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Game worth Millions. IPO Game
For stock exchange players the beginning of 2007 was eventful: the first trade sessions were held at the Almaty Regional Financial Centre; four specialised international conferences were held in Almaty and representatives of the LSE, Euronext and Deutsche Borse visited Kazakhstan almost all at once. In short, in Kazakhstan the topic of the stock exchange received a second wind.
Our People in London
2006 passed under the sign of IPOs for Kazakh companies. After the first breakthrough — Kazakhmys — Kazakhgold, KazMunaiGas E&P, Kazkommertsbank, Halyk Bank and Shalkiya Zinc climbed the heights of the London Stock Exchange. Over the past two years these companies have managed to attract a total of $4.2bn at the LSE. The LSE global development manager, Mrs Tracy Pierce, told the conference “Integration to International Capital Markets” (held in Almaty on 1-2 February 2007) that investors’ significant interest in issuers from the CIS, including Kazakhstan, resulted in 77% of International Order Book volumes in 2006 originating from the region.
It should be noted that in addition to the main floor where major companies’ shares are traded, the LSE also manages the so-called Alternative Investment Market. Above all else it is designed for growing companies, including those with Kazakh assets (mainly in the extractive sector). These companies are Celtic Resources, European Minerals, Frontiers Mining, Hambledon, Imperial Energy, Max Petroleum, Oriel Resources, Steppe Cement and Victoriy Oil & Gas. The combined market capitalization of these companies currently stands at about $2.7bn. Tracy Pierce believes that their example shows that not the size but advanced business management and a clear system of corporate management are important in achieving good results in international capital markets.
In general terms, the sustainable development demonstrated by the Kazakh economy in recent years seems to force foreign investors to significantly improve their perception of the risks linked to investing in Kazakh assets. As a result, other major world stock exchanges, including Euronext and Deutsche Borse, joined the LSE in the fight for issues from Kazakhstan. Representatives of these stock exchanges were key speakers at the conference “Corporate Finances 2007” (held in Almaty on 8-9 February 2007).
The head of Russia/CIS business development, international listings at Euronext, Mr Aaron Goldstein, discussing the potential of his stock exchange, made public the details of its merger with the New York Stock Exchange (NYSE) in December 2006. As a result, NYSE Euronext is the world’s most liquid market at the moment with a daily turnover of $100bn and the total capitalisation of listed companies totaling $27,000bn.
Deutsche Borse manager for finances and relations with issuers, Mr Stefan H?fer, speaking about the specifics of the stock market in Europe, showed the advantages of listing shares on the Frankfurt stock exchange for small, mediumsized and major companies from Kazakhstan.
In short, the world currently views our securities as “fashionable”, and this demand creates supply. According to estimates made by the head of the National Bank’s statistics and analysis department, Daniyar Akishev, a further 30-40 Kazakh issuers will offer IPOs within the next few years. These will be financial institutions, extractive enterprises and telecommunications companies, all of which are experienced in borrowing from foreign markets.
Own Resources
Placing an IPO is a long, complicated and expensive procedure, so Kazakh companies should not underestimate the possibilities of raising funds from the domestic stock market. The vice-president of the Kazakhstan Stock Exchange (KASE), Bolat Babenov, said that the resources of local institutional investors were now growing very rapidly. For example, in 2006 the assets of local banks grew by 100% to $69.9bn by 1 January 2007. Kazakh pension funds manage over $7.2bn and insurance companies now have over $1.1bn. Investment funds have started to play a significant role in the market; their assets grew by almost 300% last year to $913m on 1 January 2007. State development institutions also have great investment potential. In early 2007, they had 140 projects approved for funding to the tune of $4.1bn in their portfolios, including $1.4bn from their own sources.
The domestic stock market also had positive indicators of development. The total trade exceeded $169.3bn, or 143% of GDP, at the KASE in 2006. Although two-thirds of this was Repo operations, analysts point to the outstripping growth rates of capitalisation of corporate securities. For example, the trade of shares reached $4bn and bonds $3bn last year; the average daily turnover of shares totaled $9m and corporate bonds $11.7m.
The capacity of the domestic market and the activity of investors are proven by the fact that Kazakh investors spent $1.4bn to buy 67.4% of the total volumes of shares listed by KazMunayGas E&P even though lead managers deliberately cut purchaser appetites.
This is not limited. The potential of the domestic stock market, which is already significant in terms of accumulated financial funds, and the demand for securities can grow further thanks to the interest foreign investors show in operations at the KASE. Bolat Babenov said that the KASE_Shares index, which reflects the dynamics of the best purchasing prices of A Listing shares, had played its role here. It rocketed by 11 times over the past two years and is one of the fastest growing indexes in the world.
