RCEP/WP no.9/October 2000
ROMANIAN
CAPITAL MARKETS;
A DECADE OF TRANSITION
FLORIN POGONARU, PhD
Investment Banking Department, Creditanstalt, Romania
CAMIL APOSTOL
ABSTRACT
This paper reviews the post-Communist
evolution of the Romanian capital markets.
First, the infrastructure, the legal framework, and the main
participants are presented. The market
became operational in 1995, and, despite some small malfunctions, its
infrastructure proved to be effective.
The principal players, the foreign institutional investors, entered,
mainly in 1997, a market shaped by the mass privatization process: a widely
dispersed shareholder basis dominated by the State Ownership Fund and the
Private Ownership Funds.
Secondly, the paper takes a closer look at
the stages of the markets development, commenting on its characteristics and
some of the errors that marked its history.
The market has, so far, a concentration stage dominated by the retail
business of gathering the shares from individual investors that have been
distributed through the mass privatization process, the boom stage, and the
stage of portfolio reshuffling.
Thirdly, a larger perspective of the Central
and Eastern European context is taken, providing valuable insights for the
Romanian capital market. The elements
that made neighboring markets bounce back were the same that produced the
Romanian markets plunge. The pattern
of its much-hoped recovery can be found among the successful CEE stories.
Finally, conclusions and recommendations are
made.
CONTENTS
1. Regulatory and
Institutional Framework; the Privatization Process and the Capital Market
Structures
4
1.2 Impact of the
Privatization Process
.
5
1.3 Infrastructure of the
Market
.... 6
1.4 Grey Area
. 10
2. The Market in Action
.
12
2.1 The Main Players and the
Instruments
12
2.1 Quantitative and Qualitative
Criteria; Evolutions
.. 14
2.3 Privatization through
Capital Markets.
. 20
2.4 Growth Errors and Other
Errors
.. 22
3. The Romanian Capital
Market and the International Private Capital Flows; the Missing Ingredients
.. 24
3.1 The Central and Eastern
European Context
. 24
3.2 Regional and Country
Dedicated Funds
.. 27
3.3 Missing Ingredients of
the Romanian Capital Market
29
1. Regulatory
and Institutional Framework; the Privatization Process and the Capital Market
Structures
The design and implementation of the regulatory framework began in 1994. The market became operational in 1995, and, despite some small malfunctions its infrastructure proved to be effective. The way the privatization process was designed and implemented had a notable influence on the capital market. The most important features of the Romanian capital markets are: the widely dispersed shareholder structure, the insufficiently regulated environment of the OTC market, and the creation of six significant players (the State Ownership Fund and the Private Ownership Funds) on the Bucharest Stock Exchange and on the RASDAQ.
The Securities and Stock Exchanges Act (law
52/94) was approved by the Romanian Parliament in 1994. The law laid out the legal framework
required for the establishment of a capital market (defining and regulating the
institutions and the instruments: public offer, brokerage, stock exchanges,
investors protections, depositors, etc.), and providing for the set-up of the
National Securities Commission.
In order to administer, apply, survey, and
control the compliance with the provisions of this act, the National Securities
Commission was established as an autonomous administrative authority directly
subordinated to the Parliament. Its
five members -the commissioners- are also appointed by the Parliament. The Commission is granted the power to
regulate, decide, authorize, dispense, prohibit, investigate, and
penalize. The regulations issued by the
National Securities Commission cover all aspects of the securities markets and
are applicable to all participants.
Worthy of mention are: the
regulation regarding licensing the participants on the securities market, the
regulation regarding self-regulatory organization, the regulation regarding
clearing, settlement and custody, the regulation regarding the public offer,
the regulation regarding the tender offer, and the one regarding the private
placement.
Except for the transfers between relatives,
inheritances, and donations, any ownership transfer has to be done through the
market. Short sale, margin account, and financing the client are
prohibited. As an effect of this
measure, speculative investments are meager.
Best execution and interdiction on front running are basic principles.
According to the aforementioned regulations,
the brokerage houses have to be joint stock companies. Only they are permitted to offer brokerage
services. If a bank is willing to perform brokerage activities, it has to
establish a brokerage boutique. Brokers can offer custody services.
Important complementary pieces in the
regulatory framework of the capital markets are the legislation concerning
capital gains taxation and the repatriation of profits. The profits of
portfolio investments are not taxed in Romania. There is only a 1.5 percent transaction tax. Beginning with next
years implementation of the new personal income tax act, individuals capital
gains will be taxed as any other revenue.
To repatriate profits before June 17, 1997, one had to be approved as a
foreign investor. This required a US$
10,000 minimum investment, a lot of paper work to complete, and two months
time. Since the ordinance of the
government 31/1997 was enacted, the repatriation procedure is considerably
simpler.
1.2 Impact of the Privatization Process
The
Privatization Process: Brief History. The first step of the privatization process in
Romania consisted of the conversion of 6,280 state-owned companies with ROL
1,443bn total share capital into commercial companies. Meanwhile, six new institutions were founded
that aimed to facilitate, monitor, and support the entire privatization
process: the State Ownership Fund (SOF), and five regional Private Ownership
Funds (POFs). The State Ownership Fund
retained a 70 percent stake in the aforementioned companies in order to
administer them on behalf of the Romanian State. The remaining 30 percent stake in the new commercial companies
was distributed to the Private
Ownership Funds under regional and sectoral criteria. The POFs acted as administrators of the stakes that had to be
distributed to the individuals.
The SOF had to dissolve itself within seven
years time by selling 10 percent of its initial stake each year, but, in time,
it developed into a durable institution.
The five POFs changed their status to private investment companies
(close end funds).
As part of the second step of the
privatization process, in August, 1992, tradable Certificates of Ownership with
ROL 25,000 face value were distributed to 15.5m Romanian citizens. Each company had to adjust its number of
shares in order to achieve the same nominal value: ROL 25,000. At this
stage, the Certificates of Ownership could have been freely traded although
there was not an organized market for them or exchanged for shares only
through MEBO privatization or IPOs. The
MEBO method played the major role, since starting in 1994, around 1,500 companies
were sold to associations of employees and management for Certificates of
Ownership and/or cash from the POFs, and for cash from SOF. In March, 1995, 113 IPOs were launched. The first listed stocks on the Bucharest
Stock Exchange came from among those companies. In the same period, other companies were sold directly to
strategic investors.
