1. Key recommendations and implementation roadmap

The recommendations provided in this Review are intended to help Romanian authorities improve the legal, regulatory and institutional framework for capital markets and ultimately prepare a national capital market strategy. This process will necessarily involve the collaboration of different government and supervisory authorities as well as private sector entities, notably the Bucharest Stock Exchange. The recommendations are organised under six main areas. In order to facilitate their implementation, a Recommendations Roadmap is provided, summarising all recommendations and providing a possible main responsible authority as well as an indicative timeline for implementation.

The Romanian equity market is characterised by a loss of firms and a general lack of activity. Strong equity markets enable innovative firms to access capital and play an important role in improving the productive capacity of the economy at large. They are also a means to give households an opportunity to share in corporate wealth creation. A well-functioning capital market landscape that can mobilise funds and allocate them productively will be particularly important in the recovery period following the COVID-19 crisis. A number of possible policy initiatives to improve the state of Romanian equity markets are outlined below.

The capital raising procedure should be reviewed from a regulatory perspective, both with regard to initial listings but also for secondary public offerings/follow-on offerings. The regulator may assess its internal processes, with a focus on simplifying procedures and shortening the time needed to raise equity capital. To the extent that advisory fees associated with listing represent a barrier to the further development of the equity markets, aside from measures such as alternative markets, the government may consider offering direct or indirect financial support to concerned companies. Frameworks for alternative listing arrangements, such as direct listings and special purpose acquisition companies, could also be considered. Developing a regulatory framework for investment vehicles such as REITs could support the developments of important sectors in the economy by providing access to market-based financing.

Corporate governance standards should be improved. Specifically, disclosure of the number of audit committee meetings and the activity during the meetings should be promoted. Further, listed SOEs should ensure equitable treatment of shareholders.

In order to expand the size of the currently limited investable universe, which is hampering the development of equity markets, the government may consider the listing of financially significant SOEs, along with increasing the low free-float ratios of currently listed SOEs. The power producer Hidroelectrica and the airport company CNAB are two important candidates for public listing. Given their size and the existing institutional investor interest, a minority listing of these companies could be an important catalyst for the Romanian stock market. It is crucial that the process is handled with great transparency in line with international best practices and that the rationale is clearly communicated. Further, in order to promote transparency as well as to set an example for the rest of the market, these companies should adhere to the highest corporate governance standards, with reference to both the G20/OECD Principles of Corporate Governance and the OECD Guidelines on Corporate Governance of State-Owned Enterprises. Efforts should also be made to move SOEs currently listed on the alternative AeRO Market to the Main Market.

In order to improve the general corporate knowledge of and interest in the capital market, several stakeholders could come together in a national public-private campaign to encourage companies to use market-based financing. The ASF and the stock exchange, in co-operation with business and financial market associations, should engage in a dedicated and targeted awareness campaign to inform corporate executives and other relevant actors about the many opportunities of market-based financing. The initiative could also help promote investments in the Romanian capital market by foreign investors. It could be built from the existing platform “Made in Romania”, which is managed by the stock exchange. This platform could be used for information exchange and for guiding companies in their journey to start using market-based financing. As a way to measure progress, an annual target number of new listings could be set.

In parallel to encouraging companies to go public, the government may consider supporting the establishment of publicly listed investment companies or funds that focus on investing in unlisted firms that are not yet ready to go public. This would make a wider range of securities available to prospective investors through the stock market. Having a professional investment firm as an owner could also help unlisted companies prepare for adhering to the standards that are associated with a possible subsequent public listing. Support to this end could include the creation of a platform to match investors with private companies (the agreement between the BVB and equity crowdfunding platform SeedBlink could be an example to build from), and/or financial incentives through tax credits for newly-established such investment companies in the first years. Importantly, because of its effect on the trust in and efficiency of capital markets, the completion of the establishment of a Central Clearing Counterparty (CCP) should be a priority. The private entities that are shareholders in the CCP should continue the process of finalising the documentation and the necessary steps for authorising the entity, and continue the collaboration with the ASF, which acknowledges the importance of the project.

