Valentin Ionescu, BSE: "The listing of the Proprietatea Fund, a moment that needs to be used wisely"

(Interview with Valentin Ionescu, the managing director of the BSE)

Reporter: What will the listing of the Fund bring to the domestic market?

Valentin Ionescu: This is the issue that will be incessantly discussed until January 25th, and probably past that date as well. Everyone agrees that the listing of the Fund is a milestone event for the market, and if we use it wisely, we will be able to stimulate a series of processes, which, in the medium and long term, will radically change the landscape of the domestic capital market.

Reporter: Could you be more specific?

Valentin Ionescu: For instance, the listing of the Fund, which is managed by "Franklin Templeton" will improve the corporate governance of the listed companies, even though this will not happen overnight. In this respect, we, of the management of the Bucharest Stock Exchange, would like to resume the courses of the Corporate Governance Institute.

Our hope is to expand corporate governance at least to companies that are included in the "blue-chip" category, and, in the future, to all the companies listed on the Bucharest Stock Exchange.

Reporter: More specifically, what do you expect from the listed companies, if they implement the corporate governance principles?

Valentin Ionescu: A greater transparency in reporting, more openness to investors, better communication.

Reporter: Have you seen these things happen with the Proprietatea Fund since it was taken over by "Franklin Templeton"?

Valentin Ionescu: Offering more information within the prospectus than required, and the attention paid to conflicts of interest are just two of the examples of better corporate governance. "Franklin Templeton" is a management company with a global presence, their people know exactly what they want from a company, they know the reporting standards that companies in developed countries must comply with.

Reporter: How do you plan to attract the companies that are already listed to take these Corporate Governance classes?

Valentin Ionescu: We will send them invitations, and we may decide to offer these trainings to companies for free. Apart from the teachers of the BSE, we will also try to bring in teachers from the outside, such as Mariana Gheorghe (Petrom) or Grzegorz Konieczny of "Franklin Templeton" to hold these classes.

Reporter: What consequences do you think will the Proprietatea Fund have on the visibility of the Bucharest Stock Exchange?

Valentin Ionescu: Numerous investment funds are now talking about Romania. I"ve had meetings with foreign investors myself, in London, after which they came over here to study the domestic capital market. Coming up next is the road-show of Franklin Templeton and of the intermediaries of the listing in Europe, which is why I believe that, in the first part of the year, all the investment funds that focus on Central and Eastern Europe will be talking about Romania. I think that the admission of the Proprietatea Fund to trading on the BSE will help improve its image, as well as that of the domestic stock market. I also think that the listing will have positive effects for everyone involved in the domestic stock market.

Reporter: There are brokers or investors that are hoping at least part of the money that will result from the listing of the Fund will flow towards other issuers that are already listed... What is your opinion on this matter?

Valentin Ionescu: I think that the listing of the Proprietatea Fund will unblock large amounts of money. I think there will be all kinds of buyers, foreign funds, local funds ... You have to realize that until now, pension funds were not allowed to invest in the shares of the Fund because it was an unlisted company. Once on the stock exchange, pension funds will be able to buy shares of the Fund.

Reporter: You said that the listing of the Fund would unlock large amounts of money. Do you have any statistics on the size of the stakes that brokerage firms hold in the share capital of the Fund?

Valentin Ionescu: I have no way of knowing that. You should ask the brokerage firms that were active on the Proprietatea Fund.

Reporter: On what do you base your assumption that large amounts of money would be freed?

Valentin Iones-cu: Because it is precisely the trading of shares of the Proprietatea Fund over the last six months that has led to the reduced liquidity of the BSE, and, once part of the investors will sell their shares in the Fund, they may buy shares in other listed companies. Starting with the fact that the assets are worth around 3.7 billion Euros. At the moment, the free-float is above 60%. The listing of the fund will automatically double the free-float of the BSE. So theoretically, if we start with this premise and we make a simple calculation, we see that the turnover should at least double.

Reporter: Over the past few months, the daily turnover of the BSE fluctuated between 5 and 7 million Euros ...

Valentin Ionescu: Based on the calculation mentioned above, after the listing of the Fund, the daily turnover should double. Let"s not forget that the stake of the state tends to shrink, and the free-float is gradually increasing.

I think that the listing of the Fund will be a success story because there is no other company of such size, with a capitalization of a few billion Euros and a free-float between 60% and 100%.

What"s more, you need to remember that the shares of the Proprietatea Fund will be traded through nominee accounts, without prevalidation, and with market makers, just like the stocks of major companies listed on the international exchanges.

Reporter: Did you draft the Revenue and Expense Budget for 2011 based on these estimated figures?

Valentin Ionescu: We have worked a lot on the Revenue and Expense Budget of the BSE, it"s nearly complete, it"s just that I can"t disclose any figure.

Reporter: At what stage are you in your talks with "Raiffeisen Capital& Investment" to have it act as market maker for the shares of the Proprietatea Fund?

Valentin Ionescu: We talked to other brokerage firms as well, not just RCI. We are hoping to have two-three market makers on the day the Fund begins trading.

Reporter: Do you plan to launch new financial instruments once the Fund gets listed?

Valentin Ionescu: We want to launch derivatives for the shares of the Proprietatea Fund. They have been approved by the Board of the Exchange, we are still waiting for the Romanian National Securities Commission (CNVM) to approve them.

