PATH TO MATURITY

In recent years, there has been a notable resurgence of interest in the development of the capital market in Azerbaijan. Key elements of this new strategy include infrastructure modernisation, increased transparency and integration with international financial systems. The aim of this strategy is to strengthen the financial sector and promote economic diversification.

The primary objective of the reforms is to establish an effective platform that connects investors seeking to efficiently manage capital with companies in need of financial resources. The sustainable development of the capital market is of significant importance in stimulating the country's economic growth.

New Agenda

Azerbaijan is implementing measures to boost its securities market within the framework of the "Socio-Economic Development Strategy for 2022-2026". This strategy places a special emphasis on the development of all segments of the financial market and the expansion of access to finance for households and businesses.

Umeyra Ibrahimova, Director of the Capital Market Policy and Regulation Department of the Central Bank of Azerbaijan (CBA), has noted that both quantitative and qualitative changes are taking place in this segment.

For instance, a significant accomplishment in 2024 was the comprehensive integration of capital market trading and post-trading processes into digital platforms. Notably, this marked a historic first in the country, as public offerings and secondary market transactions became accessible via a mobile application for the first time.

Azerbaijan's capital markets are currently in a relatively early stage of development, despite the significant economic potential they possess.

The Baku Stock Exchange (BSE) is the only trading platform, established as a closed joint-stock company with 20 shareholders, among whom local banks and investment companies predominate. Foreign capital plays a prominent role in the ownership structure, particularly in the Istanbul Stock Exchange.

The BSE's technical infrastructure is based on the Korean trading system Exture, which was developed by a division of the Korea Stock Exchange (KOSCOM). A significant step towards internationalisation was the emergence of the first international issuer, the Black Sea Trade and Development Bank, in 2020.

However, it should be noted that there are still significant limitations. Retail investors do not have direct access to the market, with transactions instead being made through investment companies, who act as the principal participants in trades on behalf of both buyers and sellers. The majority of transactions are concentrated in the debt segment, which encompasses government bonds, central bank notes and mortgage-backed securities.

The popularity of OTC instruments, in particular CFD contracts and operations on the Forex market, has led to additional specificity. These instruments are available to retail investors, but they can also present a gambling element. They have become a valuable resource for individuals seeking to explore the world of investment.

Azerbaijan's capital market is experiencing a period of significant development and reform. The CBA and the BSE are collaborating to create new opportunities for market participants. The regulator is poised to initiate discussions on the specific entry conditions for companies, with the objective of promoting active development of initial public offerings (IPOs) over the next three years.

In order to support the growth of the bond market, it is envisaged that there will be an increase in the placement of government, corporate and mortgage bonds.

Special attention is being paid to creating favourable conditions for retail investors, with a view to attracting more private participants to the market. Concurrently, IPO acceleration programmes are being prepared and are expected to be led by companies from the financial, telecommunications and food sectors.

The financial sector development strategy for 2024-2026 aims to increase the share of capital markets in non-oil GDP from 10 per cent to 14 per cent and the volume of investments in the sector from ₼150 million to ₼1 billion.

Simultaneously, efforts are underway to enhance the supervision system and modernise legislation. Vugar Aliyev, Advisor to the CBA Chairman, has announced that a package of draft laws "On Capital Markets" is scheduled for presentation by the end of 2025. The development process involves not only financial market participants, but also representatives from other sectors of the economy.

Ensuring Transparency and Safeguarding Investor Interests

A key change that will take effect in 2025 is the cessation of the practice of private placements of shares. Previously, this accounted for more than 50 per cent of issuance on the capital market. This decision is aimed at eliminating the "grey" segment, increasing transparency and combating schemes that distort pricing. Thus, previously, private placements created risks of mispricing and tax evasion, with the volume of transactions in the non-listed segment approaching ₼3bn. Please be advised that such transactions are no longer included on the BSE platform and are now likely to be carried out through notary channels.

"The purpose of listing is to ensure transparent trading on the secondary market. Only shares offered on the open market are accepted for listing," emphasised Oqtay Gasimov, Deputy Chairman and Chief Commercial Officer of BSE.

He stated that 80-85 per cent of the companies on the current listing are from the financial sector, telecoms companies, state-owned infrastructure companies and a few from the real sector. "We believe that there are companies in the country, especially in the real sector, that have the potential to enter the capital market. We hold regular meetings discussing with them the benefits of working with the exchange," he added.

The BSE is also developing new rules to protect the rights of clients of investment companies. At the same time, it should be noted that Azerbaijan still lacks effective mechanisms for insuring investment risk. This distinguishes its market from more mature financial systems.

