Contributed by KCG Partners.
1. Market Overview
Energy companies were the winners of the year 2022 in Hungary, but the fall in the domestic stock market was slightly larger than in global markets. Although Hungarian companies have produced outstanding results, this is not reflected in their prices. Special taxes are making business life difficult for the biggest players, and the market is seeing fewer and fewer foreign investors, but the deterioration in the exchange rate and uncertainty over the arrival of EU funds are not helping the Hungarian stock market.
The majority of Hungarian market players have generally performed worse than their industry peers, with the BUX down 13% (compared to a drop of 5% in Paris, 8% in Frankfurt, and around 6% on the DOW), despite the fact that the second and third quarters of the Hungarian stock market were the most profitable quarters in the history of the Hungarian stock market.
Hungarian domestic legislation of the capital market has no key accounting changes for 2023, however, the EU does.
In March, the Council adopted a redesigned regulatory framework for European long-term investment funds (ELTIF) which makes these types of investment funds more attractive. In particular, the scope of eligible assets and investments, the portfolio composition and diversification requirements, the conditions for borrowing and lending cash, and other rules of the fund, including sustainability aspects, were clarified. The package also includes rules to make it easier for retail investors to invest in ELTIFs while ensuring strong investor protection.
The Commission presented its capital markets union package including the ELTIF proposal on November 25, 2021. The Council adopted its position on the proposal on May 24, 2022. Negotiations with the European Parliament ended in agreement on October 19, 2022. The European Parliament voted on the text on February 15, 2023. This formal adoption in the Council is the final step in the legislative process.
This effort is part of the capital markets union (CMU), a plan to create a single market for capital in order to get investments and savings flowing across all member states for the benefit of citizens, businesses, and investors. ELTIFs are the only type of funds dedicated to long-term investments which can be distributed on a cross-border basis to both professional and retail investors. Since ELTIFs are designed to channel long-term investments, they are well-placed to help finance the green and digital transitions.
2. Overview of the local stock exchange and listing segments (markets)
2.1. Regulated market
The Budapest Stock Exchange (BSE) is the second largest stock exchange in Central and Eastern Europe in terms of market capitalization and liquidity, and the official trading venue for publicly issued Hungarian securities. The exchange is currently owned by listed companies, Hungarian private investors, and the Hungarian National Bank (MNB). The Budapest Stock Exchange is a member of the World Federation of Stock Exchanges and the European Association of Stock Exchanges.
The Budapest Stock Exchange handles the entire volume of trading in Hungarian securities and a significant part of Central and Eastern European trading. Trading takes place exclusively via an electronic platform. The price of shares listed on the system is the reference price for the Hungarian capital market and the most well-known Hungarian stock exchange index, the BUX, is calculated on this basis.
On the BETa Market of the Budapest Stock Exchange, investors can trade with foreign equities. Equities bought here are identical in every way to those traded on foreign markets. Trading is conducted in Hungarian forints, thus the BETa Market offers access to the equities of several European companies issued in foreign currency without the need to face currency conversion costs.
2.2. Non-regulated market
Xtend, a multilateral trading facility (MTF) created and operated by the BSE, provides companies with a facilitated form of a listing on the capital market, with lower fees, easier conditions, and special support instruments. In this way, it allows businesses to become gradually used to the obligations and transparency that accompany a presence on the stock exchange.
Companies may list their shares on BSE Xtend without prior public transaction, in order to become used to stock exchange transparency and to learn how to fulfill the disclosure obligations set out by the Capital Market Act and the BSE. Xtend, which operates under looser conditions, is also an ideal choice for businesses that privately raise capital prior to going public, and list their shares on BSE Xtend after raising equity. This form of going public is called technical listing.
SME markets similar to Xtend are called multilateral trading facilities (MTFs) by international regulation. These markets differ from traditional stock exchanges (so-called regulated markets) in their level of regulation, as in terms of functionality they offer issuers and investors the same. This includes the benefits provided by public operation or the opportunities for raising funds on the stock exchange, as these are also available on BSE Xtend. As mentioned above, companies that opt for BSE Xtend have an additional opportunity compared to the BSE’s regular markets in that they can float their stocks after raising private capital without an actual IPO, by way of a so-called technical listing.