Due to the shortage of domestic capital, the lack of foreign interest, and the bureaucracy of the authorities, the participation in privatization was disappointingly low. As a result, in June, 1995, a new Mass Privatization Program was initiated. This program offered between 49 percent and 60 percent of the shares in 3,905 companies selected from those remaining of the initial 6,280. Another 800 companies were retained by the State Ownership Fund to be sold directly to foreign and local strategic investors. New, nominative, non-tradable vouchers with ROL 975,000 nominal value were allocated to 17m citizens.
During this third step, the shares of
companies and Private Ownership Funds were available for the new issued
vouchers and for the Certificates of Ownership. Each Romanian could obtain ROL 1.0m (approximately US$ 290 at
that time) worth of stocks. The number
of shares that could have been exchanged by one person was limited in order to
avoid the accumulation of Certificates of Ownership. In March, 1996, when the subscription period came to an end, 95
percent of the citizens had used their vouchers.
Impact on the
Capital Market.
The way the privatization process was conceived and implemented had a notable
influence on the capital market. The
diffuse shareholder structure, the low regulated environment of the OTC market,
and the creation of six significant players (the SOF and the POFs) on the
Bucharest Stock Exchange and on the RASDAQ are among the most significant.
As a result of the Mass Privatization
Program, the shareholder structure of the traded companies was extremely
diffuse. Shares were owned by a large
number of people, many of them ignoring even the existence of the capital
market due to the lack of relevant information, others lacking the trust to
engage in such transactions. In order
to execute large orders for institutional investors, one had to gather
separated vouchers. This retail
business was performed by a lot of small brokerage firms, who concentrated the
insignificant stakes of the individuals and transformed the brokerage industry
into a very crowded one. The companies
also suffered because of the dispersed ownership. It was difficult to organize and to moderate shareholder
meetings, due to the number of participants, their divergent perceptions, and
their total ignorance of economics, law, and the specific industry of the
issuer. Add the managers unawareness
with financial communication and one will have a fair picture of the
situation.
In order to offer equal opportunities to each
citizen, including the possibility to trade its voucher, all companies that did
not proceed according to the listing procedures on the Bucharest Stock Exchange
were listed on the OTC market. The
incomplete legislation made possible the forced listing of companies that did
not want to be traded on the market, but could not compel them to full
disclosure.
The Private Ownership Funds, transformed in
1997 into Financial Investments Companies, and the State Ownership Fund,
created as tools for assisting the privatization process, became some of the
big players on the capital market. Holding in their portfolios important stakes
in various stocks, the five Financial Investment Companies were able to
nominate members to the boards of administrators of the companies, which
allowed the concentration of decision.
Although in some cases the decisions imposed by FIC representatives in
the boards of administrators were short sighted, or lacked coherence, the
overall effect of their presence on the background of a very dispersed
shareholder structure was beneficial. On the down side, one has to mention that
the hesitations occurred during some operations for example, the delays in
bank privatization -- resulted from the unresolved conflicts between the SOF
and FICs. The five Financial Investment Companies are scheduled to be listed on
Bucharest Stock Exchange prior to the end of 1999.
The delays in the privatization of the
important companies for example, Petrom, the national oil company,
Romtelecom, a major telecom firm, and the important banks hindered the
development of the Romanian capital market.
The aforementioned privatizations connected the direct selling of a
control stake with the listing of the companies, and with the selling of the
residual stake through capital markets
1.3 Infrastructure of the Market
The main securities markets in Romania are
the Bucharest Stock Exchange (BVB), and an over-the-counter market named
RASDAQ, set up with the help of USAID and patterned upon NASDAQ.
The stock exchange, a public entity, was
established with Canadian help in June 1995.
The Exchange can adopt rules and regulations regarding the registration
of members, listing standards, trading mechanisms, transfer and clearing
activities, and registry activities. It may also adopt regulations and perform
other functions and activities according to the delegation of powers extended
by the National Securities Commission.
The highest decision-making body of the
Bucharest Stock Exchange is the Stock Exchange Association, composed of
representatives from each member company.
The Exchange Association elects the executive body of the Exchange -
i.e. the Exchange Committee, represented by 9 members of the securities
companies. The Exchange Committee, in
turn, appoints the General Manager of the Stock Exchange, who is responsible
for the execution of its strategies and the day-to-day operation of the
Exchange. The National Securities
Commission has to confirm both the members of the Exchange Committee and the
General Manager.
The Bucharest Stock Exchange has all the
traditional departments of a stock exchange (trading, listing and
membership). In addition, the Bucharest
Stock Exchange has a registry department, a clearing and settlement department,
an IT department, and a department dedicated to public relations and market
development. The Exchange is a
self-financing institution. The revenues
are collected through the fees and commissions charged for providing its
specific services (trading, listing, registry and so on).
Both the trading system and the clearing and
settlement system are electronic systems. All brokers are connected to the
Stock Exchange by remote terminals. The trading system of the Exchange is a computerized
order-driven system, which automatically matches the orders. The Stock Exchange
plays the role of the counter-party in each transaction.
A trading session consists of two parts: the pre-opening and continuous trading. The role of the pre-opening is to maximize
the volume of shares traded and to clear the market at an opening price.
When sell orders are entered, the securities
existence is automatically checked.
All clients have individual accounts in the
Stock Exchange system. Clients using
different custodians than brokers have individual mirroring accounts with the
broker and the custodian, the custodian taking over the settlement
responsibility. The custodian may
decline the trade before T+2, if proper instructions have not been released.
The
settlement cycle is T+3. While the
Stock Exchange acts as a counterpart for all trades, it also carries out
clearing and settlement. The broker
receives clearing and settlement reports that indicate only the net positions
on funds and securities.
Each broker has settlement accounts with a
settlement bank (any Romanian bank may become a settlement bank). On T+3, all settlement banks settle their
net position on funds through the National Romanian Bank, either paying or
receiving funds to or from the Stock Exchange.
The securities are electronically settled by the clearing and settlement
system. The system operates under
delivery-versus-payment condition.
Any company may, upon request, become listed
on the Bucharest Stock Exchange on the base tier, first tier, or to unlisted
market. In order to encourage listing
to further amplify the market, the Securities and Exchange Acts requirements
for the base category are not too burdensome:
·
The
company has to have made a public offer of its securities;
·
The
securities have to be registered with the National Securities Commission
Registration System;
·
The
securities have to be freely transferable and dematerialized;
·
The
company has to comply with the disclosure requirements of the Exchange;
·
The
issuing company has to request a listing and to conclude a contract in this
respect with the Exchange;
·
The
annual financial statements of the issuer should be audited by an external
independent auditor.
