Legal framework on the issuing of public securities through the State in the DRC

Gaby KABUE
Managing Partner

Abstract

More than half century, the Democratic Republic of the Congo (DRC), didn’t have appropriate legal framework relating to public securities issue (Treasury Bills and Bonds) susceptible to assume the supervision of domestic public debt market. Yet in all countries, the short-term public debt securities are relevant monetary market instrument[1].They are considered to be a  risk-free because the governments cannot default as they might always increase taxes to pay their debts (or even issue money)[2]. The implementation of Treasury Bills and Bonds requires  an appropriate regulation which defines in particular the terms of issue of public securities by the State, the maturity of reimbursement and payment of interest, the auction procedures, etc. It’s in this context that the Congolese authorities, through the Ministry of Finance has put in place the regulation on issuing and reimbursement of Treasury Bills and Bonds.  The regulation establishes the conditions of formation related to the loan contract to the State[3]. In addition, the Central Bank of Congo has the mission to regulate the monetary markets and promote the capital markets,). According to this mission the Central Bank put in place several instructions in order to execute the decree and decisions of the Minister of finance, related to the market activity of Treasury values in the DR Congo. It should also be noted that Treasury Bills and Bonds are enshrined in the specific agreement signed between the Ministry of Finance and the BCC.

 By Gaby Kabue Kayombo

Keywords: bonds, treasury, stocks, bills, term, reimbursement, negotiation.

1. Legal basis on Treasury Bills and Bonds

In the DRC, the Treasury Bills and Bonds rely on the Decree No 18/025 of June 11, 2018 setting the terms and conditions for issuing and reimbursing Treasury bills and bonds. Ministerial Order No. 030/CAB/MIN. FINANCES/2018 of August 30, 2018 relating to the implementing measures of Decree No. 18/025 of June 11, 2018 setting the terms for issuance and reimbursement of Treasury bills and bonds; Instruction No. 38 bis of August 09, 2019 regulating the Treasury securities market and the Agreement of November 07, 2018 on the terms and conditions for issuing and reimbursing Treasury bills and bonds between the central government and the Congo Central Bank.

2. Issuing and supervision

The issuing authority for Treasury Bills and Treasury Bonds is assumed by the Ministry of Finance. He is the authority empowered to issue Treasury Bills and Bonds [4] hereafter called the Securities, through auction procedure[5]In this position he determines and specifies the methods of calculation of the amounts to be paid by the subscribers, the interest and amounts to be reimbursed by Treasury[6]. He is also empowered to issue other instruments[7].

The BCC is responsible for the material organization of Treasury Bill and Bond auctions[8].  In addition, he  is responsible for overseeing the Treasury securities market, with a view, on the one hand, to guarantee its integrity, efficiency and transparency and, on the other hand, to protect investors.

The BCC is required to set up control mechanisms to which participants and subject professionals are required to submit[9].  In addition,  he is called upon to ensure the operations management linked to the securities issued, in particular the codification of the securities, the settlement -delivery of the securities, the conservation of the securities, the payment of accrued interest, the reimbursement of the securities that have reached term[10].

3. Characteristics of Treasury Bills and Bonds

Financial securities issued by the State have common and specific characteristics which enable them to be correctly distinguished within the Treasury value market.

3.1 Common characteristics

Under the terms of Article 4 paragraph 3 of Decree No. 18/025 of June 11, 2018 provides: “Treasury Bills and Bonds are reimbursed in one time at maturity, their terms and conditions for reimbursement are fixed at issue by the Minister of Finance.

They are dematerialized securities exclusively registered in a security account [11]. Furthermore, the OHADA Treaty indicates: “The securities, whatever its form, must be registered on behalf of their owner. They are transmitted by account to account transfer” [12].

Indeed, the legislator has expressly consecrated the dematerialization of securities as principle, but without determining the terms relating thereto. So in order to comply with the provisions of the AUSCGIE, the DRC has promulgated the Act on payment and securities settlement systems, which determines the principle of the dematerialization of financial securities. The explanatory memorandum to the Act stipulates “dematerialization establishes the existence of financial securities only in the form of accounting entries in the register of financial institution[13].

