Joint-Stock Companies Were Early Steps Toward The Development Of What Georgian Capital Market

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Georgian Capital Market

Capital market formation faces several problems: small volume of transactions and low liquidity; undeveloped informational, depositary and clearing networks; indirect governmental intervention through National Bank of Georgia (commercial bank securities control) and Ministry of Finance (control of non-bank financial institutions); high level of risk and the absence of business ethics. Besides the economy is characterized by instability not fully following free-market rules and despite recent expansion in trade volumes, the level of security emissions is still low. Due to these reasons capital market is still weak and does not satisfy needs of the economy.

The success of capital markets depends strongly on an appropriate and effective functioning of joint stock companies. Despite the fact that currently their number in the economy is 1773 forming 2% of all legal persons registered at the tax department, GSE could not transform into the alternative to banking sector and the means of efficient fund-raising. Georgian business environment is not yet ready for participation in capital markets. The reason for this is that the managers lack the knowledge of capital market functions and fail to use all the fund-raising benefits it provides. Therefore the levels of security emissions and exchange activities remain low. Currently Georgian financial system follows German model, where bank loans are highly favored at corporate level. Since further improvement of corporate governance is among the country’s principal interests, the Corporate Governance training program was organized by GSE leadership that aims to increase the awareness of benefits an organized stock exchange provides.

It is worth noting that mass privatization scheme that was implemented in Georgia did not serve as a factor for triggering development of stock exchanges in the country. Privatization vouchers were not listed at stock exchanges and transfers of ownership rights were mostly done through individual direct transactions. Eventually, approximately 1300 joint stock companies and half a million shareholders emerged; however the role of capital markets in this process was minimal. Even at the second wave of privatization capital markets were left out of the process and major part of privatization was conducted mainly through auctions, buy-outs and direct-sale methods. Only in 2002 first medium-scale transaction on the sale of 36646 shares (10148 GEL) was made on stock exchange.

Resumed privatization process uncovers new prospects for Georgian securities market. It is expected that new wave of privatization will trigger GSE, since nowadays holding of privatization auctions at GSE is backed by the adequate legislative bases. In addition, there were substantial foreign direct investment inflows in previous years and even larger inflows are expected to take place next year (approx. 2 billion US dollars). It is strongly believed that this will substantially contribute to the development of the capital market and improvement of investment climate in the country. To meet new demand the trading sessions must be held on a daily basis.

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