Capital Market Development: "First Generation" reforms
Over past few years important measures have been implemented to promote capital market development in Georgia.
Monetary policy mechanism introduced by NBG in 2014, expansion of Treasury bond markets and 2018 tax code amendments have significantly stimulated the corporate bond market growth and development. Pension reform implemented in 2019 will also contribute to the domestic capital market growth and encourage long-term savings.
The National Bank of Georgia was granted with IOSCO1 associated membership in 2018 and plans its further advancement to become an ordinary member. IOSCO ordinary membership ensures existence of minimum standards for investor rights protection and transparency that sends a positive signal to the local and foreign market participants. Moreover, it boosts possibilities for global financial integration and extends range of opportunities for further sustainable development. NBG will be able to obtain IOSCO ordinary membership through harmonization and approximation of Georgian Capital Markets regulations to the IOSCO Objectives and Principles of Securities Regulation.
"Law of Georgia on Securities market" amendments adopted on July 7, 2020 and "Investment Funds Law of Georgia" implemented on July 14, 2020, are essential for the securities market development. Aforementioned reforms marked a milestone as similar large scale reforms of securities market regulating framework have not been carried out since 1999 adoption of "Law of Georgia on Securities Market".
National Bank of Georgia in cooperation with the Ministry of Economy and Sustainable Development of Georgia, the Ministry of Finance of Georgia, International Financial institutions and private sector drafted aforementioned laws that are in full compliance with the best international practices of securities market regulations and the IOSCO principles.
The Law of Georgia on "Investment Funds"
Georgian Capital Markets' one of the most prominent challenges is its small market size that is due to the lack of long-term savings/institutional investors and small scale of corporate sector. The development of investment funds is important aspect of capital market development strategy, as investment funds (PE/VC) have potential to address small market size challenges and provide a wider range of alternative funding sources to the private sector. The importance of developing the latter direction became even more obvious during COVID-19 pandemic.
The Law of Georgia on Investment Funds is based on the International principles and regulatory models. Certain requirements of Alternative Investment Fund Managers Directive (AIFMD) and UCITS (Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009) were considered when drafting legislation about Investment funds. In addition, significant amendments have been ratified in the Tax Code of Georgia, in particular, special tax regimen for investment funds considering the best practice from the leading countries (Ireland/Luxembourg).
Amendments in the Law of Georgia on "Securities Market"
Investor protection and the high level of transparency that are fundamental prerequisites for capital market development, require appropriate legal and regulatory framework. On the one hand, accurate, comprehensive and timely information enables investors to better assess investment risks and returns. On the other hand, relevant mechanisms that detect and prevent misconduct are essential in the protection of investor rights.
Legislative amendments will improve level of transparency among issuers of public securities by setting requirements regarding submission and reporting of the periodic financial/non-financial and insider information. The Law incorporates definitions for inside information and market manipulation and prohibits unlawful disclosure of inside information, insider dealing or market manipulation. In addition, adopted amendments simplify approval process of the prospectus for public issuances.
Another purpose of the amendments of "Law of Georgia on Securities Market" was to reduce regulatory burdens on entities privatized during 1990ies. Majority of these entities are incapable to meet the transparency standards due to their small scale. Renewed law will no longer apply to majority of such entities and consequently they will be qualified as non-public entities that are no longer obliged to meet the requirements set by "Law of Georgia on Securities Market".
Future Events and Legislative Acts Scrutiny
Ongoing regulatory reform requires substantial amendments and improvements of the existing regulatory framework. The National Bank of Georgia aims to ensure transparency of planned amendments and active private sector engagement. Furthermore, it is important to stimulate the implementation of renewed standards/requirements and encourage development of supporting services relevant for investment fund market development. In this regard, number of planned capacity building activities are scheduled with the support of international financial institutions in the following year.
Aforementioned regulations and events regarding Capital Markets participants' supervisory strategy will be added to the existing supervisory strategy as noted in June 2020.
1IOSCO is the International Organization of Securities Commissions that brings together the world's securities regulators from more than 115 countries and is recognized as the global standard setter for securities market regulation. IOSCO develops, implements and promotes adherence to internationally recognized standards for securities regulation.