Ruslan Magomedov: “We Want the Shares of S&P 500 Companies to be Traded in Ukraine”

Ruslan Magomedov, who was appointed the Chairman of the National Securities and Stock Market Commission a few months ago, has already made several loud statements. In particular, he offered to conduct an IPO of state-owned companies. His plans are to breath a new life into the domestic stock market and to build its work in accordance with modern standards.

The Minfin talked to Ruslan Magomedov about when it will be possible to buy the S&P 500 in Ukraine and to buy shares of Ukrainian companies in the mobile application.

How the domestic stock market will be launched

One of the key tasks of any Chairman of the NSSMC is to create conditions for the launch and operation of a full-fledged stock market. Why hasn’t it appeared in Ukraine yet, in your opinion?

Some of my predecessors had to chair the NSSMC during the global crises, and of course it was not the best time to start launching the market that had been dormant for a long time.

At this moment, none of the exchanges in Ukraine is fully operational. We have lost almost all the issuers of shares. After the crisis of 2008 and Russian aggression , many issuers stopped working. Accordingly, their shares are worthless. Today, only government debt is traded in the stock market.

Currently, the lack of investment instruments is experienced by insurance companies and pension funds, which can actually place money only on deposits and in government domestic loan bonds.

What markers will you personally focus on?

My main task is to take real steps and introduce instruments to create a market. I like when results can be measured: how the number of issuers, the volume of trades, the number of market participants, the number of customers of these participants will change. Currently, no retail exchange is fully operational. If there is at least one, I will already consider it as an achievement.

At the same time, I have to say at once that the Regulator cannot build a market or tell what it should be like. The regulator can only create conditions for the market to develop or, vice versa, to tighten the screws.

Do you have quantitative benchmarks, for example, to increase the volume of trading in the stock market in many times?

Now, the volume of trading in the stock market is almost the same as the volume of trading in government domestic loan bonds in it. Everything else is close to zero. So in fact we will have to grow from scratch.

It is impossible to predict what volumes will come out. First, there should emerge at least one large issuer. Recently, the football club Veres has carried out public offering, but this is a very niche story, there was a limited number of potential investors from the very beginning.

But we need an issuer that would be interesting and understandable for a wide range of investors. Personally, I would like it to be one of the state banks. Such an issuer could emerge due to a ‘people’s IPO’. That is, due to the entry of a state-owned company into the stock market.

It is also important that the issuers entering the market feel that the placement is expedient, that it is profitable for them. Those companies whose shares are now represented in the market, in fact, do not see any point in this. This is an ‘obligation’ for them, which remained after privatization.

About ‘people’s IPO’ and privatization of the Privatbank

You say that ‘people’s IPO’ will give impetus to the development of the stock market. And what are the benefits of this option of initial public offering for an issuer, state-owned enterprises and the state?

The capitalization of a company is considered to be as assessed by the market in which the shares are traded. In Ukraine, it is impossible to evaluate a company in this way. If we carry out a ‘people’s IPO’, we will know the market price of a state company.

At first, it is better to bring a small stock of shares to the market, because we do not know to what amount of shares the market is ready. But, having sold even a small stock, we will form the value of the company.

The company can be evaluated by investors even higher than its book value, there are plenty of such examples in world markets. Even a loss-making company can be evaluated at billions due to its growth prospects. It will be the same here.

Taking into account that now there are not many instruments in the market, it is likely that we will have a good financial multiplier to current indicators.

If the state operates the company’s shares, it will be able to understand how the market predicts its future.

That is, if the government decides to sell the Privatbank, perhaps, firstly it can bring 1% of its shares to the stock market and, based on its value, set the price to the buyer of a large stock, right?

In general, yes, but I would start not with 1%, but with 5-6% for investors not to be afraid of a squeeze-out (the compulsory sale of the shares of minority shareholders of a joint-stock company for which they receive a fair cash compensation). It is difficult to say now whether it is worth bringing even more shares to the market. It is necessary to feel out the market, to determine the demand.

After the first ‘people’s IPO’, we will be able to understand the market volume and find out how it reacts to new assets. Now the stock market is like a pipeline that has not had running water for many years. It is necessary to look whether the pipes have not rusted, whether shut-off valves work.

