Document of The World Bank Report No: ICR00004007 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-80240) ON A LOAN IN THE AMOUNT OF US$ 12 MILLION EQUIVALENT TO THE Republic of Azerbaijan FOR A Capital Markets Modernization Project (CMMP) January 25, 2017 Finance & Markets Global Practice Europe and Central Asia Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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Document of
The World Bank
Report No: ICR00004007
IMPLEMENTATION COMPLETION AND RESULTS REPORT
(IBRD-80240)
ON A
LOAN
IN THE AMOUNT OF
US$ 12 MILLION EQUIVALENT
TO THE
Republic of Azerbaijan
FOR A
Capital Markets Modernization Project (CMMP)
January 25, 2017
Finance & Markets Global Practice
Europe and Central Asia Region
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CURRENCY EQUIVALENTS
(Exchange Rate Effective October 11, 2016)
Currency Unit = Azeri New Manat (AZN
1.00 AZN = US$ 1.599
1.00 SDR = US$ 1.382
FISCAL YEAR
ABBREVIATIONS AND ACRONYMS ABS Asset Backed Securities MoF Ministry of Finance
ADB Asian Development Bank MoT Ministry of Taxes
AZN Azerbaijan New Manat NCB National Competitive Bidding
BSE Baku Stock Exchange NDC National Depository Center
CAS Country Assistance Strategy ORAF Operational Risk Assessment
CMMP Capital Markets Modernization Project Framework
CPS Country Partnership Strategy PAD Project Appraisal Document
EBRD European Bank for Reconstruction and PID Project Information Document
Development PIU Project Implementation Unit
ECA Europe and Central Asia POM Project Operation Manual
EU European Union PQ Prequalification
FIRST Financial Sector Reform and Strengthening PPP Public-Private Partnerships
Initiative RVP Regional Vice President
FIMSA Financial Markets Supervision Authority SBD Standard Bidding Documents
GDP Gross Domestic Product SCS State Committee for Securities
IBRD International Bank for Reconstruction and SECO Swiss State Secretariat for
Development Economic Affairs
ICR Implementation Completion and Results TAL Technical Assistance Loan
Report USAID United States Agency for
IC SSS Individual Consultant Single Source International Development
Selection WBT World Bank Treasury
IDA International Development Association
IFC International Finance Corporation
ISDS Integrated Safeguard Data Sheet
Senior Global Practice Director: Gloria Grandolini
Sector Manager: Rolf Behrndt
Project Team Leader: Angela Prigozhina
ICR Team Leader: Stephen Pirozzi
Republic of Azerbaijan
Capital Markets Modernization Project (CMMP)
CONTENTS
Data Sheet
A. Basic Information
B. Key Dates
C. Ratings Summary
D. Sector and Theme Codes
E. Bank Staff
F. Results Framework Analysis
G. Ratings of Project Performance in ISRs
H. Restructuring
I. Disbursement Graph
1. Project Context, Development Objectives and Design ............................................. 11
2. Key Factors Affecting Implementation and Outcomes ............................................ 15
3. Assessment of Outcomes .......................................................................................... 19
4. Assessment of Risk to Development Outcome ......................................................... 25
5. Assessment of Bank and Borrower Performance ..................................................... 25
29. Environmental Safeguards: Current Environmental Assessment Category: C - Not Required.
2.5 Post-completion Operation/Next Phase
30. At the time of the drafting of this ICR, The GoA is in discussions with the World Bank for an
Advisory Services and Analytics (ASA) package for the purposes of financial sector stabilization and
development. Given the decline in macroeconomic conditions in Azerbaijan, the shift to focus on broader
9 Capital Market Modernization and Financial Sector Modernization Projects Financial Management Supervision Report, May
2016
19
issues to stabilize the financial markets appears to be an appropriate and much needed follow up to the
CMMP.
3. Assessment of Outcomes
3.1 Relevance of Objectives, Design and Implementation
Dimension Rating
Relevance of Objectives Moderate
Relevance of Design Substantial
Relevance of Implementation Substantial
Overall Relevance Rating Substantial
Sub-Rating for Relevance of Objectives: Moderate
31. The objectives of the Project have less relevance to current Government priorities than when
it was approved. At the time of project approval, the economic situation in Azerbaijan was reasonably
stable. At the time, emphasis was placed on diversification of the local economy and fostering the
development of alternative sources of financing to support growth in the private sector. The deepening of
the capital markets was accepted as a path forward to create a more efficient means for companies to
obtain cheaper long term capital and encourage growth in the non-oil economy. However, the
macroeconomic environment has changed significantly and there is greater need to stabilize the economy
and the financial sector generally to prevent further deterioration. Currency devaluation in 2015 has put
the banking sector under enormous pressure and has contributed to the failure of some institutions.
Markets are virtually illiquid and companies are not accessing the equity markets and are conducting
limited bond issues in the bond market. This is due to the currently high degree of economic uncertainty
and waning confidence in the financial sector, manly banks.
Sub-Rating for Relevance of Design: Substantial
32. The Project’s design correctly placed emphasis on institutional strengthening, reform of the
regulatory regime and streamlining market infrastructure. As mentioned earlier in this document,
gaps existed in the regulatory and institutional structures supporting capital markets development and
growth. The CMMP project leveraged off of prior work that had identified these weaknesses and focused
on critical elements that would serve as a platform for the issuance of debt and equity securities. Among
these elements are capacity building, streamlining and automation of the capital market infrastructure
including the trading platform, strengthening the legal and regulatory framework and educating business
and the public, generally, on capital markets operations and corresponding benefits. The level of
transparency achieved by the project should not be undervalued given the prevailing adverse
macroeconomic conditions that has shaken confidence in the banking sector and financial markets. It is
also important to note, however, that there has been lower than originally expected market activity and
participation due to these poor conditions. Uncertainty over the strength of the Manat as well as the
viability of several large retail banks (following a series of attempted restructurings and liquidations) has
dogged the domestic financial sector.
Sub-Rating for Relevance of Implementation: Substantial
20
33. Throughout project implementation, the SCS, Baku Stock Exchange, National Depository
Center and the Bank remained committed to meeting project objectives and in spite of a challenging
environment, substantially all objectives were met within budget and on time. The CMMP, has
established a streamlined capital market trading platform underpinned by a revised legal framework and
regulations that support its operations. However, the prevailing economic climate is not attractive to
potential issuers of securities and more fundamental financial sector strengthening work is needed at this
time. Related challenges such as instability of the banking sector and two currency devaluations had a
negative effect on the banks’ ability to attract deposits. Several commercial banks have been declared
insolvent and overall confidence in the financial sector is low. Measures to stabilize the financial sector,
generally, are very much needed at this time. As mentioned above, WB is working with the GoA to
develop an ASA package focused on financial sector stabilization to address these issues.
3.2 Achievement of Project Development Objectives
Overall Achievement of PDOs Rating: Substantial
34. The Project contributed to the overall development objectives, with gains made in most areas. Project contribution is broadly recognized and well appreciated by the GoA and significant advances in
PDO outcomes were achieved despite considerable challenges. Responsible
Institution
PDO Indicator Description –
Indicator
Definition
End Target
(Approved)
Actual
Result
Level of
Achievement
(ICR’s
Assessment)
Rating
PDO: Increase the use of equity and corporate debt as financing and/or investment instruments through the adoption
of an effective capital markets regulatory framework and infrastructure.
Internal
Audit
Department
of
SCS
1. Increased
issuance of
corporate
bonds
Outstanding
Amount of
Corporate Debt to
2010 Non-oil
GDP
3.80% 14.1% Fully achieved High
Internal
Audit
Department
of
SCS
2. Increased
number of
companies
with listed
equity
(cumulative)
Number of Listed
Companies
8-10 5 Partially achieved Substantial
Internal
Audit
Department
of
SCS
3. Improved
price
transparency
Ratio of
Competitive
Transactions/Total
Equity (Non-
Block
Transactions)
90% 100% Fully achieved.
High
35. PDO: “Increase the use of equity and corporate debt as financing and/or investment instruments
through the adoption of an effective capital markets regulatory framework and infrastructure”
21
36. PDO Indicator one: Increased issuance of corporate bonds. There has been an increase in the
issuance of securities during the life of the project based on results tracked under the indicator
“Outstanding Amount of Corporate Debt to Non-oil GDP”. The baseline in 2010 was 1.9%. The
percentage rose steadily during the life of the project and was 14% as of May 2016. This was down from
a high of 24% in 2015 and highlights the quickly changing macroeconomic environment as well as the
short-term nature of corporate debt issues. Nonetheless, it is significantly higher than the target of 3.8%.
In retrospect this target, although a doubling of the 2010 baseline, may have been set at a more ambitions
level considering the fact that the result of 14% has been achieved under the current challenging economic
conditions.