The additional requirements for first tier listing are:
·
The
company must have at least three years of business activity;
·
The
company must have recorded profit (excluding financial income) for the previous
two years;
·
Management
competence and moral integrity;
·
Adequate
working capital;
·
15
percent of the share capital must be publicly held;
·
A
minimum 15 percent of issued shares must have at least 600 shareholders
(excluding management and employees), with a minimal nominal stake of ROL
300,000.
In its first trading session, held in November, 1995, twenty-four brokerage houses traded the shares of six listed companies. In September, 1999, there were 125 companies listed, of which 21 were first-tier blue chip stocks, and the rest second tier.
Its official index, BET (Bucharest Exchange
Trading), based on the basket of the ten most liquid stocks listed on the first
tier, was introduced on September 22, 1997. Since April 17, 1998, it has
released an overall index of BET-C.
The Evolution of Bucharest Stock Exchanges Indexes
Trading on RASDAQ market began on October 25,
1996. During the first week around 3,000 shares in six companies were traded
for a total value of ROL 8.93m (approximately US$ 2,600). By December, 1996,
their number outpaced 1,000, and in mid-January, 1997, it reached 2,000. In the fall of 1999, over 5,600 companies
list their stock on the system. The
number of the brokerage houses active on the OTC market increased from five on
the first day to 29 at the end of the week.
At present, their number is around 200.
The market includes the broker communitys
self-regulatory organization, a quote-driven trading system, a Depository, and
an independent Registry.
The Romanian Association of Securities
Dealers (ANSVM), backed up by the National Securities Commission acting on
behalf of the broker-dealer community, led the efforts aimed at developing a
market to link buyers and sellers from all over Romania. The institutional framework, rules, and
regulations created by the ANSVM to support RASDAQ trading are developed around
the fair trading and customer protection practices of the U.S. market.
The ANSVM member community established RASDAQ
SRL, a fully-owned subsidiary, to be responsible for the operation of the
Portal trading system, developed by the NASDAQ Stock Market of the United
States, that accommodates trading in up to 5,600 companies. Portal technology ensures the functionality
of a market, in which the competing dealers are linked through a data network
of dedicated or dial-up lines. By using
the personal computer trading terminals with direct access, the dealers enter
bids and offer quotations for securities.
Once entered in the system, they are available in real time for all
users. The trades can be negotiated by
telephone, or even through the system.
RASDAQ SRL provides three products, one of
them specially designed and adapted to fulfil the governments strategy and
requirements for privatization:
·
Regular
Securities Market on which stocks and bonds can be technically traded;
·
Public
Offerings Market which can accommodate any kind of Public Offering;
·
Electronic
Auction a system that has been developed to accelerate the privatization
process, in order to sell the residual shares held by the State Ownership Fund
(SOF).
The transparency of the market, the
protection of the investors interests, the appropriate conduct of the
brokerage houses, and compliance with the ANSVM Rules of Fair Practice are constantly surveyed by ANSVMs Monitoring
and Surveillance Department. Special
software enables the department to supervise trading activity on the RASDAQ
market, intervening immediately through the message function of the program
anytime there is reason to believe that a provision of the Rules of Fair
Practice has been violated. The
important issues are reported to the ANSVM Disciplinary Committee for further
inquiry and disciplinary measures, if necessary.
The National Securities Clearing, Settlement,
and Depository Company (NSCSD), a public utility established in August, 1996,
according to the Securities Law No. 52/1994, (article 98) and according to Rule
No. 8/1996, promotes a clearing, settlement, and depository system for
securities. The company began to act in
October, 1996, as Central Securities Depository. One month later, it was
authorized by the National Bank of Romania as clearinghouse. In May, 1997, the National Securities
Commission nominated NSCSD as the National Numbering Agency for Romania, and in
November, 1997, NSCSD joined the Association of National Numbering Agencies. In January, 1998, the Securities and
Exchange Commission recognized NSCSD as an eligible foreign custodian for US
funds.
Low minority
shareholders protection. The lack of legislation on this topic, together with the diffuse
shareholder structure of the Romanian companies resulting from the mass
privatization program, left the minority shareholders unprotected from the
abuses of majority shareholders. As an
example, the authors mention how the biggest shareholder the state through
its SOF diluted the stake of minority shareholders in 1997. The companies in the MPP were not registered
as land owners until 1997; in 1997, they received ownership rights to land and
included it in their balance sheets as a fixed asset, while the corresponding
increase in shareholders capital exclusively inflated SOFs stake in the
company.
Insufficient
regulation of the RASDAQ market. The poor initial regulation of the OTC market
concerning such important topics as membership, disclosure, and trading
procedures made further adjustments necessary.
Yet brokers feel that ANSVM should deepen the RASDAQ regulation set.
Poor custody
regulation.
The custody services for RASDAQ trading are not properly designed. At present, the flow of securities from the
custody company of the seller to that of the buyer is not safe.
Poor
disclosure requirements. Even the transparency requirements for the companies listed on the
stock exchanges first-tier are weak.
This is more critical, since many company managers seem to view
information disclosure as useless.
Their attitude is supported by the diffusion of ownership, and
consequently by reduced control, and by the accounting system used in Romania
that lacks transparency.
The Romanian
Accounting Standards. Due to the differences in their accounting systems, direct comparison
between the financial performances of the Romanian companies and those of their
regional peers can be deceptive. The 1994 Law on Accounting put in place a
system that was close to the International Accounting Standards, yet
different. When investors paid
attention to fundamentals and this paper argues that, quite often, they did
not they also had to know that:
·
Hyper-inflation
is not reflected by the Romanian standards, and thus inventories are valued
through weighted average cost method, making operating costs artificially low;
·
Romanian
companies use the total cost method for cost accounting, and consider changes
in finished goods inventories as part of revenues;
·
Provisioning
is allowed, but companies use this possibility very seldom. As creating
provisions is not compulsory, Romanian companies usually do not have provisions
for doubtful clients, unsold inventories that are not written off, or the
replacement of obsolete tangible assets.
Securities
transfer outside the market. On August 3, 1999, the NSC agreed to a sui generis transaction
involving direct equity transfer among the players, although the current
legislation does not permit it. EBRD
struck a debt swap deal in Otelinox, listed on the Bucharest Stock Exchange,
for 24.5 percent of the companys stock.
The shares were received from Otelinoxs main shareholder, Samsung
Deutschland Gmbh, through a direct transaction outside the market.
Privatizations
across the line. Negative signals are sent to the market participants when it comes
out that transactions that do not entirely comply with the legislation may be
concluded. A typical case is the
privatization of the Cico company in the spring of 1999. The State Ownership Fund sold its stake in
Cico through a private placement, performed without obtaining the approval of
the NSC as required by Romanian legislation.
