With the backdrop of the Government of Kazakhstan’s announced privatisation programme, Dechert’s London- and Almaty-based International Capital Markets team examines recent developments in Kazakhstan capital markets, as well as certain IPO and privatisation considerations for issuers and other market participants.

Privatisation drive

In November 2018, the stock market debut of Joint Stock Company National Atomic Company “Kazatomprom” (“Kazatomprom”) on the London Stock Exchange (the “LSE”) and on the Astana International Stock Exchange (the “AIX”) marked the first international initial public offering by a Kazakhstan national company in more than ten years and the first offering as part of the Kazakhstan Government’s announced plans for a wave of public offerings of major Kazakhstan companies.

In recent years, the Kazakhstan Government has introduced a number of programmes aimed at encouraging privatisation and competition among Kazakhstan entities. In 2012, the Kazakhstan Government launched its “People’s IPOs” programme intended to stimulate the domestic equities market, which was subsequently replaced by a comprehensive privatisation programme for 2014-2016. On 30 December 2015, the Kazakhstan Government approved its “Complex Privatisation Plan” for 2016 to 2020, which targets a list of national companies and subsidiaries of national companies for privatisation. For the period from
1 January 2016 to 20 March 2019, 464 assets had been sold pursuant to the 2016 Complex Privatisation Plan for aggregate consideration of KZT 284.0 billion.¹ The Kazatomprom IPO is expected to be followed by offerings of shares in a number of national companies in the next few years and continued privatisation has been announced as a key strategic aim of the Kazakhstan Government and the Kazakhstan sovereign wealth fund, “Samruk-Kazyna” JSC. However, since then, Kazakhstan has begun a process of political transition. On 19 March 2019, President Nazarbayev, Kazakhstan’s first president, announced that he was standing down from his position (although remaining as the official “national leader” of Kazakhstan, Head of Kazakhstan’s Security Council and leader of the Nur Otan political party). On 9 April 2019, President Tokayev called early presidential elections (originally scheduled for 2020) for 9 June 2019. What effect this political transition will have on Kazakhstan’s strategic aims and the role and pace of privatisation within those plans remains to be seen.

Developments to the local capital market

In line with, and in preparation for, the Kazakhstan Government’s privatisation drive, steps have been taken to develop the Kazakhstan capital market. On 5 July 2018, the Astana International Financial Centre (the “AIFC”),with a legal framework based on principles of English law and aimed at becoming a financial hub for Central Asia, the Caucasus, the Eurasian Economic Union, the Middle East, West China, Mongolia and Europe, was inaugurated. The establishment of the AIFC is also in line with Kazakhstan’s strategic plan to become one of the top 30 developed nations in the world by 2050 and to attract new sources of foreign investment and liquidity.

In October 2018, the update of the Republic of Kazakhstan’s US$10 billion global medium-term note programme was approved, with application made for the bonds issued under the programme to be listed on both the LSE and the AIFC’s stock exchange, the AIX (an alternative to Kazakhstan’s Almaty-based stock exchange “KASE”). On 14 November 2018, trading on the AIX began. In December 2018, Kazakhstan’s national railway company, JSC National Company Kazakhstan Temir Zholy, dual listed its Swiss Franc-denominated bonds on the AIX and the Swiss Exchange (See Dechert Advises JSC National Company Kazakhstan Temir Zholy on Pioneering Swiss Franc-Denominated Dual-Listed Bonds).

The AIX is seeking exclusive domestic rights to the initial public offerings of Kazakhstan national companies, and it is anticipated that the AIX will also become the listing location of choice for domestic listings by national companies for other offerings.

Why list on AIX?

The establishment of the AIFC and AIX provides Kazakhstan-based and other issuers with an alternative listing venue in Kazakhstan, with a separate regulator and stock exchange. Those looking to list securities on the AIX must comply, inter alia, with the AIX Prospectus Rules, the AIX Markets Listing Rules and the AIX Admissions and Disclosure Standards for Issuers.

