Bonds in the Capital Market and Bond Issuance in Publicly Held Joint Stock Companies

ABSTRACT

Recent developments in global and local financial markets have led to significant changes in the methods companies use to meet their financing needs. In this context, bond issuance has gained prominence as a significant tool in corporate financing strategies and has garnered attention in capital markets. Bonds are debt instruments that companies issue with a commitment to repay the bondholders at a specified maturity date. Bond issuance is subject to specific procedures and conditions, and issuance limits are determined based on various parameters. The procedures to be followed and the application documents required for bond issuance by publicly held joint-stock companies (“PJSC”) vary depending on the issuance method/type. This study examines the legal nature of bonds, the issuance of bonds by PJSCs to meet their financing needs, and the procedures to be followed under capital markets law.

Keywords: Bond, Issuance, Capital Market, Debt Instrument, Publicly-Held Joint Stock Company, Capital Markets Board, Initial Public Offering

I. INTRODUCTION

The use of capital market instruments by companies to address their financing needs has become a common practice today. These instruments allow companies to obtain external funding when their internal resources are insufficient[1].

Capital market regulations permit companies to secure financing through various instruments, including debt securities, derivatives, warrants, investment certificates, and other securities. Bonds are a key security employed by companies to meet financing needs through debt financing[2].

II. THE CONCEPT OF BONDS AND THEIR LEGAL NATURE

Under the abrogated Turkish Commercial Code numbered 6762[3], bonds were defined as “debt instruments issued by joint stock companies with equal nominal values the same wording in order to borrow money.”[4] Under the Turkish Commercial Code numbered 6102[5] (“TCC”), bonds are regulated under Article 504, but no explicit definition is provided. Instead, it is stated that bonds are debt instruments[6].

Publications of the Capital Markets Board (“CMB”) define bonds as debt instruments issued by governmental entities or private sector companies to raise medium- and long-term funds through borrowing[7]. The CMB’s Communiqué on Debt Securities (VII-128.8)[8] (“Communiqué”) defines bonds as “a debt instrument with a maturity of 365 days or more, issued and sold by issuers acting as debtors in accordance with the provisions of this Communiqué, containing a commitment to repay its nominal value to the investor on the maturity date or in installments until the maturity date.”[9] Based on these definitions, a bond is a capital market instrument with a maturity of at least one year, issued by joint-stock companies to meet their funding needs through methods other than traditional borrowing, such as capital increases or bank loans[10].

III. BOND ISSUANCE BY PJSCS

Bond issuance by PJSCs is subject to the provisions of the Communiqué. Article 4 of the Communiqué sets forth the regulations regarding the issuance of debt instruments. Accordingly, bonds can be issued through three methods: public offerings within the domestic market, private placements within the domestic market, and offerings for sale abroad. Private placements within the domestic market can be conducted in two ways: sales to qualified investors and allocated sales, provided that the nominal value per unit is at least TRY 100,000^[11]. The Communiqué provides detailed regulations on the procedures and principles of bond issuance.

A. Decision of the Authorized Body

PJSC intending to issue bonds must adopt an issuance decision through its authorized body as specified in its articles of association. This decision must specify key details such as the type of bonds to be issued and the maximum issuance amount. Unless otherwise stipulated in the articles of association, the issuance decision is made by the general assembly. However, under the provisions^[12] of the Communiqué and the Capital Markets Law numbered 6362^[13] (“CML”), the authority to issue bonds can be delegated to the board of directors through the articles of association^[14]. Although the TCC permits the general assembly to delegate the authority to issue securities to the board of directors for a maximum period of fifteen months^[15], we believe this provision of the TCC is inapplicable to PJSCs due to their subjection to the CML and the presence of specific provisions within the CML and the Communiqué.

If the authorized body is the general assembly, and unless a stricter quorum is stipulated in the PJSC’s articles of association, the relevant provisions of the TCC regarding meeting and decision quorums will apply^[16]. Accordingly, the meeting quorum requires the attendance of shareholders or their representatives holding at least one-quarter of the PJSC’s capital. The decision quorum is a simple majority of the votes present at the meeting^[17].

