Equities

A SUPPLEMENT TO EUROMONEY

Primary market

From the beginning of Poland’s economic transformation a great importance has been attached to reconstructing the capital market. The most important development was the passage of the Act on Public Trading in Securities and Trust Funds on March 22, 1991. The Act created a structure for securities market based on four principles:

1. Paperless system

All securities admitted to public trading are kept in book entry form in the National Depository of Securities (NDS). This means that trading is dematerialized. The NDS is in charge of managing the Guarantee Fund, based on the participants’ contributions, for insurance against the civil liability for concluded transaction.

2. Centralised system

The Warsaw Stock Exchange concentrates all supply and demand for securities admitted to stock exchange trading for the purpose of common quotation.

3. Access to information

All public companies are obliged to publish detailed reports on their activities. The stock exchange shall ensure the dissemination of information allowing for the evaluation of the current value of the securities admitted to stock exchange trading.

4. Listing of securities

All equities are traded in the “par casier” system. The trading system is order driven.

Primary market privatisation

In the early stages of the Polish capital market development, the majority of the initial public offerings were those from the State Treasury. This was the effect of the privatisation methods applied in Poland:

• A capital method ­ a state owned enterprise is transformed into a joint stock company or limited liability company, the shares of which are held by the State Treasury. The Ministry of Privatisation (to be the Ministry of Treasury from January 1, 1997) is responsible for disposal of the shares either by public offering or trade sale;

• A liquidation method ­ this form may take three forms: an asset sale, employee buyout or establishing of a joint venture;

• A mass privatisation program.

Procedures for going public

Under the regulations of the Act on Public Trading in Securities and Trust Funds every entity that wants its shares or bonds to be publicly traded is obliged to prepare a prospectus for the offer. A brokerage house and other advisers assist in the approval process by negotiating with the Polish Securities Commission (PSC). Approval is not required when the State Treasury issues bonds and T-bills.

After the PSC grants an approval, the public offer may be launched. The share distribution process is usually executed by a syndicate of brokerage houses and co-ordinated by an Offeror. Most commonly used methods in distributing shares are:

Simple subscription

A period of collecting orders from investors is followed by the allotment process. The share price can be fixed (with a minimum price) or not ­ this is known as a bracket price offering. In the two approaches the final share price is set upon receipt of orders from investors.

First come first served subscription

Shares are allocated to investors at the time of placing orders until the shares on offer are exhausted. This method is only applicable if the price of one share is fixed.

Distribution through the Warsaw Stock Exchange

Investors’ orders are executed at a special session on the Warsaw Stock Exchange (both fixed-price and bracket-price approaches are applicable).

Underwriting developments

On the Polish capital market, underwriters guarantee that a specific issue will be concluded. Their role is limited to placing an order for shares not subscribed by investors during a subscription period. A fee is charged for underwriting issue, or shares are bought at a discount.

In order to make sure that share flotation is successful, issuers sign underwriting agreements with a single financial institution or a syndicate of financial institutions. The underwriting agreement provides that underwriters have to buy shares subscribed during the subscription period, thus ensuring success of issue. The payment for underwriting services usually consists of two elements: an underwriting fee and a commission for placing the order for shares not subscribed by investors (execution underwriter’s obligation). The commission for placing an order for shares often constitutes a significant part of the capital raised (there have been cases when the total underwriting fee reached 30%). This has obviously had a negative impact on the market.

In addition to the underwriting approaches mentioned above, new ones have appeared. In order to avoid the consumption of significant discounts by underwriters (in case of an acquisition of underwritten shares) a new approach emerged. The underwriter takes only the underwriting fee from an issuer. The main idea is that the price of a share should be the same for both investors and underwriters. In such a case, the price should be set on an appropriate level that is attractive to both underwriters and investors.

Bookbuilding has also come to the Polish market. In the bookbuilding process shares are marketed without specifying firm price. Investors are told only of the expected range of prices and the size of an offer. Once the full marketing process is complete and indications of interest have been received from all potential investors, the issuer and the underwriting syndicate agree on the final price and size. The primary advantage of the bookbuilding technique is that issuers and underwriters can confidently undertake large offerings targeted at the market price.

Secondary market

The Warsaw Stock Exchange

The Warsaw Stock Exchange was established in 1817. From 1918 to 1939 there were six stock exchanges in Poland. The Warsaw exchange accounted for more than 97% of trading volume in securities and more than 99% of trading volume in currencies. After World War II the communist authorities abolished the exchanges; they were considered relics of capitalism and useless in an economy that was centrally planned.

The chance for re-establishing the capital market and stock exchange in Poland appeared after the change of political system in 1989. The Warsaw Stock Exchange (WSE), established as a joint stock company, began its operations on April 16 1991 At this point, only five companies were listed and there was only one session a week. Sixty-five companies are now listed on the main market and 15 are listed on the parallel market. There are five sessions a week. Fifteen companies from the main market are also listed in the continuous trading system. The International Federation of Stock Exchanges (FIBV) accepted the WSE as a full member in October 1994.

Exchange members

Exchange members are firms who are shareholders of the Warsaw Stock Exchange and conduct their business there. An exchange member must conduct its activities in accordance with the regulations and procedures of the exchange.

During trading sessions exchange members act through their representatives, called exchange brokers.

Specialist members are exchange members and are authorized, upon approval of the Exchange Management Board and upon agreement with an issuer, to exercise the following functions:

• fixing the market price;

• intervening to balance the market and support trading volume and market liquidity;

• carrying out allocation and reduction.

A specialist member acts through its exchange brokers, called specialist brokers.

