For three months, the regulated (primary) capital market in Moldova has been paralyzed. This happened because the National Financial Market Commission (CNPF) denied a license to the Moldovan Stock Exchange (BVM), which is the solely institution to act in the regulated market, for two months since the new Law on Capital Market entered into effect on March 15.

When it received the license this was granted in order to enable the Government to run a new privatization round – which egged just two low-value deals at public auctions – and no operations were conducted ever since.

Players in this market point at the very Law on Capital Market as a cause of this failure. It reduced the number of listed enterprises from 1,000 down to just 48. The remaining societies, which by no means are constrained to trade their shares, are not in a hurry to do so.

In essense, the new legislation in defining the market relations underlines the freedom of choice for a transaction platform as a basic principle for traders.

On the other hand, BVM and investment societies (former broker companies) say that this kind of liberalization denies the possibility to get the best price for small shareholders, in addition to opening a way for non-transparent transactions.

There are two points of view as regards the problems in the Moldovan capital market. First, which leans towards investment attraction, allows the traders and shareholders to choose the transaction platform. The other starts with BVM’s role and ensures that small shareholders can get the best price for their stocks.

New conditions for joint-stock companies that want to be listed

In compliance with the new legislation, only companies that have at least one million euros in own capital and demonstrate a free-float of minimum 10% can be admitted entry in BVM. The stock exchange regulation says that BVM can select and list all companies which meet the selection criteria – but those selected may decline their inclusion. However, if they don’t notify BVM in writing of their refusal, they automatically become listed traders. Given this clause, BVM submitted a paper with 48 societies to CNPF.

If a society does not fit the requirement regarding the size of own capital – but is willing to sit at the stock exchange – it files a request with CNPF and the latter decides to accept or not. A free-float of minimum 10% and a stable financial status would then count. Once admitted, the given society must pay a 15,000-leu (790 USD) fee to BVM.

BVM no longer admits direct deals and allows traders to use its interactive system or to take part in [English] auctions to buy public property, which are organized by the Public Property Agency.

Although BVM is not happy with the such radical changes, the commission’s deputy chairwomen Nina Dosca says that things in other countries were even worse at the beginning. In Poland, for example, the stock exchange started with five traders only which – making primary public bids – attracted investments and made the market itself attractive.

CNPF leadership had meetings with BVM representatives and brokers, who were encouraged to comply with the new legislation, Mrs. Dosca recalls. “Instead, they ignored our letters. In February 2014 I issued prescription to BVM and the Securities Depository, asking them to prepare an action plan until September 1, 2014, on compliance with the Law on Capital Market. Their response was that a taskforce was formed to write the rules for the functioning of the stock exchange under the new wording of the law. However, they showed us the requested document only on March 6, 2015, that was the last day the old law was still in effect. They probably counted on the fact that we would have no choice [but issue a license anyway], since only one BVM exists,” the CNPF official stated.

On the contrary, CNPF did not give BVM a license but sent back numerous objections. There were seven pages of objections of conceptual nature alone. “The law says we must be able to watch all deals online and brokers must have the option of doing business remotely. It means he is not obliged to carry any papers to BVM and should enjoy running an operation from his office,” Mrs. Dosca counts one of the objections.

In order to melt the ice in the market, [CNPF] issued a provisional decision that allowed out-of-exchange transactions – and this sort of business has florished during the past three months.
New law neglects the interests of small shareholders

BVM representatives in turn complain that the new legislation neglects the specific of the Moldovan capital market and for this reason the interests of small shareholders are harmed. BVM head Corneliu Dodu fears that small shareholders are no longer able to get the best price for their stocks under transparent conditions, because out-of-exchange deals cannot provide optimal conditions like BVM’s interactive system can.

Another issue relates to the public bids in the secondary market, a mechanism which – once a shareholder gets control of 50%+1 share – obliged that shareholder to propose small shareholders to sell their stocks. “Now that this clause is not mandatory anymore, the shareholder in control of a society shall not be obliged to buy the other stocks at a fair price and those stocks therefore will be for no use for small shareholders,” according to Steluța Lavric, head of Iuventus DS, an investment firm.

Complied with the rules, but trading ceased

Nina Dosca [of CNPF] says that BVM has complied with the commission’s requirements and submitted a list with 48 traders but no trading took place since then. The situation may change after the entities that present a public interest get listed at BVM as obliged to when the amendments to the Law on Capital Market get into force. It’s about the presence of insurance companies, leasing companies and banks. The Parliament has passed the law and now it need to be published in Monitorul Oficial [the Moldovan official gazette].

