Capital Market

08.02.2013 ZF English

The development of Romanian capital markets is closely linked to privatization. The Bucharest Stock Exchange (“BSE”), initially established in 1864, was re-established in April 1995, but transactions started only in November 1995. Trading volumes were not significant until 2003-2004. In addition, RASDAQ became operational in October 1996.

Regulatory mechanisms and bodies

The Financial Supervision Authority (“ASF”) is the regulatory and supervisory body of the capital market. The ASF was established in 2013 and took over the prerogatives of the former National Securities Commission (the “NSC”), the Insurance Supervision Commission and the Private Pensions Supervision Commission. Currently, the former NSC is a branch of the ASF called Financial Instruments and Investment Sector. The ASF has certain extended prerogatives to the effect that it authorizes investment firms, management companies, undertakings for collective investments in transferable securities and also provides the general listing requirements for issuers and regulates the securities exchange, including trading and settlement mechanisms.

In 2004, as a result of the Government's efforts to harmonize Romanian capital market legislation with EU directives, the legal framework governing capital markets was significantly amended by the enactment of Law no. 297/2004 on the capital markets (“Law 297/2004”).

Besides the provisions concerning market operations and investors' protection, Law 297/2004 also contains provisions on:

• Intermediaries
• Collective investment undertakings
• Management companies
• Regulated markets
• Clearing, settlement, deposit and registry systems for financial instruments.

Intermediaries

Generally, securities transactions may be performed only through intermediaries, i.e. (i) Investment firms authorized by the ASF, (ii) Credit institutions authorized by the NBR and (iii) Similar institutions authorized in an EU/EEA Member State to provide investment services.

Investment Firms (Societăţi de Servicii de Investiţii Financiare) are set up in Romania as joint stock companies whose exclusive object of activity is to perform investment services.

Investment firms, authorized and supervised in a Member State may perform in Romania the investment services they have been authorized for by the appropriate body in their country of origin, either directly or through branches set up for this purpose, without the ASF’s authorization.

Non-EU investment firms are allowed to set up branches in Romania subject to the ASF’s authorization.

The minimum initial capital of an investment firm is set at three levels, depending on the type of investment services it performs, i.e. the RON equivalent of (i) EUR 50,000, (ii) EUR 125,000 and (iii) EUR 730,000. Additionally, Regulation no. 32/2006 issued by the former NSC details the licensing conditions and procedure as well as other operating requirements. Investment firms must periodically submit their financial statements to the ASF, certified by financial auditors.

Credit institutions, authorized by and acting under the supervision of the National Bank of Romania (NBR), may provide investment services on the regulated markets, on their own account or on the account of third parties. At the same time, these institutions can set up distinct investment companies.

Advisory services related to investments in financial instruments (i.e. analysis of financial instruments, selection of the portfolio, and expressing opinions with regard to the sale or purchase of financial instruments) can be performed only by authorized investment advisors (individuals or legal entities).

Issuers

According to Law 297/2004, the main listing conditions are: (i) The issuer should have had a foreseeable market capitalisation of at least the RON equivalent of EUR 1 million for its capital and reserves, including profit and loss, in the last financial year (ii) The company should have been operating over the last 3 years prior to its application for admission and should have communicated all financial statements, according to current legislation.

An eligibility condition is that shares must be fully paid and freely negotiable. Additionally, a sufficient number, as defined by Law 297/2004 (25% of the share capital or less) of shares must be distributed to the public, unless the distribution is made through transactions on the regulated market.

Admission to a regulated market requires that an application should be addressed to the market operator after the publication of an information sheet approved by the ASF. All actions undertaken in this respect are made via intermediaries.

Law 297/2004 and other regulations also set forth provisions with regard to investors’ protection, information requirements, procedures to be followed where public offers for sale or purchase of shares are made, etc.