The law also required that private placement address sophisticated
investors, which was not the case in the Cico privatization. Another issue of the Cico scandal, the flawed
valuation process, is not the subject of this paper.
The price
distortions as a result of the cross trades. In order to take advantage of some weak
points of the Romanian legislation that grant advantages to laid-off persons
who invest their allowance on the capital market without any further
conditions, many individuals buy shares, keep them for a short time, and then
sell them back. The result is a
significant number of repeated trades occurring between the clients of the same
brokerage houses, with the same stock, at artificial set prices.
Lack of
correspondence between legislative requirements and the current situation. According to law 31/1991,
no General Shareholders Meeting can be held if less than 50 percent of the
shareholders are represented. The
meeting has to be rescheduled and is held at the date of the second assembly,
no matter what the level of participation.
In the current situation, when most Romanian companies have a diffuse
shareholder structure, almost every GSM has to be repeatedly convened, which
makes the decision process difficult.
2.1 The Main Players and the Instruments
In Romania, as everywhere else, the capital
markets main players are the institutional investors. This section is focused on the domestic
ones: the five regional Financial
Investment Companies and the mutual funds. The FICs are facing problems created
by their initial portfolio structure, burdened with overvalued stocks of many
ineffective companies, by the poor management of the controlled companies, and
by lack of disclosure. The mutual funds
are weakened by their bad image, acquired in the black April of 1996, and by
the dramatic decline of population savings.
A common feature of all domestic institutional investors is their
propensity to shift towards the money market.
One reason could be the narrow range of investment instruments available
on the capital market.
The mass privatization program granted the
Romanian capital markets around 17m participants, many of them apathetic and
having weak financial power. The
privatization program also created the main domestic players, already mentioned
in the previous section of this paper:
the five regional Private Ownership Funds, transformed in 1996 into
Financial Investment Companies. To
complete the list of domestic participants, one has only to add the mutual
funds industry. However, the bulk of
investments, as in almost every Central and Eastern European country, came from
the foreign investors. Creditanstalts
analysts estimate the free float held by foreign investors on Romanian capital
markets to be equal to 50 percent of
the total markets free float in 1996, and
80 percent in 1997 and 1998.
Among the foreigners, institutional investors have the largest participation. Some of their policies are accounted in the
current papers third section. The
state of the Romanian institutional investors is briefly presented below.
The Private Ownership Funds were set up by
the Romanian Parliament as important working parts in the privatization process
of the state run companies. Their
primary goal was to administer the
stake in the share capital of the commercial companies that had to be distributed
to Romanian citizens.
In 1990, the state run companies were
organized according to Law 15/1990
either as commercial companies or as regie
autonomes. The regie autonomes
remained under state control, while the commercial companies had to operate
self-sufficiently (although benefiting from generous subsidies). The National Privatization
Agency established under the same law had received a 30 percent stake in each
commercial company, and distributed them to the five regional Private Ownership
Funds.
According to law 133/1966, the POFs, since
renamed Financial Investment Companies, became close-end funds.
Breakdown of the Financial Investment Companies Portfolios
|
Financial
Investment Company |
Bucharest Stock Exchange |
RASDAQ |
Not Listed |
|
FIC Banat Crisana |
49 |
539 |
317 |
|
FIC Moldova |
13 |
341 |
270 |
|
FIC Transilvania |
8 |
353 |
175 |
|
FIC Muntenia |
41 |
243 |
172 |
|
FIC Oltenia |
28 |
251 |
112 |
The FICs are in a continuous effort to change
their portfolio. The National
Privatization Agency distributed the companies disregarding any earnings
related criteria. Each regional fund
received all the companies located in their area that were not assigned to
another fund, and the companies in some specific industries from any part of
the country. The financial institutions
were excepted from this scheme, and were evenly distributed to the five funds
to avoid an accentuated misbalance between their portfolios. However, differences between the five
companies occurred as a result of the peculiarities of their initial portfolios
and of the different approaches of their managements.
It is no wonder that the main concern of the
FICs is portfolio reshuffle. Shares in
small companies are sold in order to lower administration costs by reducing the
number of companies in a portfolio.
Meanwhile, the FICs try to reduce their stakes in the large, loss making
companies, which, considering the scarcity of significant strategic investors,
is an ambitious task. Acquisitions of
new shares are done both on the primary and on the secondary market.
Consequent to the markets plunge, the values
of the FICs portfolios declined. Some
examples: the value of the shares from
FIC Oltenias portfolio, listed on the RASDAQ, decreased in 1998 to 86 percent of their par value, and the
market value of the shares in FIC Muntenias portfolio is around 36.8 percent
of their nominal value. As a result,
the FICs, especially FIC Transilvania, became very dynamic on the inter-bank
loan market.
In the near future the five financial
investment companies will be listed on the Bucharest Stock Exchange.
Financial Investment Companies Nominal Share Capital
|
(ROL bn) |
Nominal Share Capital |
|
FIC Banat Crisana |
547,432 |
|
FIC Moldova |
n.a. |
|
FIC Transilvania |
n.a. |
|
FIC Muntenia |
564,573 |
|
FIC Oltenia |
563,246 |
Without a doubt, the liquidity of the market will significantly improve. Whether the listing will increase trading volumes is questionable. As the FICs are holographic images of the Romanian capital market, they present the same features of the latter on another scale. Consequently, it is possible to also have its attractiveness.
The mutual fund industry in Romania has been regulated since April, 1996. The creation of the mutual funds preceded
the birth of the National Securities Commission, and, taking advantage of the
poor regulatory environment, each unit trust computed the net asset value
according to the formula with which it felt most comfortable. After regulation was issued, the plunge of
net asset value for almost all mutual funds created panic in the market. This, and some additional scandals that
shook the industry in 1996, made 1997 a hard year for the mutual funds. Since 1998, the industry has been on a
slight upward trend, but its size is still far from being significant. The chart above presents the time evolution
of the mutual funds aggregated value of assets (US$ m).
The decline of population savings, the
decrease of the capital markets, the fragile macroeconomic environment, and the
poor disclosure are some of the reasons for the slow rhythm of the recovery.
To counterbalance some of these
inconveniences, mutual funds acted in two directions. They shifted the bulk of their investments from equities to the
money market, and strove to attract capital from institutional investors. Many mutual funds reported banks or FICs as
significant investors.
