Capital Markets in Turkey: Legal Framework and 2017 Developments

Ramiz Arslan July 2018 For information purposes only All rights reserved Š Design: A-KA Design Services

This document is prepared by Ramiz Arslan for general information purposes only. This work is prepared in compliance with the law, including but not limited to Turkish Attorneyship Law which is prohibiting lawyer advertisement.

Copyright Š 2018 Ramiz Arslan. All rights reserved. This document is protected by Turkish and International copyright las. Reproduction and distribution of the document or its content (excluding the photographic material which are royalty free and available online) without written permission of the author is prohibited. The source of the numbers (e.g. amount of securities issued in a year) provided in this document is the public bulletin of the Turkish Capital Markets Board, and the reports of the Turkish Capital Markets Association. This document has been prepared for general information purposes only, not intended to provide legal advice.

The author of this document exerts maximum effort to ensure that the information published in this report is obtained from reliable sources, is up-to-date and accurate. However, author cannot guarantee the accuracy, adequacy or integrity of the information or data. Information, comments and recommendations shall not be construed as investment advice.

The author does not accept any responsibility or under no liability for any losses or damage that could result from the use of any information in this report.

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Greetings, Capital markets in Turkey have a longstanding foundation extending over Ottoman Empire government bonds, where the legal framework has the history of 40 years. Capital markets in Turkey is mainly governed by the Turkish Capital Market Law, and the detailed communiquĂŠs of the Capital Markets Board of Turkey, the regulatory body.

While there are number of provisions for joint stock companies in the Turkish Commercial Code, the Turkish Capital Market Law regulates bare areas for public companies, aside from introducing many exceptions for listed ones.

The Turkish Capital Market Law also regulates every kind of securities to be issued, and the stock exchanges where these to be traded on.

The activities and establishment requirements of financial intermediaries and investment firms operating in capital markets is also in the scope of Capital Market Law. This document is intended to take a brief look at the cornerstones of the Turkish Capital Markets Scheme from a legal standpoint, and summarize the developments took place in the year of 2017 with the numbers.

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Photo: Yoosun Won

CONTENT 5 ________ LEGAL FRAMEWORK 5 ________ Overview 7 ________ Initial Public Offerings 9 ________ Governance of Public Companies 17 ________ Related Party Transactions 19 ________ Public Disclosure 25 ________ Capital Market Instruments 31 ________ Investment Services

35 ________ DEVELOPMENTS IN 2017 36 ________ Adopting Fintech Legislation: Crowdfunding 37 ________ Commodity Exchange 38 _______ Other Developments

39 _______ 2017 IN NUMBERS 39 _______ Applications for Instrument Issuance 40 _______ Istanbul Stock Exchange 40 _______ Approved Prospectuses 41 _______ CMB Administrative Fines 41 _______ Criminal Complaints

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Overview

Overview Turkish capital markets are mainly governed by Turkish Capital Market Law numbered 6362, with the Capital Markets Board of Turkey being the lead actor as the regulatory and supervisory authority constructed in the form of an independent public institution. As described in the prolog, the main purview of the Law is to regulate and supervise capital markets to ensure the functioning and development of capital markets in a secure, transparent, efficient, stable, fair and competitive environment and to protect the rights and interests of investors.

The CMB consists of seven members, where one of the members is appointed by the cabinet as chairman. Chairman has a separate Secretarial Bureau, where the CMB also has a separate Secretarial Bureau. CMB vice chairmen are managing the following ten departments; -

Intermediary Activities Department Information Technologies Department Enforcement Department Administrative and Financial Affairs Department Institutional Communication Department Institutional Investors Department Accounting Standards Department Corporate Finance Department Market Oversight and Enforcement Department Strategy Development Department

Photo: Timon Studler

Other than the aforesaid departments, there are Research and Legal Consultancy units directly answering to the CMB.

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Overview

As of July 2018, one of the membership positions of the CMB is vacant. The CMB’s six members are as follows; Ali Fuat Taskesenlioglu - Chairman Assoc. Prof. Talat Ulussever - Deputy Chairman Yavuz Koç - Vice Chairman Mutalip Ünal - Board Member Dr. Ünal Eryılmaz - Board Member Mutlu Akın - Board Member

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this phase may differ from a company to another.

IPOs

initial public offerings IPOs in Turkey has significant importance when it comes to capital markets since the number of public companies has a correlation with the market depth and authenticity. The number of public companies is 513 (375 of these are listed ones) as of May 2018, with 3 pending IPOs.

“In Turkish capital market scheme, a company shall go through five steps for an IPO and these are; I) internal preparation for public offering, II) application to the CMB and the Istanbul Stock Exchange, III) application to the Central Registry Agency and the Clearance House, IV) public offering, V) listing and trading.”

In Turkish capital market scheme, a company shall go through five steps for an IPO and these are; I) internal preparation for public offering, II) application to the CMB and the Istanbul Stock Exchange, III) application to the Central Registry Agency and the Clearance House, IV) public offering, V) listing and trading.

The main regulative framework during an IPO to be considered consists of Communiqué numbered II-5.1, Communiqué numbered II5.2, Communiqué numbered II-14.1, Communiqué numbered II-15.1 and Istanbul Stock Exchange Listing Directive.

Internal preparation for public offering phase is where the company choose its intermediary, prepares financial reports to be included in the prospectus, takes necessary actions (e.g. general assembly) for compliance with the capital market regulations, and prepares a prospectus for the CMB and application documents for the ISE. This phase is where the company gets ready for the public offering internally without the intervention from the CMB or from the Istanbul Stock Exchange, therefore the timeline of

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The subsequent timeline of an IPO after the internal preparation phase can generally be summarized as follows: Application to the CMB with the prospectus, and application to the Istanbul Stock Exchange with demanded documents (1st business day) The preparation of the prospectus and its approval by the CMB is compulsory for the public offering of capital market instruments or for their trading on the ISE. The prospectus shall be comprehensible and can be easily analyzed by the investors. The prospectus shall also be in line with the prospectus standards determined by the CMB. There is a number of prospectus standards published by the CMB in accordance with the nature of every public offering.

The CMB prospectus approval (20th business day) The CMB analyzes the prospectus without auditing its content. The CMB decides to approve the prospectus when determined that the information given in the prospectus is consistent, comprehensible, and complete according to its prospectus standards.

A general rule is the conclusion of the application within 10 business days from the application, where the initial public offering applications will be concluded in business 20 days.

After the approval of the prospectus by the CMB, the company shall disclose the prospectus and shall announce the disclosure details in the Turkish Trade Registry Gazette.

The ISE Board of Directors’ approval (20th business day) At the same time when CMB examines the prospectus, the ISE also examines the listing application documents. The application must be finalized within 20 business days, and the company shall be informed of the conclusion of the application. The ISE Board of Directors has the power to approve the listing application, and they maintain the process of the application with being in contact with the CMB. Therefore,

both prospectus approval by the CMB and listing approval by the ISE are being carried out correlatively.

The beginning of the public offering (24th business day) Public offering of capital market instruments may be started in the 3rd business day following the date of publishing of the prospectus and the price determination report, at the earliest.

There are 3 types of public offering sales method; I) sales via book-building, II) sales without book-building, III) sales in the stock exchange.

Sales via book-building method consist of collection and collation of demands of investors for instruments, and sales of a portion of the demands met within the frame of predetermined procedures and principles. The sales via book-building method may be applied by three price mechanisms; a) book building with a fixed price, b) book building with a price bid, and c) book building within a price range.

Sales without book-building method are applied for public companies which are not listed in the ISE; where the sales in the stock exchange method are the sales commenced and concluded in accordance with the ISE directives and regulations.

The conclusion of the sales

within 2 to 3 days.

IPOs

Conveying the results of the public offering to the CMB and to the ISE (immediately after the conclusion of the offering) Apart from the all bidding investor list, the information regarding the final results of the sales, including but not limited to the table showing the investors who acquired the capital market instruments, and the list of investors who are affiliated to the issuer shall be conveyed to the CMB. Such information shall also be kept by the issuer for five years in printed and electronic media.

