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Securities bill to depress market

A new amendment to the Securities Act passed by Parliament at its November session will severely depress interest in and the liquidity of the capital market in Slovakia, market organizers and brokers said.
This latest change in securities legislation - already the seventh in the past four years -means that shares will no longer have to be dematerialized, that is the price at which they were bought or sold need not be disclosed. It also means that shareholders are no longer obligated to trade their shares on the capital market.
Reactions from leading Slovak officials involved in the capital market was swift and negative. Deputy Finance Minister Jozef Magula, widely known as the architect of the ministry's sometimes controversial capital market directives, resigned on November 7, the day after the measure passed.

A new amendment to the Securities Act passed by Parliament at its November session will severely depress interest in and the liquidity of the capital market in Slovakia, market organizers and brokers said.

This latest change in securities legislation - already the seventh in the past four years -means that shares will no longer have to be dematerialized, that is the price at which they were bought or sold need not be disclosed. It also means that shareholders are no longer obligated to trade their shares on the capital market.

Reactions from leading Slovak officials involved in the capital market was swift and negative. Deputy Finance Minister Jozef Magula, widely known as the architect of the ministry's sometimes controversial capital market directives, resigned on November 7, the day after the measure passed. "This law has destroyed everything that we were successful in adding to legislation to protect small shareholders," Magula said in a statement. "It is only beneficial to majority owners intending to conceal their true ownership and to get rid of individual shareholders."

Even the director of the Bratislava Stock Exchange (BCPB), Marian Sašik, had nothing positive to say about the law change. "The amendment will lead to a depression in the Slovak capital market," BCPB's Secretary-General said. "The protection of minority shareholders is put into question, because now they have no place to sell those shares acquired during the first wave of coupon privatization."

Other market analysts said it would lead to a flight of foreign investors. "Foreign capital that had been moving with portfolios and liquid shares will leave," said Jozef Lukáč, chief analyst with the brokerage firm Capital Partners, "due to uncertainty, lack of transparency and a shrinking market."

According to a market analyst at Bank Austria, şşforeign interest in the Slovak capital market has been dropping fast'' in the past several weeks. He said this has been happening most likely because shares of several lucrative companies were privatized to virtually unknown companies at prices perceived to be far below market value.

How it came to pass

A deputy in the ruling coalition party the Movement for a Democratic Slovakia (HZDS), Jozef Straňák, proposed the amendment. Speaking before the vote, Straňák told the chamber that the bill was drafted to help those foreign investors who had problems registering share issues of joint ventures.

A few days before that, however, Straňák told deputies in the Finance Committee that the bill was not drafted to protect minority shareholders. şşI myself know many ways how to [screw] minority shareholders,'' the daily Národná obroda quoted Straňák as saying.

According to the previous securities law, passed in 1995, securities in Slovakia were supposed to become dematerialized by January 1, 1997 and all trading had to be executed publicly.

şşThose who prepared this amendment do not understand the function of the capital market,'' said Capital Partner's Lukáč, adding that those who approved it in Parliament understand nothing about the capital market as well.

The law will now go President Michal Kováč for final approval. If he vetoes it, it would be returned back to Parliament. Asked whether the law will be softened if sent back to Parliament, analysts were skeptical. şşYou can't expect anything good from those people," said Martin Barto, an analysts at ING Baring Securities in Bratislava, "when they do not care about running the country properly.''

A boon to new privatization owners

Along with saying that the new measure will shut out small shareholders and foreign investors, market experts think the main reason the law was passed is to hide the identity of new owners who acquired controlling stakes in newly-privatized companies from the state privatization agency the Fund for National Property (FNM).

Allegations have run rampant, but remain unproven, that the FNM has been selling off its shares in lucrative formerly state-owned enterprises at cut-rate prices to people connected with the three parties in the governing coalition.

In an interview last month, Ján Ducký, who was minister of the economy until September, admitted high ranking state officials - including government officials and members of Parliament - could be linked to newly-privatized firms through silent partnership. "But proving it is close to impossible,'' he said.

However, tax offices have information about the silent partners for tax purposes. With the new legislation, the real privatizers will be able to remain completely unknown. A statement from the Association of Security Traders made that apparent. "This amendment creates conditions that promote unclear transactions and undesirable speculation, which both increases the reluctance of serious investors and adds to the risk of tax evasion."

"Matarialized shares are the only way to own shares without the public knowing,'' said a capital market expert in Slovakia who preferred anonymity. şşThe owner has the shares locked up in a safe and uses them only to vote. And that can be carried out through a mediator.''

Besides keeping secret new enterprise owners, it will also make the National Bank of Slovakia's (NBS) job of keeping track of the ownership structure of the country's banks and deterring any entity from collecting more than 15 percent ownership in any Slovak bank almost impossible.

"Revealing the clear ownership structures in commercial banks is the Central Bank's primary interest," said NBS Governor Vladimír Masár. "The amendment, however, will make this process more complicated. We will be able to find out, at most, who the subject is owning a bank, but seldom, if ever, who owns the particular subject."

Special reporting by Richard Lewis

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