A EUROMONEY SURVEY – MARCH 1996
BACKGROUND
The structure of Spanish legislation is comparable to that of leading worldwide economies. This is partly due to the demands of the European Union of which Spain is a member, but also due to the desire of the Spanish government to internationalize its financial markets. Liberalization in Spain in the last 10 years has been widespread and rapid.
LEGAL FRAMEWORK
The legal framework for the financial sector is based upon several important pieces of legislation. The central bank is responsible for a monetary policy based on economic stability and meeting the challenges of the changing financial services sector. It is also responsible for credit guidelines, banking discipline and questions of solvency.
The securities market regulation is based on the 1988 Securities Market Act and its amendments and provisions. This covers all aspects of the financial markets from listing to trading and control of markets and participants.
EQUITIES: SHARES
A share is a security which represents an equal division or proportional part of a corporation (sociedad anónima). The fundamental characteristic of a sociedad anónima is the division of its capital into shares, which incorporate the shareholders’ rights. Shares can be represented by certificates (registered or bearer) or by book-entries. With registered shares, the owner’s identity appears among the certificates’ registers, while if they are represented by book-entries, such information does not appear.
Transfer
The transfer of those shares materialized in book-entries takes place through a complex process known as an accounting transfer. If the shares are in registered form, they may be transferred by a much simpler endorsement procedure.
Shares not listed on an exchange are governed by the Companies Act (Ley de Sociedades Anónimas) of 1989, as amended. If the shares are listed on an exchange, the base rule is the Securities Market Act (Ley del Mercado de Valores) of 1988.
Tax aspects
Following the 1988 introduction of the Securities Market Act, a transfer of shares, whether or not admitted to an official secondary market, is exempt from both transfer tax (Impuesto sobre Transmisiones Patrimoniales; ITP) and value-added tax. However, transfers on the secondary market of securities of companies, funds, associations and other entities, whose assets are at least 50% formed by property located in Spain, are the exception and therefore subject to transfer tax.
EQUITIES: CORPORATE PARTICIPATIONS
In accordance with the provisions of Law 2/1995, in respect of limited liability companies (“Sociedades de Responsabilidad Limitada”), the corporate capital must be divided into indivisible and cumulative corporate participations. These are not considered to be securities, may not be represented either by book-entries or physical certificates, and may not be referred to as shares. Lack of classification as a security implies on the one hand that they may not be traded on an organized securities market and, on the other hand, that such limited liability companies may not be listed on an exchange.
Transfers
Voluntary transfers of participations among partners, as well as those carried out in favour of a spouse, ascendant or descendant of the partner or in favour of companies belonging to the same group as the transferor, are freely permitted, unless otherwise provided in the company’s by-laws.
CORPORATE BONDS
Bonds may be represented by certificates (in registered or bearer form) or by book-entries. In the event that the bonds are represented by certificates, these are issued in a numbered series and are negotiable.
In the case of default, there is a very quick procedure (juicio ejecutivo) which allows auction of the debtor’s property. The representation of bonds through book-entries is obligatory if it is intended that the bonds become, or remain, admitted to trading on an official securities market.
Sociedades anónimas, in terms of bond issuance, are governed by the Companies Act, the Securities Market Act and the Mercantile Registry Regulations. Limited liability companies may not issue bonds.
Normally sociedades anónimas use bond issues as a means of financing. There is a requirement that the total amount of the issue not exceed the sum of paid-in share capital, any reserves which appear on the latest approved balance sheet, regularization accounts and balance sheet updates.
There are some exceptions to this limit:
1) When the issue is guaranteed by mortgages, pledges, the state, an autonomous community, a province or a municipality
2) When the issue is carried out by banks
3) When the issue is carried out by highway licensee companies.
Bonds may be classified either as simple or convertible, and as ordinary or guaranteed. The difference between simple and convertible is based on whether or not they incorporate the right to be converted into shares in a new issue of the company, while the difference between ordinary and guaranteed lies in whether or not they are backed by a special guarantee (mortgages, pledge, guarantee of the state, the autonomous community, province or municipality).
TREASURY SECURITIES
The Spanish government securities market is distinguished between short-term treasury debt, both bills and notes (Deuda del Tesoro) and longer term state debt (Deuda del Estado).
Deuda del Tesoro
Deuda del Tesoro are short-term securities issued by the Bank of Spain to bolster cash flow or to fulfil monetary policy goals.
The Bank of Spain issues treasury bills or notes (Letras del Tesoro or Pagarés del Tesoro) which are normally acquired by private banks, savings banks and by money market dealers. Letras del Tesoro usually have a duration of 12 months. Pagarés del Tesoro have a maximum redemption period of 18 months.
Deuda del Estado
Deuda del Estado are medium-term and long-term bonds issued to finance public expenditure and official credit. State bonds are medium-term (five years), while debentures are 10 years. The structure of the Spanish government debt market structure was altered to a book-entry system with the 1986 State Budgetary Act, based on articles of the General Budgetary Act. This new system permits greater speed in securities trading.