The scarcity of investment instruments
available on the Romanian capital market is one of the causes of its
thinness. Both the Bucharest Stock
Exchange and the RASDAQ exclusively trade corporate equity. Governmental debt is traded only on the
primary market
The instruments available to the players are
corporate equity and, only on the primary market, governmental bonds. The sole corporate bonds issued occurred in
November, 1996, by Siderca Calarasi.
The issue has a three-year maturity and a fixed rate of 63.51 percent
p.a. The bonds are nominative,
guaranteed, and convertible. There
might have been other bonds private placements done by small size companies,
but there is no official record of them.
The maximum amount a company may issue should
be less than 75 percent of the subscribed nominal share capital. The corporate bond issue should be decided
and approved by the General Shareholders Meeting or by the Administration
Council. For a regie autonome, the state minister should approve the
decision. The nominal value for a bond
has to be ROL 25,000 for non-convertible bonds. Convertible bonds must have the same nominal value as that of the
shares.
The great interest in the issue of
governmental bonds demonstrates that a
secondary market would be appealing to investors. According to ordinance 131/1998, foreign investors are permitted
to acquire treasury bonds, treasury certificates, and other public debt
instruments under the same conditions as the Romanian investors.
2.1 Quantitative and Qualitative Criteria;
Evolutions
This paper has so far detected three stages
in the evolution of the capital market of post-Communist Romania. The first stage occurred between the autumn
of 1995 and the spring of 1997, and was marked by a slow, hesitant growth and
by the thinness of the market.
On the offer side, the availability during
1995 and 1996 of extensive low-cost credit made the equity market uninteresting to the majority of
companies. As a result, with some
notable exceptions, the companies traded on the Bucharest Stock Exchange were
of poor quality, meeting only the base listing requirements. On the demand side, foreign investors were
reticent to invest in a country whose transition was perceived as slow, as well
as
undermined by the lack
of determination to transform the economy displayed by almost all
officials. Their reticence was hardened
by Romanian companies weak governance and by the dismal level of their
earnings.
The Bucharest Stock Exchange expanded from a
single two-hour session per week to three three-hour weekly sessions. The number of listed companies grew from six
on November 20, 1995, to twenty-two on February 28, 1997. In 1996, the most actively traded stocks
were Azomures, Artrom, Sanevit, and Foraj Sonde, with a total 84 percent of the
total volume.
In the same period, the RASDAQ market faced
other kinds of listing problems. At the
end of 1996, only 60 contracts between the Registry and the listed companies
were signed, while the number of listed companies was greater than 1,300. One result was that the companies, who
perceived this as an abuse, retaliated by lessening transparency. That affected investors trust in RASDAQs
stocks, and only the shares of the companies with a built reputation were able
to attract foreign portfolio investors.
Romcim, the leading cement producer, Turbomecanica, the aircraft engines
manufacturer, and Sanex, the tiles and sanitary items manufacturer, were among
the most traded stocks on the Romanian OTC market.
The figures below
present the market evolution during that stage, using the indexes developed by
Creditanstalt Securities: CAS-SE for the stock exchange and CAS-RQ for the OTC
market. Please note that the time scale
is different.
To have a better look at the market
capitalization of the Bucharest Stock Exchange and the average trading volumes
in its first post-Communist stage, one can refer to the following chart:
Bucharest
Stock Exchange
The second stage of the market, the shortest
yet most spectacular one, occurred in the second and the third quarter of 1997.
It looked like the political change after the elections of November, 1996,
catalyzed economic policy. In February,
the government had announced a radical program of price and foreign exchange
deregulation and cuts in subsidies. Its
commitment to reform and privatization, the change in attitude by the
international financial institutions the IMF agreed to a new stand-by
facility for Romania and the progress in foreign relations led to a general
perception among investors that the risk of Romanian equities had
decreased. Meanwhile, due to the strong
devaluation of the leu, their price
also declined. This was enough reason
to focus the analysis more on the huge potential the companies had a large
domestic market, represented by Romanias 22.6m population, a relatively
educated and definitely cheap workforce, and natural resources than on the
risks the ownership structures, the
capacity of management and long-term strategic view, and the deceptive local accounting
standards. As a result, the market
capitalization and trading volumes of the Bucharest Stock Exchange took
off.
The bulk of the money came from foreign
institutional investors, and as a result, the favorite targets were the
companies with, by Romanian standards, high market capitalization and
significant free float. Terapia and
Antibiotice, two pharmaceutical companies, and Oltchim, the chemical producer,
were among the most traded companies on the stock exchange in this period. At the beginning of March, 23 companies were
listed on the BSE. During October, the
number reached 70.
Bucharest Stock Exchange
On the RASDAQ, the same chase for liquidity propelled the cement makers Romcim, Moldocim, and Casial, the refineries Arpechim, Petromidia, and Petrobrazi, and the steel producers Sidex and Turbomecanica. It seemed that no research was necessary; the only decision to be made was whether to invest in Romania or not. When they entered the market, investors picked some of the liquid companies and waited for the market to move. It did, but, unfortunately, in the wrong direction.
RASDAQ Market Capitalization (US$m)
The Creditanstalt
indexes for the Bucharest Stock Exchange (CAS-SE) and the RASDAQ (CAS-RD) are
pictured below.
The early signs of the third stage could be detected
in mid-1997. However, the authors
consider its debut to be in October, when it became obvious to everybody that
the backlash of the Romanian capital markets was going to last. The legislative hesitations had practically
never stopped. They were caused mainly
by endless frictions between the leaders of the institutions that were supposed
to play important roles in privatization.
But Bucharest Stock Exchange and RASDAQ trading declined when the
government failed to implement its own reforming program under pressure from
the trade unions. The lack of
prospective macroeconomic growth,
together with the 1H dismal financial performances of the listed companies and
the South-Asian crisis, weakened the Romanian capital market. The constants of the Romanian environment in
this period were: no significant
progress in economic structural reforms, low speed of the privatization
process, frequent changes of the legal framework, and political instability
(for example, the resignation of the government in March, 1998). The activity of foreign investors on the
Romanian capital markets diminished, triggered by government failure to
conclude negotiations with IMF for a new stand-by loan, and by the turmoil in
neighboring markets. In November, 1998, the government and the State
Ownership Fund embarked on a new campaign attempting to accelerate
privatization. The results were not encouraging. The successes of the campaign
the sale of a 35 percent stake in Romtelecom, the sale of a 41 percent stake
in the Romanian Bank of Development, the sale of a 45 percent stake in
BancPost, and the privatization of Automobile Dacia, the largest Romanian
carmaker were beneath expectations, and occurred in a lower rhythm than
anticipated. However, the gains for the
capital markets disappeared at the beginning of 1999, when the investors became
concerned over the countrys debt obligation.
