14 April 2020 – On 10 April 2020, the Serbian Government adopted the support package for the Serbian economy in response to the COVID 19 pandemic that is worth in excess of EUR 5 bn and that had been initially announced on 31 March 2020.
One of the measures that the support package envisages is the streamlining of the issuance of corporate bonds by Serbian companies. The following is a summary of the general Serbian rules related to the issuance of the corporate bonds and those introduced by the support package.
1. Corporate bonds – in general
Issuance of corporate bonds in Serbia is primarily regulated by the Law on Capital Markets (“Act”). Under the Act, bonds are issued and offered as dematerialized financial instruments. A resolution of the relevant corporate body (i.e., Shareholders’ Assembly for most cases) on the issuance of bonds is a mandatory step prior to the actual issuance. Also, a prior consent of a competent authority may be required (e.g., in case of denominating corporate bonds in foreign currency, as explained in more detail in Section 2 below); however, this is an exception, rather than the regular requirement.
2. Corporate bonds – denomination
Corporate bonds may be denominated in Serbian Dinars or in a foreign currency. However, prior to the issuance of bonds denominated in a foreign currency, the issuer should obtain a consent from the National Bank of Serbia (“NBS”), the Serbia’s central bank and the main supervisory authority for the foreign exchange operations in the country. Having this in mind, the denomination of corporate bonds is an issue that can impact the timing for their issuance.
3. Prospectus requirement
The requirement to publish prospectus applies to the majority of the securities’ issuances. When this is the case, any public offer made prior to the publication of a prospectus would be deemed as null and void. In addition, it is prohibited to admit securities (including bonds) to the regulated market in the Republic of Serbia (i.e., currently only the Belgrade Stock Exchange – BELEX; https://www.belex.rs/) prior to the publication of a prospectus. Also, a prospectus needs to be approved by the Serbian Securities Commission (“SEC”) prior to its publication. All this, of course, has an impact on timing, which might be critical for some prospective issuers.
However, under the Act, a prospectus is not required in certain situations, some of which are set out below:
In light of foregoing, if the offer of corporate bonds would be aimed at the Serbian state and/or some of the IFIs as buyers, the obligation to issue a prospectus with its related approval by the SEC, does not apply, although the issuer would still be obliged in such case to provide the investors with the information that would be disclosed in the prospectus.
4. New Government decree on debt securities
As a part of the economic measures adopted on 10 April, the Serbian Government adopted the Decree on the Procedure for Issuance of Debt Securities (Uredba o postupku za izdavanje dužničkih hartija od vrednosti; Official Gazette of the Republic of Serbia, No. 54/2020; “Decree”), which came into force on the same day. The Decree will apply on the issuance of debt securities for which the relevant entities adopted the relevant decisions during the current state of emergency introduced in the Republic of Serbia due to the COVID 19 pandemic or within 180 days following the lifting of such state of emergency.
The main purpose of the Decree is to simplify the procedure for issuance of debt securities (including corporate bonds) on the Serbian territory. This is achieved through the simplification of the preparation of the prospectus requirement. Namely, instead of including in the prospectus certain information that are available in the public registers and/or on the Internet presentation of the issuer (such as information on the issuer, and/or information on its financial and/or audit reports), the prospectus may merely contain an appropriate reference and link to the relevant sources in which such information and/or documents are contained. Also, the Decree waives a need to prepare a short-form prospectus, which is a general obligation defined in the Act in almost all cases when issuance of prospectus is required.
Also, the Decree provides that the issuer’s regular annual financial statement with the auditor’s report, as well as the annual management’s report (if the issuer is obliged to prepare such report) are deemed to represent an integral part of the prospectus. Likewise, the same applies to the last consolidated annual financial statement, when the issuer is obliged to prepare it in accordance with the applicable accounting rules. Also, in the event that the last regular annual financial statement relates to the period of 200 days prior to the day on which the request for approval of the prospectus was filed with the SEC, the Decree provides that the issuer is not obliged to prepare and provide a semi-annual financial statement (although, this provision does not seem to differ in a material manner from the already existing requirements related to the timeliness of financial statements).
The SEC is supposed to approve the prospectus within ten (10) business days from the day of receipt of the complete set of documents. This means that the Decree aims to halve the existing deadline of twenty (20) business days prescribed by the Act for approval of the prospectus in case of the issuer whose securities are not included in trading at the regulated market and/or an MTP, and who has previously not made a public offer of securities, which may be seen as the relevant corporate group targeted by the Serbian government as potentially the main beneficiaries of the streamlining of the corporate bond issuance procedure in the current context. The SEC is also instructed by the Decree to further regulate the simplified form and minimal contents of information that need to be included in the prospectus for debt securities within fifteen (15) days from the entry into force of the Decree.
Whether the relevant intervention by the Decree in the existing framework prescribed by the Act is, strictly legally speaking, in line with the powers of the Serbian Government in the context of a state of emergency is an issue that would require deeper analysis taking into consideration, inter alia, the Serbian Constitution, constitutional law doctrine, as well as an any available precedents.
5. Next steps
It is now to be seen to which extent will the corporate entities utilize this potential source of financing in the limited period ahead of us, once the further implementing rules have been adopted by the SEC (and any potential uncertainties related to the procedures/requirements duly cleared).
One cannot but notice that the corporate bonds have not been the preferred source of financing for Serbian corporate entities to-date. There are many reasons for this, one of them being a general distancing by the Serbian companies from the securities’ markets following the 2008 world economic crises which effectively degraded BELEX to a platform on which limited trading in only handful of the top corporate shares is conducted. Also, even the best and most robust Serbian companies are not rated by the relevant international independent credit rating agency (such as Moody’s). This process requires an appropriate level of transparency and is also costly. Thus, it is not clear how reputable investors would pursue such bond offerings without, e.g., appropriate information on the issuer’s credit rating originating from appropriate independent agencies.
In light of foregoing, it appears that, unless the Serbian state decides to actively participate in such corporate bond issuances, at least initially, very few of them may actually take place in practice. A further question arising in such a scenario is whether the public funds would be prudently used to invest in corporate bonds issued by only such entities that objectively represent solid and relatively safe investment cases or would this effectively be the form of funding that is actually not expected to be repaid. All these and other related questions will soon start to receive answers in the period ahead of us.
Branislav Marić, Partner
Nikola Stojiljković, Senior Associate
Andreja Vražalić, Senior Associate