SCS SUGGESTS ISSUING HOUSING CERTIFICATES IN ORDER TO DEVELOP SECURITIES MARKET SCC IS INTENDED TO SUPPORT THE IDEA OF PROLONGING FAVORABLE TAXES FOR PHYSICAL PEOPLE FOR THE NEXT 5 YEARS," SCC CHAIRMAN GUNDUZ MAMEDOV TOLD AT THE CIBC MEETING
In order to establish a valuable dialogue between business and government sector CIBC has continued meetings with the heads of state ministries and departments of Azerbaijan. On March 3 in Grand Hotel Europe Caspian Finance Club that operates within the Caspian Integration Business Club (CIBC) held a meeting with participation of Gunduz Mamedov, the Chairman of the State Committee on Securities (SCS) under the President of the Azerbaijan Republic.
"The meeting was arranged within the framework of preparation for the meeting of the Club’s members with the President of Azerbaijan Republic Ilham Aliyev. The request about this meeting is expressed in the letter send to the President on October 25, 2005," President and Chief Executive Director of the Caspian Integration Business Club Telman Aliyev said.
A number of meetings with public officials are planned to be held within the framework of preparation for the meeting with the President to provide opportunity to the business-structures to share their problems, bring their suggestions; afterwards the report composed on the basis of this meeting will be submitted to the President for his consideration.
After the request letter to the President had been signed, CIBC held meetings with Mr. Valekh Aleskerov, the Vice-Speaker of Milli Majlis of Azerbaijan, Mr. Natig Aliyev, the Minister of Energy and Industry of Azerbaijan, Mr. Ali Abbasov, the Minister of Communication and IT Technologies of Azerbaijan, Mr. Khoshbakht Yusifzade, the SOCAR Senior Manager and First Vice-President, Mr. Elshad Nasirov, the SOCAR Vice-President, Mr. Akif Narimanov, the Chief Geologist of Azneft JV of SOCAR.
In the near future CIBC plans meetings between businessmen and Minister of Economic Development of Azerbaijan Heydar Babayev, Minister of Taxes of Azerbaijan Fazil Mamedov, Chairman of the State Customs Committee of Azerbaijan Aydyn Aliyev.
As CIBC President and Chief Executive Director Telman Aliyev said, CIBC was established in June 2002, President of Azerbaijan Mr. Ilham Aliyev has become the first honorary Chairman of the Club. At present the Club united interests of three countries – Azerbaijan, Russia and Kazakhstan. In 2006 this list will be expanded due to the companies from Turkey, Ukraine and Georgia. There are three Co-Chairmen in the Club: Natig Aliyev, the Minister of Industry and Energy of Azerbaijan, Vladimir Shkolnik, the Minister of Industry and Trade of Kazakhstan, and Victor Khristenko, the Minister of Industry and Energy of the Russian Federation.
In his speech at the meeting Chairman of the State Committee on Securities (SCS) working under the President of Azerbaijan, Gunduz Mamedov informed on the state of the securities market in Azerbaijan. According to him, securities market has been developing in an organized manner for over 5 years.
On the whole, the securities market started evolving in Azerbaijan in the 20s of the 19th century in the form of shares, bills and bonds due to the rapid development of oil industry in the country. During the Soviet period Azerbaijan issued only public securities in a small amount. After declaration of independence in Azerbaijan the securities market started working again but in a chaotic manner. In 1999 this market became organized on account of efforts of the State Committee on Securities, which was established that time. Within all next years SCS managed to form a regulatory and legal framework of the securities market on the most up-to-date level. At present all operations at the market are regulated in line with the international standards. The market has its professional participants, the activities of 40 of them are licensed today. The infrastructure, three deposit organizations and Baku Stock Exchange have been formed by now.
Gunduz Mamedov summed up the results of SCS’s activity for 2005 and defined perspectives for works to be held by the State Committee in 2006. Thus, 108 stock issues in the value of 226 million new manats (1 new manat = 5,000 old manats), 24 issues of the State short-term bonds (SSTB) in the value of 128 million new manats, 54 issues of the State short-term notes of the National Bank of Azerbaijan in the value of 323 million new manats were registered in 2005.
