The mandate of the BVB Board is nearing the end

The mandate of the current Board of Directors of the Bucharest Stock Exchange (BVB) will end at the end of January next year, after a period of four years in which the management of our capital market had some notable results but also a major failure.

Radu Hanga, the current president of BVB, said in an interview he gave us in November 2019: "The key objective for the new Board of Directors will be to increase the visibility of the Bucharest Stock Exchange as a source of financing for the development of active local or foreign companies in Romania. When I talk about increasing visibility, I think of both entrepreneurs and the community of investors that we want to develop".

It is difficult to quantify "visibility", but during the mandate of the current BVB Council, our capital market has functioned to a certain extent as a financing mechanism for private companies and the state.

• The listing of Hidroelectrica only on the BVB, the revitalization of the AeRO Market, the Fidelis state securities

Transport Trade Services, One United Properties, Aquila and Hidroelectrica are the four major listings on the BVB Main Market in the last four years, of which only two (One and Aquila) raised money from investors before coming to market. In addition, from time to time an already listed company makes a capital increase. It is little, but during the previous Board's mandate none of the main listings was preceded by an offer that raised capital from the market, but the shareholders sold already existing packages.

Hidroelectrica's listing is, without question, the main event at BVB in the last two to three years. Franklin Templeton and the Romanian State have the main merits in launching the offer, but certainly BVB played an important role in the largest listing in the history of our market. The offer was made only in Bucharest, following the actions of the authorities and other important Romanian stakeholders (including BVB), the value of the operation rising to over 1.9 billion euros, a huge amount by the standards of our capital market.

"The Hidroelectrica IPO proved that no company in Romania can be considered too big to be listed on the Bucharest stock exchange," says Mihai Căruntu, vice-president of the Association of Financial and Banking Analysts in Romania (AAFBR), in a article published in the last newsletter of the Association.

Due to its size and the fact that it was oversubscribed, the Hidroelectrica offer showed that there is demand from investors at BVB, but too little new quality offer.

The AeRO market, which in the first five years after its launch in 2015 hardly mattered, fulfilled, especially in 2021, its role as a facilitator of the financing of relatively small companies. That year, of the twenty companies that went public (compared to just four in 2019 and 2020), seventeen raised money through private placements. There were some stars, companies from growth areas not represented at BVB, such as Arobs Transilvania Software, but unfortunately many companies listed on AeRO did not live up to investors' expectations, and some would not have had anything to look for at BVB.

It is true that the issuers in such a Multilateral Trading System are closer to the risk capital area, but a more rigorous selection would have been necessary.

Bond issues have become more frequent in recent years on the BSE. There have also been failures, such as Vivre Deco, but overall the market is working, and the Fidelis government bonds, which have brought many investors to the BSE, are a big plus for our stock market.

Progress has been made, but the capital market is still not an important channel for financing the economy. "I am not convinced that, at the moment, the stock market has any role in Romania, in the development of the country", said economics professor Radu Coşea, in an interview recently published in the newspaper BURSA.

• The number of investors has tripled, but unfortunately few are active

The number of investors at the Bucharest Stock Exchange has tripled in the last four years, according to the reports of the Investor Compensation Fund (FCI) and the Financial Supervisory Authority (ASF). At the end of September this year, there were at most 168,000 investors, according to FCI data, compared to 55,000 in September 2019.

The growth started with the pandemic (when trading platforms recorded record increases in the number of clients), being favored by the possibility of opening online accounts, listing Fidelis and Hidroelectrica state securities. The BVB's promotional activities probably played a role in this. But 70% of investors have portfolios below 20,000 euros, with an average value of 4,000 euros, which is very little.

The number of active investors is much lower, in the middle of the year there were almost 44,000 active accounts at Financial Investment Services Companies (SSIF), according to ASF data, compared to around 17,300 in September 2019. For June 2019, the Authority's data indicates 15,700 accounts assets, i.e. almost a tripling compared to the middle of this year.

Either way, over the past four years, the number of investors on the BSE has grown significantly, which suggests a better visibility of our stock exchange.

• The value of transactions on the BSE exceeded that of the Prague market, but remains below that of Budapest, a smaller market than ours

The increase in the number of investors is seen to some extent in the liquidity of the BSE. In the period 2016 - 2019, largely equivalent to the mandate of the former Council, the average daily value of transactions with shares listed on the Main Market was 42.3 million lei (according to our calculations based on BVB data), and since the beginning 2020 to date of 60 million lei, but for the last period the value is pulled up by the summer listing of Hidroelectrica.

