On November 10, 2015 Kuwait received news through the official announcement in the Kuwait Official Gazette that the highly anticipated new bylaws governing the Capital Markets Authority (CMA) and regulating securities activities were issued pursuant to Decree No. 72 of 2015 – Executive Bylaws of Law 7 of 2010 regarding the Establishment of the Capital Markets Authority and Regulating Securities Activities and its Amendments (the New CMA Bylaws). The inauguration of the New CMA Bylaws was well received as a major piece of reform that will benefit Kuwait’s capital markets and the economy overall.
The New CMA Bylaws, for the most part, repeal the previous CMA Bylaws issued in 2010 and most of the resolutions and circulars issued by the CMA’s Board of Commissioners during the period running from 2011 to 2015. To address the gaps and the need for further laws and reforms in order to regulate the country’s capital markets, the Kuwaiti government recognised that the promulgation of the New CMA Bylaws was necessary in order to foster a reliable market, with the intent of protecting market investors, promoting investment confidence and supporting the business environment in Kuwait.
The New CMA Bylaws are organised into 16 modules, which collectively contain 1665 articles covering many aspects of the capital market and securities regulatory system as follows:
- Module 1 – Glossary
- Module 2 – Capital Markets Authority
- Module 3 – Enforcement of the law
- Module 4 – Securities exchanges and clearing agencies
- Module 5 – Securities activities and registered persons
- Module 6 – Policies and procedures of licensed persons
- Module 7 – Clients’ funds and clients’ assets
- Module 8 – Conduct of business
- Module 9 – Mergers and acquisitions
- Module 10 – Disclosure and transparency
- Module 11 – Dealing in securities
- Module 12 – Listing rules
- Module 13 – Collective investment schemes
- Module 14 – Market conduct
- Module 15 – Corporate governance
- Module 16 – Anti-money laundering and combating financing of terrorism Although each module is important, in this article we highlight certain notable modules, providing an overview of Module 3, Module 9, Module 11, Module 12 and Module 15.
Module 3 – Enforcement Of The Law
Knowing the temperamental nature of capital markets, the CMA recognises that commencing an arbitration proceeding to resolve disputes arising from capital markets’ dealings is sometimes necessary. Due to the speed of the process and the anticipated costs associated with the arbitration process, Article 148 of Law No. 7 of 2010 and its amendments permits the referral of matters to arbitration as a resolution mechanism for disputes arising from capital markets transactions. The corresponding rules and instructions pursuant to Article 148 can be found under Chapter XII of Module 3.
Pursuant to Module 3, Article 12-1-2 stipulates that the contract must include an arbitration clause, and the clause must be independent of any other contract condition, provided that the clause is valid. Article 12-1-3 stipulates that the arbitration clause is valid if there is no evidence to the contrary. Even in the absence of a pleading from one of the parties, an arbitration tribunal may make a decision on its own to determine whether the arbitration clause is valid or not. The validity of the arbitration clause may be decided before reviewing and deciding on the subject matter. Once a party is notified of either the validity or invalidity of an arbitration clause, the limitation period for raising an objection is 15 working days before the CMA or the arbitration tribunal, otherwise the party is considered to have waived their right to object (Article 12-1-4).
To start an arbitration proceeding, the arbitration plaintiff must submit a written arbitration application to the authority with the following information (Article 12-3-1):
- The name of the arbitration plaintiff, their capacity, nationality and address;
- The name of the arbitration defendant, their capacity, nationality and address;
- The subject, facts, evidence, documents, supports and grounds, and requests;
- A copy of the arbitration agreement; and
- A copy of the payment receipt for the fees of the arbitration application.
Appointment Of The Arbitrator
Arbitrators are registered with the CMA on an arbitrator list. Each party to the dispute, regardless of the number of parties, may select an arbitrator from the list within seven working days of being notified of an arbitration proceeding before the CMA. In the event an arbitrator cannot be selected by the disputing parties or because the arbitrator is unable to judge the matter in an independent or neutral way, the CMA shall appoint an arbitrator according to the nature of the dispute and then estimate their fees. The fees shall be deposited with the CMA within three days of the arbitrator’s appointment. Each party shall be responsible for the fees; however, if a party refrains from paying their share, the paying party shall be presented with the option of paying the full amount if they wish to continue the arbitration proceeding (Articles 12-1-6 through 12-2-1).
The CMA shall determine the schedule of fees, which include the arbitrator’s fee and the costs associated with the arbitration proceeding.
Notification To The Arbitration Defendant
The CMA shall notify the arbitration defendant. The notice shall be accompanied by the arbitration application and the supporting documents, as well as the name of the arbitrator selected by the arbitration plaintiff with acknowledgement of receipt via registered letter or any other modern method of communication within five working days of receiving the arbitration application (Article 12-3-2).
The arbitration defendant has seven working days to respond to the arbitration application submitted against them and include any defences and claims. The arbitration defendant may request from the CMA an additional grace period not exceeding five working days should the need arise (Article 12-3-3). In addition, the arbitration defendant may submit a counterclaim before the CMA or to the arbitration tribunal and pay the associated fees, if applicable (Article 12-3-4).
