One of the outstanding factors in the development of the Ukrainian stock market and attracting investors is the introduction at the legislative level of new financial instruments that meet the requirements of a modern dynamic capital market.
For this purpose, legislators have developed bills No. 9034 and No. 9035.
Anna Perelygina-Kovalchuk, lawyer of ESQUIRES, spoke about the prospects for a new type of security – a bank certificate, and the possibility of using it as a convenient investment tool in her article for the Legal Practice newspaper.
The publication is available in Russian.
A significant factor in the development of the Ukrainian stock market and attracting investors is the introduction at the legislative level of new financial instruments that meet the requirements of a modern dynamic capital market.
In order to create such tools, Bills No. 9034 and No. 9035 were draft, which were submitted to the Verkhovna Rada of Ukraine and are in the process improvement and approval.
Bill No. 9034 of September 3, 2018, “On Amending Certain Laws of Ukraine on Banks’ Financial Instruments” (bill 9034) provides for the introduction of a new financial instrument – a bank certificate, which, according to the plan of lawmakers, combines the features of a bank deposit and a security. The mentioned draft law plans to amend the Commercial Code of Ukraine, and some laws, including the Law of Ukraine “On Securities and the Stock Market” (Law on the Central Bank). As indicated in the explanatory note to Bill 9034, the main purpose of the adoption of the act is to introduce a new type of equity security, which is issued by banks in non-documentary form, due to which it has a convenient circulation and repayment mechanism. What do the Legislator had in mean and who might be interested in a new financial instrument, we will consider in this article.
New type of security
Bill 9034 defines a bank certificate as a debt issued security, confirming the amount of the claim against the bank equal to the nominal value of the corresponding security, as well as the right of the owner of the bank certificate to receive, after the established period, the nominal value of the bank certificate and interest (if interest is provided for by the bank certificate) at the bank that issued it.
A bank certificate is similar to corporate bonds and savings (deposit) certificates on the basis of rights, which it certifies. Moreover, it differs from a savings (deposit) certificate with an non-documentary form of existence. It is the non-documentary form that gives the financial instrument the possibilities of convenient and quick circulation on the secondary market (both exchange and over-the-counter), and its repayment is carried out through the depository system of Ukraine directly to the personal account of the owner of the bank certificate.
Thus, in the future, a new financial instrument, which is issued by the bank, will combine the attributes of a bank deposit and security, will be able to freely circulate in the secondary market and be used as a convenient investment financial instrument.
However, we should mention the Draft Law No. 9035 “Draft Law on Amending Certain Legislative Acts of Ukraine to Simplify Attraction of Investors and Introducing New Financial Instruments”, which is pending in the Verkhovna Rada of Ukraine and providing for amendments to the Central Bank Law, including the amendments in regard of the expansion of the list of financial instruments, while the bill does not contain any references to bank certificates. Consequently, the adoption of both bills in the current version will lead to the need to re-amend the Law on the Central Bank (or the Law of Ukraine “On Capital Markets” as amended by draft law No. 9035).
Issue and placement
Since a bank certificate is a type of equity security, the procedure for its issue and placement (issue) is divided into stages and is subject to state regulation. In the classic case, an issue (stocks, bonds, etc.) is a set of actions of the issuer aimed at registering a securities issue with the National Commission for Securities and Stock Market (NCSSM), their placement among investors in securities and is carried out in sequence established by the Law on the Central Bank and by-laws of the SCSSM. Only the issue of government bonds and derivatives, as well as treasury bonds, is not regulated by the National Commission for Securities and Stock Market, since their issue is related to the budget process.
Regarding a bank certificate, Bill 9034 provides for a specific issue procedure. Firstly, the issue of these certificates is registered by the Central Securities Depository, namely the National Securities Depository of Ukraine (Central Securities Depository), followed by notification within the next business day from the National Commission for the Securities Market and the National Bank of Ukraine in the manner established by them on the registration of the issue of bank certificates.
Secondly, Bill 9034 shortened the list of stages of issuing bank certificates, and also changed their sequence. The placement of these certificates is carried out until the registration of their issue, in addition, the stage of issuing a temporary global certificate is not provided, which is the basis for recoding securities and accounting for the issuer’s obligations under them, and the stage of registering the results of placement of bank certificates among the first owners is also missed.
The motives for such innovations are understandable, since the entire emission procedure is significantly reduced, but its logical sequence is violated – the placement without preliminary registration of the issue of a temporary global certificate. In addition, the procedure for issuing a bank certificate contradicts the principle of state regulation of the market as a whole, implemented by the SCSSM in the form of registration of securities issues (the Central Securities Depository is not included in the Law of Ukraine “On State Regulation of the Securities Market in Ukraine” in the list of bodies implementing such regulation, and the Draft Law 9034 does not provide for changes regarding this). At the same time, one of the main tasks of the SCSSM is the protection of the rights of investors, which is implemented, in particular, by canceling the issue or declaring it unfair, or by stopping the process of placing securities. From the mechanism of issuing bank certificates provided for by the Bill 9034, it is still not clear how the National Commission for the Securities Market can fulfill its regulatory functions by receiving a notification of the fact of the issue (registration of the issue after completion of the placement of bank certificates).
Perspectives of usage
As conceived by lawmakers, the introduction of a new type of financial instrument of the bank (security) in a non-documentary form of existence, convenient and technological in issuing and circulation, will contribute to the development of the capital market through the mobilization of financial resources and their effective use. But one can hardly expect a lively interest in a bank certificate among ordinary people. Firstly, a potential investor must have a previously opened securities account with a depository institution. And although the procedure for opening of such an account is not complicated, nevertheless, you must pay for accounting of the ownership right for securities. Secondly, the resale of a security on both an unorganized and an organized market (stock exchange) requires the participation of a professional participant – a licensed securities trader, who also charges a commission for his services. Thus, it all adds up to that the acquisition and resale of a bank certificate will be interesting to a qualified investor, who considers an investment in securities is a type of professional activity. An ordinary consumer of banking services will find it easier and cheaper to arrange their investment as a deposit. But banks issuing bank certificates, which simultaneously operate as a professional participant of the securities market (licensed by the National Commission for Securities and Stock Market to operate as a depository institution and / or securities trader), at the same time with offering to invest in bank certificates, will be able to offer their accounting and circulation services.