• Applicable Legislation
• Regulatory Framework
• Main Concepts

The enactment of the first Company Law in 1990, which introduced public stock companies as a type of corporate entities, entailed an urgent need for the creation of the securities market that would be efficient, well regulated and supervised.

Development of the Lithuanian securities market began in 1992 when the National Stock Exchange of Lithuania ("the National Stock Exchange") and the Securities Commission of the Republic of Lithuania ("the Securities Commission") were established. By the 30 October 1992 Resolution No. 815 the Government adopted the Temporary Regulations of Issue and Public Trading in Securities and of a Stock Exchange, which was the principal legal act regulating the securities market until enactment of the Law on Public Trading in Securities in 1996. On 20 May 1993, Resolution No. 815 was amended to introduce the concept of dematerialised securities and the book-entry trading system and to provide for establishment of the Central Securities Depository of the Republic of Lithuania ("the Central Securities Depository").

On 16 January 1996, the Seimas (Parliament) passed a comprehensive legislative act the Law on Public Trading in Securities. Safety, transparency, market efficiency, protection of investors' interests and promotion of competition between market participants were the main objectives of this enactment. The Law on Public Trading in Securities, although relatively short in length, was designed as "omnibus" legislation to govern most matters related to securities. Subsequently, the Securities Commission adopted a number of sub-legislative regulations implementing the Law on Public Trading in Securities.

An important benchmark in the development of the Lithuanian securities legislation was adoption of the new Law on Securities Market (to enter into force and replace the Law on Public Trading in Securities as of 1 April 2002), which, on one hand, maintains the principles laid down in the Law on Public Trading in Securities and, on the other, enhances securities legislation to comply with the EU directives, the Objectives and Principles of Securities Regulation of the International Organisation of Securities Commissions (IOSCO) as well as the legal framework of the new Civil Code effective from 1 July 2001. Following enactment of the new Law on Securities Market, a number of the secondary legislation acts are to be brought in compliance with it.


Applicable Legislation

1. The 18 July 2000 Civil Code of the Republic of Lithuania;
2. The 16 January 1996 Law No. I-1169 of the Republic of Lithuania "On Public Trading in Securities (since 1 April 2002 replaced by the 17 December 2001 Law No. IX-655 of the Republic of Lithuania "On Securities Market"*);
3. The 5 July 1994 Law No. I-528 of the Republic of Lithuania "On Companies";
4. The 1 December 1994 Law No. I-678 of the Republic of Lithuania "On the Bank of Lithuania";
5. The 5 July 1995 Law No. I-1018 of the Republic of Lithuania "On Investment Companies";
6. The 3 June 1999 Law No. VIII-1212 of the Republic of Lithuania "On Pension Funds".

Securities Commission

The Securities Commission, consisting of a chairman and four members, is the principal regulator and supervisor of the Lithuanian securities market. The Securities Commission is an independent regulatory body, although it was established by the Parliament pursuant to a proposal of the Government and is financed from the State budget.

The Securities Commission is empowered under the Law on Securities Market to perform the following main functions:

• to regulate activities of trading intermediaries and stock exchanges, including the issuance of and public trading in securities;
• to regulate disclosure related to securities and issuers;
• to provide official interpretations and recommendations on issues concerning public trading in securities;
• to license stock exchanges and trading intermediaries;
• to supervise trading intermediaries, stock exchanges and their members and the Central Securities Depository and other securities account operators;
• to register the issues of securities;
• to apply to the courts for protection of investors' interests;
• to apply sanctions;
• to take other actions consistent with its authority.

The only stock exchange in Lithuania currently is the National Stock Exchange which was registered with the Securities Commission on 11 May 1993. The first trading session took place on 14 September 1993.

Trades on the National Stock Exchange are dematerialised, centralised and mainly order-driven. The original trading system was installed with the assistance of SBF-Bourse de Paris and SICOVAM (French Depository) in 1993 and since then has undergone a series of modifications. An enhanced, reliable, fast and flexible three-tier automated trading system TLAPS was implemented in 2000. This system is much more user-friendly and allows market participants to develop their own automated systems**.

The National Stock Exchange is a specialised public company that organises the listing, quotation and trading of securities and promotes safe and efficient transactions and settlements. According to the Law on Securities Market, natural and legal persons may become shareholders in the National Stock Exchange, however, block acquisitions are subject to the approval of the Securities Commission. The law confers on the National Stock Exchange regulatory powers to the extent that they relate to trading on the exchange (e.g. rules of trading), however, such regulations are subject to approval by the Securities Commission.

