Non-Transparency Scares Investors Off Georgian Stock Exchange
26 January, 2012
Non-Transparency Scares Investors Off Georgian Stock Exchange

87% of Georgian Stock Exchange is non-transparent, which undermines development of Georgian stock exchange market and scares investors off.

According to the research of Georgian Investment Group (GIG), a broker company operating at Georgian Stock Exchange (GSE), which analyzed the GSE’s annual trade in 2011, OTC [over-the-counter] market made 87% of the entire GSE past year, while price-making of OTC transactions remains obscure that creates setbacks to GSE development.

Out of GEL 19 344 259 of total GSE turnover, GEL 16 840

554 comes with the OTC deals and only GEL 2 503 705 with the trade room. Moreover, the OTC exceeds the open trade by 7.5 and 6.7 times from the stocks and money turnover points of view respectively.

“Figures indicate that Georgian stock market development remains at a low level and the key reason, among other things, is existing rules; especially fixing of prices through the OTC”, the GIG research reads.

Non-transparency remains the lingering problem of GSE since 2008, when the new liberalized law on stock market entered into effect and  allowed the OTC trade been forbidden before, while the trade rules leave at the traders’ discretion whether or not fix prices during the trade or only afterwards. As a consequence, almost 90% of trade moved to the OTC and prices got non-transparent: share prices  may change by 15, 19, sometimes 64- fold per day on the same shares that makes some market analysts incline to think that economic crime including even money laundering may stand behind such strange price-making.

One of the conspicuous samples confusing the GIG experts in 2011 was divesture of 41. 5% of JSC United Telecommunication Company 15-fold cheaper than it was sold 5 years ago before privatization.  The questioned portion was sold for GEL 6 000 331 in July of 2011 while the similar package was sold for GEL 89 722 692 in December of 2006, before the company was privatized in the same year. GIG cannot explain this price-making since details of this transaction are confidential.

However the prize for the most amazing OTC price-making of the year goes to JSC Word Printing Enterprise. About 25.68% of the company was sold through three trades in one day with the price gap going as high as 64.22 points. The price went from GEL 1. 30 to GEL 83.4879 per share that day.

“This is the reason why investors have no desire to buy stocks in Georgia, just imagine your frustration when  you buy something for GEL 83 and find out later that another person bought similar thing for GEL 1.30 on the same day,” Ditrikh Muller, a GIG analyst, told Georgian Journal. “Investors are confused when they learn such price gaps, I cannot explain why this happens, and this is the reason we lack petty portfolio investors so desperately.”

However this fixing scares strategic investors [those who acquire control packages] too. They cannot make prognosis whether or not they can make profit in future through shares acquired cheaper today. This kind of rules of game kills internal capital market development and makes Georgia dependent on Foreign Direct Investments (FDIs) alone while in all successful countries internal capital market-based investments overweight the FDIs by several times, Levan Surguladze, Head of head of the investment bank Caucasus Financial Service, explains.

“The key argument of the OTC initiators was that it does operate abroad, but they adopted the OTC only after stock exchanges were very well-developed and not like the way we did here. GSE was just developing and the OTC killed it in the bud,” he said.

Muller doubts money laundering fears behind strange OTC deals and assures that unlike Georgia the oversea OTC market is regulated for traders fix prices at the very onset of the trade in electronic format visible to everyone and if the price making becomes unreasonably high or low the stock exchange halts the trade that day, and regulatory body starts investigation if unreasonable trade repeats.

“But nothing like this happens in Georgia for prices are fixed post factum here,” Muller said.

Surguladze rules out money laundering fears but presumes that companies can easily manipulate by OTC fixing to hide their profit and elude due taxes.

Any public reporting and indication on suspicious deals including media coverage may lay ground to investigations, Giorgi Loladze, Head of GSE, said. But not a single case was raised since 2008 although GSE official data [with all the suspicious fixing prices] are submitted at the National Bank of Georgia (NBG) each week and GIG has been pointing on shocking price fluctuations in its each weekly market reviews.

The NBG believes the OTC transactions are transparent.

“Either a broker company or an independent securities’ registry participate in each trade and the law obliges them to fix the concluded deal no later than the next working day at GSE,” The NBG commented.

However brokers and registries cannot insure transparency Surguladze counters, because they do not participate in the trade but fix the already agreed prices.

“The fixing price-making is non-transparent because its participant sides agree the price between them and disclose the price only afterward that hampers other traders to participate in the price-making process and insure fair market price. The more traders participate in the process the more transparent the price is,” he said.

Of economic crime fears the NBG said that brokers and registries are responsible to report at Financial Monitoring Service if they discover any [money laundering] suspect. Not such a reporting was public as yet.

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