The protection of investors’ rights in the Republic of Kazakhstan

Table of contents: The Kazakh-American Free University Academic Journal №8 - 2016

Author: Dautbayeva Dinara, Ministry of national economy of the Republic of Kazakhstan, Kazakhstan

The concept of a financial instrument is widely applied now not only in practice of the international business, it also gains the increasing popularity in the domestic markets of Kazakhstan. So, according to Kazakhstani periodicals, on the domestic organized securities market there is a practice of trade by future contracts on purchase of US dollars and also “exotic (and risky) instruments - urgent contracts on an US dollar exchange rate to EURO in volume of 1000 EUR”. The regulatory base concerns also currency options. All these contracts are directly called proceeding from the objective nature of the economic relations formalized by legal rules.

It appears that legal definition of the concept “financial instrument” should be adequate to its economic nature. In this regard, in our opinion, legally significant confirmations of property rights concerning such financial assets as money and the issue securities providing legal possibility to transfer these rights can be considered a financial instrument, which not always can be transferred to the third party in confirmation of transfer of competences according to it. However, this instrument must not interfere with such transfer. In this regard the written contracts allowing a concession of the rights, securities in their traditional understanding as documents, and entries in property rights registers can be considered the instruments. The higher degree of the property right transferability, the more the corresponding instrument “merges” with the right certified by it.

So, the concession of the right sunder the usual contract is acceptable, if participants of the transfer consider certain expenses in time and other resources for such cession acceptable. The need for in crease in property rights transferability was caused by emergence of securities when transfer of the right was “adhered” to transfer of documents certifying it. Development of technologies, globalization of economic processes served as motives for development and introduction of the instruments allowing to certify property rights with the electronic records cap able to change their requisites in only a few seconds. New information technologies allow to make in a day a large quantity of transactions worth millions when accessory of a sold asset proves by the register of the market intermediary and the owner of this as set actually owns no thing. Complication of economic relations and integration of national financial markets into the world infrastructure also leads to emergence of new financial instruments giving opportunities for the so-called “cross-border transactions” (the transactions connected with transfer of financial resources and other capital through border) and also exp and s borders and possibilities of speculative transactions in the markets. In this regard one of the popular financial instruments in the developed markets of instruments is the derivative ones (“derivatives”). In the practice of law and in the legislation the term “derivative securities” is also used a long with the concept of derivative instruments. But generally speaking, just a simple study of problems of the derivative instruments transfer inevitably leads to a conclusion that they are of an extremely high risk and their legal nature is still insufficiently clear for the legislator.

Even professional Kazakhstan traders directly call derivative financial instruments the speculative ones possessing high speculative potential with a very high risk of non-payments. Therefore, the release of such derivative instruments by national issuers is possible only at a rather high level of the national stock market development. Due to underdevelopment of legal and economic theories of derivative financial instruments and national securities markets and due to limitation of the issue securities circulation, it is necessary to be very careful in the solution of a question on an admission of the derivative instruments circulation on the national securities market. For instance, the German researchers specify that derivative instruments in all their various forms and ways of regulation are a subject of disputes because of their objective danger connected with their circulation as quite of ten their trade is carried out on the non-controllable of f-exchange market. In this connection the international financial institutions recommend the developing countries to establish certain restrictions concerning derivative instruments “as even well operated firms and financial institutions incurred serious losses in connection with use of such instruments”.

In particular, they recommend to improve supervision of the derivative instruments release and circulation and to use procedures on risk management. Besides, it is important for the derivatives trade to keep the limits of the organized markets where professionals have more possibilities to keep control over various situations of objective and subjective nature. At the same time the derivative instruments trade in the organized markets should be under especially rigid supervision of the state and relevant professional organizations.

In legal literature there is no a uniform concept of a form of right protection. The form of right protection is meant as “defined by the legislation competent authorities’ activity for right protection”, in other words, the activity for establishment of original circumstances, application of law rules, definition of the way of right protection and pronouncement of the relevant decision. Apparently, according to this approach the concept of form includes right self-defense, use of measures of operative influence, i.e. an order of right protection not assuming appeal to any state or other authorities.

