5) The law introduces the concept of “issuer’s option” defined as a “bearer security fixing the right of its owner to purchase the number of its issuer’s shares at the price determined in the issuer’s option within its term and / or under the stipulated conditions” (Article 2).
This novation also causes an ambiguous reaction in the investment community. First of all, it shall be noted that options are not securities, but derivative financial instruments. Indeed, the security is not the “option” per se, but the option certificate, while the option is not a security, but a transaction. For instance, according to the Letter of the Commission on commodity exchanges and the State Anti-Monopoly Committee (No. 16-151/AK of July 30, 1996) the option (or option transaction) is defined as a document certifying the right to receive (transfer) property (including money, forex denominated values, and securities) or information on condition that the holder of the option contract may unilaterally waive the respective rights. As concerns the securities market, the object of option is the future transfer of rights and obligations pertaining to securities. The fact tha the law defines the issued security not as an option, but as the “issuer’s option” does not change the legal nature of the option and does not transform this derivative financial instrument in an issued security.
It is a well known fact that certain rules were set forth yet by the FSC resolution of January 9, 1997 (“On option certificates, its use and approval of standards pertaining to the issuance of option certificates and prospectuses of issuance”). There is no doubt that legislative fixation of such a financial instrument as option is a very positive development. It relates, in particular, to the fact that in 2001 through 2002 largest companies developed their option programs. Companies granting their top managers options to purchase their shares traditionally view it as an effective instrument to increase capitalization and managers’ interest in the companies’ development strategies, although the “Enron affair” resulted in a certain rise in pessimism as concerns the generally accepted views and posed the question about the necessity to tighten the respective regulations. Among negative consequences of options there may be noted misrepresentation of financial reporting of companies on the part of their management.
The first issue of option certificates (pertaining to shares in Tatneft) was registered in May of 2001. In August of 2001, RAO Gazporm approved the program of granting options for purchase of its shares by employees. The Board of Directors of the oil company YUKOS approved the program of rewarding its personnel with options and “under condition” shares in April of 2001. The program envisages both the use of options and granting to employees shares “under condition.” The total number of shares available to employees in the three next years shall be below 85 million, or 3.8 per cent of the total number of shares issued by the company. At the same time, the company does not plan additional issues of shares in order to implement this program. In October of 2002, there was also announced a long term program of “rewarding best employees with company’s shares” (via deeds of gifts).
A program of options for employees (management of subsidiaries and affiliates) of power engineering enterprises was envisaged in the framework of the general project of UES Russia reform. According to the See: Myazina E. Rynok tsennykh bumag snova popravilsya (The securities market has recovered again). – Vedomosti, 2002, November 2.
scheme approved by the Board of Directors in June of 2002, it was planned that managers of the main company UES Russia would have options for 1 per cent of UES Russia shares, while managers of regional companies might be offered 0.5 to 5 per cent of shares in their respective companies. At the same time, the general problems relating to the UES Russia restructuring, including the relations between the management and minority shareholders, noticeably complicate the prospects of implementation of such schemes.
As concerns companies originally created as private firms, similar programs were worked out by Vympelkom (the system of participation in profits for rank and file employees and the system of options for top managers). Apparently, evaluation of the effectiveness of these schemes in the context of companies’ capitalization is possible only after 3 to 5 years since the start of implementation. Equally, the use of such schemes is possible only at a certain stage of companies’ maturity. Obviously, beside capitalization motives, the possibility of application of option schemes in Russia may open in the context of consolidation of corporate control and legalization of managers’ incomes.
Yet another problem the companies concluding option transactions and adopting option plans may encounter in the future is the insufficient legislative regulation of this institute. It may result not only in difficulties in practical implementation of the aforesaid provision of the law, but also in abuses in this sphere.
Accordingly, the existing regulations need serious further elaboration.
6) The law amends the legal status of stock exchanges. While earlier stock exchanges might be established only in the form of not-for-profit partnerships, at present they may be joint stock companies. The necessity to introduce this stipulation has been felt for a long time and shall be viewed as a positive development. The introduction of this stipulation will favorably affect liberalization of the securities market, since now professional market operators may choose between two types of exchanges – those in the form of joint stock companies or not-for-profit partnerships12.
