This Q&A outlines the legal grounds of applicable legislation in relation to equity markets in Turkey.
What are the main equity markets/exchanges in Turkey? Outline the main market activity and deals in the past year.
Main equity markets/exchanges
Borsa Istanbul A.Ş. (BIST) is a self-regulatory entity in the form of a joint stock company that brings together all the exchanges operating in Turkey (www.borsaistanbul.com). A wide variety of instruments are traded on BIST, including stocks, exchange traded funds, government bonds, treasury bills, money market instruments (repos and reverse repos), corporate bonds, lease certificates (known as sukuk), derivative instruments, foreign securities (eurobonds issued by the Turkish Treasury) and precious metals.
BIST mainly consists of the following four markets:
- Equity Market.
- Debt Securities Market.
- Derivatives Market (VIOP).
- Precious Metals and Diamond Markets.
The Equity Market of BIST, on which publicly-held companies from various sectors are traded, is made of the following sub-markets:
- Stars Market: where the market value of the free float is above TRY100 million or the shares are included in the BIST 100 index.
- Main Market: where the market value of the free float is above TRY25 million, but below TRY100 million.
- Emerging Companies Market: where the market value of the free float is below TRY25 million.
- Watchlist Market: for companies subject to monitoring and examination due to their financial structure.
- Collective and Structured Products Market: for exchange traded funds, warrants, and certificates (formerly known as Collective Products Market).
- Equity Market for Qualified Investors: for companies whose shares are issued for direct sale to qualified investors, without being offered to the public.
- Pre-market Trading Platform: for publicly-held companies whose shares are not traded on BIST, but which have been allowed by the Capital Markets Board of Turkey (CMB) to commence trading on this platform following the evaluation of their financial status and ownership structure (formerly known as the Free Trade Platform).
Market activity and deals
As at 17 April 2017, 412 companies were quoted on the Equity Market of BIST, as follows:
- Stars Market: 121 companies.
- Main Market: 169 companies.
- Other markets: 122 companies.
In 2016, the only initial public offering (IPO) related to Çuhadaroğlu Metal Sanayi ve Pazarlama A.Ş., which generated a capital raise of TRY37 million. In 2017, the IPO of Mistral Gayrimenkul Yatırım Ortaklığı A.Ş. raised a capital of TRY53.625 million.
In 2015, the CMB approved the prospectuses of seven companies that intended to go public, two of which did not successfully complete the public offering process. Out of the successful five companies that went public, two companies started trading on the Main Market, two companies started trading on the Emerging Companies Market and one company started trading on the Collective and Structured Products Market. The aggregate amount of capital raised by these five companies was TRY96,172,500.
What are the main regulators and legislation that applies to the equity markets/exchanges in Turkey?
The main regulator is the Capital Markets Board of Turkey (CMB). The CMB is supported by the following regulatory bodies:
- Borsa Istanbul A.Ş.
- Istanbul Clearing, Settlement and Custody Bank A.Ş. (Takasbank).
- Central Registry Agency (Merkezi Kayit Kurulusu) (MKK).
The main laws and regulations that apply to the equity markets/exchanges in Turkey are the:
- Capital Markets Law No 6362.
- Turkish Commercial Code No 6102.
- Communiqué on Shares No VII-128.1.
- Communiqué on Prospectus and Issuance Document No II-5.1.
- Communiqué on Sale of Capital Market Instruments No II-5.2.
- Communiqué on Material Events No II-15.1.
- Communiqué on Principles Pertaining to Removal of Corporations from the Scope of Law and Obligation of Share Trading on Exchange No II-16.1.
- Communiqué on Corporate Governance No II-17.1.
- Communiqué on Foreign Capital Market Instruments and Depositary Receipts and Foreign Investment Funds No VII-128.4.
- Communiqué on Principles regarding Investment Services, Activities and Ancillary Services No III-37.1.
- Communiqué on Principles of Establishment and Activities of Investment Institutions No III-39.1.
- Communiqué on Common Principles Regarding Significant Transactions and Exit Right No II-23.1.
- Borsa Istanbul Listing Directive.
- Relevant directives, general letters and announcements of Takasbank and the MKK.
What are the main requirements for a primary listing on the main markets/exchanges?
IPO requirements. The following requirements apply on an initial public offering (IPO):
- The existing paid or issued capital of the company subject to the IPO must be paid in full.
- The company must not meet the conditions set out under Article 8 of Communiqué on Principles Pertaining to Removal of Corporations from the Scope of Law and Obligation of Share Trading on Exchange No II-16.1.
- If the company was transformed into a joint stock company in the two years preceding the date of the IPO application, the shareholders’ equity items included in the pre-transformation balance sheet must be shown as separate items in the current company’s balance sheet, without making a consolidation under the capital account in the opening balance sheet of the post-transformation company. The balance sheet must be drawn up by a certified public accountant.
- The amount of non-trade related party receivables must not exceed 20% of the issuer’s receivables, or 10% of its total assets.
