Debt capital markets in Turkey: regulatory overview
A Q&A guide to debt capital markets law in Turkey.
The Q&A gives an overview of legislative restrictions on selling debt securities, market activity and deals, structuring a debt securities issue, main debt capital markets/exchanges, listing debt securities, continuing obligations, advisers and documents, debt prospectus/main offering document, timetables, tax, clearing and settlement, and reform.
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This Q&A is part of the global guide to capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/capitalmarkets-guide.
Legislative restrictions on selling debt securities
Main restrictions on offering and selling debt securities
The following are the main pieces of legislation that regulate debt security offerings:
Turkish Commercial Code.
Capital Markets Law No 6362 (CML).
Communiqué No II-31.1 on Debt Instruments of 7 June 2013 (Communiqué).
Instruments classified as debt securities under the Communiqué of the Capital Markets Board (CMB) include notes or bonds, exchangeable bonds, convertible bonds and commercial papers. Other debt instruments include mortgage-based or mortgage-backed securities, asset covered bonds, warrants and lease certificates, although these are regulated under separate CMB regulations. This chapter will focus on the debt instruments governed by the Communiqué.
Under the Communiqué, debt securities can be sold through a public offering or a private placement. The offering limit is determined separately for international and domestic issues. The issue limit is five times the shareholders' equity for listed companies and three times the shareholders' equity for non-listed companies. These issue limits apply to both domestic and international issues and are doubled if the issuer is a financial institution which has a long-term investment grade. For international offerings, an additional limit of up to 50% can be granted to financial institutions. Once the CMB approves a limit, the issuer can issue the debt securities in different tranches which are subject to different terms.
Issuers must initially pass a resolution setting out the terms and conditions of the issue. Unless the company's articles of association authorise the issuer's board of directors to pass the resolution, it must be passed by the issuer's shareholders in a general meeting. The issuer must make the application for CMB approval within one year from the date of the resolution.
Both domestic and international offerings must be electronically registered and cleared through the Central Registry Agency (CRA), which is the central securities depository institution in Turkey. The CMB can exempt international offerings from the electronic registration requirement on the issuer's application.
The CMB fee to be paid by the issuers varies between 0.05% and 0.2% of the offering amount, depending on the maturity of the instrument. Only 75% of those rates apply to issuers other than banks, financial institutions and foreign entities.
The Communiqué provides that the notes and commercial papers issued by the banks can be repurchased by the issuers on the secondary markets, provided that such instruments are resold by the issuer so that the repurchase does not constitute an early redemption. The CMB has confirmed that the above provisions restrict corporate issuers, such as non-bank issuers, of both domestic and international issues from buying back the debt instruments they have issued for trade purposes.
Restrictions for offers to the public or professional investors
In private placement debt securities sales, it is sufficient for the issuer to prepare a CMB approved issuance certificate. However, in public offering debt securities sales, the issuer must prepare a CMB approved prospectus and apply to the stock exchange Borsa Istanbul to trade the securities.
Debt securities issued for sale to qualified investors can be listed and quoted on Borsa Istanbul only for trading among qualified investors within the frame of the relevant regulations. Debt securities issued for sale through a private placement are generally not listed or traded on Borsa Istanbul.
Qualified investors must either register with the CRA or sign a statement which contains a clause stating that they are qualified investors.
Except for secondary market transactions of shares, the total number of investors holding the debt securities sold on a private placement basis at a certain period of time cannot exceed 150. This limit does not apply to debt securities sales to qualified investors.
Debt instruments sold on a private placement basis can be purchased by both qualified and unqualified investors. In such cases, qualified investors are not taken into consideration when calculating the above cap on investors.
Sales to qualified investors can only be effected through a call addressed to those investors or through a pre-determination of those investors.
Market activity and deals
Based on the 2014 Annual Report of Capital Markets Board (CMB), the following reflect the main market activity:
Volume of bonds and notes issued under programmes: US$50.5 billion.
Volume of lease certificates: US$2.1 billion.
Asset covered bonds: US$155.2 million.
Asset backed bonds: US$193.8 million.
Warrants: US$ 29.5 million.
VakifBank established a EUR3 billion denominated covered bond programme in July 2015 and YapiKredi applied to the CMB in late October 2015 for EUR1 billion worth of covered bonds. Akbank also applied to the CMB in November 2015 for EUR1 billion worth of asset-backed bonds. As a result, Turkish banks with large mortgage lending portfolios are considering issuing covered bonds.
Structuring a debt securities issue
Issues to the public (that is, retail issues) and issues to professional investors are most commonly used in Turkey.
There are not many structures in Turkish practice (see Question 4).
Trust structures are not used for issues of debt securities because a trust is not a legally recognised concept under Turkish law.
