Implementation Completion and Results Report Capital Markets Modernization Project P120321 Cleared 01312017

Document of
The World Bank
Report No: ICR00004007
IMPLEMENTATION COMPLETION AND RESULTS REPORT

(IBRD-80240)
ON A
LOAN
IN THE AMOUNT OF
US$ 12 MILLION EQUIVALENT
TO THE
Republic of Azerbaijan
FOR A
Capital Markets Modernization Project (CMMP)
January 25, 2017
Finance & Markets Global Practice

Europe and Central Asia Region
CURRENCY EQUIVALENTS
(Exchange Rate Effective October 11, 2016)
Currency Unit = Azeri New Manat (AZN

1.00 AZN = US$ 1.599
1.00 SDR = US$ 1.382
FISCAL YEAR
ABBREVIATIONS AND ACRONYMS

ABS Asset Backed Securities MoF Ministry of Finance
ADB Asian Development Bank MoT Ministry of Taxes
AZN Azerbaijan New Manat NCB National Competitive Bidding
BSE Baku Stock Exchange NDC National Depository Center
CAS Country Assistance Strategy ORAF Operational Risk Assessment
CMMP Capital Markets Modernization Project Framework
CPS Country Partnership Strategy PAD Project Appraisal Document
EBRD European Bank for Reconstruction and PID Project Information Document
Development PIU Project Implementation Unit
ECA Europe and Central Asia POM Project Operation Manual
EU European Union PQ Prequalification
FIRST Financial Sector Reform and Strengthening PPP Public-Private Partnerships
Initiative RVP Regional Vice President
FIMSA Financial Markets Supervision Authority SBD Standard Bidding Documents
GDP Gross Domestic Product SCS State Committee for Securities
IBRD International Bank for Reconstruction and SECO Swiss State Secretariat for
Development Economic Affairs
ICR Implementation Completion and Results TAL Technical Assistance Loan
Report USAID United States Agency for
IC SSS Individual Consultant Single Source International Development
Selection WBT World Bank Treasury
IDA International Development Association
IFC International Finance Corporation
ISDS Integrated Safeguard Data Sheet
Senior Global Practice Director: Gloria Grandolini

Sector Manager: Rolf Behrndt
Project Team Leader: Angela Prigozhina
ICR Team Leader: Stephen Pirozzi
Republic of Azerbaijan
Capital Markets Modernization Project (CMMP)
CONTENTS
Data Sheet
A. Basic Information
B. Key Dates
C. Ratings Summary
D. Sector and Theme Codes
E. Bank Staff
F. Results Framework Analysis
G. Ratings of Project Performance in ISRs
H. Restructuring
I. Disbursement Graph
1. Project Context, Development Objectives and Design ............................................. 11

2. Key Factors Affecting Implementation and Outcomes ............................................ 15
3. Assessment of Outcomes .......................................................................................... 19
4. Assessment of Risk to Development Outcome......................................................... 25
5. Assessment of Bank and Borrower Performance ..................................................... 25
6. Lessons Learned ....................................................................................................... 29
7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 30
Annex 1. Project Costs and Financing .......................................................................... 31
Annex 2. Outputs by Component ................................................................................. 32
Annex 3. Economic and Financial Analysis ................................................................. 33
Annex 4. Bank Lending and Implementation Support/Supervision Processes ............ 34
Annex 5. Beneficiary Survey Results ........................................................................... 36
Annex 6. Stakeholder Workshop Report and Results................................................... 37
Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 41
Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 50
Annex 9. List of Supporting Documents ...................................................................... 50
Annex 10. Borrower ICR .............................................................................................. 52
Map (IBRD 33365) ....................................................................................................... 97
A. Basic Information
Capital Markets
Country: Azerbaijan Project Name:
Modernization Project
Project ID: P120321 L/C/TF Number(s): IBRD-80240
ICR Date: 01/10/2017 ICR Type: Core ICR
REPUBLIC OF
Lending Instrument: TAL Borrower:
AZERBAIJAN
Original Total
USD 12.00M Disbursed Amount: USD 11.96M
Commitment:
Revised Amount: USD 12.00M
Environmental Category: C
Implementing Agencies:
Azerbaijan State Committee for Securities
Cofinanciers and Other External Partners:
B. Key Dates
Revised / Actual
Process Date Process Original Date
Date(s)
Concept Review: 12/09/2010 Effectiveness: 11/07/2011 11/07/2011
Appraisal: 01/19/2011 Restructuring(s): 05/06/2015
Approval: 03/17/2011 Mid-term Review: 01/20/2014 02/03/2014
Closing: 12/31/2015 07/01/2016
C. Ratings Summary
C.1 Performance Rating by ICR
Outcomes: Satisfactory
Risk to Development Outcome: Substantial
Bank Performance: Moderately Satisfactory
Borrower Performance: Satisfactory
C.2 Detailed Ratings of Bank and Borrower Performance (by ICR)

Bank Ratings Borrower Ratings
Quality at Entry: Moderately Satisfactory Government: Satisfactory
Implementing
Quality of Supervision: Satisfactory Satisfactory
Agency/Agencies:
Overall Bank Overall Borrower
Moderately Satisfactory Satisfactory
Performance: Performance:
C.3 Quality at Entry and Implementation Performance Indicators
Implementation QAG Assessments
Indicators Rating
Performance (if any)
Potential Problem
Quality at Entry
Project at any time No None
(QEA):
(Yes/No):
Problem Project at any Quality of
No None
time (Yes/No): Supervision (QSA):
DO rating before
Satisfactory
Closing/Inactive status:
D. Sector and Theme Codes

Original Actual
Sector Code (as % of total Bank financing)
Public administration - Financial Sector 7 7
Capital Markets 93 93
Theme Code (as % of total Bank financing)

International financial standards and systems 36 36
Other Financial Sector Development 22 22
Regulation and competition policy 42 42
E. Bank Staff
Positions At ICR At Approval
Vice President: Cyril E Muller Philippe H. Le Houerou
Country Director: Mercy Miyang Tembon Asad Alam
Practice
Rolf Behrndt Sophie Sirtaine
Manager/Manager:
Project Team Leader: Angela Prigozhina Michael Edwards
ICR Team Leader: Stephen Francis Pirozzi
ICR Primary Author: Stephen Francis Pirozzi
F. Results Framework Analysis
Project Development Objectives (from Project Appraisal Document)

Increase the use of equity and corporate debt as financing and/or investment instruments
through the adoption of an effective capital markets regulatory framework and
infrastructure
Revised Project Development Objectives (as approved by original approving authority)
(a) PDO Indicator(s)
Original Target Formally Actual Value

Values (from Revised Achieved at
Indicator Baseline Value
approval Target Completion or
documents) Values Target Years
Increased issuance of corporate bonds
Indicator 1 :
Value
1.9% 3.8% 14.1%
quantitative or
Qualitative)
Date achieved 10/04/2011 12/31/2015 07/01/2016
Comments
Outstanding amount of corporate debt to 2010 Non-oil GDP
(incl. %
achievement)
Increased number of listed companies
Indicator 2 :
Value
2 8-10 5
quantitative or
Qualitative)
Date achieved 10/04/2011 12/31/2015 07/01/2016
Comments
Number of listed companies
(incl. %
achievement)
Improved price transparency
Indicator 3 :
Value
0% 90% 100%
quantitative or
Qualitative)
Date achieved 10/04/2011 12/31/2015 07/01/2016
Comments
Ratio of competitive transactions / total equity (non-block transactions)
(incl. %
achievement)
(b) Intermediate Outcome Indicator(s)
Original Target Actual Value

Formally
Values (from Achieved at
Indicator Baseline Value Revised
approval Completion or
Target Values
documents) Target Years
Ratio of market participants electronically linked to market infrastructure
Indicator 1 : (trading, clearing and settl
Value 0% 100% 100%

(quantitative
or Qualitative)
Date achieved 10/04/2011 12/31/2015 07/01/2016
Comments
Ratio of market participants electronically linked to market infrastructure
(incl. %
achievement)
Enactment of new Capital Market Law
Indicator 2 :
Value
No Yes Yes
(quantitative
or Qualitative)
Date achieved 10/04/2011 12/31/2015 07/01/2016
Comments
Law enacted
(incl. %
achievement)
Promulgation of capital markets regulation required upon enactment of
Indicator 3 : Law
Value
No Yes Yes
(quantitative
or Qualitative)
Date achieved 10/04/2011 12/31/2015 07/01/2016
Comments
Regulations promulgated
(incl. %
achievement)
Number of companies involved in the listing advisory program (debt and
Indicator 4 : equity)
Value
0 15 16
(quantitative
or Qualitative)
Date achieved 10/04/2011 12/31/2015 07/01/2016
Comments
Number of companies involved in the listing advisory program
(incl. %
achievement)
Increased of the threshold pass rate of the Financial Certification
Indicator 5 : examination for market participants
Value
50% 75% 75%
(quantitative
or Qualitative)
Date achieved 10/04/2011 12/31/2015 07/01/2016
Comments
Measures financial literacy level
(incl. %
achievement)
Consumer Awareness of Capital Market Instruments
Indicator 6 :
Value
24 45 59.38
(quantitative
or Qualitative)
Date achieved 10/04/2011 12/31/2015 07/01/2016
Comments
using the Capital Markets Awareness Index
(incl. %
achievement)
G. Ratings of Project Performance in ISRs
Actual
Date ISR
No. DO IP Disbursements
Archived
(USD millions)
1 07/09/2011 Satisfactory Satisfactory 0.00
6 06/11/2014 Satisfactory Moderately Satisfactory 4.24
7 11/22/2014 Satisfactory Moderately Satisfactory 4.75
8 05/18/2015 Moderately Satisfactory Satisfactory 6.18
H. Restructuring (if any)
ISR Ratings at Amount

Board Restructuring Disbursed at
Restructuring Reason for Restructuring &
Approved Restructuring
Date(s) Key Changes Made
PDO Change DO IP in USD
millions
05/06/2015 MS S 6.18
I. Disbursement Profile
1. Project Context, Development Objectives and Design
1.1 Context at Appraisal

1. From 2004 – 2008 Azerbaijan experienced an average annual increase in GDP over 20 percent
and decrease in poverty, due in large part to rising oil and gas production and prices. However, given
the exhaustive nature of oil and gas production, it was believed that Azerbaijan may have reached its peak,
as production was estimated to remain steady over the next decade and decline thereafter, thereby leaving
limited window to create an economic environment to support growth in the non-oil economy. The challenge
for Azerbaijan was the ability to transform into a sustainable higher middle income country with a more
diversified economy.
2. At the time of appraisal, Azerbaijan had made good progress on its first round of economic
reforms. This includes establishing a sound macro-framework, including the oil fund. It also includes small-
scale privatization, internal trade and price liberalization and a stable central banking and foreign exchange
system. Improved policies to provide effective services in basic health, education and social protection had
also been put into place. However, Azerbaijan continued to lag behind most other CIS countries in second
generation reforms, in such areas as, large-scale privatization, competition policy, consumer protection, rural
access to financial services, banking and securities market reform, and foreign trade in the non-oil sector. In
addition, there was a lag in developing policies and institutions needed to support a competitive highly
skilled workforce, an innovative and flexible private sector environment, and to address the environmental
legacy of the Soviet Union.
3. The Government sought to maintain progress reflected in the 2011 Doing Business Report by
further diversifying the economy and making gains in areas that at the time were identified as
requiring urgent attention, including business licensing, tax and customs administration and
reduction of corruption. While the Country’s rankings for business entry were good at the time of appraisal,
Azerbaijan ranked poorly on exit, competition and dimensions that deal with ongoing business operations,
including trading across borders, paying taxes, etc. For example, Azerbaijan’s rank for “Starting a New
Business” improved from 64 to 15 during the period 2008-2011. However, during the same period, the
rankings for “Trading Across Borders” and “Paying Taxes” ranged from 173-177 and 141-103, respectively.
4. During the time of appraisal, the capital market in Azerbaijan was underdeveloped, with
equity and debt market capitalization of 0.5 percent and 1.9 percent of non-oil GDP, respectively, at
the end 2010. Development of the capital market in the medium term was considered crucial to support
economic diversification of the non-oil sector. The main activity of the Baku Stock Exchange (BSE) was to
serve as the auction mechanism for the issuance of Government Securities. However, due to a number of
limiting factors1, secondary trading of treasury debt did not exist. Only two companies had listed their shares
on the BSE to date, one of which was closely-held and did not trade. The most active trading surrounded
shares of about 500 companies privatized in the mid-1990s, which represent the “unlisted securities market”,
which was not regulated by the State Committee for Securities (SCS). As virtually all equity trades were
pre-arranged, traditional exchange driven price discovery is not attained. The investor base was acutely
1
These include artificially low yields, high frequency of issuance, and a broad range of available maturities
11
underdeveloped and banks have had little interest of investing in low yielding existing market instruments2.
As a consequence of the underdevelopment of the capital markets, the banking sector dominates the financial
sector with more than 95 percent of total assets.
5. A number of key benefits would result in the medium term from the development of the capital
market. As a result of prior years’ high bank credit growth, both credit and related foreign exchange risks
had become concentrated in the banking system. It was anticipated that over time these risks would be
diffused as the nascent corporate bond market develops and more firms are able to gain access to longer
term funding. Secondly, the banking system’s domestic funding structure would be enhanced through banks’
improved access to debt and equity financing. Thirdly, through a stronger capital market, holders of
privatization vouchers would be able to more readily determine the price offered to sell their holdings. In
sum, lenders, borrowers and investors would each have new opportunities to participate in the growth of
non-oil economy through the capital market.
6. At project design, market participants were interested in exploring more attractive financing
opportunities for the private sector. At the time the project was conceived, the corporate sector was relying
on expensive, short-term and increasingly scarce local financing from the commercial banks. Moreover,
with the exception of IBA (which is majority owned by the State), few banks were large enough to provide
substantial funding to enterprises. Market participants and the regulator alike had indicated that a number of
enterprises have an interest to access the capital market for debt and/or equity financing. Equally, banks
were interested in diversifying their funding sources away from short-term deposits and find alternative
sources of finance. The capital market, through both equity and debt financing, offered banks potential
access to longer term funding, which was considered essential to encourage private sector development.
1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved)
Increase the use of equity and corporate debt as financing and/or investment instruments through the
adoption of an effective capital markets regulatory framework and infrastructure.
1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification
The PDO was not revised.
1.4 Main Beneficiaries
7. The main beneficiaries of the CMMP project identified in the PAD are:
• State Committee for Securities
• Baku Stock Exchange
• National Depository Centre
• Central Bank of Azerbaijan
• Ministry of Finance
• Ministry of Economic Development
• Professional financial intermediaries
• Corporate Sector
2
Apart from the government securities, mostly for the reserve requirements
12
• Individual, corporate and institutional investors
1.5 Original Components
8. The PAD defined five components or parts (as they are called in the Development Credit
Agreement), as follows:
9. Component 1: Streamlining and Automating Market Infrastructure. This

