The possibility for the establishment of Venture Capital, Private Equity, and Hedge funds in the Republic of Serbia
Following a public hearing, the Ministry of Finance of the Republic of Serbia has presented a Draft Law on Alternative Investment Funds („Draft Law“). This is the first law in the Republic of Serbia („RoS“) to regulate alternative investment funds („AIF“) – venture capital funds, private equity funds, hedge funds, etc.
The existing Law on Investment Funds is general in nature and governs the registration and business activities of public and private investment funds („IF “). Upon adoption of the Draft Law, closed-end and private IFs will no longer be governed by that general law.
Some characteristics of AIFs are:
- AIF has a much wider range of investment opportunities (valuables, artworks, startups, real estate, etc.) than IF, which can invest exclusively in capital markets (stocks, bonds, cash);
- AIF does not need a license for business activities within the meaning of the Law on Investment Funds.
Here are some of the main points of the Draft Law:
- Open-end and closed-end AIF. – Open-end AIF (usually hedge funds and ETFs) is a separate asset with no legal personality and is usually offered through fund companies, which sell shares of open-ended AIF directly to investors. Closed-end AIF can be with or without legal personality and is usually organized same as publicly traded companies.
- Fund Management Company (“FMC”) – Each AIF is managed by an FMC, which is an independent legal entity. The license for the operation of FMCs are issued by the Serbian Securities Commission. FMC’s management of AIF includes the establishment of AIF, portfolio management, risk management, assets management, etc. Also, FMC is liable for ensuring the harmonization of business activities with the provisions of the Draft Law.
- Depositary. – The Draft Law introduces significant novelties regarding depositaries. As regulated in the Draft Law, depositary’s powers largely correspond to the powers of a custodian bank under the current legislation. The change is a result of the need to harmonize Serbian legislation with rules in the EU and the rest of the world.
- Shares. – Shares in AIFs can be investment units (a share in the property of AIF assets), stocks and shares (if AIF is a legal entity). In open-end AIFs, shares are redeemable upon request of an investor, while in closed-end AIFs there is no possibility of such redemption.
- Investors. – The shares in AIF may be offered to (i) professional investors, which would be investors qulifying as professional clients on the capital market, (ii) small (non-professional) investors, and (iii) semi-professional investors.
- Public and private offering. – Open-end and closed-end AIFs can be established as AIF by way of a public or private offering. AIF with private offering can be general and specific (private equity, venture capital, hedge funds, FOF – fund of funds, etc.).
- Transparency Requirements. –
Since the intention of the legislator is to achieve a higher level of investor protection, the Draft Law includes the obligation of reporting to the investors a clear description of the investment policy, financial leverage, a description of the assets in which the investment will be made, etc. - Exceptions. – The Draft Law does not apply to holding companies, voluntary pension fund management companies and voluntary pension funds, insurance, and reinsurance companies, supranational institutions (for example IMF), national central banks, programs for employee participation in profit or employee savings, as well as to government bodies.
What will be the impact of the draft law?
Only practice will show to what extent the draft legislation will affect the currently invisible financial markets in the RoS. It remains to be seen whether it will establish the conditions for the operation of AIFs in the RoS and attract multinational AIFs to operate on the financial markets and from and within the RoS.