- The underwriters must undertake to purchase either:
all unsold shares of the company, where the fair market value of the shares offered to the public is below TRY20 million; or
all unsold shares up to a limit of TRY20 million and half of the remaining shares, where the fair market value of the shares offered to the public is above TRY20 million, but below TRY40 million.
- The articles of associations of the company must be amended so as to comply with the regulations of the Capital Markets Board (CMB) and with the objectives and principles of the Capital Markets Law No 6362.
- There must not be any encumbrances on the shares to be listed on BIST that restrict the transfer or trading of these shares, or that prevent shareholders from exercising their rights under the shares.
- From the date on which the CMB approves the prospectus related to the IPO, shareholders holding 10% or more of the existing share capital or exercising control over the company’s management (regardless of their shareholding) must not sell their shares at a price lower than the offering price on BIST, or take any action resulting in the sale of these shares at a price lower than the offering price on BIST, for one year starting from the date on which trading commences on BIST. Shareholders must submit an undertaking letter to the CMB during the application process to confirm that they will comply with this requirement.
- The issuer must deposit in a CMB account a fee equal to:
2% of the nominal value of the shares that are not publicly offered; and
1% of the difference between the offering price and the nominal value of the offering shares.
The website of the company subject to the IPO must be up and in running order to comply with the announcement requirements set out in the CMB regulations.
The issuer must engage a brokerage firm or a consortium consisting of several brokerage firms to monitor the IPO process.
Foreign companies. The following pre-conditions apply to foreign companies:
- Applications for listing or for the issuance of foreign capital market instruments to the public in Turkey must not have been refused by any foreign exchange authority or authorised capital markets authority for a reason based on the protection of investors (or a similar reason).
- Foreign capital market instruments must be issued in Turkish lira or in a foreign currency for which the Turkish Central Bank publishes the daily buying and selling exchange rates.
- The country where the foreign capital market instruments are issued must not have imposed any restrictions on:
their sale in Turkey;
the execution of transactions and of tax payments related to them; or
the exercise of administrative rights arising from them in Turkey.
Foreign capital market instruments must not be subject to:
restrictions on transfer or circulation;
restrictions on the exercise of rights by their holders; or
any rights in rem, liens or similar restrictive rights.
The CMB can impose additional requirements for the protection of investors or a similar reason, depending on the type of issuance and capital market instruments, provided that it informs the applicant before doing so.
Listing requirements. The following requirements apply to listing on BIST:
- The shares of companies subject to an IPO can only be traded on the Stars Market, Main Market, Emerging Companies Market, Collective and Structured Products Market, Equity Market for Qualified Investors and Watchlist Market, which are operating under the Equity Market (see Question 1, Main equity markets/exchanges).
- Except for investment corporations and companies applying for listing on the Equity Market for Qualified Investors, companies applying for listing on BIST must not meet the conditions regarding removal from the scope of the Capital Market Law, as specified in Article 5, second paragraph of the Communiqué on Shares No VII-128.1.
- To be listed on BIST, a company must have been incorporated for at least two calendar years.
- The financial situation of the company must enable it to carry out its business operations in a sound manner.
- The shares must not be subject to restrictions that prevent the exercise of shareholders’ rights, and the company’s articles of association must not contain any clauses restricting the transfer of the shares.
- The company’s operations must not have been suspended for more than three months during the last two years, and the company must not be involved in any form of liquidation, composition or suspension of bankruptcy, and any other similar proceedings as determined by BIST.
- There must not be any major legal disputes that may affect the operation of the company.
- An independent legal report must confirm that the company’s formation and operation comply with the relevant laws.
- The directors, general manager and controlling shareholder of the company or issuer must not have been subject to certain criminal sanctions.
Minimum size requirements
A company listed on BIST must satisfy the conditions of the group of the market to which it belongs, as follows:
- Stars Market Group 1:
- the market value of the shares offered to the public must be at least TRY250 million;
- the total market value of the company must be at least TRY1 billion;
- profits reported in independently audited financial statements must have been earned within the last two years;
- the minimum ratio of nominal value pertaining to publicly offered shares to paid-in capital must be 5%;
- the minimum ratio of shareholders’ equity to the capital, according to the most recent independently audited financial statements, must be more than 0.75.
- Stars Market Group 2:
- the market value of the shares offered to the public must be at least TRY100 million;
- the total market value of the company must be at least TRY400 million;
- profits reported in independently audited financial statements must have been earned within the last two years;
- the minimum ratio of nominal value pertaining to publicly offered shares to paid-in capital must be 10%;
- the minimum ratio of shareholders’ equity to the capital, according to the most recent independently audited financial statements, must be more than 1.
- Main Market Group 1:
- the market value of the shares offered to the public must be at least TRY50 million;
- there is no total market value requirement;
- the minimum ratio of nominal value pertaining to publicly offered shares to paid-in capital must be 15%;
- the minimum ratio of shareholders’ equity to the capital, according to the most recent independently audited financial statements, must be more than 1.
