Securities and share market
One reason for the appreciable decline of industrial
outputs in Ukraine during the last several years was the low competitiveness
of Ukrainian good-manufacturers as a result of the investment
hunger which had begun simultaneously with economic reforms. Restructuring
of the national economy requires additional investment resources.
At the same time, investment resources, including foreign, are
mainly spent on internal consumption rather than on development.
Adverse phenomena cannot be overcome unless market mechanisms
are put into practice. For this to be achieved, there should be
provided as large competition for investment resources as possible,
on the one hand, and wide-scale possibilities for mobilization
and concentration of these resources, on the other hand. Both
these tasks can be effectively implemented with the use of securities
as a mechanism. Drawing monetary funds of physical persons and
temporarily available resources of legal persons, the securities
market helps to direct a portion of the national consumption fund
to the accumulation fund. The main task of the securities market
is to establish efficient mechanisms of accumulation of temporarily
spare funds of investors and provide enterprises with an access
to investment resources. Currently, the Ukrainian securities market
is at the stage of dynamic development.
A trend is in the national economy of Ukraine toward
a prevalence of the joint-stock form of ownership. This is attributable
to the recent increase in the number of state-owned enterprises
that were privatized or turned to joint-stock companies. Simultaneously
with the increase in their number, joint-stock companies implemented
additional issuance of shares. The issue of a large number of
corporation securities resulted in that the Ukrainian securities
market even now is close to the share markets of Central European
countries such as Czechia, Slovakia, Poland in the ratio of the
volume of capitalization to gross domestic product.
The Law of Ukraine "On State Regulation of the
Securities Market in Ukraine" clearly defines the participants
of the securities market. These are issuers, investors and persons
engaged in professional activity in the securities market.
Issuers
Issuers of securities are legal persons that issue
securities on their behalf and commit themselves to implement
liabilities stemming from the terms of the issue.
The efficiency of realization of the ownership rights
by Ukrainian citizens to a significant extent depends upon efficient
work of subjects of entrepreneurial activity who implement the
issue of securities, that is, issuers.
At present, legal persons issuing securities in Ukraine
include the Government, state-owned enterprises setting up joint-stock
companies, commercial agencies, bodies of local self-government.
The number of joint-stock companies registered in
the city of Kyiv is more than 7,091 and continues to decrease
in the process of privatization.
The regional department of the State Commission on
Securities and Share Market for the city of Kyiv and the Kyiv
oblast started the registration of share issues as from 1 December
1996. As of 1 January 1998, said department of the Commission
registered 212 issues of shares worth 663,558,695 UAH pertaining
to the city of Kyiv and the Kyiv oblast.
At the stage of setting up and establishing of the
share market in the city of Kyiv, privatization was one of the
major sources of securities, in particular, shares of enterprises
that changed the form of their ownership.
Over the period between 1 December 1996 and 31 December
1997, 69 issues of open joint-stock companies established in the
process of privatization were registered totaling 51,324,269 UAH.
Investors
Investors are physical and legal persons who purchase
securities with the view of gaining profits from invested funds
or acquisition of respective rights. Investor is an owner of securities
purchased by right of ownership. He has a full right to dispose
securities at his discretion, that is, applying legal notions,
right of economic ownership and operational management.
Investor purchases securities on his behalf and at
his cost. Investor acquires a title of registered person as soon
as his name is entered into the register, which contains information
on the number of securities with particular nominal value held
by him.
Any citizen may be an investor. For this, he must
only have an intention and, of course, some amount of money. In
the process of privatization, people who acquired shares become
investors. As the level of material provision of the population
grows and the middle class establishes, the role of individual
investors (private persons) increases significantly. For the time
being, the leading role in investing is played by so-called institutional
investors.
Traders of securities
Traders of securities are persons conducting professional
activity related to trade of securities, that is, implementation
of civil-legal agreements as regards securities that provide for
supply of securities to the new owner subject to the payment on
the basis of contracts of agency or commission at the expense
of their clients (broker activity) or at their own cost with the
goal of re-selling to third persons (dealer activity).
