Jamshid Turdibekov
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In the spring of 1991, the Government of Uzbekistan established the first stock exchange in the modern history of the Republic of Uzbekistan. So far, regardless of its improvement, in my view, there are still several legal problems that hinder the further development of the market. The state of the securities market in Uzbekistan can be seen from the following data: the share of free-floating securities in the country’s GDP is very low (0.3%).  This blog post addresses system bottlenecks by comparing them with U.S security market regulations. 

State registration of securities issue

Article 8 of the Law “On securities market”, “State registration of securities issuance”, explains this process. In particular, the Department of Capital Market Development of the Ministry of Finance is the supreme governing body for registration. In fact, in the process of state registration of shares the issuer is obliged to submit a number of documents, including:  

– information on issuance of securities shall be a copy of the resolution,

– prospects of issuing securities (in case of public placement of securities), 

– the minutes of the general meeting of shareholders or participants of a company, confirming the decision on issue of securities and the list of other noticeable numerous corporate documents.

The real problem, however, is that such a large number of documents could prevent new stakeholders from entering the market and would certainly discourage foreign investors. This, in the opinion of scholar O.Narziyev, reduces the interest in the stock market because of the conviction that even from the earliest stages the state registration of the securities market itself is radically filled with huge bureaucratic paperwork.

US market regulation

In the United States, the Securities and Exchange Commission (hereinafter SEC)  is the main regulator at the federal level in the field of public offerings.  The SEC Corporate Finance Division may review the company’s registration application to determine whether it meets the disclosure requirements. For example, the New York Stock Exchange and the Nasdaq Stock Market certainly play a significant role as world trading hubs.

It is much easier when it comes to registering securities in the US. The issuer is required to file a registration application, which is the principal document to the SEC under the 1933 Act or the 1934 Securities Exchange Act (the “1934 Act”). The security registration process is as follows:

In the first stage, in order to register securities with the SEC, issuers must submit an application for registration consisting of two parts:

  1.  Prospectus ( financial disclosure that the issuer and offer are registered);
  2. Supplemental information includes information on the management, business, and assets of the company. It should also provide details of the company’s securities and financial statements offered.

In the second stage, approximately two weeks after the submission of the application for registration, the SEC sends its comments to the issuer and/or his legal counsel. The issuer must then submit an amendment to the previously submitted document together with a response to the comments, after which the SEC considers the amended registration application. The review process continues until staff is satisfied with the information provided by the issuer and the application for registration is declared valid. 

It turns out that the simplicity of state registration is one of the most important components and has led to an increase in the US capital market, while its complexity in Uzbekistan has negative consequences. Fortunately, we can recognize that there are several positive reforms ahead of us. The Capital Market Development Program for 2021-2023 itself recognized the problem and stated “there are many legal instruments that regulate the industry disproportionately and do not meet modern market requirements and international standards”. Since the Government itself is aware of the problem hopefully, that complex documentation problem would soon change.

Risk protection

It is no secret that this market is a risk-based activity. Thus, the issue of protection against risks is one of the objects of insurance legislation in the capital market of Uzbekistan.  

As one of the prospects for the further development of this market legislation, attention should be paid to the wider application of hedging legislation ( risk insurance system ) in the national legislation of Uzbekistan. In particular, under article 58 of the Law On Introduction of Amendments and Additions to the law of the Republic of Uzbekistan “On Securities market”, market participants have the right to insure their risks on the securities market. This is one of the ways to further develop the market. Chapter 52 of the Civil Code addresses the issue of “insurance”, although it is not widely used, especially in the securities market.  More specifically, the insurance rules in this section are general, and in the Law “On insurance activities”, except for article 14, which deals mainly with the professional activities of investment intermediaries, There are no specific rules protecting investor risk.  So, in my view, we need to look at the nature and ways of implementing hedge

In 2018, according to the Electronic Code of Federal Regulations” (USA) (E-CFR), hedging is a risk management strategy used to limit or compensate for the probability of price fluctuations of goods, currencies, or securities. In addition, these rules are intended to guide and encourage securities-based swap entities to accurately and efficiently manage their market and credit risks throughout the life of the swap-exchange transaction on a secured basis, including by reducing the risk of disagreement, the Chairman of the US Securities and Exchange Commission said, Jay Clayton. More precisely, the main distinction between hedging and other types of insurance is to protect commercial risk in the securities market. In other words, while insurance covers financial losses that occur due to hazards such as fire, lightning, or explosion, hedging, on the other hand, protects itself from market fluctuations and in some ways participates in trading. On this basis, we must also introduce special insurance standards similar to those of the United States. In general, the positive improvement in the insurance factors of the stock market attracts foreign investors and also increases the interest of the population in the market.

Fortunately, these issues are also addressed in the Capital Market Development Programme 2021-2023: 

1. Encourage the participation of insurance companies in the capital market;

2. Prevention of systemic risks with the introduction of appropriate international criteria and expertise.

Liability for violation of the legislation on the securities market.      

Another problem in the stock market is inadequate accountability for illegal actions. Liability is mainly provided for in the Code of Administrative Offences. In particular, Article 174 provides for the payment of fines in the amount of not less than three basic calculation sums (810,000 soums)  – a maximum of 20 (5,000 soums). In my opinion, the Criminal Code should also include rules concerning this market. The Criminal Code also contains a corresponding provision on securities (Article 176 “Counterfeit money, excise stamps or creation and transfer of securities), although it only provides for the illegal creation of securities. 

This is due to the belief that there is a mutually beneficial relationship in this market. As O.Narziev noted, some “special relations” could be recognized in joint-stock companies based on the distribution of small shareholders. This situation usually leads to cases where major shareholders are not so much interested in increasing profits as in maintaining specific relationships with managers and customers (for example, with regard to the control of financial flows or export-import transactions). It is therefore essential to develop effective and reliable legislative measures in terms of corporate transparency. Moreover, accountability for such illegal actions is so important that they must be strict. After all, for those engaged in large-scale money laundering and financial fraud in this market, a fine of 20 basic settlement amounts is irrelevant to them.

Market prospects

The corresponding Decree of the President of the Republic of Uzbekistan dated 13.04.2021 No. 6207 provides measures for the further development of the capital market. The Decree also approved the Capital Market Development program 2021-2023. The main objective of the Program is the radical improvement of the State policy, which envisages the deepening of the implementation of reforms aimed at bringing the total volume of free securities into the GDP of the country to 5%. In this regard, it should be noted that new legislation is expected to be adopted in the coming years, including: 

1.          Memorandum between the Ministry of Finance and the International Organization of Securities Commissions (IOSCO) on multilateral consultation, cooperation, and exchange of information;

2.          Draft Law “On the Capital Market”, which is directly applicable in this field based on the principles of the International Organization of Securities Commissions (IOSCO)

Cooperation with international securities organizations would improve the quality of the market, especially in terms of quality services, reduced bureaucracy, and more market participants, which was expected to reach 40,000 people, compared to 5,000 in 2021.

In conclusion, it should be noted that the analysis of existing securities market legislation presented above is considered the main problem (too many documents, lack of specific methods of protecting market risk, and “significant leniency” of responsibility for violations of the law in this area). Therefore, I believe that there is a clear and sound legal basis; this will undoubtedly provide an adequate basis for Uzbekistan to achieve the above-mentioned objectives. 

Cite as:  Jamshid Turdibekov, “Main problems of securities market law in Uzbekistan”, Uzbekistan Law Blog, 23.08.2022.