- Main Market Group 2:
- the market value of the shares offered to the public must be at least TRY25 million;
- there is no total market value requirement;
- the minimum ratio of nominal value pertaining to publicly offered shares to paid-in capital must be 25%;
- the minimum ratio of shareholders’ equity to the capital, according to the most recent independently audited financial statements, must be more than 1.25.
Trading record and accounts
The issuer must prepare complete and up-to-date financial statements and reports in accordance with the Turkish Accounting Standards and the CMB regulations. These financial statements must be submitted to the CMB and disclosed to the public, where required.
Minimum shares in public hands
While the CMB regulations do not impose any requirement relating to minimum shares in public hands, Borsa Istanbul Listing Directive defines the companies to be traded in relevant groups and markets based on the minimum market value of the shares offered to the public and the minimum ratio of publicly offered shares to paid-in capital (see above, Minimum size requirements)
What are the main requirements for a secondary listing on the main markets/exchanges?
A publicly-held company that intends to list non-traded existing shares, or shares arising from a capital increase, must file an application with the Capital Markets Board of Turkey within 30 days following the date of its resolution on the listing. A listing application to Borsa İstanbul (BIST) must be made simultaneously.
New shares issued through a capital increase, rights offerings or bonus issues will be traded on the relevant market of BIST, in accordance with the Borsa Istanbul Listing Directive.
Minimum size requirements
There are no minimum size requirements for a secondary listing.
Trading record and accounts
There are no trading record and accounts requirements for a secondary listing.
Minimum shares in public hands
There are no minimum shares in public hands requirements for a secondary listing.
There are no secondary listing requirements for foreign companies.
What are the main ways of structuring an IPO?
There are three ways of structuring an IPO:
- Offer of existing shares. This method is also known as a shareholders’ sale, as shareholders sell their shares through a public offering and the company does not receive any cash. The main advantage of this method is that, while there is a dilution of the shareholdings, the shareholders generate income.
- Offer of shares resulting from a capital increase. Non-public companies can offer their shares to the public by fully or partially restricting the pre-emptive rights of existing shareholders on newly issued shares through a capital increase. The main advantage is that the company obtains financial resources.
- Combination of an offer of existing shares and capital increase. Companies can also choose to combine the two methods described above.
What are the main ways of structuring a subsequent equity offering?
In Turkey, a subsequent equity offering is referred to as a “secondary offering” and can be structured as follows:
- Sale of existing shares of a publicly-held company through a public offering.
- Sale of new shares of a publicly-held company arising from a capital increase through a public offering.
- Sale of new shares of a publicly-held company through a private placement or to qualified investors without a public offering.
Shareholders’ pre-emptive rights can be restricted in a sale of new shares arising from a capital increase. When pre-emptive rights are restricted, the shareholders cannot benefit from the capital increase. A full or partial restriction of pre-emptive rights must be approved by a resolution of the authorised body of the publicly-held company.
What are the advantages and disadvantages of rights issues/other types of follow on equity offerings?
As for an initial public offering, a secondary offering requires a publicly-held company to prepare a prospectus and other documents listed in the Communiqué on Shares No VII-128.1. An application for approval must be filed with the Capital Markets Board (CMB). Therefore, it may take a long time before trading commences on Borsa İstanbul (BIST). In addition, publicly-held companies must pay the CMB fee and the BIST listing fee, which may be a financial burden for the relevant company.
The main advantage of a secondary offering is that the company will be able to generate cash and to strengthen its reputation on the market. A secondary offering may allow the company to be considered as a global and reliable corporation by investors.
What are the main steps for a company applying for a primary listing of its shares? Is the procedure different for a foreign company and is a foreign company likely to seek a listing for shares or depositary receipts?
Procedure for a primary listing
The main steps for a company applying for a primary listing of its shares are as follows:
- Organisation of an internal working group.
- Due diligence work for preliminary listing.
- Selection of an intermediary institution and execution of a market advisory agreement.
- Selection of an independent auditor and preparation of financial statements.
- Amendment of articles of association.
- Preparation of the prospectus.
- Simultaneous application to the Capital Markets Board (CMB) and Borsa İstanbul (BIST).
- Approval of the CMB.
- Commencement of trading on the relevant market of BIST.
Procedure for a foreign company
The requirements and procedure for the listing of capital market instruments issued, or to be issued, by foreign institutions in Turkey or abroad, and of capital market instruments issued abroad by domestic institutions, are the same as those described above.
Outline the role of advisers used and main documents produced in an equity offering. Does it differ for an IPO?
A company whose shares are offered to the public must complete the offering process with the assistance of an internal working group and external advisers.
Internal working group
An internal working group must be set up within the company to carry out the required public offering applications. The group must be made of experts from the company’s finance and public relations divisions, and other relevant mid-level managers.
In addition to the internal working group, professional external advisers must be appointed to complete the full IPO process in a diligent, appropriate and transparent manner. The external advisers are as follows:
- Intermediary institution. To offer shares to the public, a company must have an agreement with an intermediary institution. A company can either choose to sign an agreement with one intermediary institution or opt for a consortium (for example, in a relatively large IPO) to take advantage of the syndicated efforts of several brokerage firms. The agreement between the company and the intermediary institution generally determines the responsibilities and role of the intermediary institution, whether or not there will be an undertaking option and how it will be carried out, the IPO method, the offering price calculation and other relevant issues.
