BAHRAIN: An Introduction to Corporate & Finance
Corporate Borrowing in Bahrain: Expanding the Horizon
Corporate borrowing refers to the process by which companies raise funds to finance their operations, expand their business or invest in new projects. This can be achieved through various financial instruments and mechanisms, including loans, bonds and convertible debt. The ability to borrow effectively is crucial for companies to maintain liquidity, manage cash flow and achieve long-term growth objectives.
The financial landscape in the Kingdom of Bahrain has undergone significant evolution, particularly in the realm of corporate borrowing. In particular, Bahrain Decree-Law No 28/2020 introducing Articles 239(bis) and 127(bis)(1) to the Bahrain Commercial Companies Law (CCL) has broadened the scope of corporate borrowing.
Historically, the issuance of bonds and sukuk was predominantly the domain of public joint stock companies, irrespective of shareholding structure, and closed joint stock companies in which the government or any other public entity owns at least 30% of the capital. This was stipulated under Article 138 of the CCL. The issuance of these bonds required a decision by the Ordinary General Assembly, based on a proposal from the board of directors outlining the necessity and conditions of the bond issuance.
The introduction of Article 239(bis) to the CCL marked a significant shift in Bahrain’s corporate borrowing framework. This amendment allows closed joint stock companies to issue convertible debt bonds, subject to the approval of the Extraordinary General Assembly and the provisions of the company’s statute. These bonds, referred to as “convertible debenture bonds”, can be converted into shares.
The issuance and conversion of these bonds must comply with the provisions of the Central Bank of Bahrain and Financial Institutions Law (the “CBB Law”), as well as the regulations issued by the CBB, particularly the Offering of Securities Module under Volume 6 of the CBB Rulebook (the “OFS Module”). This legislative change aims to provide closed joint stock companies with an additional avenue for raising capital, thereby enhancing their financial flexibility. However, the purpose for the issuance of convertible debt bonds under Article 239(bis) is notably restrictive, as it is specifically intended for borrowing to increase the company’s capital.
The issuance of convertible debt bonds by closed joint stock companies is also subject to regulatory notification and approval requirements. As per Ministerial Order No 118/2021 on the Conditions and Controls for the Issuance of Convertible Debt Bonds by Closed Joint Stock Companies, the company must notify the Companies Control Department in writing of its intention to borrow by issuing convertible debt bonds. This notification must include, among others, an accounting report on the company’s status, activity and the feasibility of borrowing by issuing convertible debt bonds. Furthermore, the issuance is also subject to filing or approval requirements from the Capital Markets Supervision Directorate (CMSD) of the CBB. However, if the issuance is listed on a CBB-recognised foreign stock exchange, CMSD may relax the approval requirement and instead accepts the filing of the necessary documentation, which saves the issuer from following the rigorous route of approval, which is usually time-consuming due to the requirement of preparing a number of other supporting documents in accordance with the OFS Module.
The legislative amendments under Article 239(bis) allowing closed joint stock companies to issue convertible debt bonds have implications for Bahrain’s financial market. By expanding the scope of corporate borrowing, these changes provide companies with greater financial flexibility and access to capital. This, in turn, can drive business growth, innovation and economic development. Since the introduction of Article 239(bis), Bahrain has witnessed a number of issuances, which is a testament to the fact that such issuance provided companies with an opportunity to reach out to investors who were not reachable in the past. The ability for closed joint stock companies to issue convertible debt bonds under Article 239(bis) has opened new avenues for raising capital. Moreover, the notification and approval requirements ensure that the issuance of convertible debt bonds is conducted transparently and in compliance with regulatory standards.
Article 127(bis)(1) introduces another innovative financing mechanism by allowing companies to convert specified cash debts into shares, subject to creditor approval. This mechanism alleviates the financial burden on companies by converting their debt and offers creditors an opportunity to become shareholders, aligning their interests with the company’s long-term performance. It is important to note that ordinary shareholders cannot exercise their statutory right of pre-emption in relation to capital increases for adding strategic partners and for converting cash debts into equity.
The introduction of Articles 239(bis) and 127(bis)(1) to the CCL represents a notable development in Bahrain’s corporate borrowing landscape. By providing companies with additional mechanisms for raising capital, these changes contribute to the growth and diversification of Bahrain’s economy. The ability for closed joint stock companies to issue convertible debt bonds, bring in strategic partners and convert debt into equity offers a versatile set of tools for capital raising, with the objective of driving business growth, innovation and economic development.