In Ukraine, intermediary activity dealing with issuance
and circulation of securities implemented by persons, for whom
this activity is professional and exclusive, as per Law "On
Securities and Stock Exchange", is treated as activity dealing
with issuance and circulation of securities. When being engaged
in the activity dealing with issuance and circulation of securities
as an exclusive activity, is it allowed to implement some kinds
of this activity related to circulation of securities, first,
of all, such activities as provision of consulting services to
security holders and management of assets of an investment fund.
Currently, 349 establishments hold Permits to work
with securities in the market of Kyiv, including 80 banks, 73
investment companies, 196 traders. The largest number of traders
operate in Kyiv (35% of the overall number throughout Ukraine),
where the greatest number of agreements on sale-purchase of registered
securities are concluded.
Depositories and custodians
In accordance with the Law "On the National
Depositary System and Peculiarities of Electronic Circulation
of Securities in Ukraine", the National Depositary System
consists of two levels.
The lower level includes
custodians that maintain accounts of security holders and registries
of registered security holders.
The upper level includes
the National Depository of Ukraine and local depositories that
keep accounts for custodians and implement clearing and settlements
as per agreements related to securities.
To provide functioning of the single system of depositary
accounting, the National Depositary is established in the form
of an open joint-stock company. The body authorized to manage
the state's share in the statutory fund of the National Depositary
is the State Commission on Securities and Share Market.
According to the Law, a depositary is a publicly-traded
joint-stock company engaged exclusively in depositary activity,
with participation of at least ten custodians. The share of one
participant in the statutory fund may not exceed 25%.
All depositaries may be divided into two types: ordinary
depositaries and clearing depositaries. The latter are to carry
out two activities: clearing and settling based on securities
agreements.
Clearing is needed to implement securities agreements
and determine mutual commitments that imply mutual settlements,
provision and guaranteeing of settlements under securities agreements,
a clearing depositary must use the services of a settlement bank.
Custodians of securities
Custodians of securities, according to the Law, may
be commercial banks that hold a permit to implement issuance and
circulation of securities as well as traders of securities. The
latter must obtain a special permit. Custodians are authorized
to "implement, by proxy of a security holder, operations
with deposited securities and other depositary activities dealing
with circulation of securities, excluding clearing and settlements
under securities agreements."
In the statutory fund of a custodian, the share of
another custodian, securities trader, investment company, insurance
company, or other institutional investor may not exceed 5%.
If a custodian is authorized to carry out activity
dealing with registration of registered securities holders, the
custodian is banned to implement any operations with securities,
the register of holders of which he maintains, with the exception
of operations of a registrar under agreement with the issuer.
A custodian cannot be an investment manager of the deponent which
is an institutional investor.
Registrars
Activity dealing with maintaining registries of registered
securities holders must by implemented by the issuer or a registrar.
If the number of securities holders of the issuer exceeds the
number determined by the State Commission on Securities and Share
Market as a maximum number for the organization of independent
keeping of a registry by the issuer, the latter must charge a
registrar with keeping the registry by way of conclusion of the
respective agreement. An issuer may enter into a share registry
agreement with only one registrar.
A registrar may be a legal person that obtained a
permit to maintain registries of registered securities holders.
However, the Law prohibits bodies of state power as well as centers
of certificate auctions and their legal successors from being
founders and participants of registrars. The share of each issuer
of securities in the statutory fund of the registrar may not exceed
10%.
As of 1 January 1998, the Commission issued 233 permits
to independent registrars. The largest number of registrars (131,
or 46%) is located in the city of Kyiv and the Kyiv oblast.
Investment companies, investment funds
In Ukraine, the activity of investment funds and
companies is regulated by Provisions "On Investment Funds
and Companies" and the President's Decree "On Investment
Funds and Investment Companies."
These institutions combine the functions of a financial
intermediary on the securities market with the functions of an
institutional investor for which operations with securities are
the main sources of profits and the main activity. According to
the Provisions "On Investment Funds and Companies,"
these must be established in the form publicly-traded companies
or limited liabilities companies. The statutory fund of an investment
company that makes joined investments must be no lees than 50
thousand amounts of minimum incomes effective as of the day of
registration of the company. In respect to other institutional
investors, investment companies act as investment managers and
consultants, implement calculation and payment of profits on securities.