Well-functioning primary capital markets are dependent on a certain level of activity in the secondary markets that facilitates efficient price discovery and increases the resilience of the market. The Romanian secondary public equity market is characterised by low levels of liquidity, driven by a large number of inactive stocks, in particular in the AeRO Market. Liquidity in the market is dominated by shares of a few large companies.

In order to support secondary market liquidity of small companies, the Romanian authorities may consider establishing a mechanism that provides independent quantitative research on smaller companies to market participants at no cost or by subsidising brokerage companies for providing research to the market. Alternatively, the authorities may consider supporting the recent programme launched by the stock exchange aimed at increasing research coverage of small to mid-cap companies. The BVB could also consider expanding the coverage of the programme to include companies from the AeRO Market. Another strategically important issue, that Romanian policy makers have begun to address, is the dissolution of the inactive shareholders linked to the privatisation programme of the 1990s in the stock market. Such an initiative would stimulate liquidity in the market. Authorities may also consider creating a country-wide campaign to reach out to investors for the liquidation of the shares. Within the campaign, a one-time capital gains tax exemption could be offered to encourage investors to go through the process of claiming their shares and selling them. Alternatively, investors could be offered to transfer their shares to an active account from where they can sell in the future. The government may also appoint a brokerage company to support investors through the process at a pre-set fee negotiated by the authorities.

The cost of trading in the stock market has already decreased significantly thanks to efforts by the stock exchange and the ASF. However, the ASF should consider whether there would be a market-wide benefit from reducing the trading fee it charges to the buy side to further ease the cost of trading and ultimately increase secondary market liquidity. Additionally, a burdensome payment and declaration process of the capital gains tax could be discouraging investors from participating in the capital markets to a certain extent. Therefore, a simplification of the capital gains tax declaration and payment methods may boost investors’ participation in the stock market. Authorities may also consider introducing a withholding tax system for capital gains to facilitate the tax collection system. In addition, greater clarity with respect to the categories of tax-deductible and non-deductible expenses for financial firms would be beneficial to industry participants. In addition, to make the stock market more attractive, providing a fiscal credit or a temporary tax exemption on capital gains in the secondary market could be considered.

The free-float level of the companies in the stock market is an essential component to ensure liquidity. The current low levels of free-float on the Romanian stock market and the limited number of companies with higher free-float levels pose a challenge to the overall liquidity of the market. In this respect, and in addition to efforts to bring large companies to the public equity markets, authorities may consider measures to increase the free-float levels of already listed companies. One step could be assessing the regulatory and market conditions for follow-on offerings, and providing companies with support to partially or fully cover the cost of such offerings. To this end, EU funds provided in the context of the Romanian Recovery and Resilience Plan could be used. On top of this, in order to increase the number of financial instruments traded on the BVB, the exchange should consider introducing the possibility of trading open-ended investment funds (UCITS) through its systems, similar to the services provided by Euronext Fund Services.

Additionally, a well-functioning derivatives market enhances investors’ ability to hedge their risks, complements the development of capital markets and provides opportunities to increase the liquidity of the underlying instruments. In particular, having a well-functioning currency derivatives market would allow institutional investors to hedge their current and future investments and, importantly, would also increase the attractiveness of the Romanian market for foreign investors. The Romanian authorities and relevant private stakeholders should increase their efforts to develop a well-managed derivatives market in Romania, including developing oversight systems for the possible vulnerabilities that a derivatives market could create. Another important measure that would also support the development of securities lending and borrowing operations is if the Central Depository would increase its efforts in preparing adaptation plans for the AMI-SeCo Standards, to improve the efficiency of collateral management in Romania.

SMEs in Romania face significant barriers to access financing. Low capitalisation levels, significant credit constraints and limited sources of external financing have prevented them from grasping growth opportunities. Well-functioning public equity markets targeting SMEs, as well as private equity markets, can play an important role in supporting their growth.

