Serbia: Time to shake up its dormant financial market

The end of 2021 was marked by substantial changes to Serbia’s capital markets legislation. The Parliament first adopted a Strategy for Capital Markets Development in the period from 2021 to 2026 (“Strategy”), proceeding subsequently to amendments to the Company Law and adopting of the brand-new Capital Markets Law, in force as of 5 January 2022 and applicable as of 6 January 2023.

The changes were long-awaited and necessary. The 2019 Global Competitiveness Report, published by the World Economic Forum, ranked Serbia as only 72nd out of 141 economies based on the determinants of long-term growth, with an average score of 60.9/100 points. According to the report, Serbia held the undesirable 88th place for its market capitalization and a slightly less critical 69th place for the availability of venture capital. These results reflected a continuous decrease in the volume and number of transactions and participants on the Serbian capital market, lack of diversified investment opportunities offered by the Serbian market and the economy’s reliance on bank-originating funding.

The Strategy thus envisaged and triggered changes in the institutional, macroeconomic and policy frameworks to achieve a well-functioning financial system and sound infrastructure.

1. Changes to the Company Law

The process started with changes to the Company Law aimed at

• bolstering shareholders’ long-term engagements in joint stock companies and more efficient implementation of their rights at shareholders assemblies,
• procuring identification of (ultimate) shareholders and transparency of directors’ remuneration,
• improving the overall transparency within joint stock companies and regulating in more detail related-party transactions,

all of the above in accordance with the principles of the EU Directive 2017/828 and for the purpose of compliance with the Directive.

The amendments introduced, inter alia:

• detailed provisions on rights and responsibilities of institutional investors, assets managers and proxy advisors,
• means for identification of ultimate shareholders,
• reporting and other rights and obligations of companies engaging in related party transactions, and more importantly
• specific mechanics for implementation and sanctions for breaches of the newly introduced rules.

2. Adoption of new Capital Markets Law

The adoption of the new Capital Markets Law was a big step towards full harmonization of the local institutional framework with MIFID I, MIFID II, the Market Abuse Directive and other EU regulations on securities, securities’ issuers and transparency. Pursuant to the legislator, changes in this legal area were aimed at further protection of investors (domestic and foreign), procuring safe, transparent and efficient capital market and decreasing related systemic risks.

The new law, inter alia:

• systemized, to a certain extent, the core securities-related rules in one document (e.g., it introduced rules on the pledge of shares to the law, enhancing protection of pledgees’ interests in case of default by a debtor);
• introduced novel financial instruments (e.g., certificates as negotiable instruments that, in case of repayment of investment by the issuer, are ranked above shares but below unsecured bonds and similar instruments);
• introduced organized trading facility as a new trading venue, as well as a spot market and regulated high-frequency and algorithmic trading;
• defined new market participants (e.g., data reporting services provider), stipulating in detail their rights and responsibilities;
• amended rules on prospectus, improved rules on reporting requirements and enhanced transparency obligations;
• entrusted additional supervisory authorities to the Securities Exchange Commission, etc.

3. Next steps

Further awakening of the dormant Serbian financial market is expected through the modernization of the cornerstones of capital markets infrastructure in Serbia envisaged by the Strategy. The Central Securities Depository and Clearing House’s software is set for upgrade to make it compliant with MIFID II compliance programs. Efforts are being made to procure appropriate market conditions for efficient local currency sovereign debt issuance and the creation of a platform to facilitate international investment into the Serbian bond market in accordance with the Memorandum of Understanding signed by the Serbian Ministry of Finance and Euroclear. Modernization and increase of activities on the Belgrade Stock Exchange are expected in the forthcoming period, following the 2021 acquisition of a qualified stake therein by the Athens Stock Exchange.

New changes in the capital markets regulations are yet to come. The Strategy has already envisioned the adoption of the new Takeover Law, amendments to the Factoring Law, drafting of the Law on Group Financing, etc.  All market participants are obligated to comply and harmonize their operating documents with the new regulations within a period of 6 months (e.g., Securities Exchange Commission) to one year (e.g., Belgrade Stock Exchange).

Serbia, as a growing economy, is in need of a strong capital market to procure innovative forms of financing, other than those provided by banks, to booster its economic growth. The changes envisaged and partially activated by the Strategy appear to be a path in the right direction.