Securities Finance in Bahrain
What are Securities and Assets?
Securities is a financial instrument that is negotiable and holds some type of monetary value. It is equivalent to an ownership position in a corporation through the stock. Securities can be categorized into three types:
Equity security is one where you hold shares of capital stock, enabling you to be a shareholder in the company. These shares pay out dividends, and such shareholders are usually not entitled to regular payments. The dividends are dependent on how the company is performing, and in the case of bankruptcy, you are entitled to residual interest after all the obligations have been fulfilled to its creditors. On the bright side, some control in the company via voting rights is available.
Various types of Equities Shares can be defined as Debentures, Bonds, Deposits, Notes, or Commercial Paper.
A debt security is one where the money is borrowed by the company and must be repaid-with interest as per various factors. These include government and corporate bonds, certificates of deposit, and collateral securities. They are issued for a fixed period, which can be redeemed in the end by the Issuer. These securities can be secured or unsecured, dependent on the type.
There are various types of Debt shares, such as Corporate Bonds, Money Market Instruments, Euro Debt Securities, Government Bonds, etc.
As per financial terminology, Derivatives refer to those contracts that are dependent upon the performance of an underlying entity. This entity could be of any kind, such as assets, index, interest rate, or futures, referred to commonly as underlying. While there are various types of derivatives, insuring against price differences of various entities is what it is primarily used for. Two parties specify certain preset conditions upon the dates, estimated prices, underlying variables, etc. and form an agreement, paying the other party a certain amount in case of the events not being in favor of the party in a loss.
The various types of derivatives can be classified as forwards, futures, options, swaps, collateral debt obligations and contract for differences (CFDs).
What Law defines Securities as per Bahrain’s Regulations?
In the context of this article, Volume 6 of CBB Regulations define Securities as shares or bonds issued by shareholding companies, government debt instruments, and the following financial instruments:
- Shares in companies and other securities equivalent to shares in companies or other entities, and depositary receipts in respect of shares;
- Bonds or other forms of debt, including depositary receipts in respect of such securities;
- Units, rights or interests (however described) of the participants in a collective investment scheme;
- Options, futures and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event);
- Options, futures and any other derivative contract relating to commodities that can be physically settled;
- Units to Real Estate Investment Trusts (REITs);
- Index tracking products including Islamic indices;
- Any other financial instrument approved as a financial instrument by the CBB for the purpose of trading such an instrument on an exchange; and
- Islamic securities, being those financial instruments that are Shari'a compliant.
What are the Statutes and Regulations relevant to governing securities offerings in Bahrain?
The Bahrain Stock Exchange (BSE) (also known as the Bahrain Brouse), facilitates as a major stock market index that tracks the workings of shareholding companies listed with it. The Bahrain Stock Exchange also provides a ground for traders to conduct their business on the ground.
Financial Institutions Law 2006, known commonly as the 2006 Law, established the Central Bank of Bahrain as the regulatory authority of BSE.
Bahrain Bourse is the market formed and governed by various enactments such as:
- Decree Number 4 of 1987, later repealed and replaced by the Law Number 57 of 2009, and Decree Number 60 of 2010
- CBB Law 2006
- CBB Disclosures Standards Book
- CBB Resolution Number 17 of 2012
- CBB Rulebook Volume 6
- CBB Rulebook Volume 7
These laws govern a set of Rules and Regulations, such as:
- Internal Regulation
- Money Laundering Regulations
- Trading Rules and Procedures
- Clearing, Settlement, Central Depository and Registry Rules
- Clearing, Settlement, Central Depository and Procedures
- Market Rules
- Bahrain Investment Market Rules
- Listing Rules
In 2010, Bahrain Bourse was established as a shareholding company to replace BSE, as per Law Number 57.
Who is the regulatory authority/authorities tasked with the responsibility for the administration of these rules?
Central Bank of Bahrain is the sole regulatory authority in terms of supervising the market. The CBB was established by the Financial Institutions Law 2006 as a regulatory authority responsible for overseeing the main market and the secondary market. Volume 6 of the CBB Rulebook entails all the required regulations in relation to the capital markets.
Are the markets compliant as per International Standards? If so, what are they?
The Central Bank of Bahrain is compliant with various relevant international standards such as International Organization of Securities Commissions (IOSCO), IOSCO's Multilateral Memorandum of Understanding (MMOU), and was reviewed for compliance by International Monetary Fund (IMF).