In July 2019, based on international best practices, the Budapest Stock Exchange launched BSE Xbond, a new market segment for secondary bond trading. BSE Xbond is closely related to the Bond Funding for Growth Scheme (BGS) of the Hungarian National Bank, Hungary’s central bank, and offers an alternative trading venue for companies planning to issue bonds. The new market aims for professional investors by setting the minimum face value of bonds eligible to BSE Xbond trading at EUR 100,000 (or its equivalent if denominated in a different currency). Nevertheless, private investors may also invest in bonds registered on BSE Xbond indirectly, for example via investment or mutual funds, or insurance products.
Over the Counter (OTC) trading is an organized market that lags behind the stock exchange in terms of organization and concentration. Its name derives from the fact that investors participate in this market through intermediaries, with the help of banks and other intermediaries and brokerage firms. There is no standardized trading as on the stock exchange, but transactions between traders are basically carried out by telephone, using computer systems. While the bulk of equity trading takes place on the stock exchange, the focus for government securities is more on OTC markets.
3. Key Listing Requirements
The BSE has three different markets having different listing requirements (Xtend, Standard, Premium). Two of the markets are considered regulated markets.
Minimum requirements for the Standard category:
- The market value of the series of shares to be listed has to be at least HUF 250 million
- Free float: At least 10% of the series to be listed is free float; or at market prices, shares to the value of at least HUF 100 million are free float; or the series of shares is, at the time of listing, in the possession of at least 100 owners.
- No equity class requirements.
- Corporate governance report: no obligation to disclose at listing (only after listing with each annual report).
- Business year: One full, completed, audited year (discretion is possible)
- The method of listing: no public transaction requirement (technical listing is possible)
Minimum requirements for the Premium category:
- The market value of the series of shares to be listed has to be at least HUF 5 billion
- Free float: At least 25% of the series to be listed is free float; or at market prices, shares to the value of at least HUF 2 billion are free float; or the series of shares is, at the time of listing, in the possession of at least 500 owners.
- Equity class: only common shares may be admitted.
- Corporate governance report: mandatory to disclose at listing (also afterward annually, together with the annual report).
- Business year: three full, completed, audited years (discretion is possible).
- The method of listing: public transaction (one-year grace period).
There are additional administrative requirements for listing for both markets.
There are no further requirements for the listing of bonds, mortgage bonds, investment fund certificates, debt securities issued by an international financial institution, and compensation certificates other than the general listing conditions.
4. Prospectus Disclosure
4.1. Regulatory regime (EU Prospectus Regulation or similar) – equity
According to Act CXX of 2001 on the Capital Market, the provisions of the chapter on the “offering of securities and their admission to trading on a regulated market” apply in addition to Regulation 2017/1129/EU. Therefore, the provisions of the Capital Market Act complement the provisions of Regulation 2017/1129/EU on the prospectus to be published.
Basically, the issuer, the offeror, or the person requesting admission to trading on a regulated market shall publish a public prospectus under Regulation 2017/1129/EU (prospectus) in connection with the offer of securities to the public and/or their admission to trading on a regulated market. Publication of the prospectus is conditional upon the approval of the authority.
However, instead of publishing a prospectus, a summary prospectus shall be prepared subject to the content requirements set out in Annex 3 of the Capital Market Act for the offer of securities to the public where the offer value of the securities remains for a period of twelve months less than one million euro or equivalent at European Union level, and the offer of securities to the public cannot be covered by either of the cases provided for in Article 1(4) of Regulation 2017/1129/EU.
There are also special rules on the offering of government securities or securities guaranteed by a Member State of the European Union, or debt securities issued by the central bank of any Member State of the European Union to the public or their admission to trading on a regulated market. If they are offered or admitted to trading on a regulated market only in Hungary, a public-offer prospectus and public offer as illustrated in Annex 2 of the Capital Market Act shall be published.
4.2. Regulatory regimes (EU Prospectus Regulation or similar) – debt
According to the Capital Market Act, securities include bonds or other forms of securitized debt, including depositary receipts in respect of such securities. According to this, the same rules apply to debts.
4.3 Local market practice considerations
To start trading, – based on the requirements determined by BSE – the company must publish the following required information on the official publication site of the Exchange and on the official publication sites:
- the prospectus prepared for the listing on the exchange;
- the statutes of the company;
- information on the language approved by the MNB (English or Hungarian) for the fulfillment of reporting obligations during the period of continued trading of the company’s securities;
- the ownership structure;
- the name and address of the Registrar of Shares.
