The FINANCIAL -- The operating income of BG Capital increased by 37% in 2013 and amounted to GEL 1,128,223.
The FINANCIAL -- The operating income of BG Capital increased by 37% in 2013 and amounted to GEL 1,128,223. The company opened a branch in Azerbaijan this year. After 2012 the interest in capital market development was significantly raised. However, despite positive signals, it needs more in-depth analysis and work to completely recognize how comprehensive and important the mission of capital market development is for the improvement of investment environment and economic progress of the country.
BG Capital is the leading investment bank (Brokerage Company) in Georgia, successfully operating on the capital market since 2000. It has been a member of the Bank of Georgia Group since 2005. BG Capital offers a wide range of services including brokerage and custodial services, asset management, IPOs and private placements, research and market analysis. Institutional backing from Bank of Georgia provides BG Capital with the ability to interact closely with international investors. BG Capital is capable to trade and make settlements on nearly all of the world’s main stock exchanges through reliable international brokers and international depositaries.
In this exclusive interview with The FINANCIAL, Irakli Kirtava, General Director at BG Capital, explains the reasons for the lack of development of the securities market in Georgia and provides recommendations for what is needed for the development of Georgian capital markets.
Q. What are the results of the trade on the Georgian stock market; the volume of trades 2013 and which companies/stocks accounted most for the turnover?
A. According to the Georgian Stock Exchange (GSE), the total volume of trade of OTC and eligible securities amounted to GEL 52.5 million. That is three-times higher than it was in 2012 (GEL 17.4 million). Securities of 129 Georgian companies were allowed on the Georgian stock market as of 31 December, 2013. Out of them trade on only five companies’ securities was concluded in GSE System. Total capacity amounted to GEL 530,000. This is a very low figure in comparison with previous years. The turnover on trade session was GEL 8.9 million in 2012. Trade volume of Bank of Georgia shares made up 53.7% on trade sessions; it was followed by Liberty Bank with 44.7%, Caucasus Energy Infrastructure with 2.5%, Teliani Valley - 0.9%, and Liberty Consumer - 0.2%.
As for OTC, trading was settled on the stocks of 38 companies. The sum of deals amounted to almost GEL 52 million. The same amount totalled GEL 8.5 million in 2012. OTC transactions by companies were as follows: 52.9% - Poti Shipyard, 23.4% - VTB Bank, 9.5% - “Bavshvta Samkaro”, 4.6% - Isani–Kartu 3.3% - Liberty Bank, 2.5% - Caucasus Energy Infrastructure, and over 2% - Teliani Valley.
Q. The quantity of transactions of the Georgian stock market is still low. What are the problems behind the lack of development of the stock exchange and capital market in Georgia?
A. The limited transactions on trading sessions are due to ignorance and neglect towards establishing an organized motivation system that would stimulate companies, as well as be attractive to the stock market and investors. Such a motivation system should be based on: professional research of the subject, the local economic reality, Georgian potential and analysis of international practice and trends. Despite some positive messages, the importance of the stock market for the country’s economy has always been insufficiently recognised. Consequently, there was no state interest in the stock market. Various structures failed to focus on working out a combined long-term plan for the development of the stock market and investment environment.
Q. Can you highlight what has been done in connection with the capital market development, including any positive steps made by the Government during 2013 of the capital market in the country?
A. A draft concept for the development of the capital market was set up by a team of professionals at the beginning of 2013. During the past fifteen years a circle of certain specialists had the desire and several times tried to create such a document. However, due to a lack of governmental interest and absence of political will, an agreed comprehensive concept, or, moreover, strategic development plan of the stock industry still did not exist in Georgia. Newly created Georgian Stock Market Concept presents a detailed review of the local market, best international practice and analysis of global trends. The project proposes ways to solve the existing problems and ensure prospective development.
However, the document does not provide specific instructions. Correct identification of the problems, as well as selection of an alternative solution should be accepted after discussions within specialists, as well as economic and financial circles of the Government. For the improvement and development of the concept, it was introduced to a variety of business representatives, lawyers and financial stakeholders. The Business Association of Georgia (BAG) expressed its interest in the project. The presentation was introduced to the representatives Ministry of Economy, Ministry of Finance, NBG and likewise - to the economic and financial committee of the Parliament.
It should be noted that the concept of the capital market development has always been a focus of international financial institutions (IFIs). They have huge experience of operating on financial markets. Therefore, an importance of capital market development in Georgia is more obvious for them. Some IFIs carried out (or – have started) researches of the Georgian capital market, pension reform and investment environment in 2013. A research carried out by the World Bank is the most detailed and important one. We also welcome the interest of EBRD and other international organizations towards the Georgian capital market. However, these researches have not yet been published and thus their recommendations are not yet available to market participants. We hope that the recommendations of IFIs that are based on the best practice will be considered by the Georgian Government and will provide beneficial effect already in 2014 and later.
In 2013 significant changes were initiated in the securities market law. Some principle issues were decided without conceptual long-term vision. Understandably, that ignited vivid discussions within specialist and business circles. Some of the concrete, specific issues at initial stage shall be preferably discussed within narrow circle of specialists with appropriate professionalism, qualification and experience. Outspoken counter-argumentation at this phase regretfully surpassed normal legal process and made media widely engaged in those discussions, which could have been desirable from the standpoint of transparency and public information, but at the same time was accompanied with biased interpretations and/or excessive sensationalism in case of engagement of inexperienced journalists, what is not rare in Georgia. Therefore, initial discussion would be beneficial to be attended by capital market participant specialists and business stakeholders that are affected by the legislative changes. The budget and finance committee of the Parliament decided to make amendments to the law on the securities market only after holding consultations with local and foreign specialists. The legislative amendments are likely to be made this year. Hopefully, all problematic issues concerning legislation draft will be removed from the agenda as the result of compliance with the EU legislation and European directives.
