Contracts for Differences in Kuwait
Contracts for Differences (CFDs) is a type of security investment wherein investors make a profit from the difference of a company’s fluctuating stock value in the market. CFD is a form of derivative trading, formed as an agreement between an investor and a CFD broker for exchanging the difference in the value of a financial product within the opening and closing time of the contract. CFDs can be classified as a form of security that is issued by the Company. The wider range of markets to invest with, the flexibility to go long or short, and the ease of contract execution are some of the advantages for an investor to choose this form of security over others. Kuwait established the Capital Market Authority in February 2010 as a regulatory body of the various transactions that take place in the market. In 2015, the body enacted a set of laws in relation to the market place conduct.
Capital Market Authority Law (CMA Law)
- This is the Law that governs the regulations, procedures, sale, and offers in relation to the aforementioned securities, in Kuwait.
- The Law was enacted in 2015 as Decree Number 72 by the Kuwaiti Parliament.
- CMA Law is considered to be one of the most complex and diverse sets of regulations to be adopted by Kuwait in its recent years.
This article shall further discuss the regulations in relation to the licensing and other requirements for CFD Trading in Kuwait.
As per Law Number 7 of 2010, Regarding the Establishment of the Capital Markets Authority and Regulating Securities Activities, Security is defined as, “Any instrument, in any legal form, that is an evidence of ownership of a share in a financial transaction, and that is negotiable pursuant to a license from the Authority, such as:
- Shares issued or proposed to be issued in the capital of a company;
- Any instrument that creates or acknowledges a debt issued or to be issued by a company;
- Loans; bonds; Sukuk; and other instruments that can be converted to shares in the capital of a company;
- All public debt instruments that are tradable and issued by the various government entities or public institutions and authorities;
- Any right, option, or derivative relating to Securities;
- Units in a collective investment Scheme;
- Any paper or instrument considered by the Authority as a Security for the purposes of implementing this Law and the Bylaws.”
Any activity that falls under the aforementioned categories shall be termed as Securities. For companies to establish trading through securities, there are various obligations that are required to be fulfilled. Securities licensing has to be obtained in order for a Company to be authorized to issue securities. Kuwaiti entities like shareholding companies must secure the Authority’s approval for issuing securities. The issuance approval process is necessary whether the issuance of the securities is direct or indirect. Bonds may be issued by shareholding companies directly, or indirectly through a special purpose vehicle that is established either onshore or offshore.
Article 63, Chapter 5 of the CMA Handbook states that a person cannot operate without a license in the market for activities such as:
- Securities Broker;
- Investment Advisor;
- Investment Controller;
- Investment Portfolio Manager;
- Collective Investment Scheme Manager;
- Any person who conducts or participates in any other activity that is deemed by the Authority to be an activity in Securities to be regulated in accordance with the purposes of the Law; and
- A few other activities.
Whereas, a company may be granted a license to perform multiple activities aforementioned, provided they fulfill the required criteria and submit the Private Placement Memorandum (PPM).
A Private Placement Memorandum or a Prospectus is a document which helps a company attract professional clients to subscribe onto its platform. This is a crucial document as depending on the Prospectus, this specific category of clients would subscribe to the Company’s capital. As such, CMA requires the person or entity to submit its PPM in accordance with Article 5-11 of the Securities bylaws. The article provides for the Prospectus to include:
- Issuer’s details, such as name, address, and date of incorporation.
- Sales Agent’s name and address, if the Issuer is not the Sale Agent.
- Subscription Agent’s name and address, if any.
- Subscription period.
- Subscription minimum, if any.
- Kinds of investors eligible for the Subscription.
- Details of the intended use of the proceeds of the issue.
- A statement that the Prospectus has been prepared in accordance with the Law and these Bylaws and approved by the Authority.
- Statement of the Central Bank’s approval for the issue by Units Subject to the Supervision of the Central Bank.
- A statement that the Authority shall not be a party to any claim of damages arising from an approved Prospectus.
- The Prospectus shall not exclude any important information issued and the information provided is factual in nature. This is to be confirmed by the Issuer, Obligor, or the Subscription Agent and any information in relation to these entities that might be relevant, are made aware of, to the investors.
- A statement, either of Board of Directors or on behalf of individual board members stating that all information stated in the Prospectus is accurate and complete.
- Certification from legal advisors of Issuers and Obligors on the legitimacy and compliance of the Prospectus and other relevant documents with the legal requirements of the Authority.
- A note explicitly stating “We recommend that you seek the advice of an appropriately qualified Licensed Person regarding the contents of this Prospectus before deciding to take part in the subscription.”
- Transaction carried out or to be carried out by related parties to be stated in brief.
Details of the offered securities as stated:
- Number and class of the Securities offered
- Statement of the rights arising from Securities, depending on the type of Security (Shares, Preferred shares, Bonds, Sukuk, etc. as mentioned in Article 5-9)
- Brief description of any restrictions on Trading of the Securities being offered and any future measures concerning thereof
- Purpose of such Securities being issued.