Has the NSSMC already discussed the idea of state-owned enterprises IPO with the government?

This idea has already been discussed at the Cabinet of Ministers, and not only there. But it is still at a very early stage. I would say that the idea has been articulated and has not raised any objections. The proposal has interested those who have heard it, and I hope that its consideration will be prompt.

Is there a list of state-owned enterprises that could conduct an IPO?

No, there isn’t. Now it is just an idea that is going to be discussed. But there are some key criteria. It is important that the enterprise is state-owned by at least 75% to avoid unfriendly actions by private shareholders. The enterprise should  be profitable. And it should  be understandable. Because if it is a ‘niche enterprise’, it will be difficult to explain its features to investors. It is best to sell what is already understandable and well known. 

What international experience in conducting ‘people’s IPOs’ do you focus on?

The experience of Poland was successful. But we should not pay too much attention to how such processes took place in other countries. When we try to implement foreign practices in Ukraine, it turns out that the ‘devil is in the details’ and these details are so many that there is almost nothing left from the original model of someone’s experience.

The practice is influenced by the peculiarities of the legislative framework, the perception of the country, the work of the judicial and law enforcement system, the peculiarities of the regulator. As a result, we still come to the Ukrainian version.

How to return corporate bonds to the stock market

One of the promising areas for the stock market is the issuance of corporate bonds. What is the difficulty of promoting this instrument?

Now there is no market of corporate bonds, there are only single issues. And we would really like to reactivate this area.

Many companies have already moved towards the international financial reporting standards. This makes it harder to evade obligations. Therefore, it gives the possibility to restart the market.

Are you ready, as it is said, “to loosen the reins” for a little for this purpose?

After our stock market ceased to perform the main function of redistribution of capital, it has been transformed into a mechanism for laundering funds and conducting ‘grey’ schemes. Stern measures had to be taken to stop this process. It may be said that due to using ‘antibiotics’ for treatment, we have not only killed harmful microorganisms, but also the useful ones have suffered. Now we need to drink ‘probiotics’.

We are already working to understand what needs to be changed to make bond issuance easier. But again, it is essential that the immune system is not weakened so that we do not become infected with some ‘pathogen’ again and fraudulent schemes do not get revived.

On the other hand, what rules are necessary for the companies placing bonds to carry out their obligations?

Let’s have a look at the mechanism currently used and the reason why few companies  are willing to enter this market. Companies are required to provide financial statements fairly often. It is expensive, because it is prepared by external auditors. Due to this there is a considerable administrative load, and in such conditions it is more profitable for many companies to take a loan from a bank.

Therefore, we need to find a reasonable balance of audit terms. If it is carried out too seldom, there will be a place for fraudulent ‘schemes’. But if the analysis is conducted with a reasonable frequency, we can see in time that the company’s performance is falling. In this case, the Regulator needs to pay attention to it and ask additional questions. It is necessary to look for such golden mean in dialogue with issuers.

About legislative changes in the stock market

The Law on Facilitation of Investment Attraction and Introduction of New Financial Instruments #738 will come into force on July 1. What do you expect from this Law?

The law actually opens a new layer of trade. There will be big changes in the stock market, as well as commodity markets will emerge. Commodity markets already existed in Ukraine in synthetic form, when futures contracts were traded. But all this was ‘niche’ and did not take off. Now, due to the adoption of this Law and its proper implementation, we will have more opportunities for action. It is important that commodity markets will allow trading participants to hedge their risks.

Then why were there proposals to postpone the entry into force of this Law for another six months?

The Law is extensive and, of course, affects the interests of a large number of participants.

We talked about this with market participants. As always in such cases, the opinions divided. Some stood for postponement, but there was a large number of active market participants who stood for not postponing the new provisions. That is why we decided to amend the provisions where we saw conflicts and to start changes from July 1.

I believe that there should not be any special problems with transition to the new provisions. Relicensing of brokerage companies into investment firms will be in fact automatic. The Law does not provide for severe fines. But if it is difficult for companies to work for some reason, we will consider each case separately and decide what amendments have to be made to the bylaws.

On investors attraction and digitalization of services

The stock market will remain dead without investors. Will the NSSMC support the reduction of income tax on the sale of shares, dividend income, so that our market becomes interesting for investors?