Government of Georgia prepared at the end of 2013 an important and significant project of Social-Economic Strategic Development for 2014-2020 (SDSE/2014-20). We welcome the fact, that the project is focused on the importance of capital market development in terms of access to financial resources. According to the document, the Government plans to support: non-banking financial institutes and stock market development along with the banking sector; development of the stock exchange by creating conducive environment for companies;. encouraging transparency of the companies, increasing the standards of accounting and reporting, and encouraging institutional investors . The Government plans to develop OTC trading with bonds and increase public awareness in the field of the securities market.
Q. EBRD recently issued 50 million GEL bonds denominated in Georgian Lari. BG Capital and TBC Bank were the managers and guarantors of the transactions. Which segment is considered to be the potential purchasers and how can that influence the public emission of corporate bonds or other securities?
A. We consider this step of EBRD as very positive by several factors: this is the very first case in Georgia of securities issue by one of the leading IFIs; it proves, that the IFI with the highest rating has confidence in the Georgian Lari and in the policy of the National Bank and Government with respect to National currency; corporate securities with a floating interest rate were issued in Georgia for the first time. Another innovative step was that two leading managers - BG Capital and TBC Bank - guaranteed underwriting - what is a good message to emphasize the positive effects of potential cooperation between financial institutions.
It must be noted, that The National Bank and the Ministry of Finance made several changes in legislation which makes bond issuance for IFIs in Georgia easier. We hope that other IFIs will also show an interest in issuing GEL-denominated securities. This will motivate the leading companies in Georgia to raise the quality of their financial reports and transparency and to attract financial resources through placing securities, which is one of the preconditions of capital market development. Considering the high rating of the issuer such bonds distinguish with high degree of reliability and therefore with the low interest rate. Investing in such financial instruments is mostly attractive for commercial banks and financial organizations (among them – international ones), which are focused on diversifying the risks and investment portfolio.
Q. Some local experts as well as commercial banks have demanded that banks be banned from carrying out non-profile (non-banking) activities. BG Capital is the daughter company of Bank of Georgia. Are there any advantages that you have over your competitors?
A. Any idea before it is fulfilled needs an analysis –with the aim of accurate prediction of expected results. I have not heard of any one demanding that banks be prohibited from sharing companies delivering financial services. If such a requirement arises it will be a big mistake caused by a lack of competence in a practice established globally. As for the other non-profile assets, it would be better to wait for the legislative changes, and compliance with the EU Association Agreement. We need to recognize and gradually establish the basic principles that have been adapted and adopted by dozens of European countries. By this approach we will reduce the social and economic risks, which could be inevitable in case of rapid and well-accounted decisions.
As for relations with competitors, in brokerage and investment-banking business competitors appear as counterparts and partners. All the investment bankers and brokers realise that a competitive environment is important for the liquidity of securities. BG Capital has always maintained a good working relationship with other brokerage companies. We cooperate on problematic and legislative issues. We also help our colleagues to operate on international markets.
Pro-activity, progress and future orientation, implementing innovations and being the leader on the securities market have always been our advantages since 2000 and up today. We have been focused on ensuring the company’s growth and financial stability. With our team of high-level professionals we have close relations with the leading and most trusted international financial institutions, brokerage firms and international depositaries, global custodians, institutional investors, etc. The support of Bank of Georgia is really important in this regard. At the same time, it is a great responsibility for us. I believe in free competition. Artificially loose competition created by limiting the work of developed institutions seems inappropriate to me. We should not ignore the axiom that forceful methods always have negative results.
Q. How would you estimate the year 2013 for your company - what are your expectations for 2014?
A. 2013 turned out to be much better than 2012. The operating income (revenue) of the company increased by 37% in 2013 and amounted to GEL 1,128,223. We had serious growth in operating profit, which amounted to GEL 567,333. We had significant trades mainly at international markets, including the Eurobonds. We have served to some Georgian companies as financial adviser. Involvement in the bonds issued by EBRD was an important activity.
In 2014 we opened a branch in Azerbaijan. We are running significant preparatory works including serving Georgian companies in issuing corporate public bonds. We are expecting several important transactions that seem quite promising.
Q. What will be the main challenges for the Georgian economy in 2014 - in terms of improving the capital market’s investment climate specifically, and what are your suggestions in this regard?
A. The EU integration process should be considered the most important, though yet difficult aspect for economic development. Joining DCFTA is undoubtedly significant. To implement standards equal to the ‘civilized world’ will require hard work, professionalism and responsibility.
Significant efforts will be carried out in almost all areas in terms of legislative amendments. The large volume of work is associated not only with significant impact, but first of all – with highest level responsibility. It is imperative that our steps be carried out with the involvement of international experts and local professionals. The business community and the public should be provided with high-quality information.
We can consider project of social-economic strategy as a fundament for development of capital market and investment environment but we must admit that some issues of the project needs to be extended with respect to relevant directions of conceptual visions and elaboration of detailed action plans for certain industries. It is necessary to determine the structures responsible for creating strategic documents of developing such sectors and for its final recognition.
The governmental, regulatory and legislative structures together with market participants and leading business associations should work on a progressive approach based on international practice. A long-term, complex strategy should be implemented. Appropriate actions should be taken step by step. I am optimistic that these approaches will result in achievement of breakthrough developments of the country’s economy, capital market and investment climate of Georgia since 2014.