In Ukraine, investment companies are engaged in trading
securities (that is, act as traders on the market) and in the
activity dealing with management of assets of the investment fund.
The activity dealing with management of securities is carried
out on one's own behalf for award on the basis of an agreement
within the set time-limits as regards management of securities
transferred into ownership, held by other person by ownership
right, in the interest of this person or third persons specified
by this person. A peculiarity of investment companies is that
they may draw funds for joined investment by way of issuance of
securities and their placement.
In Ukraine, investment funds accumulate money of
investors and transfer it into management of an investment manager.
These funds may be either publicly-traded companies of limited
liabilities companies. Publicly-traded funds are established for
an unlimited period of time and must implement the buy-out of
their certificates within the time-limits set by the statutory
documents of the fund. Limited liabilities companies are established
for a clearly defined term and implement settlements as regards
investment certificates after the expiration of the term of the
investment fund's activity. The statutory fund of an investment
fund must be no less than 2 thousand amounts of minimum incomes
effective as of the day of its registration. Funds are authorized
to implement issuance of investment certificates in the overall
amount which does not exceed 15-fold of their statutory funds.
According to existing legislation, only limited liabilities investment
funds may work with privatization securities.
Publicly-traded funds issue investment certificates
that must be bought out solely by the fund itself; limited liabilities
funds issue certificates that may be purchased and sold without
limitation.
Trust companies
A trust company is a limited liabilities company
that carries out representative activity under an agreement concluded
with trustees of assets as to realization of owner's rights. Trustee's
assets may be monetary funds, securities, or documents testifying
to the trustee's right of ownership.
The statutory fund of a trust must be formed solely
on account of monetary funds and securities of the participants.
Prior to the registration of a trust, each of its founders is
obliged to invest at least 50% of the amount of his contribution
to the statutory fund to be contributed to the statutory fund
as per foundation documents, which fact must be certified by documents
issued by a commercial bank. Financial condition of founders (excluding
physical persons) of trust companies as regards their capability
of making contributions to the statutory fund shall be checked
by an auditor (auditor company).
A trust company may carry out the following trust
operations:
- as regards citizens: custody and representative
services related to servicing of the trustee's assets;
- as regards legal persons: disposition of assets,
agent's services, maintaining accounts for securities holders
and management of voting shares transferred to the trust company
by way of participation in the general meeting of a joint-stock
company.
Trust companies may obtain, subject to terms of the
agreement, a right to participate in the management of a joint-stock
company on behalf of its shareholders or the state bodies of privatization
holding shares of companies established by way of transformation
of state-owned enterprises into joint-stock companies.
A trust company may carry out operations related
to the placement of privatization securities, including by proxy
of buyer's partnerships. This activity may be carried out after
the partnership has obtained a permit (license) issued by the
State Property Fund of Ukraine to carry out representative activity
with privatization securities.
As of 31 December 1997, seventy one trust companies
were registered in the city of Kyiv.
CAPACITY AND STRUCTURE OF THE SHARE MARKET
OF UKRAINE
Ukraine's Share Market in between 1992 and 1996
The rise and development of the share market was
characterized by a steady growth of the volume of issuance and
shifts in the market's structure.
Specifically, according to the Ministry of Statistics,
the volume of securities issuance in Ukraine was 11 million UAH
in 1993; 286.3 million UAH in 1994; 749 million UAH in 1995; and
4,7279 million UAH in 1998. Totally, securities issued in between
1993 and 1996 were worth 5,774.2 million UAH. While the volume
of securities issued increased every year, the yearly growth rate
differed across years. Specifically, while in 1994 the volume
of issuance increased 26 times, in 1995 it increased by a factor
of 2.6, and in 1996 by a factor of 6.3.
The share of the overall volume of issued securities
that circulated in the primary and secondary market in 1992-1995
was as low as 0.2%-0.7%. In 1996, this figure was one order of
magnitude higher.