Outstanding Amount of Corporate Debt to 2010 Non-oil GDP (actual)
2011 2012 2013 2014 2015 May 2016
4.9% 4.1% 7.3% 21.4% 24% 14%
37. PDO Indicator two: Increased number of companies with listed equity. This indicator fell short of
its original target range of 8-10 companies with listed equity. It is not surprising that there was a
slowdown in equity issues given the lack of appetite and ability of companies to conduct an initial public
offering. Unanticipated price volatility, lack of market confidence and tightening liquidity contributed to a
stagnation in the equity markets.
38. PDO Indicator three: Improved price transparency. This indicator achieved 100% of its target.
The indicator was defined as the ratio of competitive transactions to total equity. “Competitive
transactions” are non-block transactions as block transactions are not considered competitive and
transparent. However, the BSE has taken measures that are designed to make block (or cross trades) more
competitive by allowing a 60 minute price discovery period to allow counter-bid/offers and prepay
requirements have been eliminated for purchase orders. Whether this actually increases competitiveness
and transparency of block trades remains untested in the currently illiquid market.10
Intermediate Results Indicators
39. Component 1: Streamlining and Automating Market Infrastructure. The rating for this
component in the project’s final ISR was Satisfactory and targeted results had been achieved by project
closing. However, this comment was rated as moderately satisfactory in two consecutive ISRs, November
22, 2014 and May 18, 2015, respectively. The implementation of new (CMIS) is a critical step in advancing and
supporting capital market development as it main focus/function is aimed at substantial upgrading of trading,
clearance and settlement, depository and surveillance functions. The procurement process experienced delays in
finalizing the supporting technical specifications and the bid invitation which was originally planned for September
2013 was delayed until April 2014.
Intermediate Indicators for Component 1. Responsible
Institution
Intermediate Indicator End Target
(Approved)
Level of
Achievement
Rating
10 See CMPP Mission Aide-Memoire (June 6-10, 2016)
22
(ICR’s
Assessment)
Internal
Audit
Department
of
SCS
1. Ratio of market
participants
electronically linked to
market infrastructure
(trading, clearing and
settlements)
100% Fully achieved High
40. Component 2: Updating and Strengthening the Legal and Regulatory Framework. The rating
for this component in the project’s final ISR was Satisfactory and targeted results had been achieved by
project closing. This component had experienced some minor delay during project implementation as the
review and consultation process within the Cabinet of Ministers and the Presidential Administration was
longer than anticipated.
Despite the delay in the enactment of the Law, the SCS and the consultancy firm had in parallel advanced
thirty required regulations while awaiting the Law’s passage.11
Intermediate Indicators for Component 2 Responsible
Institution
Intermediate Indicator End Target
(Approved)
Level of
Achievement
(ICR’s
Assessment)
Rating
Internal
Audit
Department
of
SCS
2. Enactment of a new
Capital Market Act
Enacted Fully achieved High
Internal
Audit
Department
of
SCS
3. Promulgation of
capital markets
regulation required
upon enactment of
Law
Regulations
Promulgated
Fully Achieved High
41. Component 3: Stimulating Supply: The rating for this component in the project’s final ISR was
Satisfactory and results were fully achieved by the time of project closing.. However, this comment was
rated as moderately satisfactory in two consecutive ISRs, January 11, 2014 and November 22, 2014,
respectively. The objective of Component 3 is to stimulate supply of issuers in the Azerbaijan capital
market and its core activity is the Listing Advisory Program (LAP) which an effort to focus available
resources on increasing listings on the Baku Stock Exchange. The LAP was approved in March 2013 and
formally launched in April 2014 after a 6 months delay which resulted from ) as a result of
recommendations made in the Inception Report to shift certain deliverables into this unified program. By
September 2014, realignment of these deliverables were agreed.
Intermediate Indicators for Component 3 Responsible Intermediate Indicator End Target Level of Rating
11 See CMPP ISR #7 (22-Nov-2014)
23
Institution (Approved) Achievement
(ICR’s Assessment)
Internal
Audit
Department
of
SCS
Number of companies involved in the listing advisory program (debt and equity)
15 Companies Fully achieved High
42. Component 4: Capacity Building. The rating for this component in the project’s final ISR was
Satisfactory, and was rated at Satisfactory for the life of the project. The Capital Markets Training Center
has been with some slight delay and curricula for the Training Center have been adopted and a train-the-
trainers program enacted. A nation-wide education program was approved by the SCS and has been
continued under FIMSA. FIMSA leadership confirmed that in addition to university curricula, an
agreement was made with the Ministry of Education to include security markets materials to school books
and to explore expanding the curriculum to secondary schools. The 100US$ million SOCAR bond issue
in 2016 played an important role in raising public awareness of the bond market due to SOCAR’s
visibility.
Intermediate Indicators for Component 4 Responsible
Institution
Intermediate Indicator End Target
(Approved)
Level of
Achievement
(ICR’s Assessment)
Rating
Internal
Audit
Department
of
SCS
Increase of the threshold
pass rate of the Financial Certification examination for market participants
75% Fully achieved High
Internal
Audit
Department
of
SCS
Consumer Awareness of
Capital Market
Instruments12
45 Fully Achieved:
59.38
High
3.3 Efficiency
Rating for Efficiency: Substantial
43. The project achieved a high level of cost effectiveness given the multitude of complex
deliverables competed within budget. However, the project required an extension of six months due
to early delays. The project helped facilitate the modernization of the debt and equity trading platform for
the BSE and helped inform the creation of the Financial Markets Supervision Authority (FIMSA) and
subsequent liquidation of the SCS. However there was some delay experienced in the early stages of the
project due to unanticipated complexities surrounding the TOR, tendering and ultimate installation and
12 Using the Capital Markets Awareness Index.
24
testing of the CMIS system. The successful completion of the later tasks necessitated a six month
extension of the project closing date. Aside from this particular delay, the amount of progress made was
considerable. For example, the new “On Securities Markets” Law was adopted on July 14, 2015. Twelve
new NDC and post-trading system rules and thirty implementing regulations were adopted in support of
the new securities law.
44. The markets are currently too illiquid to perform an economic analysis to assess the cost
savings accruing to issuers of corporate debt or equities vis-à-vis the alternative of short term bank
financing. An economic analysis calculating the cost savings benefits to securities issuers’ vis-à-vis
reliance on bank debt would have been a useful measure to quantify current savings and perhaps
extrapolate future benefits. Furthermore, bank lending activity has declined due to macroeconomic
uncertainly, recent devaluations of the Manat and illiquidity.
3.4 Justification of Overall Outcome Rating
Rating: Satisfactory
Overall this TAL is rated as Satisfactory.
Dimension Rating
Relevance Substantial
Achievement of Objectives Substantial
Efficiency Substantial
Overall Outcome Rating Satisfactory
45. The overall outcome rating for the project is Satisfactory. This is based on its Substantial rating
for Relevance, Substantial rating for Achievement of Objectives, and Substantial rating for Efficiency.
The project’s objective of strengthening key institutions continues to be highly relevant for the GoA’s and
World Bank’s development priorities, and the project objectives were substantially met. Revisions to the
project completion data was needed – and reflects the Bank’s responsiveness to the project and
implementing institutions. There were moderate shortcomings primarily in the project’s efficiency
evidenced by the six month extension.
3.5 Overarching Themes, Other Outcomes and Impacts
(a) Poverty Impacts, Gender Aspects, and Social Development - (N/A)
(b) Institutional Change/Strengthening
46. During the implementation phase, the responsible agency, SCS, was dissolved and its
responsibilities transferred to the newly established Financial Market Supervisory Authority
(FIMSA). The Decree of the President of Azerbaijan #760 dated February 3, 2016 called for the creation
of an integrated Financial Market Supervisory Authority (FIMSA) with regulatory and supervisory
responsibility over banks, non-bank credit institutions, capital market, payment systems and financial
monitoring for AML/CTF. Upon approval of the FIMSA Charter on March 11, 2016, the State Securities
Committee (SCS) was dissolved with FIMSA designated as its legal successor. Prior to this, the World
Bank had expressed concern that the oversight powers of the SCS (as they related to inspection and
25
investigation of market players) were impeded by the Inspections Law13
. The FIMSA has a much broader
mandate than the SCS and is responsible for ensuring the effective functioning of the financial markets, as
well as protection of the rights of creditors, investors and insurers.14
This institutional change is viewed as
an improvement that will have a positive effect on capital markets oversight and securities price
transparency. Experienced leadership within SCS (many of whom were directly involved in the CMMP)
were assigned new roles in FIMSA thereby retaining the knowledge and experience of key managers.
(c) Other Unintended Outcomes and Impacts (positive or negative) – None identified
3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops – No Stakeholder workshop
was conducted. However a project closing event was held in Baku on November 4, 2016. See Annex 6.
