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12 March, 2024

Securities - Reform in Georgia


On 16 November 2023 the Law of Georgia on Holding of Dematerialized Securities was adopted as well as certain changes to (among others) the Law of Georgia on Securities Market have been made that entered into force from 1 March 2024 (the “Legal Changes”).

Under the Legal Changes, the issues concerning dematerialized securities (such as ownership over them, their circulation, and other thereto-related rights) have been regulated. Apart from that, the guarantees for the protection of investors in dematerialized securities have been put in place.

It should be noted that the Legal Changes will apply to all securities issued in dematerialized form irrespective of whether the dematerialized form is a law requirement or a choice of the respective issuer.

In particular, under the Legal Changes:

(1)dematerialized securities have been differentiated from registered securities.

Namely, registered securities will be registered by a securities registrar with the securities registry (as was the case before) and the ownership right over such securities will be evidenced by the respective record in the registry/sub-registry kept by a securities registrar or a nominee holder (as appropriate).

Dematerialized securities will be in the form of an electronic record in an account that will be kept by an intermediary – an account keeper (i.e. a commercial bank or a brokerage company) and a credit balance in the respective securities account (an extract from such account will be issued by the central depository or the respective account keeper) will prove their holding.

The transactions over dematerialized securities will be made via crediting and debiting the respective securities accounts. This novelty will enable to making of multiple securities transactions in a simple way that, in turn, will contribute to capital market development.

The securities settlement system whereby dematerialized securities will be issued and/or where securities accounts will be opened and maintained will be operated by the central depository.

An account keeper may hold, directly or indirectly, i.e. through other account keeper(s), dematerialized securities, for its account or the account of third parties, in the securities accounts opened with the central depository.

(2) has been determined that public securities shall be issued in the form of dematerialized securities through the system of the central depository. Furthermore, an issuer of securities will have the right to issue securities designed for a private placement in the dematerialized form via the system of the central depository or to record the securities already issued through a private placement with the central depository (i.e. to dematerialize the securities issued in a registered form).

(3) the issuers who have issued public securities will have to transfer (within the established timeframe) their public securities to the system of the central depository. As a result, securities registrars will have to deal with registries of securities issued through a private placement only.

(4) has been specified that an investor will be capable of enforcing its rights, that arise out of the ownership over dematerialized securities, towards the account keeper with whom it holds dematerialized securities or the central depository, should an investor hold its dematerialized securities directly with it.

(5) corporate/contractual rights of an investor towards an issuer have been differentiated from other financial rights towards an account keeper;

(6) investors will be able to pledge (via a record in a securities account or through crediting or debiting) their dematerialized securities as envisaged by the Civil Code of Georgia. However, financial pledges over dematerialized securities will be regulated under the Law of Georgia on Financial Collateral Arrangements, Netting, and Derivatives.

(7) has determined the moment at which an issuer and the central depository are discharged from payment-related liabilities. In particular, for purposes of payment of dividends, interests as well as principal amounts concerning dematerialized securities an issuer shall make available the respective sum in the predetermined cash account. Once the issuer does so it will be discharged from its obligation except for where use of funds will become impossible due to seizure/any other measure imposed for securing an obligation. The central depository, in turn, will transfer the funds (when due) pro rata to the cash accounts of the respective account keepers whereby the central depository will be discharged from its obligation.

(8) a good-faith purchaser who will receive dematerialized securities in exchange for consideration will be protected even if as a result of such purchase the rights of third parties will be violated.

(9) the reconciliation obligation has been introduced under which (i) the number of dematerialized securities with the central depository issued in a single issue or (ii) a portion of the issue held with the central depository equals the sum of dematerialized securities in securities accounts of account keepers opened with the central depository.

(10) has been determined the governing law for cross-border scenarios where a holding chain includes account keepers and account holders in different countries. In particular, it has been specified that the laws of the country where a securities account is opened shall govern the issues related to holding dematerialized securities.

In the end, it should be noted that as a result of the Legal Changes the legal framework related to securities holding will be brought in line with the respective international standards that should be reflected positively on the capital market development.