Regulated markets

Law 297/2004 provides the conditions and procedures for setting up a regulated market, including provisions with respect to market operators. Thus, a market operator must be a joint stock company with a minimum share capital of EUR 5 million in RON equivalent. None of the shareholders of this company can directly or indirectly have more than 5% of the total voting rights. Both the market operators and the regulated market must be authorized by the ASF.

Bucharest Stock Exchange

The Bucharest Stock Exchange was established as a legal body in April 1995 by decision of the former NSC, with technical and financial assistance from the Governments of Romania and Canada, the NBR and the British Know How Fund. Initially, the BSE was a self-financing, non-profit institution of public interest. Law 297/2004 on capital markets required the BSE to turn into a joint stock company.

Until August 2006, companies listed on the BSE were grouped into two standard listing tiers, a "first tier'' and a "second tier". A “plus tier” (virtual tier) had also been established for companies which had already been listed on the first or second tier and which have decided to adopt more transparent behaviour.

Currently, according to the new BSE rules, the BSE regulated markets are: (i) The regulated spot market and (ii) The regulated derivative market (futures).

The regulated spot market operated by the BSE is structured as follows:

A. Equity sector

B. Debt sector

C. Collective Investment Undertakings Sector

D. Structured Products Sector

E. Other International Financial Instruments Sector.

A. The equity sector is divided into: (i) Tier 1 shares, (ii) Tier 1 rights, (iii) Tier 2 shares, (iv) Tier 2 rights, (v) Tier 3 shares, (vi) Tier 3 rights, (vii) International shares and (viii) International rights.

Tier 1 shares include the best performing companies. For example, in order to be admitted to the Tier 1 shares category, an issuer must have a shareholders’ equity of minimum EUR 30 million corresponding to its last financial year.

In order to be listed in the Tier 2 shares category, a company must have a shareholders’ equity of minimum EUR 2 million corresponding to its last financial year.

Tier 3 shares generally include shares in dynamic, innovative commercial companies with large economic growth potential, as well as shares in companies mainly focusing on technological development in fields such as medicine, biotechnology, agro technology, telecommunications, etc. which have a shareholders’ equity of minimum EUR 1 million corresponding to their financial year.

B. The debt sector is divided into: (i) Tier 1 corporate bonds, (ii) Tier 2 corporate bonds, (iii) Tier 3 corporate bonds, (iv) Municipal Bonds, (v) Treasury Bonds, (vi) International Bonds, (vii) Other debt.

C. The Collective Investment Undertakings sector is divided into: (i) Shares, (ii) Mutual Funds Shares, (iii) International Collective Investment Undertakings, (iv) Local Collective Investment Undertakings.

D. The Structured Products sector is divided into: (i) Certificates, (ii) Warrants, (iii) Other types of Structured Product.

E. The Other International Financial Sector is divided into: (i) Category A – financial instruments associated with equity, (ii) Category B –financial instruments associated with debt.

The 10 most liquid and active shares, except for financial investments companies (“SIFs”), are included in the “BET” index and all other listed companies, except for SIFs, are included into the composite index “BET-C.”

SIFs are included in the BET-FI index. SIFs were set up in 1996 under special privatization legislation and cannot be assimilated to other collective investment undertakings (investment funds or investments companies). According to the BSE, the BET-FI index is dedicated to all listed investments funds.

In March 2005, another index was set up based on the cooperation of the BSE with the WBAG (Vienna Stock Exchange), the Romanian Trading Index (ROTX). Only blue chip shares listed on the BSE are included in the ROTX index.

The BSE Registry keeps records of listed securities issued by companies that have an agreement concluded with the BSE.

In June 2007, the NSC authorised the derivatives market to be operated by the BSE. The trading of derivative instruments commenced in September 2007.

The derivatives market started with futures on BET indexes. Further on, new products will be developed with various underlying BSE indexes, shares and bonds.

RASDAQ

The RASDAQ (Romanian Association of Securities Dealers Automated Quotation) market was created in October 1995 under the "Romanian Capital Markets" program, financed by the United States Agency for International Development and it officially opened in October 1996, to ensure an institutional and technical framework for the trading of shares distributed through the Mass Privatization Program.

