ISRAEL SECURITIES AUTHORITY Annual Report Israel Securities Authority Annual Report 2015 Submitted to the Minister of Finance And to the Knesset's Finance Committee The following translation is intended solely for the convenience of the reader. The ISA does not assume any responsibility whatsoever as to its accuracy and is not bound by its contents. For the original Hebrew text click here. ר ש ו ת נ י י ר ו ת ע ר ך ISRAEL SECURITIES AUTHORITY יושב ראש CHAIRMAN 29th June 2016 23rd Sivan, 5776 To: MK Moshe Kahlon MK Koshe Gafni Minister of Finance Chairman of the Finance Committee Ministry of Finance The Knesset Dear Minister, Dear Chairman, Re: Report on the Israel Securities Authority’s Activities In accordance with Section 14 of the Securities Law, 5728-1968 (hereinafter: the “Law”), I respectfully submit to you this report on the Israel Securities Authority’s (hereinafter: the “ISA”) activities in the course of 2015. The capital market and stock exchange are important growth engines for the economy, employment, increased competition, as well as in contributing to lowering costs of capital and cost of living. Over the past three years, following a period of decline, trading volumes have risen, and total market capitalisation of listed companies has increased by about 50%, approximately reaching 850 billion NIS. Nevertheless, the capital market and the stock exchange have not, in recent years, been fulfilling their potential - as a meeting place for investors and entrepreneurs –for financing economic activity and diversifying investments and savings channels for the public. On the one hand, fewer entrepreneurs wish to raise capital from the public, inter alia, due to exacting regulatory demands imposed on listed companies. New regulation imposed in response to the 2008 financial crisis have, inter alia, hampered small and medium sized companies, which cannot afford the costs of regulation. Onerous regulation and the global economic crisis caused a discernible decline in the number of IPOs on the Tel Aviv Stock Exchange, as well as in trading volumes. This phenomenon is not unique to Israel, and is shared by capital markets all over the western world and the developed nations. These factors, together with the regulatory uncertainty, which was caused by frequent regulation changes, exacerbating companies’ difficulties to plan ahead. Moreover, the anti- business sentiment directed at Israeli businessmen, saps entrepreneurs’ desire to join the public arena, causing them to shun the capital market. Another factor in this regard is a discernible desire to avoid public exposure. Although the stock exchange offers clear and unique advantages such as liquidity and the ability to raise low-cost capital, and prestige enjoyed by listed companies, today's exposure to the public is considered a disadvantage, ר ש ו ת נ י י ר ו ת ע ר ך ISRAEL SECURITIES AUTHORITY יושב ראש CHAIRMAN even leading listed companies to contemplate delisting and transforming into private companies, far from the ‘public eye’. On the other hand, an increasing share of investors' funds, and in particular the investors who manage the public's short and long term savings, are channelled into local off-exchange investments, or overseas. This is due to the accumulation of huge sums in the hands of leading institutional investors, which makes the local market too small for them to consider and they prefer to invest in foreign financial giants rather than in Israeli companies. This comes at the expense of economic and employment growth in Israel. These two phenomena – a decline in the number of IPOs on the stock exchange, and declining levels of investor interest in the local market – feed on one another. On one hand, a lack of sufficient supply of quality investment channels reduces institutional investors’ appetite for the local market. On the other hand, diverting institutional investors’ investments overseas at the expense of the local market, hampers companies’ ability to issue securities in Israel at optimal prices. We do not want to accept this reality. Having competitive, healthy and prosperous stock exchange and capital market, are the two keys to successfully competing on capital sources, reducing prices, and contributing to employment and growth. A strong capital market serves as an alternative to bank credit in financing the business sector. This is why it is very important to reposition the stock exchange as the Israeli market’s growth engine, a function which is often underappreciated. In light of the above, we face two principal challenges. The first, is restoring quality manufacturing companies’ interest in financing economic activities through the capital market and the Tel Aviv Stock Exchange. Such interest will only be achieved when the advantages of raising capital from the public exceed, in the eyes of any company considering an issue, the costs of its becoming a reporting corporation. The second challenge is increasing Israeli investors' interest in investing