4.4. Language of the prospectus for local and international offerings
Pursuant to Article 27 of the Prospectus Regulation and the provisions of MNB Regulation No. 28/2013 (XII. 16.) on the languages generally used in international financial markets and adopted by the Hungarian National Bank, the prospectus must be prepared in Hungarian or English and the summary in Hungarian for approval by the MNB.
Where the securities are intended to be offered to the public in another Member State, the summary shall be available in the official language or one of the official languages of the host Member State or in any other language accepted by the competent authority of the host Member State.
5. Prospectus Approval Process
5.1. Competent authority/regulator
The Hungarian National Bank (MNB) is responsible for authorizing the publication of the prospectus (and for issuing the official certificate certifying the authorization of other EU Member States’ supervisors).
5.2. Timeline, review, and approval process
Administrative service fee for the procedure
Pursuant to Article 18/A (1) of the 14/2015. (V. 13.) MNB Decree, an administrative service fee of HUF 1.1 million shall be payable in the manner specified in Article 20 of the decree.
Documents to be submitted
Article 42 of Regulation 2019/980 specifies the documents to be submitted.
The procedural deadlines are set out in Article 20 of the Prospectus Regulation. On the basis of this provision, the MNB will, as a general rule, take a decision within 10 working days and notify the person making the application. If the MNB does not take a decision within this period, the failure to do so does not constitute approval of the application.
As a general rule, the MNB has 10 working days to respond to a deficiency notice. The above 10 working day time limits will be extended to 20 working days if the public offer concerns securities issued by an issuer that has not yet admitted any of its securities to trading on a regulated market and has not previously made a public offer of securities. For frequent issuers, the above time limits are reduced to five working days, with the requirement that frequent issuers must notify the MNB at least five working days before the planned date of submission of the request for approval.
6. Listing Process
6.1. Timeline, process with the stock exchange
Listing on the Stock Exchange is a multi-step process, the time and complexity of which depends on the “type” of listing the company wishes to carry out, among the following options.
- “Simple listing” without raising capital (issuing new shares) or offering existing shares to the public (exit). In this case, by going public, the company creates the possibility of a flexible form of subsequent financing. At the same time, the company “learns” to meet the obligations of being listed, while having the opportunity to compete in the public arena on an ongoing basis. If the company performs well during its listing, it can raise capital on more favorable terms. This option may be chosen, for example, if the company does not need additional capital immediately upon listing and if the shareholders only wish to dispose of part or all of their shareholding in the medium or longer term. On the other hand, there is, of course, the burden that the company takes on by going public, which it must bear even before the actual raising of funds or exit.
- “Classic listing”, i.e., a listing where the listing is accompanied by the offering of a block of shares to the public, the issue of new shares, or a sale of shares by way of a share deal or a sale of shares by way of an ownership stake, or a combination of both.
The listing process consists of the following steps:
Preparation of a brochure
Preparation of the prospectus: The most important basic document of the listing is the prospectus, which should contain all information concerning the economic, market, financial, and legal situation of the issuer (and their expected development) so that investors have the broadest possible information to make their decisions. This prospectus should prominently state if the shares are intended to be listed on a stock exchange and, as a key risk factor, if no investment firm is involved in its preparation. The prospectus drawn up for admission to trading on BSE must normally be submitted to the MNB for approval, which will then decide within 10 (maximum 20) working days and issue its authorization to publish the prospectus. As a consequence of EU accession, the BSE will also accept prospectuses approved by any other EU supervisory authority on the basis of the “single passport” principle. The requirements for the content of prospectuses at the EU level are laid down in the Prospectus Regulation.
Preparation of listing documentation:
The listing documentation consists of two parts: the listing application and the accompanying declaration and other documents. A listing particulars form is available for the application, which contains all the necessary elements of the application and a list of other documents to be submitted. The applicant may choose to proceed with the listing procedure in English or Hungarian. If the listing is not accompanied by a public sale or a public capital increase, the involvement of an investment service provider is not mandatory.
