Improved Regulations for Securities Market

Issue 3, June-July 2011, Magazine

Victor Kipiani, a partner at "Mgaloblishvili Kipiani Dzidziguri" (MKD) law firm, analyzes changes to the Georgian securities market that could help companies.

Easing regulation on securities trading could be a huge source of investment capital in Georgia. Recent changes to the regulation of securities could open new opportunities for Georgian businesses and the local stock market. Specifically a new initiative by the National Bank to streamline the issuing of securities and their registration. The first step towards enhancing the securities for raising funds on international capital markets.

This move that permitted denominating local securities in foreign convertible currency. Previously, there were no domestic regulations specifically addressing procedures for public placement of government securities on stock markets.

Georgian law is silent however, on the possibility of placing local currency denominated government debt securities.

In December 2010 the National Bank of Georgia took an even more radical step when the bank's president presented a list of "foreign recognized" stock exchanges - opening them up to the local securities market. This was not merely a legal act, but substantiated various provisions of the Georgian law on capital markets and signaled a further step forward, bridging the gap between domestic and international stock exchange regulation.

The National Bank"s decision replicates the law that issuing securities in Georgia has to be putsuant to the rules of the Georgian stock exchange - but with no additional regulations if they have already been registered on "foreign recognized stock exchanges".

This decision paved the way for further integration of Georgian capital market regulation with the world regulatory regime. However some technicalities remained streamlining the admission of overseas securities to a local stock exchange or, even more importantly, providing a clear and exhaustive list of those stock exchanges which, under the law, will be treated as "recognizes".

As already mentioned, the key advantege of the current legal regime is that an owner (or holder) of securities placed on a recognized foreign stock exchange is free to proceed with publicly offering his securities in Georgia without applying for approval by the National Bank of Georgia - the regulator of the local capital market.

In practical terms, what is required before offering such shares in Georgia is serving a formal notification to the regulator and filing a set of documents as evidence that the securities are being placed with a recognized foreign stock exchange.

If, however, the transaction occurs through a stock exchange licensed under Georgian law, there is no need to notify the National Bank of Georgia: a locally licensed stock exchange contacts the regulator to notify it about the placement of securities on the recognized foreign stock exchange.

So, by granting nearly free and unrestricted access to securities on recognized foreign stock exchanges, Georgian policy makers are trying to entice investors with extra incentives in order to boost to the domestic capital market.

This business-oriented approach is similar to other successful cases, which have contributed to the development of capital markets in some small jurisdictions by allowing fast-track, efficient and cost-effective listing procedures to facilitate the listing of securities (whether equity or debt).

The goals of the current local trend are to:

  • Develop the Georgian platform for trading with securities into an investment eschange in a potentially major regional economy or a significant regional financial centre; and
  • Adopt proper and financial arrangements for financial regulations that meet internationally accepted standards in the industry.

The above-mentioned regulations are a huge step i bringing the local securities regulatory environment closer to international standards. However, the practical results of these changes have yet to be seen since they greatly depend on a number of factors, including, among others, who will eventually run the local stock exchange.  


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