State property privatization terms and rules in Kazakhstan

Artyushenko Andrey
Managing Partner
21 January 2016 Corporate lawInvestments

State property privatization terms and rules in Kazakhstan

State of the Nation of the Republic of Kazakhstan Nursultan Nazarbayev to the people of Kazakhstan from November 30, 2015 says that "it is important to free up internal resources today as much as possible to ensure stable economic growth. For this purpose we must use two effective tools: large-scale privatization and expansion of the competition."

Privatization is the sale of state property to individuals, non-governmental entities in the framework of special procedures, according to the Article 1.6 of the Law "On State Property".

The first wave of privatization carried out by the government in the early 90s with the aim to create the foundations of a market economy.

Privatization in these days has been held in order to simplify the foundations of a market economy and the basic idea of this program is giving impulse to further development of private business in the country.

Below the most significant regulatory acts governing the privatization process:

  • The Civil Code of the Republic of Kazakhstan (General part) from July 1, 1999 №409-I (last amended on 27.04.2015);
  • Law of the Republic of Kazakhstan "On limited and additional liability partnership", April 22, 1998 № 220;
  • Law of the Republic of Kazakhstan "On Joint Stock Companies" dated May 13, 2003 № 415;
  • Law of the Republic of Kazakhstan "On State Property" dated March 1, 2011 № 413-IV;
  • Law of the Republic of Kazakhstan "On state purchases", dated December 4, 2015 № 434-V ЗРК;
  • Government Decision from 09.08.2011, №920 «On approval of the Rules of the sale of privatization targets";
  • Unified Rules disposal of assets and facilities JSC "National Welfare Fund" Samruk-Kazyna " and organizations, more than 50 percent of voting shares (share ownership) which directly or indirectly belong to JSC" Samruk-Kazyna "on the right of property or confidential management, approved by decision the Board of Directors of "Samruk-Kazyna" on May 28, 2014 №110 (hereinafter - the " Unified Rules ");.
  • Law of the Republic of Kazakhstan "On National Welfare Fund" dated February 1, 2012 № 550-IV.

It is interesting to note that, Law «On National Welfare Fund " amended and enter into effect on January 1, 2016, with the exception of the second block of Article 1.4.1; Article 1.4.5; Article 1.4.10, which entered into force on January 2, 2016. Most of the changes have affected the implementation of the Comprehensive Plan of privatization and withdrawal of the Fund's assets to a competitive environment.

Thereafter, the President instructed to develop a separate law on the antimonopoly authority with clear regulation of its status and the order of work, revise some provisions of the Law "On State Property" and the Civil Code, in order to reduce the number of strategic facilities, which are not subject to privatization.

Below are definitions of the terms given in the Unified Rules, which are used hereinafter in this publication.

The Asset is real or personal property (owned by the Company), including buildings, structures, equipment and other property, including intellectual property, as well as shares and interests of legal entities, on the balance of the Company.

The object is real or personal property (owned by the Company), that is subject to the property rights of the Company.

Auction is a method of tender that the Asset or Object is submitted for public release on the basis of the principle of competition, where the winner is the person who offered the highest price for the alienable Object or Assets.

Member is an individual or non-state entity, statutorily registered for participation in the Tender, according to the form in which a bidding process is conducted.

Financial advisor is a person engaged by the seller in the competition by the two-stage procedure for the provision of consulting services for the preparation of pre-privatization objects and sells them. Register of applications is registry, formed on paper or electronic medium, which contains information about the acceptance of the application for participation in the tender.

Current price is the price of an Asset or Object, which formed during the Auction, Electronic auctions or the starting price, if the change has not yet been suggested.

The seller (the person conducting the alienation of property) is the authorized body on state property or local government agency.

The realization of Assets and the Objects is held in the following ways: auction, competitive tender, direct address exclusion.

1. The auction (as well as electronic auction) is used when the only requirement is a sell price, and in other reasons by decision of the seller.

Start, first, and the minimum price is determined by the seller of the object of privatization. Participants can make any number of the guarantee fee, wherein one guarantee fee give the right to buy the object of privatization for tender participation where party made the guarantee fee, in accordance with Article 36-1.2 of Government Decision from 09.08.2011, №920 «On approval of the Rules of the sale of privatization targets"

Auction results of each sold object of privatization are formalized by electronic protocol on the results of the auction, which should be signed on website register by the seller and the winner using the electronic signature in the trading day.

If considering all timely submitted applications to participate in the Auction, for the auction were admitted at least 2 persons, Auction considered invalid. Participant status should be confirmed by the ticket. During the Auction process right to increase the current price or agreement to acquire the Assets or the Object at the current price on behalf of the Participant has only the person who received a plaque from the auction and have number specified in the log auction participants, according to the Article 206 of Unified Rules.