Arbitration Hearing, Venue And Language
Once the procedural requirements have been met, the CMA shall refer the dispute to the arbitration tribunal within three working days, and the tribunal shall start its task within 10 working of receiving the file. The tribunal shall set a schedule for the hearing and notify the parties by registered mail or by a method agreed upon by the parties. The venue for the arbitration shall be in Kuwait at the premises of the CMA. Alternatively, the arbitration tribunal may hold the hearings at a place it deems suitable. The arbitration hearing shall be in Arabic, unless otherwise agreed by the parties (Articles 12-3-4 through 12-3-8).
Applicable Laws & Procedures
The dispute shall be settled under the laws of Kuwait, unless the parties agree otherwise and provided that the law does not violate public policy and/or morality. The arbitration proceeding shall observe the basic principles of litigation, particularly the rights of defence, confrontation, and equal and fair treatment between parties. The proceeding shall follow the procedural rules under the arbitration system, and where silent, the procedural rules of the civil and commercial pleadings law shall apply.
Appointment Of Experts
The arbitration tribunal may appoint one or more experts – provided that they total an odd number – to gather and filter evidence, hear issues, and report back to the arbitration tribunal with their findings. The parties may object to the selection of an expert within two working days of the date of notification, and the arbitration tribunal shall determine the objection and its reasons (Article 12-3-12).
Suspending The Arbitration Proceeding
At the discretion of the tribunal, the arbitration proceeding may be suspended until a final judgment is made concerning another judicial or arbitral dispute that is related to the subject of the dispute in the arbitration application, provided that the judicial or arbitral dispute has started and is still ongoing before the court or the arbitrators (Article 12-3-18).
The arbitration tribunal shall render its award within six months of the date of the first valid hearing. The tribunal may choose to extend the decision by two months; however, any further extension requested by the tribunal must be justified in a request to the CMA and by decree if a further extension is requested after consulting the parties. Any such extension may not exceed one month. The arbitration award shall be passed by a majority, and it shall be declared by the arbitration tribunal in a public hearing. The judgment shall state the names of the parties, the date of the award, the facts of the arbitrated case, the requests of the parties, and a summary of their defences and responses thereto. The arbitrators shall sign the award, and the award shall be issued in Arabic, even if another language was agreed upon by the parties, accompanied by an official translation as the case may be. The arbitration award shall be final and binding (Article 12-1-5, Article 12-4-4, and Article 12-4-5).
Module 9 – Mergers & Acquisitions
This module provides the disclosure rules and regulations related to mergers and acquisitions. Providing further clarity regarding the optional acquisition of listed shares and information about how to carry out an optional acquisition, Module 9 sets forth the procedural requirements as follows:
- The proposed purchaser must notify the CMA of any initial agreement concerning the acquisition offer of a listed company before disclosure of the same on the Kuwait Stock Exchange. Such notification must be accompanied by an undertaking to proceed with the offer and that all necessary actions have been taken to continue with the acquisition process. The CMA may require that the proposed purchaser submit any guarantees to verify that said purchaser is serious about completing the transaction.
- The disclosure of the initial agreement must include the name of the proposed purchaser and offered company, provided that such disclosure does not include information that must be set out on the offer document, such as the price, timetable, acquisition manager, finance sources or other information that must be included on the offer document.
- The proposed purchaser must submit the optional acquisition offer document to the CMA no later than 180 days from the date of initial agreement. Moreover, the proposed purchaser may, at its discretion, apply for the extension of such a period.
- The proposed purchaser company (if listed on the Kuwait Stock Exchange) and the offered company must obtain independent advice concerning the presented offer from an independent investment advisor.
- The optional acquisition proposed purchaser must appoint an acquisition manager, provided that they are a person licensed to practice the activity of investment portfolio management.
- The proposed purchaser must pay the prescribed acquisition fees.
- The CMA will thereafter issue its approval of the offer document no later than 10 business days from receiving all documents, data and other information required.
- In the event the CMA approves the offer, the offer document will thereafter be published by the proposed purchaser or on its behalf as per the announcement mechanism referred to in the New CMA Bylaws and in accordance with the timetable approved by the CMA. The proposed purchaser must disclose the approval of the CMA of the offer document on the stock exchange, and publish the same on the website of the proposed purchaser company and offered company, and in at least two daily newspapers.
- Within seven business days from the date of receiving the offer document, the board of the offered company must express its opinion and make a recommendation regarding the offer to the CMA and shareholders of the company, provided that the recommendation is accompanied by the opinion of the investment advisor regarding the acquisition.
- Registration in the portfolio of the acquisition manager must open on the eighth day from the date of publishing the offer document – provided that the stocks of those desirous to participate in the acquisition are collected – in accordance with the announcement mechanism provided for in the New CMA Bylaws.
- The acquisition manager must collect the stocks of those desirous to participate in the acquisition within a period of not less than 30 days from the date of announcing the commencement of the collection period.
- The proposed purchaser must disclose to the stock exchange the achieved acquisition percentage no later than the day following the deadline set for the end of the collection period.
