The modernisation of the country’s capital markets continued in April 2018 through the promulgation and implementation of Boursa Kuwait’s new rulebook. Its purpose is to clarify the regulatory and organisational framework of Boursa Kuwait and all other aspects of Kuwait’s stock exchange. The new rules provide, among other things, for the segmentation of the market into the premier market, main market and auction market. Each segment has been designed to provide the most suitable disclosure and listing requirements for their members. These reforms also included the recognition and regularisation of specific new transactions, such as short selling, security lending and borrowing.
The reforms implemented over the last few years resulted in the upgrade of the market to secondary emerging market status by FTSE in September 2018 and the addition of Kuwait to the S&P Dow Jones Global Benchmark Indices in December 2018. It is expected that these upgrades, coupled with the implementation of the rulebook, will boost activity on the exchange, attracting a larger number of foreign investors to the Kuwaiti market. Below is a summary of the general trading rules for Boursa Kuwait, together with some of the reforms introduced through the new rulebook.
Liberalisation
The Kuwait Stock Exchange (KSE) was established in 1977 and is one of the oldest stock markets in the region. As part of a broader effort to modernise the capital markets sector, it was decided by the Kuwaiti government that the exchange should be privatised. The first step in this process were initiated by the Capital Markets Authority (CMA) in 2014 through the incorporation of a public joint-stock company under the name Boursa Kuwait. The management of the KSE, as well as its licences and assets, were transferred to Boursa Kuwait in April and October 2016, respectively.
In early 2018 and in line with Article 33 of the amended Law No. 7 of 2010 – known as the CMA Law – the CMA launched the second stage of privatisation, which culminated in February 2019 in the sale of 44% of the CMA’s shares in Boursa Kuwait to an international consortium made up of the Athens Stock Exchange, National Investments Company, Al Oula Investment and Arzan Financial Group. The involvement of major international players – including some of the world’s leading stock market operators – along with local Kuwaiti financial institutions has been a major boost to the local capital markets sector. It is expected that the participation of local Kuwaiti financial institutions in this landmark transaction will be a continuing trend over the next few years. The last phase of the privatisation process entails the sale of the remaining 50% of Boursa Kuwait to Kuwaiti nationals and is expected to be completed by December 2019.
Listing Rules
The legal regime governing the trading of shares of Kuwaiti companies on Boursa Kuwait is primarily governed by Module 12 of the executive by-laws promulgated through Resolution 72 of 2015 – known as the Capital Markets Law (CML) By-laws – together with the CMA Law and the rulebook. The first edition of the new Boursa Kuwait rulebook, which was issued in April 2018, segmented the local exchange into three distinct market categories – premier, main and auction – and outlined in Chapter 7 the associated listing rules applicable for each market. Without prejudice to the CMA listing rules, the Boursa Kuwait listing rules apply to companies which are currently listed as well as those wishing to list on Boursa Kuwait.
In April 2019 the second issue of the rulebook was published and implemented. The new version provided a number of clarifications, including a revised version of Chapter 7 clarifying the listing requirements for each market. Pursuant to the rulebook, an application to list on the Boursa Kuwait may be submitted for the premier or main market, whereas application to list on the auction market is not permissible. Nevertheless, Boursa Kuwait may transfer listed companies from either of these markets to the auction market in accordance with the criteria set forth under Chapter 8 of the rulebook.
Premier Market
A company wishing to be listed on the premier market of the Boursa Kuwait must satisfy the following minimum requirements:
• The fair value of the shares that are not owned by the controller or the group controlling the company shall be at least KD45m ($148m), as determined by an asset evaluator or investment advisor licensed by the CMA.
• The number of shareholders in the company shall not be less than 450, provided each of them holds shares worth not less than KD10,000 ($32,900) according to the fair value of the share specified above.
• The company shall continue to exercise one or more of its main purposes set forth in the company’s articles of association.
• The majority of company revenue shall be derived from such purposes and it shall have issued financial statements approved by the general assembly for the last seven full fiscal years prior to the submission date of the listing application. However, a firm established as a public shareholding company shall be exempted from the minimum value of the shares owned by each shareholder and exempted from the requirements specified in the third and fourth points stated above. To qualify for the premier market, a listed company must fulfil the following requirements:
• It must be listed on Boursa Kuwait for a minimum of two years.
• The market capitalisation of the company shall be the value determined and declared by Boursa Kuwait for each of the two years preceding the annual review.
• The firm must pass or meet the liquidity requirements determined and declared by Boursa Kuwait, for each of the two years preceding the annual review.
• The average price of the company’s shares shall not be less than its par value for each of the two years preceding the annual review.
• The company continues to operate for a period of seven consecutive fiscal years.
