The Capital Markets Working Group Established by Governmental Order # 1-1/264 issued 22 September 2014 The Georgian Capital Market Diagnostic Study and Recommendations Discussion Draft May 12, 2015 This Report was prepared through TA 8716: With support by: “Strengthening Domestic Resource Mobilization” Diagnostic Study of the Capital Markets of Georgia TABLE OF CONTENTS I. EXECUTIVE SUMMARY ......................................................................................................... 1 II. BACKGROUND ......................................................................................................................... 9 A. Origin of this Study .................................................................................................................... 9 B. Characteristics of Successful Capital Markets ........................................................................... 9 III. STRUCTURE OF GEORGIA’S CAPITAL MARKETS ...................................................... 11 A. Components of the Corporate Securities System ..................................................................... 11 B. Components of the Treasury Securities System ...................................................................... 15 C. The Legal and Regulatory Framework .................................................................................... 18 D. The NBG as Regulator ............................................................................................................. 21 E. Tax Code Policies .................................................................................................................... 22 IV. TRENDS (2007-2014) FOR THE CORPORATE SECURITIES MARKET ...................... 24 A. Centrality and Transparency of Trading .................................................................................. 26 B. Transparency of Corporate Population ..................................................................................... 29 C. Quality of Reporting ................................................................................................................. 31 D. Transparency of the Infrastructure Institutions ........................................................................ 31 E. Market Dominance ................................................................................................................... 32 F. Net Impacts ............................................................................................................................... 32 V. TRENDS (2007-2014) FOR THE GOVERNMENT SECURITIES MARKET ................. 35 A. Issuance Patterns ...................................................................................................................... 35 B. Ownership Patterns .................................................................................................................. 35 C. Maturity Structure .................................................................................................................... 36 D. Secondary Trading Levels ....................................................................................................... 36 E. Interest Rate Trends ................................................................................................................. 37 F. Net Impacts ............................................................................................................................... 38 VI. RECENT ENCOURAGING EVENTS (2014 - 2015) ............................................................ 38 A. Corporate Bond Offerings ........................................................................................................ 39 B. IFI Bond Offerings ................................................................................................................... 39 C. Involvement by Fitch Ratings. ................................................................................................. 40 D. Emergence of Private Equity Funds ......................................................................................... 41 E. GSE Reorganization ................................................................................................................. 42 F. EU-Georgia Association Agreement ........................................................................................ 42 G. NBG’s Proposal for Post-Trade Services for Corporate Securities ......................................... 43 H. Enhanced Linkages to International Infrastructure .................................................................. 45 VII. LOOKING FORWARD ........................................................................................................... 45 A. Possible Issuers of Securities ................................................................................................... 45 B. Improving the Legal Framework .............................................................................................. 54 C. Harmonizing the Tax Policy .................................................................................................... 57 D. Improving Issuer Transparency ............................................................................................... 60 E. Promoting Centrality of Trading and Improving Price Discovery ........................................... 62 F. Streamlining the Trading Methodology .................................................................................... 65 G. Consolidating and Linking the Infrastructure .......................................................................... 67 H. Improving the Transparency of the Legal Regime and Market Operators .............................. 68 ii Diagnostic Study of the Georgian Capital Market The Capital Markets Working Group I. Increasing International Regulatory Linkages and Compliance with Standards ....................... 69 J. Support from the IFI Community .............................................................................................. 70 VIII. RECOMMENDATIONS .................................................................................................... 72 A. Recommendations by Goal ...................................................................................................... 72 B. Recommendations by Responsible Parties ............................................................................... 73 C. Implementation Deadlines ........................................................................................................ 73 IX. ANNEXES ............................................................................................................................... 74 Annex 1: Table of Recommendations by Responsible Implementer .............................................. 74 Annex 2: Cross References by Theme and Responsible Implementer ........................................... 76 Annex 3: Guiding Literature ........................................................................................................... 79 Annex 4: List of Related Reports ................................................................................................... 80 Annex 5: GSE Listing Requirements .............................................................................................. 81 Annex 6: GSE Unconsolidated Financial Results (in GEL) (historical) ........................................ 82 Annex 7: GSCD Financial Results (in GEL) (historical) ............................................................... 84 Annex 8: Summary Financial Results for Investment Firms (GEL and USD) (2013) ................... 86 Annex 9: Summary Financial Results for Securities Registrars (GEL and USD) (2013) .............. 87 Annex 10: Timetable for EU Approximation ................................................................................... 88 Annex 11: Summary Financial Information for Reporting JSCs in USD (2013) ............................. 89 Annex 12: Treasury and NBG CD Trading Levels 2010 to Present ................................................. 91 Annex 13: Treasury Yields at Auction 2010 to Present ................................................................... 93 Annex 14: Private Equity Funds Operating in Georgia .................................................................... 95 Annex 15: Analysis of Commercial Banks as Potential Issuers and Purchasers .............................. 97 Annex 16: Summary Financial Data for State-owned Enterprises (GEL) (2013) .......................... 108 Annex 17: Summary Financial Data for State-owned Enterprises (USD) (2013) .......................... 112 Annex 18: Insurance Industry Summary Financial Data in (GEL and USD) (2013) ..................... 116 Annex 19: Notional Timetable for Required Actions ..................................................................... 117 TABLES Table 1: Market Share of Investment Firms ........................................................................................................ 14 Table 2: Market Share of Registrars .................................................................................................................... 15 Table 3: Availability of Implementing Regulations (as of March 2015) ............................................................. 21 Table 4: Number of Participant Firms 2007 vs. 2014 .......................................................................................... 26 Table 5: Trends in Secondary Trading ................................................................................................................