Among various forms of right protection the leading role is played by a judicial form of protection of investors’ rights as universal, historically developed, regulated in details by norms of civil procedural law. The judicial form is the most regulated one in comparison with the forms of right protection by other state authorities and especially by public organizations. It provides reliable guarantees of the correct law application and establishment of real rights and obligations of the parties. Judicial protection of civil rights is the most important guarantee of their implementation. The right for judicial protection is guaranteed by Article 13 of the Constitution of the Republic of Kazakhstan [1]. Court is a unique and independent of other branches of state power authorities carrying out justice. Its characteristics in many respects defined the nature and the maintenance of a judicial form of protection. Now judicial protection of the rights of citizens and legal entities on behalf of the state is carried out by courts of general jurisdiction and specialized courts in which the order of consideration of civil proceedings is in advance defined by the norms of civil and administrative law; the persons interested in outcome of the legal proceeding use the right to participate in trial and to defend their rights and interests on the principles of equality and competitiveness; the decision should be factual established in a court session by means of pro of s and corresponding to the law. The majority of the considered above ways of protection of investors’ rights find their realization by means of a reference to the court of general jurisdiction or specialized court according to the jurisdiction established by a legal procedure. The right to a reference to the court as the subjective right of the particular physical or legal entity is realized in various forms. The main form of realization of the right to judicial protection is the claim and , respectively, a claim form of protection, claim production. Claim production assumes existence of dispute on the right between two warring parties which act in protection of own interests and have an equal legal status. The greatest number of the conflict saris in gin the sphere of securities market is considered in claim production. At the same time protection of investors’ rights is possible also in the form of applying on the cases arising from administrative and other public legal relation ship and on special production. For initiation of a legal proceeding in court or other body it is required to define the jurisdiction of a dispute.

It is known that jurisdiction is a reference of these ort hose legal proceedings to a certain authority. Protection of investors’ rights can be carried out in courts of general jurisdiction, in specialized inter – regional courts, in executive authorities, and also within the self-regulating organizations of the securities market professional participants. There are two main forms of judicial protection of investors’ rights and interests: in courts of general jurisdiction and in specialized inter – regional courts. Legal proceedings on protection of investors’ rights can be considered also in the arbitration courts, but, the latter are not the justice-carrying authorities. For this reason they will be studied separately. The examples of the legal proceedings considered by specialized inter-regional courts can serve the following: recognition of registration of transactions on alienation of actions void; establishment of default of the foundation agreement; illegality of shares distribution; recognition void the distribution and sale of shares, increase in an authorized capital, release of shares of the second and the subsequent issues; cancellation of reports on results of release and placement of shares of the second and the subsequent issues; recognition void the contract of shares purchase and sale; an illegal exception from the shareholders structure; compulsion to registration of the property right to shares; recognition of shares ownerless, etc.

According to No. 158 Decree of the President of the Republic of Kazakhstan dated August 17, 2006 in the city of Al maty there was formed a specialized financial court equated to regional court and authorized to consider civil-law disputes of participants of regional financial center of the southern capital. In CIS there are no similar financial courts yet; in the world there are some similar courts. In this regard the formation of financial court in Kazakhstan was preceded by preliminary laborious work on studying of judicial and regulatory systems of foreign countries and financial centers in Great Britain, Irel and, Singapore, and Malaysia.

Another jurisdictional form of protection of investors’ rights is the administrative form. The administrative form of protection assumes established by the legislation order of protection of rights and legitimate interests of investors without a reference to the court of general jurisdiction and specialized court. The given form of protection allows to prevent violations or restrictions of rights and legitimate interests or to restore the broken rights by interaction with state executive authorities (administrative authorities). Unlike judicial authorities the administrative ones protect broken rights and interests along with the implementation of their other main powers. For these authorities settlement of disputes about rights is not a unique and main form of their activity. Protection of civil rights is administratively carried out by means of the appeal to an authority. The decision accepted administratively can be in any case appealed in court (Paragraph 2 of Article 9 of the Civil Code) [2].

The component part of the policy of the Republic of Kazakhstan in the sphere of regulation and supervision of the national financial market was the priorities of formation of a new system of state regulation of the financial institutions activity providing, taking into account positive international practice on this matter, association of all supervising and regulatory functions within one specialized authority. The National Bank delegated these functions to the Committee on Regulation and Supervision of the Financial Market and Financial Organizations (hereafter referred to as CFS). CFS is a state authority which carries out regulation and supervision of the financial market and its “players”, takes measures not to allow violation of rights and legitimate interests of consumers of financial services, creates equal conditions for financial organizations on the basis of the diligent competition principle, and watches the “players” of the financial market in due time and fully carry out their obligations. The direct work with consumers of financial services is conducted continuously. CFS registers each complaint to this or that financial organization and considers each case separately. On CFS site there is statistical monthly information on number of complaints to concrete financial institutions - banks, insurance companies, pension funds, participants of securities market, summaries about the most actual and widespread problems connected with financial services, and also data on the measures being taken for elimination of the allowed facts of infringement of the rights of consumers of financial services.

