Interview of Chief Executive Officer of “NASDAQ OMX Armenia” Stock Exchange Armen Meliqyan to Mediamax Agency and Banks.am portal

- On July 9, changes in the laws on “Income Tax” and “Value Added Tax” came into effect. The changes provide for tax benefits by the end of 2012 for companies, the shares of which are listed on the Exchange. Have the potential issuers reacted to these legislative changes?

- It is obvious that in connection with placement of shares and listing on the Exchange, the expenses of companies increase, and the legislative changes aim at facilitating their entry to the capital market. According to the changes in the law on “Income Tax”, companies, which are listed on the Stock Exchange by 2012, will enjoy 50% reduction in the income tax paid (for the sum, not exceeding 300mln AMD annually).

Besides requirements on meeting listing standards, to obtain the right to use the given benefit, at least 20% of the company’s shares should be quoted on the Exchange on average in a year, the minimum number of the company’s shareholders should make 100, and most importantly, the company’s financial reporting should be open, inspected and composed in accordance with international standards.

The changes, related to the Value Added Tax (VAT), are meant to facilitate the entry of companies to the capital market. The rules of the capital market are quite tough, and to enter it, company should carry out a quite significant volume of work. Thus, according to the changes, the company will get compensation by VAT for legal, informational, audit, consulting, marketing and other expenses, paid by it prior to listing.

Of course, taking into account today’s financial-economic crisis, it is yet early to expect a stir among companies, wanting to be listed. I would like to note that companies, already quoted on the Exchange, may also get the given benefits, if they meet the above-mentioned requirements.

New issuers will appear next year: the companies have time till the year of 2012.

- Recently a number of changes also took place in Exchange rules. What is their purpose?

- Changes took place in the rules of the Disciplinary Committee of the Exchange and the disciplinary fines. One of the Exchange’s Disciplinary Committee’s functions is to consider the proceedings, initiated basing on violations, committed by market participants and to impose the corresponding fines. At that, there are unpremeditated violations, which do not harm the market seriously; however the Disciplinary Committee previously lacked the authority to impose a milder fine.

Changes reconsidered the sizes of fines and the authorities of the Disciplinary Committee, in particular, concerning violations, committed by market makers: if the violation has not harmed the market and was not aforethought, the Committee may impose a milder fine, or avoid imposing the fine at all.

Besides, the new edition of the Exchange rules allows carrying out distance sessions of the Disciplinary Committee, which is important for us, since the Committee includes also NASDAQ OMX specialists.

By changing the rules of the Exchange, we strive to stimulate the work of the market participants, since the market maker is often imposed a fine at the sum of its monthly profit. The reason is that Stock Exchange rules meet the rules of NASDAQ OMX. While, we understand that the Armenian market is still a developing one, and special stimuli are necessary for it to develop.

- Some experts forecast that the market of corporate bonds in Armenia will stir up by the end of the year, and it is yet early to speak about stock market activation.

- One can express such an opinion, even if one is not an expert, since we already hear that in certain developed countries the crisis has reached the “bottom”. In 2010, the fact that other countries will be coming out of the crisis will also start influencing us positively.

Stirring up of the market of corporate bonds in the end of 2009, may take place if the issuers do not find other sources of crediting means. Concerning the shares, indeed, real issues may take place only in 2010.

It is obvious that mainly foreign investors will be investing means in shares. This is why the fact of those countries coming out of the financial crisis and solution of their internal (domestic) economic problems will increase and transfer their interest to developing markets, such as ours.

- Basing on your answer, one can make a conclusion, that an issue of bonds is the worst alternative for companies.

- I say this, because the culture of bond issue in Armenia is not developed today, and not everyone realizes the advantages of bonds. It is known that a bond issue is always more preferable for a company, than a bank loan, both as to the interest rate and the potential of attracting means and flexibility in resource management, however unawareness, insufficient involvement of specialists and inactivity of professional participants of the securities market hinder development of the market of corporate bonds.

- It is known that leading Exchange markets in the world, in particular, the American one, started developing when infrastructural companies, owned by the state, became open. Today, Armenia also has a number of infrastructural companies, in which the state has its share participation. What is the obstacle for the Armenian government to make at least a part of its share in the given companies public, thus stimulating the capital market?

- Of course, the state has always been the first stimulus for the capital market, and one cannot say that this does not happen in Armenia. Within the framework of Capital Market Development Program, “NASDAQ OMX Armenia”, jointly with the government, the Central Bank (CB), the Ministry of Finance and the Department for State Property Management realizes works, as a result of which privatization of companies with the share participation of the state will be carried out through the Stock Exchange. Will these companies want to remain at the Stock Exchange? This will already depend on their management and the buyers of shares. 

The first such practice can be expected to take place already next year, since all the corresponding talks are already concluded, and at present we work exclusively on technical issues.

- According to “Sustainable Development Program” of the Armenian government, capitalization of the stock market is planned to reach up to 263bln AMD in 2010. Is this realistic in conditions of the global financial-economic crisis? 

- This may be considered both realistic and non-realistic, at that, irrespective of the financial-economic crisis: since from 2001 to 2007, there was no crisis in Armenia, and the capitalization did not increase much.

