CzechInvest Information Series No. 7
Serial No.: CUR/11/94-7
Date of Issue: November 11, 1994
Securities and the Stock Exchange
The currency of the Czech Republic is the Czech crown (Kc). The crown consists of 100 hellers. Coins in circulation: 10, 20 and 50 hellers; 1, 2, 5, 10, 20 and 50 crowns. Bank notes in circulation: 20, 50, 100, 200, 500, 1000 and 5000 crowns. A 2000 Kc bank note is currently being prepared.
Convertibility:
Internal convertibility of the Czechoslovak crown was introduced on January 1, 1991 through the Foreign Exchange Act, with clarifying foreign exchange regulations passed on July 1, 1992. This legislation became applicable for the Czech crown on February 18, 1993 after the division of the Czech and Slovak Federal Republic on December 31, 1992.
The Czech crown is partially convertible. Convertibility applies to all current account operations and to some capital operations -- the inflow and outflow of foreign capital, for example, is virtually without limit. Some restrictions remain on the export of bank notes, payment documents and securities denominated in Czech crowns.
Czech enterprises have restricted borrowing privileges from foreign banks and financial institutions, with permission from the central bank required before loans can proceed. Czech enterprises considering direct investment abroad are also required to obtain a licence from the central bank.
Full convertibility of the Czech crown is planned and may include such steps as cancellation of the foreign currency purchase limit for Czech residents, liberalisation of capital inflow and departure from the rules for capital outflow by direct investment abroad.
The Czech crown's exchange rate has remained stable for over three years. It was established at 28 Kc per USD in December 1990 and is currently close to 30 Kc per USD . The exchange rate is pegged to a basket of two currencies -- 65% for the DEM and 35% for the USD. The exchange rate fluctuates within a narrow band and is updated and published daily by the Czech National Bank in a list that includes European convertible currencies, the ECU, Australian dollar, Japanese yen, Canadian dollar, New Zealand dollar and USD.
Foreign Value in Foreign Value in
currency Kc* currency Kc*
purchase
USD 27.55 FRF
5.24
DEM 18.02 100 JPY
28.17
GBP 44.27 ECU
34.31
* Exchange rates on November 11, 1994
Fall in Value of East European Currencies Against USD (%)
CR HUNGARY POLAND SR
1991 - 1993 0.1 -26.9 -71.1 -4.6
1991 - 1994 -1.7 - 34.8 -103.2 -13.5
Foreign Exchange Law. The legal background for foreign exchange operations in the Czech republic (CR) is provided by the Foreign Exchange Law. To determine foreign exchange entitlements of both physical and legal persons involved in foreign exchange operations, the law's decisive criterion is not citizenship but the possession of a permanent residence permit.
Protection of foreign investment. The foreign exchange law provides protection for the repatriation of capital and profits. Investment protection and double taxation avoidance treaties currently exist with many countries (a list of these treaties is available at CzechInvest) and several more are being negotiated. Foreigners can also transfer or export foreign vouchers, foreign securities and savings books in foreign currency.
Prior to 1989, the Czechoslovak banking system was highly centralised. Since the revolution, the banking sector has been fundamentally restructured, with the number of banks increasing from only two in 1989 to 57 in March 1994.
Central bank: On January 1, 1993, the Czech National Bank (Ceska narodni banka) was formed from elements of the former Czechoslovak State Bank to become the CR's central bank. The Czech National Bank is by law autonomous and can set interest rates, regulate money markets, control the money supply and be responsible for exchange rates. There are virtually no administrative ceilings on either the credit supply or interest rates.
Commercial banking: Of the 57 commercial banks currently in the CR, 24 are completely Czech-owned, 12 are partially foreign-owned, 10 are completely foreign-owned, 10 are branches of foreign banks and one is the Czech state financial institution (this list is available at CzechInvest). Apart from banks, there are several specialised financial institutions such as investment companies and the Prague Stock Exchange. Associations for banks, insurance and other specialised institutions are similar to those abroad.
Banking products and services: Most banks are universal commercial banks that provide a variety of banking products and services. In addition to such typical products as loans and transaction payments, most banks provide other services such as trade promotion, consulting, guarantee and foreign exchange operations, and stock market and foundation services. Each of the larger banks has daughter companies that operate investment and privatisation funds and are also active in leasing and consulting enterprises. Most of the banks have connections to the international banking industry.
Bank Accounts: All Czech enterprises, including those with 100% foreign ownership, must open a bank account as part of the registration process. Enterprises are also required to offer all convertible currencies to the banks (except those which consist of monetary deposits to their basic capital ) but at the same time have guaranteed access to convertible currencies. Enterprises with a major part of their turnover in foreign currencies can obtain permission to open a foreign currency account.