The AIX markets itself on three principal benefits:

• Wide geographical coverage, as an international exchange in Central Asia, providing global investor access to the region. The AIX also has a partnership with the Shanghai Stock Exchange, which the AIX expects to provide market access to Chinese capital and investors with the launch of a dedicated belt and road initiative segment in 2019. Another strategic partner of the AIX is NASDAQ exchange group, which has provided a technical platform.
• Opportunities for clients, as a result of the new regulatory environment the AIX has put in place based on principles of English law, as well as the availability of certain incentives for issuers and investors. Such principal incentives include tax advantages offered to issuers and investors in respect of securities listed on the AIX. In particular, Kazakhstan law exempts legal entities and individuals (both Kazakhstan and non-Kazakhstan) from paying income tax and withholding tax on interest accrued on securities listed on the AIX and from paying capital gains tax on any gains realized from selling securities listed on the AIX. Based on current legislation, these incentives are expected to remain available until 1 January 2066. While similar incentives may also apply to securities listed on the KASE in certain circumstances, they are less favorable. For example, while interest accrued on securities listed on the KASE is exempt from income tax and withholding tax (as is the case for AIX-listed securities), capital gains tax is only exempt if securities are sold on the KASE via the so-called “open method.”
• Variety of products and services, with announced plans by the AIX to offer a range of different asset classes, including, equity, debt and derivative instruments, commodities derivatives and Islamic financial products.

Kazakhstan issuers seeking to offer their securities outside of Kazakhstan may also find an AIX listing to be beneficial. Under Kazakhstan law (and subject to certain exceptions) Kazakhstan issuers offering their securities outside of Kazakhstan have been required to obtain prior authorisations from the National Bank of Kazakhstan (“NBK”) and must list and offer 20 percent of the offered securities on a domestic stock exchange. In October 2018, these statutory requirements were amended so that no authorisation of the NBK is required if 20 percent of the offered securities are offered on the territory of the AIFC (i.e., on the AIX) simultaneously with a non-domestic offering.

The ability of the AIX to meet its bold targets and ambitions will be evaluated over time and, while, to date, there has only been one equity offering and limited bond issuances listed on the AIX, its position as the domestic venue of choice for future privatisations, the incentives for issuers and investors and the strategic partnerships it has put in place demonstrate the Kazakhstan Government’s commitment to the AIX’s mission.

What about KASE?

In 2018, the KASE announced a number of efforts taken to develop its business model by seeking to expand partnerships internationally.

For example, in September 2018, the Supervisory Board of the Moscow Exchange (“MOEX”) approved the expansion of its strategic partnership with the KASE and approved the acquisition of up to 20 percent of the KASE by the end of 2019. A strategic partnership agreement was signed between MOEX and the KASE in October 2018. Also in September 2018, the KASE signed a memorandum of co-operation with the Tashkent Stock Exchange, thereby strengthening the ties between the two exchanges.

Such actions may indicate that the KASE has no current intention to yield its role in Kazakhstan’s capital markets to the AIX or to refocus its approach on smaller, less strategically important issuers and securities.

Global offering considerations

The decision by both Kazatomprom and the Republic of Kazakhstan to dual list their securities on the LSE demonstrates the continued attraction of a listing in London for Kazakhstan issuers. Given the historic links between many Kazakhstan national companies with the LSE (with many having previously listed debt or equity on the exchange), the LSE may also continue to be favored during the initial public offering drive.

The UK Financial Conduct Authority (the “FCA”) has taken steps to make a listing in London more attractive to state-owned companies in recent years and, in June 2018, introduced a new premium listing category aimed specifically at companies controlled by a sovereign state. The new listing category, which became available for listing from 1 July 2018, is available to issuers “in which a State exercises or controls 30 percent or more of the votes able to be cast on all or substantially all matters at general meetings of that company”. The aim of the new listing category is to encourage state-controlled companies to opt for the higher-standard premium listing, rather than a standard listing, when pursing an equity listing in London, by removing two practical obstacles previously faced by sovereign-controlled companies under the premium listing regime: (i) the requirement for a controlling shareholder agreement; and (ii) the requirement for advance shareholder approval of transactions with the sovereign.

While Kazatomprom sought a standard listing of its global depositary receipts, Kazakhstan issuers contemplating an initial public offering may wish to consider taking advantage of this new regime and obtaining a higher standard of listing and to attract investors seeking to invest in companies that are otherwise subject to the more rigorous corporate governance requirements that accompany a premium listing.

Political transition

See also Proposal for a new category of premium listing for sovereign controlled companies

Footnotes

1) According to the Kazakhstan Register of Privatisation Assets.