Public offering final results disclosure by the intermediary (within 2 business days following the distribution list finalization) Following the finalization of the distribution list of the capital market instruments, the intermediary is required to disclose the public offering final results within the framework of the CMB regulations regarding material event disclosure. Please see the page 22 for more information on material events disclosure regulations of the CMB.

“The main regulative framework during an IPO to be considered consists of Communiqué numbered II-5.1, Communiqué numbered II-5.2, Communiqué numbered II-14.1, Communiqué numbered II-15.1 and Istanbul Stock Exchange Listing Directive.”

It should be noted that these steps may vary depending on the offering method, or the timeline may differ resulting from the transaction or application delays.

The reason why the timeline of the sales may differ between belowstated terms is the sales method to be applied.

(26th to 44th business day) If the public offering will be commenced and concluded out of the stock exchange, the company may freely choose the term of the offer from 2 days to 20 days.

(26th business day) If the public offering will be commenced and concluded in the stock exchange without the bookbuilding method, the sale shall be concluded within 2 days.

Photo: Toa Heftiba

(26th or 27th business day) If the public offering will be commenced and concluded in the stock exchange with the book-building method, the sale shall be concluded

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Photo: Taylor Nicole

Governance of Public Companies

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Governance of Public Companies

GOVERNANCE OF PUBLIC COMPANIES Every capital market system aims for the perfect governance of the public companies, and therefore imposes certain rules for the protection of the investors from the possible self-ordained management tiers. The significant focus on the corporate governance around the globe, without the limitatiaon to the public companies, is the very proof of this tendency. Today, the management doctrine is discussing the corporate governance for the private companies from the stakeholder standpoint – a general role as a stakeholder whereas anyone in that society may obtain – with a significant shift to social and environmental aspects of governance. However, one who wishes to take part in these discussions shall initially gain knowledge on the corporate governance of the public companies since such debates are emerging on the public company governance foundation.

In Turkish corporate governance of a public company practice, there is a number of regulations to be considered since almost every one of them has a touch on the subject. But not to ramble the subject any further, we

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hereby will summarize the basic corporate governance principles for public companies from the legal standpoint.

It should be noted that other than the public companies, corporate governance regulations shall apply to the capital market institutions as well.

The main regulation on the governance of the public companies is the Communiqué on Corporate Governance numbered II-17.1. Similar to the OECD corporate governance principles, the Annex of the Communiqué numbered II-17.1 (Corporate Governance Principles) composed of four main topics; I) Shareholders, II) Public Disclosure and Transparency, III) Stakeholders, and IV) Board of Directors.

There is a number of mandatory provisions set forth in the Corporate Governance Principles, but the majority of the provisions are voluntary to be applied by public companies, with regard to some of the voluntary provisions may have been already adopted as mandatory by other regulations of the CMB. Many of the mandatory provisions are regulating the topics of the Board of Directors, and the Shareholders.

Photo: Lou Levitt

Governance of Public Companies

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Governance of Public Companies

SHAREHOLDERS Shareholders topic mainly covers; shareholders’ right to actively participate to the general assembly meetings, the exercise of the shareholders’ information right, shareholders’ right to question managers and directors on the corporate affairs, and the establishment of an investor relations department. Under this section, some transactions to be performed by the company’s board of directors are also regulated (e.g. the need of an approval from the independent BoD members for significant transactions).

PUBLIC DISCLOSURE AND TRANSPARENCY Public Disclosure and Transparency topic mainly covers; corporate website of the firm, and the annual report and its content. It should be noted that these principles are not mandatory to be applied by public companies according to the Communiqué on Corporate Governance, but some of them are already adopted as mandatory provisions under different regulations of the CMB, or by the provisions of the Turkish Commercial Code.

STAKEHOLDERS Stakeholders topic is the reflection of the emerging lean towards the “protection for all interested parties beyond shareholders” perspective. Stakeholders are defined as persons, institutions or interest groups that are related with the achievement of goals or activities of the company such as employees, creditors, clients, suppliers, syndicates, and some non-profit organizations, according to the Communiqué numbered II-17.1. Stakeholder section is also comprised of voluntary principles, but it should be noted that CMB is planning to increase the number of mandatory principles in parts.

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Governance of Public Companies

BOARD OF DIRECTORS The Board of Directors section is where the principles set forth regarding the selection of the BoD members, independent member qualifications, the establishment of the committees and so on.

Many of the principles in this section are mandatory, and more vivid than the other sections.

Some of the significant principles under the Board of Directors Section of the Corporate Governance Principles can be summarized as follows: Companies are free to appoint the BoD chairman as the chief executive officer, but this flexibility comes with an obligation. If the BoD chairman is also appointed as the chief executive officer, then such power unity shall be disclosed to the public on the Public Disclosure Platform.

Companies shall form a BoD for sustaining the effective operation of the company, which consists of at least 5 members. Majority of the members shall be non-executive and free from the administrative duties or daily corporate affairs.

There shall be independent members chosen from the non-executive members, which their number shall not be less than one-third of the total number of the BoD members.

The compensation terms of the BoD members and employees with administrative duties shall be in writ as a compensation policy, and shall be discussed in the general assembly agenda as a separate item. While compensating independent BoD members, criteria on the performance or the profit of the company cannot be used.

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Audit Committee Audit Committee is the most significant body to be in charge of the supervision of the company’s accounting operations, public disclosure of the financial reports, independent auditing, and internal audit systems. Audit Committee shall also take supervision duties during the election of the independent audit entity, initiation and conclusion of the independent audit in all levels of the company. Audit Committee shall determine the independent audit service provider and submit its decision to the BoD for approval.

Audit Committee shall hold a meeting at least four times a year, provided that it is once in three months. There must be a separate section in the annual report of the company dedicated to the activities and resolutions of the Audit Committee.

Corporate Governance Committee

COMMITTEES BoD of the company shall establish the following committees in order to carry out its operations properly; I) Audit Committee, II) Early Detection of Risk Committee, III) Corporate Governance Committee, IV) Nomination Committee and V) Compensation Committee.

The Nomination and Compensation Committees’ duties can be carried out by the Corporate Governance Committee if the composition of the BoD is not efficient to establish separate committees for such duties. One should note that banks are exempt from the obligation of forming Audit Committee, Early Detection of Risks Committee, Nomination Committee, and Compensation Committee since their regulations cover the duties of aforesaid committees separately.

Every committee must be comprised of at least two board members, and the majority of the memberships shall be filled with non-executive BoD members. Committee chairs are to be appointed from the independent BoD members, while not just the chair but every member of the Audit Committee shall be appointed from independent BoD members. It is important to note that the chief executive officer can neither be a chair nor a member of any committees stated above.

Corporate Governance Committee foresees the implementation and compliance with Corporate Governance Principles within the company; and shall determine as to whether principles of corporate governance applied, if not applied its grounds and state the conflict of interest which arises for not complying with these principles and give advice to the board of directors to enhance the implementation of corporate governance principles and supervise the work of the investor relations department.

Nomination Committee Nomination Committee mainly handles the issues regarding independent BoD member candidates as being in charge of forming a transparent system on the determination, evaluation, and training of the candidates suitable for positions of the BoD and executives, and determines policies with this regard. Nomination Committee also evaluates the operational competence and productivity of the BoD regularly, hence, presents advice to the BoD on its findings.

Compensation Committee Compensation Committee is in charge of determination of the criteria and principles to be implemented for the compensation of the BoD members and executives. The Committee shall

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consider the operations and longstanding goals of the company, and shall also advise the BoD on the compliance and implementation of predetermined criteria on the compensation. The compensation criteria determined by the Compensation Committee may be disclosed to the public.

Early Determination of Risk Committee Early Determination of Risk Committee is the reflection of risk management and supervision understanding in the Corporate Governance Principles. Early Determination of Risk Committee provision also made its place in the TCC which is the main legislation regarding the commercial entities in Turkey. The regulations of the Turkish Commercial Code and the Corporate Governance Principles complement each other with regard to operational grounds of the Early Detection of Risk Committee. Whilst Turkish Commercial Code persuades the Committee to present its report evaluating the risk factors of the company once in every two months, Corporate Governance Principles require the Committee to review the risk management systems at least once in a year.

Independent Members of the BoD There shall be independent members chosen from the non-executive members, which their number shall not be less than one-third of the total number of the BoD members.