Component will address the outdated capital market infrastructure constraints by focusing on: (i)
increasing automation of the market through establishing one depository center and consolidating
clearance and settlement; (ii) opening the infrastructure’s inclusion/participation and access; (iii)
minimizing off-market trades and improving price discovery; (iv) facilitating the operational introduction
of investment funds; and (v) building better risk protection through establishing an updated trade
guarantee mechanism. Market infrastructure activities supported under this Component will seek to
maximize compliance with the Group of Thirty standards on clearance and settlement, IOSCO Principles
35-38 and CPSS-10 clearance and settlement principles. In this manner the Project will promote
compliance with best international practices, and just as importantly, ready the reformed market
infrastructure for connectivity to EU systems, when the level of Azeri market activity makes this
advisable.
10. Component 2: Updating and Strengthening the Legal and Regulatory Framework. To
maximize the benefits of adopting an adequate legal and regulatory framework, this Component will focus
on: (i) reviewing the draft capital market legislation, ensuring that the existing gaps are addressed through
the forthcoming new Capital Market Act and identifying key implementing regulations needed to make the
law effective; (ii) enhancing market confidence and safety by introducing minimum capital requirements
for market participants; (iii) in collaboration with the Ministry of Taxes and Ministry of Finance, eliminating
tax obstacles to capital formation for companies and avoiding double taxation of participants in investment
funds; (iv) allowing pooled investments by insurance companies; (v) fostering competitiveness by
extending market participation through new licenses and broader geographic coverage; and (vi) ensuring
effective coordination with other regulatory authorities in the financial sector (e.g., the Central Bank of
Azerbaijan and the Ministry of Finance Insurance Directorate) to minimize regulatory gaps and arbitrage
opportunities. The EU TACIS project is currently supporting drafting of the new and approximation of the
EU directives in Azerbaijan regulatory framework. This Component of the Project will largely build on the
preparation of the draft Capital Market Act and be strengthened through the SCS undertaking in 2013 an
IOSCO self-assessment and an independent IOSCO assessment at the end of the Project
11. Component 3: Stimulating Supply. This Component will promote greater use of capital markets
as a financing alternative by focusing on: (i) creating a more appropriate environment to encourage equity
listings and the corporate bond market; (ii) actively reaching out to corporations to promote benefits of
financial market as a funding alternative and working proactively with prospective issuers to assist them in
coming to the market; (iii) promoting development of reliable benchmarks in the government bond market
(in cooperation with IMF); (iv) supporting domestic capital market financing of the large infrastructure
projects, by examining the potential for PPPs; and (v) assessing potential for introduction of new financial
products (e.g., Electronic Traded Funds in the medium term).
13
12. Component 4: Capacity Building. This Component will seek to overcome the low capacity of
market participants and regulators through launching capacity building activities. First, as the SCS is the
major force leading the CMMP reform, it is important to assure that the agency’s human and financial
capacities are sufficient and effective. This Component, will aim to: (i) strengthen the SCS’ knowledge
management, its policy formation processes and transparency of operations; and (ii) strengthen the
institutional capacity of the SCS’ surveillance, reporting and enforcement systems. Second, investor
education is a key factor to the encouraging the breadth and depth of participation in capital markets. It is
therefore necessary to ensure that potential investors are well-informed as to the use, benefits and risks of
securities ownership.
13. This Component will include, inter alia, activities to: (i) improve public awareness of the capital
market by carrying out a series of effective communication programs through media, outreach sessions
hosted by the SCS in major cities of Azerbaijan; (ii) increase potential investors’ understanding of capital
market by series of education seminars and outreach tools to nascent investment funds and insurance
industry; and (iii) promoting the Azeri market to international investors. Third, skilled capital markets
intermediaries are essential to the creation of efficient capital markets. The establishment of high
professional standards for capital markets professionals has a direct influence on the credibility of the capital
market and encourages the inflow of investment funds.
14. The set of proposed measures regarding on-going training and certification under this Component
should provide investors with confidence that the persons they are dealing with have the necessary skills,
knowledge, experience and ethical standards to administer their investments This Component will support
an increase in the professional knowledge base by: (i) developing a capital markets training center; (ii)
gauging the current capacity of the capital markets participants; (iii) establishing curricula for qualification
for licenses; and (iv) developing a sustainability plan for Training Center.
1.6 Revised Components
15. No material changes were made to project components.
1.7 Other significant changes
16. Changes were made to the loan closing date and funds were reallocated between procurement
categories. The revised closing date was July 1, 2016 which was six months beyond the original closing
date of December 31, 2015. Funds totaling USD 440,000 were reallocated, between procurement categories.
The extension of the project closing date was requested to accommodate the installation of the Capital
Market Information System (CMIS) under Component 1 of the Project “Streamlining and automating capital
markets infrastructure”. The work under the CMIS contract commenced in late February 2015 and
installation was estimated to be completed within 12 months thereby representing a two-month slippage
from the original project end date. A formal letter (#13/06-53-1271) dated March 4, 2015 was received
from the Ministry of Finance of the Republic of Azerbaijan (MOF) requesting extension of the closing date
to July 1, 2016 and the reallocation of funds between procurement categories.
17. Project funds were reallocated as follows:
14
• USD 400,000 transferred from “Consulting Services, Audit and Training” category to “Goods”
category;
• USD 40,000 transferred from “Consulting Services, Audit and Training” category to
“Incremental Operating Costs” category
Table 1: Reallocation of Proceeds
Amount of the Amount of the Percentage of