- The acquisition manager must communicate with the set-off agency to inquire about the status of the stocks of the offered company and verify the absence of any constraints preventing the shareholder from disposing of such stocks.In case there are any constraints preventing the disposal, such stocks must be excluded from participation in the acquisition.
- The proposed purchaser must send to the CMA a register of the shareholders desirous to participate in the acquisition and achieved percentage, and pay the fees prescribed by the authority. Thereafter, the CMA will approve the execution of the acquisition, with certain ancillary procedures to be carried out.
Module 11 – Dealing In Securities
One of the most important modules of the New CMA Bylaws is Module 11, which promulgates dealing and trading in securities; among several other issues pertaining to the issuance and offering of securities in Kuwait.
An important characteristic of Module 11 is that it bifurcates the issuance and offering of securities into two main aspects or processes: the issuance aspect or process (under Chapters I and II) and the offering aspect or process (under Chapter V). The requirement for each aspect or process, as further illustrated, depends on certain elements, including the nature of the issuer (i.e. Kuwaiti or foreign entity), the issuance mechanism (i.e. directly by the issuer or indirectly through a special purpose vehicle) and the underlying offering market of the securities (i.e. the public or certain qualified investors). These two aspects or processes may be instigated concurrently or separately.
General Provisions & Securities Issue & Initial Offering
Chapters I and II of Module 11 apply to any security, whatever its nature or the purpose of its issuance. It is important to note that a security is defined under the New CMA Bylaws as any deed or instrument – of whatever legal form – evidencing a share in a tradeable funding process pursuant to a licence from the CMA, such as:
- Shares issued by or proposed to be issued in a company’s capital;
- Any instrument creating or declaring a debt issued or to be issued by a company;
- Loans, bonds, sukuk (Islamic bonds) and other instruments transferable into shares in the capital of a company;
- All general debt instruments which are tradeable, issued by the various government bodies, public authorities or institutions;
- Any right, option or derivatives related to any of the securities;
- Units in a collective investment system; and
- Any paper or deed which the CMA considers as a security for the objectives of implementing the law and this regulation.
It is worth noting that commercial papers such as cheques, bills of exchange and bearer bonds are not considered as securities, as is the case for documentary credits, cash transfers and instruments traded exclusively between banks, and insurance policies and rights arising from retirement funds to beneficiaries. Furthermore, companies may not issue securities, whether directly (by the issuer) or indirectly (through a special purpose vehicle), or offer the same for subscription by any third party unless the prior approval of the CMA has been secured.
The issuance process, which is only applicable to Kuwaiti entities – specifically shareholding companies – is a set of procedures, information and documents required by the CMA in order for a Kuwaiti shareholding company to issues securities (the issuance application), whether in or outside the country. The issuance application is required whether the issuance of the securities is direct or indirect.
The concept of direct versus indirect issuance by a shareholding company of bonds or sukuk is recognised under Module 11. Bonds and sukuk may be issued through a special purpose vehicle (SPV) that is established either onshore or offshore. Chapter VII of Module 11 promulgates the rules and regulations regarding SPVs in more details.
For the purposes of the issuance application, a template application (annexed to Module 11) outlining the necessary information regarding the particulars of the securities being issued must be filled out and submitted to the CMA. Along with the application, a set of documents most notably the constitutional and financial documents of the issuer, evaluation of the real estate assets backing the securities (if any) and rough draft of the prospectus (where applicable) are also submitted to the CMA for review and approval.
The approval of the Central Bank of Kuwait (CBK) is required by the CMA as a prerequisite in relation to banks and financial institutions licensed by the CBK (the CBK approval). The timeline for the CMA to review and accept or decline the issuance application is 30 days from the deliverance of all necessary documents and information to the authority. The CMA’s approval of an issuance application does not necessarily mean that securities may be offered or sold with immediate effect.
While that may be applicable in the instances where the issuance is exclusively taking place outside of Kuwait (i.e. there will be no securities offered in Kuwait, whether on a public or private placement basis), the offering of securities in Kuwait, whether on a public or private placement basis, requires, as to be further illustrated under Chapter V, a prospectus that is compliant with the rules and regulations of the CMA, and approved thereby.
Valuation Of In-Kind Shares (Tangible & Intangible Shares)
Chapter III promulgates the evaluation of in-kind shares (whether tangible or intangible). In the event that the share capital of an entity – upon incorporation or upon an increase in the issued capital – includes in-kind shares, or in the event that the subscription consideration in a security is in-kind and non-cash, the in-kind share must be evaluated by a company licensed by the CMA to undertake the “asset evaluation” activity. The rules and regulations pertaining to the licensed activities in general, and asset evaluation in particular, are cited within Module 5. The evaluation of in-kind assets can be requested by the issuer of the securities (and the shareholders thereof) or by the court in the event of asset foreclosure.
Under Chapter IV, for the purposes of issuing bonds and sukuk, the issuer (in the event of direct issuance) or the obligor (in the event of indirect issuance through an SPV) must provide the CMA with one or more reports issued by a credit rating agency. The rating agency is a CMA activity that requires pre-licensing by the CMA. The rules and regulations pertaining to the licensed activities in general, and rating agencies in particular, are cited under Module 5.