- Independent auditor. A company applying for an IPO must prepare its financial statements in accordance with capital markets regulations. These statements must be audited by an independent audit firm selected from the CMB’s authorised list. The company must sign an audit contract with the selected audit firm.
- Financial adviser. A company applying for an IPO can choose to appoint a financial adviser, who generally advises on the timetable, structuring, valuation, price determination and so on.
- Research analyst. A company applying for an IPO can choose to appoint a research analyst to publish research on the company.
- Legal advisers. A company must appoint lawyers to oversee the legal aspects of the IPO process (such as preparing the CMB documents in line with the CMB and BIST regulations, carrying out legal due diligence, and negotiating the agreements between the company and external advisers).
- Public relations (PR) advisers. PR efforts are crucial to attract as many investors as possible. PR advisers make executive statements reflecting the company’s intention to proceed with an IPO, and publish press releases that explain the company’s core business activities.
When is a prospectus (or other main offering document) required? What are the main publication, regulatory filing or delivery requirements?
Prospectus (or other main offering document) required
For capital market instruments to be offered to the public, a prospectus must be prepared and approved by the Capital Markets Board (CMB). The prospectus is also required for the BIST listing application.
An issuance document must be prepared and approved by the CMB in the following cases:
- Issuance of capital market instruments without a public offering.
- Issuance of foreign instruments.
- All types of capital market instruments issuances that are not subject to prospectus requirements.
Main publication, regulatory filing or delivery requirements
The prospectus (or issuance document) and other documents required under the relevant legislation must be filed with, and approved by, the CMB. Generally, the CMB will approve the prospectus or the issuance document if the information given is found to be consistent, comprehensible and complete according to the CMB standards. Under the normal conditions, the approval must be notified to the company within ten business days following the submission to the CMB for approval. This period is extended to 20 business days in the case of an initial public offering. If information and documents are missing, or additional information and documents are required, the applicant must be informed in writing or electronically within ten business days following the date of application, and required to complete the deficiency. The applicant then has 20 business days to complete its application.
If the prospectus or issuance document is not received from the CMB within 20 business days following the date of CMB approval, or is not published within the required period, the prospectus or issuance document must be re-approved by the CMB. A prospectus approved by the CMB must be published on the issuer’s website within 15 business days following the date of receipt, as well as on the Public Disclosure Platform, if the issuer is a member of this platform.
What are the main exemptions from the requirements for publication or delivery of a prospectus (or other main offering document)?
The main exemptions from the obligation to prepare a prospectus or issuance document are set out in the Communiqué on Prospectus and Issuance Document No II-5.1. Issuers are exempt from prospectus requirements in the following circumstances:
- In public offerings to investors purchasing capital market instruments at a minimum of TRY250,000 per investor, separately for each public offering.
- In public offerings of capital market instruments with a unit nominal value of at least TRY250,000.
- In the case of trading among qualified investors of capital market instruments issued for sale to qualified investors.
- In the case of trading at the exchange of capital market instruments issued on a merger, acquisition, split-up, injection of assets as capital in kind, or an exchange of shares, in accordance with the CMB regulations relating to mergers and split-ups, and provided that the company publishes an announcement including relevant information in a format determined by the CMB.
A prospectus is not required in the following circumstances:
- In sales of capital market instruments to qualified investors only.
- In a private placement of capital market instruments.
- In the case of shares that are subject to a combination or division of denominations so as not to change the capital of the company.
- In the case of issuance on a merger, acquisition, split-up, injection of assets as capital in kind, or an exchange of shares, in accordance with the CMB regulations relating to mergers and split-ups, and provided that the company publishes an announcement including relevant information in a format determined by the CMB.
- On an issue of shares that are offered free of charge to existing shareholders, including dividends paid in the form of shares.
- When the consideration for a takeover bid is paid in the form of capital market instruments in accordance with the CMB regulations relating to takeover bids.
- On an issue of shares through the conversion, exchange or use of rights associated to capital market instruments issued in accordance with the CMB regulations, provided that:
- the prospectus and other required documents are published beforehand; and
- the shares are in the same group as shares of the issuer traded on the exchange.
Except for an initial public offering of shares, when the total consideration of the capital market instruments offered to the public is below TRY5 million (based on the offering price). In this case, the CMB can grant an exemption from the obligation to prepare a prospectus, provided that the company publishes an announcement containing the required information in a format determined by the CMB.
A prospectus must be prepared when capital market instruments issued under a prospectus exemption are re-offered for sale through a public offering.
Additionally, the sale of capital shares and foreign investment fund units by foreign corporations to their employees in Turkey under employee share option plans and similar schemes do not require an application to the CMB, provided that the following requirements are met (Communiqué on Foreign Capital Market Instruments and Depositary Receipts and Foreign Investment Funds No VII-128.4):
- The sale does not take place in Turkey.