For a BoD member to be counted as an independent member, following terms shall be met: • Not to have a relationship in terms of at an administrative level and responsibilities within the last five years in the company; not to own more than 5% of the capital or voting rights or privileged shares of the company; not to have gotten into a significant commercial relationship or a transaction with the company, or companies on which the company hold control of and shareholders who hold control of the company or have significant effect on the company and legal entities on which these shareholders hold control of, • Not to have been a shareholder (5% and more), an employee at an administrative level to take upon significant duty and responsibilities or member of BoD within the last five years in companies that the company purchases or sells goods or service at a significant level within the framework of the contracts executed, especially on audit (including tax audit, statutory audit, internal audit), rating and consulting of the company, at the time period when the company purchases or sells services or goods, • Not to be a full-time employee at public authorities and institutions after being elected, except being an academic member at a university, • Not to have conducted membership of the BoD more than a term of six years in the last ten years, • The same person shall not be the independent member of the BoD in more than three of the companies as such; the company or the controlling shareholders of the company who holds the control of and in more than five companies in total which are admitted to the trading on the stock exchange, • Not to be registered and announced as a BoD member representing a legal entity, • To have professional education, knowledge, and experience to duly fulfill the duties assigned for being an independent board member • To be residing in Turkey according to the Turkish Income Tax Law, • To be able to allocate time for the company’s business to follow up the activities of the company and duly fulfill the allocated duties.

“The person to be appointed as an independent BoD member has to be residing in Turkey according to the Turkish Income Tax Law.”

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Photo: Matthew Henry

Governance of Public Companies

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Related Party Transactions

Related party transactions Related party transactions is a topic governed both under the Communiqué numbered II-17.1 as being a corporate governance matter, and under the Turkish Accounting Standards. According to the Turkish Accounting Standards, related party transactions are transactions on the transfer of the funds, services or obligations between related parties regardless of a price in return. In order for a party to be considered related to an entity, one of the following conditions shall be met: • The party directly or indirectly shall be controlled by the entity, or shall be controlling the entity, or shall be in the same control group with the entity; or shall be holding a certain amount of shares providing significant effect on the entity; or shall be controlling the entity jointly; or shall be a family member of the aforesaid; or shall be an entity where the above-mentioned people are holding the shares of in the significant amount, • The party shall be a subsidiary of the entity, • The party shall be a joint venture where the entity is a party, • The party shall be a key manager in the entity or in the holding company; or shall be a family member of such manager; or shall be an entity where the aforesaid people are holding the shares of in the significant amount, • The party shall be benefiting the cease of employment plans provided by the entity or by the related party of the entity.

The companies are not free to carry out related party transactions easily. Initially, the company shall consider the “related” status of the party to be dealt with, then follow the rules determined under the Article 17 of the Law and the Part III of the Communiqué numbered II-17.1.

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Requirements to Carry Out a the net book value) comparing to the not be required in the general assembtotal asset as per the latest financial ly meetings to be made in situations Related Party Transaction BoD’s Decision Requirement According to the Article 17 of the Law, before starting a transaction with their related parties, public companies must take a BoD’s decision setting the terms and principles of the transaction to be made, however, such requirement is only to be met for transactions with particular nature or exceeding certain thresholds determined under Article 9 of the Communiqué numbered II-17.1.

According to the Article 9 of the Communiqué numbered II-17.1, there is a number of requirements for public companies to carry on with the transaction apart from the BoD’s decision requirement. It shall be noted that the following requirements are determined under Article 9 of the Communiqué on Corporate Governance numbered II-17.1, therefore, common and continuous transactions are not within the scope of the below stated provisions. For more information on the common and continuous related party transactions, please see the Article 10 of the Communiqué numbered II-17.1.

Independent Evaluation Requirement In transactions i.e. asset and service purchase and obligation transfer transactions, the rate of the transaction amount comparing to the total asset as per the latest financial statements disclosed to public or to the revenue amount as per the latest financial statements disclosed to public or to the value of the corporation to be calculated on the basis of the average of the weighted average of the daily corrected prices of the six-month term prior to the BoD’s resolution date; is foreseen to be more than 5%, before the transaction it is mandatory to have made an appraisal by an institution designated by the CMB. But in cases where the amount corresponding to 5% of the revenue is lower than the amount corresponding to one per thousand of the total equity capital; rate based on the revenue shall not be deemed applicable.

In transactions i.e. asset and service sale, the rate of the transaction amount (in case of the net book value of the asset is higher, the rate of

statements disclosed to public or to the revenue amount (in cases that the asset is transferred, leased out or right in rem is established thereon, the rate of the profit earned from the asset as per the latest financial statements comparing to the profit of the company before the taxation on its ongoing operations) as per the latest financial statements disclosed to public or to the value of the company to be calculated on the basis of the average of the weighted average of the daily corrected prices of the six-month term prior to the BoD’s resolution date; is foreseen to be more than 5%, before the transaction it is mandatory to have made an appraisal by an institution designated by the CMB. But in cases where the amount corresponding to 5% of the revenue is lower than the amount corresponding to one per thousand of the total equity capital; rate based on the revenue shall not be deemed applicable.

Real estate, integral parts of the real estate, real estate projects and rights attached to real estate that are included in the transaction shall be subject to appraisal according to the CMB’s regulations regarding real estate appraisal.

Independent BoD Members’ Approval Requirement According to the Article 9/3 of the Communiqué on Corporate Governance numbered II-17.1, in cases where it is foreseen that a rate more than 10% may be reached in respect of the rates stated under above paragraph “Independent Evaluation Requirement”, approval by the majority of the independent BoD members shall be required in the resolution of BoD regarding the transaction, in addition to the obligation of having made an appraisal.

In case that the majority of the independent BoD members do not approve such transaction, this situation shall be disclosed at the PDP in a manner including a satisfactory explanation and the transaction shall be submitted to the approval of the general assembly. In these general assembly meetings, the resolution shall be taken through a voting, in which parties to the transaction and the persons related thereto cannot vote. Meeting quorum shall

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stated in this article.

Public Disclosure Requirement According to the Article 9/6 of the Communiqué numbered II-17.1, in case that it has been decided to execute the related party transaction, direct or indirect relations among the parties of the transaction, nature of the transaction, a summary of the appraisal report including assumptions used in the appraisal and appraisal results; and in case that the transactions have not been fulfilled in accordance with the results obtained in the appraisal report, the ground for this situation shall be disclosed at the PDP within the framework of the CMB’s regulations on public disclosure.

Exceptions and Specific Provisions for the Banks, Financial Institutions, and Investment Firms • Requirements set forth under Article 9 of the Communiqué numbered II-17.1 shall not apply for portfolio management services, investment consulting services, and intermediary services for sale and purchase of the securities that investment companies purchase from their related parties.

• From the perspective of the banks, revenue is the income of interest earned from their major field of activity.

• Banks and financial institutions are not obliged to fulfill the obligations set forth in Article 9 of the Communiqué numbered II-17.1 for related party transactions arising from their ordinary activities.

Public Disclosure

Photo: Sasha & Dasha Bakani

Public disclosure

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Photo: San Kayzn

Public Disclosure

Turkish capital market, like many others, revolves around the public disclosure basis, with an aim to protect the investors through dispensing asymmetric information problem. In this section, we will present two major public disclosure requirements; financial reports disclosure, and material events disclosure.

Financial Reports Disclosure The most important information type to be disclosed by the companies is the financial reports and charts since the investors’ investment decisions heavily rely on these as financial indicators.

Therefore, the CMB regulates the certain type of financial reporting criteria for companies under the Communiqué on Principles of Financial Reporting in Capital Markets numbered II-14.1, which refers the International Accounting Standard (IAS).

Issuers and capital markets institutions but the investment funds or housing and asset finance funds are required to follow the guidelines of the Communiqué numbered II-14.1 when preparing or disclosing their financial reports. According to the Communiqué numbered II-14.1, entities shall prepare their financial reports in accordance with the Turkish Accounting Standards published by the Turkish Public Oversight and Auditing Standards Authority, which significantly reflect the IAS. Regarding the interim financial reports disclosure, companies the securities of which are traded in the stock exchan-

ge, investment firms, investment companies, portfolio management companies, mortgage finance institutions, and asset lease companies are obliged to prepare and disclose interim financial reports quarterly, semi-annually, and in every nine months.