The rating report issued by the rating agency must identify the type of securities that will be issued. With the exception of public offerings of bonds and sukuk, the CMA may exempt the issuer or obligor from the rating agency report requirement.
Chapter V promulgates the offering of securities in Kuwait by Kuwaiti entities or foreign entities, whether such offering targets certain qualified investors (a private placement offering) or the public (public offering). Essentially, no securities may be offered in Kuwait, whether by a Kuwaiti or foreign issuer or by means of public or private placement offering, unless such securities are offered pursuant to a prospectus that is prepared in accordance with the rules and regulations of the CMA and approved thereby (offering application).
As with the issuance application, the offering application is the process by which the CMA reviews and approves the prospectus furnished it by a Kuwaiti or foreign issuer for the purposes of offering securities in Kuwait.
The CMA requirements for the prospectus differ according to the nature of the offering. For instance, the requirements of a prospectus in the context of public offering are substantially different from the requirements of a prospectus for private placement offering. In relation to public offering, the prospectus must outline the information required by the CMA. The information required by the CMA is outlined under Chapter V of Module 11 in a comprehensive and extensively detailed manner, which includes the particulars of the securities being offered, the redemption mechanics and detailed information regarding the issuer.
It is worth noting that the public offering prospectus must be prepared and submitted to the CMA in Arabic or translated into Arabic (the public prospectus). It is also important to note that the requirements for the public prospectus, particularly if the prospectus has been translated into Arabic, normally lengthen the offering process.
On the other hand, for private placement offering purposes, the CMA’s requirements for the private placement memorandum are substantially less detailed and onerous than the public prospectus’ counterpart. In this respect, while an Arabic prospectus is likewise required by the CMA for private placement offering purposes, the required information is less detailed than for the public prospectus.
In other words, so long as the securities are offered to certain qualified investors, the underlying prospectus may provide an outline of the securities being offered (the private placement prospectus). In any event, the private placement prospectus must, at a minimum, provide the necessary information required under Clause 5-11 of Chapter V (additional information is required in relation to the offering of bonds and sukuk). Furthermore, for the purposes of a private placement offering, a qualified investor is defined under the New CMA Bylaws as:
- A government, public authority, central bank or international organisation, such as the World Bank or IMF;
- Entities licensed by the CMA, and other financial institutions subject to one of the supervisory bodies in or outside Kuwait;
- A company whose paid up capital is not less than KD1m ($3.3m) or the equivalent;
- A client who has had dealings in securities with large or medium volumes not less than KD250,000 ($827,000) in each quarter for the past two years;
- A client who has a volume of funds and/or assets in one authorised person or more that are not less than the value of KD100,000 ($331,000);
- A client who has been working or worked previously in the financial sector for at least one year in a professional occupational position, requiring knowledge of the transactions or services to be provided to them.
Moreover, with the exception of premium shares, shareholding companies may issue or offer shares for subscription with exemption from the offering application requirements in any of the following events:
- Invite not more than 50 persons in the state of Kuwait to subscribe in shares.
- Issue or offer shares of a total value not exceeding KD1m ($3.3m) within a period of 12 months from the date of the last issue.
- Issue shares representing not more than 10% of the last issue of the same category of shares within a period not exceeding 12 months.
- Issue bonus shares to be distributed in the form of dividends to the shareholders.
- Issue shares within the personnel shares purchase option system.
- Issue shares to the issuer’s creditors for the purpose of restructuring its debts.
- Any other cases determined by the CMA. In any event, promoting subscriptions to the said shares may not be conducted through advertisements to the general public.
To the extent that the necessary information and documents are duly submitted to the CMA, the prospectus, whether public or private placement, shall be effective after 30 days, unless the CMA issues in writing its approval or rejection to the same.
The rules governing the buying and selling of securities of Kuwaiti public and closed shareholding companies are outlined under Chapter VIII of Module 11. Module 11 provides that, with respect to the securities of a listed company, securities are transferable if the transfer is completed in accordance with the rules and procedures outlined by the Kuwait Stock Exchange and upon registration of the securities with the clearing agency. The ownership of unlisted shareholding company’s securities is transferred through the process and procedures for transfer by the clearing agency. The rules further specify that founders and shareholders of a listed Kuwait shareholding company are subject to a lock up period with respect to transacting in their shares.
Pursuant to Module 11, non-Kuwaiti investors may subscribe and acquire sukuk and bonds subject to any restrictions imposed in the prospectus and any other law. Finally, Chapter VIII provides rules and conditions in relation to the issuance of profit shares, including their assignment and the ability to enter into repurchase agreements with respect to the selling of securities.
Pledge Of Securities
Commercial lenders are one of the main players that are likely to increase their exposure in the Kuwaiti market, as they will have more confidence in the new legal framework and regulatory environment of Kuwait’s capital markets as set forth in the New CMA Bylaws. Specifically, the project finance sector will likely flourish in light of Module 11, permitting parties to collateralise shares, one of the most important types of collateral that might be taken to secure project finance loans.