4. Assessment of Risk to Development Outcome
Rating: Significant
47. The overall risk the project outcomes are rated as Significant due to the struggling banking
and financial sector. The devaluation of the Manat, lack of liquidity in the financial markets and the
draining of deposit accounts in retail banks have shaken popular confidence in the banking system. Direct
stakeholders and market participants have reported that the lack of regulatory transparency and uncertainty
in the markets are major factors contributing to the anemic state of the financial sector. Several large banks
have been declared insolvent thereby eroding confidence in the banking sector.15
5. Assessment of Bank and Borrower Performance
5.1 Bank Performance
(a) Bank Performance in Ensuring Quality at Entry
Rating: Moderately Satisfactory
48. The Bank correctly assessed the relevance of the PDO at the time of project design as well as
the strategic relevance of the objective to broaden and deepen the capital markets in Azerbaijan.
This was a timely and relevant project from inception. The project is well aligned with the FY07-10 and
FY11-14 Country Partnership Strategies16
and their common objective of strengthening the non-oil
13 Law on Audits of Entrepreneurs and Protection of Interest of Entrepreneurs. Adopted in August 2013 and enforced in March
2014.
14 See: http://en.fimsa.az/pages/10
15 Based on interviews with private sector stakeholders during the ICR Preparation Mission
16 See: Country Partnership Strategy FY07-10 for Republic of Azerbaijan (37812 – AZ); November 8, 2006, and; Country
Partnership Strategy for Azerbaijan FY11-14 (56246 – AZ).
26
economy through changes in a wide range of areas including financial markets. In the case of the CMMP,
the focus was on the development of the securities markets. At the time of project design, this was a highly
relevant objective. However, over the course of project implementation the financial sector generally
began to weaken under the pressure of lower economic activity, tighter liquidity and distress in the
banking sector
49. The Bank team failed to identify potential macroeconomic risks that could have an adverse
effect on the overall success of the project. During implementation, an unanticipated significant drop in
oil prices triggered a cascade of negative effects including a sharp reduction in economic activity,
tightened liquidity and significant distress in the banking sector. As a result of the increasingly adverse
macroeconomic conditions, there was and remains an acute need for financial market stability and
management and oversight of the banking sector. This threatened the success of the project as well as cast
some question on project relevance vis-à-vis the prevailing economic issues and distress in the financial
and banking sectors.
(b) Quality of Supervision
Rating: Satisfactory
50. The Bank team actively supervised project implementation and was responsive to client
needs. The project was closely monitored by the Bank. Two ISR missions per year were completed at
regular intervals during project implementation for a total of ten missions. A review of project documents
indicates regular and active communication between the Bank, the PIU and implementing agencies. The
ISRs provided straightforward assessments of project progress and highlighted potential issues or areas on
concern. The project was led by four TTLs at varying points, with most of them supervising the project
from Washington DC. A variety of senior technical staff from the Bank joined implementation missions to
ensure quality control of the technical aspects of components, as detailed in ISRs and AMs. Procurement
and Financial Management specialists were present in the region. Project implementation took place in a
very challenging macroeconomic environment and the Bank team provided adequate support and expertise
to bring the project to a satisfactory completion.
51. Fiduciary aspects of the project were managed in a timely manner and all audits were clean. As mentioned earlier in this document financial reporting was submitted by to the World Bank Financial
Management Specialist on a timely basis in the proper form and format. All annual audits were conducted
by a reputable firm and all audit opinions on the Project’s financial statements were unqualified.
Accounting records were consistently found to be accurate and with adequate controls to ensure accuracy
of accounting records and reports. A review of project–related documents and correspondence indicate a
close working relationship between the Bank’s Financial management Specialist and the PIU.
(c) Justification of Rating for Overall Bank Performance
Rating: Moderately Satisfactory
52. The Bank’s overall performance is assessed to be Moderately Satisfactory based on the
ratings for quality at entry, quality of supervision, and the overall outcome rating (see table below).
The CMMP project was relevant at the time of time of its inception and had the solid backing the GoA and
the respective implementing agencies. Substantially all targets were met and some were surpassed. Delays
were experienced early in the preparation stage which delayed the launch of the procurement process for
27
the capital markets information system (CMIS). Some delay was also experienced in the launch of the
national public awareness program for capital markets. The project team requested a six month extension
of the closing date to allow for the completion al all project components. The extension was reasonable
given the unexpected challenges that were encountered and the high quality of deliverables. Substantially
all outcomes were achieved in spite of unforeseen macroeconomic challenges including falling oil process,
tightened liquidity and a deteriorating banking sector. The Bank team did not account for these
macroeconomic or financial sector risks during project design. Consequently, the project is less relevant
today given the current market conditions. The successful completion of the CMMP can be largely
attributed to strong counterpart commitment to the project.
Dimension Rating
Quality at Entry Moderately Satisfactory
Quality at Supervision Satisfactory
Overall Bank Performance Moderately Satisfactory
5.2 Borrower Performance
(a) Government Performance
Rating: Satisfactory
53. The Government’s performance is rated as Satisfactory. The Azerbaijan Ministry of Finance
demonstrated ownership and commitment to the project during preparation and led project implementation
via a PIU established at the SCS. It maintained the PIU with staff responsible for project coordination,
procurement, financial management and M&E. The project was declared effective on Nove. 7. 2011, eight
months after Board approval, which is a period longer than average for this type of project and was the
result of a lengthy approval process and delays in establishing and staffing the PIU. Following Bank
Board approval, the Borrower initiated a lengthy review process of the Loan document which included the
Ministry of Finance, Ministry of Education, Ministry of Justice, and the Cabinet of Ministers. The
initiation of the CMMP was also dependent on the then-anticipated Presidential decree endorsing the State
Program on the Development of the Securities Markets.17
(b) Implementing Agency or Agencies Performance
Rating: Satisfactory
54. The Azerbaijan State Committee for Securities (SCS) was the primary implementing agency
for the CMMP. The overall implementation of the CMMP was delayed during the preparation phase. The
17 Decree of the President of the Republic of Azerbaijan endorsing the State Program on the Development of the Securities
Market of the Republic of Azerbaijan in 2011-2020. May 16, 2011,18:35
28
establishment and staffing of the PIU proved to be a more problematic than anticipated.18
In March 2011,
two specialists were identified but could not be retained until project effectiveness. As the process edged
forward, one of the specialists took another position and notified SCS of this decision in late August.
Similarly, the procurement of the 1C financial system and the search for consultants for the task “Creation
of General Framework for Stimulating Supply and Capacity Building of Capital Markets”, took longer
than what was originally anticipated. The unexpectedly complex preparation process also delayed the
launch of the procurement process for the CMIS. The setbacks experienced early in the project had a
ripple effect that ultimately required an extension of the closing date by an additional six months.
55. Despite early implementation delays and unanticipated negative macroeconomic conditions,
SCS remained fully committed to the project and achieved all deliverables. As mentioned earlier in
this document, commitment to the project remained high despite economic challenges. The borrower
remained committed to achieving the reforms and structural changes required under the CMMP plan. The
creation of the integrated FIMSA resulted in an improved agency with regulatory and supervisory
responsibility over banks, non-bank credit institutions, capital market, payment systems and financial
monitoring for AML/CTF.
(c) Justification of Rating for Overall Borrower Performance
Rating: Satisfactory
56. Overall Borrower performance is assessed to be Satisfactory. (see table below).With a high
level of commitment, the borrower undertook and implemented complex reforms in a difficult
environment which was exacerbated by falling oil prices, tightened liquidity and a weak financial sector.
Despite delays experienced during the initial phase of the project, significant achievements were realized
and internal capacity ultimately improved.
57. As of July 1 (the amended closing date), all the deliverables envisioned under the project had been
delivered and endorsed by the implementation agency. These include:
• Component 1: the adoption of 31 new regulations by the State Committee for Securities (SCS)
following the enactment of the new Law on Securities Market, which introduced new standards for
capital market operation and new requirements for licensing and operations of market participants;
• Component 2: successful installation of the new integrated Capital Market Information System (CMIS)
and its satisfactory testing result,
• Component 3: all the activities under the component were completed at the previous supervision
mission;
• Component 4: finalization of the national capital market education program and launch of the
respective public financial awareness activities; the development of strategic plan for a sustainable
operation of the Capital Market Training Center (CMTC).
18 In March 2011, two specialists were identified but could not be retained until project effectiveness. As the process edged
forward, one of the specialists took another position and notified SCS of this decision in late August.
29
58. Procurement under the project has been completed. Disbursement of the loan funds are at 98% in
June 2016, with several outstanding payments due in the next few months. Funds under the capital market
component of the FSMP grant TF00975 has been fully disbursed by October 2015.