- The sale does not qualify as a public offering.
- The information provided to the employees does not contain phrases or expressions giving the impression that the transaction is a public offering.
What are the main content or disclosure requirements for a prospectus (or other main offering document)? What main categories of information are included?
The prospectus and all information contained in the prospectus must:
- Provide sufficient details about the issuer.
- Be complete, current and comply with the standards determined by the Capital Markets Board (CMB).
- Be formulated in such a manner as to be easily analysed, understood and assessed by investors.
- Provide any additional information that may be requested by the CMB at the time of the application for approval.
A prospectus must include the following information:
- Information about the company’s guarantor(s) and the type and description of guarantee(s) (where applicable).
- Natural persons and entities responsible for the prospectus.
- Financial statements (audited or not), and data based on these financial statements.
- Resources used in preparing the prospectus. If these are not disclosed to the public in an attachment to the prospectus, the prospectus must clearly state how these resources can be retrieved and accessed.
- Reference to certain information concerning the issuer (for example, financial statements and independent audit and/or limited review reports previously disclosed to the public, articles of association, material events previously disclosed, announcement letters on a merger or demerger and so on.)
- Company’s prospects and business activities.
- Risk factors.
- Information about the company’s management and board.
Under the Communiqué on Prospectus and Issuance Document No II-5.1, a prospectus relating to an equity offering must include financial statements for the most recent three years and for the relevant interim period, as well as audited and/or limited review statements (if any). A prospectus relating to a non-equity offering (including warrants and certificates) must include financial statements issued for the most recent two years and for the relevant interim period, as well as audited and/or limited review statements (if any). If these financial statements are not included because the company has been recently formed and does not have the requisite two years’ worth of financial statements or similar reasons, the existing audited and/or limited reviewed financial statements can be included in the prospectus. If the issuer must regularly publish its audited and/or limited review financial statements on the Public Disclosure Platform, the prospectus can include a reference to these publications only.
In the case of changes or amendments to the information made public in the prospectus, or on the occurrence of new events that may affect the investment decisions of investors at any time before the start of sales or during the selling period, the issuer must immediately notify the CMB in writing of these amendments or new events. The relevant sections of the prospectus containing the amendments or additions must be approved by the CMB within seven business days following the date of notification to the CMB, and must be immediately published on the issuer’s website and the Public Disclosure Platform (if the issuer is a member).
How is the prospectus (or other main offering document) prepared? Who is responsible and/or can be liable for its contents?
A prospectus must be prepared in the case of a public offering of capital market instruments, and approved by the Capital Markets Board (CMB). In practice, the company provides the relevant details to be inserted in the prospectus and the company’s lawyers prepare the prospectus. Financial advisers also contribute to the preparation of the prospectus. The issuer confirms the prospectus before applying to the CMB.
The issuer is liable for the losses arising from inaccurate, misleading or incomplete information included in the prospectus. The following persons are liable in proportion to their fault and to the extent that losses can be attributed to them in the circumstances, when the loss cannot be compensated by the issuer or when it is clear that the loss cannot be compensated:
- The intermediary institution or consortium leader (if any).
- The company’s guarantor (if any).
- Members of the board of directors of the issuer.
Independent auditors, rating and appraisal firms and lawyers who prepared the reports that are included in the prospectus are liable for any inaccurate, misleading and incomplete information included in their reports.
Persons who offer capital market instruments to the public without publishing an approved prospectus, or who sell capital market instruments without an approved certificate of issue, are liable to imprisonment for two to five years and to a fine from 5,000 days to 10,000 days (Capital Markets Law No 6362). This judicial fine is an amount payable to the State Treasury that is calculated by multiplying the full number of days subject to penalty with the amount fixed per day. The amount of the daily fine is between TRY20 and TRY100, and will be assessed in light of the private and economic conditions of the person. In addition, in the case of fraud, criminal liability can be attributed to the persons conducting the fraudulent activity.
How are offered equity securities marketed?
Offered equity securities can be marketed through the following methods:
- Company research reports prepared by the relevant intermediary institution.
- Pre-marketing discussions with potential investors.
- Roadshows and presentations.
What are the potential liabilities for publishing research reports by participating brokers/dealers and ways used to avoid such liability?
There is no specific regulation that governs financial promotion and liability for publishing research reports. Under the Communiqué on Principles of Establishment and Activities of Investment Institutions No III-39.1, investment institutions must be objective in their publications, advertisements, announcements and promulgations made through all means of communication in the context of their investment services and activities. Investment institutions must not:
- Issue publications, advertisements, announcements and promulgations, or make other written or oral explanations, based on false, wrong or misleading information and which abuse the lack of knowledge or experience of clients.
- Give absolute return commitments or guarantees against loss in their publications, advertisements, announcements and promulgations, except in cases specified by the relevant legislation.
Is the bookbuilding procedure used and in what circumstances? How is any related retail offer dealt with? How are orders confirmed?