In this situation the main obstacle for developing the domestic market is a lack of supplies of quality shares and bonds. For example, the number of companies listed on the KASE A and B listings reached 114 last year. Most of them are financial institutions, whereas the real sector of the economy’s share is negligible. This trend is very obvious in terms of shares. Having direct access to cheap world lending markets and watching the successful experiences of Kazakh IPOs in international markets, leading local real-sector enterprises are not interested in attracting funds from the domestic market. However, listing requirements often seem unachievable for those companies that regard the KASE as a potential source of funding. Moreover, the requirement of submitting mandatory audit reports is another obstacle for these companies. As a result, at the moment institutional investors face acute shortages of appropriate financial instruments at the KASE.
Carrots of the Almaty Regional Financial Centre
The Almaty Regional Financial Centre and the Agency for Regulating the Activities of the Almaty Regional Financial Centre, which were set up by the Kazakh government last year, are expected to solve this problem. The chairman of the agency, Arken Arystanov, said that his agency aimed to attract new issuers to a special trading floor of the centre. This concerns Kazakh companies as well as companies form Central Asia and the Caspian Sea region. However, the centre does not intend to compete against the LSE, the NYSE or Deutsche Borse for international offerings. Arken Arystanov forecasts that the largest companies would leave for Western markets anyway, whereas medium-sized companies could quite well place their IPOs in Almaty. Studies show that there are enough resources in the Kazakh stock market to attract up to $100m in one offering.
The Law On Setting up the Almaty Regional Financial Centre was adopted in July 2006. The centre aims to develop the securities market, ensure its integration to international, capital markets, attract investment in the Kazakh economy and help domestic capital enter foreign securities markets. The main principle of the centre’s activities is to create equal conditions for both Kazakh and foreign players. The centre is set up as a zone with a special legal regime. In contrast to special economic zones that are already operating in the country, the centre will not have clear boundaries. Players will only have to have offices in Almaty to qualify to operate in the centre.
It is expected that medium-sized and small enterprises from Kazakhstan, Russia, Ukraine and Central Asian countries will become potential issuers in the centre. The deputy chairwoman of the agency, Alina Aldambergen, told the conference “Corporate Finances 2007” that her agency would pursue its marketing strategy in three stages. The first stage is (2007) to attract issuers from Kazakhstan, Russia and Ukraine. The second stage in 2008-2009 is to aim at companies from the Central Asian region, other CIS countries and Chinese provinces that border Kazakhstan. The third stage is to boost the agency’s activities in South Asian countries and in the Persian Gulf region.
The chief incentive for the centre’s players is a set of tax breaks and financial preferences for both professional players of the market and investors. Services on financial instruments, nominal holding, underwriting, market-making, information and consultancy will be exempt from corporate income tax. Moreover, revenues earned by companies and individuals from dividends, interests on bonds and increment of share prices will also be exempt from income tax.
As for issuers of securities, simplified procedures for listing and the fact that the agency reimburses expenses on auditing should attract them to the centre. According to the rules endorsed, these compensations will be paid to those issuers who did not audit their financial reports before listing financial instruments at the centre’s special trading floor. However, reimbursement on auditing is carried out after issuers finalise the placement of financial instruments, included on the special trading floor’s official list, and only on those instruments whose maturity exceeds one year.
The agency plans to actively cooperate with major international financial centres to advance the centre at the international level. For example, in late 2006 the agency concluded a cooperation agreement with the LSE and memorandums on understanding with Deutsche Borse, the Seoul and Singapore stock exchanges. Similar agreements are expected to be signed this year with the NYSE and NASDAQ. In addition to exchanging information with these stock exchanges, conditions are expected to be created for parallel listing.
The centre’s infrastructure is also being set up. A site in the upper parts of the city has been allotted for constructing about 50,000 sq. m. of office space. It will host the agency, a special trading floor, a depository, a clearing chamber, a national rating agency and a specialised financial court. The construction of this facility is to be completed by 2010.
Meanwhile, the centre’s special floor has been organised at the KASE and it is operating in line with the rules adopted by the agency in 2007. According to these rules, only one category — A — with the right to trade with all the financial instruments circulating in the special floor is set for the centre’s players. Since the operator of this floor is the Kazakhstan Stock Exchange the centre’s players are subject to all of its internal documents: concluding and fulfilling stock exchange contracts, observing rules for working with the trading system, stock exchange members bearing responsibility for failing to fulfil obligations relating to their involvement in trading and using the trading system and a mechanism to solve disputes and conflicts.
This means that there are two stock exchanges — the main and the centre’s special floor — currently operating at the KASE. The latter differs from the former with more simplified access procedures. Both the managements of the Almaty Regional Financial Centre and the KASE believe that that there should be a single stock market in Kazakhstan in the future, because it is not feasible to have two stock markets.
Blue Chips – Take Two!
The centre’s special floor started trading on 27 February 2007, when the MAG joint-stock company which operates in the mortgage sector issued coupon bonds (with annual yield of 11.62%, the number of bonds is 10,000) to the tune of 10 million tenge. Since then only few deals totalling $200,000 have been concluded in almost a month.
Out of 19 professional players registered in the Almaty Regional Financial Centre only seven companies are issuers that have been included on the special trading floor’s official list. These are ECOTON+, Tsesna-Astyk Concern, Bank CenterCredit, Astana-Nedvizhimost, the Kazakhstan Mortgage Company and MAG. Out of 24 financial instruments offered for trading only 15 securities are being traded now.
