would cease to exist and there would only be one single registrar responsible for maintaining the system of registers of security holders. It is envisaged that the National Bank of Kazakhstan would own a majority stake in the Central Registrar. The establishment of the Central Registrar is supposed to improve control over the registration of transactions with securities, ensure secure storage of information and generally aid the development of the securities market in Kazakhstan. 5 Law of the Republic of Kazakhstan dated 28 December 2011 no. 524-IV "On Introducing Amendments to Certain Legislative Acts of the Republic of Kazakhstan in relation to Regulation of Banking Activity and Financial Institutions in respect of Minimisation of Risks". 3

4 Ownership Structure of Pension Funds Specific conditions would become applicable to the ownership structure of Kazakh pension funds 6, as of 1 January 2013: (i) (ii) All shares shall be listed on KASE; A pension fund shall have at least three so-called large shareholders (i.e. that have 10% or more shares in each case) not affiliated with each other. A single shareholder or group of affiliated shareholders shall not have more than 75% of voting shares of a pension fund. Alternatively, the total stake of minority shareholders in a pension fund must be more than 25% of voting shares. Approval for the Listing of Securities Abroad and Placement Abroad A new provision of the Law on the Minimisation of Risks requires that a resident 7 of Kazakhstan receive the prior approval of the National Bank for the listing of securities on a foreign stock exchange. Local Offer Requirement The Law on the Minimisation of Risks obliges resident Kazakh resident not only to offer bonds on local stock exchange simultaneously with a placement on a foreign stock exchange, but to actually sell at least 20 per cent of the total issuance, if there is demand. Insider Trading The Law on the Minimisation of Risks has also considerably expanded the list of persons classified as insiders for the purposes of the Securities Law. Auditors, brokers, independent appraisers, stock exchange, state officials of the National Bank and any other persons who have access to insider information would now be considered insiders. Representative of Bondholders To protect the interests of the bondholders, the Law on the Minimisation of Risks has broadened the statutory powers of the so-called representative of bondholders so it will be empowered with the following additional rights: (i) to control the use of the proceeds by the issuer for a specific purpose, (ii) to monitor the financial position of the issuer and (iii) to file a suit on behalf of 50 per cent or more of the bondholders). Mandatory Covenants of a Bonds Issuer From now on, all Kazakh companies 8 would have to undertake and comply with (until the expiration date of the bonds) certain mandatory negative covenants in order to issue local bonds: 6 These legal requirements would not be applicable only to pension funds if one of its shareholders is the Republic of Kazakhstan. 7 For the purposes of the Securities Law, residents of Kazakhstan shall be considered companies incorporated outside of Kazakhstan if their place of management is de facto in Kazakhstan or if two thirds of their assets are located on the territory of Kazakhstan. 8 These statutory restrictions are not applicable to banks and organisations under restructuring, as provided in relevant laws. 4