Loan Allocated Loan Allocated Expenditures to be
Category (expressed in USD) (expressed in Financed
Current) USD) (Net of VAT)
(Revised)
4,300,000 4,700,000
(1) Goods 100.00
(2)Consultants' services 7,600,000 7,160,000
including audit and 100.00
training
(3) Incremental Operating
100.00
Costs 70,000 110,000
(4) Front-end fee 30,000 30,000
TOTAL 12,000,000 12,000,000 100%
2. Key Factors Affecting Implementation and Outcomes
2.1 Project Preparation, Design and Quality at Entry
18. Preparation of the CMMP took place in an economic climate significantly different from that
of today. In 2010, the corporate bonds market saw eight new issuances making it one of the most active
segments of the capital markets. These new issuances were led by banks, insurance and microfinance
companies. The total amounted to 17.6 AZN million with an average maturity of 1.5 years and an average
interest rate of 14 percent. One bank issued a 0.999 AZN million Eurobond with a maturity of 1 year and an
interest rate of 11 percent. The Azerbaijan Mortgage Fund (AMF) issued 5 and 7 year covered bonds at 3.0
and 3.25 percent respectively3. The CMMP intended to leverage these positive trends in the market and
increase private sector financing through the capital markets as an alternative to bank financing which was
more expensive and offered shorter terms. The bond market remained active but it was apparent by early
2015 that there was waning interest in listing equities as the macroeconomic conditions began to weaken. 4
3
See Pre-Implementation mission Aide-Memoire (May 26th-June 3rd, 2011)
4
16 bond issuances occurred in the first quarter of 2016 compared to 82 issuances during the same period in 2015. The Manat
devaluations in February and December 2015 negatively impacted investor sentiment, while tighter monetary policy and fiscal
15
19. The TAL was the appropriate instrument for the implementation of the CMMP. As described
in detail in the PAD, the GoA was committed to improving the capital market infrastructure so that it would
encourage and support securities issuance (debt and equity) as an alternative to bank borrowing. 5 The
CMMP continued and complemented work focused on the securities and capital markets supported by IMF,
SECO, IFC, EBRD, USAID and EU TACIS. More specifically, the project was designed to address existing
regulatory, infrastructure and capacity gaps identified in the Capital Market Assessment Report developed
with support of the FIRST Initiative in mid-2010
20. Commitment to the project remained high despite economic challenges. In spite of the prevailing
economic challenges facing Azerbaijan during project implementation, the borrower remained committed
to achieving the reforms and structural changes required under the CMMP plan. The level of commitment
is evidenced by the issuance of Presidential Decree #760 (February 3, 2016) which created an integrated
Financial Market Supervisory Authority (FIMSA). FIMSA has been created with regulatory and supervisory
responsibility over banks, non-bank credit institutions, capital markets, payment systems, and financial
monitoring of AML/CFT. Upon approval of the FIMSA Charter on March 11, 2016, the State Committee
for Securities (SCS) had been dissolved. The move was designed to add efficiency to securities and capital
markets regulation and oversight.
21. Appropriate risks were identified at the time of project design. However, macroeconomic
stability and a decline in crude oil prices were neither identified nor anticipated. Given the scope of
the project, the team correctly identified the following core risks:
Stakeholder risks. Failure to secure broad political, industry and investment community would
potentially result in delay or discontinued implementation of the capital markets reform process.
Institutional risks. Unforeseen changes in the SCS leadership structure (both high and mid-level)
could significantly delay portions of the project implementation.
Implementation risks. Given the limited capacity of the SCS there was a potential for delay. The
SCS had no experience leading a broad reform agenda and implementing World Bank Projects.
However, SCS did have successful experience implementing projects with other IFIs
22. The team believed that “the relatively simple design and implementation arrangements”6 would help
mitigate operational risks, while other risks regarding the institutional environment and governance will be
mitigated through the active engagement of the SCS Board of Directors and robust local project supervision.
However, the team did not identify macroeconomic risks that could have an adverse effect on both project
implementation and market participation. An unanticipated significant drop in oil prices7 triggered a series
consolidation resulted in a tightening of local currency liquidity and an increase in cost of funds in the period 2H2015-1H2016.
Several IPOs planned for 2015 had been cancelled pending improved conditions. (See Aide-Memoire June 6-10, 2016)
5
See PAD page 12, Paragraph 37
6
See PAD page 12, Paragraph 34
7
Crude oil prices began a steady trend upward starting in early 2002 and dipped in early 2007 when the financial crisis hit.
Subsequently, there was a rapid and dramatic rise to a peak price of $139.05* in June 2008 which was followed by an equally
16
of negative consequences including sharply reduced economic activity, tightened liquidity and significant
distress in the banking sector which resulted in several high profile bank closures. With the benefit of
hindsight, it is apparent that this has had a significant negative affect on the expected uptake and issuance
of corporate debt and securities.
2.2 Implementation
23. In spite of some delay in implementation, all deliverables were realized by the revised project
end date. As mentioned, in spite of unforeseen economic challenges most of the project deliverables were
completed on time. In April 2015, the project team sought a six month extension in the project closing date.8
The extension was requested due to a delay in procurement and contracting of a consultant for the IT solution
related to the capital markets infrastructure system (CMIS) under component 1. By June 10, 2016, all
deliverables under components 1, 2 and 3 were completed. Two remaining items under Component 4 were
completed before project closing. These were (i) recommendations of expanding commercial b2b
consultancy services of the CMTC, and (ii) Financial Literacy Survey.
24. Delays were encountered in the early stages of the project which are attributed to a more
complex preparation process than anticipated and a delayed launch in the CMIS. The disbursement
schedule lagged almost 12 months behind initial projections and persisted until the end of 2015 Q3 when
disbursements began to pick up. In addition to project complexities cited by the team, it is understandable
why such a project would experience delays given the overarching threat of financial crisis and two currency
devaluations in February and December 2015. In spite of these challenges, the project had achieved
essentially all its objectives by the revised closing date, which was only six months beyond that of the
original closing date.
2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization
25. At the time of approval the Project was relevant to country needs and the M&E framework
supported the assessment of progress towards the achievement of the PDO. At the time of approval,
Azerbaijan had largely weathered the financial crisis in 2008 and experienced a 9.3% GDP growth rate in
2009. However, growth in the non-oil sectors had slowed down to 3.2% in 2009 compared with double
digit growth during the period 2006-2008. As Azerbaijan had already begun instituting economic reforms,
strengthening of the capital markets by modernizing, facilitating access and promoting transparency was a
logical step towards market expansion and encouraging non-bank long-term financing. The banking system,
however, was not a primary focus of these efforts.
26. Monitoring of the CMMP TAL was conducted by the PIU, located within the State Committee
for Securities (SCS), in close collaboration with the Government and World Bank. The SCS was
dramatic drop to $35.23* in February 2009. Since then, the price per barrel has risen to about $100* and has settled to about
$52* as of January 2, 2017 *(2016 Dollars)
8
See Report No: RES18549 Restructuring Paper on a Proposed Project Restructuring of Capital Markets Modernization Project
Loan IBRD-80240 Board Approval: March 17, 2011 To the Republic of Azerbaijan
17
responsible for project implementation and M&E. The PIU was established within the SCS and had direct
responsibility for procurement, disbursement, accounting and reporting to the SCS, Government and World
Bank. The Internal Audit Department of the SCS was specifically given the responsibility of M&E tracking
and reporting. It was also responsible for ensuring that the implementation units were integrated into the
management information results aggregation process. Reporting was provided on a regular and timely basis.
The project was also closely monitored by the World Bank. Two ISR missions per year were completed at
regular intervals during Project implementation for a total of ten missions.
27. Of three PDO indicators, two were achieved, and one fell short. The indicator which fell short
of its target is “number of companies with listed equity”. At the time of project closing, five companies had
listed equity which fell short of the target of 8-10. It is not hard to see why this was not achieved given the
prevailing macroeconomic conditions. Poor investor sentiment, low market liquidity and uncertainty in the
stability of the Manat are not conducive to IPOs or other forms of equity issuance. All other indicators
linked to the Project’s four components were either met or surpassed – a significant achievement given the
uncertain macroeconomic conditions during project implementation.
2.4 Safeguard and Fiduciary Compliance
28. Fiduciary performance by the Borrower was satisfactory. The PIU provided financial reporting
on a timely basis in a form and format satisfactory to the World Bank Financial Management Specialist. All
annual audits were conducted by a reputable firm and all audit opinions on the Project’s financial statements
were unqualified. Accounting records are maintained in a 1C based accounting system for SCS components
and accounting records were consistently found to be accurate and with adequate controls to ensure accuracy
of accounting records and reports.9
ISR FM Rating
Key ISR Indicator Previous Rating Final ISR Rating
Financial Management Satisfactory Satisfactory
Counterpart Funding Satisfactory Satisfactory
29. Environmental Safeguards: Current Environmental Assessment Category: C - Not Required.
2.5 Post-completion Operation/Next Phase
30. At the time of the drafting of this ICR, The GoA is in discussions with the World Bank for an
Advisory Services and Analytics (ASA) package for the purposes of financial sector stabilization and
development. Given the decline in macroeconomic conditions in Azerbaijan, the shift to focus on broader
issues to stabilize the financial markets appears to be an appropriate and much needed follow up to the
CMMP.
9
Capital Market Modernization and Financial Sector Modernization Projects Financial Management Supervision Report, May
2016
18
3. Assessment of Outcomes
3.1 Relevance of Objectives, Design and Implementation
Dimension Rating
Relevance of Objectives Moderate
Relevance of Design Substantial
Relevance of Implementation Substantial
Overall Relevance Rating Substantial
Sub-Rating for Relevance of Objectives: Moderate
31. The objectives of the Project have less relevance to current Government priorities than when
it was approved. At the time of project approval, the economic situation in Azerbaijan was reasonably
stable. At the time, emphasis was placed on diversification of the local economy and fostering the
development of alternative sources of financing to support growth in the private sector. The deepening of
the capital markets was accepted as a path forward to create a more efficient means for companies to obtain
cheaper long term capital and encourage growth in the non-oil economy. However, the macroeconomic
environment has changed significantly and there is greater need to stabilize the economy and the financial
sector generally to prevent further deterioration. Currency devaluation in 2015 has put the banking sector
under enormous pressure and has contributed to the failure of some institutions. Markets are virtually
illiquid and companies are not accessing the equity markets and are conducting limited bond issues in the
bond market. This is due to the currently high degree of economic uncertainty and waning confidence in the
financial sector, manly banks.
Sub-Rating for Relevance of Design: Substantial
32. The Project’s design correctly placed emphasis on institutional strengthening, reform of the
regulatory regime and streamlining market infrastructure. As mentioned earlier in this document, gaps
existed in the regulatory and institutional structures supporting capital markets development and growth.
The CMMP project leveraged off of prior work that had identified these weaknesses and focused on critical
elements that would serve as a platform for the issuance of debt and equity securities. Among these elements
are capacity building, streamlining and automation of the capital market infrastructure including the trading
platform, strengthening the legal and regulatory framework and educating business and the public, generally,
on capital markets operations and corresponding benefits. The level of transparency achieved by the project
should not be undervalued given the prevailing adverse macroeconomic conditions that has shaken
confidence in the banking sector and financial markets. It is also important to note, however, that there has
been lower than originally expected market activity and participation due to these poor conditions.
Uncertainty over the strength of the Manat as well as the viability of several large retail banks (following a
series of attempted restructurings and liquidations) has dogged the domestic financial sector.
Sub-Rating for Relevance of Implementation: Substantial
33. Throughout project implementation, the SCS, Baku Stock Exchange, National Depository
Center and the Bank remained committed to meeting project objectives and in spite of a challenging
environment, substantially all objectives were met within budget and on time. The CMMP, has
established a streamlined capital market trading platform underpinned by a revised legal framework and
19
regulations that support its operations. However, the prevailing economic climate is not attractive to
potential issuers of securities and more fundamental financial sector strengthening work is needed at this
time. Related challenges such as instability of the banking sector and two currency devaluations had a
negative effect on the banks’ ability to attract deposits. Several commercial banks have been declared
insolvent and overall confidence in the financial sector is low. Measures to stabilize the financial sector,
generally, are very much needed at this time. As mentioned above, WB is working with the GoA to develop
an ASA package focused on financial sector stabilization to address these issues.
3.2 Achievement of Project Development Objectives
Overall Achievement of PDOs Rating: Substantial
34. The Project contributed to the overall development objectives, with gains made in most areas.
Project contribution is broadly recognized and well appreciated by the GoA and significant advances in
PDO outcomes were achieved despite considerable challenges.
Responsible PDO Indicator Description – End Target Actual Level of Rating
Institution Indicator (Approved) Result Achievement
Definition (ICR’s
Assessment)
PDO: Increase the use of equity and corporate debt as financing and/or investment instruments through the adoption
of an effective capital markets regulatory framework and infrastructure.
Internal 1. Increased Outstanding 3.80% 14.1% Fully achieved High
Audit issuance of Amount of
Department corporate Corporate Debt to
of bonds 2010 Non-oil
SCS GDP
Internal 2. Increased Number of Listed 8-10 5 Partially achieved Substantial
Audit number of Companies
Department companies
of with listed
SCS equity
(cumulative)
Internal 3. Improved Ratio of 90% 100% Fully achieved. High
Audit price Competitive
Department transparency Transactions/Total
of Equity (Non-
SCS Block
Transactions)
35. PDO: “Increase the use of equity and corporate debt as financing and/or investment instruments
through the adoption of an effective capital markets regulatory framework and infrastructure”
36. PDO Indicator one: Increased issuance of corporate bonds. There has been an increase in the
issuance of securities during the life of the project based on results tracked under the indicator “Outstanding
Amount of Corporate Debt to Non-oil GDP”. The baseline in 2010 was 1.9%. The percentage rose steadily
during the life of the project and was 14% as of May 2016. This was down from a high of 24% in 2015
and highlights the quickly changing macroeconomic environment as well as the short-term nature of
corporate debt issues. Nonetheless, it is significantly higher than the target of 3.8%. In retrospect this target,
20
although a doubling of the 2010 baseline, may have been set at a more ambitions level considering the fact
that the result of 14% has been achieved under the current challenging economic conditions.
Outstanding Amount of Corporate Debt to 2010 Non-oil GDP (actual)

2011 2012 2013 2014 2015 May 2016
4.9% 4.1% 7.3% 21.4% 24% 14%
37. PDO Indicator two: Increased number of companies with listed equity. This indicator fell short of
its original target range of 8-10 companies with listed equity. It is not surprising that there was a slowdown
in equity issues given the lack of appetite and ability of companies to conduct an initial public offering.
Unanticipated price volatility, lack of market confidence and tightening liquidity contributed to a stagnation
in the equity markets.
38. PDO Indicator three: Improved price transparency. This indicator achieved 100% of its target. The
indicator was defined as the ratio of competitive transactions to total equity. “Competitive transactions” are
non-block transactions as block transactions are not considered competitive and transparent. However, the
BSE has taken measures that are designed to make block (or cross trades) more competitive by allowing a
60 minute price discovery period to allow counter-bid/offers and prepay requirements have been eliminated
for purchase orders. Whether this actually increases competitiveness and transparency of block trades
remains untested in the currently illiquid market.10
Intermediate Results Indicators
39. Component 1: Streamlining and Automating Market Infrastructure. The rating for this
component in the project’s final ISR was Satisfactory and targeted results had been achieved by project
closing. However, this comment was rated as moderately satisfactory in two consecutive ISRs, November
22, 2014 and May 18, 2015, respectively. The implementation of new (CMIS) is a critical step in advancing and
supporting capital market development as it main focus/function is aimed at substantial upgrading of trading, clearance
and settlement, depository and surveillance functions. The procurement process experienced delays in finalizing the
supporting technical specifications and the bid invitation which was originally planned for September 2013 was
delayed until April 2014.
Intermediate Indicators for Component 1.

Responsible Intermediate Indicator End Target Level of Rating
Institution (Approved) Achievement
(ICR’s
Assessment)
Internal 1. Ratio of market 100% Fully achieved High
Audit participants
Department electronically linked to
of market infrastructure
SCS (trading, clearing and
settlements)
10
See CMPP Mission Aide-Memoire (June 6-10, 2016)
21
40. Component 2: Updating and Strengthening the Legal and Regulatory Framework. The rating
for this component in the project’s final ISR was Satisfactory and targeted results had been achieved by
project closing. This component had experienced some minor delay during project implementation as the
review and consultation process within the Cabinet of Ministers and the Presidential Administration was
longer than anticipated.
Despite the delay in the enactment of the Law, the SCS and the consultancy firm had in parallel advanced
thirty required regulations while awaiting the Law’s passage.11
Intermediate Indicators for Component 2

(ICR’s
Assessment)
Internal 2. Enactment of a new Enacted Fully achieved High
Audit Capital Market Act
Department
of
SCS
Internal 3. Promulgation of Regulations Fully Achieved High
Audit capital markets Promulgated
Department regulation required
of upon enactment of
SCS Law
41. Component 3: Stimulating Supply: The rating for this component in the project’s final ISR was
Satisfactory and results were fully achieved by the time of project closing.. However, this comment was
rated as moderately satisfactory in two consecutive ISRs, January 11, 2014 and November 22, 2014,
respectively. The objective of Component 3 is to stimulate supply of issuers in the Azerbaijan capital market
and its core activity is the Listing Advisory Program (LAP) which an effort to focus available resources on
increasing listings on the Baku Stock Exchange. The LAP was approved in March 2013 and formally
launched in April 2014 after a 6 months delay which resulted from ) as a result of recommendations made
in the Inception Report to shift certain deliverables into this unified program. By September 2014,
realignment of these deliverables were agreed.

(ICR’s Assessment)
Internal Number of 15 Companies Fully achieved High
Audit companies
Department involved in the
of listing advisory
program (debt and
SCS equity)
11
See CMPP ISR #7 (22-Nov-2014)
22
42. Component 4: Capacity Building. The rating for this component in the project’s final ISR was
Satisfactory, and was rated at Satisfactory for the life of the project. The Capital Markets Training Center
has been with some slight delay and curricula for the Training Center have been adopted and a train-the-
trainers program enacted. A nation-wide education program was approved by the SCS and has been
continued under FIMSA. FIMSA leadership confirmed that in addition to university curricula, an agreement
was made with the Ministry of Education to include security markets materials to school books and to
explore expanding the curriculum to secondary schools. The 100US$ million SOCAR bond issue in 2016
played an important role in raising public awareness of the bond market due to SOCAR’s visibility.

(ICR’s Assessment)
Internal Increase of the threshold 75% Fully achieved High
Audit pass rate of
Department the Financial
of Certification
SCS examination for
market participants
Internal Consumer Awareness of 45 Fully Achieved: High
Audit Capital Market 59.38
Department Instruments12
of
SCS
3.3 Efficiency
Rating for Efficiency: Substantial
43. The project achieved a high level of cost effectiveness given the multitude of complex
deliverables competed within budget. However, the project required an extension of six months due
to early delays. The project helped facilitate the modernization of the debt and equity trading platform for
the BSE and helped inform the creation of the Financial Markets Supervision Authority (FIMSA) and
subsequent liquidation of the SCS. However there was some delay experienced in the early stages of the
project due to unanticipated complexities surrounding the TOR, tendering and ultimate installation and
testing of the CMIS system. The successful completion of the later tasks necessitated a six month extension
of the project closing date. Aside from this particular delay, the amount of progress made was considerable.
For example, the new “On Securities Markets” Law was adopted on July 14, 2015. Twelve new NDC and
post-trading system rules and thirty implementing regulations were adopted in support of the new securities
law.
12
Using the Capital Markets Awareness Index.
23
44. The markets are currently too illiquid to perform an economic analysis to assess the cost
savings accruing to issuers of corporate debt or equities vis-à-vis the alternative of short term bank
financing. An economic analysis calculating the cost savings benefits to securities issuers’ vis-à-vis reliance
on bank debt would have been a useful measure to quantify current savings and perhaps extrapolate future
benefits. Furthermore, bank lending activity has declined due to macroeconomic uncertainly, recent
devaluations of the Manat and illiquidity.
3.4 Justification of Overall Outcome Rating

Rating: Satisfactory
Overall this TAL is rated as Satisfactory.