Long history of market problems

The current problems of the Moldovan capital market have a history that begins back in the 1990s, when the country shifted to the market economy.

In the West capital markets appeared in a natural environment, when companies felt the need for a platform that would attract investors at the best prices possible. Initially, companies borrowed money and invented shares in order to formalize those borrowings. Later intemediaries – known as brokers – appeared to find where investors could place their money and then stock exchanges were created to secure the best price for both buyers and venders.

In Moldova, the stock exchange appeared as a result of an organized action. After gaining independence [in 1992] and adopting a market economy, the country passed a number of laws which enabled the largest part of public property to fit into private hands. The Parliament passed the Law on Privatization in 1991, the Law on Joint Stock Companies in 1992, the Law on Securities and Stock Exchange in 1993, and the Government ran a mass privatization process during 1994-1995.

In compliance with the Law on Privatization, Moldova chose the following path of privatization: reorganized the state-owned enterprises into joint stock companies; issued shares for those companies that could be sold at auctions; allowed people to buy shares against vouchers via fiduciary funds or citizen associations. Around 1,400 enterprises were privatized this way. When the stock exchange opened on June 26, 1995, there were 43 investment funds, 10 fiduciary funds, and more than three million shareholders.

From the very beginning, there were market professionals in the market – investment funds – which were allowed to control at most 10% in a joint stock company. A few years later BVM registered huge transactions between those funds including stock swaps. As a result of those transactions the funds consolidated their stock portfolios. Later, as a result of several processes of reorganization and closure only six investment funds remained by the end of the 2000s. They were re-branded into investment companies.

Meanwhile most of joint stock companies formed control stakes and their owners did not worry to sell or buy shares at the stock exchange – unless they were obliged to do so by law. Thus, the stock exchange recorded – along with the auctions organized by the Government – transactions which aimed at determining the price of shares. In appearance there was a very large supply for sale and a very low buying demand.

„It became clear that investors were not interested in what the stock exchanged offered. Here’s a question: Why keep 1,000 traders at the stock exchange while only two or three transactions take place?” Nina Dosca of CNPF continues.

At the moment BVM was created the methods used to create it represented the best solution for that time, so that everyone gets to know what a capital market is, what a stock exchange is, and so on. This state of facts simply stopped being productive one day, Mrs. Dosca explains.

Re-focusing the capital market

The obligation to run all transactions though the stock exchange – which was beneficial at the beginning for BVM itself thanks to numerous transactions and large amounts of stocks – ultimately slowed down the development of the Moldovan stock exchange in comparison to stock exchanges in other countries. BVM had begun with a better infrastructure than its counterparts. This carelessness, according to Alexandru Savva, a renowned expert for the domestic capital market, led to the degradation of BVM, which cannot be described as a viable platform for attraction of investments.

„When it all started, all of the processes in the Moldovan capital market happened to create an infrastructure for privatization and to manage the situation at the post-privatization stage. Only in 2005, when other strategies emerged, the role of the capital market was changed to attraction of investments via financial instruments,” Mr. Savva stated.

Given the new market realities and based on requests from the Moldovan authorities, the World Bank offered support – including funding – to write and implement a new legislation in the area, so that the stock exchange becomes a genuine platform to attract investments. The essence of that legislation is to allow both buyers and venders to gain viable mechanisms and instruments to attract and place money through the capital market.

„In 2012, when the new Law on Capital Market was passed, it was decided to adopt the European practice, which requires that the best traders, with the largest liquidities, who fulfill all specific conditions and enjoy financial stability, remain in the market, so that investors gain confidence that their money goes to something real,” Nina Dosca says. She remembers that under the old law any joint stock company with more than 50 shareholders was obliged to trade at the stock exchange.

Who obstructed the implementation of the Law on Capital Market?

„The Law on Capital Market was passed in 2012. Since then the market infrastructure needed to be developed for three years. Absolutely nothing has been done. The mechanisms of the market, and logically the technologies and regulations had to be designed. All stayed as it used to be before. In simple words, everything has been obstructed. At the time this law was to get into force [it turned out] no one was really prepared. BVM was no prepared so it didn’t get a license, and VNPF passes two regulations – so-called temporary – which keeps in place all stuff,” Alexandru Savva finds.

The expert also recalls that the Law on Capital Market was elaborated with the support from the World Bank, which had conditioned its financial assistance with implementation of its directives.

„Formally, the [Moldovan] authorities accepted the World Bank’s conditions but for three years they did not do any great job – though the Bank released the money. The Law on Capital Market is not working because of those temporary regulations. In addition, they did a trick by obliging yet some joint stock companies to show up at BVM.