As the international experience shows, tax reduction really stimulates the arrival of investors. But the main problem is that we actually do not have where the investors should be attracted – there are no assets that can interest them.

Now reducing taxes is the same as organizing a promotion in a store when there are no goods on the shelves yet. Therefore, I am not sure that now we need to organize ‘advertising’ by reducing tax rates. This is the issue of a long-term horizon.

And what is important on the immediate horizon?

Now we need to focus, for example, on the implementation of e-commerce. We have adopted amendments to the Regulation for Financial Monitoring that allow our professional participants to open customer accounts remotely without the need to come to the company’s office. This is really a breakthrough, because during quarantine, lockdowns, many people just could not come to the company to open an account.

But although we have removed the provision that limited remote account opening, none has begun to use this opportunity in practice yet. I am waiting for the first market participant to provide such a service to its customers and how many companies will repeat it later.

Obviously, the topic of digitalization is especially close for you…

When I was working in business, I was involved in promoting the stock market among the public through digitalization. Back in 2010, a citizen of Ukraine could buy shares of Ukrainian companies using a smartphone. Then it was a breakthrough. Our problem was that we made an online store, but there was nothing on the shelves.

Now I want this online trend to revive and the participants to become digitalized as much as possible.

Then why do companies, despite the ‘green’ light from the NSSMC, do not hurry to develop the online direction?

Everyone who makes innovations takes a big risk. In the banking sector, it is easier to develop online services, because they are in great demand. And here, it is not known how many customers it will be able to attract.

If a bank would like to trade in securities through its application, does it need to go through additional procedures and obtain new licenses?

The bank really needs to get a license to trade in securities. But in general, banks have an advantage compared to brokerage companies, because they have long been able to attract customers remotely and have already established this process. Therefore, I really hope that some of our neo-banks or a large bank with a technological application will enter this market.

When there will be an opportunity to buy S&P 500 in Ukraine?

In spring, trading in shares of several American companies (Microsoft, Facebook, Tesla) began on the Ukrainian stock exchanges. Do you have any plans to simplify the registration of shares of foreign companies?

The appearance of such companies in the stock market is another way to give impetus to its development. This is a way to show that there are goods from foreign manufacturers ‘on the shelves’. Besides, it is a good tool to demonstrate what the stock market in its classical sense is.

We really want to simplify the admission of securities traded on world markets. We will try to ensure that all the necessary legislation is adopted. But it is important that there is someone who is ready to take the business risk of introduction of such shares into the market.

That is, the new rules will allow all the shares traded, for examples on the Nasdaq, to enter for trading in Ukraine automatically?

That is the kind what we do. But we are not talking about all the shares, because very different companies are traded on the Nasdaq. But for the shares of the companies that are included, for example, in the S&P 500, the procedure should be simplified and paperwork should be minimized.

What should we check? Whether the Apple is a ‘scheme’ company? My principle of work is expediency, and the bureaucracy, which does not lead to anything good, should  be removed. All the more so, because a lot of bureaucracy and paperwork directly affect the cost of bringing shares to the market and, consequently, the cost of financial services for customers.

What prevents the appearance of shares of Epicenter, Rozetka and Nova Poshta on our market?

Everything is clear with the Apple. And what is about Ukrainian companies and the transparency of their work? In our country, for example, large shareholders can get rich, and the company will be technically unprofitable, shares will become cheaper. Then what is the point of investing in securities? Is it possible to control effectively the transparency of companies entering the stock market?

The financial reporting standards, we have already talked about, are required for this purpose. They allow to see when the majority shareholder starts playing with the balance not to pay the minority shareholders their share of profits.

It is also necessary to implement well-known corporate governance practices when there are independent supervisory boards that protect the interests of all investors. It makes no sense to reinvent the wheel. All these problems have already been experienced by developed financial markets, and the majority shareholders also wanted to adhere to their interests there.

All over the world the initial placement of promising companies is of great interest to investors. Obviously, Ukraine will not be an exception. But are private companies themselves interested in raising capital in the stock market or is it still easier to take loans?

When the Veres football club carried out its IPO, I received a lot of appeals from middle-sized and small-sized companies. They were interested in how to enter the market as well.