Chapter IX of Module 11 indirectly boosts the role of project finance loans as a means of raising funds on a limited recourse basis, to the extent that a lender can primarily look into projected cash flows of that project as a security in addition to the suitable collateral typically taken under these kinds of loans (i.e. pledge over shares).
A “project” is usually a large-scale, capital-intensive and long-lived collection of assets, liabilities and related construction and operation contracts. Project finance is raising of funds on a limited recourse or non-recourse basis to finance an economically separable capital investment project, in which the providers of the funds look primarily to the cash flow from the project as the source of finance to service their loans and provide the return of, and a return on, their equity invested in the project. In other words, project finance is the extension of credit to finance an economic unit where the future cash flows of that unit serve as collateral for the loan. This is done primarily by facilitating the separation of project assets from the sponsor and enabling the financing of those assets on the basis of the cash flows they are expected to generate. Moreover, project finance can allow a sponsor to undertake a project with more risk than the sponsor is otherwise willing to underwrite independently. Project finance can also help sponsors avoid incurring leverage beyond tolerable levels, thereby helping them preserve their debt capacity, credit ratings and cash flows for alternative capital investment activities.
Commercial banks are the largest providers of funds for large-scale, capital-intensive projects, often accounting for as much as 50% of the overall project funds and up to 100% during pre-completion. Project loans from banks generally take the form of senior loans, both secured and unsecured. Senior secured project loans generally give banks a security interest in the core assets of the project. Typical forms of collateral pledged to creditors in senior secured project loans include real estate, an assignment of insurance proceeds and a pledge over shares. In light of the fact that Kuwait’s laws are very conservative with respect to enabling a borrower to grant a real estate mortgage in favour of a lender, particularly if that lender is a foreign bank, the pledge over shares has become the most essential collateral to secure project finance loans, especially during the pre-completion stage.
As such, lenders frequently require sponsors to pledge their shares in the project company as a part of the loan security package. This is important if lenders feel that the value of the mortgaged assets is insufficient or there is uncertainty about the enforceability of other mortgages. Therefore, the pledge of shares in Kuwait is important collateral for project finance due to the legal and practical barriers that hinder the collateralisation of real estate, as well as the uncertainty about its enforceability. On the other hand, effectuating a pledge of shares is generally a relatively simple procedure and, once obtained, can be a useful negotiating tool for lenders. When sponsors pledge their shares to lenders, the lenders may take control of the borrower company in the event of default and may take the steps necessary to protect their investment.
Benefits For Project Financing
The New CMA Bylaws have greatly improved the legal environment for project finance deals in Kuwait by streamlining the process of enforcing a pledge of shares. In particular, Article 9-13 of Module 11 provides that where the creditor or mortgagee is a bank or financial institution and the debtor or mortgagor is a professional client, the parties may enter into an agreement at the time of concluding the pledge contract, or at a later date, to give the creditor or mortgagor the right to acquire or sell the pledged asset in the event of the debtor’s breach of its obligations. In exercising this right, the creditor or mortgagee does not need to adhere to the provisions laid out under Articles 231 to 233 of the Trade Law (Law No. 68 of 1980) or the provisions stipulated under Book 3 of the Civil and Commercial Procedures Law (Law No. 38 of 1980).
In addition, Article 9-14 of Module 11 provides that, where the creditor or mortgagee has exercised its right under Article 9-13, the investment portfolio manager and clearance agency, as applicable, shall execute the instructions issued to them by the creditor or mortgagee for the acquisition or sale of securities and satisfy the right of the creditor or mortgagee. This is subject to the debtor and in-kind guarantor, if any, being given written notice in accordance with the pledge contract at least five business days before the date of acquisition or sale. Furthermore, the sale may not include more securities than are sufficient to settle the right of the creditor or mortgagor.
These articles constitute a major reform in the usual enforcement process for pledges of shares. Pursuant to Module 11, there is now a straightforward process of enforcement whereby a party can merely notify the debtor or mortgagor and in-kind guarantor within five business days prior to written notice, and thus easily transfer the pledged shares in its favour. As such, the creditor or mortgagor only needs to apply to the Kuwait Clearance Company to transfer the title of these shares, whether in its favour or to any third party as chosen by the creditor or mortgagor. Prior to the implementation of Articles 9-13 and 9-14, a lender would have to struggle through a very long process of court enforcement procedures as previously set forth in the Civil and Commercial Procedures Law.
Accordingly, Module 11 expressly excludes the previous approach of enforcement by setting aside the provisions under the law. A key characteristic of Module 11 is that there is now no need to liquidate pledged shares through a public auction so that the proceeds of the auction can be distributed to the lender. The requirement of an auction is repealed by the direct transfer of shares to the creditor or mortgagor, or to any third party. As such, the lender may take control of the borrower company in the event of default and may take the steps necessary to protect its investment, or to obtain its proceeds directly under an effortless enforcement process.
As a pledge over shares in Kuwait constitutes the most essential security that might be taken to secure a project finance loan, Module 11, including the enforcement process, will have a major impact on project financing. This is expected to encourage investors to step into the Kuwaiti market with more assurance. However, it should be noted that due to the relative novelty of the above rules in relation to pledging and the foreclosure of securities, the implementation of these regulations by governmental bodies’ in Kuwait is yet to be tested in practice.
