Czech Republic: capital market review by World Bank

By World Bank

Reading the potency of capital markets is an invaluable workout for any kingdom, as a well-functioning capital industry can give a contribution considerably to higher source mobilization and eventually to a greater development functionality. The Czech Republic applied significant reforms within the early Nineteen Nineties and accomplished notable financial effects. notwithstanding, macroeconomic functionality begun faltering in 1996. even if the reforms contributed to the Czech economy's early successes, the regulatory framework for firms and fiscal associations contained numerous flaws that constrained the aptitude profits from privatization and decreased the final potency of the economic system. The susceptible defense of minority shareholder rights and the absence of different vital parts of inner governance proved to be one other very important challenge to sound administration and lively restructuring. Weaknesses within the exterior mechanisms of governance additionally opened room for abuse through huge shareholders and bosses. This record makes a close review of the regulatory and institutional framework within the significant sectors of the Czech capital marketplace, identifies the deficiencies that also stay, and gives concepts for additional advancements.

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The report also makes an assessment of corporate governance in the Czech Republic, based on the performance of publicly traded companies and an analysis of the relevant pieces of legislation. The report does not provide an in-depth analysis of the banking sector, but examines the areas of the regulatory framework for banks which are relevant to the analysis of corporate governance. The mission benefited from previous work on the Czech capital market undertaken inside the World Bank by Meir Kohn, Ilham Zurayk, and Gerhard Pohl.

Strengthen further minority shareholder protection by: (i) reducing the threshold for shareholders to call a general meeting, from 10 percent of the share capital to 5 percent, and to a still lower percentage for the largest companies; (ii) entitling any shareholder to obtain a full copy of the list of all shareholders of the company, upon request and payment of the costs. If this measure violates shareholder privacy, the authorities should explore legal ways for the board of directors or the securities registrar to obtain shareholders' permission to reveal their identity and address; (iii) requiring any general meeting to include the participation of not only large shareholders, but also a minimum proportion of the total number of shareholders; (iv) allowing cumulative voting to strengthen the influence of small shareholders in the board; (v) reducing the threshold at which large shareholders must offer to buy-out of minority shareholders, from 50 percent to 25-30 percent; (vi) requiring prior shareholder approval of "vulnerable" transactions such as those relating to the purchase or disposal of substantial assets; (vii) encouraging proxy arrangements.

The specific regulatory deficiencies which opened room for abuse by large controlling shareholders included limits on the voting rights of small shareholders, poor disclosure of financial information (both the extent and the quality of information), and weak accountability of company directors to shareholders. Weaknesses in the external mechanisms of governance also opened room for abuse by large shareholders and managers. For one, some serious impediments to take-overs persisted, such as legal obstacles for prospective buyers to identify small shareholders and buy their shares.

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