Dimension Rating
Relevance Substantial
Achievement of Objectives Substantial
Efficiency Substantial
Overall Outcome Rating Satisfactory
45. The overall outcome rating for the project is Satisfactory. This is based on its Substantial rating for
Relevance, Substantial rating for Achievement of Objectives, and Substantial rating for Efficiency. The
project’s objective of strengthening key institutions continues to be highly relevant for the GoA’s and World
Bank’s development priorities, and the project objectives were substantially met. Revisions to the project
completion data was needed – and reflects the Bank’s responsiveness to the project and implementing
institutions. There were moderate shortcomings primarily in the project’s efficiency evidenced by the six
month extension.
3.5 Overarching Themes, Other Outcomes and Impacts
(a) Poverty Impacts, Gender Aspects, and Social Development - (N/A)
(b) Institutional Change/Strengthening
46. During the implementation phase, the responsible agency, SCS, was dissolved and its
responsibilities transferred to the newly established Financial Market Supervisory Authority
(FIMSA). The Decree of the President of Azerbaijan #760 dated February 3, 2016 called for the creation of
an integrated Financial Market Supervisory Authority (FIMSA) with regulatory and supervisory
responsibility over banks, non-bank credit institutions, capital market, payment systems and financial
monitoring for AML/CTF. Upon approval of the FIMSA Charter on March 11, 2016, the State Securities
Committee (SCS) was dissolved with FIMSA designated as its legal successor. Prior to this, the World Bank
had expressed concern that the oversight powers of the SCS (as they related to inspection and investigation
of market players) were impeded by the Inspections Law13. The FIMSA has a much broader mandate than
the SCS and is responsible for ensuring the effective functioning of the financial markets, as well as
13
Law on Audits of Entrepreneurs and Protection of Interest of Entrepreneurs. Adopted in August 2013 and enforced in March
2014.
24
protection of the rights of creditors, investors and insurers. 14 This institutional change is viewed as an
improvement that will have a positive effect on capital markets oversight and securities price transparency.
Experienced leadership within SCS (many of whom were directly involved in the CMMP) were assigned
new roles in FIMSA thereby retaining the knowledge and experience of key managers.
(c) Other Unintended Outcomes and Impacts (positive or negative) – None identified
3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops – No Stakeholder workshop
was conducted. However a project closing event was held in Baku on November 4, 2016. See Annex 6.
4. Assessment of Risk to Development Outcome
Rating: Significant
47. The overall risk the project outcomes are rated as Significant due to the struggling banking
and financial sector. The devaluation of the Manat, lack of liquidity in the financial markets and the
draining of deposit accounts in retail banks have shaken popular confidence in the banking system. Direct
stakeholders and market participants have reported that the lack of regulatory transparency and uncertainty
in the markets are major factors contributing to the anemic state of the financial sector. Several large banks
have been declared insolvent thereby eroding confidence in the banking sector.15
5. Assessment of Bank and Borrower Performance
5.1 Bank Performance
(a) Bank Performance in Ensuring Quality at Entry
Rating: Moderately Satisfactory
48. The Bank correctly assessed the relevance of the PDO at the time of project design as well as
the strategic relevance of the objective to broaden and deepen the capital markets in Azerbaijan. This
was a timely and relevant project from inception. The project is well aligned with the FY07-10 and FY11-
14 Country Partnership Strategies 16 and their common objective of strengthening the non-oil economy
through changes in a wide range of areas including financial markets. In the case of the CMMP, the focus
was on the development of the securities markets. At the time of project design, this was a highly relevant
14
See: http://en.fimsa.az/pages/10
15
Based on interviews with private sector stakeholders during the ICR Preparation Mission
16
See: Country Partnership Strategy FY07-10 for Republic of Azerbaijan (37812 – AZ); November 8, 2006, and; Country
Partnership Strategy for Azerbaijan FY11-14 (56246 – AZ).
25
objective. However, over the course of project implementation the financial sector generally began to
weaken under the pressure of lower economic activity, tighter liquidity and distress in the banking sector
49. The Bank team failed to identify potential macroeconomic risks that could have an adverse
effect on the overall success of the project. During implementation, an unanticipated significant drop in
oil prices triggered a cascade of negative effects including a sharp reduction in economic activity, tightened
liquidity and significant distress in the banking sector. As a result of the increasingly adverse
macroeconomic conditions, there was and remains an acute need for financial market stability and
management and oversight of the banking sector. This threatened the success of the project as well as cast
some question on project relevance vis-à-vis the prevailing economic issues and distress in the financial and
banking sectors.
(b) Quality of Supervision
50. The Bank team actively supervised project implementation and was responsive to client needs.
The project was closely monitored by the Bank. Two ISR missions per year were completed at regular
intervals during project implementation for a total of ten missions. A review of project documents indicates
regular and active communication between the Bank, the PIU and implementing agencies. The ISRs
provided straightforward assessments of project progress and highlighted potential issues or areas on
concern. The project was led by four TTLs at varying points, with most of them supervising the project from
Washington DC. A variety of senior technical staff from the Bank joined implementation missions to ensure
quality control of the technical aspects of components, as detailed in ISRs and AMs. Procurement and
Financial Management specialists were present in the region. Project implementation took place in a very
challenging macroeconomic environment and the Bank team provided adequate support and expertise to
bring the project to a satisfactory completion.
51. Fiduciary aspects of the project were managed in a timely manner and all audits were clean.
As mentioned earlier in this document financial reporting was submitted by to the World Bank Financial
Management Specialist on a timely basis in the proper form and format. All annual audits were conducted
by a reputable firm and all audit opinions on the Project’s financial statements were unqualified. Accounting
records were consistently found to be accurate and with adequate controls to ensure accuracy of accounting
records and reports. A review of project–related documents and correspondence indicate a close working
relationship between the Bank’s Financial management Specialist and the PIU.
(c) Justification of Rating for Overall Bank Performance

Rating: Moderately Satisfactory
52. The Bank’s overall performance is assessed to be Moderately Satisfactory based on the ratings
for quality at entry, quality of supervision, and the overall outcome rating (see table below). The
CMMP project was relevant at the time of time of its inception and had the solid backing the GoA and the
respective implementing agencies. Substantially all targets were met and some were surpassed. Delays were
experienced early in the preparation stage which delayed the launch of the procurement process for the
capital markets information system (CMIS). Some delay was also experienced in the launch of the national
public awareness program for capital markets. The project team requested a six month extension of the
closing date to allow for the completion al all project components. The extension was reasonable given the
26
unexpected challenges that were encountered and the high quality of deliverables. Substantially all outcomes
were achieved in spite of unforeseen macroeconomic challenges including falling oil process, tightened
liquidity and a deteriorating banking sector. The Bank team did not account for these macroeconomic or
financial sector risks during project design. Consequently, the project is less relevant today given the current
market conditions. The successful completion of the CMMP can be largely attributed to strong counterpart
commitment to the project.
Dimension Rating
Quality at Entry Moderately Satisfactory
Quality at Supervision Satisfactory
Overall Bank Performance Moderately Satisfactory
5.2 Borrower Performance
(a) Government Performance
53. The Government’s performance is rated as Satisfactory. The Azerbaijan Ministry of Finance
demonstrated ownership and commitment to the project during preparation and led project implementation
via a PIU established at the SCS. It maintained the PIU with staff responsible for project coordination,
procurement, financial management and M&E. The project was declared effective on Nove. 7. 2011, eight
months after Board approval, which is a period longer than average for this type of project and was the
result of a lengthy approval process and delays in establishing and staffing the PIU. Following Bank Board
approval, the Borrower initiated a lengthy review process of the Loan document which included the Ministry
of Finance, Ministry of Education, Ministry of Justice, and the Cabinet of Ministers. The initiation of the
CMMP was also dependent on the then-anticipated Presidential decree endorsing the State Program on the
Development of the Securities Markets.17
(b) Implementing Agency or Agencies Performance
54. The Azerbaijan State Committee for Securities (SCS) was the primary implementing agency
for the CMMP. The overall implementation of the CMMP was delayed during the preparation phase. The
establishment and staffing of the PIU proved to be a more problematic than anticipated.18 In March 2011,
17
Decree of the President of the Republic of Azerbaijan endorsing the State Program on the Development of the Securities
Market of the Republic of Azerbaijan in 2011-2020. May 16, 2011,18:35
18
In March 2011, two specialists were identified but could not be retained until project effectiveness. As the process edged
forward, one of the specialists took another position and notified SCS of this decision in late August.
27
two specialists were identified but could not be retained until project effectiveness. As the process edged
forward, one of the specialists took another position and notified SCS of this decision in late August.
Similarly, the procurement of the 1C financial system and the search for consultants for the task “Creation
of General Framework for Stimulating Supply and Capacity Building of Capital Markets”, took longer than
what was originally anticipated. The unexpectedly complex preparation process also delayed the launch of
the procurement process for the CMIS. The setbacks experienced early in the project had a ripple effect that
ultimately required an extension of the closing date by an additional six months.
55. Despite early implementation delays and unanticipated negative macroeconomic conditions,
SCS remained fully committed to the project and achieved all deliverables. As mentioned earlier in
this document, commitment to the project remained high despite economic challenges. The borrower
remained committed to achieving the reforms and structural changes required under the CMMP plan. The
creation of the integrated FIMSA resulted in an improved agency with regulatory and supervisory
responsibility over banks, non-bank credit institutions, capital market, payment systems and financial
monitoring for AML/CTF.
(c) Justification of Rating for Overall Borrower Performance
56. Overall Borrower performance is assessed to be Satisfactory. (see table below).With a high level
of commitment, the borrower undertook and implemented complex reforms in a difficult environment which
was exacerbated by falling oil prices, tightened liquidity and a weak financial sector. Despite delays
experienced during the initial phase of the project, significant achievements were realized and internal
capacity ultimately improved.
57. As of July 1 (the amended closing date), all the deliverables envisioned under the project had been
delivered and endorsed by the implementation agency. These include:

• Component 1: the adoption of 31 new regulations by the State Committee for Securities (SCS)
following the enactment of the new Law on Securities Market, which introduced new standards for
capital market operation and new requirements for licensing and operations of market participants;
• Component 2: successful installation of the new integrated Capital Market Information System (CMIS)
and its satisfactory testing result,
• Component 3: all the activities under the component were completed at the previous supervision
mission;
• Component 4: finalization of the national capital market education program and launch of the
respective public financial awareness activities; the development of strategic plan for a sustainable
operation of the Capital Market Training Center (CMTC).
58. Procurement under the project has been completed. Disbursement of the loan funds are at 98% in
June 2016, with several outstanding payments due in the next few months. Funds under the capital market
component of the FSMP grant TF00975 has been fully disbursed by October 2015.
Government Performance Rating Satisfactory

28
Implementing Agency Rating Satisfactory
Overall Borrower Performance Rating Satisfactory
6. Lessons Learned
59. When a country’s economy is reliant on a particular commodity or sector, it is critical to assess
the risks associated with both short and long-term price fluctuations. Azerbaijan’s economy has been
and remains highly reliant on oil exports. Based on customs data, petroleum products represented over 90%
of the country’s exports in 2011.19 Sustained downward price movements would have significant effects on
the country’s national budget and, as experienced during project implementation, negative effects on GDP,
pressure on the national currency, tightened liquidity and pressure on the financial sector. As a result, the
prevailing economic conditions are not conducive to participation in the capital markets. The countries’
vulnerability to macroeconomic conditions must therefore be identified and, if available, a mitigation plan
should be developed.
60. It is important to fully assess all required actions during the preparation stage of a project and
identify and assess the implementing agency’s internal capacity to execute or manage all required
functions. The project experienced initial delays largely due to a protracted process requiring approval from
multiple government authorities before loan signing and staffing the PIU. The procurement process also
proved to be challenging in the early stage as the PIU team lacked the capacity and had taken time to become
familiar with requirements and standards. Tendering and contracting also proved to be more involved that
initially anticipated. As a result, the project got off to a slow start and, despite efforts to catch up, required
a six month extension. The scale and scope, as well as the timeline, of a project should be well aligned with
the implementing agency’s capacity for coordination, procurement, contract management, and financial
management. The Bank should consider up-front training of key government operational staff or temporarily
embedding experts in the PIU if necessary to help support the weaker aspects of project implementation
61. Strong government commitment to a project agenda is a vital aspect in helping assure the
success of Bank-sponsored projects. Strong ownership of this TAL helped to make sizable progress which
included decisive legal and regulatory actions by the Government including the President, Cabinet of
Ministers and the SCS/FIMSA. It is especially noteworthy that a high level of commitment was maintained
in the face of macroeconomic and financial sector distress. If not for the Government’s perseverance the
project may very well have been sidelined in order to shift resources to other pressing issues.
62. Capacity building and institutional reforms are not only more challenging to measure, but
often take longer to be realized. The Bank should dedicate resources to monitoring and tracking such
projects after closure since impacts may be realized more in the medium-term as opposed to the short term
just after closing. This could help account for longer development periods needed for capacity building and
institutional reforms to be fully realized. Teams should also be encouraged at the design stage to consider
indicators and M&E arrangements that will allow for the tracking of results and follow up after closing.
19
Economist Intelligence Unit, Country Risk Services: Azerbaijan. August 2016.
29
7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners
(a) Borrower/implementing agencies – No Comments received
(b) Cofinanciers – No Comments received
(c) Other partners and stakeholders – No Comments received
30
Annex 1. Project Costs and Financing
(a) Project Cost by Component (in USD Million equivalent)