Central Securities Depository

The Central Securities Depository is a public company established by the Ministry of Finance, the Bank of Lithuania and the National Stock Exchange. According to the Law on Securities Market, shareholders of the Central Securities Depository may be both the State of the Republic of Lithuania, the Bank of Lithuania, other credit institutions, securities brokers and dealers, insurance companies, investment companies, pension funds and their management companies licensed in the Republic of Lithuania or the EU member state or the state which has started official negotiations on accession to the EU as well as stock exchanges and central securities depositories of such countries.

The main objective of the Central Securities Depository is to conduct the general accounting of dematerialised securities in Lithuania. The Central Securities Depository keeps track of the ownership of securities by operating general securities accounts. It also seeks to ensure compliance with accounting rules and regulations, proper and timely clearance of transactions in securities between account operators and takes measures to ensure the integrity and security of the overall securities management system. In certain cases, the Central Securities Depository may manage not only general accounts but also personal securities accounts. The instructions and directives of the Central Securities Depository on issues relating to the accounting of securities are obligatory to the market participants.

Financial Settlement (Clearing) Bank

The Financial Settlement (Clearing) Bank manages financial settlements following securities trades on the National Stock Exchange. The Centre for Financial Settlements under the Bank of Lithuania performs the functions of the Financial Settlement (Clearing) Bank.

Securities Brokers and Dealers

According to the Law on Securities Market, securities brokers and dealers (known under the law as "intermediaries of public trading in securities") in Lithuania are brokerage firms and authorised commercial banks (further collectively referred to as "brokers").

Enterprises must obtain a licence from the Securities Commission in order to undertake the investment services as defined under the Law on Securities Market (i) accepting and transmitting of the client's orders related to securities, (ii) fulfilment of client's orders to acquire or transfer securities on the client's account, (iii) fulfilment of client's orders to acquire or transfer securities on the own account, (iv) management of the clients securities portfolios, (v) offering of securities pursuant to agreements with issuers with or without undertaking to distribute the issue of securities, (vi) safekeeping, accounting and administration of securities, (vii) granting of loans to allow a client to carry out a transaction in securities, where the person granting the loan is involved in that transaction and (viii) investment advice concerning securities. The broker must have a license to render at least one type of investment services listed under items (i) through (v).

A Lithuanian commercial bank automatically has the status of a broker, unless its banking license is restricted. Certain entities and individuals are excluded from this licensing requirement, including insurance companies, the Bank of Lithuania, the European Central Bank and central banks of the EU Member States and / or institutions performing management of the state debt. The Law on Securities Market also provides for cases when certain activities, although formally falling within the definition of the "investment services", are not subject to the licensing requirement.

The Securities Commission issues general and specialised licenses. Licensed brokerage firms are divided into three categories: category "A" brokers are permitted to trade on their own account, trade on behalf of their clients, organise securities offerings and provide other investment services; category "B" brokers may not trade on their own account and organise securities offerings on a firm commitment basis; while category "C" brokers are precluded from opening and operating cash and securities accounts, trade in their own name and organising securities offerings on a firm commitment basis.

As of 31 December 2000 there were 11 category "A" brokers including commercial banks, 15 category "B" brokers, 2 category "C" brokers as well as 2 investment management and consulting firms***, which upon entering of the Law on Securities Markets will be regarded as category "C" brokers. Brokerage firms are subject to initial capital requirements. Each category of brokers must also comply with the capital adequacy requirements coherent with the EC Capital Adequacy Directive. Failure to meet capital requirements may result in a refusal to grant a licence or a licence withdrawal.


Main Concepts

Securities

The Law on Securities Market is applicable to securities which could be traded in the securities markets:

• shares of companies and depository receipts representing shares;
• debt securities;
• securities which grant rights to securities mentioned in (i) and (ii) above by way of subscription or exchange, including those which grant the right only to cash consideration.

• investment means confirming participation in the investment funds;
• money market means (which are usually traded in the money market as deposit certificates etc.);
• financial future contracts, including those which only grant the right to cash consideration;
• future interest rate contracts;
• interest rate, currency, share or share indices swap contracts;
• call or put options in relation to securities and investment means, including investment means which only grant the right to cash consideration as well as currency and interest rate options.

Registration of Securities

The Law on Securities Market requires any issuer to register its securities with the Securities Commission if any of the following conditions are satisfied:

• the issuer is a public stock company (already in existence or in the process of formation or transformation); or
• securities are intended to be issued for public trading in the Republic of Lithuania (under the Law on Securities Market "public trading" is defined as offering, allotment or transfer of securities by addressing the public or by addressing more than 100 persons).

