The bond market in Kazakhstan has begun to develop this
year, with approximately seven issues (ranging from $75,000 to
$24 million). However, there are a number of legal points that
could restrict the growth of this market.
Although Article 136 of the Civil Code expressly recognizes
the bond as a form of financial instrument, and the law
requires the registration of issues with the National
Securities Commission, problems may arise if it becomes
expedient to change the bond redemption or interest payment
conditions. Likewise, there are doubts as to the ability of a
trustee to represent bondholders in a secured offering. In
developed jurisdictions, this is achieved by agreement between
the meeting of bondholders (comprising a specified majority)
and the issuer. In Kazakhstan, however, there is some doubt as
l whether it is possible to change the conditions under
which the bond was issued; and
l whether the meeting of bondholders is authorized to agree
to such changes.
Generally, a contract is only valid under Kazakhstani law
(Article 393(1) of the Civil Code) if the parties have reached
agreement on all material conditions. Clearly, interest and
redemption conditions are material; but if they are subject to
change, can the parties be said to have reached agreement?
Arguably, the conditions of a bond issue are a specific form of
contract in which the parties acknowledge that some of those
conditions are subject to change. Moreover, it is a fundamental
principle of Kazakhstani civil law that the parties to an
agreement are free to specify any conditions, provided they are
A further potential obstacle is that Article 33 of the Law
on Joint Stock Companies specifically provides that "[the
issuer] shall not change the bond issue conditions". Although
this may be read as a general prohibition, the better view, it
is submitted, is that this provision is intended only to
prevent unilateral changes by the issuer.
Kazakhstani civil law does not recognize the meeting of
bondholders as a subject of law. This means that it does not
have legal personality and cannot enter into legal relations.
This might be bypassed by appointing a nominee to represent the
bondholders under individual powers of attorney, executed by
each bondholder upon purchasing a bond, although this would
inevitably increase the complexity of issuing and selling
The risk remains that a minority bondholder who objects to a
decision taken by the meeting of bondholders (eg to reduce the
interest rate) may claim that his rights have been infringed.
Article 13i of the Civil Code specifically provides that
bondholders have the right to receive remuneration. Any
purported waiver by a person of his legal rights, in full or in
part, may not be effective - although this is not clear.
Arguably, investors in bonds, who willingly undertake the risk
of loss on their investment, should be deemed to have exercised
the fundamental right to freedom of agreement, according to
Article 380 of the Civil Code, and irrevocably waived their
rights to object to a decision by the majority of bondholders.
As the law stands, however, it is far from certain that the
courts would not seek to protect the minority bondholder in
These potential problems highlight the fact that the bond
market in Kazakhstan is comparatively untested. It would be
preferable to introduce further amendments to the law to ensure
that bonds can be issued and traded in accordance with
Mark Lockwood and Roy Pearce