Dealing & Trading In Securities
Module 11 provides the regulatory framework that governs bonds and sukuk. It is important to note that Chapter VII outlines the way in which a special purpose company (SPC) can issue bonds or sukuk, or engage in other CMA-approved activities related to the issuance of bonds or sukuk. The SPC will be able to issue bonds or sukuk through public subscription or private placement, provided that it obtains the approval of the CMA. However, the shares of the SPC itself may not be offered to the public, and the underlying obligor must provide an undertaking that it will assume all the SPC’s liabilities.
In order to incorporate an SPC for the purposes of issuing bonds or sukuk, the relevant party should submit an application in the form outlined under Annex No. 2 of Module 11 to the CMA. The CMA will also approve the memorandum of association of the SPC, which will be a shareholding company subject to the Kuwait Companies Law (Law No. 1 of 2016), prior to the incorporation of the same. The duration of the SPC shall be shorter than the term of the sukuk or bonds issued by it.
The number of shareholders of the SPC may not be increased while it is in existence, and the capital shares of the company should be registered with the CMA under the name of persons that the CMA approves of, namely an authorised person, a law firm or an obligor or originator of the bonds or sukuk. Once approved by the CMA, the SPC may issue bonds or sukuk for public subscription or private placement, in accordance with a decree issued by the shareholders of the SPC. However, the SPC may not offer its shares for public underwriting and cannot use public underwriting to increase its capital or borrow funds.
The New CMA Bylaws outline several benefits of creating an SPC for the purpose of issuing bonds or sukuk. The SPC will not be subject to the same requirements that other companies are subject to under Kuwaiti law. For example, the SPC will not be required to have any personnel working for it and will not have to create a file with the Kuwait Ministry of Social Affairs and Labour. Furthermore, the SPC will be exempt from having to hold ordinary or extraordinary general assembly meetings as required under the Kuwait Companies Law, but will instead have decisions made for it through written approval from its shareholders.
Sukuk & Bond Issuance
Chapter XI outlines the new rules and regulations regarding the issuance of sukuk inside Kuwait. Chapter XI outlines which parties are allowed to issue sukuk. These are the government of the state of Kuwait, its ministries, public authorities and institutions, and public or closed shareholding companies.
In order to issue sukuk, a company must have its issued capital paid in full, approval from an ordinary general assembly to issue the sukuk, an auditing by an external sharia auditing office approved by the CMA, approval from the CMA for the issuance of the sukuk and an approval obtained from the CBK. The external sharia auditing office will review the structure of the sukuk and express an opinion with regards to the sharia compliance of the sukuk structure, which the CMA will take into consideration during its approval process.
All sukuk structures must be in accordance with the provisions of sharia law and approved by an external sharia auditing office. Sukuk structures may be based on various forms of sharia-compliant transactions, such as ijara, istisna, musaraka, mudharaba and murabaha. The sukuk may be either asset-based or asset-backed.
Only public shareholding companies, or SPCs that have an underlying obligor (which is a public shareholding company), may offer sukuk for public subscription. If the sukuk are issued through an SPC and the SPC is incorporated outside Kuwait, the issuer must submit documentation to the CMA indicating that it has properly incorporated the SPC. Furthermore, if a sukuk is issued through an SPC, the assets linked to the sukuk may be more than the paid-up capital of the issuer.
Chapter XII outlines the rules applicable to the issuance of bonds in Kuwait. The bond rules are very similar to the sukuk issuance rules of Chapter XI. The rules allow for SPCs to issue bonds in Kuwait. Along with SPCs, governmental entities, public and closed joint-stock companies, and foreign issuers are allowed to issue bonds in Kuwait. As is the case with sukuk, company issuers must have their issued capital paid in full, and are also obliged to obtain approval from the ordinary general assembly, the CMA and the CBK.
Bonds that are issued for public subscription shall not be redeemed prior to the lapse of one year, must have a periodical return and should not include any type of financial derivatives.
Preferred Shares Regulations
Kuwaiti public and closed shareholding companies may issue, trade, transfer and redeem shares which enjoy rights and privileges in voting, profits, liquidations or any other rights (preferred shares) in accordance with the rules and conditions outlined in Chapter XII of Module 11. Among the conditions to which a company must adhere in order to issue premium shares is that the company’s memorandum and articles of association must explicitly allow for the issuance of preferred shares by vote of an extraordinary general assembly of the company, which shall describe the rights and privileges of the preferred shares.
Unless the CMA otherwise approves an issuance of preferred shares by public offering, preferred shares may only be issued by private placement. Any issuance of preferred shares shall only be effectuated after the CMA has been provided with a prospectus in accordance with the rules and conditions set forth in the New CMA Bylaws, and the same is furnished to “professional clients” (defined in the New CMA Bylaws). A company issuing preferred shares must comply with the disclosure requirements set forth in the New CMA Bylaws and any other regulatory body in relation to preferred shares.