Actual/Latest
Appraisal Estimate Percentage of
Components Estimate (USD
(USD millions) Appraisal
millions)
Component 1: Streamlining and

6.05 7.72 127%
Automating Market Infrastructure
Component 2: Updating and
Strengthening the Legal and 1.89 1.42 74%
Regulatory Framework
Component 3: Stimulating Supply 1.86 1.70 91%
Component 4: Capacity Building 3.84 2.70 58%
Total Baseline Cost 13.64 13.56 99%
Physical Contingencies 0.00
0.00 0.00
Price Contingencies 0.00
0.00 0.00
Total Project Costs 0.00 0.00
Front-end fee PPF 0.00 0.00 0.00
Front-end fee IBRD 0.03 0.03 100%
Total Financing Required 13.64 13.56 99%
(b) Financing
Appraisal Actual/Latest
Type of Percentage of
Source of Funds Estimate Estimate
Cofinancing Appraisal
(USD millions) (USD millions)
Borrower 2.2 2.2 100%
International Bank for Reconstruction
12.00 11.96 99.6%
and Development
SECO (Component 2 and 3) 1.60 1.6 100%
Total: 15.80 15.76 99.7%
31
Annex 2. Outputs by Component
The following are Key deliverables by Component:
Key deliverables Component 1:

- The country’s post-trading architecture and environment was consolidated making the National
Depository Centre (NDC) the sole CSD for government and corporate securities, providing
clearing and settlement functions to members;
- The central role of the NDC was supported by converting it to the non-for-profit infrastructure
organization serving its members and local issuers. All other registry-keeping licenses in the
country were abolished. The securities numbering and lean registration were transferred to the
NDC’s sole operational control. The NDC was connected to the country’s RTGS (AZIPS) systems
ensuring DVP principles of both government and corporate securities.
- The securities numbering function was transferred to the NDC and its methodology was
harmonized with internationally recognized ISIN standards; the NDC is a member of the
Association of National Numbering Agencies.
- Implementation of the renewed post-trading procedures complying with the international best
practices and newly adopted securities market legislation;
- Drafting extensive, best-practices based TOR for the new electronic trading/post-
trading/surveillance platform comprising.
- Automation of the broking, trading, registry-keeping, central depository, clearing and settlement,
issuing functionalities in the market in strict compliance with the newly adopted securities market
legislation;

- Adoption of adequate legal and regulatory framework including “On the Securities Markets” Law
harmonized with the EU directives and IOSCO principles, adoption of the 29 implementing
regulations, as well as new rule books of the Baku Stock Exchange (as a part of the Component 3)
and National Depository Centre (as a part of the Component 1) fully complying with the country’s
new governing legislation;
- Drafting tax regulation initiatives covering various aspects of the securities market operations.

- Re-organization of the BSE listing tiers and adoption of the new listing requirements;
- BSE trading (subscription, public offer and secondary market) rules and procedures enabling
transparent and competitive price discovery and fully complying with the newly adopted securities
market regulation;
- Conducting Listing Advisory Program (LAP) to local issuers, stimulating new issues at BSE
platforms.

- Conducting of the Nation-wide Education Program, including producing and disseminating
printed, visual and interactive study materials for schools, universities and general public,
establishment of the Financial Laboratory at the Azerbaijan State University of Economics;
- Establishing Capital Markets Training Centre (CMTC);
32
Annex 3. Economic and Financial Analysis
The markets are currently too illiquid to perform an economic analysis to assess the cost savings accruing
to issuers of corporate debt or equities vis-à-vis the alternative of bank financing. By 2013, the twin
shocks of low oil prices and currency devaluations had brought to an end the growth in bank credit
availability that the markets had enjoyed up to that point.
Therefore, as both the securities and banking sector are under severe pressure and uncertainty, it is
impossible to conduct an analysis of relative savings that issuers of securities could realize over the
alternative of bank financing.
33
Annex 4. Bank Lending and Implementation Support/Supervision Processes
(a) Task Team members

Names Title Unit
Alina Nagdimunov Consultant GTCDR
Altantsetseg Shiilegmaa Economist GMF02
Angela Prigozhina Senior Financial Sector Specialist - TTL GFM09
Arben Maho Procurement Specialist GGO03
Deepal Fernando Consultant GGO03
Dulguun Byambatsoo Consultant GGO20
Farid Bakhshiyev Economist ECSF2
Gantuya Paniga Senior Program Assistant EACMF
Ghada Youness Senior Counsel LEGLE
Jianjun Guo Senior Procurement Specialist GGO08
Johanna Jaeger Senior Financial Sector Specialist GFM03
Joseph Huntington La Cascia Senior Procurement Specialist GGO03
Joseph Paul Formoso Senior Finance Officer CTRLA
Ketut Ariadi Kusuma Senior Financial Sector Specialist GFM08
Lars Jessen Lead Debt Specialist GMF13
Michael Edwards Adviser GFMDR
Michael Engelschalk Consultant GGO15
Nasreen Chudry Bhuller Program Assistant GFM03
Robert H. Singletary HQ Consultant ST GFM10
Sabina Vagif Majidova Program Assistant ECCAZ
Sandro Nozadze Procurement Specialist GGO03
Sau Ngan Wong Senior Counsel GFM02
Stephen Francis Pirozzi Senior Monitoring and Evaluation Specialist GFMSO
Tanja Boskovic E T Consultant ECSPF - HIS
Tural Jamalov Senior Financial Management Specialist GGO21
Uzma Khalil Senior Financial Sector Specialist GFM01
Yagut Iltifat Ertenlice Procurement Assistant ECCAZ
Yi Dong Senior Financial Management Specialist GGO20
Zahid Hasnain Senior Public Sector Specialist GGO15
(b) Staff Time and Cost

Staff Time and Cost (Bank Budget Only)
Stage of Project Cycle USD Thousands (including travel
No. of staff weeks
Le
and consultant costs)
Lending
FY10 3.10 26,023.63
FY11 27.96 173,689.25
Total: 31.06 199,712.88
34
Supervision/ICR
FY11 7.01 50,653.03
FY12 14.38 136,454.66
FY13 17.34 109,879.30
FY14 11.15 99,207.36
FY15 12.95 77,346.30
FY16 12.26 89,507.74
FY17 6.90 45,272.48
Total: 81.99 608,320.87
Overall Total: 113.05 808,033.75
35
Annex 5. Beneficiary Survey Results
No official survey was administered. However, an ICR mission in Baku20 from October 17-21, 2016
included meetings with the stakeholders listed below.
The main objectives of the mission were to:
a) Conduct meetings with key stakeholders to inform the preparation and completion of the project
ICR.
b) Use the findings of these meetings in concert with information provided during and subsequent to
the June 2016 ISR mission to assess the achievement of project objectives and identify measurable
results for inclusion in the ICR.
c) Identify lessons learned that may improve future capital markets activities and projects.
Name of Organization Name of Representative Title of Representative

1. Financial Market Mr. Ilgar Muradov Deputy Board Director
Supervisory Authority Mr. Bakhtiyar Azizov Project Manager, Head of Supervisory
and Project Board of National Depository Center
Management team
Mr. Fariz Azizov PIU Manager, Chairman of Baku Stock
Exchange
2. Azerbaijan Mortgage Mr. Samir Rzayev Head of Treasury
Fund
3. Demir Bank Mr. Elshad Ibrahimov Head of Treasury
4. Rabita Bank Mr. Ogtay Gasimov Head of Treasury
5. Pasha Bank Mr. Ivan Ukhlianidza Deputy Head of Investment Banking
Department
Mr. Mansur Mammadov Chief Risk Officer
6. Finex Group Mr. Farid Hamidov Chairman of the Board, Finexkredit
Mr. Vugar Zeynalov
7. European Bank for Ms. Ayten Rustamova Senior Banker
Reconstruction and
Development
8. AXA MBASK Mr. Selcuk Adiguzel Chief Executive Officer
Insurance
Mr. Fuad Musa Director of Legal & Finance
20
Mission led by Stephen F. Pirozzi, Senior Monitoring and Evaluation Specialist, GFMSO
36
Annex 6. Stakeholder Workshop Report and Results
A closing event was held in Baku on November 4, 2016. Below are links to local media reports as well as
a WB project impact video. Two sample articles are also included.
WB project impact video:

http://www.worldbank.org/en/country/azerbaijan
Report on the website of the implementation agency

http://en.fimsa.az/articles/58
Media reports (in English and Russian)

http://www.xebersaati.com/85041-wb-project-benefits-azerbaijani-capital-markets.html
http://www.azernews.az/business/104682.html
http://en.trend.az/business/economy/2681183.html
https://report.az/en/finance/azerbaijan-completed-implementation-of-capital-markets-modernization-
project/
http://azertag.az/en/xeber/1007867
http://en.azvision.az/WB-project-benefits-Azerbaijani--51139-xeber.html
https://report.az/ru/finansy/vsemirnyj-bank-azerbajdzhan-effektivno-ispol-zuet-sozdannuyu-dlya-rynkov-
kapitala-infrastrukturu/
Government of Azerbaijan, World Bank conclude implementation of Capital

Markets Modernization Project
04.11.2016 [15:11]
A+ A–
Baku, November 4, AZERTAC
Azerbaijan’s Financial Markets Supervisory Authority (FIMSA) and World Bank have today hosted a conference to
discuss the results of the Capital Markets Modernization Project (CMMP) supported by the World Bank and
Switzerland’s State Secretariat for Economic Affairs (SECO). The conference was attended by the representatives
of the Government of Azerbaijan, World Bank, international development partners, private business community,
civil society and media. Participants took stock of Azerbaijan’s path in modernizing its capital markets, and
discussed future challenges and actions to deepen financial markets and make capital market an important source of
financing the country’s private sector growth and economic diversification.
37
Rufat Aslanli, Chairman of the Board of Directors of FIMSA, said: “CMMP has provided organizational and
operational support to modernization of Azerbaijan’s capital markets. It has supported implementation of
Azerbaijan’s national program for development of securities market, and made important contribution to creating
state-of-the-art legal and operational infrastructure, and building capacity of the market.”
Rolf Berhnd, World Bank’s Practice Manager for Finance and Markets, said: “Improved access to finance for SMEs
and increased foreign direct investments are crucial for non-oil sector development and modernization in
Azerbaijan. Capital market is one of the key vehicles for domestic and international investment mobilization, but it
requires concerted efforts, holistic reforms and time to do it right.”
“CMMP supported a package of reforms needed to diversify the financial sector and ease the access to alternative
financing tools for Azerbaijani companies operating in the non-oil sectors. We believe that effects of the project will
be transformational and long-lasting,” said Angela Prigozhina, World Bank’s senior financial sector specialist and
the team leader for the project.
CMMP was approved on March 17, 2011 with a $12 million loan from the World Bank, supplemented by SECO
Trust Fund grant of $1.6 million. The Project closed on July 1, 2016. It supported capital market reform program
through four components aimed at enhancement of legal and regulatory framework for capital market, development
of a modern capital market infrastructure for securities trading, clearing, settlement and surveillance, increased
transparency, access and awareness of market participants, issuers and potential investors about capital market
opportunities, and enhanced capacity of the financial regulator to enforce sound market conduct rules and investor
protection practices.
Among notable results of the project are enactment in July of 2015 of the modern Law on Securities and
implementation of new regulatory requirements and normative acts in line with the best international practices,
establishment of Centralized Trading System (CETA) which linked investors, market-players, Baku Stock Exchange
and National Depositary Center in a single trading and post-trading system, and thus, significantly reduced
transaction time and costs. The project also helped streamline listing requirements at the Baku Stock Exchange and
build capacity of 16 local companies under the Listing Advisory Program (LAP) to raise more than half a billion
Manats from the domestic capital market.
AZERTAG.AZ :Government of Azerbaijan, World Bank conclude implementation of Capital Markets

