Legislative Update

The National Bank of Ukraine updated the classifier of foreign currencies and bank metals. How can the updated Classifier boost the investment attractiveness of Ukraine?

On 19 April 2016, the National Bank of Ukraine adopted Resolution No. 269 On Amendments to the Classifier of Foreign Currencies and Banking Metals (the Resolution). The Resolution updated the Classifier of Foreign Currencies and Banking Metals (the Classifier) for the first time in 10 years. The Resolution came into effect as of 4 May 2016.

By adopting it the NBU expanded the list of currencies listed in the 1st Group from 12 to 23 hard currencies by adding currencies of EU countries beyond euro area as well as currencies of new financial centers such as Hong Kong, Singapore, South Korea, etc.

It is noteworthy that the Chinese renminbi (RMB), which is to be included in the basket of currencies that will form the IMF’s Special Drawing Right from 1 October 2016, has also been included in the 1st Group, while the Icelandic Krona (ISK) has been excluded from it.

Since foreign investments in Ukraine can be executed only in 1st Group currencies, the investment opportunities of many foreign investors have now been broadened. New currencies of the 1st Group will be subject to the rules governing foreign investments coming into Ukraine.

In the meantime, certain proceeds in the above currencies (e.g., export proceeds, borrowings) became covered by the 75% mandatory sale rule.

It should be noted that the NBU later passed Resolution No. 308 dated 5 May 2016 which cancelled the 75% mandatory sale rule in respect of foreign investments proceeds in Ukraine.

Moreover, the broadening of 1st Group currencies list will widen the possibilities of the internal foreign currencies exchange market by enlarging the number and diversifying the currencies traded. This can also have a positive impact on the Ukrainian economy.

Therefore, the new liberalization and modernization steps of NBU aimed at attracting new foreign investment in Ukraine may benefit the country if they are continued further by the NBU.

 

Nataliia Murashko,

Associate, Asters

How can the introduction of the independent directors’ mechanism, according to the Investors’ Rights Protection Act of 7 April 2015, No. 289-VIII, affect the investment attractiveness of the country and investor protection rights?

Despite the majority of jurisdictions view independent directors as a powerful tool of investors’ rights protection, efficiency of the mechanism, suggested by Act of Ukraine No. 289-VIII, is not univocal.

In general times, independent directors guarantee protection of minority shareholders by ensuring that all decisions taken by the management board are aimed at a company’s benefit, as opposed to profit of certain particular shareholders, who control the directors. Such a mechanism decreases the chances of manipulating the board or vest control over a company’s decisions in a majority shareholder. Once appointed, it is hard to dismiss an independent director: the procedure prescribes getting rid of the entire management board. Moreover, appointment of independent directors in public joint stock companies is mandatory.

Despite these changes are supposed to improve the investment climate of Ukraine and ensure protection of investors’ rights, there are various flaws which might slow down the positive effect of the reform unless they are fixed.

The requirements for independent directors put forward vague and ambiguous wording. Thus, it will be hard to define “material business relations” and “material compensation”, which might allow majority shareholders to eliminate certain good candidates for independent director position on a formal basis.  Additionally, the recent increase in listing requirements for public joint stock companies led to a tendency of restructuring public joint stock companies into private, e.g. DTEK, Kyivenergo.

 

Igor Lozenko,

Senior associate, AVELLUM

National Bank Resolution No. 308 On Amendments to Certain Legislative Acts of the National Bank of Ukraine envisages a gradual liberalization of temporary anti-crisis measures introduced in 2014-2015 to stabilize the situation on monetary and currency markets. How can it improve the conditions for foreign transactions payments?

Since the mandatory 75% foreign currency sale requirement for proceeds transferred into Ukraine as foreign investments has been cancelled, this should be a positive move for counterparties of foreign investors and companies enjoying FX equity injections from their foreign parents who will now be able to retain received hard currency funds on their accounts and convert to Hryvnias when need be.

At the same time, shortening the period (from four to three business days) for prior reporting of FX cross-border payments as well as for mandatory depositing of Hryvnia funds with the servicing bank for FX purchasing seems quite nominal. While this will facilitate the speed of making cross-border payments by Ukrainian residents, including importe+rs, and may slightly reduce the currency risk faced by them when making such advance deposits, the NBU still retains the right to reject any foreign currency purchase or cross-border payment operation at its discretion (though within such a shortened 3-day period).

The signs of liberalization marked by NBU Resolution No. 308 of 5 May 2016 should positively affect cross-border settlements by providing a little bit more freedom there. The steps taken are, nonetheless, minor in light of the scale of temporary currency control restrictions of the NBU imposed on the market within previous years and which are yet in place. On the other hand, the NBU appears to be on the way of gradual easement of temporary restrictions, which seems encouraging.

 

Serhiy Mykhaylyk

Associate, Kinstellar

On 10 May Parliament approved in principle Draft Act No. 2764 On Amendments to Some Legislative Acts on Ensuring Exercise their Right to Convert the Cash Requirements for the LLCs on its Contribution to the Authorized Capital. What benefits will LLCs receive in the field of debt restructuring?