Government Performance Rating Satisfactory
Implementing Agency Rating Satisfactory
Overall Borrower Performance Rating Satisfactory
6. Lessons Learned
59. When a country’s economy is reliant on a particular commodity or sector, it is critical to
assess the risks associated with both short and long-term price fluctuations. Azerbaijan’s economy
has been and remains highly reliant on oil exports. Based on customs data, petroleum products represented
over 90% of the country’s exports in 2011.19
Sustained downward price movements would have
significant effects on the country’s national budget and, as experienced during project implementation,
negative effects on GDP, pressure on the national currency, tightened liquidity and pressure on the
financial sector. As a result, the prevailing economic conditions are not conducive to participation in the
capital markets. The countries’ vulnerability to macroeconomic conditions must therefore be identified
and, if available, a mitigation plan should be developed.
60. It is important to fully assess all required actions during the preparation stage of a project
and identify and assess the implementing agency’s internal capacity to execute or manage all
required functions. The project experienced initial delays largely due to a protracted process requiring
approval from multiple government authorities before loan signing and staffing the PIU. The procurement
process also proved to be challenging in the early stage as the PIU team lacked the capacity and had taken
time to become familiar with requirements and standards. Tendering and contracting also proved to be
more involved that initially anticipated. As a result, the project got off to a slow start and, despite efforts
to catch up, required a six month extension. The scale and scope, as well as the timeline, of a project
should be well aligned with the implementing agency’s capacity for coordination, procurement, contract
management, and financial management. The Bank should consider up-front training of key government
operational staff or temporarily embedding experts in the PIU if necessary to help support the weaker
aspects of project implementation
61. Strong government commitment to a project agenda is a vital aspect in helping assure the
success of Bank-sponsored projects. Strong ownership of this TAL helped to make sizable progress
which included decisive legal and regulatory actions by the Government including the President, Cabinet
of Ministers and the SCS/FIMSA. It is especially noteworthy that a high level of commitment was
maintained in the face of macroeconomic and financial sector distress. If not for the Government’s
perseverance the project may very well have been sidelined in order to shift resources to other pressing
issues.
19 Economist Intelligence Unit, Country Risk Services: Azerbaijan. August 2016.
30
62. Capacity building and institutional reforms are not only more challenging to measure, but
often take longer to be realized. The Bank should dedicate resources to monitoring and tracking such
projects after closure since impacts may be realized more in the medium-term as opposed to the short term
just after closing. This could help account for longer development periods needed for capacity building
and institutional reforms to be fully realized. Teams should also be encouraged at the design stage to
consider indicators and M&E arrangements that will allow for the tracking of results and follow up after
closing.
7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners
(a) Borrower/implementing agencies – No Comments received
(b) Cofinanciers – No Comments received
(c) Other partners and stakeholders – No Comments received
31
Annex 1. Project Costs and Financing
(a) Project Cost by Component (in USD Million equivalent)
Components Appraisal Estimate
(USD millions)
Actual/Latest
Estimate (USD
millions)
Percentage of
Appraisal
Component 1: Streamlining and
Automating Market Infrastructure 6.05 7.72 127%
Component 2: Updating and
Strengthening the Legal and
Regulatory Framework
1.89 1.42 74%
Component 3: Stimulating Supply 1.86 1.70 91%
Component 4: Capacity Building 3.84 2.70 58%
Total Baseline Cost 13.64 13.56 99%
Physical Contingencies
0.00 0.00
0.00
Price Contingencies
0.00 0.00
0.00
Total Project Costs 0.00 0.00
Front-end fee PPF 0.00 0.00 0.00
Front-end fee IBRD 0.03 0.03 100%
Total Financing Required 13.64 13.56 99%
(b) Financing
Source of Funds Type of
Cofinancing
Appraisal
Estimate
(USD millions)
Actual/Latest
Estimate
(USD millions)
Percentage of
Appraisal
Borrower 2.2 2.2 100%
International Bank for Reconstruction
and Development 12.00 11.96 99.6%
SECO (Component 2 and 3) 1.60 1.6 100%
Total: 15.80 15.76 99.7%
32
Annex 2. Outputs by Component
The following are Key deliverables by Component:
Key deliverables Component 1:
- The country’s post-trading architecture and environment was consolidated making the National
Depository Centre (NDC) the sole CSD for government and corporate securities, providing
clearing and settlement functions to members;
- The central role of the NDC was supported by converting it to the non-for-profit infrastructure
organization serving its members and local issuers. All other registry-keeping licenses in the
country were abolished. The securities numbering and lean registration were transferred to the
NDC’s sole operational control. The NDC was connected to the country’s RTGS (AZIPS) systems
ensuring DVP principles of both government and corporate securities.
- The securities numbering function was transferred to the NDC and its methodology was
harmonized with internationally recognized ISIN standards; the NDC is a member of the
Association of National Numbering Agencies.
- Implementation of the renewed post-trading procedures complying with the international best
practices and newly adopted securities market legislation;
- Drafting extensive, best-practices based TOR for the new electronic trading/post-
trading/surveillance platform comprising.
- Automation of the broking, trading, registry-keeping, central depository, clearing and settlement,
issuing functionalities in the market in strict compliance with the newly adopted securities market
legislation;
Key deliverables Component 2:
- Adoption of adequate legal and regulatory framework including “On the Securities Markets” Law
harmonized with the EU directives and IOSCO principles, adoption of the 29 implementing
regulations, as well as new rule books of the Baku Stock Exchange (as a part of the Component 3)
and National Depository Centre (as a part of the Component 1) fully complying with the country’s
new governing legislation;
- Drafting tax regulation initiatives covering various aspects of the securities market operations.
Key deliverables Component 3:
- Re-organization of the BSE listing tiers and adoption of the new listing requirements;
- BSE trading (subscription, public offer and secondary market) rules and procedures enabling
transparent and competitive price discovery and fully complying with the newly adopted securities
market regulation;
- Conducting Listing Advisory Program (LAP) to local issuers, stimulating new issues at BSE
platforms.
Key deliverables Component 4:
- Conducting of the Nation-wide Education Program, including producing and disseminating printed,
visual and interactive study materials for schools, universities and general public, establishment of
the Financial Laboratory at the Azerbaijan State University of Economics;
- Establishing Capital Markets Training Centre (CMTC);
33
Annex 3. Economic and Financial Analysis
The markets are currently too illiquid to perform an economic analysis to assess the cost savings accruing
to issuers of corporate debt or equities vis-à-vis the alternative of bank financing. By 2013, the twin
shocks of low oil prices and currency devaluations had brought to an end the growth in bank credit
availability that the markets had enjoyed up to that point.
Therefore, as both the securities and banking sector are under severe pressure and uncertainty, it is
impossible to conduct an analysis of relative savings that issuers of securities could realize over the
alternative of bank financing.
34
Annex 4. Bank Lending and Implementation Support/Supervision Processes
provide services mentioned under activity 17 28/04/15
This deliverable was
changed to “Report on how
Investment Funds Asset
Managers can provide fund
administration services for
investments funds” by the
Amendment No 1, dd 15 Oct
59
2014, to the lump sum
contract with the Consultant.
Provide capacity building to
newly formed CSD 1.3.9
Completion of around 10 training
sessions on the operations of the newly
formed CSD through CMTC.
18 08/10/15
IT system needs of the
consolidated capital market
infrastructure
1.4.1
Report on the assessment of the IT
system requirements for the consolidated
capital market infrastructure
19 24/06/13
Develop functionality for the
required IT systems 1.4.2
Presentation of the parameters for the
required IT systems’ functionality on the
main infrastructure components: trading,
depository, registry, clearance-settlement
and surveillance.
20 24/06/13
Draft the technical
specifications for IT system
and bidding documents
1.4.3
ToR for acquiring the integrated IT
systems for the consolidated capital
market infrastructure.
21 24/10/13
Assist PIU with selecting the
appropriate system(s) and
consult SCS for selection of
appropriate system(s
1.4.4
Provide assessment report for each of the
proposed IT systems during the IT
procurement
22 23/02/15
Oversee the system
installation and testing 1.4.5
Assessment report on the testing results
of the selected and installed systems prior
the ownership transfer.
23 May 2016
The deadline for this
deliverable was changed due
to prolongation of the project
life span till 1 July 2016. The
change was confirmed by
parties in additional contract
signed with the Consultant
on 1 February 2016
Analyze the market risk for
revised settlement
procedures.
1.5.1 Risk assessment report of revised
settlement procedures 24 24/11/14
Review of various options for 1.5.2 Recommendations report on clearance- 25 15/08/14
60
clearance and settlement
procedures
settlement procedures
Identify the extent of a
required settlement guarantee
fund, including sources of
funding, such as transaction-
based fees, letters of credit
and/or insurance
1.5.3 Identify the extent of a required
settlement guarantee fund 26 23/02/15
Roadmap for reforming the
current pre-pay / pre-deliver
system
1.5.4
Road map containing recommendations
for reforming current pre-pay / pre-
deliver system into a system based on
payment and delivery post-trade,
implemented together with risk-reducing
mechanisms.
