Maxym Libanov: “The stock market is most hindered by lack of trust”

What are the changes in the regulatory landscape in the financial sector 2020 is retained in the memory? What to expect from 2021? When will Ukrainians be able to buy the most liquid stocks included in the indices of the world’s largest stock exchanges? And what’s wrong with our stock market? This was stated by Maksym Libanov, the NSSMCer, Ph.D., in his interview to “Yuridichna Hazeta”.

–  Maksym, tell about the main innovations in the financial sector of Ukraine in 2020.

–  There were several important things that happened last year. First, it is necessary to say about changes in the regulatory landscape. On July 1, 2020, the Split Law came into force, in the result of which the National NSSMC for State Regulation of Financial Services Markets was liquidated and its powers were transferred to the National Securities and Stock Market NSSMC and the National Bank of Ukraine. Namely, if we had 3 regulators of the financial sector before, now there are 2. This is the biggest change that 2020 is remembered for.

The second thing is that in the summer the Parliament adopted and the President signed a new Law on Capital Markets (Law №738-IX On Amendments to Certain Legislative Acts of Ukraine Concerning Simplification of Attracting Investments and Introduction of New Financial Instruments). Most of its provisions should come into force on 01.07.2021, i.e. almost six months later. This law most fundamentally restructures the capital market in the country. It provides the transformation of both stock exchanges and securities traders into market operators. Instead of a stock exchange, we will have 3 new forms of market: a regulated market, a multilateral trading facility and an organized trading  facility. And investment firms will operate instead of securities traders in our country starting from July 1.

Such a paradigm of professional intermediaries is provided by the relevant acts of the EU legislation, i.e. it is a part of the Association Agreement, which Ukraine has committed to implement just by 2021. Therefore, from 01.07.2021 our capital market should start working under new rules as close as possible to the European standards. On the one hand, this will require additional time and other resources from market participants and the NSSMC has to be adapted to the new requirements and new rules of the game. On the other hand, it opens up additional opportunities, first of all, for market participants as to how they can conduct their business and what services they can provide to customers.

–  What changes do you expect the most in 2021?

–  First of all, I expect that the Law on Capital Markets, in fact, will work. A transitional process is currently under way, and the NSSMC has a task to develop and approve about 70 new regulations. Therefore, it is a certain challenge for us.

From a fundamentally new, probably, we expect the adoption of a new version of the Law on Joint Stock Companies. We have been working with it in the Parliament for more than a year. In the summer of 2020, it was adopted in the first reading, but qa lot of amendments were submitted before the second reading (more than 1000). The vast majority of them are quite constructive and aimed at improving and enhancing the quality of the regulatory impact of the draft Law. We expect that this January the Parliament will consider this draft Law at first at the level of the Committees, and then in the second reading.

In fact, this draft Law gives joint stock companies quite a lot of new in terms of possible ways of holding general meetings (it introduces different options for remote and electronic voting) and solves many other conceptual issues that hindered the development of joint stock companies. Therefore, we, of course, expect the adoption of this Law in the nearest future and hope that the Parliament will not stop at the adopted laws and will continue to develop legislation in terms of expanding and the emergence of new instruments in the financial market.

We also expect the appearance of agricultural receipts in the new edition. The relevant draft Law is in the Parliament and has already been supported. In addition, we hope that soon the Verkhovna Rada of Ukraine will be able to move to consider a draft Law on Warehouse Certificates, which should be entitlement securities. There may be a number of other financial instruments that will also be proposed to the Parliament.

–  Are there any amendments planned to the Commercial Code to systematize all of this?

–  In fact, changes to the Commercial Code are constantly being made. We understand that this Code was adopted in 2003 and it reflected the legislation that was formed in Ukraine mostly in the 90s. It was a certain attempt to codify various legislative acts that were adopted in the Parliament in the early and mid-90s. In particular, the Laws on Property, on Enterprises, on Entrepreneurship are the laws that formed the basis of the Commercial Code.