If adopted Draft Act No. 2764 will regulate the debt to equity conversion for limited liability companies in Ukraine. The legislative initiative is aimed at solving the existing uncertainty with respect to use of this debt restructuring instrument by LLCs envisaged by Article 144 (2) of the Civil Code of Ukraine. The Ukrainian borrowers and their creditors will be entitled to apply the economically efficient mechanism widely used in the European countries that enables improving the position of the company that is experiencing financial hardship.

The adoption of the Act will incentivize the foreign creditors to participate in debt restructuring of the Ukrainian LLCs by mean of debt to equity conversion. This option of debt restructuring might be more attractive for them taking into account that draft document suggests recognizing the conversion of the creditor’s rights under the cross-border loan agreement into the equity of the debtor as a type of foreign investment. However, to have it fully operational the existing foreign exchange regulations should be adjusted accordingly to allow the discharge of obligations under the cross-border loan agreement by means of a debt to equity swap.

We believe that the Act may serve as effective tool for debt restructuring and may improve the investment climate in Ukraine.

 

Sergiy Gryshko

Partner, Redcliffe Partners

Draft Act No. 2763, that suggests canceling state registration of foreign investment, has been adopted by Parliament. How it may affect eliminating corruption in state investment registration?

Explanatory note to the Draft No. 2763 declares that the Bill is “aimed at enhancing encouragement of attracting investment” by simplifying procedures for receiving such investments. In particular, Draft No. 2763 purports to abolish state registration of foreign investment. The abolition of post-Soviet old-fashioned “registration” of investments is indeed long overdue. This registration meant additional, if useless, paperwork for foreign investors wishing to open new ventures in Ukraine or buy ongoing concerns without adding any additional comfort to investors or safeguards to the State.

However, one ought not to expect to see an immediate spike in foreign inward investment when Draft No. 2763 is voted into law. The thing is that the investment registration which is going to be abolished looked good on paper but was quite meaningless in reality. By contrast with many other regulatory approvals and permits which Ukraine abounds in, I have never heard of any foreign investor being asked to give a bribe for having his investment registered. This is perhaps not surprising since there was very little value in such registration.

Therefore, Draft No. 2763 will hardly have any impact on corruption in local investment departments. However, it will potentially remove any jurisdictional obstacles for investments which need to be registered to receive protections under Ukrainian investment protection treaties. For example, Article 2.2 of the 1993 Germany — Ukraine Treaty on Encouragement and Protection of Investments provides that only investments made “in accordance with the law” are subject to protection emanating from this Treaty. If applied to German investments in Ukraine, such provision could previously have been interpreted to extend to registered investments only. Draft No. 2763 will clear up this ambiguity.

 

Vadym Vershniak

Criminal law department lawyer, AVER LEX Attorneys at Law

Draft Act No. 4548 On Amendments to the Criminal Code of Ukraine regarding the Rules of a Pre-trial Imprisonment Period Enrolment was registered in Parliament. How can the adoption of this norm affect the balance of interests between advocacy, prosecution and complainant?

After “Savchenko’s Law” came into force, according to which one day in the detention cell counts for two days of imprisonment, in case of such a punishment, many persons were actually released; and among these persons there are many people convicted for a serious crime and particularly serious violent crimes. For those who still continue serving a sentence, the imprisonment period was considerably shortened.

In connection with this, there is a necessity to introduce amendments in order to improve the procedure of release; they are provided, in particular, in this Draft Act.

Firstly, lawmakers have taken a right decision to separate crimes of a low, average severity and severe and particularly severe crimes. In addition, besides this crimes classification separation, attention must be paid to the form of guilt (intent, carelessness). Secondly, the interests of a victim and a prosecution in this case are taken into consideration, as a person who committed the crime would serve a corresponding sentence. The interests of advocacy are not taken into account in full. For example, a person has committed intentionally violent acts towards another person, but according to Article 12 of the Criminal Code of Ukraine, these would be crimes of a law or average severity. Correspondingly, such a person would have one day of a pretrial detention as two days of imprisonment.

And another person who has, for example, committed a crime due to carelessness. That is, a person did not foresee or want any socially dangerous consequences emanating from his/her acts, although he/she should and could have foreseen them; such a crime is, according to Article 12 of the Criminal Code of Ukraine, qualified as a severe and a particularly severe crime. Correspondingly, this person would not get one day of a pretrial detention as two days of imprisonment. An unequal situation appears when a person who has committed an intentionally socially dangerous act can be released earlier than the person who has committed a socially dangerous act due to carelessness. That is why this Draft needs to be elaborated, taking into consideration all the forms of guilt.

 

Igor Reutov

Head of department, Gramatskiy & Partners

Draft Act No. 3719 On Amending the Code of Criminal Procedure with Regard to Certain Issues of Investigative Actions with the Aim of Ensuring Additional Guarantees of Legality During Their Conduct. What kind of legal protection should anticipate IT companies in the event of adoption of this act?

