The International Capital Markets Review: Kazakhstan

Kazakhstan’s legal system is a civil law system similar to the systems in most other former Soviet jurisdictions. Its laws are contained in the Constitution,2  various codes, laws, edicts, decrees (having the force of law), regulations, instructions, orders and other normative acts of the Republic of Kazakhstan. 

The securities market is primarily regulated by the provisions of the Kazakh Civil Code,3  the Securities Law,4  regulations of the National Bank of the Republic of Kazakhstan (NBK) and internal rules of the Kazakhstan Stock Exchange (KASE).5  

Unlike the international capital market, the domestic capital market is heavily regulated by the laws of Kazakhstan. The local securities market, in particular, is divided into an organised market (transactions with securities are executed in accordance with the trade organiser’s (i.e., the KASE’s) internal documents) and an unorganised market (transactions with securities are executed without observing the requirements established by the trade organiser’s internal documents).  

а  first instance courts – district courts and courts deemed equivalent thereto;

b courts of appellate and cassation instances – oblast courts and courts deemed equivalent thereto; and 

c the highest judicial body performing the functions of supervisory instance – the Supreme Court. 

Kazakhstan has general and specialised courts, whose competence encompasses review of different categories of cases (economic, administrative, etc.). The review of property and non-property disputes between entrepreneurs and legal entities, as well as corporate disputes, is referred to the competence of specialised inter-district economic courts. 

Alternatively, the Law on Arbitration Tribunals of 28 December 2004 and the Law on International Arbitration of 28 December 2004 set out the key provisions relating to the proceedings in arbitration tribunals or courts of arbitration. For instance, certain6  disputes between residents of Kazakhstan can resolved by ‘arbitration tribunals’ in Kazakhstan. These arbitration tribunals are not state courts, but various private arbitration tribunals roughly analogous to private arbitration tribunals in Western countries. 

Kazakhstan is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention). Accordingly, a foreign arbitral award obtained in a state which is party to that Convention should be recognised and enforced by a state court of Kazakhstan, subject to the terms of the Convention and compliance with local procedural rules. 

Foreign court judgments may be recognised and enforced in Kazakhstan only if provided for by an international treaty for the mutual enforcement of court judgments (based on reciprocity). Kazakhstan is not a party to any such treaties with the most Western jurisdictions. Consequently, should a judgment be obtained from a court in such jurisdictions, it is unlikely to be enforceable in Kazakhstan courts.  

The following institutions are involved in regulating and monitoring capital markets activity in Kazakhstan:  

The NBK as a financial mega regulator (in 2011 Kazakhstan consolidated its financial and securities regulators under the auspices of the NBK) is the governmental authority that executes, inter alia, regulation, control and supervision over the financial market and financial and other organisations within its competence. The NBK issues licences for financial activities to market participants and adopts legal acts that regulate capital markets in Kazakhstan. The NBK is currently based in Almaty (the ‘financial centre’ of Kazakhstan). However, pursuant to a recent presidential decree, the NBK shall move to Astana (the capital of Kazakhstan) by 1 January 2017.  

The Kazakhstan Stock Exchange is the only local stock exchange in Kazakhstan and is currently based in Almaty (the KASE will be relocated to Astana after the NBK relocation mentioned above). The KASE acts on the basis of relevant licences issued by the NBK and as of September 2015 has more than 100 companies listed on it. The KASE is a universal financial market, which can be conditionally divided into five major sectors: the foreign currency market, the government securities market, the market of shares and corporate bonds, the repo operations market and the derivatives market. Currently, the KASE comprises 53 members,7  including banks, broker, dealer and investment companies. Foreign legal entities may be recognised as KASE members subject to meeting certain requirements established by the KASE.  

The Financial Institutions’ Association of Kazakhstan (AFK) is a non-governmental organisation whose members include banks, insurance companies, brokers and other professional participants in the securities market, leasing companies, audit organisations, consultancies and scientific-educational organisations. The AFK does not have a regulatory role. However, it does play an active role in the development of the financial market and relevant legislation in Kazakhstan by issuing its recommendations to the NBK and the KASE.  

