Commercial code brings many innovations to local business life

Sarp Kalkan

This file picture shows one of more than 1,300 large and middle scale call centers in Turkey. A recently updated commercial code has removed most of compliance costs while dissolving some of the rules and exempting SMEs from the remaining costly ones. Hürriyet photo

The new commercial code, which brings numerous innovations to Turkish business life, has been discussed extensively within the Turkish business community. Although the business community praised the improvements of the corporate legal structure, they also have complained about the extent of the compliance costs associated with the new rules and procedures.

A recent TEPAV study calculates the annual compliance cost at more than 6.3 billion Turkish Liras. It also claimed that small and medium enterprises are the most disadvantaged group, bearing 85 percent of this cost. The study identified the main compliance cost items as independent auditing, transaction auditing, book approvals, website obligation, and disclosure requirements. However, there are also other implicit costs associated with new rules and regulations such as increased liabilities and penalties and the borrowing ban.

The huge compliance cost and the increasing slowdown in the global economy increased the complaints about the new code in the business community. The Union of Chambers and Commodity Exchanges of Turkey (TOBB) has coordinated the concerns of the business community to ensure that they were heard by the government.

Featured changes
After three successive Economic Coordination Council meetings, late last month Parliament amended the new code.

More precisely, 109 articles of the code have been changed just three days before the code came into force.

These changes have removed most of the compliance costs while dissolving some of the rules and exempting SMEs from the remaining costly ones.

Below are the most important changes in the amendment package:

*The scope of independent auditing was narrowed. The Cabinet will have the authority to decide upon the scope of independent auditing. SMEs will most probably be excluded. The changes decrease SMEs’ associated auditing costs by more than 4.5 billion liras annually.

*Transaction auditing was completely abolished. Originally, the new code was going to control important structural transactions. This new instrument was removed in order to decrease red tape and associated costs.

Book approval
*The book approval requirement was relaxed. Before the amendment, the new code required seven legal books to be approved biannually (opening and closing) by a notary. The recent amendments scrapped one of those requirements.

The closing approval is limited to only two books, and the annual opening approval is no longer required for running books. This change is expected to decrease companies’ annual notary costs by about 300 million liras.

*The website requirement was limited. Originally, each company, irrespective of its size or operations, was obliged to build and operate a website through which it was to disclose certain legal documents. This has changed, and only companies with independent auditing requirements will have the website requirement.

Financial statements
*The mandatory disclosure of financial statements was scrapped. The Turkish business community spoke out very aggressively against the new rule to disclose all financial statements (to be disclosed in detail on their website and in the Turkish Trade Registry Gazette).

This rule was aiming for greater transparency, but the business community claimed that it would lead to the abuse of company secrets.

The publication costs of financial statements were expected to exceed 600 million liras.

*Borrowing limits were relaxed. Originally, the new code had prohibited the shareholders, the members of the board of directors, their relatives and their associated firms from borrowing from the company.

The recent amendments changed this, and shareholders can now borrow from their company if it satisfies two conditions: Firstly, shareholders need to fulfill their capital commitment.

Secondly, the firm needs to have a net cumulative profit. Additionally, the ban on borrowing in kind for independent board members and their relatives was removed.

*The protocol for a negative audit opinion was changed. Originally, the boards were required to resign and call for the general assembly in the case of a negative audit opinion.

With the recent amendments, the boards will call for the general assembly without resignation, and the assembly may ask the same board to continue its operations.

*Discrimination against Limited Liability Companies (LLCs) was scrapped. There are two major company types in Turkey: Joint Stock Companies (JSCs) and LLCs. The new code removes most of the dissimilarities between these two types of companies, but there were originally two important new distinctions working against LLCs. With the recent amendments, LLCs will not be required to pay all of their capital in advance. A down payment of 25 percent and a capital commitment of up to 24 months will be enough to form an LLC. LLCs will also be able to distribute advance dividends.

Board membership
*Board membership was widened. The requirement of at least one member of the board of directors being a Turkish citizen and have his/her domicile in Turkey and the obligation of at least one-fourth of board members to be graduates of higher education were abolished.

*Penalties were reduced. The most important argument against the new code was that the increased penalties of imprisonment were excessive. The recent amendments changed the penalties for 32 crimes into administrative fines. The penalties for five acts likewise changed from prison sentences to judicial fines. Only the penalties for seven acts have remained unchanged.

Sarp Kalkan is an economist at the Economic Policy Research Foundation of Turkey (TEPAV).