Main Market
A company wishing to list on the main market must meet the following minimum requirements:
• The fair value of the shares that are not owned by the controller or the group controlling the company shall be at least KD15m ($49.4m), as determined by an asset evaluator or investment advisor licensed by the CMA.
• The number of shareholders in the company shall not be less than 450, provided each of them holds shares worth not less than KD5000 ($16,500), or the number of shareholders of the company shall not be less than 225 shareholders, provided each shareholder owns shares of not less than KD10,000 ($32,900) according to the fair value of the share specified above.
• The company shall continue to exercise one or more of its main purposes set forth in the company’s articles of association.
• The majority of company revenue shall be derived from such purposes and it shall have issued financial statements approved by the general assembly for the last three full fiscal years prior to the submission date of the listing application. However, a firm established as a public shareholding company shall be exempted from the minimum value of the shares owned by each shareholder and exempted from the requirements specified in the third and fourth points stated above. In addition, to qualify for the main market, a listed company must fulfil the following requirements:
• The average market capitalisation of the company shall meet the required level established by Boursa Kuwait throughout the year preceding the annual review.
• The average daily traded value of the company’s shares shall be in accordance with the liquidity requirements set by Boursa Kuwait throughout the year preceding the annual review.
• The average price-to-par value ratio of the company’s share shall not fall below 1 at the end of the year.
• The company shall hold an analyst conference on a quarterly basis within five days following the issuance of interim and annual financial statements.
• The announcement of the financial statements shall include the date of the analyst conference and the presentation prepared for the conference. The transcripts of the analyst conference shall be provided in both Arabic and English within three days following the date of the conference.
• The company must disclose whether or not material information – as defined in the CML By-laws – was revealed during the conference. If material information was revealed, such information shall be disclosed on Boursa Kuwait’s website, no later than 40 minutes prior to the trading session following the conference.
• The company should not have repeated violations of the CML Rules.
• The company shall publish announcements and disclosures in both Arabic and English.
General Trading
As a general rule, subject to certain exemptions, all trades in or transfers of title to securities in joint-stock companies must occur over the counter at the trading platform of the Boursa Kuwait – known as the Boursa Platform – in accordance with applicable trading rules. Where a given trade relates to listed securities, any such transaction would be made against the general backdrop of the CMA Law, as amended by the CMA By-laws and the rulebook and similar rules of general application.
Exemptions to this general rule include transfers of securities in the following circumstances, subject to the prior approval of Boursa Kuwait:
• Transfer of ownership pursuant to an amicable settlement between a creditor and the debtor or guarantor who owns the shares;
• Transfer of ownership in implementation of the repurchase agreements in accordance with the provisions of Article 8-11 of Module 11 of the CMA By-laws;
• Transfer of ownership of qualification shares to the members of the board of directors;
• Transfer of ownership at the request of governmental bodies, within the framework of the state’s offering of the securities it owns to the private sector;
• Transfer of ownership from shareholders to the company and vice versa, as well as inter-group transfers;
• Transfers to employees under an employee share option scheme;
• Transfer of ownership based on a merger deal in respect of a registered company in the Boursa Platform;
• Transfer of the ownership of securities as a result of the company or fund’s liquidation;
• Transfer of the ownership of shares owned by a company in another listed company as in-kind profits;
• Transfer of the ownership of shares for the purpose of subscribing or participating in private subscription funds;
• Transfer of the ownership of shares for in-kind offering, subscription or redemption in collective investment schemes;
• Transfers emerging from a swap of unlisted securities or a company’s unlisted securities as a capital increase in a listed company; and
• Any other cases approved by Boursa Kuwait. Additional exemptions to this general rule include transfers of securities with no requirement for the approval of Boursa Kuwait in the following circumstances:
• Transfer of ownership by way of inheritance or will;
• Transfer of ownership between spouses and relatives up to the second degree;
• Transfer of ownership at the request of the Public Authority for Minors’ Affairs and the merger of the securities of a trustee or guardian;
• Transfer of ownership to and from companies licensed to manage the portfolios of others for the purpose of depositing in a portfolio or transferring from the portfolio if it is to the same customer; and
• Transfer by virtue of an enforceable court or arbitral judgement in respect of any of the foregoing events.
Execution of Trades
Any trade of securities in joint-stock companies is required to be executed through a broker who has been appropriately licensed and who is registered to broker securities over the Boursa Platform. Securities are generally traded during official working days, and during trading hours and sessions as specified by Boursa Kuwait. Trades are executed in Kuwaiti dinars or any other currency that may be approved by Boursa Kuwait.