The auction may be held by one of two methods. According to the Unified Rules, first two auctions conducted in the English method (increase), the third auction - on the Dutch method (reduce).

English auction is the type of auction, where starting price increases on the basis of the pre-announced scoring rule.
Dutch auction is a type of auction in which the auctioneer begins with a high asking which is lowered until some participant is willing to accept the auctioneer's price, or a predetermined reserve price, according to the Article 1.20, 1.21 of Government Decision from 09.08.2011, №920 «On approval of the Rules of the sale of privatization targets"

2. Competitive tender:

  • If implemented Asset or Object is a holder of natural monopoly;
  • There is a need to assess the qualifications and experience of potential customers of Assets or Objects according to the criteria in Article 106 of the Unified Rules;
  • In other cases, by decision of the Seller.

The realization of Assets and the Object:

  • open tendering procedure;
  • electronic tender;
  • Open two-stage competition 1) 1st stage: prequalification of participants, 2nd stage: negotiations with the parties and the choice of the best offer.

Open two-stage competition is held in the following cases: the additional requirements to the purchasers of the Assets or Objects due to the legislation on the national security of the Republic of Kazakhstan, as well as additional requirements for the purchasers of the Assets or Objects caused by the disposal of strategic objects.

Two-stage competition includes the following plan:

  1. Involvement of financial advisor;
  2. Comprehensive analysis of the privatization object, assessed value and the formation for potential buyers (investors) of database about the object of privatization;
  3. Publication by the seller of the notice on the sale of the privatization object in the print media and on the web portal of the Register in the Kazakh and Russian languages, as well as the distribution of offers to potential buyers (investors) by financial advisor;
  4. The formation of the list of applications by financial advisor, containing proposals of potential customers (investors);
  5. Holding the seller with a financial advisor negotiating with potential buyers (investors) on the list of applications in order to identify at least two potential buyers (investors), submitted the best offer during the competition (the first stage);
  6. Conducting negotiations of the seller (with the participation of financial advisor) with the winners of the first stage on the subject of improving the previously proposed conditions (the second stage).

At the end of each stage of negotiation seller, financial advisor and all participants of two-stage competition should sign protocol of the results.

The winner of the competition at two-stage competition is the potential buyer (investor), proposed the best conditions during the second stage of two-stage competition, according to the Article 54-2 of Government Decision from 09.08.2011, №920 «On approval of the Rules of the sale of privatization targets".

  • Closed two-step competition.

Participation in the closed two-stage competition receives a limited number of members, determined by the commission. Registration of the persons who got a written invitation to attend and to participate in a closed tender is made from the date of mailing of written invitations and ends twenty four hours before the start of closed two-step competition. Notice of the closed two-step competition is not subject to the publication in the media. Tender newsletter notices should be made not later than 20 working days before the deadline for receipt of applications to participate in a closed two-stage competition In addition to the above application for participation in the auction and tender offer are accepted only from those who have got notice of the tender.

3. Direct address exclusion (sale) on condition that:

  • Owners or existing shareholders (participants) on the right of pre-emption pretend to the acquisition of Assets or Object;
  • Customer of an asset or object is the collective (workers), organization (enterprise);
  • In the event that a strategic investor is attracted for the investment program (technical re-equipment of an asset or object, transfer of technology, obtaining know-how, investment in research and experimental development);
  • Fulfill obligations under international contracts, as well as the acts and orders of the President of the Republic of Kazakhstan, Prime Minister of the Republic of Kazakhstan;
  • In other cases under the law of Kazakhstan.

Sale of objects of privatization proceeds as follows:

  • Tender organizer advertising notice of the tender online at gosreestr.kz, as well as in the media;
  • The Company accepts security deposit of persons applying for participation in the tender;
  • Tender organizer accepts applications for participation in tender during the period which written in Notification of tender;
  • In a case of winner determination, it will sign a protocol on results of the tenders and the contract of sale.

Notice on the conduct of an auction shall be published in periodicals (at least 3 times a week) and on website of the register in the Kazakh and Russian languages.

Notification of tenders placed simultaneously with the publication and signed by the electronic signature of the authorized representative of the Company. Information about Assets or Objects of Company shall include, but not limited to:

  • report on the valuation of Asset or Object;
  • photo of Asset or Object;
  • audited financial statements (if applicable);
  • other information about Asset or Object prepared by the Organizer of the tender and / or consultants;
  • set of documents for the Assets or Object;
  • electronic database of documents related to the Assets or Objects, created during the advance preparation of the Asset or Object.

