Recently, there have been major changes in the shareholding structures of a number of main corporations in Turkey including Turkish Airlines, Istanbul Stock Exchange and prominent Turkish Telecommunication Companies. With this article, we took the liberty of giving you the updates on such in as much as detail as we can and provide you with the consequences that may arise in accordance with the legislation changes therewith.
Establishment of the Wealth Fund
With the enactment of the Law on the Establishment of the Turkish Wealth Fund Management and Amendments to be made in other Laws (“Law”), the Turkish Wealth Fund Management Joint Stock Corporation (“Wealth Fund”) was established in order to contribute to and improve capital markets, to bring the assets owned by the public sector in the country economically, to obtain external resources and to participate in strategic and large scale investments. The Law has entered into force on the date it was published in the Official Gazette on August 26, 2016.
The Wealth Fund, was not active until February 5th and many major corporations including the foregoing were transferred to the Wealth Fund with the enactment of a Decree Law numbered 2017/9756 and dated January 1, 2017 which was published in the Official Gazette on February 5, 2016 (“Decree in Force of Law”).
Transfer of the Assets to the Wealth Fund
On February 5, 2017, according to Article 2 of the Council of Ministers’ Decree, which is an the Annex to the Decree in Force of Law, shares of certain large publicly owned corporations, including, Ziraat Bank, Caykur, BOTAS, Istanbul Stock Exchange, PTT and total paid capital of such companies, which is 20 billion Dollars, have been transferred to the Wealth Fund.
It has further been stated that, any uncertainty that may arise on the application of the provision on the transfer of the shares of the corporations will be solved by the Prime Minister and he will have the authority to determine on the code of practice/implementation of the provision, when necessary.
According to Article 1 Council of Ministers’ Decree, certain real estates owned by the State Treasury have been transferred to the Wealth Fund. Those real estates, which previously belonged to the Treasury will no longer have their allocations and will be managed by the Treasury even after the Council of Ministers’ Decree for their transfer and registration transactions are finalized. Apart from those corporations, 3 billion Turkish Liras were transferred to the Wealth Fund from the Defense Industry Support Fund for a period of 3 months. Finally, with the public announcement made by the Chair of the Directorate of Privatization Administration dated February 6th, 2017; 49,12 % shares of Turkish Airlines, owned by to the Directorate of Privatization Administration; were transferred to the Wealth Fund.
It is expected by the analyzers that more assets will be included among the list to be transferred to the Wealth Fund in order to create additional resource for the country. Considering the assets on the current list, it is obvious that a serious cash flow is being accumulated. On the other hand, it is observed that the entire cash flow will not be used for new investments; but will be collected in a pool for the purpose of establishing significant resource for the future investments of the Republic of Turkey.
Legal Status of the Wealth Fund and its Unique Structure
Pursuant to the Law, the Wealth Fund is a joint stock corporation and its shares belong to the Directorate of Privatization Administration. Wealth Fund will be managed by the members of board of directors consisting of at least five people appointed by the Prime Minister, and will be managed under a three-year investment strategy plan to be proposed by. Although the assets included in the Wealth Fund are of state-owned nature i.e. such as shares of companies and banks on real estate or money; the legal status of Wealth Fund is not a "public enterprise". Because the Wealth Fund has the joint stock corporation legal entity status under the Turkish Commercial Code, it is subject to the private/civil law and not to the public law. Similarly, Wealth Fund is no longer subject to the legislation on the State Officials’ (Devlet Memurlari Mevzuati); or Public Tender (Kamu Ihale Mevzuati). This means that, unlike the public corporations, which are audited by the public institutions such as State Audit Court (Sayistay), Capital Markets’ (Sermaye Piyasasi) etc; the Wealth Fund is subject to private audit.
The Law provides that, the Wealth Fund will be subject to independent audit similar to any other private company. In addition to the audit of the independent auditors’, the Prime Minister will elect three independent experts with his sole discretion who will inspect/audit the Wealth Fund’s annual financial and activity reports as prepared by the independent auditors. Those three experts’ report will be submitted to the approval of the Council of Ministers’ every year until June at the latest. Finally, the financials and the activity reports of the Wealth Fund for the previous year will also be submitted to the Grand National Assembly of Turkey each year in October for auditing purposes.
Assets of Wealth Found can be Pledged
It is further provided under the Law that the assets transferred to the Wealth Fund, i.e. the assets owned by the Wealth Fund can be subject to pledge, unlike the shares of the Wealth Fund. Consequently, the assets transferred to the Wealth Fund by the Directorate of Privatization Administration are eligible to be pledged, encumbered, secured; unlike the actual shares of the Wealth Fund itself.
Exemptions provided especially for the Wealth Fund
While we have stated the legal status of the Wealth Fund as an entity which is subject to civil laws, it is difficult to state that Wealth Fund is an “independent and private company" in essence. Tax obligations such as stamp tax, corporate tax, insurance tax, which apply all private companies, will not be applicable for this fund.
The Wealth Fund is exempt from the income and corporate taxes; its transactions are exempt from stamp tax and insurance taxes. Unlike any other corporations, the Wealth Fund is also exempt from depositing security for any and all execution proceedings and court cases.