The purchase, re-sell and use by a Kuwaiti public or closed shareholding company of its own issued shares (treasury shares) is regulated by the CMA under Chapter XIV of Module 11. Chapter XIV provides specific instances in which a company may transact with its treasury shares, including, without limitation, in the following circumstances:
- In the event the company desires to reduce its share capital;
- In the event the company wishes to pay an existing debt obligation;
- In the event of a distribution of the treasury shares in connection with an employee share option plan; or
- In any other event or circumstance determined by the CMA.
A company may acquire its shares only if the company’s memorandum and articles of association provides that it may do so. In addition, a company may only acquire the number of shares which equals or is less than 10% of its issued share capital according to the market value of the company’s shares. A company wishing to buy or sell treasury shares must obtain the approval of the CMA; and in relation to the company purchasing its shares, it must submit a report to the CMA detailing the reasons for the acquisition. A sale or purchase by the company of its treasury shares can only be effectuated upon approval of the company’s general assembly and, in the event the sale of the treasury shares to particular shareholders, those shareholders are prohibited from participating in any general assembly vote.
Finally, Chapter XIV sets forth explicit instructions on the accounting treatment with respect to treasury shares, including, amongst other things, that such shares shall be recorded in the company’s financial statements under the shareholders’ equity and that the shares shall not be entitled to cash profits. Treasury shares are not included in the calculation of the required quorum for validity of the general assembly meeting and voting.
Module 12 – Listing Rules
A Kuwaiti company incorporated as a public shareholding company shall submit an application to the CMA for listing its shares on the stock exchange during the second fiscal year of the company. Further, Kuwaiti closed shareholding companies which the CMA approves to increase their capital or offer their shares through a public underwriting shall submit to the CMA an application for listing on the stock exchange after completing the underwriting process, otherwise the CMA may request the concerned official authorities to discontinue the activities of the company. Companies fully owned by the state of Kuwait are not obliged to submit the listing application. The company submitting the application to list its shares in the main market shall satisfy the following conditions:
- The company paid-up capital shall not be less than KD10m ($33.1m).
- The company shall continue practising one or more of the main objectives set forth in the company’s contract.
- Company shares should be tradeable and without absolute restrictions on the transfer of ownership.
- The appointment of a compliance officer concerned with following up the instructions and rules of the regulatory bodies and the investors.
- The appointment of a listing advisor. Any other conditions or rules determined by the CMA must also be adhered to.
The company shall submit an undertaking from each shareholder whose ownership percentage amounts to 20% or more of the company shares for non-disposition, with a percentage not less than 20% of these shares for a period of two years from the listing date. As an exemption, these shareholders may dispose of these shares to another person, provided this person adheres to the same undertaking. In all cases, these shares may be disposed if the disposition is the result of submitting an acquisition bid on the full shares of the company. The listing application shall be submitted to the CMA on the form prepared for this purpose enclosed with the documents specifically set forth under Article 3-5. Kuwaiti closed shareholding companies submitting an application to list their shares on the main market shall satisfy the following conditions:
- The company-issued capital should be fully paid up and should not be less than KD10m ($33.1m), and the total shareholders’ equities to the weighted average of the paid-up capital in the last two fiscal years shall not be less than 110%, pursuant to the audited annual financial statements before the listing application date.
- The company shares should be tradeable without absolute restrictions on the transfer of their ownership.
- The company should have realised net profits in at least the last two fiscal years, and the net profit of either year shall not be less than 5% of the paid-up capital.
- The percentage of revenues resulting from the company’s exercise of one or more of its main activities shall not be less than 75% of its total revenues, according to the audited financial statements for the last two fiscal years.
- Not less than three full fiscal years should have passed since the company’s incorporation, and issued financial statements should have been approved by the general assembly for the last three years before submitting the listing application.
- The company should be exercising one or more of its main objectives set forth in the company memorandum during the last three full fiscal years before the date of submitting the listing application.
- The company should obtain approval from an ordinary general assembly to list its shares on the stock exchange, and not more than 12 months should have lapsed since this approval.
- The company shareholders should not be fewer than 200. The authority may pass its decree for initial approval of the listing provided the required number is completed within two months of its date, otherwise the decree shall be considered as null and void. The non-controlling shareholders’ equities over the company shall not be less than 30% thereof.
- Appointing the compliance officer concerned with following up the instructions and rules of the regulatory bodies and the investors.
- Appointment of the listing advisor.
- Any other conditions or rules determined by the authority.
The company submitting the listing application may satisfy the condition set forth under Clause 8 of this article following the CMA’s approval.
The company shall submit an undertaking from one or more shareholder of the company who holds not less than 25% of its capital for non-disposition with these shares during the first year of the listing date. This percentage may be reduced during the second year from the date of listing to not less than 15% of the company capital. As an exemption from this prohibition, these shareholders may dispose of these shares to another person provided the new holder adheres to the same undertaking.
In all cases, these shares may be disposed of if this disposition is the result of submitting an acquisition bid over the full shares of the company.
