Global surveys in the area of capital market reveal that the price of company shares in the stock market may be higher by ten to twenty-five per cent on average, depending on the quality of the company's investor relations. Although it is a fact that companies in Serbia and in the region are oriented more towards bank funding than the capital market, it is important for every company to have a choice. In order to attract investors, companies must nurture good relations with them. It is necessary to increase a company's attractiveness by ensuring business transparency, which further strengthens investor confidence. The well-versed agree that if a company wants proper investor relations (IR), it must get to know them and find out about their needs. As experts warn, this is particularly true in a period of downturn. Craving for Information Investor expectations are constantly increasing, so companies constantly have to provide them with timely information. This involves a well organised website, preferably with a special section for investors, to whom everything must be available. Gordana Dostanić, Director of the Belgrade Stock Exchange, says that in a regulated market companies comply with the minimum requirement for keeping the public informed, as laid down by the law.
NIS triple winner of the Belgrade Stock Exchange Best Investor Relations AwardThe practice of compliance with minimum requirements matches the degree of IR development in Serbia, since only few companies, such as NIS, take the role of this sector seriously, offering more to investors. The Serbian market is shallow, so the Prime Market of the Belgrade Stock Exchange lists no more than four companies (Nikola Tesla Airport, Energoprojekt Holding, NIS and Sojaprotein). These companies are the cream of the crop in the Serbian capital market and they have to meet the strictest criteria in report publication and investor relations. Four other companies are at the following level - Standard Market - so it is clear that one can practically talk about IR in only eight companies in Serbia. In late November, the total BSE market capitalisation was approximately EUR 6.5 billion, 1.2 billion out of which being the market capitalisation of a single one – NIS. Experts agree that NIS is the company upholding the market, which is why it has the most developed investor relations. It is no surprise that the petroleum giant is a triple winner of the Belgrade Stock Exchange Best Investor Relations Award (in 2011, 2012 and 2013). The Invisible Stock Exchange Financial analyst Nenad Gujaničić explains that the Belgrade Stock Exchange has still not established itself among Serbian companies as the place where companies and other issuers may raise capital, which is supposed to be the main role of a capital market. - There are many reasons for that, the main ones being the marginalised position of the market, few proper financial instruments and thus few participants in it - Gujaničić explains. Gujaničić warns that investors have quite low confidence in the quality of local financial statements. – Investors, therefore, prefer one-to-one meetings with the management in order to gain an insight into the direction in which the company is headed. Most investors find it crucial that the company management perform their work properly and honestly, and that they have a certain competitive advantage over the competitors in their field of activity - he says. He adds that good IR could increase the price of company shares up to 40 per cent, as investor confidence rises as well as their readiness to make a decision to invest faster. Gujaničić assesses that few companies have a proper investor relations section, stating that NIS provides a rare example of successful communication with investors and warning that most companies, even the ones listed by the stock exchange, have still not accepted all the possibilities the stock exchange could offer. Jelena Miljuš, Director of the Investor Relations Section at NIS, states that IR has an increasingly important role in the Company's total business operations. - It is no longer sufficient to merely achieve good production, i.e. business results, which will automatically attract a desirable investor profile. As a result of overall information excess, it is necessary to create a company image in a proper fashion - Mrs Miljuš reveals. She underscores that in the last few years investor relations have had an increasingly important role in the Company positioning in a specific public segment – investor audience.