During this period, several companies were listed on the Bucharest Stock
Exchange that were able to retain investors interest due not only to their
liquidity, but also due to strong fundamentals as with Alro, the
aluminium smelter or
to their prospective growth, as with Renaults new acquisition, Automobile
Dacia.
Bucharest Stock Exchange
RASDAQ
Average Daily Trading Volume (US$ m)
2.3 Privatization through Capital Markets.
Privatization through capital markets has not
been a success so far. The State
Ownership Fund failed to speculate the moment of investors maximum focus on
Romania, when it was possible to sell many companies from its portfolio at fair
prices. Some of the causes are restrictive legislation, the conservative
culture of the organization, and its incoherent policy.
In 1998 and during the first half of 1999,
the State Ownership Fund sold through the capital markets its stakes in 103
companies, whose relative importance can be underscored by their ROL 2,140bn
accumulated share capital. In the
figure below, the respective companies are sorted based on their share
capital. The dimensions of the stakes
varied between 0.28 percent and 81.26 percent of the companys share capital.
Source: SOF
The seller obtained the total amount of ROL
424bn, which averaged 65.23 percent of the shares nominal value.
The bulk of these privatizations consisted of
secondary public offers 25 on the Bucharest Stock Exchange and 62 on the
RASDAQ. The shares of 12 companies were
sold through special auctions on the RASDAQ, the stocks of two companies stocks
were sold at order on the RASDAQ, and the shares of two companies were sold as
a result of public buying offers.
Privatization through the capital market has,
until now, been anything but a success.
The first reason for the dismal result is, without a doubt, the timing.
In 1998, when the legal framework was finally put in place, Romanian equity had
already lost the interest of foreign investors. The thinness of the market led to situations in which the sole
willing bidder was able to set the price, or to situations in which two or
three buyers successfully colluded.
The attractiveness of the SOFs portfolio of
companies to be privatized through capital markets was never too glamorous, and
in time it faded away. Among the first
ones put up for sale, one could find companies in a good financial state with
growth potential, such as Sicomed, the largest domestic pharmaceutical
producer, and ICME, an important cables and insulating materials
manufacturer. At present, the offers
consist of shares in companies with a low degree of attractiveness, or those in
a poor financial state, some of which failed to be privatized through other
methods.
Another fact that impeded the State Ownership
Funds attempts to privatize through capital markets was the existence of
restrictive regulations. A governmental
ordinance issued in 1997 ruled that the public offer should be the sole method
for privatization through capital markets.
Meanwhile, the regulations of the National Securities Commission
restricted direct selling through capital markets of more than 5 percent of a
companys stock through methods other than public offer or private
placement. In some cases, other methods
could be more effective considering the attractiveness of the company and the
size of the stake. Two more permissive
acts, the government ordinance No. 361/1998 and the Law 99/1999, now offer
better prospects for this kind of privatization.
Pricing procedures are also a sensitive issue
in privatization. Changing regulations is recommended at different moments at
different selling prices: the selling price registered in the trading day
preceding the transaction, the monthly average of the market prices, and
the price resulting from the valuation process. There is frequently an important gap between the market price
and the price resulting from the valuation process. The irrelevance of the price for an illiquid stock sometimes
contributes to the creation of this gap ironically, the bigger the stake of
the SOF, and the bigger the importance of the deal, the more illiquid the stock
is likely to be but the arguable assumptions on which the valuation is based
are always a factor. The volatility of
procedures and the extremely conservative organizational culture of the SOF led
to setting the prices higher than those at which buyers could be found. In order to avoid this inconvenience, the
usual pattern of an offer is:
·
An
opening price equal to the maximum of the three aforementioned prices;
·
The
approval of a minimum price for the shares according to the book building
results;
·
Gradual
price declines with no more than 5 percent of the opening price at
predetermined intervals until the full subscription of the issue or until the
minimum accepted price is reached;
·
The
reallocation of the shares according to the investors bids and to the number
of submitted bids.
This complicated maneuver, apart from creating confusion, tends to prejudice the strategic investors, who generally intend to acquire the entire stake or a significant part of it. Or, strategic investors now constitute SOFs targeted customer base. The first offers did not exceed 40 percent of the companies share capital and were directed to portfolio investors. The shift to strategic investors occurred when the size of the stakes to be sold increased, in some cases up to as much as 90 percent.
Selling small stakes also proved to be a
difficult task. In the second half of
1998, the State Ownership Fund initiated a program to sell its residual stakes
in the already privatized companies.
SOF offered its shares in the 293 companies where its participation did
not reach 5 percent, but it found buyers only for 25 of them. The shares with ROL 3.6bn nominal value were
sold for ROL 0.81bn. The gloomy level
of demand was caused mainly by the low liquidity of stocks, and by the
reluctance of brokers to be involved in small, low margin transactions.
The State Ownership Fund also seems to be
stuck by its inefficient procedures for the selection of the brokerage house
for the public offer. The exaggerated
weight accorded to the level of solicited fee has led to inverse selection.
More than two hundred brokerage houses operate on the Romanian capital
markets. In such a crowded industry,
submissions for fees lower than costs to intermediate SOFs public offers are
common practice. The brokerage houses
get the deal by trying to switch the costs to the buyer, or just to build a
relationship with the SOF.
Privatization through capital markets can be
catalyzed by improving its regulatory framework in order to increase
competition, disclosure, and to simplify the search of the buyer willing to
give the best price. However, the sole
solution to obtaining significant growth is the sale of stakes in the most
attractive companies in the SOFs portfolio.
2.4 Growth Errors and Other Errors
The capital market mirrors the real
economy. The main errors that marked
the history of the Romanian capital markets were made outside the market. However, as was expected at start-up, all
participants, beginning with traders, salespersons, and researchers and ending
with institutions, had their share of errors caused by enthusiasm, lack of
experience or immobility.
A strategic error of the Romanian capital
market was its focus on growth. The
Bucharest Stock Exchange had a lax listing policy in order to quickly increase
the number of traded stocks. Investors were strongly affected by the poor
disclosure requirements, while the number of the listed stocks proved to be of
lower relevance: usually the trading
volume in two or three stocks accounted for more than 60 percent of the total
daily volume. The efforts should have
been directed to encourage, through various methods, the quality companies to
list.
The stock exchange had slow reactions to
investors needs. A simple task, like
developing market indices, required so much time that at the moment of its
introduction, the prices had already fallen.