What dictates possession with regards to Contract for Difference?
CFDs do not institute possession of the stock that is bought but rather imitates the profit and loss for real purchase or sale of an asset. This contract gives a chance to trade in the underlying market and make profits without owning the said asset. As per CBB Regulations not explicitly mentioning so, CFDs come under the category of Derivatives as per aforementioned glossary of terms of Volume 6. Hence, possession of CFDs could be possible as a derivative.
What are the classifications set as per Bahrain Laws that define Trading in Securities?
Article 80 of Securities under the 2006 Laws lays down what would define an entity as a Company/Financial Firm that's trading in Securities. These activities, without limited to a single one, are:
- Promoting and underwriting securities or financing investments therein.
- Participating in incorporating of securities companies or increasing the capitals thereof.
- Forming and managing securities portfolios and investment funds.
- Depositing, clearance and settlement of securities.
- Brokering in securities transactions.
- Providing advisory services related to securities.
- Any other activities as approved by the Central Bank.
As aforementioned, CFDs are not explicitly provided for as per the terms, but any CFD that is effectively linked to security in the form of bonds, shares, indices, futures, etc. will fall within the scope and ambit of securities as defined above. All CFDs would be considered as contracts within the meaning of various definitions under Securities such as, 'other securities equivalent to shares in companies or other entities', 'any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties', or 'other derivative contract relating to commodities that can be physically settled'.
Hence, fulfilling either or all of the said criteria would put CFDs under the ambit of a contract and hence a financial firm trading in these categories would be recognized as a Company as per Commercial Companies Law in Bahrain.
What are the Licensing and Corporate Governance Compliance to be adhered by financial firms in terms of Initial Public Offering of Securities?
Article 40 of the CBB Law provides that no person may carry out regulated services without being authorized by the CBB while Article 81 states that no person may issue any securities in Bahrain unless the Central Bank of Bahrain's written approval is granted. In respect to the Articles, it is mandatory for a financial firm to adhere to the conditions specified in OFS 1.5.2 of Volume 6 which states the General Requirements and Rules and Regulations to be complied for issuing of Securities to all Issuers, including an overseas issuer. OFS 2.2 defines Initial Public Offering as an offer for a subscription to the public on behalf of or by a newly-established company, or an unlisted issuer of its own securities. For a Public Offer to be approved as per CBB, the Issuer must meet certain criteria.
The Criteria is mentioned under OFS 2.3.3 of Volume 6:
- The Issuer is a duly incorporated entity as per the laws of Bahrain, or in case of an overseas Issuer, as per the laws of its place of incorporation;
- The Issuer operates in conformity with its Articles and Memorandum of Association or the equivalent constitutional documents;
- The securities are transferable freely and free from any encumbrances;
- The offered securities are to be listed on a licensed Exchange in Bahrain, along with having adequate assurances between the Issuer and the licensed Exchange that they will be admitted to such a platform;
- The mandatory custodial and/or central depository arrangements have been made including the deposit of securities with an entity eligible to provide depository services under Article 94 of the CBB Law;
- The mandatory clearing and settlement arrangements have been made giving effect to Article 108 of the CBB Law;
- The eligible advisors have been appointed by the Issuer, including appointing a listing agent who shall liaise with the licensed Exchange and the CBB where the CBB deems vital;
- A lead manager must be appointed by the Issuer for any public offer;
- The Issuer has to make sure that the issue is underwritten unless provided an exemption by the CBB;
- While the issue is being underwritten, full details of the underwriter and the underwriting agreement must be disclosed in the prospectus.
These aforementioned submissions are to be made for the license of Initial Public Offering of Securities in the Bahrain Market.
What publicity requirements are to be made by the applicant?
The applicant is required to publish a draft of the summary prospectus in two daily local newspapers, where one is in Arabic and the other is in English, at least 5 days prior to the start of the offering period.
What information needs to be included in the filing of various documents required for PO?
