Practice Areas Review: Equity Market

Implementation of EU Directives as a Requirement for Stock Market Revival in Ukraine



Consultant, ILF



22 Shovkovychna Street,
Kiev, 01024, Ukraine
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ILF has been on the Ukrainian legal market for over 20 years. ILF has offices in Kiev and Kharkov, as well as partner offices in the UK, France, Poland, USA and Cyprus.

ILF is the No. 1 law firm in Eastern Ukraine and is in the TOP-15 Ukrainian Law Firms Rating. ILF is in TOP-3 law firms in Banking and Finance and is in TOP-5 in Agribusiness.  It is recognized as the No.1 firm in troubled assets management, bad debt restructuring and recovery, as well as in representation before the ECHR.

As of 2014, ILF is an IPO-partner of the Warsaw Stock Exchange.

The firm is recommended by the Embassies of Germany and Poland in Ukraine.

ILF is a place of work for more than 50 highly qualified associates, tax and investment advisors as well as other international business experts.

The firm’s key industries include banking and finance, IT, medicine and pharmacy, agribusiness and alternative energy.

ILF meets international standards and uses the world's best practice in customer service. In particular we:

— follow the highest standards of confidentiality and business communication;

— hedge the legal risks of our clients at all stages;

— ILF partners are directly involved in our clients' projects;

— professional liability is insured by a top insurance company (PZU).


The stock market is an efficient tool for attracting and monitoring the financial resources stream in well-developed countries, which secures sustainable development of their economies. The Ukrainian capital market is still at the stage of establishment and is behind in its development compared with the equity markets of other European countries.

Market Characteristics

According to the National Securities and Stock Market Commission of Ukraine (Commission), despite the complex economic and political situation the stock market achieved some positive results in 2014. Thus, throughout 2014 the amount of attracted investments via stock market tools came to UAH 217.25 billion, which is UAH 72 billion more than in 2013. Capitalization (value) of companies which underwent the listing procedure and are in the stock exchange register has increased. The number of market contracts has also grown (mostly due to increase of activities on the government bond market). Nevertheless, the positive figures of 2014 do not yet define the market as an effective platform for attracting investments and turnover of financial resources.    

The development of Ukrainian stock market advances identification of a number of problems. Resolving these problems shall result in the improvement of market infrastructure and tools. There are still a great number of problems to be resolved.

Currently, there are 10 organizers of auctions in the stock market of Ukraine (in particular, PJSC Perspektiva Stock Exchange — 68% of the market; PJSC PFTS Stock Exchange — 24%; PJSC Ukrainian Exchange — 2.4%). Most experts tend to recognize the necessity to reduce the existing number of stock markets to 5 or even to one platform. The large number of stock markets significantly complicates control over securities transactions and advantages manipulation of the cost of securities.

Moreover, Ukraine lacks trading infrastructure for small investors. People’s distrust and low level of information awareness as to stock market activities is one of the reasons for the stock market’s insufficient development. This results in poor involvement of private parties in the market, while they are the main investors in well-developed countries.

The problems of the stock market also include the small number of institutional investors, lack of stability in tax legislation, excessive limitations of currency legislation, defects in the mechanism of protection of investors’ rights, limited number of liquid and attractive for investments financial instruments, lack of liquid securities of public limited companies, etc.    

The above-mentioned problems definitely prevent further development of the Ukrainian stock market, and, therefore, restrain the development of economy and investments inflow. They also limit the opportunities for market’s professional participants. 

Focus on European Integration

The Commission prepared the Draft Program on stock market development for 2015-2017 European Choice: New Opportunities for Progress and Growth (Program) to resolve the above-mentioned problems and advance further development of market relations. Implementation of the best European standards and practices, as well as principles, recommended by IOSCO (International Organization of Stock market Commission) are priorities for Program enforcement.