Credits: Foreign entrepreneurs can make use of credits granted by both Czech and foreign banks, although approval is required for loans from foreign banks or entities. Czech banks offer short-term (up to one year), medium-term (1-4 years) and long-term (over four years) credit. The rate of interest varies according to the duration of credit and is expected to decrease along with future economic development.
Entry of foreign banks : Foreign banks are not restricted from entering the CR. The same regulations apply to foreign and domestic banks. The present minimum capital requirement is 500 million Kc (approximately US$16.7 million). Banking licenses are given by the Czech National Bank.
Statements: Foreign and Czech owned enterprises are subject to the same accounting regulations. The main financial statements required are:
- an income statement (produced monthly);
- a balance sheet (produced biannually); and
- an annual financial statement
-
Audits: Currently, only companies with foreign participation, joint stock companies certain limited liability companies and co-operatives are required to have an audit. These companies must have their annual financial statements approved by two auditors -- one must be a Czech national while the other may be from a foreign auditing firm recognised by the Ministry of Finance. As auditing in the CR is still a new and unorganised practice, there is as yet no professional body to regulate the 100% Czech enterprises.
SECURITIES AND THE STOCK EXCHANGE
SECURITIES MARKET
The re-establishment of equity markets in the CR has been designed to run parallel to the country's privatisation programme, which aims to privatise more than US$33 billion worth of property over a 5-6 year period. Shares may be acquired in the following ways:
- individually, through the voucher privatisation programme;
- collectively, through the voucher privatisation programme (via investment privatisation funds);
- through direct purchases for cash by management or other (i.e. foreign) investors.
These elements of the shareholder base are supplemented by shareholders purchasing shares for cash through the market, either from earlier holders or through the new public offerings.
The second and last wave of voucher privatisation began in April 1994. In total, it is estimated that 861 joint-stock companies with an accounting value of US$5.16 billion will be privatised by the end of 1994 and approximately 6.17 million people will obtain shares through the programme.
THE PRAGUE STOCK EXCHANGE
The Prague Stock Exchange opened in April 1993 with 12 monetary institutes and five brokerage firms as its founding shareholders. The Exchange traded US$300 million between April and December 1993. Total daily trading is currently close to $15-20 million. The Exchange is chaired by Richard Salzmann with Jiri Franc acting as chief executive.
The Exchange trades daily --from 8am-noon.
Trading System: The Exchange's basic function is to organise the market of listed securities. It is driven by the concentration of offer and demand for securities up to a specific deadline (an order driven system). The rate of security is calculated and fixed each day according to specifications of the Exchange's Automated Trading System.
Off-Stock Exchange Trading: The Securities Act allows for off-exchange trading, primarily for the millions of shareholders involved through voucher privatisation. RM-SYSTEM, a joint-stock company operating the "RM-S" system from 350 "share shops" throughout the CR, acts as organiser of the securities market and is independent of the Prague Stock Exchange. Individual investors and legal entities can buy and sell shares of more than 1,000 joint-stock companies through these share shops, which are connected to a central computer and pricing mechanisms.
Clearing System: Concluded exchange deals are cleared by the Securities Register Ltd., an offshoot of the Prague Exchange, on the third day following conclusion of the deal through the Czech National Bank's clearing centre. All exchange deals between members are guaranteed clearing; a Guarantee Fund covers the risks and liabilities inherent in exchange trading.
Membership: Those legally eligible to trade at the Exchange must have general securities trading licenses or exchange trading licenses issued by the Exchange chamber (by law, the Czech National Bank holds this license). All major banks, as well as some non-bank brokers, are members of the Exchange.
As in foreign exchanges, Prague Exchange members give investors advice and provide representation for a wide range of security negotiations, including sales and purchases. The Prague Exchange now has 62 members, most of whom are its shareholders, who are licensed to trade securities.
Regulation: Regulation of the exchange is conducted through the following laws:
- the Stock Exchange Law No. 214/1992 allows authorisation of the Exchange under the Ministry of Finance;
- the Investment Funds Law outlines the legal and supervisory arrangements for investment funds, particularly those involved in the voucher privatisation process;
- the Securities Law outlines the basic legal position of securities in the CR, arrangements for registration, and the aforementioned "off-exchange" market;
- the Debenture Law (1990) and the Commercial Code(1991).
Fundamental to market supervision is a "securities commission" set up within the Ministry of Finance. This commission is responsible for handling the authorisation of exchanges through the Exchange commissioner, securities dealers, and investment funds; for setting appropriate listings; and for reporting security obligations.
NOTE: This information is current as of June 1994. Although we have made every effort to ensure
the reliability of our sources, CzechInvest does not assume responsibility for its accuracy.