Registration of participants in tenders shall made from the date of publication of the notice and end two hours before the start of the Auction, the Competition and twenty four hours before the start of the closed tender by two-stage competition.

Participants should provide complete set of required documents integrally for submit applications and registration. Foreign legal entities should provide notarized copies of constituent documents with a notarized translation into Kazakh and / or Russian.

The guarantee fee shall be paid to the details of a single operator in the field of account of the state property. Stakes will be refunded except to the extent that:

  • Bidder refused to participate under 3 working days prior to the tender;
  • In the case of Winner refusal to sign the protocol on the results of the tender, or refuse to sign Contract of sale;
  • The Customer - in the case of failure to perform or improper performance of obligations under the Contract of sale, according to Article 3.17 of Government Decision from 09.08.2011, №920 «On approval of the Rules of the sale of privatization targets".

The guarantee fee is payable in respect of payments under the contract of sale to winner of the tender that signed a contract of sale.
After completion, auction, or competitive two-stage tender procedures customer and seller obliged to conclude a contract of sale. The Contract shall be in writing within the term on the basis of a protocol on the results of the bidding or the Commission's decision on the terms of the realization of Assets or an Object in the form of direct address exclusion.

Terms of the agreement should include:

  • the need to obtain all necessary corporate decisions of Customer provided by applicable law and the constituent documents of Customer necessary for the acquisition of realizable Asset or Object, as well as on approval of a major transaction or transaction in which completion there is an interest (if relevant));
  • Customer provides the supporting documents and guarantees that the Customer is not in a process of liquidation or any process related to bankruptcy;
  • Obligations of the parties to register the Contract in the cases provided by applicable law.

In the case of evasion of the winner to sign the Contract by the specified time according to the conditions specified in Announcement about tenders, winner lose the right to provide a guarantee payment as Contract security, and the results of the relevant Tender shall invalid.

Grounds for Invalidating the Contract of purchase by court, according to Article112 of Law "On State Property":

  1. Sale of the object to person who does not have the right to acquire it;
  2. Provision of illegal benefits and advantages to the customer;
  3. Fundamental breach of the procedure of tender;
  4. other grounds stipulated by the Civil Code of the Republic of Kazakhstan and other laws of the Republic of Kazakhstan.

In the event of a subsequent alienation of the object of privatization by the buyer before the recognition of the purchase contract invalid, vindication is possible by Articles 260 - 262 of the Civil Code.

Limitation period on disputes related to the annulment of the purchase contract is six months from the date of its signing, on condition that lawsuit filed in court. In the case of a claim of other interested persons or the prosecutor, statute of limitations on disputes is six months from the date when the claimant knew or should know about the circumstances which are the basis of recognition of the contract, but no later than three years from the date of signing of the contract, according to Article 112 of the Law "On State Property".

Payments under the Contract shall be made within 30 days of signing the Contract, except as otherwise provided herein, according to the Law "On State Property". The Unified Rules provides clarification that the payment shall be made within 30 working days.
The transfer of Assets or Objects shall be made after full payment under the Contract by signing the act of acceptance-transfer of Asset or Object that is an integral part of the Contract.

Payment in installments shall be permitted only in cases when the conditions of hire purchase were disclosed to the bidders with due advance.

Except as otherwise provided by the Commission's decision, the amount of the initial payment on the disposal of an Asset or Object in installment may not be less than 15% of the total price of the realized Asset or the Object of the Contract, and the period of payment by installment can not exceed 3 years. If the participant makes the following payments, the rules established by Article 282 of the Civil Code of the Republic of Kazakhstan will apply.

The publication was prepared in accordance with the following regulatory legal acts:

  1. The Civil Code of the Republic of Kazakhstan (General part) from July 1, 1999 №409-I (last amended on 27.04.2015);
  2. Law "On State Property" dated March 1, 2011 № 413-IV;
  3. Government Decision from 09.08.2011, №920 «On approval of the Rules of the sale of privatization targets";
  4. Unified Rules disposal of assets and facilities JSC "National Welfare Fund" Samruk-Kazyna " and organizations, more than 50 percent of voting shares (share ownership) which directly or indirectly belong to JSC" Samruk-Kazyna "on the right of property or confidential management, approved by decision the Board of Directors of "Samruk-Kazyna" on May 28, 2014 №110.
  5. State of the Nation of the Republic of Kazakhstan Nursultan Nazarbayev to the people of Kazakhstan from November 30, 2015 "Kazakhstan in the new global reality: growth, reform, development".

By Artyushenko & Partners lawyers