Laying down the law: The new Corporate Governance Code establishes stricter regulations

Encouraging the listing of more companies is a priority for most exchanges globally, and Bahrain Bourse (BHB) is, like many others, formulating a strategy by which it hopes to do so. This forms part of a wider, ongoing initiative undertaken in conjunction with the Central Bank of Bahrain (CBB) and the Ministry of Industry and Commerce (MoIC) to develop the bourse.

UPDATED LISTING REQUIREMENTS: However, the BHB has been able to unilaterally address the challenge of attracting new companies in the shorter term through amendments to its listing requirements. In 2011 it made two amendments to this end: the first cancelled a clause that stipulated that the price of a company’s shares on the market should not be less than the paid-up percentage of the nominal value of each share; the second removed the clause stating that a closed company wishing to list must have achieved profits during either the two years preceding its application or for three of the last five years.

Both amendments had the immediate effect of making the process of listing on the BHB a less onerous one, and are a response to the more challenging economic environment that has prevailed in recent years. “It’s hard to find companies with two years of profit in the wake of the global economic crisis. We have kept the conditions regarding the financial stability of a company, but now we look at its overall growth potential,” Ebrahim Jaffar Al Aradi, head of trading and members affairs at the BHB, told OBG.

While the BHB’s efforts to encourage more listing activity have been welcomed, the long-term prospects of its initiative also depend on the activities of the CBB and the MoIC, and their bearing on the attractiveness of the BHB as a destination to raise capital. Historically, these bodies have a reputation for cooperating effectively in this regard and the recent evolution of the regulatory framework surrounding corporate governance is a case in point. In 2010 the MoIC announced the completion of a new Corporate Governance Code, the result of years of collaboration with the CBB and the National Corporate Governance Committee. The code supplements the existing corporate governance provisions in the company law, and is intended to be a dynamic document that will evolve in response to changing domestic and global circumstances.

SETTING STANDARDS: Based upon nine core principles that lay out the role of boards, directors and officers, remuneration, management structure, communication with shareholders, disclosures and the role of sharia, the code has been welcomed as a step-change in the level of corporate governance principles in Bahrain. As the MoIC points out in the preamble to the document, “international experience has proven that good corporate governance attracts investment, protects investors and other stakeholders, and enhances companies’ value.”

More specifically, it addresses one of the region’s most persistent challenges – the prevalence of large, family-run groups which, although significant contributors to the growing economy, have been somewhat reluctant to adopt best-practise governance standards. The problems faced by Saudi Arabia’s Saad and Gosaibi family businesses, which are now in conflict over $16bn of defaulted loans, has served as a reminder of the importance of corporate governance. Bahrain’s regulatory response to this potential weakness is therefore a significant one.

ADVANCEMENTS: The new regulation moves beyond the existing Company Law in several areas. It recommends, for example, that the chairman of the board and the CEO should not be the same person, and that at least half of the board of directors should be non-executive. Although not legally binding in the code, the provisions are included in the CBB rulebook and such recommendations are strongly valued and compliance with them, the MoIC states, should be considered when evaluating a firm’s level of corporate governance. Non-compliance must be justified under the “comply or explain principle”, an enforcement model which has proved popular in other jurisdictions, which the MoIC has chosen for its corporate governance regulations.

VOLUME 6: The new code became effective in January 2011, and as soon as it was in place the CBB began the process of incorporating its provisions within its rulebook. This synchronisation effort took place across all of its six volumes, but it was Volume 6 – that for publicly listed companies – which was seen as most critical. The alterations made to this section of the rulebook in 2011 are based on the new governance code, but also includes the OECD principles of corporate governance, as these represent the corporate governance reference for the International Organisation of Securities Commissions (IOSCO) – of which the CBB is a member. The resultant module came into effect on January 1, 2012 and is a major step forward in the governance of Bahrain’s publicly listed companies, bringing it into line with international best practices.

In 2012, the CBB is preparing to make further rulebook additions which are likely to have an impact on the BHB’s long-term ability to attract new listings. During the year its new offering of securities module, which will form part of Volume 6, is due to be presented for public consultation.

Under the provisions of the module the regulatory requirements for the issuing of equity, debt and Islamic securities, previously scattered across disparate documents and circulars, will be consolidated in one location. Of more interest from a listing viewpoint is the inclusion in its appendices of an initial public offering prospectus template, which is expected to simplify the process. “This will contain all of the details the CBB requires and will make things far easier for law firms advising clients. In the past the CBB would receive IPO and other offering documentation of highly variable quality and content,” said Liam Richard Gibbon, the capital markets adviser at the CBB’s Capital Markets Supervision Directorate.

CONTINUED COOPERATION: The CBB has had a large influence on the drafting of a new Companies Law. This long-anticipated legislation is expected to enhance the present organisational structure, by which the MoIC is responsible for the registration and liquidation of listed companies, while the CBB oversees everything in between, retaining its status as national listing authority. The law will also clarify the question of foreign ownership, finally making explicit an open ownership ruling that has previously been interpreted to apply only to GCC members.

The BHB, however, will remain a self-regulating institution under the new law, free to formulate its own listing rules within the regulatory framework provided by national legislation and the CBB Rulebook. The regulatory environment pertaining to companies wishing to list on the BHB, therefore, is continually evolving, and the success of this process continues to rely on the harmonious approach adopted through the cooperation of the MoIC, the BHB and the CBB.