“Scanning” Regulatory Developments and Finance Opportunities
Global financial instability has limited opportunities to get finance on international capital markets, while lending continues to be expensive. This situation has probably become a driver for paying more attention to local regulation and enabling new opportunities for potential borrowers and investors. In this regard, our next discussion panel will address recent high-profile developments.
At this stage, the country lacks regulation of the derivatives market. Are there any expectations for new legislation? What are the legal rules that investors should comply with to secure the possibility to hedge risks with these financial instruments?
As of the date, the law-making process on derivatives in Ukraine remains in shambles. Since 2008 three of four drafts On Derivates have been withdrawn and the last one is in an ambiguous situation.
Moreover, on 6 July 2012 the On the System of Custodian Accounting of Securities Act of Ukraine was voted and is unwontedly expected to be enacted. The crucial issue is that the said Act in its recent edition implies a true-to-fact risk of monopolization of clearing of derivatives by the Central Settlement Centre, bringing adverse changes to Ukrainian stock markets, in general, and derivatives transactions, down to their vanishing, in particular.
Obviously, the mentioned On Derivatives bill is crude and requires substantial refining. In particular, to ensure transparency of derivatives market the financial instruments shall be complied with common practice of European stock exchanges, as well as EU Regulations on derivatives. Moreover, to make the market attractive for investors, whether local or foreign, the vetoing of the On the System of Custodian Accounting of Securities Act of Ukraine is much appreciated with strong prescriptions to the legislator to revise the power and status of the Central Settlement Centre. Otherwise, it becomes infeasible to ensure free competitive derivatives market, at one point, and gives reasonable grounds to expect an increase in costs related to derivatives transactions by the sole monopolist resulted in an increase of investors’ expenses, at the other point.
Everybody is aware of the initiative of the National Commission on Securities and Stock Market about cross-listing of Ukrainian issuers on the Moscow stock exchange, which would open access to the Russian capital market. Are there any legal prerequisites for implementation of this initiative? What options for placement seem technically feasible?
The initiative of the National Commission on Securities and Stock Market about cross-listing of Ukrainian issuers on the Moscow stock exchange, which would open access to the Russian capital market, has gained significant public attention. However, the permits are never applied for due to associated regulatory constraints. Instead, Ukrainian issuers resort to structures where investors provide financing to offshore special purpose entities (SPVs) or holding companies rather than Ukrainian companies directly.
It is important that the NSSMC bring its regulation on offerings abroad into consistency with the current securities laws. The existing limitations should be phased out. For example, the regulation restricts IPOs abroad (only secondary offerings are allowed) and prohibits issuers from offering securities at a price lower than the one established at a Ukrainian stock exchange. Under the regulation, ownership of securities offered abroad should be recorded under the rules of Ukrainian law. The National Depository of Ukraine has established correspondent relations with several Russian institutions, but it is not clear if this is sufficient to meet this requirement.
Issuers are also restricted in purchasing foreign currency and transferring it abroad. To pay dividends and interest, they must present a number of specific documents, including proof of ownership of securities by the investor and confirmation of the initial transfer of funds to Ukraine. It is important to ensure that issuers can comply with the applicable currency control formalities.
Expert circles are keenly discussing the issue of opening access of foreign securities to the Ukrainian market. To what extent could potential domestic investors be interested in it? Would it mean automatic exclusion of non-residents who work with investment accounts?
On 10 July the National Securities Commission approved the revised Draft Regulation On Admission of Securities of Foreign Issuers to the Ukrainian Stock Market — a version which includes proposals from market players. The document has been actively developed for over a year now.
Previously the Commission’s main message associated with the Regulation was that a new type of asset — foreign issuer’s security — should become an investment instrument with enough liquidity to give new life to the stock market. After all, the Regulation provides for the trades in such securities only at the dedicated stock exchanges qualifying under the information exchange requirements (except if granted a special permit of the Commission — for which the regulation provides no criteria).
The new Draft Regulation is even more articulate about which securities should be admitted in Ukraine — by stating that the majority of the issuer’s assets should be situated in Ukraine. This also resembles one of the main reasons for inventing the Regulation, i.e. to establish a legitimate instrument of getting the investments of the Ukrainian business back into Ukraine for the purpose of attracting local investors. The regulation seems to work for shares and depository receipts as well as for bonds. Given that the issuers of relevant securities shall be admitted to the listing on a reputable foreign exchange (which means that the business already has foreign investments), local investors may indeed be interested in such an instrument as one with good investment characteristics. Apart from that the investors will also have a new opportunity to diversify their assets. A brand new “pool” of securities may provide more adequate and less speculative trades in general.
Yet, there are several questions remaining which may change the first impression. Firstly, there is a chance that state-issued securities will be flown back to Ukraine (the consequences are unclear so far). Secondly, there is no clear information as to the prospective limitations applicable to the investors — i.e. the regulation does not provide whether foreign investors operating on the Ukrainian market shall be eligible for acquisition of the relevant securities — at the same time, the Commission had previously insisted that one of the reasons for the Regulation is to attract the foreign investors to the Ukrainian stock market. Finally, the revised regulation is ignorant as to the foreign investment licensing regime — the most discussed issue is that of the acquisition of the foreign issuer’s security could be regarded as a foreign investment which is subject to a license from the NBU. It is also unclear whether Ukrainian investors will be allowed to work through a mechanism similar to the investment accounts available for foreigners.
What are the mechanisms for protecting the rights of corporate bondholders in other countries? What jurisdictions can share their experience for their use in our country? Is the disclosure of ultimate beneficiaries of issuers a common practice?
Bondholders in Ukrainian deals are sophisticated investors, i.e. banks, pension funds, investment funds, etc. Compared to public deals, prospectus requirements for deals with sophisticated investors are less strict. However, issuers still need to disclose all material information about their business, financial results, etc. The extent of such disclosure usually depends on whether it is a Regulation S deal (i.e. bonds are distributed strictly among non-US bondholders) or a Rule 144A deal (i.e. bonds may be distributed among US institutional investors only). Rule 144A deals tend to be more stringent.
Another way in which bondholders can protect themselves is through covenants and events of defaults under the issue. Trustees play an important role by helping bondholders resolve various coordination issues, most notably with monitoring covenants and defaults, making payments and at enforcement.
Guaranteed Eurobond issues are not something unusual in Ukraine. Having the benefit of a corporate guarantee offers some additional ways for investors to get their money back if things go wrong.
Most Eurobond deals of Ukrainian issuers are done under English law. English law gives a choice of legal instruments that are currently unavailable (or not easily adaptable) in Ukraine. One of the notable examples is the concept of a “trustee”, which has proven to be very useful in issues of securities. Ukraine can also look at the experience of some continental jurisdictions and how they approach the issue of coordination of bondholders.
When a company goes public, either through an IPO or a Eurobond issue, it is important that the company discloses information about its beneficial owners. In addition, terms of Ukrainian Eurobond issues contain a change of control provision. Should a business cease to be controlled by one or more of its beneficial owners, bondholders have an option to demand early redemption of bonds.