Module 15 – Corporate Governance
This module applies to all companies listed on the Kuwait Stock Exchange, as well as any listed or unlisted licensed shareholding companies. The New CMA Bylaws state that a company is required to submit an annual report to the Corporate Governance Department of the CMA to confirm its compliance with the rules set forth in Module 15. The first report was due for submission no more than 10 business days after the New CMA Bylaws became effective on June 30, 2016. In general, Module 15 emphasises the importance of the two parts of corporate governance: compliance and disclosure related to the effective management of a company. Themes that appear throughout Module 15 are transparency, accountability, efficiency, quality, accuracy and independence.
Chapter II of Module 15 sets forth the criteria for the composition of the board of directors (BOD) in order to ensure the board members are competent, well informed and ethical. It also provides guidance as to how many meetings should be called and how minutes of meetings should be recorded.
In Chapter III of Module 15, the CMA clarifies that the role of the BOD is to achieve the objectives of shareholders by ensuring that the executive management is effectively performing its tasks and provides examples of the responsibilities to be undertaken by the BOD. Chapter III states that while the BOD is to supervise and effectively control executive management, there should be a clear segregation of tasks and responsibilities. This is to ensure full independence and to create and maintain a balance of power between the BOD and the executive management. A provision is included in Article 3-5, which states that the BOD is to avoid the issuing of general authorisations or of authorisation for undefined periods. In addition, Chapter III indicates that the role of the executive management is to execute and monitor the company’s strategic plans and policies to manage the company’s general performance using the authority vested in it by the BOD.
Chapter IV discusses how the BOD is to form a committee that is to recommend nominations for positions in the BOD or executive management, as well as how it is to prepare the rules regulating the remuneration or compensation for such positions.
Chapter V deals with safeguarding the integrity of financial reporting. It seems that the main aim of this chapter is to guarantee the accuracy of financial statements and that they are presented in a clear and impartial manner so as to measure accountability and increase investor confidence in any information disclosed by the company.
Chapter VI is related to risk management and internal audit. The BOD is required to form a risk management committee in an effort to ensure that the BOD is able to understand, analyse and measure risks the company may be exposed to in order to enable the BOD to develop strategies and policies to effectively limit or mitigate such risks. In addition, this chapter discusses how a company should ensure that its internal control and audit systems are sufficient to maintain its financial soundness, the accuracy and reliability of its statements and the efficiency of its structure.
Chapter VII seeks to promote responsible codes of conduct to reinforce investor confidence in a company’s integrity and financial soundness. Article 7-4 of Module 15 discusses the important subject of disclosure, stating that there should be a strict and clear mechanism preventing BOD members and employees from using information they have accessed by virtue of their company positions for their personal interest. Any such disclosure is prohibited unless authorised or permitted by law. Additionally, Chapter VII indicates that the remit of the BOD includes developing policies to limit and/or address any conflicts of interests.
Chapter VIII acknowledges that disclosure is important for monitoring and assessing a company’s performance; therefore, any such disclosure should be accurate, as it will increase the confidence and trust of existing investors in the company and attract new investors. While disclosure and transparency are important, there must also be mechanisms established by the BOD to regulate the same.
Chapter IX requires that governance rules be established to ensure that in meeting the company objectives, management respects shareholder rights. It also details the general rights of shareholders, confirms equality amongst all shareholders and specifies the rights of shareholders to participate in the company general assembly meetings and vote on its resolutions without facing any hurdles.
Chapter X recognises and seeks to protect the rights of stakeholders in accordance with other Kuwaiti laws, as well as any other contractual agreements. This chapter states that governance policies should be established to encourage cooperation between different stakeholders.
Chapter XI requires that the BOD and executive management should regularly participate in training programmes to enhance performance. The chapter also demands that such performance should be evaluated so as to ensure the BOD and executive OBG would like to thank Al Tamimi & Co. for its contribution to THE REPORT Kuwait 2016. management are effectively contributing to the achievement of the company’s strategic objectives.
Chapter XII focuses on the importance of corporate social responsibility and states that the company should take into consideration the concept of sustainable development for its personnel and the community as a whole.
Module 15 of the New CMA Bylaws reiterates the well-known understanding that good corporate governance policies contribute to the efficient operation of companies by attracting more investors, mitigating risk and safeguarding against mismanagement. If companies possess greater accountability and transparency, investors have the tools to address legitimate stakeholder concerns.
As evidenced in this overview of its key concepts and themes, the New CMA Bylaws are progressive and provide greater flexibility for capital markets investment in Kuwait. The new laws demonstrate Kuwait’s dedication to increasing economic diversification and private sector investment. The changes in the New CMA Bylaws are expected to attract more investors and assist in further developing projects already in existence by significantly reducing the obstacles that have historically faced investors in the country’s capital markets. Kuwait is currently in the process of significantly reforming much of its commercial legislation, particularly that which relates to the economy, where there is a persistent need to find solutions to eliminate the deficit caused by lower income from hydrocarbons. As we witness a global drop in oil prices, Kuwait, as an oil-dependent economy, has no choice but to adopt a new approach to diversify its economy. To this end, a great step has been taken by the Kuwaiti legislature in promulgating the New CMA Bylaws.