The bookbuilding method is used in both IPOs and secondary public offerings. Bookbuilding can be conducted in any of the following ways:
- At a fixed price.
- With price bids.
- With a price range.
The bookbuilding period commences after publication of the prospectus. During the bookbuilding period, the intermediary institution or consortium leader (if any) accepts the requests of investors through subscription forms. Following the end of the bookbuilding period, the intermediary institution or consortium leader (if any) prepares a distribution list, a final demand list and pricing.
Within two business days following the date of delivery of the distribution list, the issuer will approve the list and deliver it to the intermediary institution or consortium leader. On receipt of the approved distribution list, the intermediary institution or consortium leader delivers the capital market instruments to the relevant investors according to the procedures and principles specified in the prospectus.
How is the underwriting for an equity offering typically structured? What are the key terms of the underwriting agreement and what is a typical underwriting fee and/or commission?
Underwriting can be structured in any of the following ways (Communiqué on Principles regarding Investment Services, Activities and Ancillary Services No III-37.1):
- Standby underwriting. The shares are offered for sale through a public offering, and the underwriter purchases the unsold shared for cash at the end of the selling period.
- Partial standby underwriting. The shares are offered for sale through a public offering, and the underwriter purchases a portion of the unsold shares for cash at the end of the selling period.
- Full commitment underwriting. The underwriter purchases all the shares to be issued for cash before the start of the selling process. The shares are then offered to the public.
- Partial full commitment underwriting. The underwriter purchases a portion of the shares to be issued for cash before the start of the selling process. The shares are then offered to the public.
Intermediary services without underwriting (also known as underwriting on a best effort basis) refers to the process in which the shares to be issued are sold through a public offering within the selling period specified in the prospectus, and the unsold portion of shares is returned to the seller, or sold to third parties who previously committed to purchase. Most IPOs in Turkey are conducted on a best effort basis, rather than on an undertaking basis.
The underwriting agreement between the company and the intermediary institution must contain the following minimum terms:
- Information on the parties.
- Subject of the agreement.
- Type of underwriting and its scope.
- Rights and responsibilities of the parties.
- Restrictions on public offering.
- Sales principles.
- Services to be provided after sale.
- Fee to be paid to the intermediary institution, which is generally expressed as a percentage of the amount raised, and may include a separate success fee.
- Public offering principles where non-traded shares are offered.
- Term of the agreement and termination.
- Information on the consortium agreement.
- Applicable law.
- Competent courts and execution offices.
- Authorised signatories and notification addresses.
What is the timetable for a typical equity offering? Does it differ for an IPO?
While there are many factors that can have an impact on the public offering timetable (such as the size and structure of the issuer, the industry in which it operates, the effectiveness of its advisers and employees, the method used and market conditions), the IPO process generally take about six to eight months from preparation to approval of the prospectus and listing at Borsa İstanbul (BIST).
The pre-application stage (that is, the preparation of the IPO) can take about three to four months, during which advisers are appointed, articles of association are amended, financial and legal due diligence is conducted, the equity story is developed, the valuation model is built, the prospectus and issuance documents are drafted, and so on. Following completion of the preparation stage, the regulatory review process commences when the issuer applies to the Capital Markets Board for approval of the prospectus and to BIST for listing and trading. Within four to five weeks after obtaining the regulatory approvals, the offer is announced and the bookbuilding process starts. After informing BIST of the sales results, the company is traded on BIST.
Are there rules on price stabilisation and market manipulation in connection with an equity offering?
In public offerings of existing shares or following a capital increase and in secondary public offerings, after the shares start to be traded on the exchange, the intermediary institution underwriting the sales, or the consortium leader (if any), can purchase the shares for price stabilisation purposes, provided that the required information is included in the public offering prospectus (see below). The intermediary institution can engage in price stabilisation transactions on its own account or for the account of the issuer.
Price stabilisation transactions can be financed out of the issuer’s gross public offering income, provided that the required information is included in the prospectus. In this case, the funds used for price stabilisation transactions cannot be higher than 20% of the issuer’s gross public offering income, and the nominal value of the shares to be purchased cannot exceed 20% of the total nominal value of the shares offered to the public, including green shoe options.
If the funds used in price stabilisation transactions are provided by persons other than the issuer, there are no limitations on the amount of funds to be used in these transactions.
In public offerings involving price stabilisation transactions, the prospectus must include the following statements and information:
- Price stabilisation transactions aim to support the market price of the shares.
- No guarantee is given as to the performance of price stabilisation transactions.
- Transactions can be stopped before the end of the specified stabilisation period.
- Name and title of the intermediary institution carrying out price stabilisation transactions.
- Stabilisation period.
The agreement between the intermediary institution and the issuer must specify the parties who can suspend or stop price stabilisation transactions before the end of the stabilisation period. If no such provision is inserted in the agreement, the intermediary institution can suspend or stop the transactions.
After a public offering, price stabilisation transactions can be conducted for a maximum of 30 days following the first day of trading of the relevant shares on the exchange.