The ways of protection of investor‘s rights applied irrespective of existence or absence of securities. Legal status of investor assumes existence of special rights arising till the moment of securities acquisition. Firstly, it is the right to reliable information about the issuer and the securities. For adoption of the investment decision the potential investor is to receive quick and reliable information. So, in compliance with Article 21 of the Law on the securities market the issuer is obliged to provide the prospectus about issue of securities to investors [2]. To protect the given right the following ways are applied: award to discharge of duty in nature which is characterized by that the violator (the issuer, the professional participant) is obliged to execute really the actions he is obliged to make by law, i.e. to provide necessary information to the investor; protection of the right to information assumes suppression of the actions breaking the right or creating threat of its violation - this way is applicable in case if officials of the issuer create obstacles to the investor in acquaintance with documentation or not commission of the positive actions consisting in granting necessary documentation to the investor; change or termination of legal relationship by presentation of the converting claim is possible according to the Law “On Securities Market” in case of violation the requirements about granting information to the investor by the professional participant of the securities market - the issuer [2]. According to Articles 401, 403 of the Civil Code of the Republic of Kazakhstan such violation is the basis for change or cancellation of the contract between the investor and the professional participant - the issuer - in a judicial order [2].

A universal way of protection of investors’ rights is indemnification -the protection of the rights to paper, the right from paper, and at violation of the right of investor’s general ability as within contractual and extra contractual relations. But there arises a property interest. The property interest of the investor is satisfied at the expense of monetary compensation of the property losses and /or other losses of joint-stock companies. The requirement about indemnification can be declared by the investor to the issuer (for example, the losses which have arisen in connection with default by society of a duty on payment of declared dividends or payment of par value of the bond); or to other shareholders (in case the legislation established possibility of their calling to subsidiary responsibility, for example, according to Paragraph 2 of Article 44 of the Civil Code of the Republic of Kazakhstan) [2].

Compensation of moral harm is rather new and actively being applied way of protection of rights. However, the application of this way of protection of shareholders’ rights is hardly possibly. Compensation of moral harm is possible at violation of the personal non-property rights (benefits) in cases called by the law the property ones. As joint-stock legal relationship are characterized as the property ones the law stipulates no possibility of moral harm compensation to the participants of these relations (these relations are not the consumer ones where such compensation is possible).“The use of this way of protection (compensation of moral harm) is directed on complete or partial recovery of mental wellbeing of the personality, compensation of negative emotions by positive ones” [3]. It hardly corresponds to the nature of relations where the subjects have the purpose of pr of it receiving. Foreign legislation and the practice of law also do not consider compensation of moral harm for protection of shareholders’ rights possible.

Recognition void the act of authority, management or an official should also be referred to universal ways of the protection applied by investors irrespective of existence or absence of securities. This way assumes possibility of recognition void fully or partially standard and substandard acts (actions, decisions, and also inaction) of executive authorities in the sphere of the securities market, of other state authorities breaking the rights and freedoms of citizens or legal entities. Depending on the type of act and the authority status the question of its appeal or recognition void is competent to the court of general jurisdiction. According to Article 10 of the Law “On Securities Market»” the decision of the executive authority on refusal in the state registration of release can be appealed in a judicial order [3].

At the present stage the development of foreign policy activity of the courtiers promotes the formation of a complex system of international relations. Rates to attract foreign investments in Kazakhstan led to an increase in the number of investment disputes [5]. Bilateral investment agreements provide investors a direct right to submit the dispute to arbitration against the State, violating the laws and agreements - even if investors do not have agreements with the State.

For suppression of abuses at the exchange and defaults on operations with securities and derivative instruments it is necessary: first of all, to develop and adopt accurately and clear normative legal acts excluding possibilities of their double interpretation; to strengthen regulatory and supervising activity of the Agency of the Republic of Kazakhstan on Regulation and Supervision of the Financial Market and the Financial Organizations; to form special authorities at the exchange (commission or controllers etc.) for revealing suspicious transactions and suppression of wrongful actions both from investors and professional participants.


1. Конституция Республики Казахстан от 30 августа 1995 г. // Информационная система «Параграф».| the Constitution of the republic of Kazakhstan dated August 30, 1995 // Paragraph Information System.

2. Гражданский кодекс Республики Казахстан (Общая часть) от 1 июля 1999 г. // Информационная система «Параграф».| The Civil Code of the Republic of Kazakhstan dated July 1, 1999 // Paragraph Information System.

3. Кейнс Дж. М. Общая теория занятости, процента и денег. / Дж.М. Кейнс. – М.: ЭКОНОВ, 2002. – 195с.| J. Keynes General Theory of employment, interest and money./ J. Keynes. – Moscow: Econov, 2002. – 195 p.

4. О рынке ценных бумаг: Закон Республики Казахстан от 2 июля 2003г. // Информационная система «Параграф» | On Securities Market: Law of the Republic of Kazakhstan dated July 2, 2003 // Paragraph Information System.

5. Басин Ю.Г. Избранные труды по гражданскому праву. Под ред. Сулейменов М.К. - Алматы: АЮ – ВШП «Эдилет», НИИ Частного права КазГЮУ, 2003. – 734с. | Y. Bassin Selected works on civil law. Edited by M. Suleimenov. – Almaty: Adilet Higher School of Law, KazUHL Private Law Research Institute, 2003. – 734 p.

Table of contents: The Kazakh-American Free University Academic Journal №8 - 2016

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