On January 25, 2024, the Office of the Prime Minister of the Republic of Kosovo published a list of concept notes anticipated for drafting and adoption by the Kosovo Government in the present year. The concept note, a regulatory prerequisite to the enactment of legislation within a specified domain, specifies the objectives of prospective governmental policy and the optimal modalities for their implementation.
To this end, among the roster of 2024 concept notes, the inclusion of a concept note for Financial Markets signifies a stride toward regulatory oversight and formal governmental commitment to the regulation of the financial market, thereby encompassing the capital market. It is important to note that Kosovo presently lacks legislation governing capital markets pertaining to corporate or municipal securities. The sole securities permissible for exchange, either in primary or secondary markets, are government bonds, predominantly brokered through or exclusively procured by institutional investors, such as licensed banks or Kosovar Pension Fund known as Trusti.
It merits acknowledgment that government bonds were initially tendered to retail investors in 2021 through the issuance of Diaspora Bonds, specifying commercial terms tailored to the investment capacity of retail investors – a solicitation directly targeting the retail investor investment capacity.
Adopting legislation to cover capital markets and facilitating the exchange of securities in primary and secondary markets constitutes an impressive endeavor, albeit a necessary one for Kosovar corporations and retail investors alike. For Kosovar corporations, this provides an alternative avenue for capital raising, currently operating within a sector that is traditionally dominated by banks for capital acquisition through traditional loans or analogous debt instruments. Notably, amid global surroundings characterized by escalating interest rates to combat inflation, this potentiality holds positive prospects. Conversely, for retail investors – particularly within the context of diaspora influx – this presents an opportunity to diversify investments from illiquid assets like real estate to more liquid instruments such as securities.
However, the realization of these envisaged benefits hinges upon substantial challenges, chiefly the harmonization of Kosovar legislation with the extensive corpus of EU Acquis related to capital market development, pursuant to the Stabilization and Association Agreement concluded between the European Commission and Kosovo in 2015. Noteworthy directives for transposition encompass the MiFID Directives, the Prospectus Regulation, and the Market Abuse Regulation, among others.
These challenges extend beyond mere transposition to encompass the effective implementation and enforcement of capital market legislation, ensuring market integrity and investor protection. This inevitably necessitates potential amendments to the Criminal Code to incorporate tailored criminal offenses pertaining to securities transactions, alongside the requisite training of prosecutors and judges to adjudicate market manipulation or insider trading practices, thereby safeguarding a fundamental tenet of capital markets – market integrity.
Beyond these legal complexities, two pivotal challenges exist. Firstly, the operational and investment costs related to establishing a stock exchange venue necessitate significant public investment to underwrite the requisite technological infrastructure. Secondly, the institutional dimension – whether to establish a new securities agency tasked with overseeing and implementing capital market legislation or to delegate such responsibilities to Kosovo’s Central Bank, already vested with authority for financial supervision and regulation.
Consequently, the materialization of tangible economic benefits becomes necessary to outweigh the challenges, including but not limited to capital mobilization and the increase of employment level (as an indicator of economic stability). Thus, the central issue at hand pertains to whether Kosovar corporations can successfully raise capital within domestic market venues or if listing on foreign exchange markets would prove more advantageous. Alternatively, in the spirit of regional cooperation, the prospect of establishing a regional market within the Western Balkans warrants consideration for the future. While some of these issues may fall outside of the scope of a national concept note, they nevertheless merit deliberation.
By Fisnik Salihu, Managing Partner, and Klit Shala, Senior Managing Associate, RPHS Law
This article was originally published in Issue 11.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