Official submission of listing documentation to the stock exchange:
The Exchange may publish a notice on its website upon receipt of the application for listing and will then start examining the materials. The Exchange has 30 days from receipt of the application to take a decision. However, the listing procedure is greatly simplified and expedited by the use of the listing form prepared by the Exchange and the submission of the completed documentation for preliminary review. The decision on the classification of the series of shares and the starting date for trading will be taken by the Exchange, taking into account the information provided in the application.
Stock exchange categories:
The series of shares can be admitted to two different regulated market categories and to Xtend, the multilateral trading platform operated by the Exchange. The Exchange’s system of categories provides information on the differentiation of listed companies according to certain investor criteria. The Stock Exchange wishes to ensure that listing is as simple as possible and therefore technical admission may be chosen as a method of listing for the Standard Class of Shares and for Xtend. For the Standard Class of Shares, the Exchange has set requirements similar to those for the Premium Class of Shares, relating to the size of the series to be admitted (total value in terms of price), the ownership (public shareholding), and the duration of the company’s operation. For admission to the Premium Class of Shares, the Exchange requires a public sale of shares but may grant a grace period of one year from the date of admission, provided that the Issuer meets the other conditions required for the Class. The Premium Class of Shares includes a series of shares of companies with a more liquid and broader investor base.
7. Corporate Governance
7.1. Corporate governance code/rules (independent director, board and supervisory composition, committees)
The supreme body (general meeting) and the executive officer are mandatory for all companies.
The supreme body functions as the decision-making organ of the members of the business association. The principal duty of the supreme body of a business association is to adopt decisions on fundamental business and personnel issues.
The executive officer shall manage the operations of the business association independently, based on the primacy of the business association’s interests. The executive officer may not be instructed by the members of the business association and his competence may not be negated by the supreme body. Limited companies shall be managed by the management board, which is comprised of at least three natural persons. Where so provided for by the articles of association of private limited companies, the general director shall function as the chief executive officer in exercising the powers of the management board.
The supervisory board shall assess all motions brought before the decision-making body of members or founders, and present its opinion thereof at the meeting of the decision-making body. If the company has a supervisory board, the supreme body of the company may adopt a decision concerning the financial report in possession of the written report of the supervisory board.
If, in the judgment of the supervisory board, the activity of the management is contrary to the law, to the instrument of a constitution or to the resolutions of the business association’s supreme body, or otherwise infringes upon the interests of the business association, the supervisory board shall have the right to convene the meeting of the business association’s supreme body to discuss that issue and to take the necessary decisions.
It is also possible under the instrument of the constitution to establish a peremptory supervisory body. In this case, the supervisory board is given responsibility under the instrument of the constitution for the taking or approval of decisions that otherwise fall within the competence of the supreme body or management.
Where the articles of association of a public limited company so provide, it shall be controlled by the board of directors under the one-tier system instead of the management board and the supervisory board. The board of directors shall discharge the duties of the management board and the supervisory board conferred upon them by law.
The majority of the board of directors shall be made up of independent persons. A board member shall be considered independent if apart from his seat on the board of directors and apart from any transaction conducted within the company’s usual activities, aiming to satisfy the board member’s personal needs he is not holding any other office.
Furthermore, the company’s supreme body can provide for the setting up of other organs in addition to the bodies and officers defined in the Civil Code.
There are no committees that must be established prescribed by the law, except, the audit committee. Only public limited companies are required to set up audit committees, which shall provide assistance to the supervisory board or the board of directors in supervising the financial report regime in selecting an auditor, and in working with the auditor.
The general meeting (shareholders’ assembly) shall elect the audit committee from among the independent members of the supervisory board or the board of directors. At least one member of the audit committee shall have competence in accounting or auditing. The audit committee is comprised of at least three members.
Furthermore, the BSE has published corporate governance recommendations available on its website, which contains proposals and recommendations for the operation of corporate governance.
7.2. Any other ESG considerations
One of the main objectives of BSE is to support ESG investments and, at the same time, to enhance sustainability.
Providing ESG data to investors improves the company’s transparency. Improved transparency lowers portfolio risks, resulting in better valuation for the enterprise, and in the long run, better stock performance in the market. Higher valuation due to ESG factors not only impacts equities but also other asset classes, especially corporate bonds.