The Draft of proposed Act of Parliament No. 3719 On Amending the Code of Criminal Procedure with Regard to Certain Issues Of Investigative Actions With Aim of Ensuring Additional Guarantees Of Legality During Their Conduct is a long-awaited piece of legislation. It is intended to reduce the risk of abuse of power by investigative agencies when they conduct search and carry out warrants of seizure. On the other hand, the amendment, if enacted, will enhance the rights of persons being searched and persons whose property is being seized.

The Draft, inter alia, introduces a general rule, which explicitly, as opposed to the legislation in force, prevents investigative agencies from seizing computers, their parts and mobile phones, instead they will be obliged, if required, to copy information kept on such devices. The positive effect of the amendment will be appreciated by IT-companies whose business will not be stuck, in contrast to existing state of affairs, because of unreasonable seizure of their computers, hard disks, smartphones, etc.

Another positive amendment worth mentioning is that the Draft facilitates admission of an attorney-at-law to the place being searched. The Draft unequivocally states that an investigation officer must admit an attorney-at-law to the place being searched, at any stage of the search, whereas current regulation implies that an attorney-at-law is admitted by an investigation officer if the former is actually at the place being searched at the moment when the search commences, otherwise the attorney-at-law is often not allowed to be present.

To sum up, the Draft is a very promising piece of legislation which, if enacted, will considerably amplify legal protection against unreasonable search and unreasonable seizure. Hopefully, Parliament will enact a bill into law and the President will not exercise his right of veto.

 

Dr. Svitlana Kheda

Certified mediator, counsel, SAYENKO KHARENKO

The parliamentary Committee on Legal Policy and Justice approved for adoption of the Draft Act No. 665 On Mediation. How can the adoption of this act affect the efficiency of the Ukrainian judicial system? What is the intersection between the Institute of Mediation and the judiciary?

The supporters of mediation welcomed a recent decision by the parliamentary Committee on Legal Policy and Justice to recommend Verkhovna Rada passing in principal in the first reading the Draft Act On Mediation No. 3665 authored by MP Olena Shkrum et al. This is an important step forward to the legal regulation of mediation in Ukraine. The Act on Mediation would declare that the state endorses mediation as an effective/efficient alternative to corrupt Ukrainian courts. Mediation would be formally recognized in settling various disputes (e.g. commercial, labor, family, etc.), including those with foreigners. It could be used not only before filing a lawsuit but also during/after a court proceeding, and within a ruling enforcement procedure.  

For many years there were two mediation drafts sitting in Parliament. One of them (supported by the majority of Ukrainian and foreign mediators) is aimed at developing a framework act declaring mediation as part of state policy (currently Draft No. 3665). The other bill drafted by the group led by Serhiy Kivalov would, if adopted, overregulate mediation by denying its nature of a flexible and voluntary dispute settlement mechanism.

Finally, in 2016, Ukrainian mediators, as well as many judges and lawyers seem to have reached a common understanding that both bills have their own flaws. They agreed to work together on producing an improved bill prior to the second reading taking into consideration reasonable provisions of Mr. Kivalov’s bill, namely No. 3665-1.

 

Olha Demianiuk

Counsel, head of Healthcare Industry Group, Baker & McKenzie

The Ukrainian Ministry of Health has published a draft regulation of the Cabinet of Ministers on approving the Concept of the Reform of the Financing of the Healthcare System in Ukraine. What are the key innovations for the healthcare system? How can the adoption of this concept affect the quality of healthcare?

On 5 May 2016 the Ministry of Health of Ukraine (the MOH) published for public discussion a draft regulation of the Cabinet of Ministers of Ukraine on Approving the Concept of the Reform of the Financing of the Healthcare System in Ukraine.

The draft Concept suggests the following major changes to the current system of healthcare financing in Ukraine:

1. Creating the State Guaranteed Package (the SGP) of medical services that any citizen of Ukraine can receive without charge. Services beyond the SGP will be provided upon co-payment or full payment by patients. Additionally, a separate category of privileged citizens will be entitled to any medical services beyond the SGP for free.

2. Creating the National Agency for Healthcare Financing (the National Agency) under MOH management. The National Agency will become the only purchaser of medical services at the expense of the state budget, based on unified basic tariffs and quality requirements. The National Agency will conclude public procurement agreements for provision of the SGP with medical institutions of any form of ownership, whether private, state or municipal.

3. Implementing a new “money follows the patient” model of paying for various medical services. As a result, the current system of financing infrastructure maintenance (which is tied to the number of hospital beds) will be replaced by direct payments to suppliers for services actually provided.

The implementation of the new system of healthcare financing should result in an overall improvement in the quality of medical services and drive greater transparency and efficiency in the allocation of hospital resources based on quality of care. If properly implemented, it should result in better protection of citizens in case of illness, effective and fair distribution of funds from the state budget, greater independence of medical institutions. It should also increase the role of voluntary medical insurance.