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Private sector and human-resource development in Georgia

Weak auditing practices and an audit law that allows liability to be capped in the contract between the company and the auditor

Principle 13 - (Supervisory) Board responsibilities. The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the (supervisory) board, and the (supervisory) board’s accountability to the company and the shareholders.

(Supervisory) Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interests of the company and the shareholders.

Absence of detailed guidelines for supervisory boards

1.5.2 Law of Georgia on Securities Market (SML)

The Securities Market Law (SML) regulates the Joint Stock Companies whose shares are traded at Georgian Stock Exchange.

The main principles of the Securities Market Law (SML) are the following:

The purpose of the Law is to develop securities market in Georgia, to protect the investors' interests on securities market, as well as to establish fair and transparent public trading in securities and free competition;

The Georgian Securities Market is regulated by the National Securities Commission of Georgia (NSCG);

The public offering of securities is an offer to sell securities directly or indirectly on behalf of the issuer to at least 100 persons or to unspecified numbers of persons;

A company, which has a class of Publicly Held Securities, shall be deemed to be a reporting company;

All reporting companies shall prepare and submit to the National Securities Commission of Georgia (NSCG) and publish or distribute to registered owners:

I. Annual reports;
(b) Semi-annual reports; and
(c) Current reports.

II. Every person who is a member of a managing body of a reporting company shall file with the National Securities Commission of Georgia (NSCG) a report regarding the percentage of this company's securities of which he is the beneficial owner;

III. A person, acting independently or together with other persons (a "group"), shall inform the National Securities Commission of Georgia (NSCG) about the substantial acquisition of securities;

IV. Substantial acquisition of securities means beneficial ownership of securities, which provide 5% or more of the voting rights in a reporting company and also when level of beneficial ownership changes by more than 5% from that originally reported;

V. Members of the managing body of a reporting company shall exercise their rights and perform their duties: a) in good faith, b) with the care that an ordinary prudent person in a similar position would exercise under similar circumstances, and c) in a manner that they believe to be in the best interest of the company and its security holders;

VI. A Stock Exchange shall be the exclusive organizer of secondary public trading in securities;

VII. All purchases and sales of Publicly Held Securities shall be concluded through a licensed Brokerage Company;

A licensed Central Depository shall perform the following functions:
a) open, operate and close securities accounts of participants in accordance with its rules;
b) facilitate the settlement of securities transactions without physical delivery of securities certificates and, in furtherance thereof, provide facilities for comparison of data respecting the terms of settlement of securities transactions.

Licensed Stock Exchanges and a Licensed Central Depository shall be designated Self‑Regulatory Organizations (SROs) under this law;

The main objective of such an organization, as an SRO, shall be to:

a) Pprepare rules for its members and supervise compliance with such rules;
Apply sanctions provided for in its inner regulations and rules or charter against members for non-compliance with its rules.

Insider means any person who, by virtue of his membership in the managing body of a reporting company, his holdings in the capital of such company, or based upon his access to such information by virtue of the exercise of his employment, profession or duties, possesses inside information. Other persons obtaining inside information that evidently originated with an insider shall be likewise considered insiders.

It shall be unlawful for any insider, and any person who knowingly receives inside information from an insider, to:

a) Acquire or dispose of, for his own account, or the account of a third party, either directly or indirectly, Publicly Held Securities of the reporting company or companies to which that inside information relates;

b) Disclose inside information to any third party unless such disclosure is made in the normal course of the exercise of his employment, profession or duties;

c) Recommend to or procure a third party, on the basis of inside information, to acquire or dispose of Publicly Held Securities.

Analysis - The Securities Market Law (SML). The SML is drawn on German model and mostly reflects the international best practice in the field described in "The Objectives and Principles of Securities Regulation" adopted by the International Organization of Securities Commissions (IOSCO), but it has the following weaknesses: (i) It does not cover collective investment schemes (CIS), such as investment funds, and therefore there is currently no legal basis for the operation of CISs in Georgia[13]. Meanwhile, the experience obtained from the Central and Eastern Europe indicates on crucial importance of CIS, such as investment funds, in increasing the corporate governance standards and facilitating the trust amongst investors towards stock markets; and (ii) The NSCG does not have an authority to supervise private placements.

More specifically, the World Bank (WB) and the International Monetary Fund (IMF), also conducted the Assessment of the Implementation of the Objectives and Principles of Securities Regulation of The International Organization of Securities Commissions (IOSCO) in Georgia. The assessment identified quite a lot of problems in the operation of the securities regulator, the functions of which is assumed by the National Securities Commission of Georgia (NSCG). Namely, the report lists the following problems: (i) NSCG has a seriously insufficient budget; (ii) Code of ethics for NSCG staff is awaited; (iii) No specific oversight program to supervise self-regulatory organizations (SROs) has been established; (iv) Inspection and investigation powers of the NSCG over Reporting Companies and their major shareholders are not adequate; (v) Enforcement power of the NSCG on the basis of criminal legislation is limited; (vi) International Accounting Standards (IAS) are recognized but are not fully adopted in practice; (vii) There in no legislation on Collective Investment Schemes (CIS) in Georgia; (viii) There is no market surveillance and stock watch system to detect abnormal movements and unfair trading practices.

More detailed results of the assessment are summarised in Table 1.2.2.1 below:

Table 1.2.2.1 Georgia: Assessment of the Implementation of the IOSCO Principles

for Securities Regulation

IOSCO Principles for Securities Regulation

MNC[16]

Comments

Principle 1 - Clear responsibilities. The responsibilities of the regulator should be clearly and objectively stated.

Principle 2 - Independence and accountability. The regulator should be operationally independent and accountable in the exercise of its functions and powers.

· The scope of accountability is limited.

· Lack of legal immunity for NSCG staff acting in good faith.

Principle 3 - Adequate power, resources and capacity. The regulator should have adequate powers, proper resources and the capacity to perform its functions and to exercise its powers.

Seriously insufficient budget. As the market develops, more revenue from fees can be expected.

Principle 4 - Clear and consistent regulatory process. The regulator should adopt clear and consistent regulatory processes.

Principle 5 - Professional standards. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

Code of ethics awaited, and introduction of a system of independent assessment may be considered.

Principle 6 - Use of Self‑Regulatory Organizations (SROs). The regulatory regime should make appropriate use of SROs that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.

Principle 7 - Supervision of Self‑Regulatory Organizations (SROs). SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

No specific oversight program to supervise SROs has been established.

Principle 8 - Adequate inspection, investigation and surveillance powers. The regulator should have comprehensive inspection, investigation and surveillance powers.

· Inspection power over Reporting Companies and their major shareholders is not adequate.

· Investigation power not adequate.

Principle 9 - Adequate enforcement power. The regulator should have comprehensive enforcement powers.

Enforcement power on the basis of criminal legislation limited.

Principle 10 - Effective use of the powers. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and the implementation of an effective compliance program.

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