In Brief:
- The Securities and Commodities Authority (SCA) has issued a Decision on the Regulation of Special Purpose Vehicles (SPVs).
- Through the issuance of such Decision, the SCA regulates the establishment and conduct of business of SPVs and related matters.
The Securities and Commodities Authority (SCA) issued Decision No.25/RM/2024 on the Regulation of Special Purpose Vehicles on 19 July 2024 (the Decision). The Decision, which applies “onshore” UAE (i.e., to the exclusion of the financial freezones), defines and categorises special purpose vehicles (SPVs), prescribes the application process for SPVs, sets out the duties and obligations of the person managing the SPV (the SPV Manager) and describes the circumstances in which SPVs may be terminated or liquidated.
An SPV is defined in the Decision as “a company incorporated for the purpose of separating the obligations and assets related to a specific financing operation from the obligations and assets of the person who has founded it. It is used in credit operations, borrowing, securitization, bond issuance and risk transfer associated with insurance, reinsurance and derivatives in accordance with the provisions of this Decision”. This definition mirrors the same concept set out in Federal Law No. 32 of 2021 (the Commercial Companies Law or the CCL); further, a combined reading of the provisions of the Decision (in particular, Article 4(2)) and Article 4(1)(g) of the CCL suggests that the provisions of the CCL in relation to limited liability companies shall apply to SPVs to the extent not specifically provided for in the Decision. The Decision excludes, from its scope, SPVs incorporated by federal or local government authorities or companies wholly-owned by federal or local government authorities (unless they make a public issuance), SPVs incorporated in the ADGM or in the DIFC and Unqualified Special Purpose Vehicles (USPVs) incorporated in a UAE freezone.
SPVs are classified into Qualified Special Purpose Vehicles (QSPVs) and USPVs.
QSPVs are permitted to issue securitized financial instruments, bonds and sukuks in accordance with SCA guidelines. QSPVs must: (a) be incorporated and managed through: (i) a securitisation company licensed by the SCA; or (ii) investment fund management company licensed by the SCA for the benefit of investment funds incorporated by it – in which case, such SPV may be managed through a trustee in the UAE; or (b) be incorporated through a joint stock company in the UAE, provided they are managed by a trustee in the UAE.
USPVs are SPVs which do not issue securities – rather, their sole objective is to separate assets and risks. USPVs can be: (a) SPVs incorporated by legal persons, managed through a trustee in the UAE and used for the purposes of credit operations, borrowing, or risk transfer related to insurance, reinsurance, or derivatives in the UAE; or (b) SPVs incorporated by individuals or legal entities to separate their assets and risks, managed by their founder, a UAE-incorporated legal entity, a UAE national or a UAE resident. A USPV must meet at least one of the following criteria: (i) it must own at least 50% of its assets in the UAE or in a GCC state; (ii) it must own at least 50% of a company's capital in the UAE or in a GCC state; (iii) a legal entity or natural person incorporated or residing in the UAE or in a GCC state must own at least 25% of the capital of such SPV; or (iv) it must, as determined by the SCA in its discretion, contribute to facilitating transactions related to the UAE or provide the UAE with real or economic benefit.
The Decision sets out the following key parameters as characteristics of SPVs:
- An SPV possesses legal personality and financial independence from its founder and manager and shall be solely liable for the obligations arising from its exercise of its specific purposes. A QSPV shall not maintain an ownership or dependency relationship with its founder or manager and the name, books, bank accounts and registration number of such QSPV shall be independent of the manager and founder.
- The obligations and assets of an SPV are separate from those of its founder and manager; a bankruptcy of the founder or the manager of an SPV shall not trigger the bankruptcy of the SPV.
- The funds of an SPV may not be mortgaged, lent, seized or disposed except for the stated purposes of that SPV – this prohibition extends to settling any debt of the founder or manager.
- The manager of an SPV is accountable for damages sustained by that SPV as a result of his actions; the SPV itself will not be bound by any actions or dispositions of its manager that exceed the purpose for which the SPV was established.
- SPVs are not required to have a physical headquarters and may use the address of its manager.
