Removing excessive requirements for issuing of corporate bond to provide businesses with an alternative source of financing
Tashkent, Uzbekistan (UzDaily.com) - The Agency for the Development of the Capital Market advocates the lifting of restrictive rules for issuing corporate bonds and permitting their issuance by limited liability companies. The relevant bill developed by the Agency was introduced to the Oliy Majlis of the Republic of Uzbekistan in the prescribed manner.
Currently, corporate bonds can only be issued by joint stock companies and commercial banks. At the same time, the requirements for the issuer to issue bonds make this instrument an unattractive source of financing even for many joint-stock companies.
In particular, at present, according to Articles 3, 5 and 6 of the Law of the Republic of Uzbekistan “On the Securities Market” (new edition), only joint-stock companies can issue bonds within their capital, if there are three years of positive financial activity and rating.
Also, article 30 of the Law of the Republic of Uzbekistan “On Joint Stock Companies and the Protection of Shareholders’ Rights” also establishes restrictions on the issue of bonds within the amount of equity at the date of the decision to issue them.
Despite the fact that corporate bonds are a convenient alternative to bank financing, such norms significantly reduce the list of organizations that can turn to this tool.
This circumstance, in turn, causes a sharp reduction in the number and volume of corporate bonds outstanding in recent years. In particular, during the period 2010-2018, the number of corporate bonds in circulation decreased from 41 to 17 units, and their volumes from 512 billion to 198 billion soums, which is only 0.2% of the amount of issued shares.
The country currently has more than 148 thousand enterprises in the form of a limited liability company operating in various sectors of the economy. All these enterprises, often more attractive for investment than joint-stock companies, do not have an alternative to financing a bank loan, and corporate bonds can become such an alternative.
In this regard, the Agency for the Development of the Capital Market has developed a draft law, which proposes the following:
Allow the issuance of bonds to limited liability companies (LLC) with the extension to them of requirements for external audit, financial reporting, disclosure of information and other requirements that are required of joint-stock companies.
To abolish the rate of corporate bond issuance within the limits of the company’s equity capital, the requirement for collateral for corporate bonds issue, and also to soften the requirements for three-year positive financial reporting and rating.
To delegate the authority to establish conditions and determine the requirements for issuing corporate bonds to the authorized state body for regulating the securities market (Agency for the Development of the Capital Market) in order to facilitate a quick and flexible reflection of current trends and make changes and additions to the procedure for issuing bonds taking into account the interests of all securities market participants, in particular investors.
“For business, the bond market should be a worthy alternative in attracting financing, and for the population and investors - a profitable tool for investing free funds. The removal of unnecessary restrictions on the issue of bonds will significantly expand the circle of enterprises interested in raising additional funds for business development or reorganization. And issuing corporate bonds may be the only alternative for companies experiencing difficulties in attracting credit banking resources, for example, due to the absence or lack of collateral,” said Tursun Makhkamov, head of the capital market analysis and improvement of legislation of the agency.
Also, the draft law of the Agency proposes to make additions to the taxation procedure of holding companies. In particular, it is proposed not to consider the funds received as dividends of its subsidiaries, as well as cash from the sale of shares (shares) of the subsidiaries of the holdings as the total income of the Holding.
Creating favorable conditions for holding companies will help not only national holding companies, which will be able to channel the released funds to the development of the material and technical base of production, but will also help expand the circle of holding companies that operate and manage their funds from the territory of our Republic.
The adoption of this law will serve to further improve the country’s business climate, to broadly and actively attract free funds of the population and investors to the economy of the republic, thereby reducing the dependence of real sector enterprises on bank lending (the load on the banking sector will decrease) and state guarantees, as well as a drastic reduction in state participation in economics.
Also, the adoption of this bill will serve to improve the rating of the Republic of Uzbekistan in the Doing Business report of the World Bank.