Reporter: You were a broker before and you worked with foreign investors, especially during your time at "Wood &Co". You had an important role in the launch of the warrants for the stock of the Proprietatea Fund. What did you use to tell foreign investors about the Fund at the time, when asked?

Valentin Ionescu: I talked to the people at "Wood&Co" about the Proprietatea Fund in the summer of 2008. I told them then that there is a new fund in Romania, the Proprietatea Fund, that it has a very attractive portfolio, and that, in order to get the Fund listed on the Bucharest Stock Exchange, we could make a study, to attract clients. The study made by "Wood" was the first extended analysis of the Proprietatea Fund made by a brokerage firm, in August 2008.

The review was made based on a rather thorough documentation. The analysts of "Wood" came to Romania several times and visited the major companies that the Fund has in its portfolio.

Reporter: What was the impact of the report on the Fund made by "Wood"?

Valentin Ionescu: At the time, at the end of 2008, as you know, there were warning signs in the market that a crisis was coming. The Fund was a "nice story", but investors got spooked by the onset of the crisis. The story was put on hold until 2009 when it came back to the spotlight. "Franklin Templeton" was appointed as manager of the Fund and at that time, it was obvious things were going in the right direction.

Reporter: What were the foreign investors in the Fund interested in?

Valentin Ionescu: After the financial crisis, most investors turned towards production, energy. The portfolio of the Fund is made up of energy companies, for the most part. From my point of view, this is the future and many investors are looking at the Fund, given the fact that some resources are limited.

For instance, if we were to compare what the Proprietatea Fund has over the SIFs: most of the assets of the SIFs are banks. The Proprietatea Fund has stakes in energy companies. It depends on what you"re looking to buy. If you want to invest in the financial-banking sector, you buy SIFs, if you want to invest in energy, you buy shares in the Proprietatea Fund.

Reporter: But still, the energy part of the Fund"s portfolio, that so far has been presented as an advantage, raises questions over the possibility of the Fund affecting the decision-making in the companies in which it the state is a majority shareholder...

Valentin Iones-cu: I"ve seen that the donation that Romgaz made to the state was widely discussed in the media. It"s true that this kind of decisions are a warning sign for investors. It"s obvious that any minority shareholder would be unhappy being treated like that, as a minority shareholder.

Reporter: The Fund was created to compensate shareholders, the compensations were calculated at a price of 1 leu/share, which was their stated face value, and the problem is as follows: if, after the listing, the stock will trade below the face value, then that would mean that the Fund has failed to meet its goal, of compensating former asset owners. Have you considered this aspect, that an issuer that may not achieve the goal for which it was created is getting listed?

Valentin Ionescu: I think that the goal for which it was created still remains. Before January 25th, the shares would be traded at the Central Depository, starting with January 25th, they would be traded through an electronic system, it"s basically the same thing. Until now, the prices at which these trades would be concluded were not disclosed. The difference is that after the listing of the Fund, prices will be public.

Reporter: The shares of the BSE are making new highs constantly. How do you explain that?

Valentin Ionescu: Let"s see what economic theories have to say about listed companies. What are the factors which cause the price of a stock to rise? The theory says that the shares of a company only rise when something happens in the life of that company, when it is expected to post good earnings, its management changes or it makes interesting decisions. What happens? The Proprietatea Fund gets listed. What comes next? The trading volume increases. What happens after that? The exchange operator sees its profits increase. The listing will lead to the unlocking of funds that have been locked up, and this will indirectly lead to increased trading volumes. And we are not talking about the listing of the Proprietatea Fund. Then we also have foreign investors, who will have easier access to our market, thanks to trading through nominee accounts. It"s only natural for the stock of a listed company to rise when something positive happens to that company.

Reporter: Will you request that the shares of the BSE be traded through nominee accounts as well?

Valentin Ionescu: Until we get to that, there are the shares of other companies which have a far greater capitalization. I hope that all brokers will perfect their software which allows trading of the shares of the Proprietatea Fund through nominee accounts, so everything will be fine, and we don"t have any small surprises, and then we expand the use of nominee accounts to the companies which make up the BET and BET-FI indexes.

Reporter: Do you have any worries about the listing of the Proprietatea Fund on the exchange?

Valentin Ionescu: No. From the point of view of the BSE, things are very simple. The rules are the same as they are for the stock of "Erste Bank", with the added requirements that brokers need to meet certain reporting criteria and to do the daily "reconciling" (they need to report daily to the Depository the holdings in the nominee accounts so they match the records of the Depository).

Reporter: As president of the Central Depository do you have any worries about the trading of the shares of the Proprietatea Fund through nominee accounts?

Valentin Ionescu: Not at the moment. I am in touch constantly with my colleagues from the depository to see what things are like down there.

Reporter: Do you think that the warrants based on the shares of the Proprietatea Fund will be more attractive once the Fund gets listed?

Valentin Ionescu: Yes and no. There may be clients that aren"t allowed to invest in Romania because it is still considered one of the "frontier markets", and then they invest in Vienna or in Frankfurt, to buy into the Proprietatea Fund. Investors that can access the underlying asset directly and the Bucharest market will use the BSE to buy shares in the Fund.

"After the financial crisis, most investors turned towards production, energy. The portfolio of the Fund is made up of energy companies, for the most part. From my point of view, this is the future and many investors are looking at the Fund, given the fact that some resources are limited."