III – Investment funds and fund managers

1. Background

As in all other market economies, Mozambique has identified the need to promote investment in the capital markets through investment funds: investment funds allow individuals or legal entities to gain exposure to classes of assets which many times they would not be able to access on their own, as well as to benefit from low cost diversification and from the monitoring of the final investments by a team of experts.

In order to legally frame investment funds, the government approved Decree no. 54/99, of September 8, which established, for the first time, a legal regime specifically applicable to investment funds and their management companies, focusing, in particular, in the scope, taxonomy, management, incorporation, operation and winding-up of these investment vehicles.

More recently, in 2019, the Bank of Mozambique (“BM”) has approved Notice no. 6/GBM/2019, where it sets out the ratios and prudential limits of the investment funds, by defining a set of rules that regulate the composition of the respective portfolios.

2. Definition and types of investment funds

In the Mozambican legal system, like in many other jurisdictions other than the Anglo-Saxon ones, investment funds are autonomous estates without legal personality belonging to the unit holders, a plurality of persons who have made capital investments therein and expect a return from said investments.

The assets of the investment funds are represented by participation units, without nominal value, of identical content and which grant unit holders equal rights (which do not include, in principle, voting rights).

The exclusive purpose of the investment funds regulated by Decree no. 54/99 is to create portfolios of certain assets (notably securities and real estate), allowing for the diversification and consequent risk-spreading of the investments. The minimization of risk is achieved through the joint management of a portfolio of securities, entrusted to a management company, with each of the unit holders receiving a share in that portfolio (commensurate with the participation units held). Profitability is generated through investing in assets that appreciate in value and, in case of securities investment funds, usually known, in international markets, as mutual funds), that are easily bought and sold (i.e. have liquidity), with the aim of achieving an adequate return on investment.

Investment funds may qualify as securities investment funds, whose portfolio consists of securities – shares, bonds, publicly managed collective undertakings, participation units in investment funds, and any other securities, whatever the nature or form of its representation, and at least 60% admitted to trading on the Mozambican Stock Exchange – and liquidity (cash, bank deposits, certificates of deposit and securities issued by the Mozambican State with a residual maturity of less than 12 months), and real estate investment funds, whose portfolio consists of, in addition to liquidity, also real estate assets, i.e., meaning property rights and surface rights; participation units in real estate investment funds, shares exceeding 50% of the capital of companies whose shares are listed on stock exchanges and that are exclusively dedicated to the acquisition, sale, rental and operation of real estate and other equivalent assets.

With regard to the composition of their portfolio, securities investment funds and real estate investment funds shall ensure compliance with the regulatory ratios and restrictions on asset composition set out in article 15 of Decree no. 54/99 and Notice no. 6/GBM/2019.

Another important distinction concerns whether the participation units of the investment funds are fixed or variable:

  • In the first case, those are the so called closed-ended funds, where participation units correspond to a fixed number, defined at the time of incorporation. This means that the participation units cannot be redeemed, and the capital invested can only be repaid when the fund is wound up, or in case distributions are made during the life of the fund (if allowed under the respective management regulation). In this category of funds (either real estate or securities), (i) Mozambican law demands that the participation units must be traded on a regulated exchange, and (ii) the possibility of realising the value of the participation units in cash is generally limited to a sale or liquidation event or, if allowed under the management regulation, in the event distributions are made.
  • In contrast, regarding open-ended funds, the participation units are variable in number and are issued and redeemed at the request of the unit holders, leading to the possibility of the number of participation units varying significantly over time.The liquidity of the investment is greater in this type of investment fund, as the unit holder has the possibility of liquidating in cash the value of the participation unit by requesting its redemption.

​3. Management Entities

In investment funds, the joint management of the portfolio is entrusted to a management entity, which shall correspond to an investment fund management company (sociedade gestora de fundos de investimento), which qualifies as a financial company and is regulated as such under the provisions of the Credit Institutions and Financial Companies Law, or a commercial bank or an investment bank.

In addition, the Ministry of Finance may, following a hearing with the governor of the BM, determine that the management of closed-ended investment funds may be executed by credit institutions other than commercial banks or investment banks (i.e., pursuant to the Credit Institutions and Financial Companies Law, credit co-operatives and micro finance institutions).