The prospectus is defined in the Glossary in Volume 6 as 'An offering document that sets forth the plan for a proposed business enterprise or the facts concerning an existing one that an investor needs to make an informed decision. A prospectus needs to be offered for every offer of securities. OFS-5.2 to OFS-5.10 states in detail of what is further required in a Prospectus, as mentioned below:
- Full name and registration number of the Issuer;
- Type and amount of securities;
- Date of the offering document;
- The expiry date of the validity of the prospectus;
- Logo and the full name of each advisor;
- Logo and the full name of the lead manager and co-managers;
- Logo and the name of the underwriter, if any;
- Face or par value of the securities;
- Offer price;
- Premium (if applicable);
- Placement fee or charge (if applicable);
- Minimum subscription limit (if applicable);
- Maximum subscription limit (if applicable);
- Eligible subscribers (general classification by nationality or region); and
- Standard disclaimer statement, written in capital letters and box framed, stating
"THE CENTRAL BANK OF BAHRAIN AND [NAME OF THE LICENSED EXCHANGE] ASSUME NO RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THE STATEMENTS AND INFORMATION CONTAINED IN THIS DOCUMENT AND EXPRESSLY DISCLAIM ANY LIABILITY WHATSOEVER FOR ANY LOSS HOWSOEVER ARISING FROM RELIANCE UPON THE WHOLE OR ANY PART OF THE CONTENTS OF THIS DOCUMENT."
OFS 5.3 states Additional and Specific content for debt securities and 5.4 to 5.10 mentions other additional requirements to be complied with in regards to filing of the prospectus depending on the type of security that is being offered. It is mandated as per CBB that a Prospectus must be drawn up for every offer of Securities in the market.
A company is also required to submit their MOA or AOA as per regulations of Commercial Companies Law of Bahrain established as per Decree Law Number 21 of 2001.
What is Underwriting?
Underwriting service is when a licensee bears the risk of commitment to market or places all or part of the issue of a financial instrument issued by an unconnected party to the investors in return for a fee and within a pre-agreed time frame. It includes a binding commitment by the licensee to purchase the portion of the issue which remains unsubscribed for. Underwriter, as per regulations, must not be a related party; and must be done directly or through an authorized market maker. There should be an established price stabilization mechanism for the securities for a period of minimum six months beginning from the first day of trading on a licensed exchange. A longer period of price stabilization may be required by the CBB, if and where it considers as necessary.
Are there any regulations to be followed by an Underwriter?
The underwriter is required to comply with:
- CBB Law, rules and regulations,
- Volume 6 of the CBB Rulebook, and
- Issuer's Memorandum and Articles of Association, particularly concerning the eligibility of the expected subscribers to acquire the Issuer's securities and related disclosure requirements.
What are the Application Requirements?
OFS 4.1.2 provides for the accordance of the application to be submitted to the CBB for approval. It must be submitted under cover of a letter signed by two authorized signatories by the Board of Directors of the Issuer, along with:
- A copy of the Issuer's Board of Directors' proposal in respect of the issue to its General Assembly;
- A copy of the General Assembly resolution through which the issuing and offering of securities is approved;
- A copy of the duly signed Board of Directors' responsibility statement, signed by all directors in the standard statement stipulated by this Module;
- A copy of the duly signed declaration by the lead manager, based on a due diligence exercise of all relevant conditions, facts and arrangements, as appropriate;
- A copy of the duly signed declaration by the legal advisor for the offer, based on a due diligence exercise of all relevant legal conditions, facts and arrangements, as appropriate;
- A final ratified Memorandum and Articles of Association, or relevant constitutional documents for existing issuers, or a draft copy thereof for issuers under formation;
- A draft of the offering document prepared in line with the CBB requirements as stipulated under this Module;
- A copy of all arrangements, contracts and/or letters signed with the Issuer and or lead manager with all appointed advisors;
- Duly completed term sheet on the offering, as stipulated by the CBB from time to time in this Module;
- The expected offering timetable;
- A bona fide copy of either the Issuer's external auditor unqualified report on the annual audited financial statements or interim period reviewed financial statements prepared by the Issuer's external auditor;
- A copy of the audited financial statements, including the balance sheet, income statement, cash flow statement and change in shareholders' fund, for the period required under this Module for each type of offer, and the interim period reviewed financial statements for the period required under this Module;
- A copy of the duly signed report prepared by an independent accountant on any estimates, projections of the financial statements, or future operating results of the Issuer, if applicable;
- A copy of at least two independent valuer's reports if the proposed offering of securities is guaranteed, is made up of physical assets or property or backed by any assets, property, or any form of collateral;
- A copy of all documents available for inspection by the potential subscribers and/or allottees;
- Information on the legal structure of the company and company registration;
- A draft of the summary prospectus to be published in two daily local newspapers, one in Arabic and the other in English, at least 5 days before the start of the offering period;
- If the offer is subject to the listing requirements, the Issuer or lead manager must provide information on the listing arrangements and information on the designated listing agent if different from the lead manager;
- If, in addition to listing on a licensed exchange, the offer will be listed on an exchange outside Bahrain, a copy of the approval of the relevant regulator within that jurisdiction;
- If the offer will be made in countries other than Bahrain, a copy of such other country's regulatory approval for such offer;
- If the securities under the proposed offer are already listed on an exchange, details of the current listing requirements and performance of the securities;
- If the securities under the proposed offer have been placed through private placement prior to the date of submission of application, full details about such placement;
- Draft or proof print of any application form to subscribe or purchase the securities;
- A copy of the draft or any temporary document of title proposed to be issued; and
- For initial public offerings, initial offer for sale of securities and foreign listings, the Issuer is required to provide the CBB with a draft of agreements or contracts related to the depositing of securities and registration arrangements.