5 (i) (ii) (iii) (iv) The issuer cannot sell more than 25% of its assets; The issuer must not be in default under any of its obligations other than those relating to bonds for an amount greater than 10 per cent of its total assets, as of the date of state registration of the bonds issuance; The issuer cannot make changes in its constituting documents which would alter the core business of the company; and The issuer cannot change its form of incorporation. Central Counterparty The Law on the Minimisation of Risks has also introduced the concept of the central counterparty (the CCP ). In theory, the introduction of the CCP shall lower the market-side risks and the costs of post trade processing (for example, as part of the introduction of the T+3 settlement by KASE). We note however that, though the CCP implementation normally requires the establishment of a special reserve and guarantee funds, the Law omits to mention this matter. The main changes in banking legislation introduced by the Law on the Minimisation of Risks are as follows: Limitations on Bank s Shareholding in Financial Organizations The Banking Law, as amended, requires that a Kazakh bank s shareholding in a financial organisation (including foreign banks, insurance companies, and pension funds) shall not exceed 10% 9 of the bank s own in relation to each financial organisation. The Law also requires that in any case the total amount of the Kazakh bank s shareholding in financial organizations shall not exceed the maximum amount established by the financial regulator (this amount is to be promulgated soon by the FMSC in its bylaws). In addition, from 1 January 2013, as a general rule, a 10% (or greater) shareholding by a Kazakh bank in financial organizations (both local and foreign) will be permissible only if the Kazakh bank has a so-called banking holding 10 and meets minimum capital requirements to be promulgated by the FMSC. Limitations on a Bank s Shareholding in Non-Financial Organizations A Kazakh bank can acquire a maximum of 10% of placed shares/charter capital of a non-financial organization, provided that these shares meet the requirements of the FMSC bylaws soon to be promulgated. Limitation of Bank Holding s Activity Save for certain exceptions, as a general rule bank holdings in Kazakhstan are now prohibited from engaging in any transactions that constitute entrepreneurial activity, buying shares or stakes in companies or making any transactions with securities. Before similar restrictions were only applicable to Kazakh banks. 9 Before the investment limit was 15% of the bank s own capital as per each financial organization, and there was no limit on the total amount of a bank s shareholdings in financial organizations. 10 A bank holding is a legal entity that with prior consent of the FMSC (Kazakh financial regulator) owns, directly or indirectly, 25% or more of placed shares of a Kazakh bank. 5

6 Limitation on Enforcement of Share Pledge A Kazakh bank cannot become a title owner of shares/charter capital of companies to an extent greater than 10% (previous threshold was 25%) of its own capital, as a result of an enforcement of share pledges. Moreover, the law stipulates that a Kazakh bank shall even have to dispose of these shares not later than 12 months after they are acquired. Prohibition of OTC Deals for Banks Save for certain exceptions, Kazakh banks can now buy and sell securities and derivatives on a stock exchange only. Limitations on Deals with Specially Related Parties Kazakh banks are prohibited from providing loans and issuing bank guaranties in favor of so-called specially related parties 11, unless (i) such loans or guarantees are provided to parties that are members of a banking conglomerate, (ii) the loan/guarantee is secured and the security package meets the specific requirements of the FMSC (soon to be promulgated) or (iii) these specially related parties demonstrate financial stability (relevant criteria to be determined by the FMSC). Another novelty is that borrowers from now on would be required to fully disclose information on the final beneficiaries of the borrower, as well as other matters. Permission to Have Subsidiaries Not only Kazakh banks but also banking holdings are now obliged to seek the prior consent of the FMSC to incorporate or acquire a subsidiary. So-called subsidiaries of Kazakh banks cannot have their own subsidiaries. 3) CURRENCY REGULATION The Law of the Republic of Kazakhstan dated 9 January 2012 no. 531-IV ЗРК On Introducing Amendments to Certain Legislative Acts of the Republic of Kazakhstan in relation to Currency Regulation and Currency Control Issues (the Law ) came into force on 28 January 2012 (apart from certain paragraphs), introducing amendments to the Currency Control Law 12 and National Bank Law 13. Foreign Trade Contract Registration The most noteworthy innovation of the Law is its intended simplification of the repatriation of currency control requirements by way of replacing the so-called transaction passport with the procedure of assigning contract record number for the foreign trade contract. Before an exporter or importer was required to open a transaction passport for any foreign trade transactions amounting to an equivalent of US $50,000 (or more) with a Kazakh bank. The transaction passport was then supposed to be presented to the 11 The specially related parties definition covers, inter alia, (i) management of the bank and relatives of the management, (ii) a socalled large participant (a person holding 10% or more voting shares in the bank) and their relatives, (iii) affiliates of the bank etc. 12 Law of the Republic of Kazakhstan dated 13 June 2005 no. 57-III On Currency Regulation and Currency Control. 13 Law of the Republic of Kazakhstan dated 30 March 1995 no On the National Bank of the Republic of Kazakhstan. 6