Significant changes occurred in the structure of
securities traded (see Table 5.4). During 1995-1996, the proportion
of corporate shares and bonds in the overall value of securities
increased significantly (by 16.2 percent points and 8.8 percent
points, respectively). As the same time, the proportion of bills,
savings certificates, treasury bonds dropped (by 12.3, 8.9, and
1.1 percent points, respectively). The proportion of other securities
also decreased (by 2.7 percent points).
Table 5.4. Structure of Securities Traded in Ukraine
in 1995-1996 (%)
| Securities |
1995
| 1996
|
| Total |
100.0
| 100.0
|
| Shares |
38.9
| 55.1
|
| Bonds | 3.2
| 12.0
|
| Treasury bills |
2.6
| 1,5
|
| Savings certificates
| 14.5
| 5.6
|
| Bills | 27.6
| 15.3
|
| Other | 13.2
| 10.5
|
While in between 1992-1993 shares in financial-credit
establishments (primary banks) represented 80% to 90% of the overall
volume of securities issued, and there was almost no contracts
dealing with selling these shares; in early 1995, more than 80%
of the volume of the share market fell to shares in joint-stock
companies established in the process of "de-statization",
and the market's volume was more than 350 million UAH in terms
of value.
In 1996, the volume of investment in operations with
securities grew 4.5-fold. The proportion of investment in shares
of joint stock-companies was 41.2%. The issue of government securities
increased by a factor of 12.6.
Out of the overall volume (4,727.9 million UAH) of
securities issued in 1996, a share of 81.9% was placed, a share
of 21.8% was bought out, a share of 0.5% was re-sold, and a share
of 20.4% was redeemed.
As of 1 January 1997, the balance of non-placed securities
was 890.9 million UAH, including shares worth 771 million UAH,
bonds worth 1.65 million UAH, savings certificates worth 31.7
million UAH, and other securities worth 86.5 million UAH.
Securities are objects of mutual investing. Thus,
as of early 1996, the balance of securities issued by Ukrainian
issuers and sold to other states was 247.5 million UAH, including
13.4 million UAH (5.4%) falling to shares, and 234.1 million UAH
(94.6%) falling to savings certificates.
In 1996, foreign residents purchased Ukrainian securities
(including shares) worth 91.5 million UAH. At the same time, Ukrainian
issuers bought out securities worth about 9 million UAH, including
shares worth 0.42 million UAH and savings certificates worth 8.6
million UAH.
As a result of the above-described flows, the balance
of securities issued by Ukrainian issuers sold to other countries
increased by one third (82.4 million UAH) and reached 330 million
UAH. Shares worth 10.45 million UAH and savings certificates worth
225.5 million UAH represented the in-stock balance.
As of early 1997, the in-stock balance of securities
issued by foreign issuers and purchased by Ukrainian residents
reached the level of 239.9 million UAH.
Brief Review of Ukraine's Share Market in 1997
One of the major sources to finance the state budge
deficit of Ukraine is the issuance of bonds of internal government
loan (BIGL). In 1997, the summarized capitalization of the BIGL
market was nearly $4 billion USD. Figure 5.3 shows the rates of
profit gained by investors when purchasing BIGL in the primary
market, that is, auctions of the National Bank of Ukraine.
Due to a steady decrease in the inflation rate (in
August the rate of inflation was zero) and the announced introduction
of the currency corridor, the Ministry of Finance managed to decrease
the rate of BIGL from 60% as of the year's beginning to 20%-30%
in August-September.
After a financial crisis of mid-fall 1997 that affected
Ukraine, the rate of BIGL increased to 40%-50%, and the Ministry
of Finance was forced to suspend the placing of "long"
BIGLs.
Securities were traded in the stock exchange market,
over-the-counter stock trading system (PFTS), and unorganized
market. Despite of the existence of four stock exchanges, they
have not come to the forefront as organizers of trade, since they
were mainly used for selling state-hold blocks of shares in privatized
enterprises offered by the State Property Fund of Ukraine. Against
all the odds, the year of 1997 may be thought of as the year of
a rise and development of Ukraine's share market. This is especially
the case for the PFTS over-the-counter stock trading system, which
was established in February 1996 and meets international standards.
It is the center of over-the-counter trade. The PFTS association
membership includes 134 securities traders from 10 cities of Ukraine.