Large companies which are public-interest entities where on the balance sheet date in the previous two consecutive financial years either two of the following three indices exceed the limit indicated below:
a) the balance sheet total exceeds HUF 6 billion,
b) the annual net turnover exceeds HUF 12 billion,
c) the average number of employees in the financial year exceeds 250 persons;
and the average number of employees in the given financial year exceeds 500 persons;
shall publish a non-financial (ESG) statement containing information to the extent necessary for an understanding of the company’s development, performance, position, and impact of its activity, relating to, as a minimum, environmental, social, and employee matters, respect for human rights, anti-corruption and bribery matters.
The annual report also shall contain environmental protection-related information. To start with, reporting companies should determine the internal roles and responsibilities within the company that are relevant to ESG assessment and reporting. Like many other tasks, it is recommended that ESG reporting starts from the bottom up. Different departments such as finance, investor relations, communications, core business, risk, environmental, HR, purchasing, and legal need to be involved to ensure their input is integrated into the report.
Gathering reliable and complete ESG data is imperative. The quality of available data significantly affects decision-making capabilities and performance. Data gathering is a demanding task, which should be addressed by the reporting and preparation timeline accordingly.
The ESG report can be included in the board of directors’ annual report, elsewhere in the company’s annual report, or in an integrated report, but it can also be presented in a separate, stand-alone report or even through other channels. The different types of reporting represent different advantages, each company should consider which type will fit them best and the needs of their investors. Regardless of the reporting channel chosen, the format of the report must satisfy all relevant legal requirements and be easily available via the company’s website.
8. Ongoing Reporting Obligations (Life as a Public Company)
The issuers of a series of shares admitted to trading on the Exchange must comply with the disclosure obligations provided for by law and the Exchange Rules at the same time. Following the listing of the Transparency Directive in Hungary, the listing requirements have been aligned as far as possible with the European standards and impose only minimal additional obligations on listed companies.
According to the stock exchange rules, a listed company is obliged to provide information on regular, extraordinary, and other, corporate governance and certain corporate events.
The detailed rules for the information to be provided on a regular and extraordinary basis under Act CXX of 2001 on the Capital Market (Act on the Capital Market) are laid down in PM Decree 24/2008 on the detailed rules of the information obligation in relation to publicly traded securities.
8.1. Annual and interim financials
Listed issuers subject to the Act on the Capital Market are required to inform market participants about the development of their management. In this context, they are obliged to prepare the following reports in accordance with the Act on the Capital Market and the relevant provisions of PM Decree 24/2008 (VIII.15.):
- Annual report (audited): within four months after the end of the financial year;
- Half-yearly report (unaudited): within three months after the end of the first half-year.
Other regular reports
The Act on the Capital Market also provides for an additional type of periodic information to be provided to issuers covered by the Act:
- Publication of the number of voting rights attached to their shares and the amount of share capital on the last day of each calendar month.
Responsible corporate governance disclosure requirements
Listed issuers must also publish a Corporate Governance Report at the same time as their annual report. The objective of corporate governance is to enhance the transparency of the company’s management and the efficiency of its operations, taking into account the interests of its owners (but also the legitimate interests of persons and entities related to the company), while ensuring compliance with the letter and spirit of the law. The Corporate Governance Recommendations promulgated by the Stock Exchange address a number of issues that go beyond the scope of Hungarian law. Compliance with the procedures and recommendations contained in the Corporate Governance Recommendations is not mandatory, but all issuers of shares on the Exchange are required to provide information on their compliance with the Recommendations (“comply or explain”).
Corporate events calendar
Premium Class issuers are required to publish their calendar of corporate events by the first day of each financial year.
8.2. Ad hoc disclosures
Extraordinary disclosure, disclosure of inside information (MAR)
The issuer must inform market participants about any information or event that may directly or indirectly affect the value or yield of the securities it has listed on the Exchange and may be important for investors’ decisions (so-called price-sensitive information). An illustrative list of the information covered by the exceptional information obligation is set out in PM Decree 24/2008 (VIII.15.).
The rules on the disclosure of inside information are set out in Regulation (EU) No 596/2016.
Information that may be important to investors but is not price-sensitive (e.g., company’s articles of association, change of investor contact person, etc.)
Disclosure of certain company events
The SRDII Directive requires issuers to disclose information relating to specific corporate events (notice of general meeting, proposal, resolution, etc.). The publication is facilitated by the CAPS system available on the site of KELER.