“So let me put it straight: [Moldova] had certain agreements with the international structures, committing itself to do some changes to better, then it received the money for those changes and, at a moment, it drops them. Enforcing those directives is not a purpose in itself. We implement the directives because the mechanism they give is ready-made and has proved effective.

“If [the mechanism] doesn’t work, this is a problem related to our implementation capacity. Mismanagement does not mean that the Western system is flawed. At present the whole scheme is imbalanced. Nothing is working properly: neither transactions, nor the Central [Securities] Depository or registrars, nor the mechanism of market multiplication, or other deals aside from sale and purchase. Take everything in complex, plus the technical malfunctions at the stock exchange, plus the incapacity of traders of persuading the general public to join the market in order to benefit from competitive and advantageous mechanisms. This is why the capital market stagnates,” Alexandru Savva stated.

One bad law is enough to kill whole market

Corneliu Dodu, head of BVM (Moldovan stock exchange), says that all markets depend in their development on the legislation they use.

„All trading operations which CNPF registered for years were closed deals that were struck by a small number of people. Many wondered for a while: Is this how a market looks like or there’s a legislative basis that is missing for public stock emission (IPO)? It is important that the people who write our laws find the answer to this question. If this is the specific of a capital market, then not one good law would work, you’ll never persuade a shareholder who owns the control stocks to reduce its share in an open public transaction. We have to admit thus that the legislation neglecting the specifics of our market will not become functional ever,” the BVM manager explained.

“No good laws mean no open trading. I assure you that neither the amendments to the previous legislation not the new legislation would ensure IPO operations. I’ll tell you this: the closed transactions in the primary market slowed down the development of both the primary market and the secondary market, and they obstructed the development of the stock exchange market, because traders involved in closed deals have no intention to sell stocks in the secondary market. The new Law on Capital Market contains a long chapter on takeover bids and just two lines concerning the securities admission listing in a regulated market or MTF (an alternative out-of-exchange transactions system), a fact that feeds confusion among traders who can’t understand what they should expect tomorrow. Not to forget that the new law is unfriendly to small shareholders, large shareholders, and traders alike.

“All amendments and decisions which were passed later in relation to this law expose its defects. The document contains many contradicting articles, many references to regulatory acts that no longer exist. It lacks a clear and precise structure of the market and circulation of securities in the market. Let’s admit that the entire market continued to use the old legislation instead of the Law on Capital Market which entered into force on September 14, 2013 and stopped using it on March 14, 2015 when it was abrogated.”

Corneliu Dodu continued, “Although BVM has an operating license in compliance with the new legislation and holds an authorization for operations in the regulated market, the participants at this market start feeling the gaps of the law, and the current state of the market reflects this situation. As an example, there’s a minor change that would not let them transmit the registers and they already face uncertainty in the future, with no regulation market, not MTF, not investment companies or registrars able to plan anything at full capacity. There’s a lot of similar gaps.”

A transition period is necessary

In turn, Steluța Lavric, head of investment company Iuventus DS, thinks that the Moldovan capital market has not matured enough to work the way European markets work.

„There is also something specific about us. The concentration of stocks was a trend during all the years the stock exchange functioned. As a rule those who held the control packages were willing to own 100 per cent of the enterprise. And now, in my opinion, the requirements for companies seeking to formally register as traders are exaggerate. I am talking about the requirement to have one million euros in own capital and 10 per cent in free floating.

“Before this law came into force, no one really analyzed the level of development of our enterprises. No one looked at the statistics to see how many companies match those requirements. At the beginning 50 companies were invited to act as traders but 4 have left and more are going to leave [the capital market], because the market was initially quite strictly regulated and now turned to liberalization. In my opinion, there must be a transition period.

“I hope that we shall see amendments being adopted to adjust to the current state when everyone realizes the results of this abrupt march. Laws need to reflect the present-day status of the market and our realities. The new legislation contain many general definitions but barely one regulatory act for practical activity. As a consequence we are in a regulatory vacuum,” Mrs. Lavric stated.

She concluded, “Yes, there must be changes but not of the kind to wreck the market infrastructure while implementation should be slower for traders in order to let them adapt to the new realities.”

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This material was produced as part of the project "Investigative business journalism for transparency and European integration,” which Business News Service (Mold-Street.com) is implementing with the support of the National Endowment for Democracy (NED). The opinions expressed therein belong to their authors and do not reflect necessarily the stance of NED or the U.S. Government.