During one year, the volume of weekly sales in the PFTS increased
several dozens times and reached 10-15 million UAH. According
to an express-poll of the Ukrainska Investytsijna Hazeta (Ukrainian
Investment Newspaper), 80% of the contracts concluded through
the PFTS are non-residents' orders. Since such components as depositors,
clearing-settlement organizations, settlement banks are in their
infancy in the Ukrainian share market, the PFTS develops procedures
to provide efficient settlement mechanisms, enters agreements
with banks dealing with rendering clearing-settlement services.
The number of joint-stock companies listed in the
PFTS reached 106. This enabled the PFTS to form a two-tier listing.
In October 1997, four power-generating companies,
UkrNafta, Khartsyzsk Piping, and Nizhnodniprovsk Piping were
listed at the first tier of the PFTS listing. Shares in the latter
were the most popular in 1997, accounting for 7.3% of the overall
volume of shares sold through the PFTS.
Table 5.5 and Figure 5.4 show major parameters of
trade through the PFTS in 1997.
Table 5.5.
PFTS: Volume and Proportion of Sales of Shares in Companies Listed at the First Tier
of the PFTS Listing
| Issuer
| Volume of Sales through PFTS, million UAH
| Share in the Overall Volume of Sales through PFTS, %
|
| Nizhnodniprovsk Piping
| 24.3 |
7.34 |
| TsentrEnergo |
23.3 | 7.03
|
| UkrNafta | 19.1
| 5.76 |
| ZakhidEnergo |
15.8 | 4.78
|
| DniprEnergo |
13.7 | 4.15
|
| DonbasEnergo |
12.5 | 3.78
|
| Khartsyzsk Piping
| 10.9 |
3.31 |
The volume of the PFTS trade of all the securities
totaled $250 million USD in 1997. Out of this number, 70% ($180
million USD) fall to shares in joint-stock companies. Full capitalization
of the market in 1997 reached $5 billion USD. The capitalization
is anticipated to double after the planned privatization of Ukrainian
telecommunications in 1998-1999.
In 1997, the first Ukrainian share market indexes
appeared. As a rule, they are calculated by securities traders.
These indexes include Wood-15 (Wood & Co.), KAC-20 (Alpha-Capital).
ProU-50 (Prospect Investment).
In October, the PFTS index was introduced which is
calculated by the PFTS system itself. Figure 5.5. shows KAC-20
index (capitalization-weighted).
The PFTS index reflects the dynamics of processes
occurring in the share market. As suggested by the Diagram, the
first half of 1997 is characterized by a steady growth of the
market value of shares.
In June-August, the growth rate of shares took an
exponential character. This was mainly fostered by the factors
such as inclusion in the PFTS listing of power-generating companies
and intensive inflow of foreign capital into Ukraine. It is worth
noting that the rate of BIGL decreased at that time, which fact
also contributed to the redistribution of monetary funds between
the markets.
The global financial crisis occurred in October 1997
resulted in a sharply reduced foreign investment in Ukrainian
securities, manifesting itself in the lowered rate of shares (first
of all, of re-estimated shares in power-producers) related to
mid-summer.
The share market of Ukraine is still out of the frames
of new Central and Eastern European markets. According to estimates,
Ukrainian shares are still treated by foreign institutional investors
as exotic objects and are only a small fraction of their portfolios.
There are, however, some positive shifts in this
field. In early 1997, an international financial group named "Capian",
together with a Ukrainian "Kyiv Rus" initiated a joint
investment project.
According to "The Wall Street Journal Europe,"
the "Societe Generale Emerging Europe Asset Management Ltd."
established in Ukraine a joint investment fund called "Societe
Generale Ladenburg Thalman Ukraine Fund" in late May 1997.
Its authorized fund is expected to reach about $100 million USD.
In April 1997, a closed fund called "Ukraine Value Opportunities
Fund Ltd." was established in the amount of $50 million USD.
In March 1997, an offshore fund "Ukrainian Opportunity Fund"
with the authorized capital of $55 million USD was set up.
These entities expect to gain large profits in the
future, by way of purchasing shares in metallurgic, chemical,
and other Ukrainian privatized enterprises.
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