Entities are obliged to determine the content of the annual reports in accordance with the Annual Report Regulation, and required to prepare and disclose their reports in the terms regulated under the Communiqué numbered II-14.1. Apart from the mandatory minimum content set forth under Annual Report Regulation, above-stated companies are required to include the following information in their annual reports: • Limits of authorization and terms of office of directors and top-tier managers, • Collective labor contracts, and rights and benefits provided to the personnel, • Information on the sector of the entity and its position in it, • Information on the production units, total sales, and sales prices of the products of the entity, along with the sales conditions and developments observed during the past financial year, and efficiency ratios and reasons of material changes for the past financial year, • Developments in investments, use of investment incentives, and if used, to which extent the investments are realized,

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• Financial belongings and income of the entity, and if any, characteristics and amount of securities issued by the entity, • Amendments made in the AoA during the last year with their reasons, • Corporate Governance Compliance Report, if required so, • Information to be submitted to the shareholders regarding the related party transactions and balances of such transactions.

Financial reports of the companies the securities of which are traded in the stock exchange shall submit their financial reports and audit reports to the PDP within 60 days after the end of the fiscal year. If the company is required to prepare consolidated financial reports, the term to submit the reports to the PDP is applied as 70 days after the end of the fiscal year.

The companies the securities of which are traded in the stock exchange, portfolio management companies, and investment firms are obliged to submit and therefore disclose their financial reports to PDP, while other entities in the scope of the Communiqué numbered II-14.1 are required to submit their financial reports to CMB.

Material Events Disclosure Apart from the financial reports of the entities, some type of information may affect the stock prices or the investors’ investment decision. Disclosure of such information is heavily regulated under the Communiqué on Material Events Disclosure numbered II-15.1 and in the Guideline on Material Events Disclosure; non-compliance with these is where the CMB fines tend to pile up. These regulations cover mainly three types of information disclosure; I) disclosure of insider information, II) disclosure of ongoing information and III) disclosure of information regarding non-publicly traded issuers issuing securities for sale to qualified investors. The most significant and controversial type of information to be disclosed by issuers is insider information since it is hard to define its lines, while ongoing information and information pertaining non-publicly traded companies are regulated vividly.

Insider Information Disclosure Insider information is the information type that is non-public and that may affect the value or price of securities or the investment decisions of investors.

The principle regarding the insider information is issuers to disclose such information at once when they emerge or are learned, with the exception of disclosure postponement procedure.

Additional to the Communiqué numbered II-15.1, CMB published a Guideline on Material Events Disclosure which considerably sets forth the examples of insider information and the procedure of disclosure. Accordingly, including but not limited to, the following can be considered as insider information that shall be disclosed by the issuers: • External circumstances affecting the issuer

of formation that may affect the securities’ prices shall be disclosed to the public. (e.g. appointment or dismissal of executives or managers, general assembly’s decision on not to discharge BoD members, legal actions against the BoD members or executives) • Administrative or judicial proceedings Administrative or judicial proceedings initiated against the issuer that may affect the securities’ prices shall be disclosed to the public. Where the 10% capital or voting rights holders or the director nomination rights privileged shares holders in the amount of %10 are subjected to a criminal proceeding, such information shall also be disclosed to the public.

• Unusual income or loss in the significant amounts If the issuer benefits an unusual income, or suffers an unusual loss, beyond its regular operations, such income or loss information shall be disclosed to the public. (e.g. income generated out of the credit institutions waiver after debt restructuring, tax debt arises out of a merger with a subsidiary) • M&A transactions and takeover bids M&A transactions or takeover bids generally affect the investors’ decisions or securities’ prices, therefore, shall be disclosed to the public. But mainly a merger or an acquisition information composed of many tranches in the way of occurrence, therefore, issuers shall assess whether the information is deemed as a solid insider information before the disclosure.

• Transactions regarding real assets

This type of insider information is mainly occurring beyond the issuer’s reach and affects the issuer’s asset status or its operations. (e.g. changes in the legislation regarding issuer’s area of activity, natural disasters affecting issuer’s assets or operations)

Significant transactions on real assets, including but not limited to, where the sale or acquisition price of the real asset is in the amount of 25% of the total real assets of the issuer, or 10% of the total assets, shall be disclosed to the public since such transactions may directly affect the prices of the securities.

• Changes regarding the management tier of the issuer

• Changes regarding the issuer’s activities

Changes in the management structure

Changes in the issuer’s activities may

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affect the securities’ prices or investors’ decisions, therefore shall be disclosed with the discretion. (e.g. change in the issuer’s area of activity, development of a new technology within the company that may affect the operations, signing contracts of high amounts or contracts on the patent or royalty rights, entering into a joint venture) • Changes regarding the issuer’s financial structure Financial structure changes may directly affect the securities’ prices or investors’ decisions, therefore shall be disclosed to the public. (e.g. execution proceedings or litigation proceedings against the issuer in the amount of 10% of its total assets, waiver of the creditors for the benefit of the issuer in the amount of 10% of its total assets, issuer’s donations exceeding the amount of 1% of its total assets) • Changes regarding the subsidiaries and financial assets Changes in the issuers’ corporate structure such as subsidiaries or acquisition of financial assets may affect the prices of the securities’ and shall be disclosed to the public. (e.g. acquiring or disposing of subsidiaries with the sales value in the amount of 5% of the issuer’s assets, acquisition of financial assets giving the voting rights in the amount of 10% of the total voting rights, use of the profits emerged out of the subsidiaries’ activities) • Other developments Apart from the above-stated, any change or development that may affect the prices of the securities or the decisions of the investors shall be disclosed to the public with discretion. (e.g. changing the audit firm, signing a contract with a rating agency, planning management or employee buyouts, issuing securities that will be traded in the foreign stock exchanges, issuer’s information disclosures made in the foreign markets) Whilst disclosure requirement primarily directed to the issuers, which are the companies who issue securities to the public, other interest groups are also obliged to follow the disclosure rules on certain occurrences. Hence, if the insider information is learned by 10% capital or voting rights holders or

by the director nomination rights privileged shares holders in the amount of %10 without the issuer’s knowledge, such interest group or party is under the obligation to disclose the insider information immediately. Individuals and entities who are obliged to keep the information they may come across under strict confidentiality according to the applicable law (e.g. lawyers) are not obliged to disclose such insider information.

Public Disclosure

Issuers are required to keep a list that contains the names of the individuals who have access to the insider information and shall report this list to the CRA. These individuals may be the people who have regular access to the insider information or people who are working for the issuer under an employment agreement. Issuers are obliged to inform and educate the people on this list on the legal requirement to keep the insider information under strict confidentiality.

ISE constantly observes the market and keeps the record of the unusual price or quantity movements, then directs the question to the issuer whether there is a material event that is not disclosed to the public that may be causing to such movements that cannot be explained by usual market conditions. Issuers are obliged to comply with the ISE’s demand and disclose any material event if there is any that may be causing the price volatility.

Issuers are also under the obligation of responding to the news or rumors that may affect investment decisions or prices of the securities. Hence, upon such news or rumors, the issuer shall make a public disclosure in accordance with the disclosure regulations as to whether such news or rumors are true or not. If the news or rumors are related to the insider information which its disclosure is postponed, issuers are obliged to disclose such insider information since postponement terms are deemed to be ceased upon the publication of such news.

Photo: Constantine Fountos

Issuers are also required to disclose the information on transactions on the shares made by managers, by the people who are closely related to the managers, or by the parent companies, reserving that such share transactions are exceeding the amount of TRY 286,000 within a year.

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Public Disclosure

Postponement of Insider Information Disclosure Postponement of insider information disclosure is a strict procedure for issuers wanting to keep the insider information from disclosure until a certain term.

In its sole responsibility, an issuer may postpone the public disclosure of insider information to avoid damages on its legitimate interests, reserving that it does not lead to misleading of investors and it ensures that such information is kept in strict confidentiality. The issuer is required to ensure confidentiality of the insider information the disclosure of which is postponed, and secure the access to such information, and shall take effective actions to prevent access to such information other than those included in the list of people having access to insider information, and shall take necessary actions to assure that insider information is disclosed if it cannot be kept in strict confidentiality at any given time. At any time the legitimate causes enabling the

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postponement of insider information disclosure are removed, the issuers shall immediately disclose such information to the public.

