(I) It is suggested that the potential of the capital market in Georgia could be increased by means of:
Long-term goals:
Increasing the rate of country's economic growth;
Reducing the size of the shadow economy;
Attracting higher Foreign Direct Investments (FDI).
short-to-medium term goals:
Conducting the 2nd round of the privatization through GSE by involving investment funds into the privatization process;
Including the majority of leading Georgian companies into the listing of the securities traded at GSE.
(II) A high unrealized potential of Georgian capital market can be explained by low confidence (trust) amongst the investors towards the stock market, which in turn is the result of the problems existing in terms of protecting the shareholders' rights. In order to solve the latter problem, there is a need: (i) to improve the corporate governance practice, and (ii) to ensure the fairness of the market. These mainly are the goals that can be achieved in short-to-medium term.
The measures needed to improve the corporate governance practice in Georgia include:
To simplify the tax system;
To adopt the International Standards on Auditing (ISA) into law;
To enforce the International Accounting Standards (IAS).
These measures are designed to remove the incentives to pay bribes for the purposes of hiding profits and avoiding paying taxes, which would result in lower levels of corruption in tax administrations and increased transparency of corporate disclosure.
Another measure to improve the corporate governance practice in Georgia is:
To conduct an educational campaign amongst shareholders, company directors and the members of supervisory boards.
The objective of the educational campaign is to lessen the entrenched culture of abusive self-dealing and to give to shareholders sufficient knowledge about their rights. The entrenched culture of abusive self-dealing can also be alleviated by means of putting in place effective regulations and institutions for controlling the self-dealing. All these should lead to regular shareholder meetings and increase the role of the supervisory boards in giving the strategic direction to companies.
Another important factor for improving the corporate governance practice in Georgia is to have an active market for corporate control. Namely, there is a need:
To put in place an adequate legislation for investor protection. More specifically, to introduce the investment compensation schemes, strengthen the bankruptcy system and adopt the rules for takeovers;
To adopt the legislation regulating the financial intermediaries (such as private pension funds and mutual funds), which at present are absent in Georgia.
Properly functioning financial intermediaries would act as large domestic institutional investors and ensure that large volumes of capital resources are directed to the market. This, in turn, would facilitate the competition in the financial market and lead to an active market for corporate control.
The measures needed to ensure the fairness of the market include:
To Enforce a trading transparency;
To deter an unfair trading.
The last two objectives can be reached by means of ensuring an effective functioning of the National Securities Commission of Georgia (NSCG), which should be capable of ensuring an effective enforcement of the securities regulations. More specifically:
The NSCG should have an adequate Inspection, Investigation and Enforcement power, including the criminal prosecution authority;
The Government of Georgia (GoG) should increase the budgetary support of the NSCG to ensure a proper functioning of the agency;
The NSCG should be more accountable to GoG for its activities regarding the regulation of Georgian capital market;
The NSCG should develop a program to supervise the activities of Self‑Regulatory Organizations (SROs); and
The NSCG has to develop a code of ethics for its staff.
Another measure needed to ensure the fairness of the market is:
To enforce adequately the rights of the shareholders, which should be done through the improved court system.
In order to improve Georgian court system, it is important to conduct training of judges in the topics concerning the corporate law and operation of the securities market
All the above-described measures are designed to achieve in future a sound and liquid capital market in Georgia.
