Recent Developments in Kazakhstan Capital Market Regulations Affecting Commercial Bank Issuers

Dechert’s International Capital Markets team analyzes some of the practical considerations that Kazakhstan banks should take into account when considering offering their securities domestically and internationally.

In an effort to develop the Kazakhstan capital market, the Kazakhstan Government established the Astana International Financial Centre (the “AIFC”), which has a legal framework based on principles of English law, in common with similar financial centres around the world. The Astana International Exchange (the “AIX”) was formed as part of the AIFC and is an alternative listing venue to Kazakhstan’s Almaty-based stock exchange (the “KASE”).

In order to make an AIX listing beneficial for Kazakhstan issuers, certain exemptions were offered to those who opt to dual list securities abroad and on AIX. Under the general rule, Kazakhstan issuers offering their securities abroad (“Offshore Securities”) are required to:

• (i) obtain prior authorisation from the local regulator, currently the Financial Market Supervision and Development Agency (the “FMSA”); and 
• (ii) to list and offer 20% of any such securities on a domestic stock exchange. 

In October 2018, the Kazakhstan Securities Market Law (the “Market Law”) was supplemented by Article 22-1.9 of the Market Law, which states that an FMSA authorisation is not required if 20% of the Offshore Securities are listed and offered on the AIX.

Kazakhstan banks cannot rely on the AIX exemption

Despite the fact that the exemption set forth in Article 22-1.9 of the Market Law is formulated broadly to apply to all Kazakhstan issuers, the FMSA has generally taken the view that Kazakhstan commercial banks cannot rely on this exemption. The FMSA’s position is based on a literal reading of Article 16-3 of the Kazakhstan Banking Law (the “Banking Law”), which provides that Kazakhstan commercial banks require the FMSA’s prior authorisation in order to issue and offer their securities abroad.

Article 16-3 of the Banking Law was adopted in July 2018 as part of a wider set of amendments to Kazakhstan banking laws and regulations, which aimed to tighten control over the Kazakhstan banking sector. Article 16-3 became effective at the beginning of 2019 and prevails over Article 22-1.9 of the Market Law, which came into force in October 2018. Kazakhstan law establishes the hierarchy of laws, pursuant to which a later law prevails over a law which became effective earlier.

Accordingly, Kazakhstan commercial bank issuers that are planning to issue securities will need to continue to apply to the FMSA for authorisation whether or not the securities are being listed on AIX, with such approval process to be built into the transaction timetable.

Other considerations

Terms & Conditions of Notes

Another novelty set forth in Article 16-3 of the Banking Law relates to the terms and conditions of Offshore Securities issued by Kazakhstan commercial banks. Article 16-3 of the Banking Law provides that Offshore Securities of Kazakhstan commercial banks could be subject to compulsory restructuring in cases where insolvency prevention measures are being taken by the FMSA against the issuer. In such event, bondholders would have no right to accelerate the relevant bonds. Article 16-3 of the Banking Law further states that provisions relating to such compulsory restructuring (and subsequent impact on bondholders’ acceleration rights) must be included in the terms and conditions of notes that a Kazakhstan commercial bank is seeking to offer abroad. The FMSA has noted that it will withhold authorisation for a bond issuance if a Kazakhstan commercial bank fails to include these provisions in the terms and conditions of its notes. These provisions apply whether or not a Kazakhstan commercial bank is considering listing on AIX or the KASE.

KASE Listing

In order to obtain the FMSA’s prior authorisation for any issuance, Kazakhstan commercial banks must demonstrate to the FMSA, among other things, that a domestic stock exchange has agreed to dual list its Offshore Securities. While there are two domestic stock exchanges operating in Kazakhstan, i.e., the AIX and the KASE, the FMSA has in the past taken the view that Kazakhstan commercial banks are required to list and offer 20% on the KASE, not the AIX.

This position is based on the literal reading of the Market Law and FMSA Rules No. 37, dated 30 March 2020, which governs how the FMSA issues its authorisations (“Rules No. 37”). The Market Law defines the term “stock exchange” as a joint-stock company no less than 25% of the total number of voting shares of which are owned by the National Bank of Kazakhstan. The National Bank of Kazakhstan owns 49.1% of shares in the KASE and has no shareholding in the AIX.

Rules No. 37 further states that an issuer offering securities abroad must demonstrate to the FMSA that such securities would be dual listed in the category of “Bonds” in the “Debt Securities” sector of the “Main” Market in case of debt securities, and in the “Premium” Sector of “Shares” in the “Main” or “Alternative” Markets in case of shares. Technically, the above categories and sectors of listings are only available on the KASE because listings on the AIX are organized differently.

A failure to demonstrate that the Offshore Securities would be dual listed, as mandated by the Market Law and Rules No. 37, may lead to the FMSA’s refusal to grant its authorisation for the issuance.

When planning to offer securities abroad, Kazakhstan banks are recommended to clarify the position of the FMSA with respect to its proposed transaction and to and structure their offering accordingly.

Issuers and market participants who would like further information on these or other matters affecting the Kazakhstan capital markets should contact their Dechert contact or a member of the International Capital Markets team.