Oman Investment Funds

Over the next several months, we will examine certain provisions of the Omani Capital Market Law (Royal Decree No. 90/98) and the implementing executive regulations (Ministerial Decision No. 1/2009) pertaining to investment funds. The regulations apply to all forms of investment funds proposed to be established in Oman, including, for example, all forms of collective investment vehicles traditionally known as ‘private equity funds’ and ‘hedge funds’. Earlier this year, the first private equity fund in Oman was launched by a local investment company. The fund managers requested the Capital Market Authority (CMA) to waive certain provisions of the executive regulations to bring the fund more in line with general market practice and make it more attractive to investors and money managers.

Problems with a ‘one size fits all’ approach

Without an express waiver by the CMA, the regulations effectively would prohibit activity in one of the most important segments of the investment funds industry ─ traditional private equity funds and real estate funds. One problem which arises under Article 208 of the regulations provides that ’The capital of the fund shall be divided into investment units with equal rights’. Strictly interpreted, this regulation would prohibit the fund from issuing different classes of units with different voting and/or economic rights. For example, it is common in private equity funds to issue ‘side-letter’ agreements which provide certain investors with special voting, economic, exit and/or other rights. The referenced language would not allow such side letters and, as a consequence, would be problematic for fund managers interested in establishing an Oman fund.

The ‘one size fits all’ approach mandating the issuance of units of equal rights effectively ignores the fact that different kinds of funds are operated for different reasons because they can offer portfolio diversification opportunities, tailor-made solutions and higher returns.

Frequently negotiated investor rights and terms

It is standard within the fund industry to structure a fund, for purposes of both fund marketability and governance, so as to attach different rights to different classes of fund units, whereby certain units may carry economic rights only, and other units may carry voting rights only or both economic and voting rights. The spectrum of different economic and voting rights associated with units issued by funds, and the varied characteristics of a class of fund units, are usually the result of intense and prolonged negotiations between the manager and one or more sophisticated investors, where the investors may not subscribe to the fund (and the fund therefore may not launch) in the absence of the negotiated, preferential terms. Such preferential terms might include:

• shorter lock-up periods (or more frequent redemption dates) or commitment periods;
• reduction of management fees and carried interest payments;
• special redemption or excusal rights upon the occurrence of “key person events”;
• enhanced fund reporting and/or valuation requirements, carve-outs to transferability restrictions relating to the fund interest and other rights accommodating tax and/or regulatory issues specifically applicable to the investor; and
• specifically in relation to Omani pension funds acting as investors in funds, such pension funds generally negotiate special rights to accommodate the Omani law requirements that a pension fund invest at least 50% of its assets under management in Oman.

In respect of the recently launched Omani private equity fund, the CMA has demonstrated its willingness to waive the referenced restriction in Article 208 of the executive regulations. An amendment of the regulations to remove the blanket restriction on the issuance of different classes of investments units in a fund by the CMA undoubtedly would provide more certainty to the market and assist in attracting sophisticated investors and money managers to Oman investment funds.

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Investment Management in Oman

As the Sultanate continues its drive to diversify the national economy, the past few years have witnessed both the growth of existing companies and a flourishing of new ones. With expanding industries, a robust and conservative capital markets infrastructure and increasing trade, Oman stands poised to offer an array of attractive investment opportunities. Not surprisingly, a number of investment funds and investment managers, both domestic and international, are showing increased interest in Oman.

In order to establish or manage an investment fund, it is necessary to comply with the rules and procedures of the Omani laws and regulations that govern the capital markets sector. This article provides a brief overview of the legal and regulatory framework for the investment management sector and answers a pair of frequently asked questions.


The Legal and Regulatory Framework

The Capital Market Law, established by Royal Decree No. 90/1998, provides the legal framework for, among other things, the Muscat Securities Market, the authorities of the Capital Market Authority, and general regulation of Omani capital markets activity. With regard to investment funds, the Capital Market Law prescribes general organizational and operational requirements, while more detailed requirements are set forth in the Executive Regulations of the Capital Market Law issued by Ministerial Decision No. 1/2009.

However, we note that this legal framework is currently best suited to conventional investment funds such as mutual funds. Certain provisions of the Executive Regulations – for example, requiring subscriptions to a fund to be fully paid up front or requiring equal terms for all investor classes – could make it more challenging for some alternative investment funds, such as private equity funds or hedge funds, to operate in Oman. As the Omani authorities continue their drive to enhance the nation’s capital markets, we will continue to monitor the development of this legal framework.

Which kinds of capital markets activities require a license in Oman?

The Capital Market Law states that the following securities-related activities require a license from the Capital Markets Authority:

• promotion and underwriting of securities or financing of investment in securities;
• participation in the establishment, or in increasing the capital, of companies using securities;
• depositing, clearance, and settlement of securities transactions;
• the establishment and management of securities portfolios and investment funds;
• brokerage in securities; and
• management of trust accounts and custodianship of securities.

Note that establishment and management of investment funds are included on the above list and require a license from the Capital Markets Authority.

Are there general rules on a fund’s investment allocations?

The Capital Markets Law and the Executive Regulations prescribe an array of investment rules. Among these, the most general are:

• an investment fund shall invest at least 75% of its capital to achieve its main investment objectives;
• an investment fund that invests in securities:
o shall not hold more than 10% of the outstanding securities of any single issuer;
o shall not allow its investments in the securities of any single issuer to exceed 10% of the net asset value of the fund (this provision does not apply to index funds); and
o shall not borrow more than 10% of its net asset value; and
• an investment fund investing in real estate shall not borrow more than 30% of its net asset value.

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