New Era for FX Loans and FX Denominated Loans
This
article will address major amendments and novelties stipulated for foreign
exchange and foreign exchange denominated loans.
In the
first quarter of 2018, taking into consideration the current foreign exchange
risks, the Council of Ministers announced a decree and a communiqué amending
Decree No. 32 on Protection of the Value of Turkish Currency (published in the
Official Gazette dated August 11, 1989, No. 20249) (the "Decree No. 32") and the Communiqué on Decree No. 32 on Protection
of the Value of Turkish Currency (published in the Official Gazette dated
February 28, 2008 and numbered 26801) (the "Communiqué No. 2008-32/34"), in the Official Gazette dated January
25, 2018, which will be put into force on May 2, 2018.
Following
these amendments, the Central Bank of the Republic of Turkey (the "Central Bank") introduced the
Regulation on the Principles and Procedures regarding Monitoring of the
Transactions Affecting Foreign Exchange Position (published in the Official
Gazette dated February 17, 2018, No. 30335) (the "Monitoring Regulation") in order to regulate the principles
for gathering information from the companies having foreign exchange and
foreign exchange denominated loans in the amount of at least USD 15 million as
of the last business day of the relevant accounting period.
II. Amendments to Decree 32 and Communiqué No.
2008-32/34
Pursuant to
the recent amendment, individuals residing in Turkey will no longer be able to
obtain FX loans from banks and financial institutions in Turkey, in addition to
the previous restriction on obtaining FX loans from abroad.
Once
the amendment to Decree 32 enters into force, it will not be possible to extend
FX loans to a legal entity having residency in Turkey unless such entity has
foreign currency income or meets certain exceptions provided by the decree.
According to the amendment to Decree 32, it is possible
to obtain FX loans without generating foreign currency revenue if:
(a)
the borrower is public authority and institution,
bank and financial leasing company, factoring company or financing company;
(b)
the outstanding loan balance of the legal entities
having residency in Turkey is at least USD 15 million at the time of the utilization;
(c)
the FX loans are extended to finance an
internationally announced domestic tender or a public private partnership
project, to carry out a defense industry project approved by the
Undersecretariat for Defence Industries, to acquire certain machines and
devices or for a transaction within the scope of an investment incentive
certificate; or
(d)
the FX loan does not exceed the expected foreign
exchange revenue of legal entities having residency in Turkey, as certified by
such entity; or
(e)
the borrowing Turkish legal entities fulfill other
criteria to be subsequently determined by the Ministry in charge of the
Undersecreteriat of Treasury.
Other conditions
provided for foreign exchange loans (regardless of the source these were
obtained from, Turkey or abroad) of the borrowing legal entities having
residency in Turkey are as follows:
If
the loan balance of a borrower is less than USD 15 million on the utilization date
of the loan, the sum of the loan amount requested and the current loan balance of
the borrower shall not exceed the sum of its foreign exchange revenues pertaining
to the last 3 fiscal years.
If
the loan balance of a borrower is less than USD 15 million, the borrower shall prove
its foreign exchange revenues pertaining to the last 3 fiscal years with
applicable documents as certified by the public accountants.
If
it is determined at a later stage after utilization date of the loan that the loan
balance of the borrower exceeds the sum of its foreign exchange revenues
pertaining to the last 3 fiscal years, the exceeding part of the loan used through
the banks, financial leasing companies, factoring companies or financing
companies located in Turkey or their foreign branches shall be recalled and
converted into a Turkish Lira-denominated loan.
As another
novelty; banks, financial leasing companies, factoring companies and financing
companies having residency in Turkey have been authorized to provide foreign
exchange loans to each other or by way of attending to an international
syndication without any maturity limit. Previously, only banks were entitled to
engage in such transactions between each other.
In
addition, previously, banks were entitled to provide foreign exchange loans to
the individuals or legal entities having residency in Turkey for their business
needs, up to one third of their foreign exchange loans already provided for
financing of the export pertaining to investment goods. However, with the
recent changes, this practice has been revoked.
Before the
amendment, financing companies were allowed to provide foreign exchange
denominated loans to legal entities and individuals for commercial and
occupational purposes. However, the amendment entirely prohibits legal entities
and individuals residing in Turkey from obtaining foreign exchange denominated
loans from abroad or within Turkey.