Sale by Public Auction
Where a person wishes to acquire 5% or more of the total issued share capital of a listed company from an existing shareholder, such acquisition may be concluded through public auction, which was formerly referred to as a block trade. In order to carry out a sale by public auction, there must be an initial agreement at a fixed price with a buyer. The person selling the shares is required to apply to Boursa Kuwait requesting a sale of securities through public auction. The buyer of the securities is also required to provide a certified cheque, through the broker, representing a payment of a non-refundable advance of 10% of the total trade value. There is a 10-day window within which the trade is advertised on Boursa Kuwait and during which a person with a competing bid may apply to purchase the securities and must submit a cheque for the same non-refundable 10% advance referred to above. If, on the 11th day following the advertisement of the trade, no competitive bid is received, the trade shall be executed in favour of the buyer. However, if a competitive bid is received, a public auction of the securities will be held in Boursa Kuwait’s trading hall. This auction will proceed for 15 minutes and if a higher offer is not received, the trade shall be executed in favour of the initial bidder.
Since sales by public auction entail an execution risk for buyers due to the public auction factor – i.e., the risk of a higher bidder participating in the sale – off-market trades, which are discussed further below, have become increasingly popular in Kuwait.
Unlisted Companies
Boursa Kuwait requires that all unlisted trades take place on the Boursa Platform. If an unlisted company at the time of registration comprises 50 shareholders or more, Boursa Kuwait may permit the company to trade its shares through continuous trading or through off-market trades, to the extent that these companies have not requested that trading is limited to off-market trades. Where the company has less than 50 shareholders, trades must be conducted off-market.
Off-Market Trades
The rulebook permits negotiated trades, subject to the approval of Boursa Kuwait, where the relevant trade requires that it is preceded by an agreement for the sale and purchase of securities in a specified quantity and price. The rulebook stipulates that off-market/special trade transactions may be concluded between one buyer and one seller, provided the value of the targeted securities is not less than KD150,000 ($494,000).
The securities are required to be wholly owned by the selling party and free of any legal restrictions or agreements that prevent the disposal of such securities, unless the person in whose favour the encumbrance is made signs a waiver to this effect.
The advantages of off-market/special trade transactions include the lack of execution risk given that the transaction would proceed directly between the buyer and seller without a screen trade or a block trade auction. Additionally, special trades would be conducted for cash consideration and the price is regulated by the rulebook (i.e., the price should not fall below or exceed the preceding day’s closing price by more than 20%). However, if the transaction involves the sale of shares representing 5% or more of the capital of the listed company, Boursa Kuwait may exempt the sale from the price restrictions referred to above if Boursa Kuwait deems it necessary to protect the interests of the transaction and the parties involved.
It should also be noted that, in the context of an off-market/special trade transaction, the parties to the trade cannot cancel it after it has been announced on Boursa Kuwait’s website. The buyer therefore would be obliged to complete the share purchase.
Tender Offers
Where a trade relates to an acquisition of not less than 5% and not more than 30% of the shares of a listed company, the acquirer would be required to submit a tender. The offer should be made to all shareholders of the listed company, and each shareholder would have the option to sell or retain their shares. A bidder who submits a tender offer would be required to deposit to the clearing agency a cash amount or bank guarantee for the full value of the shares to be purchased. Furthermore, the tender offer must be approved by Boursa Kuwait.
The party making the bid would be required to submit all relevant details pertaining to the offer and the bidder. Tender offers have an auction process similar to that of the public auction process and applicable to the sale of more than 55 of the shares of the company discussed above. A tender offer may not be withdrawn unless it follows the 10-day collection window, the number of shares collected is less than 5% of the target company’s share capital or less than 50% of the quantity of shares that are subject to the offer. Furthermore, these offers are subject to certain additional requirements and restrictions, including a mandatory tender offer if the acquired shares exceed 30% of the share capital of the company, a restriction on sharing information regarding the listed company only to certain shareholders and the risk of submission of a competing offer.
Short Selling
Chapter 9 of the rulebook provides a legal framework for short selling. However, the short selling of securities is not permitted without a prior agreement with a licensed broker to arrange the borrowing of securities in accordance with the rules specified by the Clearing Agency. Boursa Kuwait will determine the share of securities available for short selling, with this figure not exceeding 10% of the outstanding share capital of the relevant listed company. Furthermore, Boursa Kuwait may change the percentage of securities available for short selling in accordance with the data relating to the securities lending and borrowing system of the Clearing Agency.
Boursa Kuwait will determine the securities available for short selling by listing them on its website on a regular basis. However, the short selling of securities issued by a company listed on Boursa Kuwait for less than six months is not permitted, and the CMA may suspend short selling in the event of extreme volatility.
In order to conduct short selling, a licensed broker should meet the following requirements:
• The licensed broker is required to enter into agreements with the Clearing Agency to cover short selling operations through a securities lending and borrowing agreement.
• The licensed broker is required to enter into agreements with its clients that allow it to cover short selling operations and fulfil obligations arising out of the agreement concluded with the Clearing Agency.
