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Expanding opportunities for retail investors in Kazakhstan: AIFC's influence on the new legislative framework

July 2024 – According to the official website of the Government of Kazakhstan, the Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market is working on a new legislative proposal with the goal of broadening the participation of retail investors in collective investment schemes (the "CIS") across Kazakhstan. Currently, the CIS retail business is mainly possible within the Astana International Financial Centre (AIFC). While this could be seen as competition with the AIFC, in the long term, the adoption of such a law will help create a solid platform for the development of funds not only within the AIFC but also throughout Kazakhstan.

In these proposed innovations, we see the influence of the flexible regime for collective investments existing in the AIFC. It's evident that the current regime in Kazakhstan is not as flexible, and therefore, the introduction of these innovations (as mentioned on the Government's website) is a positive step forward. Investors may still choose the AIFC due to various existing tax incentives there. However, these innovations could potentially open doors for investors within Kazakhstan, generally, as well.

The draft law outlines three major innovations:

  • Expansion of Capital Sources: The new law will allow the creation of funds in any organizational and legal form. Existing legislation (i.e., in Kazakhstan outside of the AIFC) permits the establishment of funds only in two forms – unit investment funds and joint-stock investment funds. Upon the law’s adoption, founders will have the option to establish funds in any form, including limited liability partnerships, limited partnerships, and simple partnerships. This flexibility is currently available only within the AIFC.
  • New Fund Classification Based on Investor Qualification: Funds will be classified into two categories – securities investment funds and alternative investment funds. Access to securities investment funds will be available to both qualified and non-qualified investors, as these funds will invest in highly liquid and low-risk instruments. Conversely, alternative investment funds will be accessible only to qualified investors due to their riskier management strategies. This will ensure the proper protection of non-qualified investors' rights and interests while expanding investment opportunities for qualified investors. Again, this flexibility currently exists within the AIFC, and extending it to the general regime in Kazakhstan will undoubtedly boost the development of funds within Kazakhstan.
  • Increased Transparency for Alternative Investment Funds: Requirements for accounting registration with the authorised state body and disclosure of information will be introduced for alternative investment funds. Currently, reporting requirements apply only to professional securities market participants managing unit and joint-stock investment funds.

According to the World Bank experts, the adoption of this law will positively impact the further development of the collective investment market by creating a regulatory environment understandable to foreign investors and aligned with best international practices. The regulatory approaches outlined in the draft law will allow Kazakhstani investment and venture funds to be included in the UCITS (Undertakings for Collective Investment in Transferable Securities) and AIF (Alternative Investment Funds) indices, thereby attracting foreign investments.

The AIFC's Influence on the new legislative framework may establish a pivotal foundation for Kazakhstan's investment landscape. By embracing a comprehensive legislative overhaul, Kazakhstan may enhance accessibility to investment vehicles beyond the AIFC and attract global investors through transparent and aligned regulatory frameworks. These initiatives may position Kazakhstan on a trajectory towards broader economic integration and heightened investment attractiveness, promising a future where retail investors can thrive in a dynamic and inclusive financial environment.

While it is still early to assess the full impact of these innovations, the fact that such measures are being considered is a positive indicator of progress in financial market development.

This note is aimed to be a useful guide – it is not comprehensive and should not be regarded as legal advice.

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