Ongoing Information Disclosure Ongoing information is generally defined as all information, events, and developments that are not covered by the definition of insider information. But ongoing information disclosure refers to the rather limited area of information since insider information covers a wide range of issues. Ongoing information disclosure covers mainly the capital structure or management control changes, such as, if and when direct or indirect shares or voting rights of natural person or legal entity or of other natural persons or legal entities acting together with that natural person or legal entity in the capital of a publicly traded issuer reach or fall below 5%, 10%, 15%, 20%, 25%, 33%, 50%, 67% or 95%, the said persons and the CRA are obliged to disclose such information to the

Public Disclosure

public.

assembly meeting,

Another type of ongoing information disclosure type is where the issuer publishes the general information regarding company on the PDP. This general information covers the information on the members of the BoD, a table showing natural persons and legal entities directly having 5% or more of capital shares or voting rights, information on subsidiaries and financial assets of the company, and basic trade registry information along with investors relations department’s contact information. Companies are also obliged to adopt an information policy and disclose this policy on the PDP.

• Information on use of the right to attend general assembly meetings, and on total voting rights,

Another and critical information type to be disclosed is the information on general assembly meetings and capital increases.

Hence, issuers are bound to disclose the herein events and information:

• Information about the resolution of the BoD on the issuance of new shares, and use of preemptive rights on newly issued shares, and in the case of the right of cancellation and exchange of the shares issued due to the capital increase, information about the exchange process.

• Resolution of the BoD relating to date, time, place, and agenda of the general

• Decisions taken by the BoD or the general assembly about profit distribution, • List of attendants and minutes of the general assembly meetings, • If a general assembly meeting cannot be held, information about reasons thereof and the date of the next meeting,

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Capital Market Instruments

Capital market instruments In the Turkish Capital Markets Scheme, according to the Law, the capital market instruments are securities and derivative instruments as well as other capital market instruments designated in this context by the CMB, including investment contracts.

With that being the legal definition, one should consider the definition of the securities as well as derivative instruments in this regard.

these securities. Money, cheques, bills of exchange and promissory notes are not to be considered as securities.

Securities are to go into a division of I) Shares, other securities similar to shares and depositary receipts related to these shares, and II) Debt instruments or debt instruments based on securitized assets and revenues as well as depository receipts related to

II) Derivative instruments the values of which depend on the price or return of a security; the price or a price change of a foreign currency; an interest rate or a change in the rate; the price or a price change of a precious metal or precious stone; the price or a price

Derivative instruments are also defined under the Law, separating into three categories as follows;

Photo: Neil Fedorowycz

I) Derivative instruments giving the right to buy, sell or interchange securities,

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change of a commodity; statistics published by institutions deemed appropriate by the CMB and changes in them; derivative instruments which provide the transfer of credit risk, which have measurement values such as energy prices and climatic variables and depend on an index level which is formed by these listed items or on changes in this index level; the derivatives of these instruments and derivatives giving the right to interchange the listed underlying assets, III) Leveraged transactions on foreign exchange and precious metals as well as other assets to be designated by the CMB.

Capital Market Instruments

It should be stated that in practice four types of instruments come to mind when it comes to derivatives and these are forwards, futures, options, and swaps.

Apart from the following brief explanations on capital market instruments, it is important to state that the issuance of foreign capital market instruments is regulated under the Communiqué on Foreign Capital Market Instruments and Depositary Receipts and Foreign Investment Funds numbered VII-128.4.

Debt Securities (e.g. bonds) The major stake in capital market instruments market in Turkey is currently in the hands of the debt securities. So it won’t be an exaggeration if debt securities are referred as wheat in the bread in capital markets of Turkey. In general, financing short-term needs that cannot be done with shares is the main goal of any kind of debt security.

Debt securities are bonds, convertible bonds, exchangeable bonds, bills, precious metal bills, and securities which are deemed as debt securities by the CMB, which are issued by issuers as an obligor.

Debt securities may be issued to be sold

through or without a public offering.

Sales without public offering may be in the form of private placement or sales to qualified investors.

amounts of the bonds subject to early redemption are paid to investors latest on the third business day as of the starting date of early redemption.

For debt securities issued through a public offering, if the sale is receded or debt securities offered cannot be sold partially or fully, then these debt securities may be offered for sale again over the related issue ceiling approved by the CMB.

Convertible Bonds

Debt securities to be offered to the public shall be listed and traded on the ISE, and an application shall be filed to ISE for this purpose.

Bonds Bond is the most popular fixed-income instrument among the capital market instruments. Aside from the basic principles of the bonds, it is important to mention about a provision on the early redemption of the bonds; bonds may be early redeemed wholly or partially subject to the request of the issuer. Redemption plan of the bonds to be offered to the public shall be published on the website of the issuer. But generally, this disclosure requirement is not fulfilled wholly unless additional disclosure has been made before the PDP. If the issuer has chosen the early redemption option then it is mandatory that the

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A convertible bond is the debt security that can be converted to the company’s equity. In practice, it is expected to see convertible bonds for high-risk investments. According to the regulations of the CMB, the maturity of the convertible bond cannot be less than a year. Conversion of the convertible bonds into shares may be fulfilled at the earliest 365 days after as of the maturity commencement date.

Despite convertible bonds are in the scope of the capital market regulations for a long time, the first convertible bond issuance has just occurred in Turkish financial market in 2018. This convertible bond issuance was in the amount of TRY-170.000.000 and is intended to finance a real estate project.

The CMB published the Communiqué numbered II-31.1 on June 7th, 2013.

Asset-Backed Security (ABS) and Mortgage-Backed Security (MBS) Since the global financial crisis in 2008, many are skeptical of the use of MBSs given that these instruments were regarded as the igniters of the crisis. However, one must acknowledge the truth before being doubtful; the reason for any financial industry sourced crisis is the incompetence of the use of securities, not the securities themselves. Like the rest of the world, Turkey has also taken regulative steps regarding the issuance and the use of the MBSs, along with the ABSs. ABSs and MBSs are only to be issued by the asset and housing finance funds, and the issuance of these instruments are regulated strictly with the Law and with CMB communiqués.

According to the definition of the Law, the housing finance fund is a property established by means of the funds collected in return for mortgage-backed securities, on behalf of the mortgage-backed securities` holders, while the asset finance fund is a property established by means of the funds collected in return for asset-backed securities, on behalf of the asset-backed securities’ holders; both funds are established in accordance with the principle of fiduciary ownership with the fund rules and do not have a legal identity.

being built and that have a nominal value representing certain particular individual sections or a certain area unit of individual sections of a real estate project. RECs are one of the popular investment instruments when it comes to project finance.

The Law also strictly regulates the protection of the assets of the funds in a way where the assets of the funds cannot be used as collateral or be pledged, except being used for taking credits, performing derivative instrument transactions, short selling transactions, or similar transactions realized as a party in the name of the fund, if they are on the account of the fund and that a provision exists in the fund rules.

There are certain basic principles when it comes to issuance and use of RECs. First of all, in issues representing certain particular individual sections of a real estate project, the number of RECs corresponding to each individual section is required to be determined before the issue. Also, the amount of issue of RECs cannot exceed fifty percent of sales prices of all individual sections of the real estate project.

The CMB regulations set a risk retention liability for the originator who transfers its assets to the fund, or for the founder of the fund, in the event of the issuance of an ABS or an MBS. Accordingly, the originator or founder is required to repurchase ABS or MBS corresponding to 5% of the nominal value of the ABS or MBS issued and retain this value until the end of maturity. The CMB is authorized to increase this rate by up to 10%.

The CMB published the Communiqué numbered III-58.1 on January 9th, 2014.

Real Estate Certificate (REC) Real Estate Certificates are real estate backed securities which are issued by issuers for use in the financing of real estate projects to be built or

Photo: Markus Spiske

MBSs and ABSs are capital market instruments issued by putting as a contingency the assets taking place in the portfolios of the related funds or

mortgage institutions. However, the mortgage finance corporations may issue mortgage-backed or asset-backed securities without the need for the establishment of a housing or asset finance fund within the scope of ABS and MBS regulations.