Modernization Project
© Content from this site must be hyperlinked when used.
38
Azerbaijan, WB hail implementation of Capital Markets Modernization
Project
4 November 2016 17:58 (UTC+04:00)
571
By Nigar Abbasova
The development of the capital market, which is considered to be a multi-faceted sector of the economy, is currently
in focus of relevant financial authorities of Azerbaijan.
The results of the Capital Markets Modernization Project (CMMP) supported by the World Bank and Switzerland’s
State Secretariat for Economic Affairs (SECO), was at core of discussions at the conference hosted by Azerbaijan’s
Financial Market Supervisory Body (FMSB) and the World Bank (WB).
The CMMP for Azerbaijan was aimed at the increase of the use of equity and corporate debt as financing or
investment instruments through the adoption of an effective regulatory framework of the capital market.
Head of FMSB Rufat Aslanli addressing the event said that the project has significantly enhanced the potential of
Azerbaijan’s capital market, providing organizational and operational support to modernization of the market.
However, the authority believes that the country needs implementation of additional measures in this direction.
Aslanli mentioned that the main objective is to attract those, who will be interested in the use of the potential of the
market.
SECO Deputy Regional Director for South Caucasus Simone Haeberli, speaking at the event said that the secretariat
is ready to implement new projects of technical assistance to help Azerbaijan solve the most difficult issues existing
in the sphere.
Haeberli said that Azerbaijan and Switzerland have been cooperating effectively for already 25 years, including the
cooperation within the SECO, which covers the microeconomic policy and ensuring financial stability. She
39
underlined that modern and transparent capital markets are now more important for Azerbaijan than at the time
when the SECO started implementation of the project.
Capital market, which stands for the market for buying and selling of equity and debt instruments, is vital to the
functioning of an economy, since capital is a critical component for generating economic output.
World Bank’s Practice Manager for Finance and Markets Rolf Berhnd, in turn, said that one of the main functions
of the WB is improvement of conditions for small and medium-scale entrepreneurs, mentioning that capital markets
are considered to be one of the main tools for reaching the goal. He mentioned that capital market is one of the key
vehicles for domestic and international investment mobilization, which requires concerted efforts, holistic reforms
and time to do it right. Berhnd said that the implementation of the reform of the capital market is quite a difficult
process, underlining that Azerbaijan has managed to succeed in the sphere despite the difficulties. He mentioned
that the reform will allow to create favorable conditions for the attraction of foreign investments.
WB’s senior financial sector specialist Angela Prigozhina said that the project supported a package of reforms
needed to diversify the financial sector and ease the access to alternative financing tools for Azerbaijani companies
operating in the non-oil sectors.
CMMP was approved on March 17, 2011 with a $12 million loan from the World Bank, supplemented by SECO
Trust Fund grant of $1.6 million. The share of Azerbaijani government in the project, which was closed on Luly 1,
2016 amounted to $2.2 million.
Among the most notable results of the project are enactment of the modern Law on Securities and implementation
of new regulatory requirements, which are in line with the best international practices. Moreover, the project
contributed to the establishment of the Centralized Trading System (CETA) which linked investors, market-players,
Baku Stock Exchange and National Depositary Center in a single trading and post-trading system, significantly
reducing transaction time and costs.
40
Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR
Executive Summary of Borrowers’ ICR (Portions extracted from the Borrower’s ICR)
1. Context of the project initiation phase:

Economic reforms which were implemented in the Republic of Azerbaijan during the recent years
determined the economic system functioning on the basis of free market relations. Fundamental
institutions of the market economy, including, legislative framework fixing new economic relations,
public institutions regulating such relations and private entrepreneurs, which are the main subjects of new
economic systems have been formed. During this period price and exchange rate policy had been
liberalized, large scale privatization program implemented and favorable environment for the
entrepreneurial activities in whole, macroeconomic stability and the country’s significant investment
attractiveness had been achieved.
Consequently, during the recent decade before the project the country’s GDP increased approximately 9
times, export more than 15 times, strategic currency reserves 31 times, hundreds of thousands of new jobs
has been created, relative number of poor population reduced by more than 5 times.
During this period, comprehensive reforms were implemented aimed at establishment and institutional
development of effective financial sector, administration, supervision and regulation of this sector was
improved in line with the international standards and consequently competing abilities of banks’ increased
significantly.
For the decade preceding the project initiation the bank assets increased 15 times, deposits of population
36 times and credit investment into economy increased 19,6 times.
Securities market, being an important component of financial system, had permanently been subject to
attention and advanced legal and organizational measures had been undertaken in this area. Initial legal
and regulatory framework and mechanisms, trading, clearing and settlement system, financial intermediary
institutes had been created for the securities market.
For the 5 recent years before the project volume of trading at the organized securities market increased 4,3
times. In whole, the securities market had demonstrated growth higher than general economic growth and
ratio of trading volume of the Baku Stock Exchange to non-oil GDP increased by 41% reaching 12,1%.
Lessons and consequences of resent Global Financial Global of 2007-2008 urged reshaping of regulatory
paradigm in the financial services sector including strengthened capital adequacy norms for financial
services intermediaries, reforms in post-trade/depository infrastructure, etc.
In parallel, development of the non-oil sector of the economy was declared by the government as a main
priority. Achieving new level of quality for the securities market enhances means to regulate economy,
facilitates attraction of financial resources to real sector and cross-sector movements of investment flows
and by putting forth necessary requirements, such as increasing transparency of economic activities
ensures increased effectiveness of the economic system in whole.
Increasing geopolitical instability in the region and commodities prices volatility of the mid-2010s
underpinned the importance and timeliness of the government’s “2011-2020 State Program on Capital
41
Market Development” (endorsed by the Presidential Degree on 16th May, 2011). The Capital Markets
Modernization Project supported the implementation of the State Program goals for the first 5 years of it.
A primary goal of the State Program on the Development of the Securities Market of the Republic of
Azerbaijan in 2011-2020 is to develop a highly effective securities market, which is modern, complying
with the international standards, providing large capitalization opportunities for the economy and ensuring
reliable risk management.
To achieve this goal, the following tasks were identified:
- Improving securities market regulation mechanism in line with the best international practices,
increasing institutional development level of the securities market and ensuring that it complies
with the international standards ;
- achieving increased capitalization rate in national economy, enhancing use of non-inflational
investment resources attracted through the securities market for the purposes of financing
economic projects;
- creating conditions with protected investment and reliable risk management for the purposes of
effective placements of savings of economic subjects and the public;
- creating relevant conditions necessary for gradual integration of national securities market into
international stock market.
The State Program is comprised of three stages:
- First stage (2011-2014) envisions modernization of securities market infrastructure, improvement

of legal and regulatory base for this purposes, strengthening material-technical base, as well as
creating necessary opportunities for the development of human capacity at the securities market.
- Second stage (2015-2017) provides for full automation and consolidation of transactions at the
securities market and, meanwhile, establishment of framework necessary for introduction of new
tools and services.
- Third stage (2018-2020) envisions increased depth of securities market through the introduction of
new and more complicated types of tools and services and, in parallel, creation of effective system
risks management arrangements. Upon completion of this stage covering the last 3 years of the
State Program the stock market of Azerbaijan will be ready for integration into international
financial markets.
A very important role in the formulation of the capital markets strategic development goals was played by
the FIRST project initiated by the SCS in March 2010. Through the intense cooperation with the SCS and
country’s capital market organizations, by late 2010, FIRST consultants prepared a comprehensive capital
market assessment report. The FIRST initiative also catalyzed the inception of the CMMP project
supported by the World Bank and the SECO.
2. The Project:
According to the agreement with donors assisting in financing the implementation, the project was divided
into 4 parts and included 2 major tenders: on provision of the consultant services and on provision of
goods (the Capital Market Information System).
The agreements defined project parts as follows:
42
Part A: Streamlining and Automating Capital Market Infrastructure;
Part B: Updating and Strengthening the Legal and Regulatory Framework;
Part C: Stimulating Supply;
Part D: Capacity Building.
The total project finances breakdown is as follows:

1. IBRD loan- 12,000,000.00 USD
2. SECO grant – 1, 600,000.00 USD
3. Azerbaijan Government – 2,200,000. USD (for VAT)
Brief information of two major procurements within the project:
The Request of Expression of Interests for provision of the consulting services, namely the assignment
"Creation of General Framework for stimulating supply and capacity building of Capital Markets" was
announced on 11 October, 2011. QCBS was used as the selection method for this procurement. Forty-
six international companies, expressed their interests. The consortium of companies Corporate Solutions
Consulting Ltd, Wiener Borsa, CAPMEX was selected as a winner and the contract was signed on the 15th
of August 2012. The Consulting services contract 95 deliverables and 102 tasks to support the
implementation of the four project parts (components).
The tender for supply and installation of Capital Markets Information Systems was announced on 18 April
2014 within works and goods category. The two stage bidding selection method was used for this
procurement. KOREA EXCHANGE was selected the winner of the tender and on 13 January, 2015 the
contract was signed.
3. Project Development Objective (PDO) Indicators and Intermediate Result Indicators:
The project’s development objective was to increase the use of equity and corporate debt as financing
and/or investment instruments through the adoption of an effective capital markets regulatory framework
and infrastructure. The PDO level results indicators are: (i) increased issuance of corporate bonds; (ii)
increased number of listed companies and (iii) improved price transparency. The Project outcome and
output indicators are measurable
PDO 1. Increased issuance of corporate bonds
2010 2011 2012 2013 2014 2015 2016 6m

Outstanding amount of
344 907 751 1,340 3,940 4,418 2,619
corporate debt
Non-oil GDP 18,443 24,165 28,474 32,638 35,969 37,670 10,939
corporate debt/Non-oil 1.9% 3.8% 2.6% 4.1% 11.0% 11.7% 23.9%
GDP
43
This indicator represents the ratio of outstanding amount of corporate debt to non-oil GDP (the
outstanding amount of corporate debt to 2010 non-oil GDP, 1.9% was taken as a baseline for the
indicator).
In 2016 outstanding amount of corporate debt to non-oil GDP increased to 23.9%. The baseline indicator
was 1.9% and the target was 3.8%.
The major factor for increase in indicator was a significant increase of corporate bond issuance including
by organizations like Azerbaijan Mortgage Fund (AMF). From 2011 to 2015 total issuance of AMF bonds
amounted to 256.6 mln AZN. Optimized REPO procedures, introduced incentives for market makers,
awareness programs to treasury managers resulted in total amount of corporate debt issuance from 2011 to
2016 was 2,400 mln AZN. The outstanding amount of corporate debt at the end of the project to baseline
year’s (2010) non-oil GDP is 14.2%, which is still considerably higher than expected target of 3.8%.
PDO 2. Increased number of companies with listed equity
2010 2011 2012 2013 2014 2015 2016 6M

Prime Market - 1 1 1 1 2 2
Standard Market - - - - - 3 3
In 2016 number of companies with listed equity is 5. The baseline was 2 and the target was 8-10
companies. There was only one listed company during 2010 - 2014 periods. The company was listed in the
first Tier. However, most of the transactions occurred in the Alternative Trading Market (ATM) without
needing to fulfill extensive listing and disclosure requirements. The first listing took place in the first tier
in 2011 which was Demir Bank OJSC with market capitalization of 23.11 million AZN. Due to the low
volatility in the market, this number has not significantly changed during the period from 2011 to 2014. In
2015 four new companies were listed in BSE. 1 – International Bank of Azerbaijan in Prime Market 2 –
Azerkosmos, Turanbank and Aqrolising in Standard market. Overall market capitalization increased to
1,019 million AZN. The Listing Advisory Program and other initiatives worked with tens of local
potential IPO candidates. Global financial crisis consequences, geo-political and regional instability and
volatilities in national currencies in all neighboring countries as well as in commodity prices turned local
issuers to conservative mood, making them consider bond issuances as more applicable capital market
fund raising tool, if any at all.
PDO 3. Improved price transparency
2010 2011 2012 2013 2014 2015 2016 6M

Price Transparency - 0% 0% 0% 100% 100% 100%
In 2016 overall price transparency indicator was 100%. The target for that period was 90%.
In 2014 the SCS, BSE and NDC took a number of measures to increase transparency and accessibility of
trades to all categories of traders and investors. First, a special regime was adopted at BSE for all cross
transactions at secondary market (cross transactions are transactions conducted by the same broker from
the buying and the selling side). Thus, a crossing transaction cannot be matched (finalized) unless within
next 30 minutes of trade session any other broker bids with better conditions (price) for the buying or the
44
selling side of the transaction. If the latter happens, the auction starts. If no interest was shown the original
transition was finalized. In 2015 the holding period of cross transactions was prolonged to 60 minutes.
Secondly, in 2014 the special regime was introduced by the NDC to let smaller and less financially
advanced brokers to participate instantly in cross transaction. The NDC eliminated funds pre-validation
regime for all categories of brokers and let them deliver funds after the transaction matched. The funds
provision is ensured by liquid assets pledged or bank guaranty mechanisms. Elimination of funds pre-
validation allows brokers and all categories of investors to promptly react on bid quotes in the trading
system. All transactions that appear on BSE trading system are a non-block transaction which means that
all of the transactions are counted as being competitive transactions. Thus all transactions in BSE trading
system are transparent and competitive.
Intermediate Results:
Intermediate Result One (Component One): Streamlining and Automating Market Infrastructure:
2010 2011 2012 2013 2014 2015 2016 6M

Ratio of market
participants
electronically linked to 0% 0% 75% 90% 100% 100%
0%
market infrastructure 100% 100% 100% 100% 100% 100%
(trading, clearing and
settlements)
Despite the project planning phase expectations of gradual grow of number of market participants
electronically connected to trading and post-trading operations at BSE, NDC and other involved entities,
the transformation was instant due to the decision of BSE and NDC to conduct all the necessary changes at
once and at their own expense. Thus, in 2011 BSE and NDC agreed the electronic protocol of data
exchange, developed the connection facilities and handed over them to all brokers. Later, in 2016 the
achievement was reinforced by implementation of the Korean technologies, through which, inter alia, the
surveillance, market watch and DVP processes were also processed and automated.
Intermediate Result Two (Component Two): Updating and Strengthening the Legal and Regulatory
Framework
2010 2011 2012 2013 2014 2015 2016 6M

Enactment of a new No Yes Yes Yes Yes Yes
No
Capital Market Act No No No No Yes Yes
After inter-ministerial, parliamentary and Presidential Administration discussions, the “On Securities
Markets” Law was enacted in July 2015.
Intermediate Result indicator Three (Component Two): Promulgation of capital markets regulation
required upon enactment of Law
2010 2011 2012 2013 2014 2015 2016 6M

Promulgation of capital No Yes Yes Yes Yes Yes
No
markets regulation No No No No Yes Yes
45
required upon
enactment of Law
All implementing regulations required by the enactment of the “On Securities Markets” Law were adopted
by end of the 2015.
Intermediate Result indicator Four (Component Three): Number of companies involved in the
listing advisory program (debt and equity)
2010 2011 2012 2013 2014 2015 2016 6M

