Ukraine is actively working on new stock market regulations better aligned with European standards. In particular, further to already introduced legislative developments, i.e. the “split” law, the regulator aims to simplify JSCs activity and adopt new approaches to corporate governance which potentially will bring the Ukrainian stock market to a whole new level.
Ukraine is actively reshaping the regulatory landscape for the stock market and joint stock companies (JSCs) which will lead to profound changes in the regulation of this sector in the coming years.
To begin with, we expect that by the end of the year the Parliament will adopt the law which will fundamentally transform the Ukrainian stock market regulation, securities issuance, and stock exchange trading.
Another major draft law aims to protect investments in capital markets against abuse and increase the number of tools used by the National Securities and Stock Market Commission (SEC) to impose effective penalties for market abuse. In addition, in October 2019, the so-called “split” law was adopted providing for liquidation of the Financial Services Regulatory Commission by 1 July 2020 with its powers to be divided between the National Bank of Ukraine (NBU) and the SEC.
The next stage requires implementation of a number of steps developed by the European Commission together with the SEC, in particular new laws on collective investment schemes (CIS), insurance companies, private pension funds, and prudential supervisory arrangements for investment firms need to be introduced.
- Draft law on capital markets
- Draft law on protection of investments in capital markets against abuse
- New laws on CIS, insurance companies, private pension funds, and prudential supervisory arrangements for investment firms
- Restated JSC law
Implementation of the EU legislation in Ukraine will impact three main areas:
- establishment of a strong regulator that will apply supervision tools, identify violations by market participants, and impose effective sanctions against violators;
- establishment of new investment vehicles, including derivatives, and a number of bodies (e.g. a bondholders’ meeting or bondholders’ collective representation procedure);
- establishment of public companies with broad disclosure obligations so that a potential investor could assess the current state of affairs in a company.
What would be the long-term consequences? The SEC intends to create new regulation of the stock market to enable issuance of various securities in Ukraine, not only shares and bonds but also derivatives necessary for commodity markets. About a year ago, the SEC adopted a new regulation on securities issuance prepared in accordance with EU standards. We believe that by 2022 Ukrainian companies would go for an IPO in the Ukrainian stock market with simultaneous listing on a foreign stock exchange.
Establishment of investment firms that will replace today’s securities traders became a major step towards implementation of the EU legislation in Ukraine. The investment firms will provide an extended list of investment services while complying with increased prudential requirements under the supervision of a strong regulator, the SEC.
Furthermore, the SEC has prepared a draft law aiming to simplify JSCs activity and offering new tools, including electronic voting and a new JSC reorganisation procedure that will be transparent, clear, and somehow simplified.
Finally, the SEC offers a new corporate governance structure commonly used in Europe providing for both a two-tier governance system comprising a board and a supervisory board, and a one-tier system comprising executive directors (management) and non-executive directors responsible for the supervisory function. These changes will be reflected in the restated Law “On Joint Stock Companies” to be adopted in early 2020.
Top 5 steps to raise Ukraine’s rating in Doing Business in the context of minority shareholders’ rights protection
- To reduce the threshold for a shareholders’ meeting to pass decisions on interested-party transactions to 10% of JSC assets value
- To include the appointment of an external auditor of a JSC in exclusive competence of a shareholders’ meeting
- To ban cross-ownership between a JSC and its subsidiaries
- To restrict the possibility to apply pre-emptive shareholders’ rights when issuing shares of a public JSC
- To increase liability of JSC directors if their actions lead to sustaining losses by a JSC
Another issue currently addressed by the SEC is improvement of Ukraine’s rating in the World Bank’s Doing Business rankings. A number of improvements suggested by the commission were adopted at the end of 2019.
What else needs to be changed? First, it is time to rethink the existing approach to securities transactions, in particular when it comes to brokers whose participation was required in the ’90s, since it provided the regulator with minimal records on off-market transactions. Nowadays, however, all the documents are recorded in electronic form, and no such need arises. Statistical records, for example, may be kept by depository institutions and consolidated at the central depository level. Therefore, we believe that mandatory participation of a trader is a relic of the past, at least when it comes to the off-market transactions.
Also, the EU directive on social enterprises should be implemented. As recently as last year, the law on accounting was amended requiring banks, insurance companies, public joint stock companies, and even large taxpayers in the form of LLCs to follow heavy procedures and file their accounts. The idea itself is a good one: we should definitely implement the EU legislation, and such big companies must report on their activities and be transparent. However, in Ukraine such initiatives may sometimes take a grotesque form. Fully private companies that do not raise money from depositors or insurers and exist in the form of simple LLCs are still obliged to establish supervisory boards and committees as well as hire independent directors who will subsequently elect an independent auditor to carry out an audit. In our opinion, the EU legislation should be implemented wisely, using common sense, without limiting the freedom of entrepreneurship.
To sum it up, we may conclude that the coming years will bring about a global reform of the JSCs and the stock market laws that will eventually morph into a new capital market structure with a new class of financial instruments and investment intermediaries.
Maksym LIBANOV, SEC member
Our plans for the next five years are quite ambitious. Reshaping the Parliament and rebooting the Government allow for sweeping and rapid changes. Our objective is to have Ukraine recognised as a fully compliant EU capital market participant.
To achieve the objective, the National Securities and Stock Market Commission (SEC) must become an institutionally capable capital market regulator with effective supervision tools. The regulatory system must become proportional, transparent, and competitive. This is not an easy task, and here we apply the principles of the International Organization of Securities Commissions (IOSCO) that govern oversight and regulation in developed countries. We have prepared a draft law which, once adopted, will allow Ukraine to join the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (IOSCO MMoU). Ukraine’s accession to IOSCO MMoU will facilitate the integration of our market into global financial markets and will allow us to use international support to combat capital market abuse. It will also reduce losses incurred by investors as well as losses from cross-border crimes sustained by the state.
To protect domestic and foreign investors, we aim to develop a system for combating and preventing capital market offences in line with the EU MAR and MAD regulations.
The 2017-2018 amendments to corporate laws ensured a high level of transparency and quality of reporting by Ukrainian issuers. This will boost relevant “dividends” given that in the long run Ukrainian companies will be able to effectively raise investments through an IPO. Over the next few months, we expect that the first IPO by a Ukrainian company will be held in Ukraine serving as an indicator of whether investors believe in the changes that are taking place.
Over the next five years, a complex and lengthy process of forming a three-tier pension system is to be completed. Starting from 2023, it is expected that the accumulative pension system (the II level) will be launched ensuring, along with the I and III levels, social guarantees offered to Ukrainian citizens and financial stability of Ukrainian pension system while also contributing to the long-term financial resources for the economy.
We expect that the Ukrainian Parliament will consider a draft law on simplification of raising investments and introduce new financial instruments (reg. No 2284), which will significantly expand the number of financial instruments in our market. First of all, the new legislative framework for bonds will allow to restart this market and ensure investors’ confidence, since the law introduces new instruments to protect bondholders’ rights. This law will also comprehensively regulate the functioning of the derivatives market and allow for the introduction of proper hedging mechanisms.
All this will increase trading volume and the number of issuers whose securities will be listed on organised markets. This very law will allow us to make capital markets transparent given that the information on all the transactions in financial instruments will be publicly available. This is an important step towards restoring confidence in Ukraine.
We will intensify our efforts to rebuild public confidence in capital markets and improve financial literacy so that citizens could knowingly use existing financial instruments and improve their own well-being.