These management entities, which shall act independently and in the exclusive interest of the unit holders of the funds managed, are required to execute all actions and transactions necessary or convenient to the management of the respective funds, including select, acquire and sell any securities and assets owned by the fund, as well as calculate the value of the fund participation units, issue and authorise their redemption (whenever the law and the management regulation so allow it).

Due to its crucial role in the activity of investment funds, the management entities are not allowed to transfer to third parties, in whole or in part, the powers which are bestowed onto them by the law. Any services subcontracted to third parties must consist of non-essential activities.

The management entity may also be replaced: pursuant to the referred Decree no. 54/99, any such process must be authorised by the BM, but the law does not clarify who has the right to request such replacement (if only the management company itself, unit holders, or both).

Notwithstanding the broad scope of powers assigned to the management entities, the law also provides notable restrictions. In particular, article 6 of Decree no. 54/99 contains the list of transactions, most of which involving the encumbrance of the assets of the funds under management, which are not allowed to these entities.

For the performance of their duties, the management entities are remunerated in accordance with the terms expressly set out in the management regulation of each fund. Such remuneration may only comprise:

  1. a subscription fee, to be paid by investors, intended to cover the expenses for the subscription and issuance of participation units;
  2. a management fee, to be paid by the fund, intended to cover all management expenses;
  3. a redemption fee, to be paid by the unit holder (in case of redemption of its units).

4. Depositaries

The depositary is the entity that shall be entrusted with the custody, guarantee and oversight of securities and other assets held by the investment funds.

Under applicable law, only credit institutions authorized to operate in Mozambique can be investment fund depositaries. However, similarly to the case of managing entities, the Ministry of Finance may, following a hearing with the governor of the BM, determine that depositary functions may be executed by credit institutions other than commercial banks or investment banks (credit co-operatives and micro finance institutions).

Among the most important functions of the depositary are the deposit or registration of the securities of the funds; the execution of the requests for subscription and redemption of participation units; the payment, to the unit holders, of the respective share of profits in the fund. The depositary is also tasked with protecting investors’ interests, by monitoring the compliance with the law and fund management regulation throughout the fund’s activities.

The services to be provided by the depositary shall be set out in a written contract entered into with the management company, which copy (as well as a copy of any changes related thereto) is required to be sent to the BM.

The remuneration of the depositary shall also be expressly set out in the management regulation of the fund and may only encompass a depositary fee, to be paid by the investment fund.

5. Incorporation process

The incorporation process of the investment funds is initiated by the management company with the submission of an application for commencement of activities; this application is addressed to the BM, which is the regulatory authority responsible for supervising the process and issuing the respective authorization.

This application must be accompanied by a draft of the management regulation which is prepared by the management company and shall identify the fund, the management entity and the depositary, and define the rights and obligations of the unit holders, management company and depositary. The management regulation shall also specify the investment and management policy of the fund and the conditions for its winding-up and liquidation, as well as the elements provided for in article 14(2) of the Decree no. 54/99.

In addition to the draft of the management regulation, the request shall also be submitted with the agreement entered into with the depositary.

The decision of the BM on the request should be taken in a 45 day period counted from the date of receipt of the request or, if applicable, of eventual complementary information requests made by the BM, and will be notified to the relevant interested parties. No tacit approval occurs if the BM does not decide within such a period.

Once the activity of the fund has been authorized, the management entity shall prepare and keep up to date an informative prospectus, to be made available to potential investors, in its facilities, in the depositary’s facilities and in the facilities of any placing entities. The prospectus is subject to the prior approval of the BM and must contain the detailed information set out in Annex A of Decree no. 54/99 (relevant topics of information include investment policy and risk factors which can undermine investors’ returns).

6. Winding-up and liquidation

The liquidation of an investment fund may only be executed within the conditions defined under the management regulation.

The process shall be initiated with the publication of a liquidation notice at least six months in advance in one of the most widely read newspapers in the country and in the Official Bulletin of the Mozambican Stock Exchange.

In closed-ended funds, unit holders cannot demand the fund’s early liquidation except in the cases set out in the management regulation.

The BM may also order the compulsory liquidation of the fund when, as a virtue of the breach of the management regulation or legal or regulatory provisions, the interests of unit holders are imperilled. In this scenario, upon the determination of the BM, subscription and redemption transactions shall be suspended and the liquidation process shall commence immediately. The BM shall also establish a deadline for the liquidation to be completed.