According to regulations issued by the NSC at the end of 1996, all companies privatized through the mass privatization program are listed on the RASDAQ regardless of whether the companies' management has expressly requested this.

The RASDAQ market has three listing categories (first, second and base category) based on certain criteria expressly provided by law.

According to regulations issued by the NSC, security issuers have reporting obligations to the RASDAQ market (including reporting about major events such as calling of general meetings of shareholders, resolutions adopted, etc.).

Currently, discussions are being held about the status of the RASDAQ market and its possible restructuring.

Monetary Financial and Commodities Exchange (MFCE)

In addition to the two merging markets, an independent derivatives market operates in Sibiu, the Monetary Financial and Commodities Exchange (MFCE), Romania's second largest financial market.

The MFCE focuses almost exclusively on the exchange of derivative financial products. However, the MFCE has recently started to operate a spot market as well. It is Romania's first and largest market for Futures and Options contracts to date. Contracts are based on the Romanian stock index, currencies, cross rates, interest rates, and the price of gold. 

Bonds and other debt securities 

The bonds market is currently developing, in terms of both corporate and municipal bonds. In this respect, regulations have been adopted governing the securitization of receivables and mortgage-backed securities. 

Additionally, the Ministry of Public Finance is empowered to issue treasury bills in national or foreign currency, for short, medium or long term periods. These treasury bills can be issued in materialized or dematerialized form. Dematerialized treasury bills with a maturity in excess of 12 months can be traded on the regulated market and can be bought by individuals and companies. The Ministry of Public Finance, together with the NBR and the former NSC have issued Regulations governing the performance of these transactions.

At present, municipal bonds are the fastest growing as city halls have started to use this financing method mainly in relation to infrastructure projects. Currently most bonds of this type are traded on the BSE.

Alternative Trading System (ATS)

In 2010, the former NSC approved the establishment of the ATS under the administration of the BSE, as system operator. Also, the former NSC approved the ATS Rulebook which has a general, obligatory normative character.

The ATS was founded to provide access to financing and trading to newly established companies and other companies that are not traded on the regulated market administrated by the BSE.

The main advantages of the ATS, as presented by the BSE in the ”Issuers guide for the alternative trading system” are the following:

• It is addressed to all categories of issuers regardless of size or experience in the economic environment and it is designed for both stocks and bonds and for other types of financial instruments that do not qualify for admission on the regulated market;
• It brings important advantages to issuers, such as financing, free promotion, and a better visibility in the financial-economic environment, which results in increased confidence among business partners and current and potential customers;
• It is characterized by a simplified listing procedure where no listing prospectus is required, but only a company presentation factsheet.

According to the ATS Rulebook, the participants in ATS are intermediaries who provide financial investment services in Romania, registered in the Public Registry held by the ASF and in the Registry of Participants held by the BSE. Acceptance as a participant takes effect by resolution of the BSE and produces effects from the registration date in the Registry of Participants.

The admission or withdrawal of financial instruments on/from the ATS is made by resolution of the BSE. In addition, the relevant financial instruments can be suspended from trading to clarify the situation leading to their withdrawal from trade, if this is imposed for the maintenance of market integrity and protection of investors.

The ATS has the following structure:

A. Section for financial instruments listed on the ATS

B. Section for securities admitted for trading on a regulated market or on a market in a non EU country, (traded, but not listed on the ATS)

C. New Market Shares Section

A. The section for financial instruments listed on the ATS is divided into (i) Equity segment, (ii) Debt securities segment, (iii) Collective investment undertakings segment and (iv) Other financial instruments segment.

(i) In order to be admitted for trading on the equity segment of the ATS, (shares or rights), issuers and financial instruments must meet certain criteria. For example, the issuer’s average capitalization over the last 6 months must be at least the RON equivalent of EUR 1 million, or the equity value over the last financial year must be at least the RON equivalent of EUR 1 million.