The time periods within which these documents need to be submitted are specified below.
Are there any Language Requirements for filing?
The prospectus is required to be drafted in layman's language and is not to be made too complicated. Apart from this, as stated above, while having to publish the Offering Document in the newspapers, it has to be done in one Arabic and one English language national daily newspaper. These regulations are specified as per Volume 6 of the CBB Module.
What are the time periods specified?
The application has to be submitted with the required information, documentation, and fees at least 30 days prior to the commencement of the offering period. The applicant then has to make representation to the CBB within 30 calendar days of the receipt to clarify any grounds set out in the notification. It is crucial to note that CBB will only start the process of the application once all the required documents are submitted. After receiving the representation, the CBB will provide its final decision in another 30 days.
Is there any differentiation between Primary and Secondary Offerings?
No, there are no separate categories mentioned as per Volume 6 of CBB Rulebook on Primary and Secondary Offerings.
Are there regulations governing Private Placements?
OFS 2.4 states the regulations and criteria required to be fulfilled for Offers made by Private Placement. A private offer must be made only to accredited investors for a minimum investment of USD 100,000. The private offers are limited to be taken up by not more than 100 accredited investors, excluding offers of private equity.
What are the restrictions and criteria to qualify for Private Placements as per CBB?
- It is required for the first offering to be made to existing shareholders and then to the public.
- Listed issuers are required to obtain CBB Approval to make a Private Placement.
- Approval from the shareholders during the General Assembly is also necessary.
- Issuers must combine all offers of securities that are in substance part of a single offering. The CBB will consider if the offer occurs in the six-month period before or the six-month period after the completion of an offer.
- The Issuer must make sure that the purchasers of securities are not doing so for reselling or redistribution purpose as this would be regarded as a Public Offer.
- Any private placements marketed or promoted by licensees of the CBB must set fees within the actual cost and must be within reasonable and justifiable levels that do not compromise the interests of the Issuer or the investor.
- The Issuer, lead manager and any appointed advisor to the private placement offer must not disseminate or make available any information related to the private placement offer to the public prior to the subscription being closed and must not at any time disclose or make available any information that could be regarded as an inducement to deal in these securities.
Are there restrictions on transferring of securities in private placing?
It is to be made sure by the Issuer that the purchases of securities are not made by the holders for the purpose of redistribution to other investors within a period of one year.
What are the Documents required to be submitted?
- A confirmation from the Issuer or the lead manager that the offer will not be offered to the public and shall only be offered in line with requirements of Section OFS-2.4;
- A copy of the subscription form which must include the accredited investor status confirmation;
- A list of the expected accredited investors, if available at the time of submission; and
- An offering document for a private placement of securities must meet the requirements of the particular security.
The private placement or any other fee such as offering expenses, upfront discounts, placement commissions, or other placements or selling agents, and any other related cost must be disclosed clearly in the PPM.
What about Foreign Offers?
Foreign offers that are marketed within Bahrain is subject to filing requirement as per the Module. Any offering document for Foreign Private Placement also requires to have the following statement to be included to be able to be in circulation in Bahrain.
"In relation to investors in the Kingdom of Bahrain, securities issued in connection with this prospectus and related offering documents must be in registered form and must only be marketed to existing account holders and accredited investors as defined by the CBB in the Kingdom of Bahrain where such investors make a minimum investment of at least US$ 100,000, or any equivalent amount in other currency or such other amount as the CBB may determine.
