Monday, December 19 2011 13:25
Issuers should create their history already now
ArmInfo. Interview with Konstantin Saroyan, newly appointed CEO of NASDAQ OMX Armenia
Mr. Saroyan, before asking you to comment on the uneasy trends in the equity market, I’d like to learn of its opportunities hidden among the problems and difficulties. Do you think that there will be new trading floors, new issues of shares or at least corporate bonds next year?
The year 2012 will be quite rich with new and big projects. There will be new instruments, new issues of corporate bonds and maybe even shares. A depository system will be reformed fundamentally.
Before speaking of the novelties of the coming year, I’d like to assess the current state of the exchange market and define its active trading floors. These are the foreign exchange trading floor and the trading floor of overnight interbank loans. The first one is active thanks to the active involvement of almost all banks, for it does not require an individual record-keeping and is very comfortable for banks. Overnight loans are not affected by the crisis and banks prefer this instrument for their free funds. This allows them settling their liquidity problems and certain regulative processes.
There is no such activity in the market of shares however. Shares of three companies are listed on the exchange at present: Arpa Sevan, Armeconombank and Artsakh HPP. Shares of another 8 companies are in the open market. No matter in what category a company’s shares are listed and how much a company gains. What is important for them is to have vision of future. At first sight, for some companies the few percentages in the free market is a drop in the ocean. In fact, these companies work for the future.
That is, they form their history, specifically, the price…
They are creating history today and premises for further development. At the same time, they are making a price. Any company that is going to become a public company, first of all, works on its image and Artsakh HPP is a bright example of that. The first issue of the company was more complicate than the second one, while the third issue exceeded all the expectations of the company’s leadership. Demand for the company’s securities is growing with every issue alongside with the growing confidence of issuers.
I wish there were such an Armenian company… I mean a company registered in Armenia…
There is such. There is even an idea to create a fund or pool of certain projects. There are many interesting projects, for instance, in the energy sector. I mean construction of power stations. People have relevant licenses but lack the necessary leverage. And they can have it by means of such a pool or fund. The given structure may provide them with 30% capital stock, while the remaining funds a company may raise from banks.
Turning to our issuers, I’d like to say that Arpa-Sevan is one of the exemplary companies where tax privileges really work. I’d like to recall that in line with the amendments to the Law On Profit Tax, national companies that were listed on the exchange and have 20% free float shares and at least 100 shareholders receive 50% profit tax privilege within the following three years.
It’s a good impetus, but it hasn’t boosted the capital market…
Because 20% of free float shares is not a barrier for companies, but rather a difficult task to achieve. The government set that barrier to make local companies more public. I think, eventually, many companies will be able to use that privilege. It is a matter of time. And it is necessary to work with these companies.
Who must work with these companies: professional market participants or maybe the stock exchange?
I think, both. The stock exchange is charged with the functions that are uncharacteristic of it. In line with the agreement with the Armenian Government, NASDAQ OMX Armenia should contribute to development of the equity market. I understand that it is a good goal, but the given function is not characteristic to the stock exchange. The exchange has no level of influence on the organization process, for instance, IPO. We meet with potential investors now, hold meetings and discussions trying to persuade them that exchange mechanisms are efficient. But certain difficulties emerge as soon as it is time to choose a company that would prepare the issuer for IPO. Every market participant has its working conditions. An issuer should properly study their conditions and choose a company. The same an investment company does to reveal the state of a potential issuer. All this protracts the negotiations and makes IPO less interesting to issuers.
Would a link help settle that problem?
A coordinating body is needed. If it has certain powers, levers of influence and control over the process, it will significantly speed up and facilitate preparations for IPO. The exchange is, inherently, the last component in this chain. In the meantime, the exchange is charged with development of the equity market, and we try to do it.
Mr. Saroyan, do you plan to create trading floors for long-term interbank loans? What opportunities will it give to banks and what hinders creation of that trading floor?
It requires a mechanism of trading in lending resource, a different principle, not like the one of the overnight loans. Overnight loans are a relatively non-risky instrument and transactions here are anonymous, while free funds of banks that they sell at the end of the working day are blocked on the account with the Central Bank and cannot be used by a buyer. Our task is to create a similar non-risky mechanism but more long-term. The problem of debenture emerges here and requires a more complicate mechanism with daily reassessment of the limits.
So, when will the trading floor be launched?
We are planning the given project for the first half of the next year. The exchange is expected to create opportunities for integration of the local market into the markets of at least Baltic and other countries of Northern Europe included in NASDAQ OMX Group.
Don’t you think that it is a very difficult task?
It is a really difficult task but because of administrative and not technological solutions.
Do you mean the necessity of standardization and regulation of processes?
Exactly, and we have much to do in this dimension. At the initial stage integration of markets will make us visible to foreign investors.
It is a good impetus for IPO, isn’t it?
Precisely, integration is a very important process for both potential issuers and investors. Our task is to create a trading platform similar to the ones of NASDAQ OMX Group countries and fully reform the depositary system. It is already united with the trade system, which significantly facilitates the integration process.
I can state with pleasure that the Central Bank fully supports the decision on integration of our market. Our mega-regulator also wants to see a system more integrated with the European market, which will make shares or corporate and even government bonds accessible to foreign investors.
Do potential issuers understand that integration may open new perspectives for them?
Many businessmen are realists. However, they are big optimists at heart and create ambitious plans and strive to reach for the top. All businessmen are well aware that issue of shares is a complicate process and issuing shares they become proud of such success. Adopting a decision on IPO, they gain both in the short-term outlook getting tax privileges, and in the long-term outlook getting an opportunity to raise funds in the local market and then in abroad.
To bring these ideas to businessmen, it is necessary to work with them constantly. The exchange will not manage to do that alone even in case of solid financial and labor resources. It requires the support of the Government, Central Bank and Mass Media. We can get through to every consumer and citizen only by combined efforts.
Many bankers say they need derivatives and there is high demand for that instrument in the market…
Is there supply? Well, this instrument is highly in demand in the market, but it is not clear yet who will hedge currency risks. The market participants are interested just in buying derivatives, but it is not sufficient for normal operation of the floor. It requires supply, reverse transactions. In the short-term period this mechanism works, but if we want to have derivatives that should hedge drams instruments, for instance government bonds for a year, two and three years, a question arises: who will be hedging the currency risk? Western investors rely on an instrument that would fully cover their currency risks. If such instrument must cost up to 12% in Armenia, there is no sense in investing in such instruments. So far, we have no mechanism that would fully cover the currency risk.
Nevertheless, NASDAQ OMX is working on creation of that trading floor…
Yes, and the floor may be launched already in 2012.
There is another instrument that is highly in demand in the market and its introduction has “political motives”. I mean corporate bonds in US dollars. Both, corporations and investors, local and foreign, are well aware of the efficiency and necessity of the given instrument. Here we face another question. Is our national economy sustainable enough to go on such risks? It is important to be sure that these risks will be justified.
What about bonds in terms of the national dram? The interest rates on government bonds are still high and hinder development of corporate securities trading floor. When will the market become favorable for issue of corporate bonds?
Pension reform will change the situation in the market. Rather big funds will be invested in economy and effective placement of these funds requires alternative instruments of investment. Corporate bonds and shares will become the very instruments we need. Investors will prefer securities of the companies having good history. Therefore, it is necessary to create that history already now.
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