COMMON FUND

In recent years, so-called joint-stock or share investment funds (SIF & PIF) have become increasingly popular in many countries of the world, in particular, in emerging markets. These forms of collective investment provide an alternative opportunity for increasing savings without using traditional bank deposits. There has been a legislative possibility for creating such funds in our country for more than 10 years, and recently, the Milli Maclis (parliament) passed an amended draft law "On investment funds".

SIF & PIF

In recent years, various types of investment funds have become a rather popular tool among private investors all over the world, and not only among those who have been monitoring stock markets for a long time and are well-informed about the activities of share funds, but even among the rapidly growing number of average well-off citizens. This is mainly connected with changes on the world financial market - the decrease in interest rates for bank deposits, the absence of positive dynamics on the real estate market and the instability of the exchange rates of key world currencies. These and other factors that fuelled the global economic crisis make owners of savings more and more susceptible to information about new ways of preserving and increasing their money.

Various types of SIF and PIF funds abroad have played a key role in the accumulation of isolated private capitals and their subsequent investment in priority directions of the economy. These forms have developed to the greatest extent in offshore zones where investment funds are exempted from the profit tax and the capital tax and in some cases, from an increase in the value of asserts. Under the lowest rate, taxes are also imposed on the net asserts of investment funds.

What does a share investment fund, for example PIF, represent? As a matter of fact, it is a way of amalgamating the funds of numerous investors and handing them over to a managing company for trust management. In turn, the PIF invests clients' asserts in securities on stock markets and other financial tools, and subsequently, operates the entrusted capitals which can be invested in assets optimized in terms profitability and reliability.

As a rule, having invested finances in an investment fund, its clients become co-owners of the common portfolio of investments in a concrete fund. The cost of net assets of the fund is regularly estimated, and thus, the current price of one share is defined. Then in a certain time interval, the profit from these operations is distributed among clients according to their shares.

According to world experience, PIFs are divided into three categories. Open - they are obliged to redeem and sell shares every working day and keep their assets only in highly liquid asset forms, for example, in state securities. Interval PIFs - these purchase and sell shares in a period of time stipulated by the fund, but no more than once a year.

And finally, closed-type investment funds - these sell shares during the formation of the fund and, as a rule, do not redeem them before the end of the work of the given structure. However, unlike bank deposits, the main feature of all types of PIFs is the absence of fixed interest rates for profitability. That is to say owners of shares in such an investment fund can receive up to 60-80 per cent a year in profit, or, on the contrary, end up in the red in the event of adverse market conditions.

Similar activities in the sphere of investment are also carried out by other types of funds - specialized (joint-stock) investment funds (SIF).

The distinctive feature of these structures is more rigid legislative regulation of their activity; in particular, they are obliged to form their assets based on the principle of diversification of investment risks. As a rule, SIF funds are not intended for investment from retail investors - their clients are legal entities, so-called well-informed investors.

New life for the old law

It is remarkable that back in 1999, a legal basis for the development of investment funds was created in our country. However, over the past decade, with rare exceptions (for example, the short-lived Sigma voucher investment fund), no appreciable number of such structures was created in the country.

The reasons for the inactivity of Azerbaijan businessmen in this field were connected with the very rigid approach of the first national legislation to the work of funds. The liberalization of the activities of investment funds was required practically in all fields - both in the organizational-legal form, and in the portfolio structure, the number of participants and investment possibilities.

"Moreover, the law on investment funds adopted in 1999 did not meet the current requirements: over the past period, the volume of operations with securities, and also the activity of Azerbaijan's stock market have increased considerably, and therefore, there has appeared a requirement for new legal frameworks that take modern realities into account," says the head of the parliamentary standing committee on economic policy, MP Ziyad Samadzada.

The third reading of the bill "On investment funds" was drawn up by the State Committee for Securities (SCS) and adopted on 22 October this year during the last session of the third Milli Maclis.

Thus, the new law has defined principles, rules, and norms of organizing, managing and abolishing investment funds in our country, and also legal and economic basis for state regulation and control over the activities of these structures. While drafting the bill, the experience of over 30 states was taken into account with all the upheavals that occurred on the global financial market, as well as recommendations from the European Commission.

In particular, the law on investment funds says that while setting up a SIF, the presence of at least three founders - legal and/or physical entities - is necessary. They cannot be engaged in other activity, create branches, issue other securities except their own shares, borrow loans that exceed 10 per cent of their assets and last longer than three months.

When creating a PIF, the minimum requirement for the size of its net asserts is defined by the supervising body, and moreover, one person cannot own more than 50 per cent of the shares in such a structure. The activity of the funds is licensed, and foreign investment funds or their representative offices can operate only with the permission of the supervising body. The document also takes into account the activity of the offshore funds in the territory of the country, in particular, with the aim of excluding infringements of the counteraction regime against money-laundering and terrorism financing.

The new version of the law has introduced a number of innovations to the activities of investment funds. For example, under the law operating until recently, investment funds in our country could be established only in the form of joint-stock companies. And the new law allows them to be established in the form of share funds. The law has also defined more optimum and exact procedures of licensing.

It will pass in two stages: in the first stage, potential founders of an investment fund will appeal to the SCS to obtain permission for creating a fund. The term for the consideration of this appeal is 60 days. In the second stage, after state registration, the investment fund, as a legal entity, should ask the SCS for a direct licence within a month.

As a whole, the law provides for maximum liberalization of the operating mechanism in the sphere of investment funds, which will make it possible to expand proposals and the volume of operations on the securities market, and also stimulate the appearance of new tools and more comprehensible conditions for potential investors.

By the way, for the time being, after the endorsement of the new law, potential investors' interest in setting up various investment funds has considerably increased in Azerbaijan. "The SCS has begun exploratory talks with a number of investors interested in establishing the first investment funds in our country. Although no official applications have been received yet, certain projects have already been outlined. And not only local investors, but also certain foreign companies are showing a greater interest in establishing investment funds," the SCS chairman Rufat Aslanli recently said.

The presence of an up-to-date legislative basis is certainly a big plus for the development of new tools in the country. However, wide-ranging activities are necessary to attract foreign investment funds, and moreover, the main thing is to ensure that wider business circles in our country get used to rather unusual forms for investment.