This offer does not constitute an offer of securities in the Kingdom of Bahrain in terms of Article (81) of the Central Bank and Financial Institutions Law 2006 (decree Law No. 64 of 2006). This prospectus and related offering documents have not been and will not be registered as a prospectus with the Central Bank of Bahrain (CBB). Accordingly, no securities may be offered, sold or made the subject of an invitation for subscription or purchase nor will this prospectus or any other related document or material be used in connection with any offer, sale or invitation to subscribe or purchase securities, whether directly or indirectly, to persons in the Kingdom of Bahrain, other than as marketing to accredited investors for an offer outside Bahrain.
The CBB has not reviewed, approved or registered the prospectus or related offering documents and it has not in any way considered the merits of the securities to be marketed for investment, whether in or outside the Kingdom of Bahrain. Therefore, the CBB assumes no responsibility for the accuracy and completeness of the statements and information contained in this document and expressly disclaims any liability whatsoever for any loss howsoever arising from reliance upon the whole or any part of the content of this document.
No offer of securities will be made to the public in the Kingdom of Bahrain and this prospectus must be read by the addressee only and must not be issued, passed to, or made available to the public generally."
Is Cross Border Practice permitted?
Cross Border practice may be conducted if it is not Collective Investment Undertakings (the CIUs) or Reverse solicitation or activity under the definition of tolerated practices, as per CBB.
Are there any additional regulations or exemptions for Convertible Securities?
The Issuer of convertible securities must disclose in the offering document the extent to which the shareholder may subscribe for the convertible securities.
Securities may be converted into other types of securities, or these can be converted into another class of the same securities. The conversion of securities may also take place within the same securities issuer's company and/or group, or in relation to another company or group.
In the case of convertible securities which are exchangeable for securities of another company, an Issuer must submit to the CBB the annual report and accounts of that other company unless that company is listed or adequate information is already available.
Are there any specific ongoing reporting obligations for the Issuer?
The Issuer is required to keep the Exchange and holders of its listed Debt Securities informed of any information concerning its business as soon as reasonably practicable, including information on the major new developments in the group's sphere of activity which is not in public knowledge. It is necessary to enable them and the public to appraise the position of the business and is necessary to avoid the establishment of a false market in its listed Debt Securities if it can be reasonably expected to significantly affect its ability to meet its commitments.
The Issuer also needs to ensure if his Debt Securities are also listed on other exchanges, information released to any of such other exchanges is released to the Bahrain Stock Exchange at the same time as it is released to the other markets.
This regulation is subject to Article 160 of the Commercial Law, and further ongoing obligations are mentioned in Volume 8 of the Rulebook.
What are the regulations against malpractices?
Bahrain Regulations provide for a general overview of the prevention of malpractices, like insider trading and more. Appointed advisors are subject to confidentiality requirements which must be explicitly stated in the respective agreements, contracts and/or letters.
All advisors must abide by the rules relating to the Prohibition of Market Abuse and Manipulation contained in Module MAM of Volume 6, as well as the relevant rules of the licensed Exchange regarding the prevention of insider trading, in their capacity as a temporary insider.
What are the relevant Market practices one needs to keep in mind while abiding by CBB Regulations?
There are various market practices that CBB will take into account which are given under Prohibition of Market Abuse and Manipulation, MAM 1.2.1 as:
- The level of transparency of the relevant market practice to the whole market;
- The disclosure requirement of the relevant market practice by the market participants;
- The need to safeguard the operation of market forces and the interplay of supply and demand, or safeguard the interest of the securities holders;
- The degree to which relevant market practices has an impact on market liquidity and efficiency;
- The degree to which the relevant practice takes into account the trading mechanism of the relevant market and enables market participants to react properly and in a timely manner.
Behaviour or conduct does not amount to market abuse if it conforms with a rule which includes a provision to the effect that behavior conduct conforming with the rule, does not amount to market abuse.
Is Price Stabilization to be declared, and are there exemptions provided?
Lead Manager's Declaration must contain the price stabilization method, limits and determination of issue price where the issue is not underwritten. There are various practices that are exempted from Prime Stabilization method, which has been provided under the Prohibition of Market Abuse and Manipulation in Volume 6.
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