Kuwait: A new authority in town

Having recently published its executive bylaws, Kuwait’s first independent stock market regulator, the Capital Markets Authority (CMA), is now ready to begin operations.

The Kuwaiti parliament passed legislation in February 2010 that established the CMA as part of a larger regulatory framework for the country’s capital markets. The Capital Markets Law (CML), as this legislation is generally known, calls for the CMA to regulate the Kuwait Stock Exchange (KSE), supervise public and private subscriptions, and oversee mergers and acquisitions. The CML also gives the CMA broad authority over the country’s investment companies, which were previously regulated by the Central Bank of Kuwait (CBK).

The legislation set out broad legal concepts, but left the drafting of specific regulations to the CMA’s five-member board of commissioners. In September 2010, Kuwait’s cabinet approved the appointment of board chairman Saleh Al Faleh, the former head of the KSE, and vice-chairman Mahdi Al Jazzaf, as well as members Saleh Al Yusuf, Nayef Al Hajraf and Yusuf Al Ali. On March 3rd of this year, the CMA board issued its executive regulations – known as the CML bylaws – which implement the provisions of the CML. These regulations were then published in the Kuwait Official Gazette on March 13th, at which point they were promulgated into law. In effect, this means that the CMA now has the power to enforce the regulations that it issued.

Prior to the establishment of the CMA, the KSE was a self-monitoring institution. In recent years, some have noted a worrisome increase in insider trading and other forms of market manipulation, activities that the CMA is expected to curb. According to an April 2011 report by the Financial Times, even prior to the promulgation of the bylaws, the KSE had already started to monitor trades more carefully and follow up on those that seemed suspicious. Salah Al Fulaij, the chief executive of NBK Capital, a Kuwait-based investment bank, recently told OBG that, as a result of the CML, “a lot of fictitious [trading] volumes that no longer conform with the regulations have disappeared from the market.” However, he cautioned, the CMA “needs to have teeth to be effective”.

Aside from listed firms, perhaps the institutions that will be most affected by the CML are the investment companies, which are involved in a variety of activities, including direct and indirect investment in various sectors, asset management and financial advisory services. During the financial crisis, investment firms came under increasing pressure as the result of over-leveraging and maturity mismatches, among other factors, and a few investment companies defaulted. In its July 2010 report on the stability of Kuwait’s financial system, the IMF noted that, although the CBK’s oversight framework was effective and well designed for banks, it was not sufficient to “avoid the turmoil that severely affected the investment company sector”.

The enactment of the CML means that regulation of the investment companies will largely fall under the CMA’s jurisdiction, and the CBK and the CMA are currently working to coordinate this transition process. In late May, Reuters reported that the CBK had told investment firms to review their activities and decide whether to operate in financing or to offer investment and asset management services. Companies that chose the former would continue to be regulated by the CBK, while the CMA would regulate those that opted for the latter. Alternatively, investment companies could choose to operate in both fields, however, this would require a second licence. In such cases, the CBK and CMA would each supervise the relevant operations of the investment company.

Investment firms were given one month to make a decision. Saleh Al Selmi, the vice-president of Kuwait’s Union of Investment Companies, told Reuters that his organisation, which represents 44 of the approximately 100 investment companies in Kuwait, was reviewing the statement by the CBK. “This is an important decision that will have an effect on the future of the companies and one month is little time to decide on the fate of a firm,” he said.

The CML also establishes a supervisory framework for mergers and acquisitions, with a particular focus on protecting minority shareholders during the acquisition process. Anyone making an acquisition offer for a Kuwaiti listed firm must first receive approval from the CMA. In terms of protecting minority shareholders, the bylaws specify that, for example, neither the buyer nor the target can provide information to some shareholders without making this information available to all of them.

Perhaps more significantly, the CML bylaws also require that anyone who buys more than 30% of voting shares in a Kuwaiti listed firm must make the same offer to all shareholders within 30 days. There have been some legal questions regarding whether or not this “mandatory offer” rule would apply to deals that were announced prior to the publication of the bylaws. To this end, on March 19th, the UAE’s Emirates Telecommunications Corporation (Etisalat) announced that it was rescinding its bid to purchase a 46% stake in its rival telecoms operator Zain Group, in part because of the new mandatory offer requirement.

The private sector will no doubt continue to raise similar legal questions as the CMA begins to enforce its bylaws. However, despite such uncertainties, implementing the CML will likely increase transparency and improve the overall functioning of Kuwait’s capital markets.