Specific recommendations for improving the performance of GSE. More specific recommendations, together with the objectives to be achieved, performance indicators, responsible agencies, duration, etc., are presented in the next page. Objectives given in parenthesis correspond to the Problem Tree given in the above:
| Recommendations | Objectives to be Achieved | Responsible Agencies | Duration | Comment | |
| · Conduct the 2nd round of the privatization process through GSE; · Involve the Investment Funds into the privatization process. | · Privatization process is improved (Objective 13); · Potential of the capital market is increased (Objective 2). | · The companies included in the privatization list of the 2nd round should be privatized through GSE; · A number of (at least 3-5) Investment Funds take part into the privatization process. | DSPM NSCG GSE | · 1-2 years | · With the technical assistance of the WB. |
| · About 80% of the leading Georgian companies, which currently are not traded at GSE, have to be included into the list of the securities traded at GSE; · Government of Georgia (GoG) must introduce some incentives (e.g. simplified tax regime) for those corporations that decide to be listed at GSE. | · Majority of leading companies are traded at GSE (Objective 4); · Potential of the capital market is increased (Objective 2). | · Majority of leading Georgian companies are listed at GSE; · Simplified tax regime is introduced for the corporations traded at GSE. | PoG MoF NSCG GSE | · 1-2 years | · With the technical assistance of the WB |
| · Prepare and adopt the amendments into the Tax Code of Georgia (TCG); · Conduct the tax administration reform. · | · The tax system is simplified (Objective 7); · There is an adequate tax code (Objective 6); · Incentives for paying bribes/Hiding profits are reduced (Objective 11); · The level of corruption is reduced (Objective 10); · Transparency of corporate disclosure is increased (Objective 12); · Reliability of financial disclosure is increased (Objective 28); · Corporate governance practice is improved (Objective 17). | · Business-friendly tax code is in place; · Simplified tax regime for securities and corporations are established; · No frequent changes into the tax code are made; · Collection of taxes is increased; · Companies file more reliable information about their profits; · Companies increase the transparency and quality of corporate disclosure. | PoG MoF STD | · 6 months · Ongoing | · With the technical assistance of the WB; · In consultations with NSCG. |
| · Make amendments into Law on Audit Activity (LAA) to adopt International Standards on Auditing (ISA); · Ministry of Finances (MoF), together with Parliamentary Council on Audit Activity (PCAA), requires audit companies to conduct audits in compliance with the International Standards on Auditing (ISA). | · ISA is adopted into the law (Objective 34); · There are adequate auditing standards (Objective 33); · Incentives for paying bribes/Hiding profits are reduced (Objective 11); · The level of corruption is reduced (Objective 10); · Transparency of corporate disclosure is increased (Objective 12); · Reliability of financial disclosure is increased (Objective 28); · Corporate governance practice is improved (Objective 17). | · International Standards on Auditing is adopted into law; · Audits are conducted in compliance with International Standards on Auditing; · Companies file more reliable information about their profits; · Companies increase the transparency and quality of corporate disclosure. | PoG PCAA MoF | · 6 months · Ongoing | · With the technical assistance of the WB; · In consultations with NSCG and GSIA. |
| · National Securities commission of Georgia (NSCG) requires reporting companies to prepare their financial accounts in compliance with the International Accounting Standards (IAS). | · IAS is enforced (Objective 9); · There are adequate accounting standards (Objective 8); · Incentives for paying bribes/Hiding profits are reduced (Objective 11); · The level of corruption is reduced (Objective 10); · Transparency of corporate disclosure is increased (Objective 12); · Reliability of financial disclosure is increased (Objective 28); · Corporate governance practice is improved (Objective 17). | · Reporting companies prepare their financial accounts in compliance with the International Accounting Standards; · Companies file more reliable information about their profits; · Companies increase the transparency and quality of corporate disclosure. | NSCG MoF | · 3 months · Ongoing | · In consultations with GSIA. |
