Capital markets are the platform on which buyers and sellers, including both individuals and businesses, buy and sell financial securities, such as stocks, bonds and related debt and equity instruments. Capital markets help channel surplus funds from savers to institutions by facilitating an open, transparent and safe environment in which to trade securities. Capital markets consist of primary markets on which new issues of securities are traded, and secondary markets, on which existing or previously-issued securities are traded.
Capital is a critical component for generating economic output. Efficiently functioning capital markets, therefore, have a direct and positive impact on a country’s GDP growth. They can also enhance the reputation of a country, contribute to the inflow of foreign investments, increase employment, competitiveness and business efficiency and generally promote financial stability.
Unfortunately, Slovakia’s capital markets do not function efficiently. Therefore, it is a very good sign that the Slovak Ministry of Finance recently submitted for consultation a draft policy to develop the Slovak capital markets. The draft summarizes the current state of the Slovak capital markets and suggests way to improve them.
In its draft, the Ministry admits that the Slovak capital markets fail to carry out their elemental role of reallocating available financial resources. The range of Slovak investment instruments is poor and The Bratislava Stock Exchange (BSE) does not permit derivative trading. Accordingly, bank financing prevails in Slovakia and international companies operating in Slovakia generally tend to use foreign capital markets. In sum, Slovakia’s capital markets do not serve the purpose of fostering vigorous trading market that provides capital expansion and investment opportunities.
Even worse, trading on the Slovak capital markets is more expensive than in any other V4 country. This is due to a heavy tax burden coupled with costly fees required by investment service providers, especially the Central Securities Depositary of the Slovak Republic (CSD).
The Ministry’s goal is to increase activity on the Slovak capital markets. To achieve this objective, the Ministry has proposed the following changes:
Amendment to the Securities Act
Expand the range of investment instruments and enhance the regulatory framework regarding securities certification. Currently, only banks are permitted to issue certificates for securities, including stocks, bonds and any other financial instrument whose value is tied to the value of indexes, interest rates, shares, debt securities, exchange rates, commodities, or other underlying assets (baskets), or a combination thereof. The investment certificate entitles its holder to acquire the financial instrument which is the underlying asset of the investment certificate, or the right to settlement in cash, or a combination thereof.
The Ministry also intends to simplify the legal framework for doing business on the capital market by transposing MiFID.
Amendment to the Bonds Act
Modernize the regulatory framework for bond issuance in order to increase market liquidity.
Amendment to the Health Insurance Act
The duty to pay health insurance contributions from dividends is a worldwide rarity. The Ministry recommends re-assessment and change of this bizarre practice.
Amendment to the Income Tax Act
Introduce tax-favorable retirement savings accounts. Individuals’ deposits in such accounts shall be tax deductible. Furthermore, revenues from investment in these accounts shall be taxed only once upon an early withdrawal or a retirement (similar to ISA in the UK or IRA in the US). The Ministry also proposes to increase the level of tax free income from the sale of securities traded on the regulated markets.
Amendments to the Commercial Code and Bankruptcy Act
Start-up companies in Slovakia are confronted by many regulatory obstacles that inhibit entrepreneurial activity. These amendments intend to remove them. For example, there is no regulatory framework for shareholders’ agreements or equity vesting. Increasing share capital, company structure changes and exit strategy are all tied to very complicated legal proceedings. Additionally, the recently amended tax legislation complicates transfer of ownership interests due to tax office transfer approval. The amendments would change or eliminate these obstacles for start-ups.
Implement new act on venture capital funds
Venture capital and private equity funds are rarely housed in Slovakia and are certainly not subject to an enhanced regulatory framework and tax benefits as would be found in more friendly jurisdictions, such as Luxembourg. A new act is expected to create a special legal framework regulating the establishment, operation and winding up of venture capital and private equity funds.
Amendment to the Collective Investments Act
The Slovak regulatory framework does not provide for a business entity that has variable capital that entitles the investor at any time to redeem his ownership interest for cash. These open-end collective investment schemes are commonly known as SICAV in Western Europe and, for example, akciová společnost s proměnlivým základním kapitálem in the Czech Republic. According to the draft, a new collective investment vehicle should serve to enhance business opportunities for domestic financial institutions, asset management companies and foreign financial institutions
Finally, the Draft anticipates that the CSD will be reorganized. The CSD’s operations could be delegated to the National Bank of Slovakia, or alternatively it might be merged with the BSE.
The amendments can be implemented once they are approved by the Government. The first amendments shall be submitted to the Slovak parliament this year.
As a valuable member of the EU, Slovakia needs to have functional capital markets. Although this is a long-term process, we believe that it is finally headed in the right direction. We will closely follow this initiative.