If a breach of the stabilisation rules set out in Communiqué on Shares No VII-128.1 constitutes market abuse or market manipulation, the Capital Markets Board and Borsa Istanbul can bring proceedings against the persons carrying out the stabilisation transactions.
What are the main tax issues when issuing and listing equity securities?
Capital gains derived from the listing of equity securities on Borsa İstanbul are subject to a 0% withholding tax and to corporate tax at a 20% rate. Certain exemptions from corporate tax are available under the Corporate Tax Law, and should be considered on a case-by-case (for example, a 75% exemption when the shares have been held for more than two years).
Transfers of shares are not subject to stamp tax or value added tax.
What are the main areas of continuing obligations applicable to listed companies and the legislation that applies?
Periodic financial and general reporting
Issuers must prepare and disclose annual financial reports (Communiqué on Principles of Financial Reporting in Capital Markets No II-14.1). Issuers must disclose their annual financial reports and independent audit reports to the public via the Public Disclosure Platform within either:
- 60 days following the end of their accounting period, when they are not required to prepare consolidated financial statements.
- 70 days following the end of their accounting period, when they are required to prepare consolidated financial statements.
Publicly-held companies must prepare interim financial reports every quarter, semi-annually and every nine months. They must disclose their interim financial reports to the public via the Public Disclosure Platform within either:
- 30 days following the end of the relevant interim period, when they are not required to prepare consolidated financial statements.
- 40 days following the end of the relevant interim period, when they are required to prepare consolidated financial statements.
Other disclosure obligations
The Communiqué on Material Events Disclosure No II-15.1 sets out the principles and procedures that apply to disclosure requirements. The Communiqué makes a distinction between insider information and continuous information. Insider information that must be disclosed to the public is not listed in the Communiqué, but the Capital Markets Board (CMB) expects companies to disclose insider information on a case-by-case basis.
The following continuous information must be disclosed to the public:
- Changes in shareholdings and management control when direct or indirect shares or voting rights of a natural person or legal entity (or of 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%.
- Board of directors’ resolution relating to the date, time, place and agenda of the general assembly meeting.
- Information on the exercise of the right to attend general assembly meetings, and total voting rights.
- Decisions of the board of directors and the general assembly of shareholders relating to dividend distribution.
- List of persons attending the general assembly and meeting minutes.
- In the case of a failure to convene a general assembly meeting, information about the reasons for the failure and the date of the next meeting.
- Board of directors’ resolutions on the issuance of new shares.
- Information on the exercise of pre-emptive rights on newly issued shares, and in the case of a right to cancel and exchange the shares following a capital increase, information about the exchange process.
- Certain transactions executed by persons with managerial responsibility and related persons, as follows:
- all transactions regarding the issuer’s securities (other than its shares offered to public) when the total value of the transactions executed within a calendar year exceeds TRY250,000; and
- all transactions relating to shares and other securities when the total value of the transactions executed within a calendar year is TRY250,000 or higher.
Developments and changes relating to previous public disclosures of material events must be continuously updated and disclosed to the public. If there are no developments relating to an event that was previously disclosed to the public, the absence of developments must be disclosed to the public (with reasons) every 60 days starting from the date of the last public disclosure of the event. In the case of a change to the general information published on the Public Disclosure Platform, the issuer must update the information within two business days of the change.
Related party transactions
The Communiqué on Corporate Governance No II-17.1 sets out the principles and procedures that apply to related party transactions of public companies. The board of directors must pass a resolution approving the transaction between the company and any related party.
Transaction representing 5% to 10% of the total equity or total gross sale revenues of the company. The company must obtain a valuation report for the transaction from an institution designated by the CMB. Shares must be sold on an arm’s length basis. The following information must be disclosed to the public on the Public Disclosure Platform:
- Decision to execute a related party transaction, and nature of the relations between the parties of the transaction.
- Reasons for non-compliance with the valuation report (where applicable).
Transaction representing more than 10% of the total equity or total gross sale revenues of the company. In addition to a valuation report (see above), the company must obtain the approval of a majority of the independent board members. Members of the board of directors who are related to the transaction cannot cast a vote. If a majority of the independent board members do not approve the transaction, this must be disclosed on the Public Disclosure Platform and include a satisfactory explanation. The transaction must then be submitted to the approval of the shareholders’ general assembly. The parties to the transaction and the persons related to the transaction cannot vote at the general assembly meeting. There is no quorum requirement for the general assembly meeting. The resolution must be passed by a simple majority of the shareholders present with voting rights.
Significant transactions require the approval of the shareholders’ general assembly. Under the Communiqué on Common Principles Regarding Significant Transactions and Exit Right No II-23.1, the following acts and transactions constitute significant transactions, provided that the significance criteria set out in the Communiqué are met:
- Mergers, de-mergers, liquidation and changes of legal form.
- Disposal, lease or establishment of rights in rem over the whole or a substantial part of the company’s assets.
- Changes in the scope of the company’s activity, wholly or to a considerable extent.
- Creation of new preferred stock categories or changes to the scope or subject matter of existing preferred stocks.
