Overview of the current legal environment in the capital markets of Azerbaijan
Sabina Gulmaliyeva and Ismail Askerov
MGB Law Offices
Baku
Sabina Gulmaliyeva (Bio)
Ismail Askerov (Bio)
The capital market of Azerbaijan is relatively young. In 1992, the Milli Majlis adopted the Law on Securities and Stock Exchanges which was one of the first securities related legislation adopted in the countries of the former Soviet Union. Although the Government of Azerbaijan has always attempted to keep domestic legislation in line with international standards in the field of securities, the development of the securities market in Azerbaijan has been slow and the capital markets is still in the process of development and reform. Specifically, the Azerbaijani capital markets for short-term debt instruments (treasury bills), repo agreements and other local debt instruments are not well developed. It should also be noted that the process of issuance of sovereign bonds by the Government on the international market in order to create benchmarks for Azerbaijani securities is not active to an adequate level.
The main regulatory authority for the capital markets of Azerbaijan is the State Securities Committee (the SSC) which is authorised to adopt and implement regulations in the market of securities and registered securities, as well as issue licenses for professional activities in the Azerbaijani capital market. It is also important to note the oversight functions of the Central Bank and the Ministry of Finance over the banks and insurance companies, which are required by law to be established in form of open joint stock companies.
Recent legislative developments
One of the recent notable changes in the securities legislation of Azerbaijan was the enactment of the Law on Investment Funds on October 22 2010 (effective since November 14 2010) (the Law). The Law mainly focuses on the regime of establishment of investment funds in Azerbaijan, their management, reorganisation, dissolution and bankruptcy procedures.
Although the Law envisages provisions for licensing the operation of foreign investment funds' representative offices in Azerbaijan, the Law is silent as to the process of offering of foreign investment funds' instruments to Azerbaijani investors without registration of establishment of the relevant investment funds in Azerbaijan.
Another recent regulation of the SSC is the 'Rules on Issue and Turnover of Corporate Bonds in the Republic of Azerbaijan' approved on December 6 2010. These Rules set out the detailed procedures for the issuance of corporate bonds, trading with corporate bonds and redemption thereon.
The importance of introduction of mechanism for registration of security interests over the securities under the 'Rules on Registration of Pledge over the Securities' approved by the SSC in December 23 2010 may not be underestimated, particularly in the area of protection of security interests of beneficiaries of pledge of rights registered in form of securities.
Legal obstacles in capital market
The current government policy for the regulation of the capital markets is reform- oriented and received approval on May 16 2011. The '2011-2020 Government Program for Development of Capital Market in Azerbaijan' (the 'Government Program') by the President of the Republic of Azerbaijan is one of the signs that the government is attempting to keep the capital markets active, however there are still certain measures to be taken in order to improve the legal framework.
Placement of domestically-issued Azerbaijani securities abroad
Azerbajani legislation does not specifically regulate for the cross-border placement of domestically-issued Azerbaijani securities. Although the Civil Code provides that the rules of cross border placement are determined by 'the relevant executive authority' i.e., the SSC, to date such rules have not yet been adopted. This vacuum in legislation creates uncertainty as to the feasibility of a direct placement abroad of locally issued debt securities and, consequently, delays development of the local securities market.
Bond issue limitation
Under the existing legislation, the aggregate par value of bonds (i) authorised but unissued, and (ii) issued but outstanding may not exceed the issuer's share capital or the security granted by the issuer for the bonds. This creates a legal restriction on issuance of bonds for companies operating in Azerbaijan, especially banks requiring complex finance structures to enable banks to access international capital markets.
Reforms in the capital markets
Currently, the main directions of the Government Program are oriented to: (i) institutional development of capital markets; (ii) establishment and development of financial agency services and investment schemes; (iii) promotion of supply and demand in the capital markets; (iv) extension of the principles of financial transparency and application of corporate governance rules; (v) development of the legal framework for the capital markets; and (vi) improvement of awareness and professional training in the capital markets.
Among the targets of the Government Program, ones which are particularly noteworthy include (i) the development of the stock exchange and trading opportunities for basic and derivative financial instruments; (ii) simplification of the registration mechanism of securities; (iii) issuance of an indicative number of Eurobonds; formation of an over-the-counter network for certain enterprises; (iv) introduction of a trading system for the admission of securities listed in foreign stock exchanges for trading in the local market (and vice versa); (v) support of large state enterprises and companies raising capital from the stock market and the promotion of listing in the Azerbaijani stock exchange; (vi) the formation of a legal framework for securitisation and the promotion of issuance and trading with asset-backed securities; (vii) implementation of a mechanism for the financing of infrastructure projects by stock market instruments and; (viii) the implementation of a trading mechanism with credit notes and term contracts.
Tax exemptions
The Government Program also envisages certain fiscal advantages such as a favourable tax regime for income derived out of securities, including trading operations with securities and other tax advantages for the purposes of promotion of the operation of investment funds and admission of companies to listing on the stock exchange.
Conclusion
With the government efforts for the development of the capital markets including the implementation of reforms and guarantees of protection of investors' rights, it is expected that the business and legal environment in the Azerbaijani capital markets will improve in the near future.