| · National Anti-Corruption Bureau of Georgia (NACB) conducts the assessment of the activities carried out by the tax administrations. | · The level of corruption is reduced (Objective 10); · Transparency of corporate disclosure is increased (Objective 12); · Reliability of financial disclosure is increased (Objective 28); · Corporate governance practice is improved (Objective 17). | · Index of corruption is lowered; · Companies file more reliable information about their profits; · Companies increase the transparency and quality of corporate disclosure. | NACB | · Ongoing | · With the technical assistance of the WB. |
| · Georgian Securities Industry Association (GSIA) should conduct training courses, seminars, workshops, etc. amongst shareholders, company directors and members of supervisory boards on the best practices of corporate governance; · NSCG enforces the corporate governance standards. | · Educational campaign is conducted (Objective 27); · Shareholders have sufficient knowledge about their rights (Objective 26); · Entrenched culture of abusive self-dealing is lessened (Objective 16); · Shareholders' meetings are held regularly (Objective 29); · The role of supervisory boards is increased (Objective 35); · Corporate governance practice is improved (Objective 17). | · Majority of company directors and members of supervisory boards, as well as interested shareholders take part in training courses; · NSCG conduct quarterly/annual audits of JSCs; · Shareholders' meetings are held annually; · Supervisory boards' meetings are held on a quarterly basis. | NSCG GSIA | · 1 year · Ongoing | · With the financial and technical assistance of the USAID. |
| · Prepare and adopt the regulations for Pension Funds; · Prepare and adopt the regulations for Mutual Funds. | · Legislation for financial intermediaries is adopted (Objective 23); · Financial intermediaries are well-developed (Objective 21); · Large domestic institutional investors are present at GSE (Objective 20); · Larger volumes of capital resources are directed to GSE (Objective 18); · There is a competition at GSE (Objective 22); · There is a strong market for corporate control (Objective 30). | · Private Pension Funds start functioning in the country; · Mutual Funds start functioning in the country; · Large domestic institutional investors take part in trading at GSE; · Volume of trades at GSE is increased substantially; · Number of participants in trading at GSE is increased; · Investment funds take active role in the work of supervisory boards/shareholders meetings. | PoG MoF NSCG GSE | · 1 year | · With the technical assistance of the WB. |
| · Adopt the investment compensation schemes; · Strengthen the bankruptcy system; · Adopt the rules for takeovers. | · Adequate legislation for investor protection is adopted (Objective 24); · Financial intermediaries are well-developed (Objective 21); · Large domestic institutional investors are present at GSE (Objective 20); · Larger volumes of capital resources are directed to GSE (Objective 18); · There is a competition at GSE (Objective 22); · There is a strong market for corporate control (Objective 30). | · Investment compensation schemes are in place; · Regulations for the bankruptcy system are in place; · Rules for takeovers are in place; · Large domestic institutional investors take part in trading at GSE; · Volume of trades at GSE is increased substantially; · Number of participants in trading at GSE is increased; · Investment funds take active role in the work of supervisory boards/shareholders meetings. | MoF NSCG GSE | · 1 year | · With the technical assistance of the WB. |
| · Assign an adequate Inspection, Investigation and Enforcement power, including the criminal prosecution authority to the National Securities Commission of Georgia (NSCG); · Increase the budgetary support of the NSCG; · Make the NSCG accountable to the President of Georgia; · Develop the code of ethics for NSCG; · Develop the program to supervise Self‑Regulatory Organizations (SROs); · NSCG installs the market surveillance and stock watch system. | · Power of the NSCG is increased (Objective 40); · Budgetary support of the NSCG is increased (Objective 37); · Accountability of the NSCG is increased (Objective 36); · Code of ethics for the NSCG staff is developed (Objective 38); · Program to supervise Self‑ Regulatory Organizations (SROs) is developed (Objective 39); · The NSCG does function in an effective manner (Objective 39); · Regulations are enforced in an effective manner (Objective 42); · Trading transparency is enforced (Objective 43); · Unfair trading is deterred (Objective 44); · Fairness of Market is ensured (Objective 45). | · NSCG has the criminal prosecution authority; · Budget allocations to NSCG is increased; · Rules are in place that make the NSCG accountable to the President of Georgia; · The code of ethics for NSCG is in place; · The program to supervise SROs is in place; · Trades are conducted in a transparent manner/information is easily available; · Facts of unfair trading are detected and/or deterred. | PoG NSCG GSE | · 6 months – 1 year | · In consultation with the IOSCO. |