Both the short-term and long-term treasury markets have experienced strong growth in Spain in recent years, due principally to a decline in interest rates. Investors have been able to secure high returns which enjoy the guarantee of the state.
FOREIGN EXCHANGE
Currency market regulations have changed profoundly because of liberalization in the European Union. This liberalization has created significant modifications in both the spot and forward markets. One important change is the trading of the peseta directly against all of the EU currencies instead of calculating foreign exchange by cross-rates via the dollar. In addition, because of the new foreign exchange freedom, banks can now establish their own fixing or average foreign currency exchange rates which may differ from those published by the Bank of Spain.
Furthermore, individuals and legal entities, either resident or non-resident in Spain, may obtain loans and credits in foreign currencies or in pesetas, granted either from within or outside Spain. When a resident or non-resident applies to a bank for financing in Spain it is not necessary to obtain any previous authorization on the part of the government, no matter what the amount is. If the financing is applied for abroad, a resident will need to obtain a financial transaction number (Número de Operación Financiera or NOF). This is generally assigned by the Bank of Spain, and its purpose is to allow the central bank to obtain statistical data on the country’s foreign indebtedness. Loans and credits from non-residents to residents and vice versa are regulated by Bank of Spain Circular 23/1992.
Both resident and non-resident persons (individuals or legal entities) may open and maintain current accounts, savings accounts and term deposits, in pesetas or foreign currency, within or outside Spain. Non-resident persons who wish to open this type of account in Spain must demonstrate their non-resident status to the registered entity and confirm such status every two years. Such accounts are regulated by a 1991 ministry of economy and finance order and the Bank of Spain Circular 1/1994.
DERIVATIVES
Futures and Options
In Spain, there are two official organized markets for financial futures. On one, options and financial futures on fixed-income are traded. It is governed by a company called MEFF Sociedad Rectora de Productos Financieros Derivados de Renta Fija, headquartered in Barcelona. The other market trades equity derivatives, and is governed by a company named MEFF Renta Variable, headquartered in Madrid. The capital of both companies is wholly owned by MEFF Sociedad Holding de Productos Financieros Derivados, also headquartered in Barcelona. MEFF is the equivalent of the London International FInancial Futures Exchange (Liffe).
Bearing in mind that derivatives contracts are recent creations in Spain, the regulations are generally insufficient. For purely contractual aspects, the Royal Decree 1814/1991 regulates the official futures and options markets. In addition there are other laws and acts which regulate different aspects of the market such as the 1993 amended Bank of Spain Circular 4/1991 which refers to contracts and their form of accounting; articles 31, 59 and 77 of the Securities Market Act, which created the futures and options markets in Spain; and the 1989 treasury and financial policy resolution which allows futures and options on public debt book entries.
In Spain, no specific rules regulate commodities although in 1995 a new market for futures and options on citrus fruit was created in Valencia. This market follows the model of the Chicago commodities exchange.
CUSTODY AND SETTLEMENT
Settlement refers to the delivery of securities subject to trading. It also refers to the payment for such securities. Initially, because all securities were represented by physical certificates, settlement implied the physical movement of the certificates. This is what is now known as the traditional system.
The proliferation of sociedades anonimas with high levels of capital created a massive onset of certificates, the possession of which became necessary in order to exercise shareholder rights. Therefore, a system was needed which would be capable of transferring shares, bonds and coupons, as well as a system for the exercise of the rights they incorporate, without the need physically to mobilize, manipulate or materially transfer anything. A 1974 decree implemented by ministerial order in the same year created a new system for clearing and settling securities transactions.
Only securities which officially trade on the securities exchanges (Madrid, Barcelona, Bilbao and Valencia) may be admitted to this system. In addition, they must meet certain requirements:
1) that the governing bodies of the exchanges on which they trade allow them to be so traded
2) that they be possessed by a member entity of the system
3) that they not be subject to any condition which prevents their being treated as fungible
4) that they not be subject to any pledge, retention, or lien.
In order to settle securities transactions, the governing body of each exchange organizes a settlement and clearing service which, in addition to controlling the securities included in the system, takes care of their accounting instrumentation and registration. The service will open accounts, in respect of the movements of securities, in the names of the member entities of the system. These accounts will be set off on each class of security, in which the securities bought and sold during each securities exchange session are paid and charged to them.
The 1992 General Directorate of International Economy and Foreign Transactions (Dirección General de Economía Internacional y Transacciones Exteriores or DGEITE) resolution states that investors non-resident in Spain who subscribe or acquire securities which are negotiable on the Spanish market must maintain their securities accounts or custody of certificates at a Spanish entity (banks, savings banks, credit cooperatives, and even broker/dealers). The holders of these accounts may freely transfer them from one entity to another.
