LEGAL VIEWPOINT: Issuance & Listing of Bonds – By Dr AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

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Dr AbdelGadir Warsama Ghalib, Legal Counsel

Government institutions or big companies, including central or commercial banks and investment houses, normally issue bonds with the aim of collecting money from third parties as a “debt” for certain specified time. This type of a debt, normally takes the form of a bond as an undertaking, to be repaid in due course with the accrued interest and related fees.

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Almost in all cases the issuers of bonds look positively for, and they are certainly interested in, many investors to come-in. The potential investors could be certain entities, private individuals, banks or institutional investors.

Generally speaking, the bonds that are intended to reach a large number of potential investors should be listed in certain stock exchange (s). The listing of such bonds makes them known to the public at large who are supposed to start the investment process, according to the concerned regulations in the stock market.

According to the concerned laws in many Gulf Arab countries such as Bahrain, Abu Dhabi, Dubai, and Qatar …. The Securities Markets  in each of these countries  is authorized to list bonds according to the regulations and procedures issued by the Regulatory Commission \ Board of the market.

At the international level if we take Eurobond issues, for example, the most common famous stock exchanges for their listing are London Bourse \ Stock Exchange and Luxembourg Stock Exchange. Other Stock Exchanges could include Singapore, Frankfurt and Zurich…, the list is long..

The choice of each one of these Stock Exchanges \ Bourses, of course, depends on the type of potential investors targeted by the issuers and the required or best available market for that depending on the rules and regularities governing that market.

It is important to mention that the New York Stock Exchange is not available nor appropriate, in most cases, for Eurobond issues because the requirements issued by the Securities Exchange Commission (SEC) make the listing of the Eurobonds impracticable . This shows that each Stock Exchange is having its own regulations and procedures for listing bonds therein… Matter of policy, that differs from place to another.

A valid question may arise here, why bonds are to be listed in stock exchanges?  To begin with we could say that there are many advantages for listing bonds. The primary main objective of listing bonds is access to potential investors. Listing of bonds helps to enlarge the number of investors to whom the concerned bonds can be sold. Moreover, many institutional investors such as banks, insurance companies, pension funds, public corporations are required by their by-laws (memorandum of association or others) not to invest in unlisted securities. The aim of this prohibition is to protect these institutions from investing in unknown securities. From this point it appears that listing of bonds improves their marketability to a great extent, because it brings the existence of the bonds to the attention of many potential investors.

Another advantage to the benefit of investors comes from the fact that the stock exchange quotes, after or at the time of listing, the current price of the bonds based on the prices at which the securities have changed hands so that potential investors benefit from a reasonably objective assessment of the current price of the security \ bond..

We cannot rule out completely the existence of certain disadvantages to the listing of bonds. In fact, there are some disadvantages with reference to the issuer of the bond. This disadvantage could include the fact that the issuer must comply with the stock exchange disclosure requirement or other similar requirements.

The issuer, also, must enter into a listing undertaking or its equivalent with the stock exchange whereby the issuer, among other things, commits himself to produce continuing information and to notify certain events which my lead to false market in the securities e.g. adverse events which are not within public knowledge or public information and which may significantly affect the issuer’s ability to meet his obligations.

A stock exchange’s listing requirements may change during the currency of the bonds \ securities and accordingly impose more onerous disclosure obligations.  The issuer, also, may be limited by the terms of the subscription agreement from de-listing or listing elsewhere. Listing, in certain cases, may impede a rapid issue to take advantage of a “window” in the market. This is because the stock exchange authorities, in most cases, may require certain listing particulars to be submitted, to the concerned dept. or staff, in advance so as to be checked by them before listing and trading.

It is important, at this juncture, to explain the contents and forms of bonds, is it the same everywhere or there are different types of forms or contents.

As mentioned above Governments or big companies particularly commercial banks, investment companies or insurance companies, normally issue bonds. However, according to the commercial company’s law and the securities market law in the countries listed above all big companies are eligible to issue bonds whenever they deem appropriate or necessary according to their financial and investment policies.

Each bond shall include certain details and terms that are commonly found in international bonds. To begin with, the face of each bond shall clearly explain that the issuer of the bond, for value received, promises to pay to the bearer the amount of the bond. Also, the issuer undertakes to pay the interest at the prescribed rate in accordance with the detailed terms and conditions on the back of the bond. All potential investors should read these terms and conditions of each bond very carefully before starting any business related to the bond.

Bonds, generally speaking, state that they are issued subject to and with the benefit of the specified fiscal agency agreement that is available for inspection at any of the paying agents’ places. In some cases there is a need to issue a formal trust deed when the issuer is a company. It is also stated, in the terms, that the bondholders and coupon holders are bound by and deemed to have notice of their terms.

Based on above, bonds could be registered in securities markets for trading purposes subject to certain provisions & conditions applicable therein. It would always be better for investors to have full info before closing the deal.