At the same time, in accordance to amendments to the federal law “On not-for-profit organizations” a notfor-profit partnership may be transformed in a joint stock company. Accordingly, all stock exchanges operating in the form of not-for-profit partnerships may be transformed in joint stock companies.
The list of other activities stock exchanges have the right to engage in has also been amended. While earlier stock exchanges might engage in only depositary and clearing operations, the enactment of the law makes it possible to combine the activities of stock exchanges with activities of currency and commodity exchanges, clearing operations relating to clearing of securities and investment shares of mutual investment funds, activities relating to information, publishing, and lease of property. The introduction of these amendments to the law is a positive development, since earlier legal entities operating as stock exchanges had had to establish and operate via separate firms in order to lease property or publish a magazine on exchange trade. The law sets forth the requirements pertaining to the activities of stock exchanges, for instance, the requirements relating to the approval of internal documents of stock exchanges, requirements relating to transparency and public oversight over trading operations by informing the participants about the place and time of such operations, etc., what also is a positive development, since earlier these issues had not been regulated.
Among other novations, there shall be singled out the following:
- more precise definition of the legal status of brokers (the legal definition of brokers and the procedure governing respective operations);
- legal fixation of the concept of marginal transactions;
- introduction of provisions defining the responsibilities professional securities market operators shall bear for price manipulation on the securities market (Article 51 of the law contains the exhaustive list of actions, which may be qualified as price manipulations on the securities market)13;
According to the law, only members of the stock exchange have the right to be participants of exchange operations on the exchange established in the form of not-for-profit partnership, what somewhat hinders professional participants to access the market. It is not necessary to be a shareholder of an exchange created in the form of a joint stock company to participate in its operations.
At the same time, in practice there may arise difficulties to call to account the respective offenders. For instance, the law stipulates that such operations as “carrying out transactions with securities on stock exchanges and other organizers of trade on the securities markets not resulting in the change of the owner of such securities” as price manipulation.
However, the law fails to define what number of such transactions shall a professional operator of the securities market conclude in order that such operations might be qualified as price manipulation. Also, it would be rather difficult to establish the cause – effect relationship between the actions aimed at price manipulation on the securities market and - amendments to the definition of bonds, determination of issuance and circulation specifics of secured bonds (mortgages, warranties, bank, state, or municipal guarantees, etc.).
It is apparent that in the future there shall be resolved problems associated with practical enforcement of the stipulations set forth by the law and to evaluate their impact on the activities of market operators.
Besides, some time is required to bring all regulatory and legal acts, first of all those issued by FSC, in conformity with the law.
At the same time, it shall be clearly understood that in the medium term perspective this market will not become a serious source of investment resources for enterprises due to a wide range of objective and subjective factors. Accordingly, the practical significance of this segment shall not be overestimated in the course of elaboration of social and economic strategies. In the future, ideas of market liberalization and transparency of regulatory norms shall make the basis of the state regulation of this sector. Meanwhile, the existing model of market regulation should remain the administrative (permission-based) one, although ideally it would be necessary to balance a combination of 6 principles: 1) detailed legal procedures relating to the activities performed by issuers and professional operators; 2) varied legislative requirements (control, transparency, guarantees, etc.) relating to procedures governing the activities of different types of economic agents (differing in terms of professionalism, client base, quantities, etc.); 3) a priori assumption of the conscientiousness of market operators and, therefore, minimization of necessary approvals and permissions on the part of governmental agencies in favor of notification approach (for instance, as concerns the issuance of shares and bonds, granting of the status of professional market operator of certain types, etc.); 4) transparency of all procedures, which would exclude all ambiguity and possibilities of administrative selection of market operators for any type of activity; 5) a two-tier system of enforcement in the case there would be detected actions in bad faith – arbitration courts of self-regulating organizations (enhancement of the role they play) and the state judiciary system. At the same time, the development of the system of arbitration courts will result some lightening of the burden on the budget as concerns the financing of the judiciary system; 6) a wide range of sanctions (from expulsion from a self-regulating organization and prohibition to engage in certain types of operations to criminal prosecution) for detected offences.
I. V. Mezheraups, A. D. Radygin respective damage. It shall be noted that due to the fact that this regulation is relatively new, at present it is difficult to evaluate its effectiveness.
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