Under Kazakh law, security means ‘a complex of particular records and other symbols certifying

proprietary rights’8  and, in particular, the following constitute securities: 

a shares and bonds;

b derivatives (as defined in law); 

c securities of foreign issuers; 

d mortgage certificates; e warehouse certificates; and 

f other types of securities.  

Kazakh joint-stock companies can issue shares, convertible securities, corporate bonds and other securities both to the public and as a private placement. Participatory interests in Kazakh limited liability companies are not securities under Kazakh law and may not be issued to the public or traded in the organised market.  

Both Kazakh joint-stock companies and limited liability companies may issue corporate bonds. The bonds may be secured (by the property of the issuer or bank guarantee) or unsecured. Kazakh law also recognises mortgage bonds and infrastructure bonds.  

Mortgage bonds shall be secured by the pledge of rights under a mortgage loan and, in addition, may be secured by the pledge of other high liquid assets established by the NBK (such as money, Kazakh and foreign state securities (if the issuer has a sovereign rating not less than BBB- of Standard & Poor’s or the equivalent of other rating agencies and highly rated Kazakh securities). Money and securities shall not exceed 20 per cent of the total security provided during the circulation of the mortgage bonds.  

 Infrastructure bonds are issued in concession projects and are secured by the suretyship of the state within the frameworks of the concession agreement on realisation of infrastructure project between the state and the issuer. The value of such suretyship shall be equal to the value of the object transferred to the state. The state suretyship is only provided if the infrastructure bonds are listed on the KASE.9   

Kazakhstan depositary receipts (KDRs) are derivative emission securities confirming the ownership for the certain amount of emission securities issued under foreign law as underlying assets. KDRs can be issued by the Kazakh custodians, the shares of which are included to the supreme category of the official list of the KASE and have risk management and corporate governance systems in place. KDRs may be placed and circulated in the organised market only, and any payments under KDRs shall be made in the local currency – tenge. The issuer of the underlying assets may not be registered in those offshore jurisdictions listed by the NBK, or be an affiliate of an offshore jurisdiction company. The issuer of the underlying assets or the underlying assets themselves shall have a rating of not less than BB- by Standard & Poor’s or Fitch or a Ba3 by Moody’s. The concept of KDRs has been introduced for the purposes of diversification of investment portfolios and risks of the investors and to give them the opportunity to invest in the securities of foreign issuers with decreased transaction costs. To the best of our knowledge, however, no issuance of KDRs has happened in Kazakh securities market thus far.  

In 2009, Kazakhstan was the first county in CIS and Central Asia to introduce Islamic banking and Islamic securities. In 2012, JSC ‘Development Bank of Kazakhstan’ issued Islamic securities – sukuk al-murabaha (that was, however, governed by foreign rather than Kazakh law). 

Islamic securities issued under Kazakh law are subject to separate regulation in Kazakhstan. In particular, Islamic securities may be paid only in cash. Until an offered Islamic security is paid in full, the issuer may not issue an order to charge it to the acquirer’s personal account. 

The key principles of Islamic finance as prescribed by Kazakh laws are as follows: the issuer may not accrue interest as a percentage of the Islamic securities value, or guarantee income on Islamic securities; and the funds received as a result of issue and placement of Islamic securities cannot be used to finance activities related to the production of, or trade in, tobacco, alcohol, weapons, ammunition, or to gambling business, etc. 

Islamic securities certify the right of their holder for the portion of the material assets and the right to disposal of such assets and the income derived from such assets, services and other assets of the particular projects for financing of which Islamic securities have been issued. The prospectus of Islamic securities shall be approved by the so-called council on principles of Islamic finance that may be engaged by the issuer based on the agreement. 

Islamic securities include: shares and units of Islamic investment funds; Islamic lease certificates; Islamic participation certificates; and other securities recognised as Islamic securities by Kazakh law.  

The Securities Law recognises three types of investors: individual, institutional and qualified. An institutional investor is a legal entity attracting the funds for the purposes of investment. 

An individual investor is any other investor. Individual investors may invest independently or through professional participants in the securities market, whereas institutional investors may invest only through professional participants in the securities market.10