| · Special training courses are conducted for the judges dealing with corporate disputes/ protection of shareholders rights. | · Georgian court system is improved (Objective 32); · Shareholders rights are enforced adequately (Objective 31); · Fairness of Market is ensured (Objective 45). | · Judges have sufficient knowledge of corporate/securities laws; · Number of complaints against judges is reduced. | MoJ NSCG GSIA | · 6 months |
| Kazbegi JSC | |
| Sector: | Consumer Goods |
| GSE Ticker: | KAZB |
| Summary Information: · Kazbegi JSC is the leading Georgian brewery and producer of non-alcoholic drinks, coffee, cigarettes, etc.; · Last year the company reported an impressive 75% increase in annual sales to GEL 9.4 mln., although the sales figure fell somewhat behind the management's ambitious estimate of GEL 12 mln.; · Net profit of the company increased by 18% to GEL 1.4 mln., translating into EPS of GEL 0.51; · Capital expenditures amounted to GEL 1.7 mln. that were mainly used for modernizing the existing facilities; · The company's assets grew by 21% over the year to reach GEL 7.7 mln.; · The company's equity increased by 25% and amounted to GEL 5.6 mln.; · The company continues to pay dividends, which amounted to GEL 240 thousand or GEL 0.086 per share. At current prices dividend yield amounts to 3%. | |
| Source: Galt & Taggart | |
| Kazbegi JSC - Summary | |
| Current Price (GEL) | 2.50 |
| Year High (GEL) | 2.50 |
| Year Low (GEL) | 2.50 |
| Market Capitalization (GEL mln.) | 7.0 |
| Shares Outstanding (mln.) | 2.8 |
| Free Float (%) | 42.7 |
| Free Float (GEL mln.) | 3.0 |
| Source: Galt & Taggart | |
| Kazbegi JSC – Key Figures (IAS) | ||
| Year Ending December 31 | 2001 | 2002 |
| Net Sales (GEL mln.) | 5.4 | 9.4 |
| Net Income (GEL mln.) | 1.2 | 1.4 |
| EPS (GEL) | 0.43 | 0.51 |
| Total Assets (GEL mln.) | 6.3 | 7.7 |
| Equity/Assets (%) | 70.8 | 73.2 |
| ROA (%) | 19.0 | 18.2 |
| ROE (%) | 26.8 | 24.9 |
| Book Value per Share (GEL) | 1.60 | 2.00 |
| P/E | 5.77 | 4.91 |
| P/BV | 1.57 | 1.25 |
| Sources: Kazbegi, Galt & Taggart | ||
| Kazbegi JSC – Valuation (Refer to Annex 1) | ||
| Valuation Limits | True Value (GEL mln.) | True Value/Market Cap. |
| Low | 15.0 | 2 |
| High | 22.5 | 3 |
| BANK OF GEORGIA JSC | |
| Sector: | Financial Services |
| GSE Ticker: | GEB |
| Summary Information: · Bank of Georgia JSC is the country's leading commercial bank; · Last year the company reported about 6% increase in annual sales to GEL 36.6 mln.; · Net profit of the company has decreased by about 7% in 2002 mainly due to higher administrative expenses; · The Earning Per Share (EPS) in 2002 was GEL 0.72; · The company's assets grew by remarkable 30% over the year to reach GEL 176.7 mln.; · The company's equity increased by 13% over the last year and amounted to GEL 46.6 mln.; · The company continues to pay dividends, which amounted to GEL 2 mln.or GEL 0.20 per share. | |
| Source: Galt & Taggart | |
| BANK OF GEORGIA JSC - Summary | |
| Current Price (GEL) | 1.55 |
| Year High (GEL) | 1.90 |
| Year Low (GEL) | 1.00 |
| Market Capitalization (GEL mln.) | 15.5 |
| Shares Outstanding (mln.) | 10.0 |
| Free Float (%) | 47.6 |
| Free Float (GEL mln.) | 7.4 |
| Source: Galt & Taggart | |
| BANK OF GEORGIA JSC – Key Figures (IAS) | ||
| Year Ending December 31 | 2001 | 2002 |
| Net Sales (GEL mln.) | 34.4 | 36.6 |
| Net Income (GEL mln.) | 7.7 | 7.1 |
| EPS (GEL) | 0.78 | 0.72 |
| Total Assets (GEL mln.) | 135.6 | 176.7 |
| Equity/Assets (%) | 30.5 | 35.8 |
| ROA (%) | 5.7 | 4.0 |
| ROE (%) | 18.6 | 16.5 |
| Book Value per Share (GEL) | 4.13 | 5.14 |
| P/E | 2.02 | 2.15 |
| P/BV | 0.38 | 0.30 |
| Sources: Bank of Georgia, Galt & Taggart | ||
| BANK OF GEORGIA JSC – Valuation (Refer to Annex 1) | ||
| Valuation Limits | True Value (GEL mln.) | True Value/Market Cap. |
| Low | 50.8 | 3.3 |
| High | 68.6 | 4.4 |
European School of Management (ESM).