27 24/10/13
Devise the required rules to
implement the roadmap and
revise business processes and
procedures
1.5.5
Draft rules to implement the roadmap,
including revised business procedures
(Rule Book)
28 08/10/15
Recommendations on the
CCP capacity of the CSD 1.5.6
Assessment report on the CCP capacity of
the newly established CSD 29 24/10/13
Review the fee schedules and
incentives for trade 1.6.1
Recommendations report including
proposed fee structure on eliminating
financial incentives for pre-arranged
trades
30 24/06/13
Definition and use of
“address sales” and provide
recommendations
1.6.2 Draft revised legislation to cover the gaps
indicated under activity 1.6.2. 31 24/06/13
Recommendations for
integrating C&S of limited
off-market transaction
1.6.3
Feasibility report on integrating clearance
and settlement operations of the limited
off-market transactions.
32 15/08/14
Review the definition and use
of non-trade transfers 1.6.4
Draft revised legislation to cover gaps in
negotiated trade transfer. 33 24/06/13
61
Recommendations on
approaches to order
placement and trading rules
for thinly-traded securities
that will promote depth and
better price discovery
1.6.5
Recommendations report on the
placement and trading rules for thinly –
traded securities
34 24/11/2014
Support SCS and review laws
and regulation 2.1.1
Recommendations and international
expertise (cases) during the discussions of
the Draft Law, as required.
35 30/01/13
Revisions to the legislation
and international standards 2.1.2
The list of the laws and regulations
requiring amendment including the scope
of the amendments to ensure the
maximum compliance with IOSCO
principles.
36 30/01/13
Inventory of implementing
regulations supporting Law
on Securities
2.2.1
The list of the new implementing
regulations and revisions to the existing
legislation under the new law.
37 30/01/13
Draft/comments on the
required new implementing
regulations
2.2.2 Draft and deliver 16 high-priority
implementing regulations 38 24/10/13
This deliverable was
changed to “Draft and
deliver high-priority
implementing regulations”
by the Amendment No 1, dd
15 Oct 2014, to the lump
sum contract with the
Consultant.
Revisions to existing
regulations to conform to
new Law
2.2.3 Draft and deliver remaining
implementing regulations 39 15/08/14
This deliverable was
changed to “Completion of
remaining implementing
regulations” by the
Amendment No 1, dd 15 Oct
2014, to the lump sum
contract with the Consultant.
62
Review, analyze the risks and
opportunities 2.3.1
Review/ development of agreed rules for
BSE 40 28/04/15
This deliverable was
changed to
“Review/development of
agreed rules for BSE” by the
Amendment No 1, dd 15 Oct
2014, to the lump sum
contract with the Consultant.
Additional regulation for
BSE 2.3.2
Additional regulation for BSE to ensure
compliance with new Securities Market
Law
41 07/10/15
This deliverable was
changed to “Additional rules
for BSE to ensure
compliance with new
Securities Market Law” by
the Amendment No 1, dd 15
Oct 2014, to the lump sum
contract with the Consultant.
Recommendations and
Guidelines related to the role
that banks will play in the
new settlement model
2.3.3
Recommendations and Guidelines related
to the role that banks will play in the new
settlement model imposed by the new
draft legislation
42 24/11/14
This deliverable was
changed to “Report on
Recommendations and
Guidelines related to the role
that banks will play in the
new settlement model
imposed by the new draft
legislation ” by the
Amendment No 1, dd 15 Oct
2014, to the lump sum
contract with the Consultant.
Adopt accounting and tax
treatment for shares sold
above nominal value
2.4.1
Recommendations report on the proper
accounting and tax treatment for shares
sold above nominal value
43 03/04/14
Implement “tax
transparency” of investment
funds
2.4.2
Recommendations report on the “tax
transparency” implementation of
investment funds
44 03/04/14
Reinstate the tax waiver on 2.4.3 Recommendations report on the tax 45 15/08/14
63
dividend and interest income
from bonds
waiver on dividend and interest income
from bonds
Provide tax incentives for
companies to list their
securities on the BSE
2.4.4
Recommendations report on the tax
incentives for companies to list their
securities on the BSE
46 03/04/14
Analyze pooled investment
by insurance companies 2.5.1
Report on feasibility of pooled
investment by insurance companies 47 15/08/14
Drafting the regulations on
capital adequacy of the
market participants.
2.6.1 Draft the regulations on capital adequacy
of the market participants. 48 03/04/14
Drafting regulations on risk
management & requirements
of the market
2.6.2
Draft regulations on risk management
systems and prudential requirements of
the market participants.
49 24/10/13
Drafting regulations on
reporting procedures of the
market participants
2.6.3
Drafting regulations on the prudential
reporting procedures of the market
participants
50 24/10/13
Assessment report on the
modality of attracting local
and foreign issuers to the
listing
3.1.1
Assessment report on the modality of
attracting local and foreign issuers to the
listing
51 10/04/13
This deliverable was
changed to “Listing
Advisory Programme (LAP)
Report” by the Amendment
No 1, dd 15 Oct 2014, to the
lump sum contract with the
Consultant.
1st LAP Progress Report 3.1.2
Strategy for BSE for providing fund
raising platform for Azerbaijani
companies
52 03/04/14
This deliverable was
changed to Strategy for BSE
for providing fund raising
platform for Azerbaijani
companies, to be included in
the 1st LAP Progress
Report” by the Amendment
No 1, dd 15 Oct 2014, to the
lump sum contract with the
64
Consultant.
Expanding distribution
channels for government
securities.
3.2.2 Expanding distribution channels for
government securities 53 23/02/15
Recommendations Related to
Investment Companies and
Securities Market
Participants Bankruptcy
3.2.3
Report on the feasibility of the market-
makers and draft regulations governing
them
54 08/10/15
This deliverable was
changed to “Report on
bankruptcy of investment
funds and securities market
participants” by the
Amendment No 1, dd 15 Oct
2014, to the lump sum
contract with the Consultant.
Recommendations covering
the issues under activity
3.2.4. as required
3.2.4 Recommendations covering the issues
under activity 3.2.4. as required 55 08/10/15
This deliverable was
changed to “Organization of
at least 4 workshops and
LAP launch event” by the
Amendment No 1, dd 15 Oct
2014, to the lump sum
contract with the Consultant.
Provide recommendations for
developing the corporate
bond market
3.3.1 Recommendations report for developing
the corporate bond market 56 28/04/15
This deliverable was
changed to
“Recommendations report
for developing the corporate
bond market, to be included
in a report on initial
screening of at least 4
companies” by the
Amendment No 1, dd 15 Oct
2014, to the lump sum
contract with the Consultant.
Support LAP Activities – 2nd
LAP Progress Report 3.3.2
List of best Azerbaijani corporate
candidates for corporate debt offering 57 07/08/15
This deliverable was
changed to “List of best
Azerbaijani Corporate
65
candidates for corporate debt
offering to be included in 2 nd
LAP Progress report” by
the Amendment No 1, dd 15
Oct 2014, to the lump sum
contract with the Consultant.
Develop Presentation
Materials for LAP Team and
Coordinate with Agencies
3.4.1
Published educational materials
describing the role of the capital markets
and opportunities for corporate issuers
58 15/08/14
Develop and publish
educational materials on IPO 3.4.2
Published educational materials
describing the benefits of good corporate
governance and profitability
59 23/02/15
This deliverable was
changed to “Published
educational materials on
IPO” by the Amendment No
1, dd 15 Oct 2014, to the
lump sum contract with the
Consultant.
Create a cadre of instructors
capable of leading corporate
education events - At least 3
training sessions for trainers
leading the corporate
education events
3.4.3 At least 3 training sessions for trainers
leading the corporate education events 60 24/11/14
Develop educational
materials for investors
describing investment funds
3.5.2 Published educational materials for
investors describing the investment funds 62 28/04/15
Recommendations on
creating and enabling ETFs 3.5.3
Recommendations report on creating and
enabling ETF 63 15/08/14
This deliverable was
changed to
“Recommendations report
on enabling and creating
ETFs and developing the
needed regulations and
published educational
materials concerning ETFs”
66
by the Amendment No 1, dd
15 Oct 2014, to the lump
sum contract with the
Consultant.
Feasibility study for
implementing a market
(MTF) for foreign stocks
traded on the BSE
3.5.4 Recommendations report on enabling and
creating REITs and their regulations 64 15/08/14
This deliverable was
changed to “Feasibility study
for implementing a market
(MTF) for foreign stocks
traded on the BSE” by the
Amendment No 1, dd 15 Oct
2014, to the lump sum
contract with the Consultant.
