CmaBoardReleases
Title: Press Release: Calculating the Minimum for Submitting the Request for Initiating the Procedures of Preventive Settlement, Restructuring or Declaring Bankruptcy
Kuwait, March 7, 2022 – The Capital Markets Authority (CMA) issued Resolution No. (35) of 2022 Regarding the Calculation of the Minimum Value for Submitting the Request of Initiating the Procedures of Preventive Settlement, Restructuring or Declaring Bankruptcy, in compliance with the requirements of Law No. (71) of 2020 Regarding the Issuance of the Bankruptcy Law and Resolution No. (81) of 2021 Regarding the Issuance of the Executive Bylaws of the aforementioned Law. The Resolution includes an equation of calculating the minimum value for submitting the request of initiating the procedures of preventive settlement, restructuring, or declaring bankruptcy provided that such equation shall achieve a balance between the interest of both the creditor and debtor in regards with submitting the request for initiating the procedures of preventive settlement, restructuring, or declaring bankruptcy. The elements of this equation consist of a risk factor based on the nature of the licenses and the securities activities of the licensed person as well as a factor based on the capital of the licensed persons.
Legal basis:
Law No. (71) of 2020 Regarding the Issuance of the Bankruptcy Law and Resolution No. (81) of 2021 Regarding the Issuance of the Executive Bylaws of the aforementioned Law were issued with the aim of regulating the procedures of preventive settlement, restructuring, and declaring bankruptcy for the Kuwaiti companies. The Law has included provisions related to the role of regulators in such procedures, one of which is the CMA, specifically in Article (2) of Law No. (71) of 2020, which specified that its provisions apply to collective investment schemes by way of an example, and permitted the CMA to set out regulations for the procedures of preventive settlement, restructuring, and declaring bankruptcy for securities exchanges and clearing agencies in a form contrary to what was stipulated in the Law and pursuant to the nature of such entities. Article (3) of Law No. (71) of 2020 states that it is not permitted to submit a request for initiating preventive settlement, restructure, or declaring bankruptcy regarding an outstanding debt to Boursa Kuwait, the clearing agency, collective investment schemes with legal personality, or the companies regulated by the CMA until 10 business days has passed from the date of notifying the CMA.
In regard to the Executive Bylaws of Law No. (71) of 2020, each of Articles (3), (4), and (5) assigned to the CMA the function of determining the minimum value of debt that a debtor had stopped or is expected to stop paying to submit a request for initiating the procedures of preventive settlement, restructure, or declaring bankruptcy for the exchanges, clearing agencies, and persons licensed by the CMA. Furthermore, Law No. (71) of 2020 and its Executive Bylaws included several articles related to CMA’s role in the preventive settlement, restructuring, and declaring bankruptcy procedures for the Kuwaiti companies.
Basis of forming the equation:
The aim of setting out an equation to calculate the minimum value for submitting a request of initiating the procedures of bankruptcy and restructure is to determine the optimal value of enabling each of the CMA as a regulator, the creditors, or the licensed persons -as debtors- to submit the request of initiating the procedures of preventive settlement, restructuring, and declaring bankruptcy for any of the companies that practice an activity licensed by the CMA regarding an outstanding debt. The equation specifically addresses the minimum value required in relation to the level of the risks related to the company’s activities, specifically on the financial markets and the persons dealing in them. In addition to the size of company in terms of the value of the paid-up capital or the value specified pursuant to the minimum capital requirements of licensed persons as stipulated in Module Five of the Executive Bylaws of Law No. (7) of 2010 Regarding the Establishment of the Capital Markets Authority and Regulating Securities Activities and their amendments (minimum capital) for each company separately, due to the difference of these factors based on the nature of the activities practiced by each company. Therefore, it is not feasible to determine a uniform fixed value or percentage to establish the minimum value for submitting the request of initiating the preventive settlement procedures, restructuring, and declaring bankruptcy for all licensed persons in a general manner or for each activity separately.
One of the major factors of this equation is the risk factor that is based on a number of points that increases with the rise of the risks reflected on the capital markets and the persons dealing in them in the event of the licensed person’s bankruptcy, leading to the risk based classification based on the total number of points designated to each license granted by the CMA (Table (1)). This factor will be used as part of the equation for calculating the minimum value for submitting the request of initiating the procedures of preventive settlement, restructuring, or declaring bankruptcy, the aforementioned factor will be multiplied by either 5% of the value of the paid-up capital or by 20% of the value of the minimum capital of the company according to the activities it practices as stipulated in Module Five of the CMA’s Executive Bylaws.
