On May 15, 2015 the Securities Markets Law was adopted as a comprehensive law governing the securities market. To this day, capital market had essentially been regulated by the Civil Code and its implementing regulations. The Azerbaijani State Committee for Securities (SCS) is the principal regulator of the securities market. It carries out the state registration of the issuance of investment securities in first place. Other government agencies, such as the Central Bank of Azerbaijan and Ministry of Finance, may also be involved in regulating the securities market.
Issue of Investment Securities
The Civil Code defines “investment securities”: it includes bonds and shares in stock companies. The procedure for issue of bonds and shares is very much similar. The Civil Code sets out the stages of issue of investment securities.
The appropriate corporate body of the issuer (in case of shares, it is the general meeting of the issuer’s shareholders) approves the issue of investment securities. Following this, the issuer needs to prepare and submit registration documents to the SCS for the registration. If the issuer intends to offer the securities publicly, among the documents the issuer must file is the prospectus. The prospectus must provide detailed information on the issuer, its business and assets. The issuer needs to attach its audited financial statements to the registration documents. After the SCS registers prospectus and the securities, the issuer may market the securities and offer them to the public. The issuer must disclose the prospectus before it starts placing the investment securities. The Civil Code also requires the issuers to prepare, file with the SCS and subsequently disclose to the public report on the results of placement of the securities.
According to the Capital Markets Law, all investment securities must be issued in an electronic form, and held in a professional depository. The issuers enter into agreement with the depository on providing depository services and the services of a register holder. The major depository is the National Depository Center (NDC)23, which is the Central Depository of Azerbaijan Republic and the only permanent depository in country. Other depositories should perform under a license. TheNDC also provides the services of a paying agent – it may pay dividends on stocks and coupons on bonds on behalf of the issuer.
Capital Markets: Market Participants
Current structure of the capital markets resembles the system in the United States. stock exchange, investment fund, stock investment fund, investment fund depository, clearing house, and securities’ blank preparation and sale all are subject to licensing – before engaging in any of those businesses one must obtain a license from the SCS. The website of the SCS – www.scs.gov.az - provides substantial information on professional market participants and applicable licensing.
The SCS has created the NDC and Baku Stock Exchange24. Baku Stock Exchange is the only organized and regulated market in Azerbaijan. Even securities, which the issuer or its underwriters would like to place privately, may be admitted to trading through Baku Stock Exchange. BSE in these situations acts more like a clearing house.
BSE’s rules on listing distinguish three groups of companies, whose shares can be traded through BSE – first and second degree quoted companies and non-quoted companies. Companies, which have been in existence for at least three years and with the value of their equity not less than AZN 5,000,000 (approx. USD 3,208,000), may be included into the list of the first group quoted companies. Other entities may be listed as the second group quoted companies. In order to ensure there is a liquid market for its equity securities, the issuer may admit its securities to non-quoted list. This admission allows for trading of securities among brokers and dealers, who are members of BSE.
It is likely that the new regulations, including the securities market law, will change the current structure of the market to make it resemble more the EU system, as set out in, among others, EU Directive 2004/34/EC25 (referred to as just MiFID). In particular, MiFID defines “investment firms”. Those are the financial institutions which engage in different businesses in capital markets, including executing client’s orders, trading in securities on their own behalf, portfolio management, providing investment advice etc.
Collective Investment Schemes
On the SCS’ initiative in 2010 the Azerbaijani Parliament adopted the Law On Investment Funds (Investment Funds Law). Investment funds are the collective investment schemes. Investment Funds Law provides for two types of investment funds – corporate investment funds and, what may be translated into English as investment trusts. Corporate investment funds must be registered in the form of an open joint stock companiy. These funds collect investors’ contributions by issuing shares, which are publicly traded. Investment trusts are not incorporated and the law defines them as “pool of assets”. Investment trusts issue “investment fund units” – these are the securities issued to investors in exchange for the investors’ contributions. Shares and units of investment funds must be deposited with a professional securities depositary.
Investment funds are managed by their licensed managers. Managers also need to procure obtaining licenses for the fund. The SCS issues licenses.
Corporate investment funds must be found by at least three persons. All investment funds, including corporate funds, must prepare and disclose their “investment declaration” – essentially, a prospectus. In the prospectus an investment firm must disclose its investment strategy, purpose
and any limitations on the investment activity. Corporate investment funds may invest their funds in cash, various types of securities, including corporate and state issued, and real estate. An investor’s return from investing in corporate investment fund may be in the form of a dividend (paid by the fund) or appreciation of its share, which the investor realizes upon the sale of its share. Upon liquidation of a corporate investment fund an investor is entitled to residual value of the fund’s property. In terms of management rights, shareholders of a corporate investment fund are entitled to participate in the general meeting of shareholders and vote on important corporate matters, such as reorganization, liquidation of the fund, distribution of dividends and appointment of a new fund manager and depositary.
The Investment Funds Law distinguishes three types of investment trusts – open, interval and closed investment trusts. The distinction is based on how often a trust sells and redeems its units. An open trust must issue and redeem its units at least once a week. An interval investment trust must organize the sale and redemption of its units at least once a year, while a close investment trust sells or redeems its units when it closes down. One other feature that distinguishes a closed investment trust from other two types of trusts is that closed investment trusts may hold real estate in their portfolio in addition to cash and securities.
Holders of units in investment trusts can hope to obtain return from investing in the fund through the sale of its units back to the fund, when the fund redeems its shares, or appreciation of the unit. As a general rule, an investment trust must redeem its shares at their net asset value (NAV). The law defines NAV as the difference between the fund’s (or the trust’s) assets and liabilities. The SCS enacted certain rules on calculating net asset value of an investment trust.
Currently, there are no investment funds in Azerbaijan. This may be partly due to the lack of detailed rules in Azerbaijan’s tax regulations on how proceeds of investment funds and distributions to shareholders or unit holders are taxed.