on the local market, inter alia, through developing the market and increasing the supply and quality of the products available to them. Concurrently, we should highly consider the possible negative influence associated with regulatory instability and the anti-business sentiment. These factors contribute to an undesirable atmosphere in the capital market, and our challenge is to generate a positive sentiment, emphasising a regulatory environment attractive to companies in general, and technology companies in particular, so that they may prefer raising capital on the Tel Aviv Stock Exchange, rather than overseas. Inter alia, I believe that it is time to initiate, even as a temporary provision and for a limited term, a tax relief regime that will encourage investing on the local market. For instance, there is room to contemplate fostering the capital market (for investor benefit, and to cool down the real estate market) by repealing tax biases that encourage the public to invest in ר ש ו ת נ י י ר ו ת ע ר ך ISRAEL SECURITIES AUTHORITY יושב ראש CHAIRMAN real estate rather than in the capital market. Currently, a considerable share of the public tends to act at the real estate market at the expense of the capital market. One of the main reasons is the income tax regime, which establishes a structural preference to investing in the housing market over the capital market. We therefore propose to deal with this tax bias, and to encourage investing in the capital market. From the General to the Particular – What Has Been Done in the Course of 2015 and the First Half of 2016: In the course of 2015 and the first half of 2016, the ISA completed a long list of measures designed to achieve both abovementioned goals. These measures include, aside from work on completing regulation (where lacking), two central components: de-regulation and market development. This stems from a belief that alongside the basic duty to protect the interests of the investing public in the capital market, the ISA is dedicated to ensuring that the Israeli capital market fulfils its main designation as a channel for development and financing the Israeli economy. The measures taken by the ISA touch on each of three circles comprising the capital market: The circle of investors, the circle of companies, and in between investors and the business sector – the circle of the stock exchange. Most of the measures have only been approved recently, so it is still early to evaluate their impact. The circle of the stock exchange: The ISA’s working assumption in this arena is that the stock exchange is at the heart of the capital market: It connects investors to companies; thus, it is the nexus between capital and industry. Demutualizing the Tel Aviv Stock Exchange – The ISA and the Ministry of Finance published a Legislative Memorandum, under which the Stock Exchange’s ownership structure will be changed, in line with the structural changes that all developed nation stock exchanges have been subjected to. The change will create an incentive model for the Stock Exchange forcing it to act in a competitive and effective manner – reducing costs for investors joining new members, competing with the banking system as a source of alternative credit, and collaborating with foreign stock exchanges. Early signs of the spectacular opportunities that will open up for the stock exchange, can already been detected in the agreement of principles entered between the Stock Exchange and NASDAQ. Cross listing – The ISA is promoting legislation that would enable investors in Israel to trade securities of foreign giant companies listed on the main stock exchanges in the U.S., at low transaction costs, convenient trading hours and in local currency. Finality of clearing and settlement system – The ISA is promoting legislation that would regulate the finality of clearing and settlement on the Stock Exchange’s clearing houses. This move will strengthen the Stock Exchange’s clearing houses’ ר ש ו ת נ י י ר ו ת ע ר ך ISRAEL SECURITIES AUTHORITY יושב ראש CHAIRMAN stability, minimise risks involved in their operations, and generate legal certainty as to the operation and finality of clearing and settlement actions which takes place in their systems. The amendment removes a barrier blocking the Stock Exchange’s clearing houses from providing services directly to European financial intermediaries and foreign investors. The ISA has completed the following steps for investors: An electronic voting system – The ISA has advanced the legal infrastructure for establishing and operating an electronic voting system, which it has created, and which was launched in June 2015. This system enables a person who owns securities to exercise its voting rights over the internet at meetings in which she is entitled to vote. The electronic voting system makes access to information and exercising the right to vote easy and cost free, thereby contributing to increasing the rate of the public’s participation at general meetings.