The Government of the Republic of Serbia adopted Decree on conditions and compliance criteria of state aid through capital increase of market participants in order to eliminate disorders in the economy caused by the epidemic of the infectious disease COVID-19 (“Official Gazette of RS", no. 126/2020, hereinafter referred to as: “Decree”), which further regulates and prescribes conditions and criteria for compliance of state aid in the form of capital increase of market participants facing financial difficulties due to the epidemic of COVID-19, with the exception of participants on the market of financial services.

The Decree stipulates that state aid in the form of capital increase can be granted if the following conditions are met:

1. that market participants were not experiencing difficulties, i.e. that they were not in a position where they are not able to prevent losses with their own funds, with the funds of their owners/shareholders or creditors or funds from other sources on the market and which losses, without state intervention, short term or medium term, would threaten their existence, on the day of December 31st 2019; the prescribed restriction does not apply to small and micro enterprises, unless they are subject of bankruptcy proceedings and unless they have not been granted state aid for recovery or restructuring;
2. that without state intervention, the market participant would cease business operations or would face serious difficulties in conducting business operations;
3. that the state has the interest to intervene;
4. that the market participant is not able to obtain financing on the market on affordable terms, and existing horizontal state aid measures which serve to eliminate harmful consequences or the liquidity of market participants are not sufficient to ensure sustainability of the user;
5. that the market participant submitted written, explained request for the granting of the state aid, which is submitted to State Aid Control Commission with the application for the state aid.

State aid through capital increase can be granted no later than September 30th 2021.

If the individual or state aid that is being distributed, based on the plan per user, surpasses the amount of 250 million euros in dinar equivalent at the official middle exchange rate of National Bank of Serbia on the day the state aid is being granted, in such case the grantor is obliged to prove, in addition to fulfilling the conditions from this Decree, that:

1. financing on the market or horizontal state aid measures for liquidity are not sufficient to ensure sustainability of the user;
2. selected instruments of capital increase with accompanying conditions are suitable for resolving serious difficulties of the user;
3. the state aid is proportional, i.e. does not exceed minimum required to ensure sustainability of the market participants.

The state can grant aid individually or in combination using two types of instruments, namely: equity instrument, by issuing ordinary or preference shares, that is in other manner which directly acquires a share in the capital and through the exercise of the rights to participate in the profit, a „silentˮ partnership agreement without participation in management, convertible secured or unsecured bonds, warrants, i.e. with other instrument through which a share in the capital is acquired indirectly – the so-called hybrid instruments.

The minimum compensation for hybrid equity instruments, until their conversion to an equity instrument, must at least be equal to the primary reference interest rate or other reference rate, increased by the premium as follows:

1. micro, small and medium companies – 1st year 225, 2nd and 3rd year 325, 4th and 5th year 450, 6th i 7th year 600 and 8th year over 800;
2. large companies – 1st year 250, 2nd and 3rd year 350, 4th and 5th year 500, 6th and 7th year 700 and 8th year over 950.

Conversion of hybrid instruments into ownership share is carried out at a price reduced by 5% or more of the issue price of shares (TERP – Theoretical Ex-Rights Price) at the time of conversion, whilst at the time of conversion into ownership share a mechanism for a gradual increase in compensation to the state is being introduced. If the share in the capital of the user is not sold two years after the conversion, the share is increased by at least 10% in the relation to the remaining share of the state in the ownership based on the conversion, and the grantor can propose alternative mechanisms for increase of the compensation or for determination of the conversion price provided that they have the same stimulus effect and similar overall impact on state compensation.

It is important to note that the state aid through capital increase must not exceed the amount necessary to establish the capital structure of the user that was existent prior to the outbreak of the COVID-19 epidemic, i.e. the balance on the December 31st 2019, while the compensation for state aid through capital increase represents the price, i.e. reward to the state, for investing in the capital of market participants. As mentioned above, the compensation is gradually increased, approaching the market prices of borrowing, with the aim to encourage the user to repurchase the investment of the state as soon as possible, which at the same time serves to lower the risk of competition distortion. User is allowed to repurchase a share in the capital acquired by the state on the grounds of state aid at any time, while the state can at any time sell its capital at market prices to the buyer who is not the user of the capital increase.

Article 17 of the Decree stipulates that if the value of state aid is higher than 25% of the user’s capital at the time of granting the state aid, the user is obliged to make an exit strategy based on credible data, regarding exit of the state from the capital. The prescribed does not apply if the value of the state’s share on the basis of the capital increase decreases below 25% of the ownership capital within 12 months from the date of granting the state aid.

The user is obliged to periodically, every 12 months from the date of granting the state aid, submits a report to the grantor on the progress in the implementation of the repayment schedule and compliance with the conditions of the Decree. Until they are fully repaid, the users of the aid, except for the micro, small and medium companies, are obliged to, within 12 months from the date of granting the state aid and then periodically every 12 months, publish informations on the use of received state aid.

For any additional information or legal assistance you can contact the team at Tasić i Partneri by e-mail office@tasiclaw.com or by phone at +381116302233.