According to all indicators, in 2005 SCS registered the 4-5-fold growth compared to the similar indicators of 2004. Unfortunately, some delay is observed in issuing of the corporate bonds. If in 2004 SCS registered 14 corporate bonds, in 2005 only 3 were registered. "Thus, in order to provide growth in this area of the market we should give more attention to this segment of the securities market, which implies some liberalization of conditions of issuing and circulation of the corporate securities," Gunduz Mamedov stressed.
At present SCS together with various international finance institutions (IFI) is implementing the program First, within the framework of which the project on issuing of corporate bonds from 4-5 large enterprises of Azerbaijan will be implemented in 2006 with technical assistance of IFI experts.
In 2005 SCS registered growth in issuing of other kind of securities – 73 issues of notes in the total value of 40 million new manats. Circulation of securities also grew; thus, in 2005 the Committee registered 7,259 agreements on purchase-sale of shares in the total value of 50 million new manats on the face value.
5-fold growth of contracts on shares, the total number of which reached 1,081, was indicated within the framework of the Baku Stock Exchange’s activity in 2005.
208 repo operations in the total value of 127 million new manats were held on notes of the National Bank of Azerbaijan. 47 agreements on purchase-sale of notes in the value of 24,8 million new manats were registered at Baku Stock Exchange in this segment of the security market.
The number of deposit operations also grew - 86 operations on state registration and 58 additional operations on bail bonds’ registration were held in 2005.
However, along with the positive trend there are some problems at the securities market. Mainly these problems are related to the corporate management. Thus, the rights of minority shareholders are violated in many joint stock companies; in this connection, SCS is intensifying protection of small shareholders’ rights. In 2005 SCS received 334 applications from the minority shareholders that cover the activity of 550 joint stock companies. The audit showed that some information in these complaints is true. Administrative measures were taken against these joint stock companies and their heads, 132 penalties to the total sum 30 thousand new manats were rendered and 61 directions related to liquidation of committed violations were given. As Gunduz Mamedov said, despite all measures taken by SCS cases of violations of shareholders’ rights and damages to the image of investors are still observed. "It is necessary to intensify work in this direction, to introduce the mechanism and culture of the corporate management," SCS Head said.
Then Gunduz Mamedov spoke about primary directions in the SCS activity in 2006. Thus, according to him, SCS’s target in 2006 is to expand and stimulate activity of institutional organizations at the market in order to stimulate activity of investment funds (IF) in Azerbaijan. SCS is working out a new draft bill "About investment Funds" to be ready in May-June 2006 to form and develop IF. The draft bill will try to liberalize conditions of IF functioning and offers to change legal organizational form of IF. In particular, IF are planned to be registered both as joint stock companies and other legal organizational forms. According to the bill, the opportunity to form investment trusts is not excluded. It is supposed that not only a management company but also the administration of a trust will be able to dispose of property. IF portfolio is expected to be expanded to give opportunity to invest in securities and other papers as well as in real estate. It will allow expanding investment opportunities of IF. If these measures are taken, IF will find their place at the market of Azerbaijan, Gunduz Mamedov said.
SCS is also taking steps in the area of introduction and circulation of new kinds of securities at the market. The role of mortgage securities increased on account of beginning of the mortgage crediting in Azerbaijan. In 2006 SCS plans to take a number of measures to provide wide use of these securities at the market. Due to increase of house building, SCS offers to issue housing certificates, as the regulatory and legal framework for their circulation has already been worked out. "At present buyers of houses and construction companies conclude transaction based on the agreement between each other. As a rule a buyer pays for a flat at the initial stage of the construction and I know many cases when the construction is not completed and court cases are started or a client does not want to buy a flat any more," Gunduz Mamedov said. Housing certificates can be resold, thus giving opportunity to hand over rights on property to another owner. Certificates can be mortgaged in the process of getting a credit from the banks. Moreover, operations pass registration in the SCS, which has already formed a register of housing certificates. While being as a deposit, the security is frozen and can be withdrawn to be kept in the depositary.