The increase in liquidity is also visible in a regional picture. In recent months, the turnover of Romanian shares on the BVB has exceeded that of the Prague Stock Exchange, an emerging market in the MSCI category, according to data from the European Federation of Stock Exchanges (FESE). In October, at the BSE, the average daily turnover with local shares was 11.7 million euros, compared to 11.5 million euros in the Czech Republic (in other months the difference was much higher), while in Budapest the value of transactions was raised to 20 million euros per day. Warsaw, with a daily average of 304 million euros, is in another league entirely.

The listing of Hidroelectrica and the increase in share prices, the BVB indices having in the last four years the best evolution among the indices of the major markets in the region, made our stock market the second largest capitalization in Eastern Europe and the third in Central and Eastern Europe East. In October, the BVB's capitalization was 40.2 billion euros, over those of the Prague stock exchanges, of 31.9 billion and 29.4 billion euros. In Warsaw, capitalization amounted to EUR 170.4 billion, according to FESE data.

It is a success, but the fact that an exchange like the one in Budapest, with a smaller capitalization, has more liquidity than that of our market, shows structural deficiencies at the BSE, reflected by a weak trading intensity.

Although the value of transactions on the BSE remains low, the data of the last years shows an improvement, in which the management of our exchange certainly had a major role.

Other targets mentioned by Radu Hanga four years ago and which have been achieved refer to the simplification of reporting and taxation of investors or coverage with analysis reports of companies, in which sense the exchange launched and developed the BVB Research Hub program. It should also be noted that, during the mandate of the current Board, our market became secondary emerging FTSE, but here it is a longer process, the inclusion on the monitoring list and the decision of the British agency being taken during the time of the old board.

• The first part of next year - the new term mentioned by Adrian Tănase for the operationalization of the CCP

The Central Counterparty is the major failure of the BVB's executive management and implicitly the Board of Directors. The CCP project, an entity intended to facilitate the relaunch of the derivatives market in our country and short sales, was approved by the stock exchange shareholders in November 2019.

According to the original plan, 2020 should have been the first year of operation of the Central Counterparty, and in the following year the company should have made a profit. There were still delays, so that the BVB's business strategy for the period 2021-2024 mentions the year 2022 as the objective for the launch of the derivatives market.

The new term for the operationalization of the CCP was the reason why the BVB Council extended Adrian Tănase's mandate as general manager by one year, in December 2021. But the Central Counterparty was not ready even then, the board extended the BVB director's mandate again, the CCP was not ready and so on.

"We hope that the derivatives markets will be functional in the first part of next year", said Adrian Tănase in October this year, in a conference.

It's a statement we've been hearing for years, and maybe it will come true at some point. Until then, the CCP, which represents the largest investment in the history of our exchange, at least ten million euros, has only expenses, does not produce income, and our market has no derivatives.

Lack of trust is another problem that our market suffers from, but here the main culprit is ASF. The authority has been accused of turning a blind eye to reporting misconduct, discriminatory sanctioning and complicit favoring of certain market players. In the area of insurance, things are even worse, with the two biggest players in the RCA market in bankruptcy. ASF has never had a very good image, but the situation in recent years has completely compromised the institution, and the governing coalition will remove Nicu Marcu from the leadership of the Authority.

Drawing a line, there are some important pluses in the mandate of the current BVB Council and a big minus. The number of investors has increased, liquidity has slightly improved, the primary market is more dynamic, and even if it is not yet an important financing channel for the economy, our capital market has demonstrated that it has serious resources. Quality offer is needed.

On the other hand, the lack of derivatives, short sales and, implicitly, the impossibility of implementing more complex strategies, makes BVB an unattractive market for sophisticated investors, who can easily access international markets.

Today, the shareholders of the Bucharest Stock Exchange elect the new Council with a four-year mandate, which will start in January-February next year. Radu Hanga will be re-elected as president, according to our sources. Therefore, it is reasonable to assume that the projects of recent years will be continued. In addition to attracting companies and investors, it is essentially about entering the MSCI emerging markets category and operationalizing the Central Counterparty.

At least in the case of the CCP, the outcome depends only on the BVB.