Notes or bonds are directly issued through a public offering, a private placement or a combination of both solely to qualified investors in Turkey or outside of Turkey (international offerings). The debt is directly incurred by the issuer, allowing the investors to have full recourse to the issuer's assets.
There are ways to segregate assets through covered bonds or asset-based securities. However, none of those resemble a trust. This chapter will not examine these because they are not governed by the Communiqué No II-31.1 on Debt Instruments of 7 June 2013.
Main debt capital markets/exchanges
Main debt markets/exchanges
Borsa Istanbul is the only exchange in Turkey. The following can be traded on the Borsa Istanbul debt securities market:
Securitised asset and income backed debt securities.
Liquidity bills issued by the Central Bank of the Republic of Turkey.
Any other securities approved by the Borsa Istanbul Executive Board.
The above can be traded in Turkish lira (TRY).
The Borsa Istanbul debt securities market comprises the following:
Outright Purchases and Sales Market, where the secondary market transactions of debt securities are conducted. Its market trading volume for 2014 was US$147 billion.
Offering Market for Qualified Investors, where the capital market instruments of the companies whose equities are traded on Borsa Istanbul are issued to "qualified investors" (as defined in the capital markets legislation). Its trading volume for 2014 was US$800 million.
Repo-Reverse Repo Market, where repo-reverse repo transactions are conducted, and the Interbank Repo-Reverse Repo Market, where the repo-reverse repo transactions are conducted only by banks for their own portfolios. Their joint market trading volume for 2014 was US$1.3 billion.
Repo Market for Specified Securities, where repo-reverse repo transactions with specified debt securities are conducted, and the Equity Repo Market where repo-reverse repo transactions are carried out with the shares of companies that are traded on Borsa Istanbul and which are included in the BIST 30 Index. Their joint market trading volume for 2014 was about US$2 billion.
International Bonds Market, where foreign debt instruments issued by the Turkish Undersecretariat of Treasury and listed by Borsa Istanbul are conducted.
The following are the main bodies that regulate the debt capital markets in Turkey:
Capital Markets Board (CMB).
Central Registry Agency (the central securities depository).
Debt securities offerings are regulated by the:
Turkish Commercial Code.
Capital Markets Law No 6362.
Communiqué No II-31.1 on Debt Instruments of 7 June 2013 (Communiqué).
Listing Directive of Borsa Istanbul of 31 August 2015.
Listing debt securities
Before being able to trade debt instruments on Borsa Istanbul, the debt issuer must file the following:
A listing or registration application with Borsa Istanbul.
An application for the approval of the prospectus or issue certificate with the CMB.
The issuer can file the applications to Borsa Istanbul and the CMB using either one of the following methods:
In a way that covers all debt securities to be issued within one year.
In a "one time only issuance" which covers a certain amount.
Debt securities which have been listed or registered for issuance and sold within one year under a Borsa Istanbul resolution can be traded on the debt securities market once an announcement through the Public Disclosure Platform of the Central Registry Agency has been made.
Debt instruments which are issued solely to qualified investors can be listed by Borsa Istanbul once the CMB approves the issuance certificate.
Lease certificates which are issued through a public offering or a private placement to qualified investors are listed by Borsa Istanbul once the CMB approves the prospectus or issuance certificate.
Minimum size requirements
The minimum size requirement has been abolished by the new Listing Directive.
Trading record and accounts
The issuer must satisfy the following criteria:
The "operating term criterion" which states that a minimum of two calendar years must have passed since the company's establishment date.
The "audit criterion" which states that the company must submit financial statements and independent audit reports to Borsa Istanbul.
The "profitability criterion" which states that profits before tax must have been earned at least in one of the last two years as evidenced by its financial statements prior to the application date.
The "shareholders' equity criterion" which states that the total shareholders' equity in the most recent independently audited financial statement of the company must be more than its paid-in capital.
The "sound financial structure criterion" which states that Borsa Istanbul management must have examined the company's financial structure and accepted its ability to continue as an ongoing concern.
The company must document its purpose in terms of its establishment and activities, together with the legal status of its debt securities representing indebtedness, in order to verify that they are compliant with the respective legislation.
The company's articles of association must not include any provisions that restrict the transfer and circulation of the securities to be traded on Borsa Istanbul or prevent the shareholders from exercising their rights.
The above application procedure for the listing of stocks also applies to private sector bonds listed on Borsa Instanbul.
The minimum denomination requirement has been abolished by the new Listing Directive.
The banks, investment institutions and the issuers whose shares are currently traded on Main Market or Star Market are exempt from the requirements mentioned above. Such requirements do not apply to issuances of covered bonds and asset or mortgage backed securities.