SCS opened its department in the Nakhchivan Autonomous Republic to protect rights of shareholders. Besides, branches of the National Depositary Center will be formed in Nakhichevan, Ganja, Lenkoran, Sheki and other regions of Azerbaijan.
The representative of SCS answered the questions, discussed various financial issues with companies, banks, insurance companies and other financial structures. In particular, Zakir Nuriyev, the Co-Chairman of Caspian Finance Club and Chairman of Board of Rabita Bank answered the most important questions related to the financial market, as he reminded that now physical people did not pay profits tax. According to him, tax "recess" in Azerbaijan valid within 5 years will expire on January 1, 2007. They were aimed at increasing of number of physical people’s operations at the securities market and wider participation of people in the banking deposits.
Mr. Mamedov agreed that these measures are aimed at development of financial and securities markets. Simultaneously it implies strengthening of positions of the banking sector in the country. According to SCS, it is necessary to continue these measures after 2007 within next 5 years as minimum. SCS has applied to the government with the request to release legal entities from taxes on operations with securities. As Mr. Mamedov stressed, the State Committee intends to apply to the government once more to exempt physical people from taxes for the next 5 years and expand the circle of covering, which is important for securities market’s development.
As Kamal Ibragimov, the Co-Chairman of Caspian Finance Club and General Director of Standard Insurance Company said at the meeting, within the last years the market of corporate bonds and shares has been rapidly developing in Azerbaijan. Considering the information related to the beginning of shares sale of privatized enterprises at the Baku Stock Exchange spread by mass media, the companies involved in the financial sector of the country’s economy are interested to take part in these processes, Kamal Ibragimov said.
In opinion of SCS Head, this idea put forward by the previous administration of SCS and now by the Minister of Economic Development of Azerbaijan, Heydar Babayev, should be implemented without fail. As SCS considers, piles of stocks, that were not privatized in the process of privatization and remained on the state’s balance, should be displayed at the Exchange in large lots. Thus, the stocks will be deposited in a more transparent form and find their buyer. As Mr. Mamedov stressed, in this case the matter will concern bundles of stocks (up to 30%) of enterprises that very often do not find their buyers among investors in the Republican Auction Center (RAC). At present, various departments engaged in this process are exchanging views on this matter.
The Head of SCS believes that the sides will reach understanding very soon and settle procedural-legal aspects.
Within the framework of the Caspian Finance Club’s meeting the head of SCS addressed the insurance companies to take more active participation at the stock market as it will stimulate development of both companies and financial market of the state.
The participators in the Caspian Finance Club’s meeting also discussed a question related to profitability of public securities. According to the forecast of SCS Chairman, profitability on public securities will not go down to more than 7% annual interests. Banks are concerned due to reduction of profitability on state papers that is taking place within the last two months, in particular the rates on notes decreased from 12.44% (last year) to 6.72% according to the results of the last auction.
As Mr. Mamedov thinks, it is difficult to forecasts, as within the last 4 years the situation at the public securities market variously changed. In 2004 the profitability on state short-term bonds went down to 4-5%, in 2005 the rates grew up to 12-13%, in 2006 the rates started reducing again. In his opinion, the profitability at the market of state short-term bonds can keep on the level 8-10%, whereas there is less optimistic trend related to notes. If in the second half of 2005 the reduction was less noticeable, in 2006 it accelerated. As SCS Head considers, even if interest rates go down, they will not be less than 7% annual interest rates, though everything depends upon the market.
According to stockbrokers, the reason for profitability’s reduction is in rising demand on public securities, which exceeds proposal by 1.5 – 2 times very often. This fact is not caused by high-liquidity of banks, which are the only participants at the notes market. They do not exclude that rates on state short-term bonds will also go down. Still they are preserved on the level 10%.
According some experts, the present situation at the notes market (reduction of profitability by immediately 5.72 percent items within two months) is explained by short-term character of notes, which are issued for 7-10 days. This stimulates strong competition, low rates are advantageous for issuers because of low expenses. In compliance with agreement between the Ministry of Finance and National Bank, state short-term bonds will be issued for longer period (three months). First issue of 11-month state bonds took place in February.