The Slovak capital market has been plagued by low liquidity, non-transparency and market manipulation for a long time. The previous government did little to improve the market environment. On the contrary, a set of amendments to The Securities Law, No. 600/1992, and The Investment Company and Fund Law, No. 248/1992, brought the market to the verge of collapse.
The Bratislava Stock Exchange may have reported increased volumes of securities tradiing, but these figures were generated by an expanding trade in state debitures. As for share trading, some 99% of the volume was generated by so-called "direct trades" between the Stock Exchange members. These trades consisted of exchanges of large stakes between principal shareholders of listed companies, with the share prices agreed on beforehand.
The trades market contributed more to market manipulation than to investment pricing, and was promoted by interest groups related to the former government. The new, "government-friendly" owners of privatised enterprises wished to remain anonymous and preferred insider trading to open market deals. One of the greatest incentives to insider trading was the Stranák Amendment to the Securities Law, which introduced the concept of bearer (unregistered) shares. Before 1996, all shares had to be registered with the Slovak Central Securities Depository, and data on shareholders had to be provided. The Ministry of Finance administration at that time was closely connected to the privatisation interest groups, and did its best to promote the vested interest of the government's friends.
The government of Prime Minister Mikuláš Dzurinda, however, has presented an impressive -looking programme for capital market reform. Within a period of 2-3 years, the basic legislative and administrative framework of the Slovak capital market should be brought into line with that of the European Union.
While such goals are easier to set than achieve, the government seems to be taking the first steps on the long road to EU investment markets. At the beginning of this year, a new Department of Financial Markets was created at the Ministry of Finance. The department includes sections dealing with the Capital Market, the Banking and Insurance markets.
This administrative structure should reflect the increasing independence of various financial bodies. Most large securities dealers, for example, were established by banks and insurance companies. Many insurance firms, on the other hand, are directly or indirectly owned by banks. In the near future, the new Financial Markets Department should closely collaborate with the National Bank of Slovakia in regulating the Slovak financial market.
Over the next 5 to 10 years, the Department may become the central regulator of the Slovak financial market, similar to the British Financial Services Authority. The head of the Department, Michal Horváth, is the former general director of the Securities Dealers Association and has detailed knowledge of the problems of securities trading in Slovakia.
As for concrete moves, the Department prepared two documents in April 1999 which should stop the market's downward plunge and should bring Slovakia's capital markets back to the standards of transparency comparable to the situation before 1996, at least. One of the documents is a completely revised Investment Company and Fund Law. Under a new name - "The Collective Investment Law" - it should become a cornerstone of modern collective investment regulation in Slovakia. The prepared law closely follows the 85/611 EU directive on undertakings for collective investment in transferable securities (UCITS). This law should be submitted to parliament for scrutiny over the summer.
The government has set itself the goal of establishing a new legislative framework for the capital market by 2000 or 2001, a framework which should provide for a complete harmonization wit h EU laws on capital markets. An amendment to the Securities Law should set new rules for securities dealers. The rules are to comply with the 93/6/EEC Directive on Capital Adequacy, and securities dealers will be examined with much greater care than before. A new minimal basic capital level, equivalent to 730,000 euros, should provide for better financial stability of securities deals. The Law on Investor Compensation Schemes is also set to be put in force.
In March and April 1999, the staff of the Financial Markets Department several times visited EU headquarters in Brussels and took part in screening Slovak legislaion with regard to its compatibility with EU law. The screening revealed that while most of Slovak laws on stock listings and collective investment complied with EU standards, significant gaps remained in standards of fair trading, investor protection and capital adequacy requirements for securities dealers. The European Commission, however, was satisfied with the ministry's plan to harmonise activities and promised to support the project with expert advisors and financial assistance through the PHARE programme.
Vladimír Baláž is an independent stock market analyst who cooperates with the Sevis Investment Group in Slovakia