7 customs authorities who were obliged to confirm the match between monetary and trade inflows and outflows. According to the new procedure, the foreign trade contract need bear just a stamp of the relevant servicing Kazakh bank, including the contract register number (the CRN ). The National Bank has also developed drafts of the rules on the CRN procedure (available on the National Bank s official website). Until the new rules enter into force the old rules relating to formalisation of transaction passports apply. 4) LAW ON PEOPLE S IPO The Law of the Republic of Kazakhstan No. 538-IV ЗРК of 12 January 2012 "On amendments to some legislative acts of the Republic of Kazakhstan regarding development of the securities market of the Republic of Kazakhstan (the Law ) 14 came into effect on 25 January 2012 (apart from certain provisions). The main purpose of the Law is to create an appropriate legislative framework in Kazakhstan for implementing the so-called People s IPO state programme which envisaged the privatisation of a number of Kazakh blue chip companies through initial public offerings on the national stock exchange. Please note the following provision of the Law: A Kazakh issuer cannot sell its shares to foreign citizens and/or foreign companies or stateless persons, if the controlling portion of its shares is either directly or indirectly owned by the JSC NWF Samruk-Kazyna, at the time these shares are placed on the stock exchange in fulfilment of the relevant decree of the Government of Kazakhstan to be adopted. The main idea of the Law, evidently, is that the main target investors of the proposed People s IPO are citizens of Kazakhstan and local pension funds. 5) LAW ON STATE SUPPORT FOR INDUSTRIAL AND INNOVATIVE ACTIVITIES The Law of the Republic of Kazakhstan No. 534-IV ЗРК of 9 January 2012 "On State Support for Industrial and Innovative Activities (the Law ), came into effect on 6 February The Law is aimed at implementing the state accelerated industrial and innovative development program and at improving the competitiveness of the national economy by boosting the development of priority sectors. Please note the following provision of the Law: Measures of State Support The Law sets out an exhaustive list of measures for state support, which a so-called subject of industrial and innovative activities 15 can benefit from, including, among others: 1. Financing (including co-financing)of projects, leasing financing; 2. Provision of guarantees and sureties for loans; 3. Arranging bank lending; 4. Subsidizing of interest of bank loans and bond issues coupons. 5. Guaranteed off-take. 14 The Law introduced changes to the Securities Law, JSC Law etc. 15 These are natural persons and/or legal entities that implement industrial-innovative projects in priority sectors of economy. 7

8 6) PROJECT FINANCE LAW The Law of the Republic of Kazakhstan dated 12 January 2012 no. 539-IV On Introducing Amendments to certain Legislative Acts of the Republic of Kazakhstan in relation to Project Finance Issues (the Law ), came into force on 6 February It introduces the concept of project finance into Kazakhstani legislation by amending the existing Securitisation Law 16. Please note the following major provisions of the Law: Concept of Project Finance The Law introduced a concept of project finance that is defined as a method of arranging the financing of a long-term project that is secured by way of assignment of receivables related to the creation and transfer of assets and also rendering services and/or manufacturing products and/or execution of work while using the created asset. A project finance transaction under Kazakh law involves a client 17 that enters into a so-called base agreement 18 with an executor 19 and, apart from certain exceptions discussed below, with the optional involvement of a so-called special finance company 20. The Executor on the basis of the signed Base Agreement raises debt finance for the project (by way of concluding loan agreements with creditors and/or issuing bonds or attracting finance from the SFC) and assigns receivables under the Base Agreement to the creditors or SFC as a security or provides other collateral. The Law requires that the appropriate Executor for the project shall be selected on a tender basis in accordance with the Concession Law. The Law provides the Client with the possibility to change the Executor at any time of the project if the Executor fails to properly meet its obligations under the Base Agreement. The list of investment projects that Kazakhstan intends to implement on the basis of the project finance mechanism shall be determined by the Government of Kazakhstan from time to time. Special Finance Company Special Finance Company (the SFC ) is in essence the special purpose vehicle whose activities are strictly limited to project finance transactions and the Law explicitly states that any activities of the SFC outside the scope of the project finance transactions are void. 16 Now the Law of the Republic of Kazakhstan dated 20 February 2006 no. 126-III On Project Finance and Securitisation. 17 That can be a natural person or legal entity or the state represented by the Government or by local executive body (i.e. Akimat/mayor) and also by authorised state agencies. 18 Base agreement is defined as a written agreement whereby one party undertakes to create and transfer to another party an asset or render service and/or manufacture products and/or execute some work while using created asset. 19 Executor is defined as a legal entity that in accordance with the base agreement creates and transfers an asset and also renders services and/or manufactures some products and/or executes some work while using created asset. 20 That is a legal entity created only for the purposes of the project finance transactions or securitisation who is a beneficiary of an assigned receivables (the SFC ). 8

