Do legislative loopholes allow banks to control Georgia’s capital market?
16 October, 2014
Do legislative loopholes allow banks to control Georgia’s capital market?
“After the power shift in 2012, the new government headed by Ivanishvili’s political party Georgian Dream pledged to reform the securities regulation and make it more regulated and in line with the international practice. The bill amending the securities law entered Parliament early in 2013 but has sat there for almost two years. Loladze and Muller believe the reason is the huge lobby of the banks. This past summer Loladze as well as former Director General of GSE asked the
Prime Minister of Georgia, the ministers of finance and economy, Governor of the National Bank, Head of Parliament and Head of Finance and Budget Committee at Parliament to take measures to prevent the banks’ impending monopoly at GSE by restoring cap limits on shares. But this was to no avail. The bill is still is shelved an for uncertain period while GSE is being handed over to banks.”


“Banks always crave monopoly, everywhere in the world, and must not be allowed to manage non-banking companies like stock exchanges. For this reason banks are held back from the management of non-banking assets by laws and regulation in all civilized countries. But Georgian law puts no prohibition on this.”
Loopholes in the regulation of banks and securities allow Georgian commercial banks to establish full control of the Georgian Stock Exchange. Some market players fear that the bank’s reign over the GSE implies the risk that banks will become complete monopolies in the Georgian capital market. This could leave the Georgian economy standing on only one leg and scare investors off. GSE’s new management argues that its staff is well balanced and competent. It plays down the risks of the banks’ dominance at GSE.
GSE has undergone big changes: The new Supervisory Council of GSE elected a new chairperson on October 6th. Giorgi Bachiashvili, Executive Director of the Co-Investment Fund [affiliated with the ex-Prime Minister of Georgia and tycoon Bidzina Ivanishvili] became the new head of the GSE Supervisory Council. A new 12-member council was elected three weeks ago, and banks alone dominate it. Brokerage companies, mostly affiliated with five leading Georgian commercial banks, now hold 58 percent of the GSE and tossed out non-banking GSE members from the management. These non-banking stakeholders holding 42 percent feel discriminated and fear that their interests now will be overlooked. This counters global best practice and risks killing competition within Georgia’s capital markets.
“According to the 39th directive of the EU, to avoid interest clashes between the major stakeholders/owners of the regulated market and the fair functioning/management of this market, minor stakeholders should also have their voice in the management. This directive is completely ignored,” Giorgi Loladze, former Head of the Supervisory Council of GSE, told Georgian Journal.
Non-banking broker companies believe that bank-owned broker companies will carry out the interests of commercial banks that consider GSE as a key competitor and are not interested in making it stronger. Normally stock exchanges are considered as an alternative, more flexible investment tool to banking deposits. Stock exchanges help guarantee transparent pricing in the capital market and insure the inclusion of the population in national economies.
“This change means that banks will become monopolies of the Georgian capital market and our interests will be ignored in future,” Dietrich Muller, a spokesperson for Georgian Investment Group+ [a non-banking brokerage company holding two percent of GSE], worries. “This means that our financial market is missing one leg and the consumer is deprived of an alternative financial source. Brokerage companies are mediators between the client and financial market. But the bank-affiliated brokerage companies will always put their client’s interests behind their own interests. And their interests are tied to the bank’s interests. Once bank-affiliated companies take full control of GSE, it means the Georgian consumer and national economy is left in the claws of banks completely.”
Giorgi Paresishvili, Deputy Chairperson of Supervisory Council of GSE, argues that the council staff is well balanced. He indicates that two non-banking broker companies including ABBEY Assets Management also voted for the new council. Also, among the 12 members of the council, seven are independent persons and only five are representatives of bank-affiliated brokers.
However, the concerned parties believe that the independent council members as well as the said two non-banking brokers that voted for the new council are also affiliated with Bank of Georgia [BOG] through personal connections. BOG holds 100 percent of Galt & Taggart Broker Company that is the biggest stakeholder of GSE with 44 percent.
Paresishvili [who is also connected to BOG by his employment background] believes such allegations cannot be serious.
“It is not plausible to accuse people who worked at certain banks years ago that they are now carrying out the interests of those banks,” he said in an interview with Georgian Journal. He also plays down the assumed risk that the bank-affiliated GSE players will undermine GSE’s position.
“Conversely, stock exchanges do need important financial support and only banks can provide this support in Georgia. Banks are the only financial institution with the skillful personnel and the strong financial resources that are necessary for the development of GSE. The practice shows that banks have always been interested in GSE. Banks founded all the key companies that trade shares at GSE. Let’s take Teliani Valley, Caucasian Energy and Infrastructure for instance that are founded by BOG; Liberty Consumer is set up by Liberty Bank. Construction company M2 and Georgian Leasing Company [both affiliated to BOG] have placed obligations at GSE recently. If banks are not interested in GSE why do they do this?”
Lia Eliava, a financial market analyst, believes that banks may really be interested in GSE development because of they see profit in it. But if the profit fades away the banks may lose this interest and create setbacks for GSE. Therefore she shares the concern that banks’ domination of GSE can be risky for the Georgian economy. She believes this is a problem of bad laws and not bad management in fact.
“GSE is a private company and it is common practice that the owners of the company who hold controlling portions are always dominant in the management,” Eliava said. “But banks always crave monopoly, everywhere in the world, and must not be allowed to manage non-banking companies like stock exchanges. For this reason banks are held back from the management of non-banking assets by laws and regulation in all civilized countries. But Georgian law puts no prohibition on this. Banks can own brokerage companies by 100 percent.”
Actually, Georgian laws regulating the securities market once prohibited a GSE stakeholder from owning more than 10 percent. Banks were allowed to hold no more than 50 percent in total. However, the liberally predisposed former-government lifted the caps during the reforms of 2007-2008. As a result, banks were able to increase their share. Galt & Taggart enhanced its shares to 44 percent ultimately. This allowed Galt & Taggart to prevent the entrance of the international stock exchange Nasdaq-OMX at GSE though all the remaining stakeholders were in support of its entrance. Reforms also allowed over-the-counter trades that removed 95 percent of GSE trades off the hall and utterly shattered GSE position.
After the power shift in 2012, the new government headed by Ivanishvili’s political party Georgian Dream pledged to reform the securities regulation and make it more regulated and in line with the international practice. The bill amending the securities’ law entered Parliament early in 2013 but has sat there for almost two years. Loladze and Muller believe the reason is the huge lobby of the banks. This past summer Loladze as well as former Director General of GSE asked the Prime Minister of Georgia, the ministers of finance and economy, Governor of the National Bank, Head of Parliament and Head of Finance and Budget Committee at Parliament to take measures to prevent the banks’ impending monopoly at GSE by restoring cap limits on shares. But this was to no avail. The bill is still is shelved an for uncertain period while GSE is being handed over to banks.
Eliava believes the bank-affiliated brokers’ entrance into GSE management is illegal because the law on commercial banks activity does not imply clear permission on non-banking assets management.
“But there is a loophole in the law on commercial banks’ activity that gives the opportunity to banks to manage non-bank assets via broker companies. The law must include a clear prohibition of non-profile business management,” she stated.

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