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Legal Alerts

Open-ended investment vehicles bring major change to the Turkish investment climate

Legal Alerts
Capital Markets


On May 27, 2015, the Turkish Capital Markets Board (the “CMB“) issued the Communiqué on Securities Investment Companies No. III-48.5 (the “ICVC Communiqué“) setting out the rules for investment companies with variable capital (değişken sermayeli yatırım ortaklıkları – “ICVC“) under Turkish law. The rules are similar to those governing UK OEICs (open-ended investment companies) and Continental European SICAVs (société d’investissement à capital variable) – open-ended collective investment vehicles that are frequently used in private equity and other collective investment transactions. As an open-ended investment scheme, the amount of capital in the fund varies according to the number of investors. Shares in the fund are bought and sold based on the fund’s current net asset value.

Key Features of ICVCs

This type of investment is similar to an umbrella mutual fund and is designed with the sole purpose of bringing in returns for the fund’s investors. As an open-ended corporation, this investment tool can provide the investor with flexibility and diversification. Under the direction of the ICVC, investors can pool their money together; the ICVC will then invest the funds in different types of securities. A manager is in charge of making the investment decisions for the group, and for purchasing stock, bonds and shares in other mutual funds in order to obtain gains for the group. They have the flexibility to invest in a number of different investment vehicles as well. When investors want to join the group, the company must create new shares for them. If someone wants to leave, they can redeem the shares and cash them out.

The CMB’s ICVC Communiqué is the first regulation setting out ICVC structures in Turkey in a manner comparable to the international standards used in cross-border investments. The previous CMB Communiqué on Securities Investment Companies No. III-48.2 regulated ICVCs under a regime that is applicable to fixed-capital companies, and therefore did not meet the specific needs of ICVCs.

Under the ICVC Communiqué, ICVCs are primarily designed for portfolio management by allowing investors to pool their assets with other investors and invest in capital markets with greater cost efficiency. ICVCs are open-ended investment companies with variable capital. Such capital can be increased or decreased with the trading of shares by either issuance or redemption. As there is no limitation on the number of shares an ICVC can issue, ICVCs are better suited than closed-end companies to satisfy investor demand for investments and exits. An ICVC’s capital is equal to its net asset value (“NAV“) and its assets and liabilities are recorded at fair value using mark-to-market accounting.

The provisions of Turkish company law relating to share capital, minimum capital requirements, content of articles of association, non-cash capital commitments, share buybacks, capital increases and decreases, share transfers, profit calculation, reserves, and liquidation do not apply to ICVCs; ICVCs have their own special regulations for these matters. This makes ICVCs a revolutionary tool for Turkish companies and investment laws.

ICVC Structure – Establishment and Governance


  • An ICVC must be incorporated as a joint stock company (anonim şirket), which trade name must include the phrase “securities investment company.” As joint stock companies, ICVCs have separate legal personalities, unlike mutual funds under Turkish law.
  • An ICVC’s founders, directors and general manager must satisfy certain criteria to ensure they have reliable criminal and financial records and the required financial competency.
  • The ICVC’s initial share capital must be at least TRY 2 million. Within six months following registration by issuing investor shares, the ICVC must increase its capital to TRY 4 million.
  • An ICVC must have articles of association (“AoA“) in line with the Turkish capital markets regulations. An ICVC must also appoint a portfolio custodian before its incorporation.
  • Both the CMB and the Ministry of Customs and Trade must approve the incorporation of an ICVC based on the qualifications explained above. After these approvals are obtained, the ICVC is registered with the trade registry. In line with the ICVC’s undertaking to increase its capital, an ICVC must issue investor shares.