Listing of securities of foreign-based institutions operating abroad
The listing rules for foreign-based institutions operating abroad are the same as the ones for domestic institutions (see Question 7).
Circulation of securities of foreign issuers
Depending on the rights attached to the securities, any restrictions on their circulation and the legislation of the issuer's home country, Borsa Istanbul can demand additional requirements, or waive some of the conditions, for the listing of debt securities rated by domestic and foreign institutions.
Continuing obligations: debt securities
Periodic financial reporting
Companies with Turkish listed debt securities must prepare and disclose their annual and interim financial statements under the relevant CMB regulations.
Other disclosure obligations
Issuers must disclose the general information that is required by the relevant CMB regulation. This includes information concerning the following:
Amount of the capital.
Classes of shares.
Names of the directors.
The issuer must disclose this general information by using a detailed Public Disclosure Platform form. The issuer must update any change in the information within no later than two business days.
Additionally, issuers must publicly disclose the following events:
Decisions taken by the general assembly regarding profit interest payments.
Minutes of the general assembly meeting, and if such a meeting cannot be held, the reasons for that.
Decisions concerning a capital increase or decrease, merger, spin-off or change of the type of the company, and completion of these processes.
Decisions regarding the issue of a new security.
Issue process, and events of default and redemption in interest and coupon payments.
Use of conversion or exchange rights relating to securities.
Rating notes relating to securities, if any, and changes in the related notes.
Guarantees and collaterals relating to securities, if any, and any changes to those.
If and when direct or indirect shares or voting rights of a natural person or legal entity, or of any other natural persons or legal entities acting alongside them, in the capital of a debt securities issuer reach or fall below 25%, 50% or 67%, the persons or shareholders must disclose these changes in the shareholding structure on the Public Disclosure Platform.
Continuing obligations apply to listed foreign companies and to issuers of depositary receipts. However, the Capital Markets Board (CMB) is authorised to adopt different principles in relation to the financial reporting and independent audit requirements for foreign companies, taking into account the respective legislation of the jurisdictions where the foreign companies are incorporated.
Foreign companies are exempt from the CMB regulations relating to profit interest payment distribution and corporate governance, unless otherwise specified by the CMB.
Advisers and documents: debt securities issue
The main documents produced when issuing and listing debt securities are:
Listing application form.
Negative assurance letters.
Auditors' comfort letters.
Any other prerequisite documents, such as financial statements and audit reports, which must be appended to the main documents.
The advisers are involved in:
Producing the main documents.
Dealing with the applications to the relevant authorities, namely the Capital Markets Board, the Borsa Istanbul and the Central Registry Agency (CRA).
Providing a legal report on the issuer for listing purposes to the Borsa Istanbul.
Debt prospectus/main offering document
In a sale of debt securities through a private placement, it is sufficient to prepare an issuance certificate and obtain the Capital Markets Board's (CMB's) approval for that issue certificate.
However, in public offerings, the issuer must prepare a prospectus and obtain the CMB’s approval and apply to Borsa Istanbul to list and trade the securities on the exchange.
The approved prospectus or issuance certificate will be published on the websites of the issuer, the underwriter and the Public Disclosure Platform (PDP) (if the issuer is a PDP member).
There is no requirement to prepare, publish or deliver a prospectus in the following cases (Communiqué No II-31.1 on Debt Instruments of 7 June 2013):
Public offerings to investors who purchase capital market instruments of a minimum of TRY2,500 per investor, separately for each public offering.
Public offerings of capital market instruments, the per unit nominal value of which is a minimum of TRY2,500.
Cases of trading on the exchange among qualified investors of capital market instruments issued for sale to qualified investors.
Sales of capital market instruments only to qualified investors.
Private placement of capital market instruments.
Cases where the consideration payable for a take-over bid is paid in the form of capital market instruments within the context of the relevant regulations of the Capital Markets Board (CMB).
Cases where the total consideration of capital market instruments offered by issuers to the public is below TRY5 million (calculated by the offering price), provided that a written announcement containing the required information and issued in a format determined by the CMB is advertised for public disclosure purposes. In this case, the CMB can grant an exemption from the obligation to prepare a prospectus. This exemption does not apply to an initial public offering of shares.
The issuer must prepare the prospectus in a multi-document format, which includes an information document, an instrument note, an offering summary and an offering circular. These documents must include:
Financial and operational information on the issuer.
Terms and conditions of the securities.
Risk factors relating to the securities.
The issuer is primarily liable for a prospectus offering of debt securities. In a public offering, the underwriters and guarantors, if any, are also liable for the accuracy and completeness of the information provided to the investors, in proportion to their fault.