In preparing the methodology for calculating the minimum value for submitting the request of initiating the procedures of bankruptcy and restructuring, it was taken into account that the central institutions of the financial system (securities exchanges and clearing agencies) -based on the nature of their activities- carry a level of risk that exceeds that of other licensed in the event of default due to their systemic importance, thus, an alternative risk based methodology was built around these assumptions.
Accordingly, the risk factor for licensed persons was built based on the following elements:
- The nature of the licensed person’s activity and their role in the capital markets system.
- The degree in which the licensed person deals with the clients’ funds and assets.
- The operational risks and burdens resulting from the capital markets system or any of the participants in this system as a result of the licensed person’s inability to practice their activity in the required manner.
The Methodology:
First: the equation for calculating the minimum value for submitting the request of initiating the preventive settlement procedures, restructuring, or declaring bankruptcy of licensed persons (except the securities exchanges and clearing agencies):
The risk factor according to the licensed person’s licenses and activities multiplied by the capital factor for licensed persons(20% of the minimum capital or 5% of the paid-up capital whichever is higher)
The equation is dependent on two major factors to reach the previously mentioned amount, as explained below:
- The risk factor according to the licensed person’s licenses and activities:
The risk factor is derived according to the total accumulated points based on the degree of the risks related to the licensed person’s activity(s), the company’s status from a regulatory point of view, the degree in which the entity deals with its clients’ funds and assets, and the systemic importance of the entity to the investment and financial system. The degree of the risks related to some licensed activities varies according to the nature of the activity and the extent to which the clients’ funds and assets are dealt with, and based on capital market developments, after studying the data of the licensed persons by the CMA.
The degree of the risks and the points allocated to each activity were also determined after studying the nature of the securities activities’ licenses and their necessary supervision in the CMA’s Executive Bylaws, and were classified based on the risks involved in the event they were exposed to bankruptcy.
Table (1) – Allocation of the Risk Factor Points for Licensed Persons:
Allocation of the Risk Factor Points for Licensed Persons |
||||||
Activity |
Broker Registered in the Exchange |
Market Maker |
Broker Not-Registered in the Exchange |
Investment Advisor |
Investment Portfolio Manager |
Collective Investment Scheme Manager |
Points |
61 |
12 |
6 |
3 |
12 |
12 |
Activity |
Custodian |
Investment Controller |
Subscription Agent |
Assets Valuation |
Listed in a securities exchange that is licensed by the CMA |
|
Points |
6 |
3 |
6 |
3 |
3 |
To view the list of companies licensed by the CMA and their activities, kindly click on the following link:
https://cma.gov.kw/ar/web/cma/licensed-companies
The number of the points indicated in Table (1), or the sum of the related points indicated in the table in the event that the company practices more than one activity, may be used to classify the licensed persons into four categories in accordance with the following:
Table (2) – Distributing the points of the risk factor according to the classification points of the licensed person:
The classification points of the licensed persons according to their risks’ degree |
|||
From (point) |
To (point) |
Risks degree |
The risk factor according to the classification |
1 |
15 |
Low |
1 |
16 |
30 |
Moderate |
1.25 |
31 |
60 |
High |
1.5 |
61 |
And more |
Very high |
2 |
- The capital factor of licensed persons:
The higher value of the capital employed is applied in the equation after multiplying both by a fixed percentage as follows:
- Minimum capital: the minimum capital of licensed persons by the CMA according to the highest value established for the securities activities practiced by the company pursuant to the minimum capital requirements of licensed persons stipulated in Module Five of the CMA’s Executive Bylaws for each company separately. The fixed percentage is set at 20% for this criterion.
- Paid-up capital: the value of the paid-up capital is applied in accordance with the latest audited periodic financial statements or annual audited financial statements, or upon the occurrence of any change to them. The fixed percentage is set at 5% for this criterion.
The equation for calculating the minimum value for submitting the request of initiating the procedures of preventive settlement, restructuring, or declaring bankruptcy of the licensed persons (except securities exchanges and clearing agencies):
The risk factor according to the licensed person’s licenses and activities multiplied by the capital factor (20% of the minimum capital or 5% of the paid-up capital 5% whichever is higher)
A hypothetical example of the equation for calculating the minimum value for submitting the request of initiating the procedures of preventive settlement, restructuring, or declaring bankruptcy of the licensed persons (except the securities exchanges and clearing agencies) is shown below:
Details of the hypothetical company are as follows:
- Paid-up capital: 15 million KWD.
- Granted licenses: Investment Controller – Subscription Agent – Investment Portfolio Manager.
- Listing status: the company is listed in an exchange licensed by the CMA.
- Minimum capital in accordance with the minimum capital requirements of licensed persons stipulated in Module Five of the CMA’s Executive Bylaws: 5 million KWD.