- Acquiring or renting a considerable amount of assets from related parties.
- Where the amount of a capital increase exceeds the amount of the current share capital, and the capital increase amount is to be used for the partial or full payment of due obligations arising from the acquisition of non-cash assets from related parties (as defined in the relevant CMB regulations).
In addition, the CMB can consider that the following constitute significant transactions:
- Any act or transaction that lead to considerable changes in relation to promises or commitments made, or material circumstances observed before the public offering.
- Even if there is no promise or commitment, any act or transaction that may have a considerable effect on the activities and commercial life of the company.
Significant transactions must be approved by at least two-thirds of the voting shares represented at the general assembly meeting, unless the articles of association of the company provides otherwise. However, if the shareholders representing half of the voting shares are present at the general assembly, a significant transaction must be approved by the majority of the voting shares represented at the meeting, unless the company’s articles of association provide otherwise.
An individual controlling shareholder who is party to a significant transaction, or a company over which this individual exercises management control, cannot vote on the approval of the significant transaction, if the transaction results in a direct personal benefit for the individual shareholder.
Do the continuing obligations apply to listed foreign companies and to issuers of depositary receipts?
The continuing obligations under Turkish legislation also apply to foreign companies and to issuers of depositary receipts that are listed on Borsa İstanbul. However, the Capital Markets Board can grant exemptions from the obligation to prepare and disclose financial reports.
What are the penalties for breaching the continuing obligations?
Breach of the continuing obligations is subject to administrative fines (Capital Markets Law No 6362). In addition to this, Borsa İstanbul can de-list a company for failure to comply with its continuing obligations.
What are the restrictions on market abuse and insider dealing?
Restrictions on market abuse and insider dealing
Acts and transactions that cannot be justified by a reasonable economic or financial reason and that may disrupt the operation of exchanges and other organised markets in trust, transparency and stability are considered as market abuse (piyasa bozucu eylemler) (Capital Markets Law No 6362).
Insider dealing (bilgi suistimali) is defined as making purchase or sale orders regarding capital market instruments, or changing or cancelling these orders, in reliance on information that has not been made public and that may affect the price or value of the relevant capital market instruments, or the decisions of investors. The use of the information must provide an advantage to the person making the order or to any other persons.
Penalties for market abuse and insider dealing
Both market abuse and insider dealing are capital markets crimes. The following penalties apply:
- A person whose actions qualify as insider dealing can be punished by imprisonment from two to five years or by a judicial fine. If a judicial fine is imposed, the amount of the fine cannot be less than twice the benefit obtained.
- A person whose actions qualify as market abuse is liable to an administrative fine from TRY20,000 to TRY500,000 (the amount of the fine is updated annually by the Capital Markets Board). However, the amount of the administrative fine cannot be less than twice the benefit obtained through these actions.
When can a company be de-listed?
Voluntary de-listing. A publicly-held company can apply to Borsa İstanbul (BIST) for de-listing where 95% or more of the company’s voting rights are acquired, directly or indirectly, individually or jointly by persons acting together, as a result of a takeover bid or otherwise.
After the general assembly resolves on the de-listing, the company must apply to BIST for de-listing no later than five business days following the resolution. The controlling shareholder must apply to the Capital Markets Board (CMB) to comply with the obligations related to mandatory takeover bids.
The following events must be disclosed to the public in accordance with the relevant CMB regulations:
- The publicly held company’s board decision to de-list and its approval by the general assembly.
- Filing of the de-listing application with BIST and the CMB.
- All stages of a takeover bid process relating to de-listing.
Compulsory de-listing. A controlling shareholder that has 98% or more of the voting rights of a company can buy out the shares of minority shareholders, who will be entitled to sell out their shares to the controlling shareholder. After completion of this process, BIST must decide whether to de-list the company or to introduce certain restrictions for further listing.
The General Manager of BIST can temporarily suspend transactions in capital market instrument for a maximum of five days in any of the following circumstances:
- Uncertainty or information of vital importance that can affect the decisions of investors regarding a capital market instrument or issuer, where the General Manager considers it necessary that investors be informed about the situation.
- Buy and sell orders recorded at extraordinary prices and/or volumes, to prevent the operation of a sound market for a capital market instrument.
- Information of vital importance about the market maker or liquidity provider in charge of a capital market instrument, which may affect him or her in his or her duty, when the General Manager considers it necessary that investors be informed about the situation.
- Emergence of systemic, communicational, technical and other factors that prevent the sound performance of a session.
Are there any proposals for reform of equity capital markets/exchanges? Are these proposals likely to come into force and, if so, when?
The Capital Markets Law No 6362 was adopted in December 2012, after which the relevant communiqués were published by the Capital Markets Board and other market participants (such as Borsa İstanbul, the Central Registry Agency and Istanbul Clearing, Settlement and Custody Bank A.Ş) (see Question 2). The 2012 reforms aimed to deepen Turkish capital markets and to improve investor protection. No further regulatory reform of equity capital markets/exchanges is expected in the near future.