Exchange members are obliged, by the Rules of the Warsaw Stock Exchange, to set the rules of purchase and sale securities traded on the exchange by members of their governing bodies and employees whose duties include operations connected with trading.

Trading

Trading sessions are held regularly from Monday to Friday between 11.00 am and 1.00 pm. Shares are traded in a single price quotation system on main and parallel markets and in a continuous trading system, according to criteria determined in the Rules of the Warsaw Stock Exchange.

Since July 1 1996, Mass Privatisation Program Vouchers (PSU or NIF Certificates) have traded in a single price quotation system and, since August 12 1996, in a continuous trading system.

Single price quotation

Security price is calculated on the basis of orders for the security. Fixing the price, the specialist broker must:

• maximise the turnover;

• minimise the volume of fixed-price securities in sell and buy orders;

• minimise the difference between the current session price and the previous session price.

The market is balanced when:

• the volume of turnover is maximised;

• all orders at the market price, all buy orders with a price limit higher than the market price and all sell orders with a price limit lower than the market price are fully executed;

• the price set by specialist broker does not differ by more then 10% from the previous quotation

If the ratio of sell orders to buy orders exceeds 5:1, transactions may not be executed.

Post-auction trading

In order to ensure market liquidity, post-auction trading is announced. It usually starts at 11.30 a.m. During this part of the session specialist brokers collect orders at a fixed price. From December 1, 1995, the post-auction trading may consist of two parts and lasts about 45 minutes:

• Balancing phase ­ a specialist broker may announce an offer after setting the price. This is an invitation for market participants to enter orders to eliminate the existing imbalance. During this phase only counterbalancing orders (orders from the lighter side of the market) are accepted. The phase begins at 11.30 am and ends no later than at 12.15 pm.

• Crossing phase ­ activated only when the market in a given security is fully balanced before 12.15 pm (with or without the balancing phase). During this phase orders for both sides may be placed, regardless of any imbalance. After the crossing phase the market must be balanced. The order surplus will be cut.

Continuous trading

Since July 8 1996 equities are also traded in a continuous trading system on the WSE. The following companies are now so listed: BIG, BPH, Debica, Elektrim and Rolimpex, BRE, BSK, Budimex, Stalexport, Universal, Stomil Olsztyn, Górazdze, Animex, WBK, and Okocim. The basic criterion for choosing the companies was the liquidity of a given security. Shares are traded in blocks and consist of, for example: BIG ­ 500 shares, BPH ­ 50 shares, Debica ­ 100 shares, Elektrim ­ 500 shares and Rolimpex ­ 50 shares. One block of PSU consists of 100 Certificates. A block of shares was worth between Z5,600 and Z14,000 in August 1996. By the end of this year shares of all twenty companies included in the WIG-20 index should be traded in this system.

The trading session begins at 11.00 am and ends at 1.00 pm. The opening price is set according to the rules of the single price quotation system. Once a security is purchased it is not possible to sell it during the same trading session. Short selling is also prohibited.

Subscription rights trading

Subscription rights are guaranteed by the Commercial Code. Shareholders of a joint stock company have the priority to buy shares in a new issue. Since February 1994 subscription rights have been subject to the same rules as transactions concluded on the WSE. Subscription rights are quoted using the single price quotation system. The trading in subscription rights is the first type of derivative transaction on the WSE.

Off-session transactions

During the period between admitting securities for exchange trading and the date of the first quotation, the Exchange Management Board may permit the execution of pre-session transactions. At least 2% of the securities admitted to trading is subject to a transaction and corresponding orders must be submitted simultaneously by at least one Exchange Member.

If corresponding orders have also been submitted by at least one Exchange Member, the off-session transaction may be concluded after the date of the first quotation. The number of shares in the transaction must not be less than the average trading volume for three sessions. Their value must exceed Z200,000 ($70,000). Average volume is calculated excluding the data of the day of the transaction and that of the day prior to the conclusion of the transaction. The price in an off-session transaction cannot differ from the price of the last quotation by more than 15% (or by more than 30% if more then 5% of securities of a given issue is the subject of transaction.)

The value of securities traded in the off-session transaction, as part of the continuous system, must exceed Z400,000 ($140,000).

The requirements mentioned above were implemented on August 10 1996. As they are less rigid than the previous rules, it is expected that activity on this market will increase.

The indices

Three indices are used on the WSE:

• WIG ­ the main index of the WSE is a total return index, weighted by a company’s capitalisation (market value). If the company’s participation exceeds 10% of the total value of the WIG’s total value, its share in the index is reduced at the beginning of the new quarter. The base date of the WIG is April 16, 1991, and the base value is 1000.

• WIG 20 ­ represents a portfolio of shares of 20 companies with the highest capitalisation and daily turnover value listed on the main market. The base date of the WIG 20 is April 16, 1994, and its base value is 1000.

• WIRR ­ the index for the parallel market covering all companies listed there. WIRR is calculated similarly to the WIG index. The base date of the WIRR is December 31, 1994, and its base value is 1000.

Prospects for developments.

We expect that the market will develop in many areas, of which the most important are:

• regular trading in derivative instruments;

• creation of a legal framework for establishment of pension funds and close-end mutual funds. This should result in a substantial expansion of institutional investment;

• first companies will soon be quoted on the Polish OTC market;

• inflow of new companies on the WSE, coming from Mass Privatisation Program.

A new draft of the Act on Public Trading in Securities is being discussed. As the legislation process has just started it is hard to determine its final shape, but it will make the Polish equity market even better regulated for foreign investors.