By World Bank
Reading the potency of capital markets is an invaluable workout for any state, as a well-functioning capital marketplace can give a contribution considerably to raised source mobilization and finally to a greater development functionality. The Czech Republic applied significant reforms within the early Nineties and accomplished outstanding fiscal effects. even though, macroeconomic functionality began faltering in 1996. even though the reforms contributed to the Czech economy's early successes, the regulatory framework for companies and fiscal associations contained a number of flaws that constrained the aptitude earnings from privatization and diminished the general potency of the economic climate. The susceptible security of minority shareholder rights and the absence of alternative very important components of inner governance proved to be one other very important difficulty to sound administration and energetic restructuring. Weaknesses within the exterior mechanisms of governance additionally opened room for abuse via huge shareholders and bosses. This file makes an in depth evaluation of the regulatory and institutional framework within the significant sectors of the Czech capital marketplace, identifies the deficiencies that also stay, and offers innovations for additional advancements.
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The measures described above do not address some basic weaknesses of the current scheme, such as its short-term orientation and its functioning on endowment insurance principles. To address these problems, the regulators may consider the following changes: (i) linking the current scheme formally to retirement; (ii) imposing a minimum contribution of around 5 percent of income; (iii) redesigning the tax treatment of pension funds with a view to adopting the EET system, and lowering the State contribution, (iv) considering a more structural move from the endowment insurance model to the mutual fund model.
The report indicates that, although the quality of the regulatory and institutional framework has generally improved, it is still uneven across different sectors of the capital market. The regulation of securities markets is generally adequate and in line with EU directives. Although some additional improvements may and should be introduced in the Securities Act and the Stock Exchange Act, the major problem in security trading is the lack of enforcement of trading rules, as most of the fraudulent operations with securities have been breaches of existing laws.
These structural deficiencies have resulted in a mixed restructuring record, as suggested by the rather weak financial performance of Czech firms in recent years. Average nominal returns on equity have remained generally lowbetween 3 and 6 percent for large firms and between 1 and 3 percent for medium and small firms. Moreover, while there was a reduction in enterprise losses and an increase in profits in the 1993-95 period, financial results worsened again in 1996, and improved only modestly during 1997.