DIRECT INVESTMENT
In recent years, liberalization has bolstered foreign capital inflows to Spain. The Royal Decree 671/1992 establishes the legal framework for this type of investment and was adapted to take into account the current status of the Spanish economy and European Community regulations. (Directive 88/361 in 1988 liberalized the movements of capital between persons residing in member states of the EU.)
Those investments made by governments and entities of foreign sovereignty belonging to non-community states require authorization by the Spanish council of ministers, unless they are allowed by virtue of international treaties signed and ratified by Spain.
According to the royal decree, direct foreign investments are deemed to be those which are:
* participation in Spanish companies where the investor may effectively influence the management or control of the company by its participation or what its participation would become
* the establishment and expansion of branches, as well as the granting of repayable advances
* the granting of long-term (greater than five years) loans to Spanish companies
* the capitalization of reserves and reinvestment of undistributed profits
* the acquisition of property when such acquisition in itself constitutes a business activity.
Scheme of direct investments
In general, this type of investment is freely permitted and only requires prior administrative clearance from the General Directorate of International Economy and Foreign Transactions (DGEITE) in certain circumstances.
These are when:
* the foreign holding exceeds 50% of the capital of the Spanish company which receives the investment and any of the following circumstances are present:
– that the amount of the investment exceeds Pta500 million
– that the foreign holding in the share capital plus reserves of the Spanish company is greater than Pta500 million
* the amount of the loans or the amount of the establishment or expansion of branches exceeds Pta500 million or comes from natural persons or legal entities resident in tax havens;
* the foreign holding exceeds 50% of the capital of the Spanish company receiving the investment and any of the investors is a natural person or legal entity resident in a tax haven.
Declaration and registration
Foreign investments must formally be made by means of a document authorized by a Spanish certifying official and declared to the investment registry of the ministry of economy and finance.
TRADE FINANCE
Official export credit
This is an officially-backed credit which is granted to finance the amount of an export contract for Spanish goods and services. Not all types of goods are included, but rather equipment and factories, second-hand goods, boats and aircraft, etc. Consumer goods and agricultural products, as well as military goods, are excluded.
The following forms of credit exist:
* credit to the domestic supplier;
* credit to the foreign purchaser.
With regard to the first type of credit, the exporter receives from the importer at least 15% of the amount of the commercial contract (advance payment) and receives from the financial entity a credit for 85%, which it is obliged to repay.
The importer will pay the deferred amount of the commercial contract (85%), the amount of which the exporter will normally apply towards cancelling the credit granted by the bank.
In the second case, the importer is bound to the financial entity. Normally, however, a financing entity other than the importer and from the same country may appear, who will assume the payment obligation in the name of the importer. This credit only becomes effective when the exporter receives the advance payment, which is also referred to as a deposit or down payment (at least 15% of the amount of the commercial contract). Within this form, two types exist:
* individual credit agreement: this refers to a credit designed and negotiated to finance a specific export contract
* line of credit: this is a standard agreement or global credit limit against which, and up until the limit of which, operations in respect of various commercial agreements may be financed.
The following regulations govern these credits:
* Law 11/1983;
* Royal Decree 322/1987 ;
* Ministerial Order of March 5 1987
* Resolution of March 13 1987 of the General Directorate of Commercial Policy
* Ministerial Order of March 8 1988
These regulations are compatible with the international frame of reference, called OECD consensus, for this type of financing. The consensus became effective in April 1978, and is an informal agreement which establishes a self-imposed limitation on the conditions and practices in respect of export credit (minimum interest rates, amortization periods, prepayment, etc).
Export credit insurance
Normally, entities financing these operations take out a policy with Compañía Española de Seguros de Crédito a la Exportación (CESCE), an insurance and underwriting company the majority of whose capital is owned by the Spanish state. The policy covers any credit (or non-payment) risks deriving from these operations. Such risks of non-payment may be due to commercial, political, or extraordinary natural causes.
One of the characteristics of these export credits is that they often are subject to fixed, below-market interest rates. This characteristic, together with others, such as customarily long amortization periods, make them inadvisable as an investment alternative.
In order to pay the difference between the cost of funds for the financing bank and the OECD consensus rate, in 1983 the state introduced an agreement for reciprocal interest adjustment, called Contrato de Ajuste Reciproco de Intereses or CARI. Through the system, the Official Credit Institute (Instituto de Crédito Oficial or ICO) is required to pay to the financing entity a constant return during the life of the credit, in order that the bank will grant the credit under conditions which are more advantageous to the borrower than those which would otherwise prevail in the market.
Foreign investment in Spanish stock exchanges
For further information, contact:
ESTUDIO LEGAL ABOGADOS
_____________________________
Luis Fernando Lopez-Chicheri
c/ Velázquez, 51
28001-Madrid
Tel: (34-1) 578.06.43
Fax: (34-1) 431.21.52