According to the Commission, priority actions include the following:

(i) harmonization of European Union legislation in terms of disclosure of information by public joint stock companies;

(ii) increase quality of institutional investors’ operations;

(iii) implementation of European Union practice as to avoidance of conflict of interest when securities dealers provide services;

(iv) implementation of the European standards of prudential and consolidated supervision via improvement of standards on fight against abuse in the stock market with the use of insider information; implementation of new approaches to combat manipulation in the stock market; implementation of the European Union requirement as to capital adequacy of professional participants of the stock market;

(v) extension of rights of investors as to the use of investments and informational transparency via implementation of standards of the European Union Directives on provision of information on activities to investors, etc. 

What does the Agreement Offer? Expected Results

In terms of harmonization of Ukrainian legislation in accordance with EU laws on securities, 24 EU Directives are to be implemented. Here are some of them.

EU Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 On the Prospectus to be Published when Securities are Offered to the Public or Admitted to Trading and Amending Directive 2001/34/EC. The Directive sets out the principles for preparing the issue prospectus. One of objectives of the Directive is to provide full and objective information to investors on securities and issuers thereof, as well as principles of doing business. The expected result from implementation is the increase of trust in securities and, therefore, the advancement of appropriate functioning and development of the securities market.

Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 On the Harmonization of Transparency Requirements in Relation to Information about Issuers whose Securities are Admitted to Trading on a Regulated Market and Amending Directive 2001/34/EC (72/166/EЕС) has similar objectives to the Directive mentioned in the previous paragraph. In particular, the Directive provides more detailed financial reports for six months for issuers of shares, listed for auctions in a regulated market. The expected result of implementation is the opportunity for investors to receive a more accurate evaluation of the issuer’s condition.

Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 On Investor Compensation Schemes requires implementation of investor compensation schemes, which guarantee a harmonized minimum level of protection for the investor in the event of an investment firm being unable to meet its obligations to its investor clients. The expected result of implementation is the increase of the level of trust to investments in the stock market (using stock market instruments), establishment of environment for securities market development. Current Ukrainian laws do not guarantee any compensation mechanisms (schemes) for investor protection (as opposed to protection of depositors (investors in banking sector), whose deposits are secured by the Deposit Guarantee Fund).

Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 On Insider Dealing and Market Manipulation (market abuse). It calls for the necessity to implement measures to prevent any person, who has insider information, to use such information during the sale or purchase of securities. Timely disclosure of insider information will contribute to combatting market manipulation and raise investors’ trust in financial markets.

Today, the Ukrainian stock market is characterized by low level of capitalization and liquidity. One major factor, which resulted in such condition, is the fact that the Ukrainian stock market, created mostly via privatization, has become an insider’s market. Decisions on the sale or purchase of securities is often made based on information provided by a closed group of the issuer’s employees or authorities instead of published information. Such conditions do not allow establishment of a fair market price for securities among market participants. The current situation deters professional investors and general public from investment in securities, which decreases market liquidity.

The first measures by the national government in the fight against use of insider information were taken on 23 February 2006, when the Verkhovna Rada of Ukraine adopted the Act of Ukraine No.3480-IV On Securities and Stock Market (Securities Act). This Act introduced the terms “insider” and “insider information” for the very first time. It also provides prohibition on security trading with the use of insider information. The Criminal Code of Ukraine was amended by the Securities Act to establish criminal responsibility for disclosure or use of unpublished information about an issuer or securities. Provisions of Directive 89/592/EEC of the European Parliament and of the Council of 13 November 1989 On Coordinating regulations on Insider Dealing were put into the Securities Act.

On 22 April 2011 the Verkhovna Rada of Ukraine adopted the Act of Ukraine No.3306-VI On Amending to some Legislative Acts of Ukraine on Insider Information. Before this Act was adopted there had been no clear definition of insider information and which actions on illegal use of insider information entail administrative or criminal responsibility. This Act also set out the definition of the time when information was no longer considered to be “insider information”.


When signing the EU Association Agreement, Ukraine confirmed its desire to follow the European path. Further development of the country and, in particular, the stock market shall be performed in accordance with European standards and laws. Specific legislation shall also be focused on Europe.

Harmonization of Ukrainian laws with international standards is an essential condition to make the Ukrainian securities market attractive for investors. Therefore, development of the securities market will advance crisis recovery, stabilization of the economy and the well-being of the public.