Reduction of state ownership in the banking sector: new legislative initiatives

For 2024, the Government of Ukraine has set itself an ambitious task — to reduce state ownership in the banking sector. This task is enshrined in a number of documents, such as the Government's Priority Action Plan, Financial Sector Development Strategy, Memorandum on Economic and Financial Policy with the International Monetary Fund, as well as the Ukraine Facility Plan for 2024-2027. The main tool for achieving this goal is the introduction of amendments to the current Law of Ukraine "On the peculiarities of the sale of state-owned shares in the authorized capital of banks" and other related regulatory acts.

The current version of the law regulates the sale of shares exclusively in those banks in the capitalization of which the state participated. However, the situation requires extending the scope of the law to all state banks. This will create a legal basis for their potential sale in the future, which will help reduce the share of state ownership in the banking sector.

The new draft law No. 11474 dated August 12, 2024 aims to improve the current legislation to ensure the successful selection of an adviser for the sale of state-owned shares in the authorized capital of banks (hereinafter referred to as the adviser). In particular, it is proposed to optimize the procedures for the selection of advisers for the sale of shares, as well as to increase the requirements for legal entities that can be engaged as financial advisers.

In addition, one of the key tasks is the transfer of funds from the sale of shares to the state budget, which will be an important step for the economic strengthening of the country in the conditions of military aggression by the Russian Federation.

Basic provisions and innovations of the draft law

The draft law was developed taking into account the recommendations of experts from the International Monetary Fund and the World Bank. It provides for the expansion of the current law to all public sector banks, which will allow attracting a wider range of potential investors, including international donors.

The draft law also establishes new rules for determining the price of shares and conducting auctions in accordance with market practices, which will contribute to the transparency and competitiveness of the sales process. Importantly, the changes take into account the probability of only one potential investor participating in the auction, and also prevent possible abuses by former owners or minority shareholders.

Thus, the draft of the Law:

- expands the circle of potential investors whose sale the state is ready to consider;

- allows the sale of any share of the state in the bank (and not only 100% of the state's shares, as provided for in the current law);

- increases the requirements for legal entities that can be engaged by the state as financial sales advisors;

- includes international donors to participate in the procedure of selecting financial advisors for the sale and the procedure of the sale itself;

- updates the rules on determining the price and conducting the auction in accordance with the recommendations of the World Bank;

- takes into account the probability that only one potential investor can participate in the auction;

- brings the requirements to the sales contract in line with market practices;

- prevents negative influence on the sale procedure (for example, stoppage of sale) by former beneficial owners (relevant for SENS BANK JSC) or current minority shareholders (relevant for JSC UKRGAZBANK).

Therefore, the new draft law on the sale of shares of state-owned banks is an important step towards reforming the banking sector of Ukraine. It is aimed at reducing the share of state ownership, attracting foreign investors, as well as strengthening the financial stability of the country in the conditions of the ongoing war. It is expected that the implementation of this draft law will ensure a more transparent and efficient process of the sale of shares, which will correspond to the best international practices.

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