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RECs may be issued domestically or internationally through a public offering or through non-public offering by sale to qualified investors.

The CMB published the Communiqué numbered VII-128.2 on July 8th, 2013.

Warrant A warrant is a type of derivative that grants its holder the right to buy or sell a right or an asset at a predetermined or determinable price. In the Turkish capital markets, there are two types of warrant defined under the regulations. These are covered warrants and corporate warrants.

A covered warrant is a type of instrument which grants its holder a right to purchase or sell the underlying asset or indicator at a predetermined price until or at a particular date,

where this right is used through dematerialized delivery or cash settlement.

A corporate warrant is a type of instrument which enables its holder to demand a settlement method with regard to shares of an issuer subject to authorised capital system the shares of which are or will be listed and traded in stock exchange or with regard to shares of any corporation the shares of which are listed and traded in stock exchange, until or at the due date thereof, and which is issued by issuers at the time of public offering of the relevant capital market instrument. The type of settlement methods the holder can demand are settlement through dematerialized delivery, settlement by shares, and cash settlement. In practice, warrants are often seen with investment contracts to expand the coverage of the investment’s sustainability.

The CMB published the Communiqué numbered VII-128.3 on September 10th, 2013.

Covered Bonds Covered bonds are debt securities collateralized by cover assets, which deemed as a general obligation of the issuer. Covered bonds are asset covered securities (ACS) and mortgage covered securities (MCS).

There are certain limitations on who can be the issuer of the covered bonds. ACS can be issued by institutions can collateralize the securities with necessary assets, which are numerus

clausus; (I) banks, (II) mortgage finance institutions, (III) financial leasing companies, (IV) factoring companies, (V) financing corporations, (VI) real estate investment companies, (VII) public entities authorized to issue securities in their laws, (VIII) other entities the requirements of which will be determined by the CMB. MCS can solely be issued by mortgage finance institutions and housing finance institutions.

There are also certain limitations on what type of assets can be used and their characteristics to collateralize the ACS. Hence, to collateralize an ACS, assets but the following cannot be used: • Bank and financial corporation receivables arising from consumer and commercial loans, • Financial lease contract receivables and factoring contract receivables, • Turkish Housing Development Agency’s (TOKI) contractual or installment receivables arising from the real estate sales, • Real Estate Investment Companies’ collateralized receivables arising from the sales of the real estate in their portfolio, and the receivables due to the lease agreements regarding the real estate in their portfolio, • Long-term foreign currency loans provided by banks to Undersec-

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retariat of Treasury for project finance, • Substitute assets, • Other assets determined by the CMB. The following assets can be used for collateralization of the MCS: • Bank and financial corporation receivables arising from mortgage secured housing finance, • Financial lease contract receivables arising from the housing finance, • Bank and financial corporation and financial leasing company commercial loans and receivables which are mortgage secured, • With being limited to the issues made by Mortgage Finance Corporation, Turkish Housing Development Agency’s (TOKI) contractual or installment receivables arising from the real estate sales, • Substitute assets, • Other assets determined by the CMB. The CMB published the Communiqué numbered III-59.1 on January 21st, 2014.

Capital Market Instruments

“On the other hand, one shall consider that the government is expected to bring tax advantages to lease certificates, according to the Medium-Term Programme of 20182020 published by General Directorate of Budget and Fiscal Control.�

Lease Certificates (Sukuk) As the Islamic Finance showing significant growth around the globe, Turkish legal structure and capital markets kept up with the pace and introduced regulations regarding Sukuk as named lease certificates, whilst the Undersecretariat of Treasury also issued Sukuk one after another. The major actor in the Sukuk market in Turkey is currently Kuveyt Turk, which is a Shari’ah-compliant commercial bank.

Mainly ijara type Sukuk named as lease certificate has been regulated by the CMB as an interest-free security for investors. While some domestic investors prefer lease certificates out of religious reasons, many domestic and international investors also keep their eyes on these instruments out of diversification needs. On the other hand, one shall consider that the government is expected to bring tax exemptions to lease certificates, according to the Medium-Term Programme of 2018-2020 published by General Directorate of Budget and Fiscal Control.

Photo: Norman Abdullah Rosman

Lease certificate is a security issued by an asset lease company for the purpose of financing all kinds of assets and rights, and which enables its holders to get a proportionate share from the revenues derived out of such assets and rights.

None other than the Asset Lease Companies can issue lease certificates. There are five types of lease certificates based on their nature. Hence, lease certificates may be issued based on; (I) ownership, (II) management agreement, (III) trading, (IV) partnership, (V) construction contract. The lease certificates can be issued through the combined use of the listed above.

The CMB defines these types differently in its regulations as herein: Ownership-based lease certificates are lease certificates issued to finance the assets and rights to be acquired by Asset Lease Company from the originator to be leased to the originator or third parties or to be managed in the name of the Asset Lease Company. In ownership-based lease certificates, the originator is the one who transfers assets and rights to the Asset Lease Company.

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Management agreement-based lease certificates are lease certificates issued for the purpose of transfer of revenues derived as a result of management of assets and rights owned by the originator in favor of the Asset Lease Company, also including the lease of them until the end of maturity, to Asset Lease Company within the frame of provisions of the management agreement.

In management agreement-based lease certificates, the originator is the one who manages the assets of its own in the name of the Asset Lease Company.

Capital Market Instruments

Trading-based lease certificates are lease certificates issued to finance the purchase of certain assets or rights by Asset Lease Company to be sold on deferred payment basis to companies described in the regulation. In trading-based lease certificates, the basis assets or rights must be traded in ISE or in other liquid markets.

Partnership-based lease certificates are issued by Asset Lease Company for the sole aim of partnership in a joint venture. There is a number of provisions for partnership-based lease certificates regarding the issuance of these and management of the JV; with a separation of Asset Lease Company being a sole capital partner or being a capital partner with others. In partnership-based lease certificates, if the JV suffers damages arising from unlawful acts of venturer or partners of JV excluding Asset Lease Company or third parties appointed by these partners, collaterals shall be turned into cash and paid to certificate holders.

Photo: Ä°zuddin Helmi Adnan

Construction contract-based lease certificates are issued for the purpose of completion of works defined under a construction (EPC; Engineering, Procurement, and Construction) contract where the Asset Lease Company is a party as contract giver. In construction contract-based lease certificates, the contractor must establish a pledge on movables or real properties or must give similar guarantees to Asset Lease Company for the completion of the work on agreed upon date, if the amount determined in the contract paid in advance by the Asset Lease Company.

The CMB published the CommuniquĂŠ numbered III-61.1 on July 7th, 2013.

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Investment Services

INVESTMENT SERVICES Under the Turkish Capital Markets Scheme, it is strictly forbidden to carry out capital market activities without prior approval from the CMB. Types of capital market institutions and investment services are set forth one by one in the Law, while the CMB also has the power to define other types of investment services when needed.

Capital Market Institutions

Investment Services to be Provided by Investment Firms

Investment Firms

Reception and transmission of orders in relation to capital market instruments

Collective Investment Schemes

Execution of orders in relation to capital market instruments in the name and account of the customer or in their own name and in the account of the customer Dealing on own account

Independent Audit Firms Appraisal Firms Rating Agencies Portfolio Management Companies

Investment advice

Mortgage Finance Institutions

Underwriting of capital market instruments on a firm commitment basis

Housing Finance and Asset Finance Funds

Placing of financial instruments without a firm commitment basis

Asset Leasing Companies

Operation of multilateral trading systems and regulated markets other than exchanges

Central Clearing Institution Photo: Alexandar Pasaric

Portfolio management

Central Depository Institutions

Safekeeping and administration of capital market instruments in the name of the customer and portfolio custody services

Trade Repositories

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Investment Services

Other than above-stated ones, one should consider the crowdfunding platforms as capital market institutions, and crowdfunding as an investment service. Please see the page 36 for more information on the recently adopted legislation on crowdfunding.

Besides the investment services to be provided to the investors by the investment firms, there are also ancillary services that can be carried out.