An important error, made in disrespect of the
interests of minority shareholders, was the permission granted by the National
Securities Commission to the newly created National Oil Company, Petrom, to
de-list four companies. The
shareholders of Arpechim and Petrobrazi refineries, two of the most traded
stocks on the RASDAQ, and two oil retailing companies, well-traded on the
Bucharest Stock Exchange, have their shares stuck to this day.
The
National Securities Commission had to increase its efforts to create a
secondary market for governmental debt, a corporate bond market and a secondary
market for asset-backed securities and had to play a more active role in
improving the regulatory environment.
3. The Romanian Capital
Market and the International Private Capital Flows; the Missing Ingredients
3.1 The Central and Eastern European Context
Excepting the influences of the global
context (i.e. South Asian crisis, Russias default, Wall Streets trends) there
is no correlation between the evolution of the Romanian capital markets and
that of the regional peers. There is a
significant difference between the size of the Bucharest Stock Exchange and
that of other stock exchanges in CEE.
What they share is their sensitivity to foreign capital movements and
the instruments to control those movements. Unfortunately, most of these
instruments are outside the market: social and political stability and a
favorable macroeconomic environment.
There are also endogenous factors:
the listing of liquid, high quality companies and requirements for
strong corporate governance.
Although significant differences between the
evolution of the Romanian capital markets and those of the markets in other
Central and Eastern European countries can be noticed, the authors consider
that a closer look at the Hungarian, Polish, and Czech capital markets provides
valuable insights for the subject of this paper.
The first particularity concerns the size of
the market. The two charts below
illustrate the huge difference between the Bucharest Stock Exchange and its
regional peers in terms of market capitalization and average daily
turnover.
Market
Capitalization End of Period (US$ bn)
Total Traded Volume Daily Average (US$m)
However, all three markets still lack breadth
and liquidity, the execution of any large-scale trade producing important
movements to the price of the stock.
The major factor that made this difference is
the ability of each country to attract foreign portfolio investments. The amount of foreign capital entering
Romania is a quite small fraction of that entering other Central and Eastern
European countries. Easy to evidence
for FDI or for debt, this is not so obvious in the case of portfolio
investments, due to the lack of reliable data:
secondary market transactions in bonds and equity are not systematically
recorded in most of the CEE countries.
However, Creditanstalts data suggests that trading on the other stock
exchanges in the region is also driven by the flow of foreign capital. In 1997, the free float held by foreigners
was approximated at 35 percent of total free float on Warsaw Stock Exchange,
and at 10 percent of total free float on Prague Stock Exchange, while foreign
investors too had significant control stakes in the companies listed on the two
markets. The presence of foreign
investors on these markets was an important factor in the origin of the
successive booms in the Czech, Polish, and Hungarian equity markets in the
second half of 1993 until early 1994, in 1996, and in the first half of 1997.
Excepting the reactions to the influences of
the global context (i.e. South Asian crisis, Russias default, Wall Streets
trends), there is no correlation between the evolution of the Romanian capital
markets and that of its regional peers.
Their post-Communist history is, at our scale of time, longer: the Budapest market opened in June 1990, the
Warsaw market in mid-1992, and the Prague market in April 1993.
The Hungarian markets boom in the summer of
1993 was, in the view of analysts, explained by the quality of the new listed
companies on the Budapest Stock Exchange, and by the fact that foreign
investors had the attention focused on the region as an effect of the burst of
the Polish market. Both features can be
identified in the increase of the Romanian market back in 1997: the listing of some companies more
attractive than those already traded and investors propensity for emerging
markets securities were among its basic ingredients.
In the Czech Republic, the increased equity
investment was caused by the resale to international fund managers of the
stocks received by domestic residents during the mass privatization process in
1991 and 1992. The Prague Stock
Exchange opened in April, and local fund managers succeeded in gathering a
significant number of shares from individuals, so that in the autumn they were
able to offer blocks to foreigners. The
Czech economys prospects seemed favorable at that time, and, consequently, the
holdings were inexpensive.
Parallels can be drawn again: the similar Romanian voucher privatization
process created frenetic retail activity, and laborious building of blocks of
shares. The impressive program of
deregulation announced in February by the government, its commitment to
economic reform, and accelerating privatization all pledged for promising
economic growth. Consequently, computed
in respect to foreseen earnings (or to past earnings distorted by state
subsidies), Romanian stocks P/E ratios were rather modest.
HUNGARY. After the impressive
run-up in 1993, the Hungarian market pulled back, as U.S. interest rates began
to increase and made returns on the Hungarian equities less attractive. As the privatization process was sluggish,
the Budapest Stock Exchange reached a minimum in January, 1995, and than
reversed trend, but at a reduced level.
Investor confidence increased after 1995, driven by two reasons: the performance of the economy and the
commitment of the government to the active privatization program. Among the economic achievements resulting
from the success of the Hungarian government in implementing a painful economic
stabilization package, the authors note here the falling inflation, the renewed
growth, the introduction of currency convertibility in January 1996, the
acceptance as an OECD member in the spring of 1996, and the acceptance as a
NATO member in 1997. All these led to a
sharp increase in the market capitalization of the stock exchange.
The strengthening of the market was
accentuated by the privatization of some companies with high market
capitalization and with high interest among the investors: TVK, a chemical producer, MOL, the oil
producer, and MATAV, the telecom.
POLAND. After the 1994 peak, the
Polish market suffered from a lack of liquidity. Retail investors dominated the Warsaw Stock Exchange, while both
domestic and international institutional investors were reluctant to enter the
market because of the political tensions between the parliament and the
president. The situation began to
change in May, 1995, when the government decided to implement its mass
privatization programme. The good
macroeconomic environment (7 percent real GDP growth in 1995 and sharply
declining inflation) increased the investors trust in the Polish capital
market.
THE CZECH
REPUBLIC.
The Prague Stock Exchange, with the largest market capitalization in the region
in 1995, also registered a decline in demand due to foreign capital rebound.
Major investors were absent, perceiving the Czech economic environment as
inefficient, fragmented, and undermined by lack of transparency. As on the Romanian capital market, only 677
issues are traded daily, from a total of 1,700 listed companies, and, as in
Bucharest, there is a core group of three to four companies that account for
around 73 percent of the turnover of the equity market. Meanwhile, the shares are dispersed through
the voucher privatization to a great number of individuals. In 1996, foreign investors came back to the
Czech capital market as a result of legislation changes. The strengthening of disclosure
requirements, the improvements in investor protection laws, and the upgrading
of the trading methods boosted investor confidence in the Czech markets.