Basically, the Treasury Bill and Bonds are also negotiable securities,[14] which mean that the securities can be yield [15] and assimilated. The assimilation consists in attaching to new issue to an issue of Bills or Bonds of the same category previously issued [16].

Treasury Bills and Bonds are issued through auction, it means procedure[17] for issuing Treasury securities in the form of multiple price auction open to all banks, including economic agents who have made a request their participation to the Ministry[18]. Moreover the Treasury Bills and Bonds may also be submitted to the term of non-competitive offers[19]. The non-competitive is a purchase  offer for a given quantity of Treasury value presented by a participant without specifying the rate and price.

Transactions on the primary and secondary markets of Treasury Bills and Bonds are liquidated through the settlement system, liquidation and conservation of securities for the Central Bank of Congo (SRLCT/ BCC).

3.2 Particular characteristics

These are the characteristics that apply distinctly to Treasury Bills and Bonds into the Treasury market.

3.2.1 Particular characteristics of Treasury Bills

Treasury Bills are short-term securities with terms of 3, 6 and 12 months. However, this term may be extended in purpose that the deadline falls on working day (day of operation of the settlement system, liquidation and conservation of BCC securities, in initials, SRLCT / BCC) [20].

They can be issued in different installments with the same characteristics, namely the unique code (ISIN, international security identification number) and deadline. In this case they are assimilable and form the same line[21]. They are issued through auctions at multiple rate basis of the rates offered by bidders. The interest rate suggested by bidders must be expressed in unit in unit with two decimals, who’s the last must be 0 or 5 [22].

All offers introduced at interest rates lower than the highest rate used by the Ministry of Finance are awarded for the total amount. Offers at the minimum rate may be awarded for proportional reduced amount. In this case, the amounts thus reduced are rounded up at slice of 1 million Congolese francs or 100 dollars immediately higher[23].

Treasury Bills are negotiable, worded in Congolese francs or, if applicable, in the US dollars and with a nominal value of 100,000 Congolese francs or 10 dollars.

They are exclusively dematerialized and registered into securities accounts kept at SRLCT/BCC, accessible, if necessary, to international clearing systems (Euroclear and Clearstream). The amount to be entered in the securities account is the amount (capital and interest included) due by the State on the final deadline before any deduction of tax levies.

3.2.2 Particular characteristics of Treasury Bonds

Treasury Bonds are issued for the terms higher to one year, at fixed or variable rates, representative of government loan issued in successive installments, the interests of which are payable annually [24].

They are issued in different installments with the characteristics of ISIN Code, nominal interest rate and installments. They are also issued by multiple price auctions based on the prices offered by bidders. The amount of the bid is the amount due by the Treasury on the final deadline.

They are also negotiable, that is to say the Treasury Bonds can be yielded, worded in Congolese francs if applicable, in dollars, with a nominal value of 100,000 Congolese francs or 10 dollars and refundable at the end of the term.

Treasury Bonds are dematerialized securities exclusively registered in a securities account hold through the SRLCT /BCC, accessible if necessary, to international clearing systems (Euroclear and Clearstream). The amount to be registered to securities account is the nominal capital to be paid by the State at the final deadline. The price is expressed in percentage of nominal value of Bonds with two decimals, which the first must be 0 or 5.

The bidders may submit several offers with different rates for the Treasury Bills as well as different prices for Treasury Bonds. The offers are awarded at the proposed price.

All offers introduced at higher price than the minimum taken into account by the Ministry of Finance are awarded for their full amount.  Offers introduced at the limit price may be awarded for proportional reduced amount[25]. Offers which do not meet these requirements are rejected [26].

4. Settlement and delivery of Treasury Bills and Bonds

Treasury Bills issued through auction or non-competitive subscription are delivered on their settlement date against payment of the amount due to via SRLCT/BCC.