Number of companies
5 10 15 15 15 15
involved in the listing 0
advisory program (debt
0 0 1 4 16 16
and equity)
The Listing Advisory program came into being after extensive negotiations with potential service
providers (brokers, auditors, lawyers and others) on 16th of April 2014.
Since its establishment LAP partners arranged numbers of company meetings and organized several group
seminars for companies that might be interested in listing. The aim of those seminars was to educate
companies and its management about the capital markets opportunities and help them to take advantage of
this market. Key events were:
On the 17th of October 2014 the BSE staged a workshop for companies who had potential to do initial
public offers (IPOs) or otherwise to issue and list equity or debt securities. This workshop was led by BSE
team and invited guest expert Dr. Albrecht Buerger. There was an inspiring and “lessons learned”
presentation from the first company joined LAP, Embawood Furniture Production, about their successful
listing, through which they issued AZN10 millions of corporate bonds. A guest speaker from Borsa
İstanbul gave a presentation on the similar experience, corporate governance practices in Turkey,
challenges that Turkish SME issuers are facing.
On the 22nd of May 2015 together with PWC Azerbaijan, BSE organized a workshop on the topic of
“Raising Public Equity and Debt Capital”. Over 70 representatives of 40 companies attended. The
workshop was led by Mr. Rustem Teregulov, Partner and Capital Markets Leader, PwC CIS and CEE.
Issues of major Azerbaijani companies were case studied in detail.
Since its establishment and till the end of the Project period, the LAP signed consortium contracts with 16
organizations, out of which 12 listed their instruments at Prime and Standard tier of BSE listing.
Alternative tier companies are decided not to be taken into account for the purposes of this indicator as
ATM tier companies are either offered to or traded by limited number of investors or have lower listing
entrance requirements.
Intermediate Result indicator Five (Component Four): Increased of the threshold pass rate of the
Financial Certification examination for market participants
2010 2011 2012 2013 2014 2015 2016 6M

46
Increased of the
threshold pass rate of
the Financial 50% 55% 60% 65% 75% 75%
Certification 50%
examination for market 50% 50% 75% 75% 75% 75%
participants
Financial Certification examinations were conducted by the SCS and lately by the FSMA. In 2013 the
methodology of the examination was completely revised based on the Consultant’s recommendations.
Since 2014 the CMTC provides preparation courses for the examinations. The threshold pass rate for the
Financial Certification has been 75% for the last 4 reporting periods.
Intermediate Result indicator Six (Component Four): Consumer Awareness of Capital Market
Instruments
2010 2011 2012 2013 2014 2015 2016 6M

Consumer Awareness 28 33 37 41 45 45
of Capital Market 24%
Instruments N/A 32 36 56 59.11 59.38
Consumer Awareness of Capital Market instruments was the most important indication that the SCS was
focusing on. Initiatives like establishing CMTC, launching LAP, Nation-wide Education Program
initiative, cooperation with universities, youth organizations and journalists, conducting local and
international conferences and workshops (detailed in above chapters) contributed to the increasing rates of
financial literacy and consumer awareness. Moreover, the CMMP coincided with analogous initiatives of
other financial institutions and governmental bodies, with whom the SCS cooperated closely in this regard
(CBAR, MoF, etc). The indication surveys were conducted by the external independent specialized
companies.
4. Amendments and extensions to the original project work plan.

There were 3 occasions when the Project’s work plan was amended to comply with its main direction and
goals: at the inception (October 2012), in the midst of the project span (October 2014) and at the end of
the original project period (extension negotiations, October 2015- February 2016). All amendments were
pre-approved by the World Bank and consequently confirmed by official amendments to the consulting
services contract (the provision of goods contract remained unchanged for the whole period from Jan 2015
to Feb 2016).
4.1. Inception period amendments:
In the initial meetings in October 2012 with the project team, the Consultant and the World Bank, the
SCS’ Chairman raised the issue of importance of increasing listing on BSE as a priority of the initial phase
to be supported by CMMP. The SCS had been considering the creation of a Listing Advisory Program
(LAP) to attract issuers to listing with resources to be allocated from BSE, SCS and other market
participants and professionals to actively promote Capital Market, provide training and provide
preliminary listing advisory services. The Consultant was requested to take the lead in defining the
program and provide technical and managerial support with its delivery. Supporting the LAP necessitated
47
changes to the activities under Component 3 namely 3.1.1, 3.1.2, 3.2.3, 3.3.1 and 3.3.2. (See table 2.1.1
above).
Moreover, other changes were also agreed in the inception phase.

Activities 2.3.1: “Review and analyze the risks and opportunities” and 2.3.2: “Recommendations on the
optimal participation of the banks and requirements” were considered no longer required as the Central
Bank had decided that commercial banks would only participate in Capital Market through their
subsidiaries and not directly. Resources of these two tasks were agreed to utilize to support BSE to
develop their rules and regulations to adapt new technological and legislative environment after launching
the Capital Markets Information system and enactment of the new “On Securities Market Law”
accordingly.
Activities 3.2.4 and 3.3.2 were similarly re-focused to concentrate on LAP activities, supporting seminars
to be provided by the LAP etc.
Activity 3.4.2: “Develop and publish educational material on Corporate Governance” was considered no
longer valid as the IFC had initiated, prepared and published extensive material on Corporate Governance
for local issuers. The Consultant was asked to assist BSE and prepare a study material on opportunities of
IPO for local issuers.
All changes were endorsed by the World Bank and then confirmed in the Amendment to the contract with
the Consultant (in October 2014).
4.2. Mid-period amendments:
In mid-2014 the SCS initiated another round of negotiations with the World Bank and the Consultant on
updating and amending the tasks and activities in the deliverables to comply with the recent developments
at the capital markets.
The role of the NDC as an asset manager of commercial investment funds were was reconsidered based on
the experts recommendation in order to prevent the State owned NDC’s monopolization of the segment.
Thus, it was asked to re-direct the Activity 1.3.8 from NDC to providing recommendations on potential
private fund administration entities.
Activities 2.2.2 and 2.2.3 were renamed and reshaped in order to comply fully with the task of preparing
the implementing regulations that would support the new “On Securities Market Law” draft.
Activity 2.3.3 was reconsidered to concentrate more specifically on role of banks in newly proposed
settlement model for the securities market of the country.
In light of the local real estate market dynamics, Activities3.5.4 and 3.5.5 were re-organized to focus on
bringing international expertise of organizing foreign securities trade (MTF) to BSE.
Activities 4.6.4 and 4.6.5 supporting the CMTC were completed by the SCS itself before the
commencement date of the Consultant assignment. So, the Consultant was asked to prepare self-study
materials on various topics of the capital market operations.
48
4.3. Extension of the Project period:
In light of the complexity and significance of CMIS procurement tender as well as multiplicity of terms
and conditions to be assessed, in the first quarter of 2015 the SCS and the World Bank started negotiating
the possibility of the Project Period extension. Indeed, the procurement of the CMIS took longer time than
initially anticipated. The project closing date extension topic was eventually triggered by the need to
complete installation of CMIS in 12 months period after its inception, whereas all pre-requisite technical
agreements and future contract negotiation were completed by mid-February 2015. The implementation of
the information system could be finalized at least within 12 months, meaning a two-month slippage from
the project’s original end-date (31 Dec 2015). In turn, the assessment of the development and
implementation results of the CMIS was possible only after its go-live and required the consultants at least
one month after its launching to be able to comprehensively assess all aspects of the implementation.
At the same time, the SCS requested to consider two additional tasks for CMTC strategic development and
sustainability. In consultation with the World Bank it was decided to sign new agreement with the same
Consultant for additional services. The SCS asked the World Bank’s no-objection for SSS method and the
Bank provided SCS with NOL on February 1, 2016 and new agreement with Corporate Solutions
Consulting Ltd was signed on the same date. At the same time the existing agreement was extended to
conduct the deliverable no 1.4.5 on assessing the CMIS implementation results.
The Borrower, Ministry of Finance (MOF) of Azerbaijan, requested extension of the project for additional
6 months to have enough time for CMIS installation and handover and accommodating services. The Bank
provided its approval of Project Closing Date extension till July 01, 2016.
49
Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders
None Available
Annex 9. List of Supporting Documents
World Bank Group (WBG), Country Partnership Strategy FY07-10 for Republic of Azerbaijan. November
8, 2006.
WBG. Country Partnership Strategy FY11-14 for Azerbaijan. September 15, 2010.
WBG. Country Partnership Strategy Progress Report for the Period FY2-11-FY2014 for Azerbaijan.
April 30, 2013.
Independent Evaluation Group (IEG) of the WBG. Completion and Learning Review CPS Period: FY11 –
FY14. June 30, 2015.
WBG. Project Information Document (PID) Concept Stage: Capital Markets Modernization Project.
November 30, 2010.
WBG. Project Appraisal Document on a Proposed Loan in the Amount of $12 Million Equivalent to the
Republic of Azerbaijan for the Capital Markets Modernization Program (CMMP). February 10, 2011.
WBG. Implementation Status and Results Reports: Capital Markets Modernization Project (P120321).
Sequence 1-10
WBG. Aide Memoires for Capital Markets Modernization Project (P120321). Dated June 2011; June
2012; March 2013; February, September 2014; February, October 2015.
WBG. Loan Agreement (Capital Markets Modernization Project) between the Republic of Azerbaijan and
the International bank for Reconstruction and Development. September 22, 2011.
WBG. Restructuring Paper on a Proposed Project Restructuring of Capital Markets Modernization

Project Loan IBRD-80240. Board Approval: April 29, 2015.
WBG. Azerbaijan Systemic Country Diagnostic. June 3, 2015
WBG-IMF. Financial Sector Assessment Azerbaijan. November 2015.
The Economist Intelligence Unit, Country Risk Service. Azerbaijan. London, UK. August 2016.
State Committee for Securities (SCS) PIU. Project Operations Manual, Capital Markets Modernization
Project. December 24, 2012
WBG. Azerbaijan Partnership Program Snapshot. April 2015.

50
WBG. Doing Business 2008. September 26, 2007.
Doing Business 2009. September 10, 2008.
Doing Business 2010: Reforming through difficult times. September 9, 2009.
Doing Business 2011: Making a difference for entrepreneurs. November 4, 2010.
51
Annex 10. Borrower’s ICR
COMPLETION AND RESULTS REPORT
ON A LOAN
IN THE AMOUNT OF US$12 MILLION

TO
THE REPUBLIC OF AZERBAIJAN
FOR THE
CAPITAL MARKETS MODERNIZATION

PROJECT
OCTOBER, 2016
52
ABBREVIATIONS AND
ACRONYMS
ABS Asset Backed Securities MoF Ministry of Finance

ADB Asian Development Bank MoT Ministry of Taxes
National Competitive
AZN Azerbaijan New Manat NCB Bidding
National Depository
BSE Baku Stock Exchange NDC Center
Operational Risk
CAS Country Assistance Strategy ORAF Assessment
Capital Markets Modernization
CMMP Project Framework
Project Appraisal
CPS Country Partnership Strategy PAD Document
European Bank for Project Information
EBRD Reconstruction and PID Document
Project
Development PIU Implementation Unit
Project Operation
ECA Europe and Central Asia POM Manual
EU European Union PQ Prequalification
Financial Sector Reform and Public-Private
FIRST Strengthening PPP Partnerships
Regional Vice
Initiative RVP President
Financial Markets Supervision Standard Bidding
FSMA Authority of SBD Documents
State Committee for
the Republic of Azerbaijan SCS Securities
Swiss State Secretariat
GDP Gross Domestic Product SECO for
International Bank for
IBRD Reconstruction and Economic Affairs
United States Agency
Development USAID for
Implementation Completion and International
ICR Results Development
Report WBT World Bank Treasury
Individual Consultant Single
IC SSS Source
Selection
International Development
IDA Association
International Finance
IFC Corporation
ISDS Integrated Safeguard Data Sheet
LAP Listing Advisory Program
53
5. Context of the project initiation phase:
Economic reforms which were implemented in the Republic of Azerbaijan during the recent years
determined the economic system functioning on the basis of free market relations. Fundamental
institutions of the market economy, including, legislative framework fixing new economic relations,
public institutions regulating such relations and private entrepreneurs, which are the main subjects of new
economic systems have been formed. During this period price and exchange rate policy had been
liberalized, large scale privatization program implemented and favorable environment for the
entrepreneurial activities in whole, macroeconomic stability and the country’s significant investment
attractiveness had been achieved.
Consequently, during the recent decade before the project the country’s GDP increased approximately 9
times, export more than 15 times, strategic currency reserves 31 times, hundreds of thousands of new jobs
has been created, relative number of poor population reduced by more than 5 times.
During this period, comprehensive reforms were implemented aimed at establishment and institutional
development of effective financial sector, administration, supervision and regulation of this sector was
improved in line with the international standards and consequently competing abilities of banks’ increased
significantly.
For the decade preceding the project initiation the bank assets increased 15 times, deposits of population 36
times and credit investment into economy increased 19,6 times.
Securities market, being an important component of financial system, had permanently been subject to
attention and advanced legal and organizational measures had been undertaken in this area. Initial legal and
regulatory framework and mechanisms, trading, clearing and settlement system, financial intermediary
institutes had been created for the securities market.
For the 5 recent years before the project volume of trading at the organized securities market increased 4,3
times. In whole, the securities market had demonstrated growth higher than general economic growth and
ratio of trading volume of the Baku Stock Exchange to non-oil GDP increased by 41% reaching 12,1%.
Lessons and consequences of resent Global Financial Global of 2007-2008 urged reshaping of regulatory
paradigm in the financial services sector including strengthened capital adequacy norms for financial
services intermediaries, reforms in post-trade/depository infrastructure, etc.
In parallel, development of the non-oil sector of the economy was declared by the government as a main
priority. Achieving new level of quality for the securities market enhances means to regulate economy,
facilitates attraction of financial resources to real sector and cross-sector movements of investment flows
and by putting forth necessary requirements, such as increasing transparency of economic activities ensures
increased effectiveness of the economic system in whole.
Increasing geopolitical instability in the region and commodities prices volatility of the mid-2010s
underpinned the importance and timeliness of the government’s “2011-2020 State Program on Capital
Market Development” (endorsed by the Presidential Degree on 16th May, 2011). The Capital Markets
Modernization Project supported the implementation of the State Program goals for the first 5 years of it.
54
A primary goal of the State Program on the Development of the Securities Market of the Republic of
Azerbaijan in 2011-2020 is to develop a highly effective securities market, which is modern, complying
with the international standards, providing large capitalization opportunities for the economy and ensuring
reliable risk management.
To achieve this goal, the following tasks were identified:
- Improving securities market regulation mechanism in line with the best international practices,
increasing institutional development level of the securities market and ensuring that it complies
with the international standards ;
- achieving increased capitalization rate in national economy, enhancing use of non-inflational
investment resources attracted through the securities market for the purposes of financing
economic projects;
- creating conditions with protected investment and reliable risk management for the purposes of
effective placements of savings of economic subjects and the public;
- creating relevant conditions necessary for gradual integration of national securities market into
international stock market.
The State Program is comprised of three stages:
- First stage (2011-2014) envisions modernization of securities market infrastructure, improvement of