After securities are registered with the Securities Commission, the order and terms of allotment as established in the prospectus or memorandum may only be changed with the permission of the Securities Commission. It is prohibited to change the price, nominal value, class or kind of securities being issued. In case when the securities are being offered through the stock exchange and other cases determined by the Securities Commission, the minimum and maximum issue price could be established.

The Securities Commission is authorized by the Law on Securities Market to set various levels of disclosure requirements taking into account the nature of the issuer's activity, type of securities issued (to be issued), number of the securities holders and the fact whether the securities are intended to be listed on the stock exchange.

It is noteworthy that the Law on Securities Market provides for the right of the Securities Commission to grant exemptions from the registration. Moreover, the Securities Commission under the new law is entitled to determine cases when securities are registered without a prospectus or memorandum as well as to set specific registration procedures for the securities issued according to special programs and registration of securities the prospectus of which was verified by the supervisory institution of the EU member state.

Dematerialisation

The system of dematerialised securities (i.e. securities that exist only in a form of a book-entry) is one of the essential features of the Lithuanian securities market. The Law on Securities Market establishes that all securities (except those defined as "investment means") falling within the sphere of its regulation, and which are described in section "Securities" above, must be recorded through an entry in the personal securities account opened in the owner's name. However, the pledged securities may be accounted in the name of the holder of the pledge, provided the owner of the security is also indicated in the account of pledged securities. The securities held by foreign brokers on behalf of their clients may be recorded in the securities accounts opened in the name of such foreign brokers, however, it must be indicated that the securities are held on behalf of their clients.

Only issuers of securities (until 1 January 2004; thereafter, the issuers will be obliged to transfer accounting of their securities to the brokers), the brokers, including authorised commercial banks and the Central Securities Depository are allowed to manage personal securities accounts. Account operators are required to become members of the Central Securities Depository and open a general securities account. Because the general accounts represent the aggregate number of securities managed by a particular account operator and the number of securities of a particular issue, the Central Securities Depository is able to ensure the proper general accounting of securities and control the passing of title to securities.

Transfers of securities are performed through crediting and debiting of the relevant personal securities accounts and, when transaction involves transferring the securities to another broker, - also general securities accounts.

Point of Interest
The new Civil Code (effective from 1 July 2001) recognises holding of other persons' property in trust, thus providing for the basis for development of the beneficial ownership of securities in Lithuania. However, due to the fact that the said norms of the Civil Code were introduced a relatively short time ago holding of securities in trust is not yet common in Lithuania.

Disclosure

In addition to the requirement to submit a prospectus or memorandum to register securities, the issuer whose securities have been registered is also responsible to meet the following on-going disclosure requirements:

• filing of annual audited prospectus-reports and semi-annual and quarterly reports with the Securities Commission and the stock exchange on which the securities are listed;
• filing of information on shareholders holding more than 5% of the votes of the issuer (as an annex to the annual report-prospectus); and
• presentation to the Securities Commission and the stock exchange, and at least two information agencies or daily newspapers indicated in annual prospectus-reports, of details of every "material event", known or ought to be known to the issuer, which may have material influence on the price of the issuer's securities. Confidential information does not need to be published.

Tender Offer

According to the Law on Securities Market, if a person, acting independently or in concert with other persons, acquires more than 40% of the voting rights in the general meeting of shareholders of the issuer that has registered the issue of securities with the Securities Commission, he must within 30 days submit a mandatory tender offer to buy, at the price stated in the offer, the remaining securities with voting rights as well as securities containing the right to acquire securities granting voting rights or, alternatively, dispose of the securities exceeding the aforementioned limit. The price of the mandatory tender offer must be registered with the Securities Commission and shall be the maximum price of the securities bought by the offeror during the 12-month period before exceeding the 40% limit.

The procedures for registration and implementation of the mandatory tender offer, as well as cases where the mandatory tender offer is not necessary, are established by the Securities Commission.

Trading in Securities

Primary and secondary trading in securities is distinguished. Primary trading is defined as the offer made by the issuer or broker, based on a contract with the issuer, to acquire securities at the time of their issue and their transfer to investors. Primary offering may also be exercised on the stock exchange.

The following requirements of the Law on Securities Market apply to the primary public offering of securities:

• the advertising and announcement of subscriptions for unregistered securities is prohibited;
• a potential investor has the right to see the prospectus and other documents which were the basis for registration of securities;
• an investor has the right to cancel the acquisition in case of change of information provided in the prospectus and/or after publication of the notice of a material event;
• each investor must be guaranteed equal terms and conditions of acquisition;
• only information contained in the prospectus and the annual prospectus-statement may be used in the advertising of offered securities;
• every advertisement must state where and when an interested investor may familiarise him/herself with the prospectus and reports of the issuer.