Everyone faced two problems. The first one is the complex IPO procedure that we want to simplify now. The second one is that many small and medium-sized companies operate on the simplified tax system and have an opaque ownership structure. The stock market is not available to them. In order to enter it, firstly you need to change the type of the ownership: a private company should  be changed into a limited liability company, and then into a joint stock company. But if they have to pay taxes on the general system, their business will become unprofitable.

Potential issuers may have other concerns. Those who believe they now have a good capitalization on the balance sheet are afraid that if they conduct an IPO, it may decline. There are fears that you will have to pay for the market entry procedure, and there will be few buyers of shares.

Therefore, there is a question of priority. There should emerge the market, people who know how to buy and sell, investment advisers. Then, at least, there will be someone to ask what demand is expected for shares of, let’s say, Rozetka, Nova Poshta, or Epicentr.

How the state protects those who invest in the foreign stock market

Now the Ukrainians have the opportunity to trade in foreign stock markets via international brokers. Does the NSSMC regulate their activities and how?

The activities of these brokers are not regulated because the investment takes place abroad. A person who decides to invest abroad should  understand that he/she is acting within the legal framework of another country.

For example, if 100,000 Ukrainians trade through Interactive Brokers, you still do not have any authority to check how this company works?

Yes, we don’t have such powers. The NSSMC should sign the IOSCO Multilateral Memorandum (MMoU) to obtain such powers. We strive for this, but are not yet signatory to this Memorandum.

When we succeed, we will be able to react to what is happening outside Ukraine.

In Ukraine, a large number of companies with foreign licenses that provide access to the forex market, binary options, is operating. Some of these companies are on the list of dishonest companies according to the NSSMC’s opinion, but they continue to operate. Why is this happening?

This is a question about the powers of the NSSMC. Some companies should  be a subject to our regulation, but they do not want to be licensed. They conduct aggressive advertising campaigns and work until their activities are stopped.

When such cases appear, we try to react to them as quickly as possible together with the law enforcement authorities.

The Security Service of Ukraine recently announced that it had blocked the operation of the broker Just2Trade. What offense was committed by this broker?

The company was performing activities of providing access to trading, but was not licensed in Ukraine. The Company refers to the fact that it is working within the legal framework of Cyprus. But let’s see them trying to open an office in Cyprus and to offer financial services there, having only a Ukrainian license.

What is the fundamental difference between the activities of the Just2Trade and, for example,  the Exante or the Freedom Finance, which also provide access to trading in international markets via their companies registered abroad?

They allocate money through bank accounts controlled by the National Bank of Ukraine. You can transfer money to their account within the e-limit.

In the case of the Just2Trade in Ukraine, money was just collected under questionable pretences and it was unclear where it was invested. This is the occasion for the NSSMC to get concerned in such activities and to react to them.

Do I understand correctly that there is an international broker Just2Trade, and if I transfer money to its account from my bank card within the e-limit, there is no violation. The violation related to the way the company’s office worked in Ukraine.

Yes, if the company works on the same principle as, let’s say, the Interactive Brokers, there will be no violation. If the money is transferred through a Ukrainian bank, this means the person has already shown the origin of the money.

But it is important to understand that becoming a client of such a large company as the Interactive Brokers may be difficult because foreign brokers are often interested in the origin of money. This is where such stories when an ‘investment company’ operating in Ukraine without a license is ready to take money even in packages are coming from. Such companies are not interested in the origin of funds.

In your declaration, submitted upon appointment to the position, it is stated that you own the shares of the Ukrainian Stock Exchange only at a small amount of UAH 6 000. Why don’t you invest personal funds either on the foreign or Ukrainian stock market?

I still have the shares of the Ukrainian Stock Exchange because I was actually at its origins. But I have already sold them because there was a conflict of interests, as I owned a share in the professional participant of the stock market.

I do not want to invest in foreign markets because I want to develop the market here. I would be happy to invest in Ukrainian shares, but there is not any in the market right now. All companies, the shares of which are being traded in the market, are not the conscious issuers. It is not the way to raise capital for them.

I would like to revitalize this market so that we have the participants which understand the economic nature of stock trading. And then, after the end of my term at the NSSMC, I will be able to invest in this market.

Source: “Minfin”