- The manager of an SPV will act as its legal representative in judicial matters and dealings with third parties and shall be liable for the SPV’s compliance with the Decision.
- An SPV may have up to 3 shareholders and its shares may not be listed or traded. Further, in the case of a QSPV, shareholders have no voting rights, decision-making rights, authority to change the manager or other shareholder rights; their ownership of shares in a QSPV is on a fiduciary basis.
The process of establishment and licensing of SPVs is also described in the Decision – this commences with the founder filing an application with the SCA seeking its approval to incorporate the SPV and to obtain a license to carry out its purposes. The conditions and requirements in relation to such application and the related process is set out in Article 5 of the Decision, which includes, among others: (a) specification of an appropriate and proper name of the proposed SPV; (b) provision of a copy of the proposed articles of association, using the form stipulated by the SCA and including the capital of the SPV (which has to be a minimum of 1,000 dirhams) and names and identification documents of the SPV’s proposed shareholders; (c) provision of a copy of the SPV’s proposed business plan; (d) provision of copies of the SPV’s proposed management and governance manuals and policies, which should include, among others, the SPV’s proposed anti-bribery, anti-corruption, risk management and AML/anti-terrorism financing policies; and (e) furnishing proof of payment of the application fee.
Following the submission of a complete application, the SCA shall decide whether to accept or reject the application within 5 working days from the application date and if denied, the SCA shall state the grounds for rejection. The term of an SPV shall be 1 year from the date of issuance of its first license; the manager must file a license renewal application at least 1 month prior to its expiry and pay the license renewal fee.
The scope and extent of an SPV’s manager’s duties and obligations are described in the Decision. These include, among others, (a) ensuring that the SPV focuses exclusively on its intended purposes and complies with all applicable law; (b) refraining from employing any persons as employees of the SPV; (c) refraining from carrying out any mergers, divisions or other legal form conversions and (d) disclosing to any persons when dealing on behalf of the SPV that the SPV has been incorporated and licensed with SCA’s approval and is subject to SCA’s supervision and control. With respect to QSPVs, the manager must additionally, among other things, ensure: (i) that the QSPV complies with all applicable UAE laws and regulations relating to listed securities; (ii) that the QSPV adheres to Sharia principles relating to any issues of securities if its founder is subject to such principles; (iii) the preparation and submission (on behalf of the QSPV) of audited annual and semi-annual IFRS compliant financial reports, semi-annual work reports and any other report requested by the SCA; and (iv) that the management of the QSPV is not delegated to third parties nor is a trustee appointed with respect to the QSPV other than in circumstances set out in Article 7 of the Decision. With respect to USPVs, the manager must additionally (and similar to the additional duties prescribed with respect to QSPVs), among other things, ensure: (A) that the USPV complies with all applicable UAE laws and regulations; and (B) that manager is not the manager of more than 5 USPVs.
The Decision also sets out the circumstances in which an SPV may be terminated or liquidated and sets out the process applicable thereto. Such circumstances include, among others, the fulfilment of its purpose; bankruptcy under UAE law; a judicial ruling for dissolution and the loss of most or all of its funds making it impossible to continue or achieve its objectives, fundamental violations or in the public interest. If any such circumstances arise, the SPV’s manager must notify the SCA and liquidate the SPV.
Any violations of the provisions of the Decision shall attract penalties as provided for in the UAE Cabinet Decision No. 102/2022 regarding the administrative penalties for acts committed in violation of the Commercial Companies Law. Entities managing SPVs prior to 1 August 2024 (the date the Decision becoming effective) are required to adjust their respective positions in accordance with the Decision and pay the requisite licensing fee within 90 days from 1 August 2024.
In conclusion, it is clear that the Decision reinforces SCA’s objectives of maintaining a robust regulatory and governance regime that supports the growth of securitization and sukuk transactions and the development of investment funds in the UAE. The Decision will also enhance the standing of the UAE capital markets and furthers the reputation of the UAE as an international hub for financing.
For any queries on this, please feel free to reach out to the Hadef & Partners Banking and Finance team.