A step in the right direction

December 08, 2015 - Authors : Tarek Yehya

As the country takes strides to diversify its economy for key investment prospects, Kuwait’s new CMA Executive Regulations is a coherent and accessible tool for businesses.

Kuwait has been extremely active in recent years in regards to the development of new, commercial legislation and regulation, passing a raft of news laws to enhance its economy. This includes the Companies Law, the Commercial Licensing law, the Direct Investment Promotion law, the Public and Private Partnership law, the long-awaited revised Capital Markets Law and most recently, the publication of the new Capital Markets Executive Regulations. Such significant strides should assist in the achievements of Kuwait’s Vision Plan 2035.

The new Executive Regulations (“Regulations”) of the Kuwait Capital Markets Authority (“CMA”) was issued in November 2015 in a new and coherent form, simplifying the research of concepts and rules and offering an accessible tool for businesses. Each of the resolutions, instructions and rules published separately have now been combined in more a thought-through process, classified under relevant and practical chapters to offer practitioners and stakeholders a one-stop-shop capital markets regulation. The sixteen dedicated chapters promotes standardisation for all rules similar to other civil law systems. This approach is deigned to provide a number benefits such as clearer guidance for the capital market users and investors. As a result, confidence and trust in the regulator is enhanced thereby enabling a more attractive and competitive investment environment. Among the new entrants to the regulations is the section on the sukuk1 issuance which cannot be overlooked. Following the financial crisis in 2008, it was clear that insufficient regulation on sukuk has contributed to a decline in its use. Briefly, under Chapter 11 (Trading in Securities) of the Regulations, the incorporation of a special purpose vehicle (“SPV”) for the issuance of sukuk in indirect issuances could be local based on a CMA license that allows obligors and originators to establish Kuwait based SPV in a streamlined manner exempting the entity from most of the standard corporate requirements i.e. lease, minimum capital requirement, management structures.

Significantly, the Regulations provide a list of exemptions that eases the creation of the SPV thus encouraging its use. For example, the SPV is exempted from deducting an annual rate of profit to form any reserves. Moreover, the SPV is no longer required to have a head office, employees or open a file with the Ministry of Social Affairs and Labour.

The SPV may have specific sukuk(1) objectives, i.e. issuing sukuk or acting as the agent in relation to sukuk and the ownership or possession of instruments or disposition of assets on behalf of sukuk holders. Equally important, the Regulations confirm that the board members of the SPV cannot be held liable for any obligations not within the terms of the sukuk or bond. Following the CMA approval, sukuk may be issued through public offering or private placement. A further key enhancement introduced is that of Government sukuk, which are also regulated by the CMA, to the extent that they do not conflict with the relevant law allowing the Government to them. This will go a long way to further support the mission of the Kuwait Ministry of Finance, which confirmed Government plans to issue local-currency sovereign debt before 2016 as a solution to the budget deficit gap.

A final noteworthy change in regards to sukuk regulation was the establishment of a Financial Trust. This groundbreaking provision allows issuer to create a financial trust approved in its capacity as a trustee for the benefit of the sukuk holders as beneficiaries. Nevertheless, the regulation is strict with the details required. The trust deed needs to set out as a minimum the identity of the issuer and the declaration of a financial trust in respect of which it will be acting as trustee, information that allows the sukuk holders as beneficiaries to be identified, description of sukuk assets and their identification, term of the financial trust and provisions of termination, dissolution events, rights, obligations and powers of trustee and also any other information later requested by the CMA. Failure to comply with the requirements will invalidate the trust thus heightening and strengthening their weight. Ultimately, the CMA creates a register for the financial trusts for the purposes of sukuk issuances that is not disclosed except by court or CMA investigation order, by regulation or to the sukuk holders themselves. This is indeed a progressive move by the CMA.

To conclude, the CMA has proven to be a body worthy of our trust. We will find that its ability to constantly improve and adapt according to market conditions provides the confidence necessary to attract a bouyant investment environment.

Arabic meaning of financial certificates. It represents proportionate beneficial ownership of an asset for a defined period whereby the risk and the return associated with the cash flow generated by the underlying assets in a pool are passed to the sukuk holders, the investors.

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