At different moments, all three markets
bounced back as a result of dismal economic results or of political
instability. At different levels, all
succeeded in recovering by regaining investors trust. When one tries to forecast the prospects of
the Romanian capital markets, one has to remind oneself what brought the other
Central and Eastern European capital markets back on track:
·
The
governments success in implementing a healthy, stable macroeconomic framework.
·
The
acceleration of the privatization process and the listing of liquid companies
with high interest for investors.
·
The
political stability and the governments commitment to structural change.
·
The
strengthening of disclosure requirements and the improvements in investor
protection laws.
3.2 Regional and Country Dedicated Funds
According to the available data, around 68 percent of
emerging-market mutual funds had already made direct purchases of shares in
Hungary, the Czech Republic, and Poland in 1991, and practically all do now. As the authors have already mentioned, the
presence of foreign investors in these markets was an important factor in the
origin of the successive booms in the Czech, Polish, and Hungarian equity
markets in the second half of 1993 until early 1994, in 1996, and in the first
half of 1997.
The presence of the regional funds is not so
intense in Romania. Even when the
market reached its peak in 1997, there were only a few companies that complied
with the funds usual liquidity requirements.
Having a small pool of eligible companies, and being forced to act on a
market so thin that virtually any execution of an institutional investors
order produced significant prices movements, was hardly an incentive for fund
managers. When the market began its decline, the regional funds reduced their
activity in Romania even more. The
table below presents the Romanian exposure of the most important regional
players at the end of 1998 (US$ m).
|
Regional |
|||
|
of the Fund |
|||
|
Black Sea Fund |
28 |
62 |
Global Finance |
|
Balkan Fund |
0 |
27.5 |
Global Finance |
|
East
European Development Fund |
17* |
207.8 |
Invesco |
|
Vontobel Eastern
European Fund |
5* |
108 |
Vontobel
Fondsleistungs |
|
Coop Central
European Fund |
3* |
15 |
Julius Baer
Investment Fund |
|
Central European
Growth Fund |
n.a. |
173 |
Credit Suisse
Inv.Management |
|
DB Osteuropa
Fund |
n.a. |
65.6 |
DeutcheBank |
|
Framlington East
Europe Fund |
n.a. |
8.8 |
Framlington |
|
Pictet Targeted
Fund Eastern Europe |
n.a. |
80.6 |
Pictet Asset
Management |
|
Raiffeisen
Osteuropa Fund |
n.a. |
18 |
Reiffeisen
Kapitalanlage Fund |
*End 1997 figures
The country-dedicated funds had no
option. They had to continue their
investment activity even when the market plunged.
|
Country Funds |
Value of the
Fund (US$ m) |
|
Romanian
Investment Fund |
65 |
|
Societe Generale
Investment Fund |
50 |
|
Romanian Growth
Fund |
30 |
|
Broadhurst
Investments |
100 |
|
Romanian
Investment Company(Foreign & Colonial) |
68 |
|
Romanian
Reconstruction Fund |
15 |
Romanian Investment Fund is managed by East
Fund Management. It invested both in
private equity and in shares of listed companies. The fund acquired from the State Ownership Fund a 31 percent
stake in the stock of the rubber products processing company Rolast, and 29.19
percent of the paint producer Policolor.
Among its private equity investments, the most successful seems to be
RIFs participation in the Monopoly media company, recently sold, a project
that offered 50 percent annualized rate of return.
Romania Fund, managed by Societe Generale, is
exclusively dedicated to direct investments in Romanian companies with growth
prospects, or with favorable price per assets ratios. Among their investments,
the authors mention a 25.48 percent stake in the shares of the white goods
producer Arctic, a 12.09 percent stake in Electroaparataj shares, and 7.91
percent of IMSAT stakes.
Romanian Investment Company is managed by
Foreign & Colonial Management. The
fund invested in private equity and in listed stocks, directly or through the
market. Romanian Investment Company may
also acquire governmental, municipal, or corporate bonds. The fund holds a 13.96 percent stake in the
automotive company Compa, 8.66 percent in the aluminium smelter Alro, 15.48
percent in the white goods producer Arctic, and 6.28 percent in the pharmaceutical
manufacturer Antibiotice.
Broadhurst Investments represents in Romania
the American group New Century Holdings.
Broadhurst has a very aggressive policy. It holds stakes greater than 5 percent in 25 liquid companies
listed on Bucharest Stock Exchange (6.12 percent in Alro, 5.28 percent in Compa,
10.09 percent in Azomures, 14.63 percent in Sicomed, and 63.41 percent in
Berceni) but also controls a wide range of small companies across the country,
mainly consequent to acquiring shares through the SOFs public offers.
|
Venture Capital
Funds in Romania |
Value of the
Fund (US$ m) |
|
Romanian Post
Privatization Fund |
46 (EUR 44m) |
|
Romanian-American
Enterprise Fund |
80 |
|
Danube Fund |
20 |
|
Oressa Ventures |
n.a. |
Romanian Post Privatization Fund is managed
by GED Capital Development. EBRD pooled
ECU 44m to be invested in Romanian private companies or companies that are to
be privatized. The targeted companies
must have good growth and profit potential.
RPPFs participation can be between ECU 0.3m and ECU 3m, is for a
limited period (5 to 7 years), and must represent a minority position.
Romanian-American Enterprise Fund is
financing the Romanian private companies through debt and equity and provides
technical assistance. Among its
investments are 27.35 percent of Policolor shares, a 25.41 percent stake in
Rolast stock, and the private bank Banca Romaneasca.
3.3 Missing Ingredients of the Romanian Capital Market
Unfortunately the ingredient whose absence is
most burdening for the Romanian capital market is the investors trust. Lost when it became evident that the
governments moves toward reforms were as hesitant as the moves of the previous
executives, confidence will be reinstalled only when a steady legal framework
and the conditions for stable economic growth are put in place.
There is no corporate bond market, and no
secondary market for government bonds. There are many reasons for the absence
of a Romanian bond corporate market.
The first is the gap between the level of the interest rates and
companies weighted average cost of capital.
Before 1997, the low cost bank credit made bond issue uninteresting to
companies. After 1997, the interest rates offered by banks were more attractive
for investors than the returns corporate bonds could offer. The second is the size of the Romanian
corporate debt needs that make issuance costs too high.
There are no asset-backed securities. The
delay in creating the asset backed securities market is due to the imperfect
legal environment. One of the most
important flaws in the legislation is the lack of instruments to assure the
recuperation of assets in case of default.
However, the market is currently under construction. A governmental agency was created to
facilitate mortgage securitization.