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Banking Sector and Securities Market as Competitors

National Bank of Georgia (NBG) warns Georgian citizens that corporate bonds are not insured by either government or NBG guarantees.

According to NBG, the website ubani.ge has spread a securities offer with erroneous and misleading information that does not comply with Georgian legislation requirements for securities market.

We remind you that: 1. Neither National Bank nor any other office carries out securities certification or its evaluation in any other form; 2. NBG only adjusts the prospectus form to the legislation requirements and does not bear responsibility for its content. The law sets the same requirements. Namely, the frontpage of the final prospect must depict the following words: prospectus issuance approval by NBG refers to the form of a prospectus and it should not be considered as a conclusion about its correctness or value of investments described here. 3. NBG neither insures any risks for issuers nor determines the nominal value; 4. The securities indicated in the above-mentioned statement, according to the issuance prospectus, is an uninsured obligation.

According to the Georgian Law on Securities Market, the issuer must submit a final prospectus of approved issuance to a potential investor, not other documents. Moreover, according to the Georgian Law on Advertising,when spreading Advertisement on securities, it is inadmissible to spread any other information than the mentioned information in the issuance prospectus.

For the purpose of correcting gaps and updating investors, NBG will act within legal frameworks.

We remind you that corporate bonds are not insured by government or NBG guarantees. Payment of the principal amount of an investment and interest rate depends on a company solvency. Moreover, financial instrument may lose market value partly or fully. Therefore, making investments in similar instruments is related to personal risks of investors and such decisions require corresponding caution and analysis», NBG explains.

As reported, issuance of corporate bonds started in 2014. Some companies have already issued similar securities in the country. Therefore, specialists sharply criticize similar statements.

At this stage, corporate bonds have been already issued by M2, JSC Nikora, Silknet and so on.

The Caucasus Business Week (CBW) has inquired who a responsible body is and what guarantees exist for buying bonds of a specific company and whether consumer are protected.

Economic expert  Akaki Chargeishvili noted that this statement by NBG hinder securities market development and the head of the parliament’s finance and budget committee was to make reaction to this statement.

The NBG statement contains two inaccuracies. 1) NBG talks that corporate bonds are not insured by the Government and 2) corporate bonds are not insured by NBG either, Akaki Chargeishvili said.

This is an erroneous explanation that serve the interests of commercial banks on the free market, he added.

«In reality, in the market environment, free economy, when private companies use one of the free market instruments, be it a privileged share or bond, this signifies that everything depends on the company’s private obligation. It is not correct when the regulator tells the consumer in advance that these securities are not guaranteed by either government or the national bank. This signifies that interested bodies should not by similar bonds at all and the securities market will not be developed», Chargeishvili said.

NBG should be called to account for this statement. Today, banking monopoly has occupied the Authorities and parliamentary control does not exist either, he said.

«The parliament’s finance and budgeting committee has not made even one statement. This committee is to raise the issue of responsibility of NBG, because it is to control the regulator. Nor other state offices have made reaction. NBG had no right to make direct hinting to the population», Chargeishvili said.

The securities market is self-regulated, in itself. This signifies that the financial infrastructure should be regulated in a guaranteed way by the law-determined supervisory body, in our case, by NBG.

First of all, NBG should set securities market requirements. Secondly, it should act as a regulator, issue regulating norms and carry out supervision, but NBG does not take these steps, Chargeishvili noted.

«In this case NBG was to inform that there are corporate bonds of private company. This is regulated by the law», Chargeishvili said.

Securities market always bear certain risks, but they are especially high in Georgia. NBG does not apply due leverages and instruments to ensure the securities market development. In this case the regulator makes such warnings that shapes negative climate for those, who are interested in purchasing similar bonds.

«NBG should say that it has created instruments, shaped market conditions, minimized falsification risks through its own regulations. However, NBG does not talk about this, but it says bonds are not insured by guarantees and similar statements shape negative environment», Chargeishvili said.

In response to the question, whether bodies interested in corporate bonds are protected, Chargeishvili noted that in this case citizens are protected by the legislation. Any action on the market is related to risks, in general, he added.

Gogi Loladze, founder of Caucasus Capital brokerage company and the former chairman of the Stock Exchange supervisory board, noted that similar statements make negative influence on the undeveloped securities market, disorient citizens and shape negative background.

Each word in the NBG statement satisfies legal frameworks, but the fact is that spreading similar statements so frequently raises certain questions, even more so we have not heard similar statements in relation to depositors of commercial banks, Givi Loladze noted.

«We have market economy and a company is responsible for any obligation they take. The information that is required for public offer should be supplied to a wide society in line with the legislation – through an issuance prospectus.

NBG proves an issuance of prospectus and its correspondence to the legislation. Therefore, content of this statement is correct, however, NBG is, first of all, to regulate commercial banks and we have not heard the same warnings for millions of depositors. Nobody has said that deposits (at commercial banks) are not insured by the Government and NBG», Loladze noted and pointed to the asymmetric position that NBG demonstrates in relation to various sectors of financial field.

«Discriminating attitude is demonstrated towards the securities market and this is a big error. Today, there are only several hundreds of citizens interested in purchasing bonds, while we have millions of depositors in the country, while statements are directed towards those potential or active investors, who have applied different mechanism – securities market. Therefore, this fact raises a lot of questions», Loladze noted.

Today we have banking system in Georgia and the Authorities do not pay due attention to securities market development. They make empty statements on capital market development, but the process does not advance, he said.

The banking sector and securities market are competitor fields as two alternative sources for attracting financial resources to the business. Therefore, the logics is that the banking sector is not interested in securities market development.

«It is frequently said that commercial banks have assisted business companies in issuing bonds. In reality, all these instruments belong to the banking sector. These securities are not liquid securities in its classical understanding. The nominal value of bonds is so high that we receive absurd situation – 107 million GEL bonds of EBRD. The price of one bond is 1 million GEL. And where is there securities market here?! Under real liquid instrument, the nominal value should be 50, 100, 500 GEL, while today the cheapest bond is worth 1000 GEL or USD.

The lower the price, the more attainable bonds are for population, while today we have  a form of loan. It look like securities in appearance, but this is a classical form of a loan that are bought by commercial banks», Loladze said.

Georgia’s main stock exchange infrastructure is  wholly owned by the banking system and it is unimaginable that the stock exchange will be developed, when it is controlled by the competitor sector, he pointed out.

The Caucasus Capital founder also talks about legislative gaps, but notes that today only the banking sector representatives are prioritized and the so-called strategy approved by NBG and Government are designed for development of only the banking sector instruments.

Shota Gulbani, president of Association of Young Financiers and Businessmen (AYFB) explains that the Government does not try to diversify financial system and the strategy proves this consideration, because it does not ensure equal opportunities for those institutions, which are not affiliated with commercial banks.

«It is important that ownership of the stock exchange be represented wider. This signifies reformation of the current environment on the stock exchange will bring more benefits, because today one brokerage company affiliated with a specific commercial bank maintains dominating control  on the whole industry of the stock exchange (Galt&Taggart as noted above). This move will grow the interest of other brokerage companies in building the stock exchange as an institution. It is also important that brokerage companies, which are members of the stock exchange, but are not affiliated with commercial banks, have adequate representatives at Georgian Stock Exchange (GSE) supervisory board.

The new strategy does not call for protecting the trade centrality principle and improving objective pricing mechanisms, as it was in the securities regulating law before 2007. Moreover, the stock exchange should be entitled to adopt obligatory trading regulations for the stock exchange members, because today offexchange deals are made mainly”, Gulbani said.

First corporate bonds issuance started in 2014.