Concept guidelines for local
sponsors for trading in
foreign stocks (MTF) on the
BSE
3.5.5 Published educational materials on ETF
and REITs, as requested 65 15/08/14
This deliverable was
changed to “Concept
guidelines for local sponsors
for trading in foreign stocks
(MTF) on the BSE ” by the
Amendment No 1, dd 15 Oct
2014, to the lump sum
contract with the Consultant.
Recommendation/
educational materials/manual
for ABS sponsors
3.5.6 Recommendations on introduction of
Assets Backed Securities 66 23/02/15
Recommendations on how
capital markets can support
projects
3.6.1 Recommendations report on the project
financing through securities market 67 28/04/15
Recommendations on how
capital markets can support
state companies
3.6.2 Recommendations on how Capital
Market can support state companies 68 23/02/15
Recommendations on how
capital markets can support
privatization
3.6.3 Recommendations on how capital
markets can support privatization 69 23/02/15
67
Review current government
support to private sector
development
3.7.1
Recommendations report on development
of instruments to support government
funding for the private sector
71 24/11/14
Conduct a training needs
assessment for all levels of
SCS staff
4.1.1 Training needs assessment report 71 30/01/13
Devise and provide a training
program 4.1.2
Curricula for all subject matter categories
of staff and all levels 72 03/04/14
Conduct in-house training for
SCS staff 4.1.3 Around 30 training sessions for SCS staff 73 07/08/15
Conduct a train-the-trainer
program for the training
sessions
4.1.4 Conduct around 10 train-the-trainers
programs 74 28/04/15
Identify external training
opportunities for SCS staff 4.1.5 Identified external training opportunities 75 27/05/13
Devise and provide a
knowledge management
system
4.1.6 Establish information portal and
searchable database within SCS intranet 76 24/10/13
Review the SCS’s internal
systems, policies, structures
and procedures
4.2.1
Recommendations report with proposed
time based road map for SCS ‘ s internal
systems , structures and procedures
realignment
77 28/04/15
Review the SCS’ current
procedures and practices of
decision-making
4.2.2 Recommendations report on SCS’s
current procedures and decision making 78 15/08/14
Review the SCS’ current
market surveillance policies
and systems
4.3.1
Recommendations report on SCS’s
interim market surveillance policies and
procedures
79 28/04/15
Review the SCS’ market
enforcement capacity and
revisions to enforcement
4.3.3 Recommendations report on SCS
enforcement capacity and revisions to 81 07/08/15
68
procedures enforcement procedures
Review the current systems
used for reporting by market
participants
4.3.4
Recommendations report on
improvement of the current systems of
reporting by market participants
82 07/08/15
Automation of the disclosure
of public information and
reports to the regulator
4.3.5
Report on module descriptions,
parameters for the automated disclosure
of public information and reports to the
regulator.
83 24/10/13
Promote the Azeri market to
International Investors 4.4.1
Conducting 2 regional conferences every
year and 2 international conferences
overall.
84 30/01/13
Two international
conferences have been
supported technically and
financially. Financial support
for regional conferences has
been provided.
Assist SCS in conducting
annual financial surveys 4.5.2
Financial support for annual financial
literacy surveys 85 03/04/14
Prepare a communications
plan for SCS 4.5.4 Communication plan for SCS 87 24/10/13
Recommendation/
educational materials/manual
for ABS sponsors
4.5.5 Review and update the SCS’s website 88 23/02/15
Assessment training
programs propose a model
for the training center
4.6.1
Assessment report of the current situation
and presentation of the proposed model
for the training center
89 18/3/13
Strategic business plan for
establishing training center 4.6.2 Business plan for the training center 90 24/10/13
Conduct needs assessment
and identify demand for
training programs
4.6.3
Recommendations report on the training
programs (such as certification programs,
regulatory trainings, trading trainings,
mini-MBA with concentration in finance,
etc.)
91 03/05/13
69
Developing a self-study kit
on securities trading (capital
market )
4.6.4
Around 3-4 training programs and
curricula for more general public based
on the agreement with SCS on the
recommendations for the task 4.6.3. At
each training session approximate number
of participants will be around 10 to 15
92 July 2015
This deliverable was
changed to “Developing a
self-study kit on securities
trading (Capital market)” by
the Amendment No 1, dd 15
Oct 2014, to the lump sum
contract with the Consultant.
Developing a self-study
guide on Corporate Bonds 4.6.5
Attracting the trainers and identifying the
trainers for each program 93 July 2015
This deliverable was
changed to “Developing a
self-study guide on corporate
bonds” by the Amendment
No 1, dd 15 Oct 2014, to the
lump sum contract with the
Consultant.
Start the train the trainers for
the local trainers 4.6.6
Conducting the “Train the trainers”
program for local staff 94 30/05/14
Prepare the marketing plan of
the center and promote the
center
4.6.7 Marketing plan of the center and its
execution 95 30/07/13
70
2.2 Component 1: Streamlining and Automating Market Infrastructure.
This Component was designed to address the outdated capital market infrastructure constraints by
focusing on: (i) increasing automation of the market through establishing one depository center and
consolidating clearance and settlement; (ii) opening the infrastructure’s membership and access; (iii)
minimizing off-market trades and improving price discovery; (iv) facilitating the operational introduction
of investment funds; and (v) building better risk protection through establishing an updated trade
guarantee mechanism.
Key deliverables of the Component 1:
- The country’s post-trading architecture and environment was consolidated making the National
Depository Centre (NDC) the sole CSD for government and corporate securities, providing
clearing and settlement functions to members;
- The central role of the NDC was supported by converting it to the non-for-profit infrastructure
organization serving its members and local issuers. All other registry-keeping licenses in the
country were abolished. The securities numbering and lean registration were transferred to the
NDC’s sole operational control. The NDC was connected to the country’s RTGS (AZIPS) systems
ensuring DVP principles of both government and corporate securities.
- The securities numbering function was transferred to the NDC and its methodology was
harmonized with internationally recognized ISIN standards; the NDC is a member of the
Association of National Numbering Agencies.
- Implementation of the renewed post-trading procedures complying with the international best
practices and newly adopted securities market legislation;
- Drafting extensive, best-practices based TOR for the new electronic trading/post-
trading/surveillance platform comprising.
- Automation of the broking, trading, registry-keeping, central depository, clearing and settlement,
issuing functionalities in the market in strict compliance with the newly adopted securities market
legislation;
2.2.1 List of NDC rules and post-trading system rules adopted in accordance with the new “On
Securities Markets” Law (2015):
1. Rules on requirements to Central Depository members;
2. Rules on opening, closing and managing accounts in Depository Centre;
3. Rules on registration and transfer of securities;
4. Rules on safe-keeping of securities in Depository Centre;
5. Rules on forming and holding securities owners’ registry;
6. Rules on registering liens in the Depository Centre;
7. Rules on fees payment;
8. Rules on depository risks management;
9. Rules on operation of financial security in the Depository Centre;
10. Rules on depository information protection and retention;
11. Requirements on post-trading system formation and operation;
71
12. Requirements to clearing organization members;
13. Rules on clearing operations;
14. Rules on information exchange in clearing operations;
15. Rules on information protection and reporting in clearing operations.
2.3. Component 2: Updating and Strengthening the Legal and Regulatory Framework.
To maximize the benefits of adopting an adequate legal and regulatory framework, this Component was
designed to focus on: (i) reviewing the draft capital market legislation, ensuring that the existing gaps are
addressed through the forthcoming new Capital Market Act and identifying key implementing regulations
needed to make the law effective; (ii) enhancing market confidence and safety by introducing minimum
capital requirements for market participants; (iii) in collaboration with the Ministry of Taxes and Ministry
of Finance, eliminating tax obstacles to capital formation for companies and avoiding double taxation of
participants in investment funds; (iv) allowing pooled investments by insurance companies; (v) fostering
competitiveness by extending market participation through new licenses and broader geographic coverage;
and (vi) ensuring effective coordination with other regulatory authorities in the financial sector to
minimize regulatory gaps and arbitrage opportunities.
Key deliverable elements of the Component 2:
- Adoption of adequate legal and regulatory framework including “On the Securities Markets” Law
harmonized with the EU directives and IOSCO principles, adoption of the 29 implementing
regulations, as well as new rule books of the Baku Stock Exchange (as a part of the Component 3)
and National Depository Centre (as a part of the Component 1) fully complying with the country’s
new governing legislation;
- Drafting tax regulation initiatives covering various aspects of the securities market operations.
