PRESTIGIOUS CAPITAL

For any company to be admitted to the listing of an international stock market it is first and foremost a matter of prestige, proof of its solvency and self-sufficiency. Then this means an opportunity to have permanent access to cheaper and more reliable capital for developing business. But at the same time the process by which a new company is "admitted" to the stock exchange is far from easy and has many stages. This is especially true of such a prestigious stock market as the London Stock Exchange.

In general, London has developed historically as an international financial centre, and today the London Stock Exchange is one of the most prestigious, since companies from more than 115 countries trade on it. Incidentally, the British capital's geographical and convenient "time" location, due to which traders from different regions of the world can easily go on trading throughout the exchange's working day, is evidently among the reasons for this too. 

"Over the last few years companies from the CIS [Commonwealth of Independent States] have been quite active on the market, and I think that in two or three years time representatives of Azerbaijan will join them too," Ayuna Nechayeva, the manager for promoting business in Russia, the CIS and Mongolia from the capital market department of the London Stock Exchange, thinks.

We note that, as part of the "business correspondent" programme, sponsored by Azerbaijan's Pasha Bank, the British Council of Azerbaijan and the British Thomson Foundation [international media development organisation], a group of Azerbaijani journalists has managed to get inside the stock exchange, see how it works and speak to A. Nechayeva,

Access through demand

The London Stock Exchange was traditionally set up as a centre for buying and selling securities, but today it consists of a diversified group of companies, which embrace completely different aspects of the securities market. Thus, such segments are operating on the stock market as primer markets (primary capital market), a platform by means of which capital is wooed; trading - the platform on which these securities are traded; post-trading risk management - the platform on which the calculating and clearing of securities is carried out. There is also a system for checking information, through which all emittents reveal information to the market, and the Millenium IT segment, which is engaged in developing state-of-the-art technologies relating to all the existing stock exchange platforms.

 "When a company first thinks about trading on the stock market, the application comes to our department - primary markets first. The main advantage that it gains, in placing its shares on the market, is share capital. When you take credit from the bank, that is a loan; when you sell shares, you do not owe anybody anything; moreover, you promise your investors that your company will grow, bring in profits and pay dividends. Besides this, the company can continue to make investments, i.e. it has constant access to finance. This is convenient and the emittents take advantage of this. The company can also use its shares as collateral when sealing deals, which makes the process much more flexible," A. Nechayeva notes.

Why is it then that by no means all major companies decide to take such a beneficial step? It turns out that it not so easy to be admitted to the listing of the London Stock Market. There is a huge swathe of rules and criteria that have to be observed and met, which are thoroughly checked and re-checked. One of the basic criteria is the submitting of complete financial accounts for the last three years, acquiring the emittents' prospectus, a 300-page-long document detailing all the nuances of business and the risks that exist. Investors' attention is particularly drawn to the last section. It takes into account everything ranging from the risk posed by a country, including threats of terrorism in it, and the expropriation of assets, to economic instability or stagnation and so forth. There are also the risks relating to the sector. Let us say, if it is dealing with the mining segment, then the amount of demand for the metals, the prices, the population's incomes and so forth are examined. And there is a third group - the risks relating to the company itself. These apply to the competitors, the suppliers, the sales, the shareholders, the management and so forth. 

There is also the factor that the company should be ready to offer the investors a minimum 25-per-cent package of shares. Another important condition is the presence of independent directors on the board of directors. These should be professionals with an international reputation who have previously worked in the top management of auditing and investment companies; they should not have shares in the company and not be related to members of the top management. Their function is to monitor that all the decisions taken by the board of directors are in the interests of the company's development. 

In this connection, there is another section which attracted a great deal of attention after the financial crisis of 2008; the subject was corporative administration, the existence of independent directors, of committees controlling management bonuses, the conducting of auditing, committees managing the risks, and the investors' request that the companies observe the highest requirements in the given segment.

