Wednesday, January 8, 2014

Investment Funds

Investment funds have become increasingly popular investment structures in Oman, with several funds becoming active in the market recently. These investment funds may be formed and organized either in Oman or outside of Oman. For an investment fund established outside of Oman targeting investors located in Oman, such fund must comply with the Oman Capital Market Law (Royal Decree No. 80/98) and other applicable laws. Investment funds established in Oman must also comply with the Oman Capital Market Law and regulations issued by the Capital Market Authority (the “CMA”). In this article we focus on the key formation and establishment considerations for investment funds to be established in Oman.

An investment fund established in Oman must take the form of a joint stock company. Together with the relevant provisions of the Capital Market Laws and the Commercial Companies Law, the Articles of Association are the source of legal authority that governs the operations of the investment fund. The Articles of Association must reflect certain mandatory requirements mentioned in the Executive Regulations of the Capital Market Law. It is advisable that a law firm assists in the drafting of the Articles.

The promoters of an investment fund must prepare a prospectus if securities are to be offered to the public in Oman. Prospectuses for public subscription must contain the following matters:

  1. the investment policy to be followed;
  2. the manner of distribution of annual profits and the method of dealing with accumulated reserves;
  3. the name of the investment manager who will undertake the management of the fund;
  4. a comprehensive summary of the investment manager’s previous experiences;
  5. the method of regular evaluation of the funds and assets; and
  6. the procedures for the return of the value of the investment bonds.
It is crucial to involve an experienced law firm in preparing the prospectus to make sure that the prospectus is drafted in accordance with the requirements of the CMA.

An investment fund must appoint an investment manager to manage all of its activities. The investment fund will need to enter into a management contract with the investment manager, a copy of which will need to be submitted to the CMA prior to the execution of the management contract. The CMA will verify that the provisions of the management contract are consistent with Omani Law. The CMA should issue its opinion within 15 days from the date of submission of the management contract for verification. Engaging an experienced law firm to assist with drafting the management contract may help to facilitate and expedite this verification process by helping to ensure that such contract is in compliance with the CMA requirements.

The Capital Market Law contains restrictions on activities of the investment managers with respect to the investment funds they manage. It is important for investment managers to be aware of these obligations and restrictions. The prohibitions on the activities of investment managers include, among other prohibitions:
  1. carrying on activities which the investment fund such investment manager manages is prohibited to carry on;
  2. using the investment fund's money for the formation of new companies or for the purchase of securities of companies that are under liquidation or undergoing bankruptcy;
  3. obtaining personal gain for itself, its management or employees from the operation of the investment fund;
  4. having an interest of any kind in a company in which the investment fund it manages has an investment; and
  5. purchasing investment units of the investment funds it manages (which restriction applies equally to the employees of the investment manager).
It is important that promoters, investors, investment managers and the investment fund's officers and employees are aware of the Capital Market Law and the regulations issued by the CMA that relate to investment funds. The CMA has broad powers and authority to deal with non-compliance by such persons. Failure to comply with the Capital Market Law or the regulations may result in fines or, in certain circumstances, imprisonment.

The investment fund will be managed by a committee of investors or other specified persons. The regulations issued by the Board of Directors of the CMA specify the procedures for the formation of the committee and the methods for its operation.

Commercial banks and investment companies whose capital is at least RO 5 million may establish investment funds aiming to invest savings in securities. Such investment funds may require the approval of the CMA in co-ordination with the Central Bank of Oman (CBO). If the establishing entity is a bank, the CBO will need to be involved in the approval process.

Given Oman's stability and growth prospects, Oman is still considered by many investors as a good market providing many investment opportunities. There are a number of investment funds currently under formation in Oman to take advantage of such opportunities. As investment funds are regulated entities under Omani law, it is very important for promoters, directors and investment managers to seek professional legal advice from experts in investment fund law to better ensure compliance with applicable law and regulation and to mitigate legal risks.