A high degree of reliance on internal financing and bank loans could indicate that SME entrepreneurs lack knowledge about other sources of financing. One useful initiative could be establishing a co-operation between the stock exchange and the Chamber of Commerce and Industry of Romania (CCIR) to promote the use of market-based financing among SMEs. As the CCIR represents over 15 000 companies in the country, it could play a key role in reaching SMEs that have the potential to grow but lack the necessary financing. Within the scope of the national public-private campaign, experts from the stock exchange could offer seminars and training sessions on market-based financing to selected SMEs, especially those operating in the areas identified in the Romanian Smart Specialisation Strategy. Such programmes may help to increase awareness among SMEs about the benefits of market-based financing and relevant procedures.

Despite the establishment of the AeRO equity market in 2015, equity offerings have been limited and almost all offerings have been carried out as private placements. The Prospectus Regulation has granted EU member states the flexibility to waive the prospectus requirement if the issuance is below EUR 8 million. In Romania, the current threshold is only EUR 1 million, which is significantly lower than other member countries. In order to encourage SMEs to undertake public offerings to reach a larger pool of investors, the government may consider increasing this threshold. This could facilitate the use of public offerings and enable firms to reach a wider pool of investors. In addition, in order to support smaller companies in the process of being admitted to trading on the AeRO Market, the Romanian authorities may consider subsidising brokerage companies to help them prepare a relevant and accurate assessment of their financial prospects. In doing so, market trust and confidence can be increased for new AeRO Market issuers. Funds provided by the EU in the context of the Romanian Recovery and Resilience Plan could be used to this end.

Moreover, as the AeRO equity market grows, a number of companies have shown significant growth and could start planning, with the help of the stock exchange, for a future transfer to the Main Market. It is important to design a mechanism for the companies listed on the AeRO Market to eventually transfer to the Main Market and not to stay listed on the alternative market indefinitely. Aside from helping position the AeRO Market as a marketplace for smaller companies, the prospect of graduating to the Main Market could also be seen as an incentive for some SMEs to list on this market.

Private equity, in particular venture capital and growth capital, can be an important source of alternative financing for SMEs. This is particularly important for growth companies that lack collateral or a stable stream of cash flows. The Romanian private equity industry lags behind those in peer countries, particularly in terms of fundraising. The government and a relevant industry association could join forces to increase the visibility of the Romanian private equity and venture capital market to traditional government agencies, funds-of-funds and other asset managers. To promote the development of the Romanian private equity market, the government may encourage fundraising by establishing a personal income tax benefit, such as the VCT scheme in the United Kingdom. Such a scheme would allow investors to deduct taxes when investing in private equity funds and encourage more participation from retail investors. In addition, the Romanian authorities could evaluate the possibility to support SMEs to take advantage of the financing available via the SME IPO Fund that will provide financing during the pre-IPO, IPO and post-IPO stages. For example, the authorities and/or business associations could group a number of SMEs in search of financing, provide support via information sessions and help these companies meet with fund managers. It is also worth considering that within the portfolio of unlisted SOEs, there are many companies that would benefit from having a private equity fund as an investor.

The Romanian Smart Specialisation Strategy (S3) has identified four clusters of specialisation with innovation potential that could contribute to the country’s transition towards a knowledge-based economy. These selected clusters should be given priority when it comes to support with market-based financing, co-operation programmes and growth strategies, as well as other financial support in the form of grants and research funding. Moreover, a collaboration programme could be established to create more links between the business sector and research institutions.

The framework for ELTIFs in Europe can be used as an investment vehicle to bridge the gap between retail investors and SMEs. The ELTIF regulation not only requires that ELTIF funds provide retail investors with a key information document in addition to the prospectus, it also grants retail investors more flexibility when selling assets to incentivise their participation. With the recent review of the ELTIFs framework, there is an opportunity to engage retail investors in investing in SMEs and further support SME financing in Romania.