Of course, in the years that have passed since its adoption, much has changed; so many amendments are made to the Commercial Code on a regular basis. In particular, the Law on Capital Markets, which was adopted, led to the revision of entire chapters of the Commercial Code. Moreover, in order to eliminate duplication, many outdated rules were simply excluded from the Commercial Code in order to maintain the unanimity of the legal regulation of relations concerning securities, financial instruments and activities related to them. Therefore, it is clear that the same Law on Joint Stock Companies provides a number of amendments to the Commercial Code, and I think other laws will propose certain amendments to this Code.

–  So do we need a completely updated Commercial Code?

–  To be honest, I take the position that we need to get rid of this dualism when we have the Civil and Commercial Codes, to unite them in a single piece of legislation, to eliminate the conflicts that exist between them, and to leave one Code. I know that such work is being conducted in the Verkhovna Rada by a working group chaired by Ruslan Stefanchuk, the First Vice Speaker, so I think that in the future they will propose a draft Law.

–  Do you think that supporters of the Commercial Code will support it?

–  The issue doesn’t concern the supporters of the Civil and Commercial Codes. This is a theoretical discussion that will last forever. The issue concerns the fact that there are two pieces of legislation that need to comply with each other.

–  Recently, the NSSMC approved the circulation of shares of foreign IT companies in Ukraine. In particular, 6 companies were admitted to trading — Facebook, Tesla, Netflix, Microsoft Corporation, Visa and AMD. We understand that this is a significant step for Ukraine, but the question is why only now we begin to develop this investment direction?

–  We have a legally defined procedure for the admission of foreign securities to circulation in Ukraine. In order for shares of Apple, Facebook, Tesla to be admitted to such circulation, there should be a first interested party who will conduct the entire technical procedure. And we understand that, in fact, in Ukraine, securities that are in the depository system of the United States or Europe should physically enter Ukraine so that Ukrainian investors can buy them here and credit them to their own accounts in the Ukrainian depository system. This requires certain technological processes related to the “migration” of securities from a foreign depository system to the Ukrainian one. It is clear that foreign securities will not appear in the Ukrainian depository system till a “pioneer” who takes these steps appears.

In 2020, several securities traders took such an initiative and carried out the necessary organizational actions, appealed to the NSSMC, and the NSSMC granted permission for the circulation of these securities in Ukraine. As far as I know, not all of these securities have been physically imported yet, i.e. they cannot be bought on the Ukrainian stock exchange yet. But hopefully, in the nearest future, this opportunity will actually appear.

In fact, now my colleagues from the market are working to simplify the bureaucratic procedure and allow the most liquid stocks included in the indices of the largest stock exchanges in the world (New York, London, Frankfurt Stock Exchanges) to enter the Ukrainian stock market under a simplified procedure.

–  And in what perspective will it be possible – 1, 2, 5 years?

–  Actually we hope to complete the review of regulations in this field in January, so that already in the second quarter of this year all these securities could be put into circulation on the territory of Ukraine. It is definitely not about years, we hope that in a few months we will cope.

–  Can an ordinary Ukrainian buy shares in these companies?

–  Of course. That’s what it’s for.

–  And when can you start investing? From what amount?

–  You can buy one share. For example, if we talk about Apple shares, they were introduced in the depository system, it seems, in the summer of 2020, and I think now Ukrainians have the opportunity to physically buy even one share (its price is about $ 200), this is a more or less acceptable figure in hryvnia equivalent. But of course, the larger the investment package will be, the lower the cost of administrative procedures related to the registration of property rights will be. Investing from $ 2–3 thousand is considered a classic. This is the threshold where administrative costs are almost imperceptible and can be covered by the income received by the investor.

–  What other actions does the Ukrainian stock market need for development?

–  In fact, there is a lot to talk about, but all these steps are described in the Strategy for the Development of the Financial Sector of Ukraine until 2025. This strategy was developed by the NSSMC and the NBU with the involvement of market experts with public discussion. The Strategy was approved a year ago, in early 2020. Now, after the first year of its implementation, we, together with the NBU, plan to conduct a review, assess the state of implementation, and possibly propose some changes and clarifications to its text. You can keep an eye on everything, because this process is quite public. Both the NSSMC and the NBU regularly make relevant publications and announcements on their websites. You can find the text of the Strategy on the website.