Comparison with other Funds and International Standards
Until the date the Wealth Fund was established, among the G20 Countries Turkey was the only country not having a wealth fund. After February 5, 2017, Turkey took its place among other G20 Countries, with an operating wealth fund. According to the Law, the aim of the establishment of the Wealth Fund is quite similar when compared to the ones in the aforesaid counties. On the other hand, however, since its establishment and status to become active are rather recent developments in Turkey, there are blank spaces in the operation of Wealth Fund yet to be filled. For instance, it is not clear where and/or in which specific areas the expenses will be directed, although the incomes of the wealth fund have already been listed.
Those kinds of concerns have been considered in other countries, which have been establishing wealth funds in the past, and as an outcome of all the uncertainties causing problems, international principles have been formed. Ultimately, 24 principles had been accepted as the international standards and guidelines for the wealth funds have been drafted by the International Working Group of the Sovereign Wealth Funds, including several major wealth funds with the joint efforts of the International Monetary Fund in 2008, called “Santiago Principles” . The main aims of the Santiago Principles are to form an international framework and maintain a global guideline for the operating and financing of the wealth funds, to provide transparency to the public and assure states that the objectives for the establishment of such funds are economic. The wealth funds from all over the world endorse the Santiago Principles on a voluntarily basis. It is presently a key question mark for the public in Turkey whether the Wealth Fund will endorse the Santiago Principles and be welcomed by the remaining international institutions seizing such principles.
When look over the history on the establishments of the major Sovereign Wealth Funds, we observe that they were established for the purpose of transferring the surplus of the public income to a certain pool and then deposit the same and use it, if and when necessary, for any public needs and thus provide long-term stability in the country economy, to preserve the country against possible crisis and invest with the aim of increasing the welfare of the next generations.
Norwegian Wealth Fund
Having said that, according to the rankings of the Sovereign Wealth Funds Institute, the funds are formed under certain fundamental consisting of some principles which constitute the basis of their rankings, such as seeking the ability in the funds to provide transparency, up-to-date independently audited reports, the origin of wealth, investment policies and ethical standards etc. The flag carrier Norwegian fund, the Government of Pension Fund Global, as being the first in the ranking , maintains an Ethical Council and strictly applies both generally accepted international principles and standards and also the ones formed within the country throughout the years.
Together with the aforementioned principles and samples, Turkey’s aim of establishing the Wealth Fund and its financial status are considered to be in contradiction with one another since it has been announced that the Turkish Wealth Fund was structured in order to provide financing to domestic market due to the budget deficits and the current accounts. On the other hand, however, the sources, the assets of which have been transferred, do not comprise of entities with surplus in their incomes.
Initial Activities of the Wealth Fund: Collaboration with Russia
On March 10, 2017, the Wealth Fund has entered into a Memorandum of Understanding (“MoU”) for a 50% partnership with the Russian Direct Investment Fund (“Russian Fund”) in order to establish the Russia-Turkey Investment Fund. According to the MoU, both the Wealth Fund and the Russian Fund will invest up to USD 500 million in the Russia-Turkey Investment Fund and the investment will be approximately USD 1 billion. The Russia-Turkey Investment Fund is expected to assist the major as well as the small and medium sized enterprises’ capitals in Turkey and in Russia once it is established. Mehmet Bostan, the Chairman and CEO of the Wealth Fund has stated that, such initiative of Russia-Turkey Fund has exited them due to being the first international affairs of the Wealth Fund and they believe that the Russia-Turkey Fund will be a long-lasting relationship between the two funds with the projects contributing to the prosperity of both of the countries.
Pros and Cons
Since the enactment of the Law and the establishment of the Wealth Fund to the initial transfers of publicity held assets took place on February 5, 2017, different assessments have been made by economists, politicians etc. discussing its positive and negative aspects.
The supporters of establishment of the Wealth Fund claim that the Wealth Fund will be a well-audited corporation, audited by independent auditors and its transactions will be reviewed through many well-trusted supervisors. Also, its aim will be bringing into practice and providing a prosperous future for the next generations of Turkey by building up large-scale projects.
The opponents, on the other hand, are in fact the ones who are deeply concerned about the Turkish economy in general. They are especially concerned about the structure of the Wealth Fund, and allege that the Wealth Fund may cause the economy to incur more debts and increase interests by transferring and collateralizing its wealth for the already existing debts, in an environment where there is a lack of surplus of governmental income whereas a big deficit have been alive for years.
Future of the Wealth Fund and the Assets Within
According to the news on the near future plans of the Wealth Fund, securitization seems to be on the pipeline for the assets owned by the Wealth Fund. It is the news that the assessment on the assets in the Wealth Fund will certainly be made and cherry picked assets will be securitized and offered both to local and international investors. It is also expected by the analysists that the international investors will mostly be from Islamic Financiers.
Another major news on the Wealth Fund is that certain of the companies the assets of which are transferred into Wealth Fund are expected to be re-structured and re-shaped managing body of the Wealth Fund with regards to their fields of activity. Such companies may be merged to constitute different, new corporations. Within the scope of the expected companies to be re-structured, TURKSAT A.S., BOTAS, ETI Maden, PTT are aligned.
From a legal point of view, such news is a substantial one for those corporations, which in any case conduct mutual works and have agreements therewith, since there might be a need to make revisions on their existing contracts, regarding the default and/or cross default provisions, entered into with those companies.
Wealth Fund has been established only a couple of months ago and coming into force is quite recent as well. The common wish of Turkish people is for the Wealth Fund to function in accordance with the purpose of its establishment as any other internationally recognized and succeeded funds.
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