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Securities Act

The Ministry of Finance of the Republic of Serbia recently published a series of draft amendments to the Securities Act (Zakon o trzistu hartija od vrednosti i drugih finansijskih instrumenata, Official Herald of the Republic of Serbia, Number 47/2006), which is the first set of amendments to the Securities Act of 2006. The evident purpose of these draft amendments is to further harmonise Serbian securities legislation with the relevant EU directives.

As a major novelty, the draft amendments introduce the institute of so-called book-building, which does not exist under the Securities Act. Namely, instead of the optional publication of a preliminary prospectus, which is regulated under Article 30 of the Securities Act, the draft amendments provide for a possibility to submit to the Serbian Securities Commission a preliminary notification of a public offer of securities. Like the preliminary prospectus, the preliminary notification must contain most of the information that will later be included in the prospectus itself. However, the preliminary notification may also include information on the price of the securities to be offered, which can be stated either as a fixed price or as a range (that is, a minimum to maximum price).

This change effectively enables book-building, which is not possible in the context of the currently prescribed preliminary prospectus. Namely, the preliminary prospectus can also contain information on the price of the securities, but such information must be fixed, which basically does not make book-building possible. The inability to also express the share price as a range in the preliminary prospectus has been a major obstacle for investment banks doing business in Serbia, effectively precluding them from being able to conduct an effective road show before an intended initial public offering.

Another important improvement in the draft amendments, is the possibility of including existing (that is, previously issued) securities into a public offering of new securities, but only if the previously issued securities are of the same type and class as the new ones. This is not possible under the current Securities Act, since only new securities can be included in the prospectus. The proposed change is aimed at making an initial public offering even more attractive to potential investors by enlarging the overall block of shares being offered.

Furthermore, the proposed change is of particular importance given that the Serbian state still directly or indirectly owns relatively large blocks of shares in a number of public companies in Serbia. If such a public company needs to raise capital by way of a public offering of new securities, the shares owned by the state could not be added to the offer – this despite the fact that the state is usually willing to sell its entire stake in the context of such offerings.

Therefore, this proposed amendment, together with the proposed introduction of book-building, will serve to enable economically attractive public offerings of shares, which is likely to attract large institutional investors to Serbian capital markets.

The draft amendments also include a provision whereby joint stock companies undergoing privatization, which are mostly state-owned or have a majority of so-called social capital (as a consequence of the previous socialist economy that was abandoned in late 1980s), will not need to file to be listed at the stock market until after the privatisation process has been completed. The proposed change appears to effectively ratify the situation on the ground; that is, one that currently exists in practice, whereby many such companies in privatisation have not listed their shares on the stock market, although they are formally required to do so under the Securities Act (whether or not they have been privatised). This proposed new rule would alleviate the uncertainty that currently exists with respect to companies that are still not publicly traded but are undergoing privatisation.

The draft amendments are yet to be approved by the government of Serbia, after which they would be submitted to the Serbian parliament for discussion and – it is hoped – adoption.

Branislav Maric

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