Well-functioning capital markets provide households with more saving opportunities and allow for diversification and better planning for retirement. However, one of the main obstacles to the expansion of the Romanian capital markets is the limited levels of household savings and their low allocation to capital market securities. Financial inclusion in Romania has improved considerably recently, but still lags behind peer countries.

In order to increase the portion of the population that has access to a bank account, co-operative banks could become a key partner in implementing a low-cost saving digital tool. Under the supervision of the National Bank of Romania, the central body of credit co-operatives – the Banca Centrala Co-operatista Creditco-op – can gain scale by implementing cost-saving digital tools, for example via mobile phone access to services, that could enable them to reach financially excluded households.

Although several programmes to improve financial literacy have already been established, further efforts are needed to reach levels of financial literacy that can help develop a retail investor base in Romania. For this purpose, the Romanian authorities may consider using the momentum from the National Strategy for Financial Education, developed with the support of the OECD, to reinforce co-operation among all relevant stakeholders. Within this framework, seminars and trainings designed specifically to private investors should be implemented, with the aim of raising awareness about the benefits of actively participating in the country’s capital markets. The Bucharest Stock Exchange should join this crucial initiative that will enable households to improve their understanding of and confidence in the Romanian capital market. In particular, the fact that the BVB recently established a co-operation programme with a crowdfunding platform, places it in a good position to attract more retail investors to its platforms.

Lastly, following the successful examples of several European countries that have introduced individual savings accounts offering a favourable tax treatment for individual investors, the authorities may consider designing a tax-exempt simplified individual savings account tailored to Romanian households. Either investment firms, pension fund management companies or asset management companies could offer this savings account that invests following similar investment rules as Pillar II funds at a low cost. This would not only increase household participation in the capital market but could also help pension fund management companies reach greater economies of scale.

Romanian institutional investors could help drive the development of capital markets by providing the real sector with long-term capital to invest, innovate and grow. This has been the case in many other countries that have established funded pension systems. However, the system in Romania is still young and many challenges remain. In order to continue boosting the role of institutional investors in capital markets the authorities may consider the policy initiatives outlined below.

As the pension system in Romania matures, the regulator should consider developing a strategic approach to further advance the system. Both Pillars II and III of the pension system currently follow investment limits in different assets classes in order to ensure a balanced diversification of risks and have to apply a risk-weighted assets approach. These restrictions, combined with very few available securities, will eventually make it harder for pension management companies to deliver an adequate return to their beneficiaries. Therefore, the regulator should consider revising the risk weighting methodology currently applicable to pension funds with a view to effectively increasing the investable universe of asset classes.

Moreover, the authorities should consider allowing pension funds to lend securities, with the aim of providing an extra return for beneficiaries and to support secondary market liquidity given the limited rotation of pension funds’ portfolios. Considering the social purpose of pension funds, securities lending will require the completion of the establishment of a Central Clearing Counterparty (CCP) and a well-functioning market that ensures harmonisation and integration of securities settlement, and collateral management as well as the proper execution of guarantees.

The voluntary saving system has not grown as expected and the balance in each account remains modest. Therefore, the government may consider increasing the fiscal deductibility of the annual contribution and indexing it to a relevant income measure in the country. Romania needs a fiscal system that encourages long-term savings, and fiscal incentives is one among many tools that the government can use to boost savings. In addition, the authorities may prioritise improving communications to the public aiming to increase knowledge and awareness of the need for a higher savings rate. The promotion of long-term investment products targeted to households could also be part of the national private-public campaign mentioned above. Occupational pension schemes should also be promoted within the scope of the national private-public campaign, since they represent another alternative to foster long-term savings.

