"Mr. X": New law for investors

17:50, 12.06.2018
5 min.

The Verkhovna Rada adopted a law simplifying the entry to the Ukrainian market of foreign investors. This should ensure the introduction of foreign financial intermediaries, nominal holders – a sort of Mr X. Meanwhile, experts are divided on the prospects for the new legislation. UNIAN tries to clear up the situation.

Attraction of investments to Ukraine, which is in dire need of financial injections, is one of today's priority tasks. To cope with the task, the authorities are removing administrative burdens, deregulating relations with businesses, and implementing a wide range of reforms. However, the Western capital is in no hurry to enter into Ukraine. There are still nine circles of bureaucratic hell on its path. This also applies to the purchase of valuable Ukrainian securities, the acquisition of which by Western investors could replenish the country's budget by billions.

But some progress has been made in this sphere - the Verkhovna Rada adopted a law simplifying this process. The document introduces the institution of a financial intermediary "nominal holder."

Simply put, potential foreign investors wishing to buy, say, our domestic bonds, will not need to deal directly with Ukrainian "paper worms." Instead, they will apply to a bank in their home country, open an account there, and then the latter will settle the issue with its subsidiary in Ukraine. The subsidiary is entitled to acquire, at the request of its clients, the package of securities they need, not at all concentrating on who is the ultimate acquirer. All identification process will be carried out by the "parent" bank, in line with a very strict jurisdiction, which is not in place in Ukraine. After all, beyond Ukraine, you cannot just come and bring in a million dollars, saying that you want to buy, without complete verification of the source of capital. Thus, at first glance, all parties are insured against all kinds of trouble.

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Presenting the law in Parliament, a member of the parliamentary committee on financial policy and banking, Pavlo Rizanenko, noted that "the adoption of the law will allow reducing for foreign investors the number of bureaucratic procedures and boost confidence of global investors in Ukrainian securities."

According to him, the National Commission for Securities and Stock Market and professional market players calculated that the law would potentially attract about UAH 100 billion of additional investments to the Ukrainian economy over the year. According to the National Depository, the innovations will expand the share of foreign capital in the country's economy to 30% from almost zero.

Photo from UNIAN

And most importantly, the document specifies that representatives of the aggressor state, that is, Russia, will not be able to open accounts in the nominal holder's securities.

Initially, after the bill's first reading, 56 amendments were proposed by parliamentarians, of which 53 were taken into account. One of them says that the identification of clients should be dealt with by a foreign bank exclusively.

Immediately, a number of experts, just like people's deputies who did not support the law, subjected the innovations to harsh criticism, claiming that, supposedly, "Russian money" will now have the opportunity to enter Ukraine and that this could also be used by corrupt officials who are targets of law enforcers. UNIAN tried to clear up the situation.

Money, please come in

An expert at the Dragon Capital's sales department, Serhiy Fursa, believes that the law on the "nominal holder" is very well developed, taking into account all international requirements. Therefore, the purchase of Ukraine's securities by corrupt officials is practically ruled out.

"Western banks strictly identify their customers. Corrupt individuals will have a really hard time getting to our securities. The law opens up the way for an investor to enter Ukraine, which will accordingly lower the rates on domestic bonds, which in turn will reduce rates for bank lending, which is a positive thing for the entire economy. Therefore, this law is very important," the expert said.


As for the "Russian money", according to Fursa, their absence is important with the planned large-scale privatization. But the law passed by the Rada does not concern this process in any way: "If the Russians buy our promissory notes, then I see no problem with that."

As the expert stressed, it is still very difficult for foreigners to enter Ukraine - it requires a lot of paperwork, so no one wants to deal with it.

"People have many other things to do than fly to our country and go through the identification by some notary. All over the world, such things are dealt with through the function of a 'nominal holder'," Fursa said.

As an example, the expert named Egypt, where this system is actually working. Over the last year and a half, the country has attracted $18 billion to the domestic market.

"I'm not saying that we will attract as much, nevertheless, there are a lot of funds out there across the world. The primary market is working in Ukraine. What the Ukrainian market lacks is buyers. And the new law allows them entering, "he said.

Commenting on the claim that, thanks to the new law, some UAH 100 billion in future investment could come into Ukraine, the expert said that to calling any figures would be like pointing a finger in the sky.

"The law should have been adopted 2-3 years ago, when there was a lot of cheap money around the world. Had it been adopted back then, we would've already felt the results. Today, key rates are gradually rising, and interest in such markets as the Ukrainian one will be falling. We are late for the party but still, the law's adoption is the right move. We will be waiting for the result," Fursa said.

Financial analyst Vitaliy Shapran shares his view, claiming that "nominal holders" are common practice for developed markets, so Ukraine cannot really choose whether this service is needed or not if every other jurisdiction provides it: after all, the more non-residents buy Ukrainian government bonds, the better. And there should be no fear of Russian capital entering.

"I don't see anything wrong with the fact that Russian money will go to Ukraine to purchase domestic bonds, since this instrument is currently in demand among 99% of those entering Ukraine. If someone manages to slide through to our corporate sector, I think they will eventually face NSDC sanctions," the expert said.

Shapran does not rule out the possibility that corrupt officials might exploit some innovations, but says the risk is small.

"Yes, it is possible, because the final beneficiary will have to be determined through the court only, but on the other hand, what is the difference between owning domestic bonds and UAH banknotes? There is almost no difference," the expert said.

But there are other opinions regarding the new law. An expert at the Center for Economic Policy Analysis, Yuriy Havrilechko, believes that the law is needed, but at the moment, it is too raw, so corrupt officials might take full advantage of some of its provisions.

"The law is needed, but only that with clear definitions, regulator's functions that are transparently and unambiguously laid out, as well as a full list of conditions for the participation of market players and many other technical provisions. It might give a hand to corrupt officials because the law is full of inaccurate definitions; also, there is no clear definition of rights and obligations of the subjects of legal regulation and the legal status of the National Commission on Securities and the Stock Market," the expert said.

In his opinion, the main drawback of the document is the phenomenal amount of uncertainties and inconsistencies in it with the current legislation, which will lead to the need to pass amendments once procedural complications emerge as soon as the authorities start implementing it.

Regarding multibillion forecasts due to the law's application, Havrilechko stressed that this is only at the level of discussion at the moment.

"The main share of foreign direct investment in Ukraine in recent years is the banks' sub-loans attracted before replenishment of statutory funds. We have no secondary securities market, while the London funds are not interested in going on IPO in Ukraine as such," the expert said.

There might be some gaps in the new law. However, taking into account the fact that it has only been four years since Ukraine chosen a civilized track of development, it is probably impossible to take such steps with no mistakes along the way. And even if in the next few years we are unable to attract the earlier announced billions of hryvnias thanks to the latest innovations, which, most likely, will be the case due to the military situation in the country and global changes worldwide, but in a few years, we will eventually see everything happening the right way. So in the future, the law will solve many of Ukraine's pressing problems.

Nana Chornaya

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