Good investor relations could increase the price of company shares up to 40 per cent, as investor confidence rises as well as their readiness to make a decision to invest faster- Investor relations are no longer a matter of choice but a necessity. The purpose of the sector is to ensure a better understanding for the company it represents both by financial, institutional and individual investors, as well as the existing shareholders. This requires systematic, organised and continuous provision of information on the company and simultaneous collection and analysis of information coming from the market to the company – Mrs Miljuš underlines. This two-way relationship shows what an investment decision-making process is like, revealing first of all what stimulates these decisions and on what basis proper strategies for approaching investors are defined. Mrs Miljuš adds that NIS actively communicates with investors in the form of regular quarterly presentations of results achieved, investors being able to be in direct communication with the management. As requested by investors, one-to-one meetings are also possible. This year, proper IR of the Company will involve taking part in investor conferences and organising them. An example of events organised is NIS Investor Day, when there are direct talks with representatives of investment and pension funds and banks, which most often invest in NIS' shares. However, there are not so many companies in the Serbian capital market apart from NIS which can boast proper IR. The situation is not much different in the region, either. Tomislav Bajić, Head of Analytics at Inter Capital Securities Croatia, says that this is due to the fact that the regional capital market is still developing. - Nevertheless, it does offer an opportunity to all the companies with proper investment segment. Investors most often face the problem of a lack of transparency and liquidity. The transparency problem can be resolved, while liquidity is influenced by some factors beyond the reach of companies, so the highest corporate governance standards must be applied - Bajić explains. Risk Avoidance He adds that investor aversion to risk has increased in the period of economic downturn, so defensive sectors and low beta stocks are most investors' first choice. Bajić clarifies that in addition to the risk related to the company's activity, stock liquidity at the stock exchange is what is really important to investors. - Regardless of the basics, if a stock is illiquid, investors are not likely to find it attractive - warns the expert on the capital market. He points out that despite the fact that some companies in the Zagreb Stock Exchange adopted western European standards of communicating with investors, most companies remain isolated and have a negative attitude towards investors. Bajić does state that compared to the period of ten years ago, the amount of information made public by the companies has considerably increased, so annual reports have become proper books in themselves thus presenting quite a challenge to investors in terms of having to process this amount of information, which is why investors have increasingly been asking for concise key information they need in order to assess investment. As a representative of a financial institution which is an active investor in the region, Bajić underscores that it is always positive regardless of all correlations between the quality of IR and company price trends. - If a company communicates with investors and analysts well, and even if there are some surprises, the impact on the stock price is much lower than if it were the other way round - this financial expert explains. He assesses that IR in the Croatian capital market is not sufficiently developed, apart from several positive examples that stand out. Bajić believes that the experience with the shining example of the Serbian IR - NIS - has been positive so far, referring to the company as “a true blue chip” in the Serbian market and one of the leading companies in the regional market. The situation in Hungary is slightly better, says Tamas Pletser, an analyst with Erste Bank Investment in this country, who says that Australian and U.S. investors are present in the Hungarian capital market, which goes to prove that the capital market is open and one only needs to attract investors. This analyst believes that legislation is the problem of the regional capital market. For instance, the fees paid by companies to stock exchanges are too high in Romania, while on the other hand, the companies are expected to provide detailed reports. With regard to Hungary, this analyst mentions legal uncertainty with frequent changes in the amount of taxes or legislation, while investors in the Turkish and Polish markets find fault with the excessive involvement of the state in the capital market, explains this well-informed analyst. He adds that investors in the region have turned their attention to real estate companies, but major companies in the sectors of oil, gas and banking are almost always in the focus of interest. - Investors are always looking for undervalued shares in all sectors - he clarifies and adds that this is the reason why the region has to offer more companies. He warns that good communication with investors and transparency are crucial to success in the capital market. - An investor must be aware of the ownership structure, the rights they acquire by investing, all legal procedures and the risks involved in the investment - Pletser says. At the same time, he underlines, it is not the riskiness of the investment that is disputable, but possible information withheld from investors which may entail a hidden risk. He therefore cautions that it is difficult to earn trust but very easy to lose it. Downturn Outweighs the Law The Law on Capital Market, whose implementation started in November 2011, was supposed to result in increasing the number of transactions in the Serbian financial market. However, the stock exchange statistics reveals that the turnover in the first 11 months of last year of hardly around 153 million euros is the poorest recorded result in the last 15 years, indicating that the law is belated as the capital market had already been marginalised in the financial market. Although the legislator aimed at increasing certainty and investor protection by introducing the obligation to establish the Investor Protection Fund, as well as at fair, efficient and transparent capital market, the downturn outweighed the attempts. Namely, the Law failed to mitigate systemic risks in the capital market as there are simply too few companies in the market in the first place. The modified and more modern Law places great emphasis on composing, approving and circulating prospectuses for making a public offering for securities or for their inclusion in a certain market, but IPO has still not become a reality in the Serbian capital market. The Law on Capital Market gives greater powers to the Securities Commission, so in the future manipulation and recommendation of insider information will be treated as criminal offences, which at the moment may be considered a solid basis while waiting for the market to recover. Ivana Ristić