Method of Calculation |
|||
Capital standard |
|||
5% of the paid-up capital |
15 million KWD X 5% = |
750 thousand KWD |
|
20 % of the minimum capital as stipulated in Module Five of the Executive Bylaws |
5 million KWD X 20% = |
1 million KWD |
|
The risk factor based on the company’s licenses and activities |
|||
Points according the type of activity |
Investment Controller |
3 points |
Total: 24 points |
Subscription Agent |
6 points |
||
Investment Portfolio Manager |
12 points |
||
Listed company |
3 points |
||
The risk factor based on the company’s licenses and activities |
= |
1.25 |
|
The minimum value for the request of initiating bankruptcy procedures |
|||
1 million KWD X 1.25 = |
1.25 million KWD |
Second: the equation for calculating the minimum value for submitting the request for initiating the procedures of preventive settlement, restructuring, or declaring bankruptcy of licensed securities exchanges and clearing agencies:
Due to the importance that securities exchanges and the clearing agencies maintain as central institutions upon which the financial system relies, and the potential disruption to the workflow in any of them may lead to instability in the financial market system, which may result in the occurrence of systemic failures that could affect the capital markets. In the event that the exchange was exposed to any financial disruption that may lead to initiating any of the procedures of preventative settlement, restructuring, or declaring bankruptcy, the financial market system in the State of Kuwait may be exposed to the risk of suspending all the transactions of securities activities, which would expose all market participants and dealers in securities activities to the risks related to suspending their activities or inability to liquidate their assets and investments in the financial market.
Furthermore, clearing agencies are considered to be highly important entities in the financial market system, whereby the procedures of preventative settlement, restructuring, or declaring bankruptcy and that their liquidation may pose risks related to the procedures taken and may pose risks related to financial market infrastructures such as the clearing house and the central securities depository, which exposes these entities to operational risks and financial risks that may cause major market failures.
Accordingly, the minimum value for submitting the request of initiating the preventive settlement, restructuring, or declaring bankruptcy for each of the securities exchange and the clearing agency was determined differently than the rest of the licensed persons, according to the following:
The equation for calculating the minimum value for submitting the request of initiating the preventive settlement, restructuring, or declaring bankruptcy of licensed securities exchanges and clearing agencies:
Value of the paid-up capital multiplied by a fixed percentage
- Value of the paid-up capital: value of the paid-up capital pursuant to the latest reviewed periodic financial statements, audited annual financial statements, or upon the occurrence of any change to them.
- Fixed percentage: a fixed percentage that is equal to 50%.
A hypothetical example of the equation for calculating the minimum value for submitting the request of initiating the preventive settlement, restructuring, or declaring bankruptcy of securities exchanges and clearing agencies:
Details of the hypothetical company are as follows:
- Granted license: securities exchange.
- Paid-up capital: 40 million KWD.
- Fixed percentage: 50%.
The minimum value for submitting the request of initiating the preventive settlement, restructuring, or declaring bankruptcy of the securities exchange:
40 million KWD X 50% = 20 Million KWD.
Disclaimer:
The Capital Markets Authority disclaims its responsibility for any legal consequences that may occur as a result of any errors in the calculation of the minimum debt value of a debtor that had stopped or is expected to stop paying to submit a request for initiating the preventive settlement, restructuring, or declaring bankruptcy based on Law No. (71) of 2020 Regarding the Issuance of Bankruptcy Law and Resolution No. (81) of 2021 Regarding the Issuance of the Executive Bylaws of the aforementioned Law. In addition, it is noted that when calculating the minimum debt value, it is necessary to ascertain the risk factor of each license of the licensed person’s licenses considering they are variable elements, the paid-up capital according to the latest reviewed periodic or audited annual financial statements or upon the occurrence of any change to them, and the minimum capital requirements pursuant to Module Five “Securities Activities and Registered Persons” of the Executive Bylaws of Law No. (7) of 2010 Regarding the Establishment of the Capital Market Authority and Regulating Securities Activities and their amendments.
Ends-
Notes to Editors:
The Capital Markets Authority was established pursuant to Law No. 7/2010, approved by the Kuwaiti Parliament in February 2010. Pursuant to the Law, the CMA shall regulate and supervise the securities activities, achieve transparency and fairness, observe listed companies’ execution of Corporate Governance regulations, and protect investors from unfair practices which violate the CMA's Law.
Furthermore, the Law's provisions stipulate the supervision of mergers, acquisitions, and disclosure operations. The CMA also aims to provide awareness programs related to securities activities.
For further information, please contact:
Public Relations & Media Office
Tel: 22903062
Fax: 22903505
Email: pr-media@cma.gov.kw