The new “On Securities Markets” Law was adopted on 14th
July, 2015. The adoption of the Law was
assessed as a considerable effort to improve the legal and operational framework within which securities
market will operate in the future by experts. The Law sufficiently addresses “rule of law” related issues,
including: provisions for finality of settlement, better rules of supervision administration, initiatives that
move toward the creation of a modern central depository, enhanced book entry securities “ownership”,
reporting requirements, provisions for an investor compensation fund, more intensive monitoring of
market abuses, proper conduct of business with retail market participants. In brief, the Law provisions
observe the three IOSCO core objectives of securities regulation:
- The protection of investors;
- Ensuring that markets are fair, efficient and transparent; and
- The reduction of systemic risk.
The regulator recognizes that matters which are not directly subject of the law itself, such as thorough
surveillance and compliance programs, effective enforcement and close cooperation with other regulators
are necessary to give further effect to all three objectives.
72
After the adoption of the Law (as well as the Presidential Decree endorsing it and subsequent Regulations)
the supervisory authority (e.g. SCS at that time) works under a clear mandate, with its responsibilities and
powers established by legislation and further specified within the Law for specific areas. Responsibility
for supervision of the conduct of business obligations of investment companies and other market
participants (institutions) is clearly stated. Decisions of the regulator are required to be transparent and are
open to judicial review.
On the other hand, under the new legislative platform the supervisory authority has adequate powers to
carry out its regulatory functions, and has rulemaking authority. In addition, members and staff are subject
to integrity policies that ensure high standards of professional conduct.
Under the Law provisions supervisory authority has appropriate powers to obtain information and records,
and can exercise these powers on a routine basis to ensure compliance with the laws it administers.
Regulated entities are subject to record keeping requirements directly under the LAW, including records
relating to clients’ orders. Supervisory authority has adequate powers to investigate both administrative
violations of the law. Further development of the legislative platform is agreed to consider in future
enabling the regulator(s)’criminal prosecution and sanctions ability for serious violations.
Under the Law, appropriate disclosure rules requiring public offering, material event reporting and
ownership and control reporting, which attempt to improve transparency of information and to guide
continuous disclosure has been adopted, as has the requirement for preparers and management to be liable
for the accuracy of disclosure. Issues to the public of equity and debt securities require a prospectus
approved by the supervisory authority. Secondary legislation adopted under the Law ensures disclosure
requirements for prospectuses are in line with IOSCO principles. Issuers are also required to submit
reports about material developments. Financial statements must be prepared in accordance with IFRS. The
supervisory authority has sufficient powers to enforce issuers ‘compliance with reporting standards, and to
issue supporting secondary legislation. In addition, changes of control transactions are required to comply
with disclosure requirements.
The Law provisions related to market intermediaries in general properly achieve three main objectives: to
protect client assets from insolvency of the investment company, guard against defaults and sudden
disruption to the market, either through sudden insolvency or settlement failure, and, to ensure that
intermediaries are fair and diligent in dealing with their clients.
The Law sets appropriate licensing standards (limiting the market place to those with sufficient resources
and qualification), prudential standards (protecting against sudden financial failure), internal controls and
risk management standards (reducing the possibility of default or appropriate of client assets), and
business conduct rules (ensuring proper handling of client accounts).
Provisions on secondary markets are in place to ensure the efficiency and credibility of the markets as
mechanisms for pricing and transfer of securities. Exchange is subject to licensing requirements, including
standards applicable to information technology systems and risk management, and is subject to on-going
supervision, including inspections and reporting requirements.
Potential sources of market disruption are addressed through the regulation of clearing, settlement and
depository services, including risk management mechanisms designed to ensure that intermediaries settle
73
their market obligations in a timely and orderly manner. Market activity is properly subject to market
abuse rules, including prohibitions on trading on insider information, market manipulation and
misrepresentation.
Exchange business is subject to licensing allowing operating both securities and derivatives markets.
Clearing and settlement facilities are performed by the NDC. Both trading and post-trading are subject to
the supervision of the supervisory authority, which has proper powers to ensure both institutions acts in
accordance with regulatory requirements. The Law has sufficient provisions that trading on the markets is
transparent, and supervisory authority has direct responsibility for detecting insider trading and other
forms of market abuse, which will be further subject of uses and assistance of technological system.
2.3.1. List of implementing regulations adopted subsequent to the “On Securities Market” Law
(2015):
1. Rules on securities issuance and conversion at reorganization of juridical entities;
2. Rules on real estate certificates in the Republic of Azerbaijan;
3. Rules on merging, splitting and par value increase of shares;
4. Requirements applicable to issuers’ management reports;
5. Rules on statutory registry of securities;
6. Rules on issuance of securities outside of the boarders of the Republic of Azerbaijan;
7. Disclosure rules for persons conducting research on securities or issuers, proposing investment strategies recommendations;
8. Rules on lien registration, lien cancelation, pledge management;
9. Disclosure rules on securities issuers;
10. Rules on prospectuses and information memoranda;
11. Rules on transactions with investment securities;
12. Rules on investment securities subscription and allocation; 13. Rules on payment, notarial and depository registration of securities enactment contracts;
14. Regulations on market manipulation (market abuse);
15. Rules on issuers maximal limits of bond issuances;
16. Regulations on the registration of the mortgage cover and form and manner of a mortgage cover inspection report;
17. Rules on registry-keeping of the mortgage covers, depository reports on validating mortgage covers;
18. Regulations on the procedure of stabilization of prices of securities;
19. Rules on issuance, registration and turnover of depository receipts;
20. Rules on placement and turnover of derivative financial instruments;
21. Disclosure rules for stock exchanges;
22. Rules on drafting and submission of reports by investment firms;
23. Rules on conducting investment services (transactions) by investment firms;
24. Rules on post-trading systems and clearing operations;
25. Rules on margin trading with securities;
74
2.3.2 Tax regime initiatives:
One of the aspects of the component 2 was modernization of the tax legislation in respect of the securities
market operations. Together with the Project consultants the SCS specialists elaborated main aspects of
the taxation legislation and in 2015 proposed the following amendments to the Ministry of Taxes:
- Elimination of the double taxation on dividends (withholding tax on issuer and profit tax on
investors);
- Elimination of the double taxation on investment funds units (withholding tax on issuer and profit
tax on investors);
- Elimination of the capital gain tax in securities operations;
- Elimination of tax on profit made from difference of par value and public placement price of
shares;
- Elimination of profit tax on accrued interest of fixed income instruments;
- Elimination of the VAT tax on financial services operations made with securities.
The Ministry of Taxes were handed the prepared drafts of amendments to be made into variety of
legislative acts and codes to implement the above stimulating measures. The amendments will be
considered as a part of the State Budgetary plenaries in 2016/7.
In January 2016, the Parliament adopted amendment to the Taxation Code withdrawing profits tax on
dividends and coupon payments for the next 3 fiscal years.
2.4. Component 3: Stimulating Supply
This Component was designed to promote greater use of capital markets as a financing alternative by
focusing on creating a more appropriate environment to encourage equity listings and the corporate bond
market; actively reaching out to corporations to promote benefits of financial market as a funding
alternative and working pro-actively with prospective issuers to assist them in coming to the market.
Key deliverable elements of the Component 3:
- Re-organization of the BSE listing tiers and adoption of the new listing requirements;
- BSE trading (subscription, public offer and secondary market) rules and procedures enabling
transparent and competitive price discovery and fully complying with the newly adopted securities
market regulation;
- Conducting Listing Advisory Program (LAP) to local issuers, stimulating new issues at BSE
platforms.
26. Rules on conducting attestations for qualification certificates on delivering investment firm services (transactions);
27. Rules on attestation of executives and branch managers of licensed entities in securities market;
28. Regulations on the requirements to external auditors of the regulated institutions;
29. Rules on minimum chapter capital and sources of its formation for licensed entities in securities market;
30. Rules of capital adequacy for investment firms.
75
2.4.1. New Listing regulations at BSE:
As a key aspect of the Component 3 the re-drafting of BSE listing/delisting rules and regulations were
started in 2014. Initial changes were made to the listing rules on the 30th
of January, 2015. After the
adoption of the “On Securities Market Law” (2015) the listing rules and regulations were updated to fully
comply with certain provisions (definitions) of the new Law.
Regarding the new Listing regulations, separation of bond and stock market, the creation of market
segments, minimum capital requirements according to market segments, compulsory free float rates are
the most noteworthy changes for the description of key developments headline.
Before the modernization of Market Structure, Bond and Stock markets (requirements to Bond and Stock
issuers) were not separated. Therefore, there was sole requirement for the acceptance of companies to the
listing and disclosures for both the issuance of stocks and bonds. However, after the new regulations, the
bond and stock markets were apportioned and each was treated as an independent market as regards to
listing and disclosure requirements.
Moreover, after the approval of new Listing regulations, the transition from 2 tiers listing structure (1st tire
and the 2nd
tire listing markets) to 3 tiers listing structure (Prime, Standard and Alternative segmentations)
was realized. This development made the ground for the companies to be rearranged to these market
segments according to their financial and other indicators.