Secondary trading in securities is defined as an offer to acquire securities and their transfer upon completion of the primary trading (i.e. after the securities have been issued).

The rules applicable to secondary trading in securities are generally concerned with the way in which securities are traded (i.e. privately or publicly) and place at which the securities transactions may be executed (i.e. on a stock exchange or off-exchange).

Securities may be traded either privately (off-exchange) or through the stock exchange. On the stock exchange a full procedure (central market) or a simplified procedure for the registration of block trades is available.

The stock exchange is the only venue for the execution of the secondary purchase-sale of securities registered by the Securities Commission to be publicly traded and included in the official or current trading lists of the stock exchange registered in Lithuania.

The block trades take place on the National Stock Exchange when brokers deliver matching purchase and sale orders regarding listed securities. The minimum amount of the block trade in the securities listed in the Official List is LTL 40,000 (EUR 11,585). There are no price fluctuation limits for the block trades. The block trades are registered with the National Stock Exchange and the terms, price and volume of the transaction are published.

Secondary public trading must always be carried out through a broker.

Trading Lists

There are currently three market tiers operating on the National Stock Exchange, namely, the Official List, the Current List and Unlisted Securities.

The National Stock Exchange's listing and disclosure requirements for members of the Official List are relatively high (e.g. market capitalisation of the shares must be not less than LTL 10 million (EUR 2,896,200) during the last financial year; financial statements of the issuers must be prepared in accordance with international accounting standards.

Securities are admitted to the Current List upon the decision of the Board of the National Stock Exchange, provided that: the company's minimum authorised capital is not less than LTL 4 million (EUR 1,158,480); at least 25% of an issue with a nominal value of at least LTL 1 million (EUR 289,620) is considered to have been distributed to the public and the number of shareholders in the issue is not less than 100; securities subject to secondary trading are fully paid up; and all securities are accounted for in compliance with the requirements of the laws of Lithuania and other accountancy regulations.

As of 31 December 2001, there were 1,118 securities listed on the National Stock Exchange, of which 6 securities were listed on the Official List, 46 securities listed on the Current List and the remaining 1,066 representing the tier of Unlisted Securities.

Trading Procedures

Trading procedures on the National Stock Exchange are centralised, dematerialised and mainly order-driven. Different trading procedures apply to trading in shares and in debt securities.

Securities on the Official List and the Current List are traded daily and some securities on the list of Unlisted Securities are traded daily as well. In practice, transfers of securities, however, are still carried out through direct transactions.

The National Stock Exchange operates an automated trading system of continuous trading at variable prices. Orders are matched and executed within a price sequence. Orders to buy at the highest price and to sell at the lowest price are executed first (the price priority principle). If the same price is indicated in two or more sell or buy orders, these orders are executed according to the time of entry (the time priority principle). Fluctuation of prices between trading sessions is limited so that the rate of securities may vary from the last established rate by not more than 5%. During continuous trading, in general, the price of a security may not vary more than 10% from the opening price during a trading session in question.

Clearing and Settlement

As the Central Securities Depository operates in conjunction with the National Stock Exchange and the Financial Settlement (Clearing) Bank through a common computer network, the liaison between these three institutions ensures that once a trade on the National Stock Exchange has been confirmed, notice is given to both the Clearing Bank (that debits or credits the cash accounts of the brokers involved in the trade) and the Central Securities Depository (that debits or credits the appropriate securities accounts).

The clearing and settlement system is based on a delivery versus payment principle. Trades in shares and debt, excluding treasury bills, at the central market (full procedure) are settled within 4 business days including the day of transaction, while trades in treasury bills on the central market are settled within 2 business days including the day of transaction. Settlement terms of trading in securities through direct transactions are indicated in the order and may not exceed 6 business days including the day of transaction.

Guarantee Fund

The National Stock Exchange has established the Guarantee Fund to insure settlements of central market transactions. The Guarantee Fund is financed mainly through variable contributions made by registered brokers. In the event of a broker's default, the Guarantee Fund will indemnify investors. However, the protection of the Guarantee Fund does not apply to direct transactions.

* Taking into account that this publication will be issued after the new Law on Securities Market comes into force, the provisions of this law and not the Law on Public Trading in Securities will be described below. ** Annual Report of the National Stock Exchange, 2000. *** Annual Report of the Securities Commission, 2001