Providing services in relation to the conduct of underwriting

Providing advisory services concerning capital markets

Granting credits or lending and providing foreign exchange services limited to investment services and activities

Ancillary Services

One shall regard that the CMB has the power to extend the framework of both investment and ancillary services if deemed necessary.

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“Investment firms are defined very broadly under the regulations as intermediary firms, banks, and other capital market institutions established to perform investment services and activities, where the establishment and operation principles are regulated by the CMB. An intermediary, on the other hand, is an investment firm solely permitted by the CMB to carry out investment services defined under subparagraphs (a), (b), (c), (e), and (f) of the Article 37/1 of the Law.”

Photo: Dan Schiumarini

Photo: Pepi Stojanovski

Investment Services

Anyone who intends to carry out investment services business must be permitted by the CMB before starting operations. Investment services shall only be permitted to the investment firms, while ancillary services can also be offered by portfolio management companies. The CMB does not look for a separate license for ancillary services where the provider holds an investment services license. But the Article 7 of the Communiqué numbered III-37.1 requires the investment firms to notify the CMB for ancillary services to be provided.

Before heading on to summarizing investment services that are being provided in the Turkish Capital Market Scheme, we must clarify the distinction between investment firms, and intermediaries. Investment firms are defined very broadly under the regulations as intermediary firms, banks, and other capital market institutions established to perform investment services and activities, where the establishment and operation principles are regulated by the CMB. An intermediary, on the other hand, is an investment firm solely permitted by the CMB to carry out investment services defined under subparagraphs (a), (b), (c), (e), and (f) of the Article 37/1 of the Law, and these are; (a) reception and transmission of orders in relation to capital market instruments, (b) execution of orders in relation to capital market instruments in the name and account of the customer or in their own name and in the account of the customer,

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(c) dealing on own account, (e) underwriting of capital market instruments on a firm commitment basis, (f) placing of financial instruments without a firm commitment basis.

If an investment firm is authorized to carry out one of these, it shall be deemed as an intermediary institution, and therefore, follow additional requirements set out by the CMB. There are three intermediary firm types separated on the basis of the services to be provided: • Narrowly authorized intermediary firms which are engaged in any of all of reception and transmission of orders and investment advice related services and activities, • Partially authorized intermediary firms which are engaged in any or all of execution of orders, best effort, limited custody and portfolio management related services and activities, • Broadly authorized intermediary firms which are engaged in any or all of dealing on own account, general custody and underwriting related services and activities.

Photo: Osman Koycu

Investment Services

Intermediation for Public Offering Perhaps, the most noteworthy type of investment service is intermediation for a public offering, since public offerings require the consideration of significantly more variables on seller basis.

Intermediation for a public offering service covers the following activities: • Taking actions for determination of issue price, issue amount and public offering process together with issuers and/or public offerors, • Preparing other information and documents required to be submitted for approval of prospectus and filing an application to the Board, • Establishing a consortium,

an authorization for best effort, however, it is possible to give authorization only for the best effort. In almost every major offering, underwriting and best effort intermediation applied by a consortium of intermediaries.

Underwriting is a commitment given to the seller that may appear in four different ways.

• Standby: The underwriter can commit to the seller that the capital market instruments to be issued will be offered for sale through a public offering and that all the unsold part will be purchased in cash at the end of the period of sales.

• Full Commitment: The underwriter can commit to the seller that the capital market instruments to be issued will be fully purchased in cash before the sales process starts, and will then be offered to the public.

• Collecting demands, • Organizing domestic and foreign events for sales of capital market instruments to be offered to the public, • Organizing the sales and conducting similar other corporate financial activities, • Performing other obligations set forth in the underwriting agreement • In the course of sales of capital market instruments without a public offering, intermediation in private placement of these issues to a particular group of investors is also considered and treated as a part of the activity of intermediation for a public offering.

Intermediation for a public offering is categorically divided into two types; underwriting, which shall only be carried out by the broadly authorized intermediary institutions (with exceptions); and best effort, which can be carried out by the partially authorized intermediary institutions.

The authorization for underwriting also covers

• Partial Standby: The underwriter can commit to the seller that the capital market instruments to be issued will be offered for sale through a public offering, and a portion of the unsold remaining instruments will be purchased in cash at the end of the period of sales.

• Partial Full Commitment: The underwriter can commit to the seller that a portion of the capital market instruments to be issued will be purchased in cash before the sales process starts, and will then be offered to the public.

Best effort is the type of intermediation to the sale without the intermediary to commit the sale of the shares. Therefore, best effort refers to the process in which the capital instruments to be issued are going to be sold through a public offering within the period of sales specified in the prospectus, and the unsold portion thereof is going to be returned to the seller, or sold to third parties who previously committed to purchase.

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Photo: Diego Ph

Developments in 2017

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Photo: Efe Kurnaz

Crowdfunding

Adopting Fintech Legislation: Crowdfunding is now a capital markets activity in Turkey Fintech is certainly one of the hottest topics around the globe with its innovative and problem-solving nature.

Any kind of activity presenting solutions or any idea “showing the better way” for financial systems may be deemed a subject of Fintech, and crowdfunding is certainly one of those.

Some are considering ICOs (Initial Coin Offerings) as a type of crowdfunding as well, but that is a topic for another day.

True to its name, crowdfunding is a funding type with the power of masses. Simply put, in crowdfunding, people are able to fund a project or a company published on a crowdfunding platform through the internet.

Yes, crowdfunding is a powerful way for fundraising, so strong that according to the Kickstarter which is one of the biggest crowdfunding platforms, the most funded project is backed by more than seventy thousand people in the amount of USD-20,000,000. If one would include ICOs in the game, we would see the project named “EOS” is funded in the amount of USD4,000,000,000+.

The ease of use is the very source of the success of crowdfunding, but also its weakest point since unregulated

funding activity could leave the investors or contributors unhappy out of the uncompensated losses. Investors and contributors shall also be informed on the crowdfunding’s risks, but without a regulation, it is hard to impose such disclaimer or disclosure requirement on platforms or fundraisers. Therefore, policymakers around the world started to adopt specific regulations for crowdfunding, with U.S., U.K., and Germany are being the leads. Turkey followed this stream by adopting a legislative change on the Law on December 5th, 2017.

Basically, there are four types of crowdfunding; I) donation-based, II) reward-based, III) equity-based, and IV) loan based. For the past couple of years in Turkey, with the lack of any specific legislation, Turkish crowdfunding platforms were collecting funds for the start-ups and projects under the provisions of general aid and donations legislation. Since there was no explicit regulation for crowdfunding in Turkey platforms were avoiding from equity-based crowdfunding, for that the equity-based crowdfunding may be considered as a public offering activity and crowdfunded companies may be considered as public companies in terms of the Law, since companies composed of more than 500 shareholders considered as public companies according to the Law. The recent legislative change in the Law

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clarified this elusiveness and excluded the crowdfunded companies from the term “public company”. The recent development however only covers the equity-based crowdfunding, and other types of crowdfunding will still be carried out in accordance with the general aid and donations legislation.

The adopted legislation has only a few articles and does not cover the crowdfunding principles in detail, but authorizes the CMB to ratify secondary regulations on the subject. According to the Law, the CMB will publish a communiqué regulating the principles and terms on the following subjects: • Crowdfunding platforms’ establishment requirements, • Crowdfunding platforms’ shareholder structures, • Crowdfunding platforms’ managerial structures and employee qualifications, • Crowdfunding platforms’ share transfers, • Investors’ monetary caps, • Projects’ or start-ups’ monetary caps.

It shall be noted that the CMB is expected to regulate that only the startups with up to three years of activity will be able to raise funds through the equity-based crowdfunding.

aiming for the price stability in Agricultural Products: Turkey Establishes Commodity Exchange

“Directives regarding the activities of the Commodity Exchange will be determined after the opinion of the CMB.�

Photo: Paul Morris

Agriculture is a significant sector for Turkey, with a share of 7% in the GDP, and 10% in the exports. For years, the policymakers were planning to establish a commodity exchange with an aim for price stability in agricultural products.