One of the main contributions of new Listing regulations was to shed light on the minimum capital
requirements of the companies. Hence, companies that were to be listed in prime segment should carry at
least 2.5 million AZN of minimum capital requirement), this indicator is 0.5 million AZN for standard
market segment (in which there was not any capital requirement before new the regulation).
Another noteworthy and one of most essential changes was the creation of free-float rates required to be
listed in each tier. For the Prime market, minimum portion of shares to be on free-float if 5% to 10%
depending on the overall equity of the company and those new shares should be held by at least 50
shareholders and no more than 5 % for each singular investor.
It can be noted that there were substantial changes in the listing requirements, trading fees and the
acceptance regulation of the companies to the listing.
For the easing of burden of the listed companies and to enhance the capital market practice, some fees
were substantially lowered, even some of them totally eliminated. With respect to these modifications,
one-time fee for being accepted to the listing was canceled out which was 3000 AZN and 600 AZN for
stocks and 600 AZN and 300 AZN for bonds for the 1st and the 2nd tire listings, respectively.
76
Annual membership fee for issuers was fixed by 1000 AZN in prime market, 500 AZN in standard market
and 200 AZN in alternative market. Previously, these numbers were 0.03% of total issue in the 1st tire
listing and 0.015% of total issue 2nd
tire listing.
Moreover, the bonds to be traded in prime market segment were required by this new regulation to be
rated by S&P and Fitch rating agencies with the rating “BBB-“, “Baa3” by Moody’s or should be rated
with the equivalent rating by other rating agencies. Otherwise, Market maker is required to be appointed
for these bonds within the whole maturity date of these securities.
Additionally, for providing the creditworthiness of issuer, it is required that 50 % of the sum of the last 3
year PBIT (which should take into consideration the outstanding bonds as well) should exceed the annual
interest payments on the new issued bonds.
2.4.1.a. Equity Market Listing Requirements:
Market
Structure
(listing
levels)
Listing Requirements
Primary
Market
Issuer should have the legal form of OJSC
No bankruptcy procedures should have been started for the year before
the listing application
Net positive income for at least one of the past three years
At least one year of operating history
Equity capital AZN 2.5m - 5m: minimum 10% free float
Equity capital AZN 5m - 10m: minimum 7% free float
Equity capital more than AZN 10m: minimum 5% free float
Shares in free float should be divided among at least 50 shareholders,
each of whom cannot possess more than 5% of total shares.
Financial statements prepared in accordance with IFRS and audited by
an international auditor
No significant changes in structural management for past six months
(i.e. at least two-thirds of management staff should remain unchanged).
Standard
Market
Equity capital should be at least AZN 0.5m
At least one year of operating history
Financial statements in accordance with local accounting standards
(GAP)
Audit by an independent auditor
Minimum of 5% free float (or at least AZN 125,000) which should be
divided among at least 20 shareholders, each of whom cannot possess
more than 5% of total shares.
Alternative Shares of issuers that do not meet the requirements of either the Primary
77
Trading
Market
Market or the Standard Market will be included in the Alternative
Trading Market
2.4.1.b. Bond Market Listing Requirements:
Market
Structure
(listing
levels)
Listing Requirements
Primary
Market
Financial statements prepared in accordance with IFRS, and audited by
an international auditor
No significant changes in structural management for past six months
(i.e. at least two-thirds of management staff should remain unchanged).
No bankruptcy can be declared by the issuer during one year prior to the
date of submission of listing application
Equity capital at least AZN 2.5m.
The presence of a market-maker and/or a high credit ranking granted by
an international credit agency (i.e. at least “BBB-” from Standard &
Poor's or Fitch, “Baa3” from Moody's, or equivalent of those rankings
granted from other rating agencies)
Sound and clear debt history
The I to be paid over one year should not be more than 50% of total
earnings before tax for the past three years.
Government bonds can be traded in this segment
Bonds with maturity of less than one year cannot be traded in this
market
Standard
Market
Equity capital should be at least AZN 0.5m
Net positive income for at least one of the past three years
At least one year of operating history
Financial statements in accordance with local accounting standards
(GAP)
Audit by an independent auditor
Sound and clear debt history
Alternative
Trading
Market
Bonds of issuers that do not meet the requirements of either the Primary
Market or the Standard Market will be included in the Alternative
Trading Market
2.4.2. Listed instruments at the BSE to the date of the document:
78
Segment /
Instrument Equity Bond
Prime
Market
DemirBank OJSC Ministry of Finance
Central Bank
International Bank of
Azerbaijan OJSC
Azerbaijan Mortgage Fund
SOCAR
Standard
Market
Azərkosmos OJSC Unileasing CJSC
Finans Lizinq OJSC
Turanbank OJSC Finex Kredit BOKT OJSC
KredAqro CJSC
Aqrolizinq OJSC Merkuri BOKT LLC
Amrahbank OJSC
Alternative
Market
Meqa Siğorta OJSC ProKredit BOKT OJSC
Bank BTB OJSC Premier Kredit BOKT LLC
Bakı Siğorta OJSC FinansLizinq OJSC
Muğanbank OJSC FINOKOBOKT OJSC
FINOKO BOKT OJSC
AXA MBASK Sığorta Şirkəti
OJSC
FinEx Kredit BOKT"OJSC
Bank of Baku OJSC
Rabita Bank OJSC
2.4.3. Listing Advisory Program:
Listing Advisory Program was established and implemented by Baku Stock Exchange within Capital
Market Modernization Project as part of the government program of “The development of the Capital
Markets of Azerbaijan for the years of 2011-2020”. The Program was launched in April 2014 and aims to
build on success in making a “highly effective securities market” in order to attract financial resources to
the real sector, move capital between sectors and increase effectiveness of the economic system,
contributing to creating better corporate governance and more transparency about economic activities of
listed issuers and increasing popular participation. Together with the consortium of the partners joining the
initiative (the country’s leading auditors, lawyers, investment firms) LAP is conducting seminars and
round-tables for prospective issuers on variety of technical topics, and, on pro-bono basis, is providing
issuers with legal and organizational guidance and support to assess their needs and potentials for capital
market fund raising, and, once decided, fulfill the whole process, from drafting comprehensive prospectus
to organization of secondary market for their issued instruments. So far, more than 40 local companies
participated in the initiative, out of 16 companies signed special agreement with LAP consortium for
closer, one-to-one cooperation and support of the capital market fund raising.
Updating and Strengthening the Legal and Regulatory Framework
Stimulating Supply
Capacity Building
VAT
Supporting Capital Markets Training Center's Operational Efficiency and Its Divercification
Project management
95
1 176,598.48
2 235.97
3 214,000.00
390,834.45
4
5 390,834.45
6
7 350,432.15
8 2,074.54
9
10 350,432.15
11 40,402.30
NOTES
/i:
Disclosure to Dİscrepancy (11):
268.22
174,922.02
Total discrepancy 175,190.24
Signator 1: / / /
signature date signator's initials position
THE REPUBLIC OF AZERBAIJAN
Capital Market Modernization Project
Designated Account (DA) Statement
International Bank of Azerbaijan (DA,USD)
as of 9/30/2016
in USD
Opening balance as at 1/1/2016
Add: Cumulative unexplained discrepancy
IBRD advance during period from: 1/1/2016 to: 9/30/2016
Less: Refund to IBRD from DA during the period from: 1/1/2016 to: 9/30/2016
Present outstanding amount advanced to DA
DA closing balance as at 9/30/2016 carried forward to next period
Add: Amount of eligible expenditures paid during quarter
Service charges (if debited into DA)
Less: Interest earned (if credited into DA)
Amounts due to other bank accounts(-) or DA (+)
Amount in cash on hand (retained (+)/due (-))
Total advance accounted for
Discrepancy (5) - (10) to be explained /i
The discrepancy, w hich should be explained in a separate note, may comprise eligible expenditures paid out of DA but not yet entered by the DA bank, amount
advanced by the Bank but not yet credited by the DA bank, etc.
Foreign exchange difference(losses (-)/gains(+)
Payables(-)/advances(+) to contractors and employees
96
ASSETS
Cash and cash equivalents
147.19
39,968.32
Advance Payments
Cumulative Project Expenditures 1/ 15,655,187.74
FUNDS AND LIABILITIES
Project Financing 2/ 15,695,978.27
Other income (like bid fees)
Exchange Rate Difference 3/ -675.02
Total funds and liabilities
NOTE:
1/ Total Uses of Funds (see Report 1-A)
2/ Total Sources of Funds (see report 1-A)
3/ See Report 1-A
Signator 1: / / /
signature date signator's initials position
Signator 2: / / /
signature date signator's initials position
PROJECT BALANCE SHEET
as of: 9/30/2016
in USD
15,695,303.25
15,695,303.25
International Bank of Azerbaijan (Project A/c, AZN)