9 Interestingly, legal entities incorporated or that have affiliates incorporated in certain offshore/black-listed countries 21 cannot directly or indirectly own and/or use and/or dispose of voting shares of the SFC. So-called segregated assets 22 of the SFC are used only for the purposes of protecting the interests of the creditors and the levy of execution upon segregated assets during bankruptcy proceedings is prohibited. Importantly, if one of the parties of the project finance transaction is the Republic of Kazakhstan, it is a mandatory requirement of the Law that SFC shall be used. The project finance transaction shall also be implemented with the involvement of the SFC if at least one of the creditors requires it to be. 7) AMENDMENTS TO INVESTMENT LAW The Law of the Republic of Kazakhstan dated 20 February 2012 no. 567-IV On Introducing Amendments to Certain Legislative Acts of the Republic of Kazakhstan in relation to Investments Issues (the Law ), came into force on 3 March 2012 (save for article 1.2 of the Law that entered into force on 5 July 2010). It introduced amendments to the Investments Law 23 and Subsoil Use Law 24. Please note the following major provisions of the Law: Customs Duties Exemption The Law expanded the list of assets that can be exempted from import customs duties if a Kazakh company implements an investment project or so-called strategic investment project 25 on the basis of an executed investment contract. Before only equipment and components of the equipment could benefit from import customs duties exemption, if used for the performance of the investment project. The Law states that (i) production manufacturing equipment, (ii) its components, (iii) spare parts and (iv) raw and other materials, can now be imported without payment of customs duties, if these are used for an investment project or the strategic investment project. * * * * * We hope this Legal Alert of the GRATA Finance & Securities Group is useful to you in your present work. Please let us know if you have any questions. We would be glad to be of assistance. As we are constantly trying to improve the quality of our services, we would highly appreciate your recommendations or comments as to how we can serve you better. Furthermore, if there is anything we omitted to mention when working on a project of yours, please do let us know. 21 This seems to be the same list of offshore/black-listed countries as promulgated by the FMSC (financial regulator) for Kazakh banks and insurance companies. 22 Segregated assets consist, mainly, of assigned right (receivables) and also money on bank custodian account received from assigned receivables payments. 23 Law of the Republic of Kazakhstan dated 8 January 1998 no. 373-II On Investments. 24 Law of the Republic of Kazakhstan dated 24 June 2010 no. 291-IV On Subsoil and Subsoil Use. 25 This is an investment project included in the list of projects approved by the Government of Kazakhstan and that has strategic importance for the economic development of Kazakhstan. 9

10 Comments and recommendations can be sent to We will make sure we fix any problems and continue to offer you the best service we can. Sincerely yours, Shaimerden Chikanayev This Legal Alert is provided for your convenience and does not constitute legal advice. It is prepared for the general information of our clients and other interested persons. This Legal Alert should not be acted upon in any specific situation without appropriate legal advice and it may include links to websites other than the GRATA website. If you no longer wish to receive legal alerts from the GRATA Finance & Securities Group, please send an to 10