These efforts came to fruition on April 6th, 2017 and the Ministerial Cabinet published its decree on the establishment of the Commodity Exchange based in Ankara with TRY-100,000,000 capital. Later on, the Ministry of Customs and Trade published the Regulation on the Principles Regarding the Establishment, Activity, and Inspection of the Commodity Exchange on August 10th, 2017. Directives regarding the activities of the Commodity Exchange will be determined after the opinion of the CMB.

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Other developments The Communiqué on the Evaluation Standards in Capital Markets numbered III-62.1 is Published The CMB published its communiqué regulating the evaluation standards to be used in capital markets on February 2nd, 2017.

According to the Communiqué, in the capital market evaluation activities carried out in accordance with the regulation, it is mandatory to comply with the International Valuation Standards published by the CMB and the Turkish Appraisers Association.

The Regulation on Derivatives Market of the Istanbul Stock Exchange is Abolished The CMB published a regulation on February 24th, 2017, abolishing the Regulation on Derivatives Market of the Istanbul Stock Exchange. The Directive on Derivatives Market of the Istanbul Stock Exchange is in force instead. Such transition has been implemented since the reestablishment of the Istanbul Stock Exchange required so.

The General Regulation on the Principles Regarding the Establishment and Activity of the Precious Metals Exchange is Abolished The CMB published a regulation on October 7th, 2017, abolishing the General Regulation on the Principles Regarding the Establishment and Activity of the Precious Metals Exchange. The Directive on Precious Metals and Precious Metals Borrowing published by the ISE is in force.

Photo: Simon Launay

The Communiqué on Portfolio Management Companies and Activities of Such Companies numbered III-55.1 is Amended The CMB published the Communiqué Amending the Communiqué on Portfolio Management Companies and Activities of Such Companies on January 17th, 2017, changing the Article 9 of the Communiqué. According to the amended Communiqué, portfolio management companies with limited activities may only be established for the purposes of; providing portfolio management service to the customers residing abroad, or establishing and managing a foreign investment schemes which their shares will be marketed to the customers residing abroad, or establishing and managing solely venture capital investment funds or real estate investment funds.

The CMB published the Communiqué Amending the Communiqué on Principles of Real Estate Investment Companies on January 17th, 2017, changing the Articles 11/A, 17, 22, 23, 30, 34, 40. Article 45 of the Communiqué on Principles of Real Estate Companies regulates the Real Estate Investment Companies’ dividend distribution. According to the second paragraph added by the Communiqué numbered III-48.1.a REICs are not allowed to distribute dividends in cash before their shares are offered to the public, or before the sale of their shares to the qualified investors.

With that being the principle, with the Amendment Communiqué published on January 17th, 2017, the CMB added a Temporary Article 3 in the Communiqué regulating that; the second paragraph of the Article 45 won’t be applicable for the REICs exclusively operating a portfolio consisting of infrastructure investments and services, until December 31st, 2017. It shall be noted that on May 10th, 2018, the CMB once again extended this term until the end of 2019.

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Photo: Breno ASsis

The Communiqué on Principles of Real Estate Investment Companies numbered III-48.1 is Amended

2017 CAPITAL MARKETS

IN NUMBERS Applications for Instrument Issuance

232 65

Applications made to the CMB for Capital Market Instrument Issuance

TRY- 413,248,985,075 EUR- 10,940,000,000 USD- 40,140,000,000

Applications for Share Issuance TRY- 4,861,822,465

Applications for Debt Instrument Issuance

TRY- 188,735,642,000 EUR- 470,000,000 USD- 19,950,000,000

1

Applications for Real Estate Certificate Issuance

TRY- 239,238,705

5

Applications for Mortgage or Asset Covered Bond Issuance

TRY- 8,267,800,000 EUR- 5,000,000,000

9

Applications for Lease Certificate Issuance

TRY- 6,150,900,000 USD- 120,000,000

1

Applications for Warrant Issuance

TRY- 300,000,000

3

Application for Asset-Backed Security Issuance

TRY- 500,000,000

148

39

Stock Exchange Istanbul Stock Exchange in 2017 (Source: WFE, IMF, TĂœIK, and Turkish Capital Markets Association.)

Market Cap: $228bn Transaction Volume: $395b BIST 100 Index Annual Return: 47,6%

Prospectus Approvals

3 Prospectuses Approved by the CMB for Initial Public Offering

53

Prospectuses Approved by the CMB for Share Issuance of Public Companies

23

TRY- 6,323,385,621

Prospectuses Approved by the CMB for Issuance of Other Securities

TRY- 19,861,228,708 USD- 118,426,500

223

Prospectuses Approved by the CMB for Issuance of Debt Instruments

TRY- 245,760,078,605 EUR- 9,420,000,000 USD- 38,400,000,000 40

Administrative Fines and Criminal Complaints

202

Administrative Fine Decisions of the CMB

192

Criminal Complaints Submitted by the CMB

TRY- 2,476,947

22

TRY- 3,987,007

Independent Audit and Appraisal Irregularities

7

TRY- 1,529,847

32

Forex Leverage Irregularities

61

Public Disclosure Irregularities

TRY- 560,182

Non-compliance with the CMB’s Decisions

2

TRY- 6,184,030

21

Stock Trading Irregularities

TRY- 7,051,176

TRY- 700,610

14

In Total TRY- 25,583,728.56

Non-compliance with Corporate Governance Rules

TRY- 3,093,929

44

Predatory Practice

41

Non-compliance with Investment Services Rules

LIST OF ABBREVIATIONS AND ACRONYMS • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

ABS: Asset-Backed Security ACS: Asset Covered Security BoD: Board of Directors MBS: Mortgage-Backed Security MCS: Mortgage Covered Security The Annual Report Regulation: The Regulation on Determination of Minimum Content of Annual Report of Companies The CMB: The Capital Markets Board of Turkey The Communiqué numbered II-14.1: The Communiqué on Principles of Financial Reporting in Capital Markets numbered II-14.1 The Communiqué numbered II-14.1: The Communiqué on Principles of Financial Reporting in Capital Markets numbered II-14.1 The Communiqué numbered II-15.1: The Communiqué On Material Events Disclosure numbered II-15.1 The Communiqué numbered II-15.1: The Communiqué on Material Events Disclosure numbered II-15.1 The Communiqué numbered II-17.1: The Communiqué on Corporate Governance numbered II-17.1 The Communiqué numbered II-31.1: The Communiqué on Debt Securities numbered II-31.1 The Communiqué numbered II-5.1: The Communiqué on Prospectus and Issue Document numbered II-5.1 The Communiqué numbered II-5.1: The Communiqué on Sales of Capital Market Instruments numbered II-5.2 The Communiqué numbered III-37.1: The Communiqué on Principles Regarding Investment Services, Activities and Ancillary Services numbered III-37.1 The Communiqué numbered III-48.1: The Communiqué on Principles of Real Estate Investment Companies numbered III48.1 The Communiqué numbered III-55.1: The Communiqué on Portfolio Management Companies and Activities of Such Companies numbered III-55.1 The Communiqué numbered III-58.1: The Communiqué on Asset-Backed and Mortgage-Backed Securities numbered III58.1 The Communiqué numbered III-59.1: The Communiqué on Covered Bonds numbered III-59.1 The Communiqué numbered III-62.1: The Communiqué on the Evaluation Standards in Capital Market numbered III-62.1 The Communiqué numbered VII-128.2: The Communiqué on Real Estate Certificates numbered VII-128.2 The Communiqué numbered VII-128.3: The Communiqué on Warrants and Certificates numbered VII-128.3 The Communiqué numbered VII-128.4: The Communiqué on Foreign Capital Market Instruments and Depositary Receipts and Foreign Investment Funds numbered VII-128.4 The Corporate Governance Principles: The Annex of the Communiqué numbered II-17.1 The CRA: The Central Registry Agency The ISE: The Istanbul Stock Exchange The Law: The Turkish Capital Market Law The PDP: The Public Disclosure Platform The TCC: The Turkish Commercial Code

42

ATTRIBUTION We would like to thank to photographers who enabled us to use their art for this work with a royalty-free license.

We are also grateful to the creators of the icons used in the “In Numbers” section. Icons used in pages 39 and 40 are created by Freepik, and icons used in page 41 are created by Smashicons.

We are sincerely indebted to everyone who supported us along the way of creating this work.

Front cover photo: Anna, Back cover photo: David McEachan