III. The Monitoring Regulation
1. Purpose of the Monitoring Regulation
The main
purpose of the Monitoring Regulation is to follow up the relevant companies' transactions
affecting foreign exchange positions by the Central Bank by way of gathering
relevant documentation and laying a burden of certain notification liability on
those companies. With the Monitoring Regulation, the Central Bank aims to raise
effectiveness in the foreign exchange risk management.
2. Companies subject to the Notification Liability
The
Monitoring Regulation stipulates that if a company's sum of the foreign
exchange loans and the foreign exchange denominated loans obtained from Turkey
or abroad exceeds USD 15 million as of the last business day of the relevant accounting
period, such company shall be subject to notification liability before the
Turkish Central Bank starting from the following accounting period. In order
for calculation of the aggregate loan amount, the latest and applicable annual
financial statements of the company shall be taken into consideration. In this
respect, loan calculations will be based on the foreign exchange buying rates published
in the Official Gazette, on the last business day of the relevant accounting
period. If the aggregate loan amount of the company goes down the foregoing
threshold (i.e. USD 15 million), the company's notification liability shall end
as of the following fiscal year.
3. Notification Procedure and Timing
A company
subject to the notification liability should convey the relevant data to the
Central Bank's Systemic Risk Data Monitoring System (the "System") in line with the financial reporting framework within the
scope of data form. Exact content of the data form is specified and explained
in detail within the disclosure form and user guidelines of the Central Bank.
Notifications
to the Central Bank should be made as follows; (i) by the end of the first
month following each quarterly interim account period, and (ii) by the end of
third month following the annual accounting period.
4. Accuracy Check and Timing
The
Monitoring Regulation also stipulates an accuracy check mechanism for the data
conveyed by the companies to the System. In this respect, the accuracy check is
conducted by (i) duly authorized independent auditors and (ii) the Central Bank
separately.
For the
accuracy check to be conducted by duly authorized independent auditors, a company
under the notification liability should enter into an audit agreement with an
independent auditor. This agreement should be signed within 60 days as of
commencement date of the company's notification liability (i.e April 18, 2018).
Within the scope of accuracy check, the independent auditor assesses accuracy
of the data conveyed by the company to the System based on the company's
notification liability. The audit should be completed until May 31 of the
following year. During the audit, in
case the independent auditor detects any mistake other than any insignificant
discrepancies regarding the data, it may request from the company to make the necessary
revisions. This being the case, the company should complete the necessary
revisions within 5 business days upon the independent auditor's request. If so,
the independent auditor will prepare the audit report with a positive opinion. However,
if the company does not complete the necessary revisions within 5 business
days, then the independent auditor will prepare the audit report with a
negative opinion. If the independent auditor cannot audit the mandatory data
for any reason, it should not proceed with the audit duty and explain the
reason(s) of such leave in written. All of the correspondence pertaining to the
foregoing process should be conducted over the System.
In addition
to the audit to be conducted by independent auditors, the Central Bank also conducts
cross check of the data conveyed by the companies to the System.
5. Applicable Sanctions in case of Non-compliance
If
companies do not duly comply with the requirements of the Monitoring
Regulation, the relevant individuals and/or executives of the companies may be
imposed judicial monetary fine from TRY 20,000 to TRY 200,000.
The Central
Bank will notify the independent auditors who prepare the audit report with a positive
opinion despite the fact that there is inaccurate and missing data or fail to comply
with the required timings stipulated in the Monitoring Regulation, to the
Public Oversight Accounting and Auditing Standards Authority.
6. Effective Date of the Monitoring Regulation
The
Monitoring Regulation shall be in force as of its publication date, February
17, 2018.
IV. Conclusion
In the
light of the foregoing, considering current needs of the free market economy, relevant
public authorities of the Republic of Turkey aim to protect the Turkish
borrowers' foreign currency positions and projections, particularly small and
medium sized enterprises, and to monitor various foreign exchange risks of
Turkish borrowers by constituting a local database.
ELIG Gürkaynak Attorneys-at-Law - October 28 2019