XVII.A few information concerning the Issuer shall be mentioned in the Prospectus such as:
- Number and Detail of ant Securities previously issued by the Issuer
- Audited and approved financial statements of the three years immediately preceding the application of Prospectus. If the last audition was conducted nine months prior to the application, then an updated financial statement by an Auditor is to be provided.
XVIII.Any information on claims, judicial actions, or arbitration procedures to be taken against the Issuer or any of its Subsidiary Companies in relation to the financial position, regardless of the status as to whether it is considered, suspended, or alleged.
The aforementioned set of details and documents needs to be submitted to the Authority before the Company is able to issue Prospectus to the Public.
These documents are not just applicable for the purpose of CFDs, but also other types of Securities, such as shares. Unlike with CFDs, certain securities such as shares have various rights affiliated with them to be enjoyed depending on the type, which is stated in Article 5-9 of the Module:
In the case of Ordinary Shares, the rights arising shall be:
- Voting rights.
- Profitability (short-term) of shares.
- In case of liquidation, Rights.
- In the event that the Subscription is not covered, pertaining Rights granted.
Whereas in the issuance of Preferred Shares:
- Profit distribution, with provisions determining the distribution of Dividends.
- Restriction on payment of Dividends for Shares.
- Voting rights.
- Profits and liquidation proceed rights.
- Terms and Conditions for the conversion of Preferred Shares into ordinary shares, and redeeming the convertible shares.
- Ability to exercise rights before and after the conversion of shares.
Whereas in the issuance of Sukuk, offering bonds, and any other debt instruments:
- Payable Returns.
- Date of Payment.
- Redemption Payment.
- Provisions of formation and operation of Bondholders and Sukuk holders Association.
- Events that would lead to an acceleration of this particular set of securities.
- Terms and Conditions for conversion to ordinary shares.
- Rights in case the Issuer or Obligor’s financial status results in bankruptcy, liquidation, or being wound up.
The process for a license application of any Securities Activity is lengthy and would take three months or upwards to be granted. The documents required to be submitted for the application is specified in Articles 1-5 of CMAs executive bylaws. These documents are stated as mentioned below:
- Name and address and the commercial register number of the license;
- Regulatory business plan containing certain details;
- Statement of the Securities Activity for which the application is in regards to;
- Information about the issued and paid-up capital of the Company to which the application is in regards to;
- A statement of the shareholders whose ownership has reached above a specified percentage of the Company to which the license application relates;
- A copy of the Company Contract to which the license application relates and any amendments to the same;
- Nomination for applicants for Registered Positions and Employment Positions in accordance with the Fit and Proper Rules in Appendix 5 of this Module;
- Sufficient information of any Effective Control over the Company to which the license application relates;
- Any agreements or undertakings with external entities;
- The audited financial statements for the last three years prior to the date of application, along with forecasts of its expected financial position for three years after business commencement;
- Approval of the Central Bank should the applicant be one of the Units Subject to the Supervision of the Central Bank;
- A legal opinion from an external legal advisor of the Company on any lawsuits of material influence on the legal position of the Company;
- Declarations signed by the founders of the Company to the effect that no verdict of bankruptcy, penalty on a crime of breach of honor or trust, or being convicted of a crime/ felony involving a breach of honor or trust or freedom restricting penalty in any of the crimes stipulated in the Law of the Authority or any other law over the five year period preceding the license application unless he or they have been discharged;
- A declaration by the license applicant stating that the information contained in the application and enclosed documents are accurate and complete in addition to any other declarations required by the Authority;
- Proof of payment of fees for the processing of the application;
- Any request by the applicant for the dis-application of legal or regulatory requirements and the justification for such a request;
- Any other information or documents that may be specified by the Authority.
The license applicant could be asked to submit further documents covered under Article 1-7 including but not limited to, the sufficiency of resources for practice, admin experience, technical resources, etc. If the applicant does not meet the allotted deadline to submit the extra documents and cannot provide a legitimate reason in not doing so, then the application would deem to be withdrawn.
Reverse solicitation is also commonly known as Passive Marketing. This is the act where an investor who has not had any previous contact with an investment manager, contacts an agent to make a potential investment in the fund. Article 63 of the CMA law prohibits the act of offering and selling of foreign securities in Kuwait unless it is done through a ‘licensed person’, invalidating the practice of Reverse Solicitation. The categories of such licensed entities permitted activities are mentioned above under Licensing.
The practice of reverse solicitation used to be very common in the Kuwaiti market earlier. A foreign company now may conduct its marketing provided it is through an agent or registered as per the aforementioned criteria. But a foreign entity is prohibited from conducting any activities with the Kuwait Markets unless it is through licensed persons. Article 93 under Chapter 9 explicitly states that foreign securities may not be issued for Public or Private Placement unless licensed by the Authority.
It is required of the licensed person to be the one initiating contact with the investor. Provided that this is the circumstance, the Company does not need to obtain a license or submit PPMs. These regulations are not applicable to any entity that has their operations, branches, employees, or other forms of logistics located in Kuwait, as they are eligible for marketing their securities without having an investor establish contact first, provided they have obtained their license as per stated regulations.