Expected ever since the first unofficial draft was published by the Banking Regulation and Supervision Authority (BRSA), back in May 2008, the new Law on Financial Leasing, Factoring and Financing Companies numbered 6361 (Law No. 6361) has entered into force as of 13 December 2012 with the exception of certain provisions–, upon its publication on the Official Gazette numbered 28496.
The Law No. 6361 comes as an overarching reform in the Turkish regulatory landscape applicable to financial institutions (i.e. leasing, factoring and financing companies) complementing (and sometimes, competing with) the activities of banking institutions.
The new law repeals and replaces a number of well-established older laws, namely, the Financial Leasing Law numbered 3226 of 1985 (Financial Leasing Law) and the Decree-Law numbered 90 on Money Lending Activities of 1983 (Decree-Law).
It is worth noting that the main piece of secondary legislation, i.e. BRSA Regulation on Principles for Establishment and Operation of Financial Leasing, Factoring and Financing Companies of 2006 (“BRSA Regulation”) will remain in force until new secondary legislation is enacted, to the extent it does not conflict with the provisions of the new Law No. 6361.
Main Novelties at a Glance
Main changes under the Law No. 6361 include:
• Increase in the share capital requirements of the financial institutions;
• new provisions allowing a more detailed monitoring, reporting and prudential regulation have been laid down;
• possibility to perform “operational leasing”
– this concept was not recognized under the Financial Leasing Law;
• sell and leaseback transactions are now allowed – this type of financial leasing was prohibited by the case law developed under the Financial Leasing Law;
• notarized form which was a validity requirement for the execution of the financial leasing agreements under the Financial Leasing Law is replaced with simple written form;
• restrictions applicable regarding the minimum contractual term of financial leasing agreements (in principle, 4 years) have been removed, save certain exceptions;
• professional association with public status, namely, the “Association of Financial Leasing, Factoring and Financing Companies” is to be instituted, acting, amongst other things, as a self-regulation authority (in addition to the oversight exercised by BRSA) and as the registrar of financial leasing agreements.
Incorporation, Corporate Governance and Field of Activity of Financial Institutions
Under the Law No. 6361, the minimum share capital requirement (to be paid-in, in full and in cash, at the time of incorporation) for incorporating a financial institution is set at TRY 20,000,000 and BRSA is authorized to update this figure on an annual basis depending on the variations of the producers’ price index. The new share capital requirement imports a significant increase, especially for factoring and financing companies, since, under the BRSA Regulation, said companies were required to have a minimum paid-in share capital of TRY 7,500,000.
In addition to the increased initial share capital requirements, a number of miscellaneous general requirements for incorporating a financial institution have been amended under the Law No. 6361, as well.
Five founding shareholders are required for incorporating a financial institution and the members of the board of directors of a financial institution must have sufficient professional experience to fulfil the corporate governance requirements and activities set forth under the Law No. 6361.
The Law No. 6361 provides a clearer and more institutionalized framework for the board structure of financial institutions. Apart from eligibility requirements, the new law now clearly provides that the general manager (and in his absence, his assistant) will be a natural member of the board of directors. Furthermore, a single- director board is not allowed and the financial institutions are required to have a board of directors consisting of at least 3 members, including the general manager (Article 13).
The limitations of activities of the financial institutions have been subject to a more detailed regulation under the Law No. 6361.
Previously, under the BRSA Regulation (Article 22), financial institutions were prohibited from:
• engaging in transactions other than those relating to their respective main fields of activity;
• issuing letters of guarantee;
• collecting funds through deposits or similar instruments against consideration, other than issuance of securities pursuant to Capital Market Law and borrowing of funds from international markets.
Under the new regime set forth by the Law No. 6361 (Article 9), financial institutions are still prohibited from engaging in transactions other than those relating to their respective main fields of activity.
They are, however, authorized to carry out a number of activities, which were either not allowed, or not clearly provided for under the previous regulation.
More concretely, financial institutions now may:
• provide cash loans, as an additional financing to their clients, within the contractual framework, up to an aggregate amount of 1% of the paid-in share capital.
BRSA is vested with substantial discretionary authority on this point and is authorized to reduce the allowed lending limit down to nil, or, to increase the said limit up to 5% of the paid-in share capital, or, to differentiate said limits for individual entities;
• provide surety, guarantee or letters of guarantee, in the form of (i) surety and guarantees to be given within the limits of the transactions relating to their main business activities and (ii) surety and guarantees to be given for the benefit of their controlling shareholders or those holding 10% or more of their shares and their controlled subsidiaries or of which they hold 10% or more of the shares the aggregate amount of which may not exceed 20% of their paid-in share capital.
Same as the lending limits, BRSA has important discretionary authority and may reduce the total down to 5% or increase it up to 25% of the paid in share capital, or, to differentiate the said limits for individual entities.
Furthermore, under the Law No. 6361:
• financial leasing companies are allowed to engage in insurance brokerage activities relating to insurances to be contracted in connection with the leased assets (either by financial or operational lease), collaterals and insurances to be taken by the lessee; and
• financing companies are allowed to engage in insurance brokerage activities in connection with the goods or services financed by themselves and borrowers (including insurance against payment default of the borrower).
These novelties under the Law No. 6361 are likely to be welcomed as a positive step in expanding the fields of activity of the financial institutions so as to allowing them to compete more effectively with banking institutions.
Some of the most important changes adopted under the Law No. 6361 relate to the leasing agreements.
The – very much criticized – statutory requirement for financial leasing agreements to have a minimum term of four years set forth under the Financial Leasing Law has not been carried over into the Law No. 6361, with an exception relating to financial leasing transactions realized with foreign leasing entities. This change is a welcome one, as it paves the road for further flexibility, such as balloon repayments or early buy-outs, which were either impractical or simply not permitted under the Financial Leasing Law.
Financial leasing agreements are no longer subject to notarized form and simple written form is now sufficient to fulfil the form requirement. Registration requirements will continue to apply, provided that, the notarial registry held in connection with movable assets under the Financial Leasing Law will be replaced by the registry to be held by the Financial Leasing, Factoring and Financing Companies’ Association to be instituted within 6 months following the entry into force of the Law No. 6361.
Registration of the financial leasing agreement is, as ever, a crucial step of the perfection of the agreement under the Law No. 6361, same as under the Financial Leasing Law, since, after the completion of the registration or annotation of the financial lease agreement with the relevant registry, an acquisition of an in rem right by bona fide third parties may not be validly asserted against the financial leasing company.
Another novelty in the Law No. 6361 comes in the form of its provisions on the post- termination phase of the financial leasing agreement: except as may be agreed otherwise between the parties, when the lease agreement is terminated by the financial leasing company or by the lessee (under a limited set of circumstances) and in case the returned asset is sold or leased to a third party by the financial leasing company:
• if the proceeds of the subsequent sale or lease exceed the sum of the outstanding amounts remaining unpaid under the terminated agreement with any excess damage incurred by the financial leasing company, the excess amount is to be paid to the lessee by the financial leasing company; and
• if such proceeds are less than such outstanding amounts, the shortfall amount shall be indemnified to the financial leasing company, by the lessee.
Whereas the law has been recently enacted and its implementation remains to be seen, it is conceivable that the practice evolves in a direction where the financial leasing companies would be deemed to be under an obligation to sell or lease the asset within the ambit of a bona fide and arm’s length transaction, upon termination of the financial lease agreement, as part of their duty to mitigate their damages.
The financial leasing companies are now explicitly allowed to engage in operational leasing transactions, provided, however, that, "the provisions of the law relating to the financial leasing transactions do not apply in connection with operational leasing transactions realized by financial leasing companies".