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 to:
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 legal.
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 bonds.
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 such circumstances.
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 international practice.
Mark Lockwood and Roy Pearce