• The licensed broker is required to provide all applications, and automated and technical systems necessary to ensure the safety of its short selling operations. Boursa Kuwait may request that the broker improve such systems and applications.
Pledged Securities
Chapter 10 of the rulebook provides that, in the event of a secured lending transaction – where the pledge lender is a bank or financial institution, and the debtor or the pledger is a professional investor, as defined by the CML – it may be agreed between the parties at the conclusion of the pledge contract or thereafter, that the pledge lender shall have the right – in cases of a breach of obligations by the debtor – to own or sell the pledge shares without having to comply with the provisions of commerce law (e.g., sell the shares at auction through the court).
Under the CML By-laws, a professional investor is defined as either a professional investor by nature, or by qualification. A professional investor by nature is:
• Any government institution, central bank or international institution, such as the World Bank;
• A licensed person or regulated financial institution in Kuwait or outside of Kuwait; or
• A company with paid-up capital of KD1m ($3.3m) or its equivalent. A professional investor by qualification is:
• A person who trades in securities in large volumes that are on average no less than KD250,000 ($823,000) in each quarter for the past two years;
• An investor whose assets and funds with the licensed person are no less than KD100,000 ($329,000); or
• An investor who is working or has previously worked in the financial sector for at least one year in a position which requires knowledge of the provided services and transactions in the financial sector. Pursuant to the rulebook, in the event of the sale of securities directly pledged to the creditor or pledged in a trading account with the Clearing Agency or held in a portfolio, the sale shall be undertaken in accordance with the following procedures:
• The pledge creditor is required to submit a sale application to one of the licensed brokers or to the manager of the investment portfolio – as the case may be.
• This must be submitted together with the relevant documents confirming the pledge, the breach by the debtor of the terms of finance or pledge contract, and a copy of the notice sent to the debtor or the guarantor in kind, informing them of the commencement of the sale procedures.
• The licensed broker or the portfolio manager – as the case may be – will execute the pledge creditor’s request to sell the pledged shares after making the necessary verifications of the documentation.
• When the broker/portfolio manager implements the sale application submitted by the pledge creditor, they must comply with the duties of efficiency, integrity and due diligence, as well as the provisions of Articles 9-15 of Module 11 of the CML By-laws.
• Upon completion of the sale procedures, the licensed broker, the Clearing Agency or the portfolio manager shall pay the indebted amounts to the pledge creditor, provided the amount is determined in accordance with the documents submitted by the pledge creditor who requested the sale.
Swaps
Chapter 10 of the rulebook also provides for swap transactions. These are transactions that require an agreement between the parties to exchange shares listed on Boursa Kuwait with other shares prior to the execution thereof. Swap transactions are to be carried out according to the following terms and conditions:
• The transaction may be executed only after obtaining the approval of Boursa Kuwait.
• The transaction value should not be less than KD1m ($3.3m) based on the total value of the securities subject to the transaction.
• The shares’ value subject to the transaction should be equal, based on the previous day’s closing price.
• The securities must be fully owned by the parties to the transaction and be free of any legal restrictions or agreements preventing their disposal.
• The transaction must be limited to two parties only and may not be undertaken during the prohibition periods for insiders outlined by the CML.
• In order to be swapped, the securities must not be suspended from trading. Furthermore, the transaction must be executed through a licensed broker who will be responsible for verifying the following prior to the execution of the transaction:
• Securities subject to the transaction are not Treasury shares;
• Approval granted by the Central Bank of Kuwait (CBK) if the transaction is related to securities representing 5% or more of a listed bank’s capital;
• Ensure the non-applicability of one of the cases of transfer of ownership as set forth in the rulebook;
• The commission to buy and sell will be fully applied and payable on swap transactions; and
• Swap transaction commissions will be calculated based on the execution price. The ownership of securities subject to swap transaction will be transferred from the account of the first party to the account of the second party, and from the second party to the first party. The swap transaction form will be submitted to Boursa Kuwait, following its authentication by the two brokers, via an e-mail address reserved by Boursa Kuwait for this purpose.
CBK & CMA Agreement
In 2018 the CBK and the CMA signed a memorandum of understanding (MoU) defining their respective roles in monitoring and supervising certain activities by entities regulated by the CBK. In addition, the MoU outlines the supervisory responsibilities where an entity is regulated by both the CBK and the CMA, among other issues. The MoU provides for coordination between the CBK and the CMA with regard to investment companies established before the issuance of the CMA Law, the licensing of banks’ securities activities, and mergers and acquisitions. The MoU specifies the respective roles to be undertaken by each regulator so that there is no overlap of responsibilities.
OBG would like to thank ASAR – Al Ruwayeh & Partners for its contribution to THE REPORT Kuwait 2019
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