The investment fund industry is still underdeveloped in Romania. Moreover, probably due to the lack of listed securities, investment funds allocate a small share of their assets to these instruments. Similarly, the insurance industry is still immature and further efforts are needed to continue expanding it beyond the property and motor third party liability insurance. The investments of insurance corporations are highly concentrated in government bonds. However, if the industry develops further, it can be expected that insurance companies will increasingly demand other long-term securities that can provide higher returns. Therefore, promoting the participation of more issuers in the capital market, either via listed equity or corporate bonds, could contribute to further developing the entire market. In addition, a simplification of the approval process for funds, for example by standardising some of the required documents, could further support the development of the industry.

The Romanian corporate bond market is undersized, but could be further developed by addressing a number of inefficiencies. The general lack of access to market-based credit for many companies has left the Romanian economy over-reliant on bank financing – when available – and on foreign financing in particular. An expansion and deepening of the local bond market would be both an important step towards increasing the resilience of the corporate sector and a way to satisfy the existing demand from local institutional investors to invest in long-term local currency fixed income securities. A number of policy measures can be taken to this end.

Several market participants have raised concerns about the time required to issue a bond. A regulatory review should be undertaken with a view to streamlining the listing process. In order to prevent any delays in the approval of prospectuses, the ASF may consider expanding its staff to support companies in ensuring the documentation is submitted in the correct form. Further, the requirement to hold an extraordinary general meeting to issue a bond should be re-evaluated.

To increase activity in corporate fixed income markets, it is important to address the role of credit rating systems. It should be assessed whether any existing authority has the capacities and the required data to provide credit ratings to the market. Alternatively, subsidies for the establishment of a domestic rating agency could be considered. A third option is to simply provide financial support to smaller companies in obtaining credit ratings from an already established credit rating agency. Finally, the current pension fund regulatory framework only recognises credit ratings from the three major players. It should be adapted with a view to including more rating agencies that follow rigorous standards and use solid methodologies.

Investors and their investment policies play a key role in developing the domestic market. Currently, institutional investors’ participation in the corporate bond market is very limited. While traditional institutional investors are still at an early stage of development and remain small, diversification of their investments with increasing allocation to corporate bonds could generate increased demand for these instruments and encourage other issuers to make use of this market. This would enable a simultaneous development of institutional investors and corporate bond markets over time. In this respect, the Romanian authorities should encourage collective investment vehicles to create diversified products including non-financial corporate bonds. A special focus could be given to the instruments issued on the AeRO Market to support the financing of mid-sized companies through corporate bonds. Finally, promoting the investment in non-financial corporate bonds by the banking sector would also create additional demand.

To promote the development of the corporate bond market and to finance Romania’s large scale infrastructure needs, the authorities should consider financing these projects via corporate bonds. There are a number of projects in progress, but the financing model used has mostly been bank loans. Romanian authorities could design public-private partnerships where the private sector company or an entity created for the purpose of the execution of the project could issue corporate bonds to fund the investment. This would support an increase in corporate bond activity in Romania, while providing longer-term investment opportunities to institutional investors.

As a combined measure to stimulate the market for corporate bonds and to facilitate Romania’s green transition, the government should consider providing incentives for issuers of green bonds such as covering the cost related to obtaining an external review or rating for bonds within an internationally recognised green, social or sustainability bond framework. Such a measure recognises the additional expenses that might be associated with issuing a green bond compared to a regular bond, and can therefore be helpful in the development of green corporate bond markets.

One important step to support the development of the corporate bond market is to ensure a well-functioning government bond market. Therefore, it is crucial that Romanian Government debt managers continue to employ strategies to build a liquid local currency benchmark yield curve while also increasing the average maturity of government bonds.

In line with the objectives stated in the Romanian National Recovery and Resilience Plan to create opportunities for businesses to diversify their financing sources, authorities could consider allocating part of the funds received from the EU to further develop the corporate bond market. In this respect, EU funds could be used to finance the above recommendations to support smaller companies to obtain credit ratings, subsidise the establishment of a domestic rating agency, and/or incentivise the issuance of green bonds.

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