Ruslan Khalilov, Chairman of the BSE Board, has stated that attention to systemically important participants is increasing, and that the Central Bank is taking a special interest in the introduction of relevant instruments. "In the event that an investment company managing a client's portfolio experiences a state of default, the matter of safeguarding client rights comes into play. This is not limited to banks," he states.

R. Khalilov has stated that the liability mechanisms of banks and investment companies are different. For instance, the Deposit Insurance Fund provides coverage for bank deposits up to ₼100,000, while no such insurance mechanisms exist for investment instruments.

"Market instruments, including futures, options and swaps, are employed for the purpose of risk management. However, they have not yet become widespread in the domestic market of Azerbaijan. In developed markets, these mechanisms are already in use, and their introduction is of the utmost importance for systemically important entities," he said.

Shaping the Market's Culture

The head of the BSE has stated that many Azerbaijani companies, particularly those in the real sector, are not yet fully prepared to enter the stock market. A successful IPO is not a one-time sale of shares. It is a long-term commitment to transparency, constant communication with investors, including minority shareholders, and the application of modern corporate practices such as electronic voting by shareholders. "Entry into the capital market is not confined to share offerings. This process necessitates long-term commitments, including ongoing and transparent engagement with shareholders, comprehensive reporting, and the establishment of mechanisms to safeguard investors' rights. This requires both technical and institutional preparation," Khalilov noted.

He added that some companies are now prioritising bond issues and raising debt capital. However, it is important to maintain the right balance between debt and equity.

"While an understanding of the need for such a balance is emerging, the level of readiness of companies still varies," he said.

However, the BSE is confident that there are companies in the country that can successfully list, primarily in the financial, telecom and food sectors. "Presently, the primary expectations for new IPOs are from the financial sector and to a certain extent from the telecoms sector. It is generally acknowledged that banks and insurance companies are better prepared to enter the market. Any company or group of companies that meets the capital and profit requirements under IFRS can apply for listing," summarised R. Khalilov.

Entry into the Global Market

In parallel, the BSE is actively developing cooperation with foreign platforms. A memorandum of cooperation has already been signed with the Abu Dhabi Stock Exchange, and the nearest plans include connecting brokers to the markets of Oman and Kazakhstan. In order to achieve full integration, it is necessary to modernise trading systems and harmonise the regulatory framework.

The BSE head noted that the purpose of this strategy is to simplify the entry of Azerbaijani brokers and investment companies to international markets, as well as to provide access of foreign participants to the Azerbaijani market. For instance, any broker or investment company operating in Abu Dhabi has the option to become a remote member of the BSE and present their products in our market. At the same time, Azerbaijani companies will be able to connect to the stock exchanges of Abu Dhabi, Oman and Kazakhstan," he explained.

Khalilov has stated that these measures will facilitate market expansion in terms of both demand and supply. However, there are certain legal barriers that require changes in the regulatory framework.

"This is not a one-day process. The process is being implemented in stages. Over the last 3-4 months, technical diagnostics have been carried out and work is underway to strengthen trading systems and infrastructure.

Khalilov also emphasised that concurrent meetings are held to increase the activity of market participants, and technical solutions are being developed with simplicity and ease of use in mind. Any person should be able to enter the market through the bank they are served by or through an investor's application to quickly and conveniently buy or sell securities.

In addition, the exchange has implemented structural reforms, including revisions to the composition and functions of committees, and updates to listing and trading rules.

"It should be noted that unlisted securities cannot be admitted to mass trading. This is a significant step towards enhancing transparency and investor protection. The platform is required to adhere to stringent standards, ensuring that only securities that meet these criteria are utilised. This also creates a more reliable and attractive environment for foreign investors," Khalilov concluded.

Positive dynamics are already evident. According to the results of the first three months of 2025, the volume of transactions on the BSE increased by 2.4 times, reaching almost ₼18bn. Repo transactions and transactions involving corporate securities have seen particular activity, with a 2.4-fold increase in the number of these transactions over the past year, reaching 7,450.

Repo transactions accounted for 93.7% of the BSE's total turnover of ₼16.71bn, representing a 3.4-fold increase year-on-year.

Concurrently, a decline in activity was observed in the government securities market, with the value of transactions decreasing 9.6 times to ₼228.06 million. Concurrently, the volume of transactions in corporate securities surged by 92.3%, reaching ₼900.63 million.

To summarise, Azerbaijan is on the cusp of a significant capital market transformation. Although the road to a full-fledged and mature market is just beginning, consistent reforms, a focus on transparency and infrastructure development are setting the stage for accelerated progress.

Achieving these goals will depend on successfully combining institutional transformation with the strengthening of investor confidence and the development of a financial culture in the country.