Laws and regulations

Risk Factors Relating to Laws and Regulations

The Group operates in a highly regulated industry and regulatory changes may have an adverse effect on the Group’s business, financial condition and results of operations

The Group operates primarily in Poland, whose legal system and regulatory environment can be subject to frequent and sometimes significant unanticipated changes and whose laws and regulations may be subject to conflicting official interpretations. The capital market and the commodity instruments market are subject to broad governmental regulation and may be subject to increasing regulatory scrutiny.

It is important for the development of the electricity market that, under the regulations in force as at the date of the preparation of this Report, electricity producers must sell 15% of generated power through a commodity exchange or a market organised by entities which operate regulated markets in Poland. It is also important that those entities which use compensation under the Act on Cost Coverage are required to sell their remaining production of power at bids, through a commodity exchange or a market organised by entities which operate regulated markets in Poland. Amendment of regulations which stipulate these obligations and gradual reduction of the number of entities which use compensation could have an adverse effect on the Group’s business, financial condition and results of operations.

The development of trading in property rights in certificates of origin of energy and the operation of the register of certificates of origin by PolPX is largely dependent on the existence and the wording of the Energy Law provisions concerning support for the production of energy from renewable energy sources and cogeneration. The obligation imposed on energy traders to cancel a certain proportion, increased each year, of certificates of origin of energy in relation to energy sold to final consumers (or to pay a “substitution fee”) is the driver of the growing trading volume and revenue of PolPX in this segment. Amendment of regulations which stipulate these obligations and gradual reduction of the number of entities which use compensation could have an adverse effect on the Group’s business, financial condition and results of operations.

Regulatory changes may have an adverse effect on the Group and on the current and future users of its services. For instance, regulatory authorities may implement changes which reduce the attractiveness of listing or trading securities on the markets organized and operated by the Group or the use of the Group’s services. In addition, Poland is subject to regulations enacted by the EU, including the Markets in Financial Instruments Directive, the Prospectus Directive, and the Transparency Directive. Changes to these regulations and their respective implementations may also have a material adverse effect on the Group’s business, financial condition and results of operations.

Changes in tax laws or their official interpretations may materially and adversely affect the Group’s business, financial condition and results of operations

Changes to tax laws may have a material impact on the business of the Group. There is a risk that as new regulations are introduced, the Group may have to adjust to such regulations, which may result in significant costs due to additional compliance burdens and costs related to non-compliance. There is a risk that the Group’s particular interpretations and applications of current and future Polish tax laws may be challenged. This may result in penalties and fines being imposed on the Group, or a need to revise the practices adopted by the Group’s companies.

In Poland, various local tax authorities assert overlapping jurisdiction over the Group, and may issue their own conflicting interpretations regarding tax matters. As a result of applying tax laws, a number of controversies may occur, and the tax laws may not be applied uniformly. In addition, changing interpretations of tax laws as applied by these various tax authorities, long tax liability time limitation periods, and relatively high fees and other penalties for non-compliance may result in material tax risk.

Changes in the regulations applicable to open-ended pension funds and other developments affecting such funds could reduce the volume of trading activity on WSE

Investments by open-ended pension funds (OFE) in shares of Polish companies listed on the WSE regulated market amounted to PLN 92 billion as at December 31, 2012, which represents 34.2% of total free float domestic shares on WSE. Historically, OFE have been a significant source of new capital inflows on WSE. The size of capital flows from OFE depends on contributions into these funds, payments to beneficiaries, as well as investment decisions of the funds. The operations of OFE are significantly influenced by the demographics of the Polish population and regulatory requirements applicable. Changes in fund flows to and from OFE or their investment decisions may result in a reduction of investments in assets traded on the markets organized and operated by the Group, in particular on the Main Market.

The Group faces a number of risks associated with possible changes in regulation related to OFE, including payment of contributions to the pension system and asset allocation restrictions. As at the date of preparation of this Report, contributions to OFE represent 2.8% of the gross pay, as compared to 7.3% until April 30, 2011 and 2.3% from May 1, 2011 to December 31, 2011. In addition, as at the date of preparation of this Report, the provisions of the Act on Pension Funds and the regulation issued on the basis thereof allow OFE to invest up to 47.5% of their assets in securities issued by companies listed on a regulated exchange market.

In view of material investment of OFE in shares listed on WSE, any further reduction of contributions transferred to OFE or limitation on OFE assets allowed to be invested in securities issued by companies listed on WSE could adversely and materially impact the level of trading and demand for shares of such companies.

Current regulations in Poland impose a cap on investment of open-ended pension funds in financial instruments listed on foreign exchanges and not listed on WSE, which limits the opportunities of open-ended pension funds to invest in stocks listed on other exchanges to 5% of their total assets. The compatibility of the cap with European legislation was examined by the Court of Justice of the European Union (CJEU). On December 21, 2011, CJEU decided that the cap in the Polish law is not compatible with EU legislation: it is discriminatory and not proportionate, which would justify an exception from the free movement of capital. The Act on Open-Ended Pension Funds will have to be amended accordingly following the CJEU decision. Elimination or reduction of the limitations on investment in financial instruments issued by foreign issuers which are not listed on markets organized and operated by the Group, especially the Main Market, may reduce the investment of open-ended pension funds in instruments listed on WSE. This, in turn, may reduce the level of trading and the supply of financial instruments listed on those markets, affecting their prices and consequently reducing trading volumes, which could have an adverse effect on the Group’s business, financial condition and results of operations.

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