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23 October 2013

New Depository System Law

The new Depository System Law (the “DSL”) was adopted on 6 July 2012. The bulk of its provisions came into the effect on 12 October 2013.

The All-Ukrainian Securities Depository, which so far was main depository for non-state securities, lost its license on 10 October 2013 and was supposed to transfer the global certificates of all securities issues handled by it to the Central Depositary by 12 October 2013. National Depository of Ukraine, owned by the state, that used to attribute International Securities Identification Numbers and establish correspondent relations with foreign depositories, became a “sole” Central Depository. While the Central Depository is defined as “sole”, there’s another player still left in the field of depository services. The National Bank of Ukraine has maintained its function of a depository of state securities and local authorities’ bonds, so two depositories remain in Ukraine. Both of them are now controlled by the state. However, the DSL provides for the reduction of the state’s ownership stake in the Central Depository to 25 percent plus one share over the next five years.

At the same time, the DSL establishes a single Ukrainian Settlement Centre which will handle same day settlement of all exchange and over the counter transactions with securities held by the Central Depository. The aim is to achieve same day settlement (“delivery versus payment”) which will be a marked improvement over the current T+3 settlement.

Some commentators say that creation of the Settlement Centre might lead to the unnecessary centralization of settlement activities and might make it difficult to achieve “delivery versus payment” settlement with minimal risk. Although it may seem that a better solution might have been to empower the Central Depository to process both securities and cash settlements, the DSL comes short of offering this solution.

All custodians of securities are obliged to make their procedures compliant with the new law and obtain a new license. The new licensing regime was approved by the National Securities Commission on 14 May 2013.

The DSL seeks to complete transition to book-entry-only (the “BEO”) system for all securities issues. In particular, it provides that all shares and bonds, and all other issue securities can only be issued in the BEO form. Since 11 October 2012, the publishing date of the DSL, it is not allowed to issue such securities in documentary/certificated form.

The new law also attempts to facilitate dematerialization (transition to BEO) of shares which were issued in the 1990s and the early 2000s by many joint-stock companies (the “JSC”) in the documentary form. This process began earlier with the adoption of Joint Stock Companies Law that required JSCs to dematerialize their old certificated share issues and convert them to the BEO system by 2011. A lot of JSCs, nevertheless, either did not conform with that requirement of the law in a timely manner, or having dematerialized their stock faced the reluctance of minor shareholders to pay custodians for the services of keeping their shares in securities accounts.

Therefore, the DSL provides that the owner of the dematerialized securities must sign a contract with a custodian (and pay for the custodial services) by 12 October 2014. The shares belonging to those, who failed to do so, will be excluded while determining the quorum and voting of the issuer. We welcome such decision of the problem of the so-called “ghost shareholders”, who have lost their interest in shares because of lack of market demand thereof. The changes will allow reducing administrative expenses for holding shareholders’ meetings and clarify the status of “dead” shares. We draw your attention, however, to the fact that shareholders, whose stock is approaching 25% or 50% of issued shares, may in such way obtain voting rights exceeding the mentioned thresholds, which may theoretically result in the necessity to obtain the permission for concentration from the Anti-Monopoly Committee of Ukraine.

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