Article 10 of the Capital Markets Law No 6362 (CML) regulates the liability applicable to the mandatory offering documents which the issuer must prepare and have approved by the CMB. Under Article 10 of the CML, issuers are responsible for making sure that the information in the documents is a fair reflection of the facts. However, intermediary institutions, institutions conducting the public offering, guarantors (if any) and any board members of the issuer who have acted without due diligence can be held responsible for the part of any loss caused that cannot be indemnified by the issuers. Their liability is a secondary one and flows from their negligence.
In relation to non-mandatory offering documents which the issuer prepares and which are not approved by the CMB, the parties must comply with Turkish Code of Obligations. Any criminal liability will be based on fraud.
Timetable: debt securities issue
The typical timetable is four to six weeks. The following are the stages that occur over this period:
Applying to the CMB for prospectus or issuance certificate approval.
Applying to Borsa Istanbul for debt instruments to be listed and traded on Borsa Istanbul.
Carrying out marketing activities before and after CMB approval of the prospectus or issuance certificate, not providing any deceptive or inaccurate information which would mislead the investors.
Once the applications are approved, selling and trading the securities on the stock exchange through the authorised brokers.
The issuer will make public announcements on the issuance of debt instruments before, during and after the offering or the placement process.
The private placement process is simpler: the securities can be transferred outside the stock exchange on the closing date, in return for payment of the purchase price.
Tax: debt securities issue
This section will analyse the major tax issues that occur when debt securities are listed.
There are two regimes for the taxation of securities in Turkey:
Declaration regime. This is the primary regime where taxes are declared by taxpayers in their annual tax return.
Provisional regime. This is a provisional regime which, although currently temporary and initially set to conclude at the end of 2015, is now expected to be extended on a permanent basis.
Income tax is covered by the declaration regime. Capital gains and interest income derived mainly from listed debt securities are covered by the provisional regime.
Under the provisional regime, taxation is carried out through withholding, mainly by brokerage houses, banks and custody banks.
Debt instruments issued by Turkish resident companies abroad, such as Eurobonds, are subject to the declaration regime. Non-resident investors are only exempt from the declaration regime until the end of 2015. It is expected, however, that the exemption will be extended indefinitely. The interest income is subject to withholding tax under the provisional regime which ranges from a rate of 0% and 10%, depending on the debt instrument's maturity. Eurobonds with maturity of five years or more are subject to withholding tax at a rate of 0%.
Debt instruments issued by companies resident in Turkey are subject to withholding tax under the provisional regime. The capital gains and the interest income derived from debt securities issued in Turkey by both resident and non-resident companies are subject to withholding tax at a rate of 0%.
Recently, there has been a discussion as to whether the interest payments for debt securities should be subject to VAT or not. The Ministry of Finance is working on a draft regulation stating that they should be exempt from VAT. Although this is a good indication, certainty will only come once the regulation comes into force.
The documents related to the issue of debt securities are exempt from stamp tax.
Clearing and settlement of debt securities
Both domestic and international offerings must be registered electronically and cleared through the Central Registry Agency (CRA), which is the central securities depository institution in Turkey. On the issuer's application, the CMB can exempt international offerings from the electronic registration requirement.
The settlement of transactions on the Borsa Istanbul debt instruments market is performed on the same day for domestic securities, and at least a day later for foreign exchange paid securities. The proceeds are transferred to the issuer's CRA account. The debt securities are issued, transferred and settled in electronic book-entry form as per their nominal values. No printed global or individual certificates are used.
The CMB has announced a draft amendment proposal to the Communiqué No II-31.1 on Debt Instruments of 7 June 2013 (Communiqué) on 27 November 2015. The following are some of the highlights of the proposal:
The minimum value of private placements will be TRY100,000.
The requirement to obtain CMB approval for the trance issuance certificate for international offerings will be removed. The issuer will notify the CMB ahead of such issuance and provide the CMB with the minimum mandatory information on the issuance. This includes the amount, issue date, ISIN code, first payment date, maturity date, interest rate, name of the custodian and currency of such notes and the country of issuance.
Issuers must have sufficient credit rating for domestic offerings,
International offerings will be exempt from the Central Registry Agency electronic registration requirement.
Domestic and international corporate issuers (such as non-bank issuers) will be authorised to buy back the debt instruments they have issued for trade purposes.
Omer Collak, Partner
Areas of practice. Capital markets; banking and finance; Islamic finance.
Professional associations/memberships. American Bar Association; International Bar Association; the Assembly of Turkish American Associations; Darüşşafaka Society.
Okkes Sahan, Senior Associate
Professional qualifications. Capital market activities qualification (advanced level); derivative instruments qualification; real estate appraiser; credit rating specialist; corporate governance rating specialist and independent auditing in capital markets licence.
Areas of practice. Capital markets; banking and finance; banking regulatory; corporate governance.
Professional associations/memberships. Istanbul Bar Association.