The emerging securities market in Lithuania: problems and prospects

Rimantas Busila
General Director & Chair of the Board,National Stock Exchange of Lithuania

In 1995 and 1996, the Lithuanian Parliament (the Seimas) passed new laws that have since made a significant impact on the development of the Lithuanian capital market: the law on investment companies which regulates activities of investment funds and the law on foreign investment which ensures protection of foreign investment. Also, at the start of 1996, the law on public trading in securities was adopted, which formed a legal basis that will enhance further development of the securities market. In this way, formation of a unified legal framework regulating the securities market was completed.

On 4 July 1995, the Seimas passed the law on privatisation of state and municipal property. This law brought to an end the initial, and commenced the second, stage of state property privatisation in Lithuania. The value of state assets privatised within the four years of the privatisation process amounted to 3.5 billion litas (US$870.5 million): more than 5,500 different objects were privatised. A further concentration of capital was in progress on the securities market. The law states that during the second stage of privatisation, state and municipality-owned property can be privatised only for cash at market prices, and that both foreign domestic and foreign investors can have an equal opportunity to participate in privatisation.

The Lithuanian government adopted a list of more than 450 objects set up for privatisation in 1996, which includes 80 public stock companies and 128 closed corporations, as well as various buildings. The value of the privatisable part of all offered objects totals LTL 651.49 mill (US$ 162.9 mill). Companies included in the list of privatisable objects represent different branches of the economy: agriculture, energy, heavy and light industry, trade, construction, transport, telecommunications, the service industry, public catering and others.

In order to organise and supervise the second stage of the privatisation process in Lithuania, new institutions - the Privatisation Commission and the Lithuanian State Privatisation Agency - have been established. The law on privatisation of state and municipality-owned property provides for five ways of privatisation:

  • public sale of shares;
  • public auction;
  • public tender;
  • direct negotiations;
  • leasing with a right to purchase.

In August 1996, the National Stock Exchange of Lithuania also started organising the public sale of shares and public auctions. The privatisation programme is announced publicly, indicating the main parameters of privatisable objects and companies. Information about the companies set for privatisation and their principal financial ratios is published in the information bulletins of the Privatisation Agency, while information on the public auctions of the privatisable objects and public sale of shares organised at the NSEL is announced in the official bulletin of the Stock Exchange. Financial information about all the companies set for privatisation has been accumulated, and it is constantly being updated and produced for the needs of potential investors.

Even though 1996 was the year of financial upheavals in Lithuania, the overall situation at the Stock Exchange remained stable. During the past three years, the Stock Exchange finally implemented the functioning trading system that enables effective trading in securities. Block trades are concluded every working day, while the Exchange trading sessions are held twice a week.

At the beginning of 1996, 415 issuers were included on the current trading list of the Stock Exchange. Total market capitalisation of the NSEL came to LTL2,239 million (US$559.76 million) in July 1996, which constitutes 10.1 per cent of the GDP of 1995.

In 1995, total turnover of the Stock Exchange amounted to LTL499.9 million (US$125.0 million) and exceeded the turnover of 1994 by 6.4 times. During the first six months of 1996, total turnover of the Stock Exchange represented a 32.4 per cent increase against the same period of 1995.

Trading in Lithuanian Government Securities (LGS) totalled LTL137.7 million (US$34.4 million). The Lithuanian debt market mainly consists of Treasury bills with a maturity of one, three and six months. The size of one issue is usually LTL50-55 million (US$12.5-13.75 million). In 1995, LGS constituted 71 per cent of the total Stock Exchange turnover, and in 1996 this percentage dropped to 64.4 per cent.

During the two trading years, confidence in these securities markedly grew. This trust grew even more significantly at the end of 1995 and the beginning of 1996, when Lithuania faced financial difficulties due to the crises of its two largest banks, while investors in LGS incurred no losses. With the increase in popularity of LGS, demand in them and their turnover has also grown. Consequently the interest rate dropped, and in the middle of 1996 reached 12-15 per cent.

With regard to the equities market in 1996, shares in the wood processing, textile, food industry and services companies, and also several banks, were in the highest demand. Shares of the following companies were most frequently quoted: commercial banks Vilnius bank and Hermis, public companies Medienos Plausas (wood processing) and Kalnapilis (food industry).

However, low liquidity of shares remains a problem. Supply of shares constantly exceeds demand and the supply/demand ratio fluctuates between three and eight. In this situation a significant lack of institutional investors is felt.

Early in 1996 a strategic development plan for the Stock Exchange was prepared. It raised the following priorities:

  • the improvement of the trading mechanism and implementation of new ways of trading;
  • the enforcement of measures to improve liquidity;
  • the introduction of new trading products;
  • the improvement of the information dissemination system.

The improvement of the trading and electronic systems of the Stock Exchange laid the foundations for the implementation of continuous trading, and enabled stockbrokers to look through the submitted orders before the price was fixed. Presently, the Official Trading List is being formed in accordance with the approved requirements; the introduction of the specialists' institution is being planned and the system of trading in derivatives is being worked out. The strategic development plan of the Stock Exchange also foresees the expansion and improvement of Stock Exchange activities in the fields of privatisation, taxation, international accounting and public education.

The urgent need to solve the aforementioned problems is determined by the overall macroeconomic situation in Lithuania that directly influences companies' activities. In 1995 the average monthly inflation rate was 2.6 per cent, and it annually came to 35.7 per cent. It exceeded expectations, and demonstrated that the real income of the population was growing slowly. During the first six months of 1996, inflation marginally decreased to 10.2 per cent.

In 1995 GDP grew by 2.7 per cent against the previous year and amounted to LTL22,230.3 million (US$5,557.6 million) in real prices. By February 1996, 5,038 joint stock and foreign capital companies were registered, their total authorised capital amounting to LTL1.6 million (US$400 million), 60 per cent of which belonged to foreign investors. This displays the growing interest of foreign investors in the Lithuanian securities market.

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