European-style stock market in Latvia

By Anna Krumina

Rules of the game on Latvian stock market have changed as of January 1, 2004, as the existing law on securities was replaced by a new law on financial instruments.

Experts’ opinion is divided about what awaits investors and shareholders after the new law enters into effect. Some predict dramatic rise in investments, others foresee revival of the financial pyramids’ era.

The Latvian stock market has felt the need for legislative changes for quite some time: the law on securities passed in 1995 had sprouted such a huge number of amendments over 7 years that it was obvious that a new law has been required. In November 2003 the Latvian parliament passed the bill in the final reading.

One of the most important changes introduced by the law on financial instruments is the provision making the market supervision body, the Finance and Capital Market Commission, responsible for control ONLY over those market players, who operate on the regulated market. There is only one such market in Latvia – the Riga Stock Exchange. Companies with the status of a public corporation, which sell their shares on the over-the-counter market or close corporations, will remain outside the Commission’s “sphere of vision”. These companies will no longer be required to submit to the Commission their annual reports or notify the financial watchdog about various significant events concerning their business. When the law was passed, some experts voiced concern about possible rebirth of financial pyramids, wondering whether it was possible to maintain order without supervision.

The Commission rushed to calm down the panic-mongers, saying that not a single “pyramid” will be built in Latvia. Similar laws work just fine in a number of the EU member states, for example, in Germany, and the state would not permit any experiments on people. Commission chairman Uldis Cerps explained to the BC that the new law will not open the way for organisation of financial pyramids because the companies willing to make use of people’s money through issue of shares will still be required to submit to the Commission shares emission prospectus and lots of other documents. The company status will have no bearing on this requirement.

As to alleged loosening of supervision, Mr. Cerps said: “Commission’s control function is built entirely on the financial grounds – we watch out for price manipulations, insider trading, etc. But this kind of information can be checked only in respect to stock exchange listed companies and on that market where the price is set up. To supervise unlisted companies in this respect does not make sense, only now this has been put down into a law”. 

Another important change under the new law was the one that will affect mostly small shareholders. As of January 1, 2004, the Riga Stock Exchange will no longer have the free list. But in order to give minority shareholders in such “laid-off” companies a chance to sell their holdings freely, law requires the stock exchange to create a special list for companies, which do not meet the listing requirements (minimum turnover, liquidity) but nevertheless want to remain on the regulated market.

True, this will not be a free service. The listing fee is now 5,000 lats (previously the listing was free). For small companies, the amount is no small change, therefore they will be offered an alternative, i.e. to convene a shareholder meeting and decide about changing the company status to a closed company and announcing a buy-out to minority holders. It’s hard to tell which of the options will turn out cheaper in the end – to find 5,000 lats for a listing fee or the money for the buy-out of shares. The new law has already seen its first ‘victim’, however. Kalceks pharmaceutical has announced its intention to de-list and reorganise into a close corporation. Riga Stock Exchange president Guntars Kokorevics said he feels not in the least sorry about it. He said to BC, “the companies currently included in the free list should not be listed on the stock exchange at all. They are “victims of privatisation”, and got listed not on their free will. If they do not have 5,000 lats to pay for further listing, they can hardly afford to be listed. Let them make a share buy-out and withdraw to the over-the-counter market. We don’t need them, and they don’t need us either”.

Mr. Kokorevics said that the final deadline set for such companies was the end of 2003. If they do make the buy-out offer by the deadline, they will automatically remain listed. He expects all public companies to seek listing in future. By the way, Commercial Code does not provide for such type of business as a close corporation; therefore all companies leaving the stock exchange and reorganising into close corporation will pretty soon have to think about their status again.

According to Mr. Cerps, all of this is just about details. The conceptual idea of the new law is to integrate Latvian stock market into the European one. It means that it will become simpler for Latvian banks and brokerages to do business on the European market. Starting with 2004, the principle of “a general license” will be introduced, which means, e.g. you’ve got a license in one country but can work and trade anywhere. The same will also be true for Latvian issuers of securities. Mr. Cerps said it would become easier for them to attract foreign investments because, theoretically, a consolidated law understandable to Europeans is supposed to bring more finances to Latvia. 

Here’s another “detail”. The new law provides for tougher punishment to financial speculators and manipulators. One can easily end up behind the bars for insider trading, and it is a perfectly regular practice in the world, says Mr. Cerps.

Photo: A.F.I.

Uldis Cerps.

Photo: A.F.I.

Guntars Kokorevics.