The amount to be paid by the subscriber on the issue settlement date which corresponds to the amount borrowed by the Treasury for each offer selected or subscribed.  Interests are restrained and deducted from the price to be paid by subscribers at settlement moment of their subscriptions[27].

Concerning the Bonds issued through auction or by non-competitive subscription are delivered on their settlement date against payment of the amount due to via SRLCT / BCC.

The amount that the subscriber pays on the issue settlement date corresponds to the price offered or the subscription price, increased and calculated interest [28]. Interest on Treasury Bonds is paid annually

5. Reimbursement mechanisms on Treasury Bills and Bonds

Under the terms of article 19 of ministerial Order No. 030, the maturity day of the Treasury Bills and at the maturity date of the capital and interests of the Treasury Bonds, the SRLCT/BCC automatically debits the General Treasury Account of the total amount due and automatically credits the current accounts of the participants who hold the security concerned. This transfer is release for the Treasure.

Participants are required to credit at maturity and at the same value date the cash account of their customers with the nominal value of Treasury Bills and maturity Bonds. No cause of delay can be raised. If the maturity date is a non-working day, the interest and/or capital paid on the first working day that follows, without attribution of interest on late payments.

6. Sanctions

The regulation on Treasury Bills and Bonds provide for penalties. However, the Minister of Finance has the right to cancel Treasury Bills and Bonds for which no payment has been received on the date of settlement. In this context, the defaulting subscriber is fully liable to the Treasury and without any prior formality being required and 7 days’ interest allowance for the Treasury Bills and 14 days’ interest on Treasury Bonds, calculated at the policy rates of the BCC increased to 1.5 percent. This penalty is calculated on the amount that had to be paid.

References

[1] J. PAUL NYEMBO TAMPAKANYA, The organization of financial markets in the Democratic Republic of Congo: for establishment of stock exchange, Paris, L’Harmattan edition, 2017, p.33.

[2] F. MISHIKIN, C. BORDES, D. LACOUE-LABARTHE and X.  RAGOT Money, banking and financial markets, 9th editions, Paris, Pearson edition, 2010, p.37.

[3] G. MBULA ea LOONDO and W. PAMBU PAMBU, Development of private securities market in the DRC: operational diagram, BCC, January 2020, p.3.

[4] Article 2, decree No 18/025

[5] Article 2 point 1, Agreement of November 07, 2018 on the terms and conditions for issuing and reimbursing Treasury bills and bonds between the central government and the Congo Central Bank.

[6] Article 4 paragraph 4, decree No 18/025

[7] Article 4 paragraph 5, decree No 18/025

[8] Article 11, ministerial decree No 030

[9] Article 3, instruction No 38 bis of August 09, 2019, p.3.

[10] Article 2, Agreement of November 07, 2018 on the terms and conditions for issuing and reimbursing Treasury bills and bonds

[11] Article 5 paragraph 1, decree No 18/025

[12] Article 744-1, paragraph 1, AUSCGIE

[13] Law No 18/019 of July 09, 2018 relating to payment and securities-settlement systems, Official Journal, Special number, 23 July 2018, p. 55

[14] Article 2 point 2, instruction n°38 portant règlement général de marché de valeur du Trésor, p.2.

[15] Article 5 paragraph 2, decree No 18/025

[16] Article 5 paragraph 3, decree No 18/025

[17] Article 2 point 1, instruction n°38

[18] Article 7, decree No 18/025

[19] Article 5 paragraph 3, decree No 18/025

[20] Article 3, Ministerial Order No. 030/CAB/MIN. FINANCES/2018 of August 30, 2018 setting the measures for the implementation of the decree No. 18/025 of June 11, 2018, p.2.

[21] Article 3, Ministerial Order No. 030

[22] Article 10, Ministerial Order No. 030

[23] Article 12, Ministerial Order No. 030

[24] Article 4, Ministerial Order No. 030

[25] Article 13, Ministerial Order No. 030

[26] Article 10 paragraphs 6 and 7, Ministerial Order No. 030

[27] Article 16, Ministerial Order No. 030

[28] Article 17, Ministerial Order No. 030