Taking into account the fact that capitalization of the stock market in Armenia a bit exceeds 50bln AMD, according to the government program, next year it should increase almost five times. There are companies in Armenia, the entry of at least one of which to the capital market will already secure to targeted level of capitalization. The same way, if the market is consolidated, they can make capitalization reach even 500-600bln AMD in 2010. The most important part here is the consolidation of the market participants and their readiness to enter the stock market.

We have always been inclined to express discontent with the government, but not many people think about how they can assist it. Now we see what aims the government has set itself in the sphere of stock market development and we should in every possible way help it in achieving that goal.

Exchange privatization of state enterprises will also contribute to reaching the targeted level of stock market capitalization.

- Certain heads of small and medium high technology companies in Armenia consider listing on the Exchange as a promising, but quite expensive pleasure. What expanses are there that a small or medium enterprise will face to attract means from the stock market by means of stock placement?

- The main part of expenses is realized before listing, aiming at preparing the issue and bringing the company in compliance with the terms of listing on the Exchange. These include expenses of the company for audit and consulting, realization of the company’s financial reporting in accordance with international standard, improvement of internal procedures, etc. The expenses for listing itself are incomparably smaller, as compared to the ones already made. The legislative change, related to VAT, is exactly meant to reduce expenses, prior to listing.

Thus, if we imagine a company, which has not undergone audit, does not have already implemented principles of corporate management, and if the company’s financial reporting does not meet even Armenian standards, the maximum volume of its expenses during the first year of listing will make about $300 thousand (including benefits for VAT).

The key issue here is what sum the company intends to attract in the capital market. If we talk about only $1-2mln, here it is more expedient to turn to a bank for a loan, but if the company wants to attract, for instance, $10mln, the entry to the capital market is justified.

- From January 1, 2010, the requirement to function in accordance with International Financial Reporting Standards will have effect on all Armenian companies, the annual proceeds of which exceed 100mln AMD, and the financial reporting of companies, the assets or the proceeds of which following the results of 2009, exceed 500mln AMD, are subject to compulsory audit. In fact, many companies, irrespective of their wish to undergo listing, will bear the expenses, made prior to entering the stock market. What will be the effect of this fact on the capital market of Armenia?

- Undoubtedly, many companies will have the wish to undergo listing since the next year, but one should not think that listing is an easy process. Before the arrival of NASDAQ OMX to Armenia, the process of listing lasted for 20 days, and now the period makes 6 months, during which they consider important aspects of the company’s activity, such as, for instance, the system of the company’s corporate management, the business plan, which, by the way, may be recognized as non-realistic. In particular, aiming at protecting investors, the composition of the company’s major shareholders, the history of their activity in the market and other factors are studied.

If fraud is revealed in the activity of one of capital market participants, all the others will suffer as well. This is why the Exchange is a kind of a guard in front of the door taking to the capital market. This does not at all mean that the Exchange is terrorizing companies, which do not meet our requirements. Providing such companies access to trading in the free stock market, we thus help them overcome all the necessary steps for them to meet all the necessary requirements for listing in future. 

- Does NASDAQ OMX plan any bold steps to stimulate the stock market in Armenia?

- The first bold step by NASDAQ OMX was the arrival in Armenia. The Exchange is ready to realize any wish of the market, to meet any demand; one should only use the provided opportunity - by the presence in Armenia of a brand, which enjoys international recognition. Many people think that NASDAQ OMX itself should create financial tools, while, this is the business of market participants. Yes, the Exchange creates instruments, such as futures and options, but these tools will be created only if there is the corresponding demand. 

Our plans for the nearest future include improvement of the trading system of the Exchange, pension reforms and change in the technical system of the Central Depository.

One should however remember that NASDAQ OMX is not a charitable organization. We understand that the market is developing and in this period we are ready to realize all the necessary measures for its development. And the most important index of the market development is the number of investors, the growth of which is hindered by a number of factors, among which are the insufficient activity of the market participants and the stereotypes, which have gained a foothold in our society.

All the remaining indices of the capital market – capitalization, the number of deals, trading volume, fluctuation of prices, can be created artificially, while, the only real index of the capital market development is the growth in the number of investors.

- To what extent did the arrival of NADAQ OMX increase the confidence of foreign investors concerning the Armenian stock market?

- Right after the arrival of NASDAQ OMX in Armenia, significant growth in the number of investors was registered. Then the growth stopped because of the crisis, since everyone started solving their domestic problems.

Investors know that if the company is quoted on NASDAQ OMX Stock Exchange, one can only simply get familiar with the management program of the given company. It is expected that upon conclusion of the crisis in developed markets, interest towards foreign capital markets, including the Armenian one, will be restored among foreign investors.

- Recently, they talked about the wish of Armenian companies to be listed on Warsaw Stock Exchange.

- I cannot take such talks seriously, but if Armenian companies want to be listed there, no one stands on their way. It is simply incomprehensible, why would one cross the river to drink water from the opposite bank of it.

There is no difference between the requirements and the listing processes at Warsaw Stock Exchange and “NASDAQ OMX Armenia”. At that, in Warsaw the Armenian companies will surely be asked why they have come to Poland, if there is NASDAQ OMX in Armenia. The first question asked in such cases is: do local investors trust your company? And if yes, why not to first pass listing on the Exchange, which functions in your country?

One should understand that NASDAQ OMX has brought its brand to Armenia, it develops the Armenian stock market, and the participants of the market should in the first place use that, irrespective of political, patriotic and other considerations.