Capital structure

  • Unlike close-ended investment companies with fixed capital, ICVCs are open-ended investment companies with variable capital. Such capital changes with the number of issued shares. ICVC shares have no nominal value. The value of each share is equal to the net asset value per share (“NAVPS“) calculated by dividing the ICVC’s NAV (i.e., ICVC’s assets less its liabilities) by the total number of shareholders (i.e., founder shares plus investor shares).
  • The NAVPS is the sale and purchase price of an ICVC’s shares; it is calculated and announced daily. The NAVPS fluctuates depending on the value of portfolio securities and/or their underlying assets.

Issuance and types of shares

ICVCs issue both founder shares and investor shares:

  • Founder shares are issued during incorporation or after incorporation (with the CMB’s approval).
  • Investor shares can only be issued after the incorporation through a public offering, private placement or sale to qualified investors.

An ICVC must prepare a prospectus (izahname) and investor information memorandum (i.e., a two-page document summarizing the ICVC’s structure, investment strategy and risks) (yatırımcı bilgi formu) for public offerings of investor shares. An ICVC is only required to prepare an issuance certificate (ihraç belgesi) for private placements and sales to qualified investors, and can prepare investor information document at its discretion. The CMB approves the prospectus or the issuance certificate, following which the ICVC can offer or sell its shares to designated parties.

Founder shares must be in registered form (nama yazılı), entitling its holders to:

  • dividend distribution rights;
  • liquidation rights (i.e., right to receive proceeds following a liquidation);
  • one voting right per founder share in a general assembly meeting;
  • information and inspection rights;
  • right to request a special audit;
  • right to initiate general assembly decision cancellation lawsuits; and
  • minority rights.

Investor shares can be issued in registered form or as bearer shares (hamiline yazılı) entitling its holders to dividend distribution rights and liquidation rights only.

Founder and investor shares have no pre-emption rights.

Founder shares can only be redeemed with the approval of other holders of founder shares. An ICVC must redeem investor shares upon an investor’s request and pay the NAVPS in cash to the investor. An ICVC can implement entrance or exit commissions as prescribed in the disclosure documents (i.e., prospectus or issuance certificate).

The transfer of the founder shares prior to the issuance of the investor shares is subject to the CMB’s approval. The CMB’s approval must also be sought if, after the issuance of the investor shares, a transfer of the founder shares results in a change of control of the ICVC.

Corporate structure

An ICVC has two main corporate bodies as a joint stock company: the general assembly and the board of directors. An ICVC must enter into a portfolio management agreement with a licensed portfolio management company upon the CMB’s approval. An ICVC must notify the CMB and publicly disclose any changes to the portfolio management company.
An ICVC is also required to have licensed portfolio manager(s) to manage its portfolio(s), acting on the interest of investors under the ICVC’s investment strategy and under the CMB’s portfolio management rules.

Corporate governance

An ICVC must have: (i) an internal control department, (ii) a risk management system, and (iii) an internal audit department. An ICVC can outsource these services to licensed banks and brokerage firms.

ICVC assets are subject to periodic valuation carried out in line with international valuation standards by an independent valuation firm. ICVCs must prepare performance reports twice a year (i.e., half year and year-end) subject to an independent audit. ICVCs are also required to publish annual activity reports and quarterly activity reports.

The CMB must approve amendments to an ICVC’s AoA.

Investment instruments

ICVCs must invest in certain liquid capital market instruments prescribed under the ICVC Communiqué, as provided below:

  • shares;
  • government and corporate debt instruments;
  • term deposits or participation accounts (i.e., Islamic finance deposits paying a return on the deposit) with less than one year’s maturity;
  • gold and other precious metals traded on an exchange, or capital market instruments backed by gold and/or other precious metals;
  • mutual fund interests;
  • repo and reverse repo transactions;
  • lease certificates;
  • real estate certificates;
  • warrants;
  • cash collateral and premiums of derivative transactions;
  • Takasbank money market transactions;
  • CMB-approved non-Turkish capital market instruments and loan participation notes; and
  • other CMB-approved instruments.