–  And what hinders the domestic stock market the most? What are the obstacles?

–  I would probably say that the stock market is most hampered by a lack of trust. This is the most important thing. In order for the market to “be”, an investor should come. In order that he invests his money, he should be sure that his interests will be protected, he should have confidence in the stock market instruments that do not deceive him. On the other hand, the issuer offering the relevant financial instruments should also be protected in some way, because as a debtor it has certain obligations, so it should be protected from abuse by the creditor, which is the investor. Now there is a situation when there is simply no mutual trust between issuers and investors. As a result, both sides generally do not consider the stock market as a possible tool for raising capital and income opportunities, respectively.

As a matter of fact, most of the steps envisaged by the Strategy 2025 are aimed at building this trust, so that the investor understood that he is not deceived, and the issuer knew that if he offered such instruments, he would not be at a disadvantage comparing with financing through the banking system where there is a certain level of protection for both the creditor and the debtor.

From my point of view, the issue of trust is the key one.

–  What has changed in corporate governance this year? How did the pandemic affect this? What was the most difficult?

–  First, the rules for holding general meetings have changed. At the beginning of the pandemic, back in March 2020, the NSSMC proposed appropriate initiatives to provide a tool for remote general meetings, as restrictions were imposed on any meeting of more than 5 people in one place. Therefore, the NSSMC in March 2020 proposed to allow the general meeting to be held remotely. The Parliament supported this initiative, and the transitional provisions of the Law on Joint Stock Companies were supplemented by a new temporary provision related to restrictions for the quarantine period.

The requirements of the Law on the terms and procedure for holding the annual general meeting were also repealed, and the NSSMC was tasked with immediately developing a temporary procedure for holding a remote general meeting. The NSSMC developed and approved it in early April 2020, and starting from mid-April 2020 the JSC has the opportunity to hold a general meeting remotely, when shareholders do not physically meet in one place, and everyone votes remotely and provides information on his vote to the issuer, namely the joint stock company, with the help of the central depository and depository institutions. And then the issuer organizes the calculation, summarizing and registration of the results of the general meeting.

Of course, at the beginning the main problem was to convince both shareholders and joint stock companies that such a mechanism for holding general meetings is effective, reliable and secure. Sometime in May 2020, it was held the first general meeting under this procedure, and by the end of 2020, an increasing number of joint-stock companies began to hold remote general meetings. Even such a “monster” in terms of the number of shareholders as Raiffeisen Bank Aval, which has more than 100,000 shareholders, was able to hold a general meeting without any problems.

This indicates that the procedure for holding a general meeting is workable. In fact, the new version of the Law on Joint Stock Companies stipulates that such a mechanism for remote holding of general meetings will be introduced on a permanent basis. After all, we are in the 21st century and can use more modern methods and mechanisms of holding meetings.

–  And what exactly is remoteness? How long is this procedure?

–  What’s the mechanism there? – Each shareholder has a week or two to take the e-newsletter on the company’s website, print it out, if necessary, fill it out and send it to his depository institution. He can do this through electronic communication channels and a qualified electronic signature, or he can use more traditional channels. You need to contact your depository institution to do this and agree on how the issued bulletin can be transferred to the depository institution. That is, in fact, instead of gathering 100,000 people in one place, the process was broken down into small time points, where each shareholder individually makes certain decisions and makes them individually. Yes, it takes some time, it is almost impossible to synchronize it in one day, so the remote procedure of the general meeting provides that voting takes at least a week.

–  In addition to the law on Joint Stock Companies, what changes in corporate governance should be expected this year?

–  The NBU has proposed appropriate changes for the banking environment, and a corresponding draft Law has been registered in the Parliament, this draft Law reviews the corporate governance system for banks thoroughly. So we are waiting for them.

Source of information: Yuridichna Hazeta