And finally, one extremely important point is the full and immediate disclosure of any important information about the company. For example, if an oil company is carrying out lengthy prospecting work in new oil fields, there should immediately be a public announcement about it. Or, for example, if there is a change of director or management, all this should be made public, for which any public company is obliged to have a separate public relations department.

Raising the standards

In short, if solely the key aspects are taken into account, it becomes clear that a company's decision to trade on the London Stock Exchange is a serious step, indicating that that company has reached a sufficiently high standard of development and is ready to do business with international partners. Today, all in all, some 2,500 companies from all over the world, of which only 111 are from the CIS, are already trading on the stock exchange floors.

A.Nechayeva says that more often than not CIS companies take advantage of the so-called global depository receipts (GDR). This is a certificate, acquired by the company, which may represent some of the company's shares. "This is done because sometimes investors cannot purchase shares directly, since they are valued in local currency and it is much simpler to get a receipt for a purchase in dollars; all the payments are made at the stock exchange and are converted by the depository bank. More than 50m dollars in capital has been attracted our markets by means of depository receipts from CIS companies," the London Stock Exchange manager noted.

She said that CIS companies had started trading on the stock exchange in 2004, and the first company had brought with it just 178m dollars. But three years later, in 2007, a boom was observed and the sum of capital attracted was 25bn dollars. 

"Very many companies started trading that year, and many of them are still trading. One fact is that at that time, the year before the recession, investors were not as exacting as they are now," A. Nechayeva noted. In 2008, there was a slump (3.2bn dollars), but then the situation began to recover gradually. This year started off very well, until the conflict between Russia and Ukraine began, which has created volatility on the market, although experts are not losing hope that the situation will stabilise in little while. 

It must be said that the companies from the CIS countries that are most actively trading on the London stock market are Russia, Kazakhstan, Ukraine and Georgia, but there are also companies that have assets in Azerbaijan and Uzbekistan.  

What is stopping countries from the CIS, in particular Azerbaijan, from trading on such a prestigious stock market? To begin with, the following needs to be recognised: in spite of the fact that the securities market in Azerbaijan has been developing at fairly rapid rates over the past few years, it still has a very long way to go before it reaches international standards. In our country investments in shares and bonds are still not regarded as profitable investments among the wider business circles, and entrepreneurs still prefer to apply to the banks for loans in order to boost their businesses, rather than going onto the stock market.

Besides the objective reasons for such a hesitant attitude, there is also a subjective lack of desire on the part of managers, even in major companies, to get to grips with the new capital markets, an inertia and sluggishness when it comes obtaining international recognition and attaining a qualitatively new and essentially high standard.

A. Nechayeva thinks that the main thing "acting as a brake"on CIS companies on the route to the stock exchange is the lack of preparedness to go public. The commitment to be completely transparent about everything, even the most negative information about the business, is frightening them off for the moment. Although the London Stock Exchange expert asserts that over the last few years obvious progress has been made in this respect. 

 "Companies from Azerbaijan are showing an interest in trading on our stock market, and this was clearly demonstrated during the 'Caspian Corridor' conference held in London recently. For example, we know that the Azerbaijani Pasha Bank and other banks and companies showed an interest in this. In general, I note that the financial organisations represent a remarkable industry for starting work with the stock exchange since they are less tied to state risks and more flexible when it comes to our requirements," A. Nechayeva noted.

 She also said that enormous interest in companies from Azerbaijan is being observed on the part of international investors. "I can also say that in this case it is important how the first companies that start trading on the stock exchange conduct themselves. If the deals are successful, then that will be to the advantage of those who come after,""the expert said, after adding that the representatives of the stock exchange are willing to hold talks with potential participants in the market, to explain the rules to them and to point out the advantages, but ultimately the decision must be that of the company management. It is to be hoped that over the next two to three years companies from Azerbaijan will become more active in trading on international money markets.

Yes, managing to co-operate with the prestigious London Stock Exchange is something requiring painstaking efforts for perhaps a few years to come. But, as they say, the game is worth the candle.