Nevertheless, the centre has another great trump card, capable of breaking through this unsuccessful start to the game. The matter is in the Samruk, Kazyna and KazAgro state holding companies which group almost all the state-owned companies and development institutions. The Kazyna fund’s managing director, Mr Abay Alpamysov, told the conference “Integration to International Capital Markets” that the fund’s investment projects that could be launched within the next three years were estimated at $10bn, of which about $3.5bn would come from Kazyna. The fund has already formed an investment portfolio (through uncontrolling stakes in registered capital) of 40 investment and innovation projects. A mechanism to sell the stakes of shares owned by the fund on the centre’s special trading floor will be devised later. Moreover, some of the Investment Fund of Kazakhstan’s shares (up to 25%) will be floated later and the best insurance companies will be allowed to get involved in the registered capital of the State Insurance Corporation. Speaking about bonds, Abay Alpamysov said that the Kazyna fund and its structures would enter the domestic market of borrowings with tenge instruments. For example, a decision has already been passed to issue bonds to the tune of $50m in the third quarter of 2007. The Development Bank of Kazakhstan and the Small Business Development Fund may also issue their bonds in the long-term.
Of course, after the double placement of an IPO by KazMunaiGas E&P, portfolio investors from international and domestic markets pin their hopes on the Samruk holding company. The director of Samruk’s strategy and corporate management department, Meyramkul Duzbayeva, told the conference “Corporate Finances 2007” that this company’s mission was to improve corporate management and increase the value of national companies in the past, whereas it was decided in December 2006 that Samruk should also carry out investment activities. The company intends to invest funds in a limited number of infrastructure projects (no more than 10), each of which should cost at least $250m. Moreover, it will use the mechanism of public-private partnership and some investors will be attracted through the Almaty Regional Financial Centre.
As for placing shares, there are some restrictions for infrastructure national companies that represent the state’s strategic assets to enter the market. It is clear that these decisions will be made at a government level. That is why it is more realistic that “second-tier” national companies and subsidiaries of some national companies will enter the market first. Samruk now includes 19 companies, 14 of which are “second-tier” companies specialising in producing and distributing electricity, extracting minerals, transport and machine-building. However, before entering the market they have to change internal corporate culture, introduce an institution of independent directors and switch to international accountancy standards. Meyramkul Duzbayeva believes that this is a mandatory requirement because international practice shows that the premium investors are ready to pay for quality corporate management can reach as high as 30%.
Meanwhile, the government decided to sell 4.6% of ordinary shares of Kazakhtelecom from the state stake owned by Samruk. Out of this stake 90% (or 447,837 shares) were initially expected to be sold to the population and the rest (49,760 shares) were expected to be sold on the stock exchange. The first stage, which was directly aimed at the population, was completed last December. However, 48,650 shares were not sold because minority investors failed to pay for the shares they had applied for. Now it is the stock exchange’s turn. The company placed the shares on the centre’s special floor on 21 March 2007. The shares were traded at KASE through a continuous double auction with the only bidders being the Kazakh pension funds. The bids were based on the price of one share denominated in the Kazakh tenge and rounded to two decimals. The 95,000 shares offered were traded in lots of 5,000 shares each and the remaining 3,410 shares were sold in a single lot. The only seller was RESMI Investment House Almaty authorised by Samruk. The trade was closed three hours ahead of schedule since all the shares were sold in 20 deals for a total of 4,946,205,500.00 tenge ($39,914,505.33 at the current exchange rate). The average weighted price of a share amounted to 50,238.34 tenge or $405.41.
Speculators in Demand
Offering shares of blue chips on the stock market will solve another important problem in developing the regional centre — involving a wide range of minority investors in this process. Despite the boom in personal savings, only a small proportion of Kazakhs are represented on the stock market. This is proven by the continuing growth of deposits of individuals in banks and a growth in property prices. The flow of these funds to the stock market will expand its speculative component and increase liquidity, because individual investors, in contrast to pension funds with their strategies of “buy and hold”, will be active in selling and buying shares and bonds.
In order to attract the population’s attention to the stock market and increase its investment literacy the Agency for Regulating the Almaty Regional Financial Centre intends to set up a media company which will include a weekly business newspaper, an analytical magazine, a specialised business TV channel and an information and analytical centre. The agency also plans to hold round tables and conferences at various levels, create special education programmes for people jointly with local executive bodies and place information material about the Almaty Regional Financial Centre in the local and national media. When asked by journalists at the conference “Integration to International Capital Markets”, Mr Arystanov said that when Kazakhstan has at least 1.5 million holders of securities, the Almaty Regional Financial Centre would be regarded as a success.
Well, there are many grandiose plans, but time will tell how successful are.

Table of contents
World Investment: Another Year of FDI Growth  Global investment overview 
Stock Market: Insights  Sholpan Aynabayeva 
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· 2007 №1  №2  №3  №4
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· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3

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