B. Application to the CMB and Required Documents

An application must be submitted to the CMB within one year of the date of the authorized body’s decision on bond issuance, made in accordance with the provisions of the Communiqué^[18].

The documents to be submitted to the CMB during the application process vary depending on the issuance method. For bonds to be issued through public offering within the domestic market, the documents listed in Annex-1 of the Communiqué must be submitted, whereas for bonds to be issued through private placement or for issuance abroad, the documents specified in Annex-2 must be provided^[19].

Article 4 of the CML requires the preparation and CMB approval of a prospectus for the public offering or listing of capital market instruments on a stock exchange^[20]. Therefore, a prospectus must also be prepared for bonds to be issued through public offering. For private placements, an issuance document must be prepared.

In bond issuances conducted through public offering, PJSCs must apply to the CMB at least five business days prior to the designated sale date for each tranche during the validity period of the prospectus to obtain approval. For private placements, after obtaining the CMB-approved issuance document, PJSCs may proceed with the sales process within the issuance ceiling by applying to the Central Securities Depository (“CSD”) prior to the sale of each tranche^[21].

C. Dematerialized Issuance of Bonds and Notification to the CSD

Bonds must be issued in dematerialized form. Bonds issued within the domestic market must be reported to the CSD to enable the tracking of rights. For bonds issued abroad, issuance details must also be communicated to the CSD within three business days of the issuance^[22].

IV. LIMITATIONS ON BOND ISSUANCE

Article 9 of the Communiqué governs the issuance limits for debt instruments. As bonds are debt instruments, their issuance must comply with these limits. This limit is calculated based on the date of application to the CMB for the approval of the prospectus or issuance document.

This limit is calculated based on financial statements prepared in accordance with the CMB’s regulations on financial reporting for listed companies. Accordingly, the financial statements used to determine the issuance limit depend on the application date, as follows:

i) For applications submitted between January 1 and March 15: the financial statements for the previous year or, if unavailable, the semi-annual financial statements for the prior year.

ii) For applications submitted between March 16 and August 15: the financial statement for the previous year.

iii) For applications submitted between August 16 and December 31: the interim semi-annual financial statements for the current year^[23].

The issuance limit, determined based on the above-mentioned financial statements, may not exceed five times the equity of PJSCs^[24].

V. CONCLUSION

Bonds, which are distinguished from other debt instruments by their nature as securities, are capital market instruments issued by companies to address specific financing needs through external funding, with a maturity of at least one year. While both the TCC and the CML include provisions on bonds and bond issuance, the Communiqué provides more detailed and specific regulations. PJSCs intending to issue bonds must comply with the provisions of the Communiqué and conduct the issuance process in accordance with the stipulated conditions.

Therefore, the decision regarding bond issuance must be made by the authorized body in accordance with the company’s articles of association, and an application must be submitted to the CMB. The issuance method (public offering or private placement) is crucial for the CMB application and the preparation of the required documents. The relevant documents listed in the annexes of the Communiqué, depending on the chosen issuance method, must be included in the application file.

The Communiqué establishes certain limits for bond issuance, which are calculated based on the financial statements required for the period in which the company applies for issuance. For PJSCs, this limit may not exceed five times their equity.

 REFERENCES

1. Dr. Volkan Çelen, Prof. Dr. Hüseyin Hatemi'ye 80. Yıl Armağanı, Borçlanma Araçlarının Değişimi, On İki Levha, 2018

2. Doç. Dr. Koray Demir, Özel Esas Sözleşme Değişiklikleri: Şarta Bağlı Sermaye Artırımı ve Esas Sermayenin Azaltılması, On İki Levha, 2020

3. Nihan Zeynep Aksan, Paya Dönüştürülebilir Tahviller, 2018

4. Prof. Dr. Burak Adıgüzel, Sermaye Piyasası Hukuku, Adalet, 2022

5. Capital Markets Board, Capital Market Instruments Booklet, 2024