(ii) The bonds issued by companies may be admitted to trading if they cumulatively meet certain conditions. For example, if the bonds have formed the object of a successful public bid, they are intangible, freely transferable, etc.

(iii) To be admitted for trading on the ATS, collective investment undertakings and their issuers must meet the same conditions as the shares and the companies that issued them.

(iv) To be admitted for trading on the ATS, financial instruments that do not fall within the segments previously mentioned must also, cumulatively meet certain conditions as mentioned above at point (ii).

B. In order for securities to be traded in the section for securities admitted to trading on a regulated market or on a market in a non EU country (traded, but not listed on the ATS), the following requirements must be met: Confirmation by the Central Depository as to the fulfilment of the clearing, settlement and registration conditions necessary for the trading of the financial instruments in question; where the registry operations are performed by another central depository authorized by ASF, or if they are traded on a regulated market of another member state or on a market in a non EU country, the registry operations for these are done by a central depository of another member state.

C. New Market Shares Section. This section aims to attract to the stock exchange companies that are not traded on another market. The New Market Shares Section has the role of offering pre-listing to start-up companies, to companies that have been quoted on the stock exchange but have subsequently been delisted, and to any company wishing to take this first step on the alternative system before the actual listing on the regulated market.

Collective Investment Undertakings

Law 297/2004 classifies collective investment undertakings in two main categories: (i) Undertakings for collective investments in transferable securities (“UCITS”) and (ii) Other types of collective investment undertakings.

UCITSs (Open-end Investment Funds and Investment Companies)

The setting up and operating rules of UCITSs must be approved by the ASF. Open-end investment funds are non-incorporated collective schemes authorized by the ASF and managed by a management company that has the exclusive prerogative to set up an open-end investment fund. The funds issue fund units but are not allowed to issue other financial instruments.

A management company can be set up as a joint stock company, with an initial capital of at least the RON equivalent of EUR 125,000.

The object of activity of a management company is to manage UCITSs and/or, subject to ASF prior approval, other collective investment undertakings. Under certain conditions, management companies can also manage individual investment portfolios (including those of pension funds) on a discretionary basis, as well as other non-core services.

Subject to prior approval by/notification to the ASF, management companies are allowed to delegate to third parties the managing activities related to collective investment portfolios.

Investment companies (i) Are joint stock companies issuing nominative shares, fully paid upon subscription and (ii) Are managed either by a Board of Directors, according to their Acts of Incorporation (self-managed investment companies) or by management companies. Their sole object of activity is to make collective investments in liquid financial instruments.

The minimum initial capital of self-managed investment companies is the RON equivalent of EUR 300,000. Additionally, an investment company needs to apply to be listed on a regulated market within 90 days of having been licensed.

The common feature of UCITSs is that their units (fund units or shares, as appropriate), must be repurchased from their owners, upon request.

Other collective investment undertakings (OCIUs)

Law 297/2004 provides specific provisions with respect to OCIUs, depending on different criteria such as: (i) Whether they raise funds from the public or not, (ii) Whether they address/target qualified investors or not, (iii) The minimum nominal value of the units.

Specific provisions are set forth under Law 297/2004 with regard to OCIUs which raise funds from the public (individuals and/or companies) and which are set up as (i) Closed-end investment funds or (ii) Closed –end investment companies. These entities must register with the ASF and must entrust their assets to a depositary. Closed-end investment funds registered with the ASF must be managed by an authorized management company.

Former NSC regulations provide supplementary obligations (e.g. reporting obligation, investment limits, types of financial instruments that can be invested in, etc.) for each type of other collective investment undertaking.

Depositaries

The assets of UCITSs must be entrusted to a depositary. According to current legislation, only Romanian credit institutions or branches of credit institutions registered in an EU Member State may provide depositary services. To perform such activities, an operating permit from the ASF is required.

The competences and obligations of depositaries are set out under Government Emergency Ordinance 32/2012 and Regulation no. 15/2004 issued by the former NSC.

Source: KPMG - Investment in Romania report (May 2013)