Portfolio management rules and fees

An ICVC’s portfolio can be established as any of the following types:

  • balanced portfolio;
  • variable portfolio;
  • hedge portfolio (which can only include qualified investors);
  • debt instrument portfolio;
  • share portfolio;
  • precious metals portfolio;
  • money market portfolio; or
  • participation portfolio (i.e., portfolio with Islamic finance instruments) depending on the investment instruments in the portfolio.

The CMB has safeguards for ICVC portfolio diversification in order to mitigate risk exposure, such as the prohibition of holding one issuer’s money market and/or capital market instruments exceeding its NAV by 10% (except for asset covered bonds and mortgage covered bonds, separately capped at 25%) or one group’s money market and/or capital market instruments exceeding its NAV by 20%. The CMB also prohibits ICVCs from holding more than 10% of an issuer company.

The CMB regulates the maximum fund fees an ICVC can charge. The annual maximum fund fees vary from 128 basis points to 365 basis points, depending on the portfolio’s type.

An ICVC’s portfolio cannot be pledged or used as collateral except for loans, derivative transactions and other transactions carried out on behalf of the portfolio as provided under an ICVC’s AoA and its portfolio prospectus.

Portfolio debts cannot be set off against a third party’s receivables from the portfolio.

Prohibited Activities

An ICVC cannot perform the following activities:

  • lending;
  • collecting or engaging in activities that can result in the collection of deposits, or participation funds;
  • commercial, industrial and agricultural operations;
  • brokerage activities;
  • margin trading and/or leveraged transactions;
  • holding cash in excess of its cash requirement for daily operations;
  • purchasing property and real estate in excess of its requirements; and
  • purchasing or selling assets below or above their fair value.

Tax Treatment

The income generated from an ICVC’s portfolio management activities is exempt from corporate tax. All other income generated by ICVCs is subject to a 20% flat corporate tax.

The following entities are subject to a 0% withholding tax for income generated from the disposal of ICVC shares traded on the Borsa Istanbul: (i) Turkish limited liability companies (limited şirket); (ii) Turkish joint stock companies; (iii) Turkish mutual funds; (iv) Turkish investment companies; and (v) non-Turkish limited liability companies and entities deemed equivalent to mutual funds and investment companies by the Ministry of Finance. For all other taxpayers, income generated from the disposal of ICVC shares traded on the Borsa Istanbul is subject to a 10% withholding tax. If ICVC shares are held for more than one year, no withholding tax will be applicable.

Income generated from the disposal of privately held ICVC shares is subject to taxation in line with other companies.

Dividend distributions to resident individuals, non-resident individuals and non-resident entities are subject to a 0% withholding tax, as opposed to the general withholding rate of 15%. One half of the dividend income received by resident individuals is exempt from income tax. The remaining amount exceeding TRY 30,000 (for 2016) will be declared. Dividends distributed to resident entities are not subject to withholding tax and but are subject to corporate tax.


Investing in an investment company with variable capital can provide you with some advantages. One of the primary advantages is the ability to diversify your investments: this type of an investment company will purchase many different securities, which will help to diversify the investments as a whole. Another advantage is the company’s professional fund/asset management. Individuals with a great deal of experience in the financial markets have the final say as to what investments will be chosen for the group.

ICVCs have the potential to create significant flexibility for investors in the Turkish capital markets. Considering their flexible open-ended capital structure, they allow investors to opt in or opt out from investment companies without a cumbersome procedure.

On the other hand, ICVCs are not designed in a way that enables them to invest into the shares of privately held companies; they can only invest in the shares of publicly traded companies. This, in practice, would mean that ICVCs would not be open for Turkish private equity transactions as most of the targets of these transactions have historically been privately held companies.

Once again, the CMB is marching like a janissary band: two steps forward, one step back. This is not a criticism but rather a factual statement. This kind of cautious progress could be critical both in maintaining the trustworthiness of the capital markets in emerging markets such as Turkey and in advancing the markets’ infrastructure to accommodate new structures.