legal and regulatory base for this purposes, strengthening material-technical base, as well as creating
necessary opportunities for the development of human capacity at the securities market.
- Second stage (2015-2017) provides for full automation and consolidation of transactions at the
securities market and, meanwhile, establishment of framework necessary for introduction of new
tools and services.
- Third stage (2018-2020) envisions increased depth of securities market through the introduction of
new and more complicated types of tools and services and, in parallel, creation of effective system
risks management arrangements. Upon completion of this stage covering the last 3 years of the State
Program the stock market of Azerbaijan will be ready for integration into international financial
markets.
A very important role in the formulation of the capital markets strategic development goals was played by
the FIRST project initiated by the SCS in March 2010. Through the intense cooperation with the SCS and
country’s capital market organizations, by late 2010, FIRST consultants prepared a comprehensive capital
market assessment report. The FIRST initiative also catalyzed the inception of the CMMP project supported
by the World Bank and the SECO.
6. The Project:
According to the agreement with donors assisting in financing the implementation, the project was divided
into 4 parts and included 2 major tenders: on provision of the consultant services and on provision of goods
(the Capital Market Information System).
The agreements defined project parts as follows:
Part A: Streamlining and Automating Capital Market Infrastructure;

55
Part B: Updating and Strengthening the Legal and Regulatory Framework;
Part C: Stimulating Supply;
Part D: Capacity Building.
The total project finances breakdown is as follows:

4. IBRD loan- 12,000,000.00 USD
5. SECO grant – 1, 600,000.00 USD
6. Azerbaijan Government – 2,200,000. USD (for VAT)
Brief information of two major procurements within the project:
The Request of Expression of Interests for provision of the consulting services, namely the assignment
"Creation of General Framework for stimulating supply and capacity building of Capital Markets" was
announced on 11 October, 2011. QCBS was used as the selection method for this procurement. Forty-
six international companies, expressed their interests. The consortium of companies Corporate Solutions
Consulting Ltd, Wiener Borsa, CAPMEX was selected as a winner and the contract was signed on the 15 th
of August 2012. The Consulting services contract 95 deliverables and 102 tasks to support the
implementation of the four project parts (components).
procurement. KOREA EXCHANGE was selected the winner of the tender and on 13 January, 2015 the
contract was signed.
56
2.1. List of the Consultancy services contract deliverables:
Del Date
Task name No Deliverables Comment
No. Approved
Draft description of the Steering
Formation of Policy Steering
1.1.1 Committee and establishment of Steering 1 30/01/13
Committee
Committee
Draft description of the MAGs and
Formation of MAGs 1.1.2 2 30/01/13
establishment of MAGs
Arranging MAG(s) and
1.1.3 Minutes for each of the meeting 3 24/11/14
Policy Steering Committee
Diagnostic study on Financial and operational diagnostic
clearance and settlement and 1.2.1 report for consolidating the clearance and 4 15/05/13
depository functions settlement and depository functions
Road map for consolidating Road map for consolidating the clearance
1.2.2. 5 24/06/13
functions and settlement and depository functions
Organization and delivering of workshop
Present the consolidation
1.2.3 on the presentation of the plan to the 6 15/08/14
plan to industry.
industry with support of SCS
Rules and procedures for Draft rules and procedures for
clearance and settlement 1.2.4 administering clearance and settlement 7 24/11/2014
systems systems at CSD
Settlement default guarantee
fund procedures and Draft Settlement default procedures at
1.2.5 8 23/02/15
procedures for use of CSD
guarantee fund for CSD
Review of ISIN codification
Review of already-existing ISIN
system, its implementation 1.2.6 9 24/06/13
Implementation
and functionality.
57
Prepare new rules and
procedures for CSD on its Prepare new rules and procedures for
participants‘ structure that CSD
1.3.1 10 23/02/15
allows custodians and
investment firms to access
CSD
Draft internal procedures on
1.3.2 Draft procedures on registry keeping 11 15/08/14
registry keeping services
Draft procedures on conversion of
Draft procedures for
1.3.3 certificated securities into dematerialized 12 03/04/14
dematerialized securities
securities
Recommendations on the
transfer of functions on Recommendations report on the proposed
registration of securities liens 1.3.4 approaches for the transfer of lien 13 24/11/14
from SCS to CSD, including registration from SCS to CSD
business procedures
Draft procedures for CSD in
Draft procedures ensuring the security of
managing information 1.3.5 14 23/02/15
accounts
security
Draft risk-management and Risk management and internal technical
internal technical-audit 1.3.6 audit procedures for CSD (name is 15 23/02/15
procedures for the new CSD different in the work plan)
Feasibility report on the CSD’s ability to
The CSD’s ability to provide
1.3.7 provide the services mentioned under 16 24/11/14
services
activity 1.37
This deliverable was
changed to “Report on how
Review the CSD’s ability to Investment Funds Asset
Feasibility report on the CSD’s ability to
act as share registry for 1.3.8 17 28/04/15 Managers can provide fund
provide services mentioned under activity
investment funds administration services for
investments funds” by the
Amendment No 1, dd 15 Oct
58
2014, to the lump sum
contract with the Consultant.
Completion of around 10 training
Provide capacity building to
1.3.9 sessions on the operations of the newly 18 08/10/15
newly formed CSD
formed CSD through CMTC.
IT system needs of the Report on the assessment of the IT
consolidated capital market 1.4.1 system requirements for the consolidated 19 24/06/13
infrastructure capital market infrastructure
Presentation of the parameters for the
required IT systems’ functionality on the
Develop functionality for the
1.4.2 main infrastructure components: trading, 20 24/06/13
required IT systems
depository, registry, clearance-settlement
and surveillance.
Draft the technical ToR for acquiring the integrated IT
specifications for IT system 1.4.3 systems for the consolidated capital 21 24/10/13
and bidding documents market infrastructure.
Assist PIU with selecting the
Provide assessment report for each of the
appropriate system(s) and
1.4.4 proposed IT systems during the IT 22 23/02/15
consult SCS for selection of
procurement
appropriate system(s
The deadline for this
deliverable was changed due
to prolongation of the project
Assessment report on the testing results
Oversee the system life span till 1 July 2016. The
1.4.5 of the selected and installed systems prior 23 May 2016
installation and testing change was confirmed by
the ownership transfer.
parties in additional contract
signed with the Consultant
on 1 February 2016
Analyze the market risk for
Risk assessment report of revised
revised settlement 1.5.1 24 24/11/14
settlement procedures
procedures.
Review of various options for 1.5.2 Recommendations report on clearance- 25 15/08/14
59
clearance and settlement settlement procedures
procedures
Identify the extent of a
required settlement guarantee
fund, including sources of Identify the extent of a required
1.5.3 26 23/02/15
funding, such as transaction- settlement guarantee fund
based fees, letters of credit
and/or insurance
Road map containing recommendations
for reforming current pre-pay / pre-
Roadmap for reforming the
deliver system into a system based on
current pre-pay / pre-deliver 1.5.4 27 24/10/13
payment and delivery post-trade,
system
implemented together with risk-reducing
mechanisms.
Devise the required rules to
Draft rules to implement the roadmap,
implement the roadmap and
1.5.5 including revised business procedures 28 08/10/15
revise business processes and
(Rule Book)
procedures
Recommendations on the Assessment report on the CCP capacity of
1.5.6 29 24/10/13
CCP capacity of the CSD the newly established CSD
Recommendations report including
Review the fee schedules and proposed fee structure on eliminating
1.6.1 30 24/06/13
incentives for trade financial incentives for pre-arranged
trades
Definition and use of
Draft revised legislation to cover the gaps
“address sales” and provide 1.6.2 31 24/06/13
indicated under activity 1.6.2.
recommendations
Recommendations for Feasibility report on integrating clearance
integrating C&S of limited 1.6.3 and settlement operations of the limited 32 15/08/14
off-market transaction off-market transactions.
Review the definition and use Draft revised legislation to cover gaps in
1.6.4 33 24/06/13
of non-trade transfers negotiated trade transfer.
60
Recommendations on
approaches to order
Recommendations report on the
placement and trading rules
1.6.5 placement and trading rules for thinly – 34 24/11/2014
for thinly-traded securities
traded securities
that will promote depth and
better price discovery
Recommendations and international
Support SCS and review laws
2.1.1 expertise (cases) during the discussions of 35 30/01/13
and regulation
the Draft Law, as required.
The list of the laws and regulations
requiring amendment including the scope
Revisions to the legislation
2.1.2 of the amendments to ensure the 36 30/01/13
and international standards
maximum compliance with IOSCO
principles.
Inventory of implementing The list of the new implementing
regulations supporting Law 2.2.1 regulations and revisions to the existing 37 30/01/13
on Securities legislation under the new law.
changed to “Draft and
deliver high-priority
Draft/comments on the
Draft and deliver 16 high-priority implementing regulations”
required new implementing 2.2.2 38 24/10/13
implementing regulations by the Amendment No 1, dd
regulations
15 Oct 2014, to the lump
sum contract with the
Consultant.
changed to “Completion of
Revisions to existing remaining implementing
Draft and deliver remaining
regulations to conform to 2.2.3 39 15/08/14 regulations” by the
implementing regulations
new Law Amendment No 1, dd 15 Oct
61
changed to
“Review/development of
Review, analyze the risks and Review/ development of agreed rules for
2.3.1 40 28/04/15 agreed rules for BSE” by the
opportunities BSE
changed to “Additional rules
for BSE to ensure
Additional regulation for BSE to ensure
Additional regulation for compliance with new
2.3.2 compliance with new Securities Market 41 07/10/15
BSE Securities Market Law” by
Law
the Amendment No 1, dd 15
Oct 2014, to the lump sum
changed to “Report on
Recommendations and
Guidelines related to the role
Recommendations and Recommendations and Guidelines related
that banks will play in the
Guidelines related to the role to the role that banks will play in the new
2.3.3 42 24/11/14 new settlement model
that banks will play in the settlement model imposed by the new
imposed by the new draft
new settlement model draft legislation
legislation ” by the
Adopt accounting and tax Recommendations report on the proper
treatment for shares sold 2.4.1 accounting and tax treatment for shares 43 03/04/14
above nominal value sold above nominal value
Implement “tax Recommendations report on the “tax
transparency” of investment 2.4.2 transparency” implementation of 44 03/04/14
funds investment funds
Reinstate the tax waiver on 2.4.3 Recommendations report on the tax 45 15/08/14
62
dividend and interest income waiver on dividend and interest income
from bonds from bonds
Provide tax incentives for Recommendations report on the tax
companies to list their 2.4.4 incentives for companies to list their 46 03/04/14
securities on the BSE securities on the BSE
Analyze pooled investment Report on feasibility of pooled
2.5.1 47 15/08/14
by insurance companies investment by insurance companies
Drafting the regulations on
Draft the regulations on capital adequacy
capital adequacy of the 2.6.1 48 03/04/14
of the market participants.
market participants.
Drafting regulations on risk Draft regulations on risk management
management & requirements 2.6.2 systems and prudential requirements of 49 24/10/13
of the market the market participants.
Drafting regulations on Drafting regulations on the prudential
reporting procedures of the 2.6.3 reporting procedures of the market 50 24/10/13
market participants participants
changed to “Listing
Assessment report on the
Assessment report on the modality of Advisory Programme (LAP)
modality of attracting local
3.1.1 attracting local and foreign issuers to the 51 10/04/13 Report” by the Amendment
and foreign issuers to the
listing No 1, dd 15 Oct 2014, to the
listing
lump sum contract with the
Consultant.
changed to Strategy for BSE
for providing fund raising
Strategy for BSE for providing fund platform for Azerbaijani
1st LAP Progress Report 3.1.2 raising platform for Azerbaijani 52 03/04/14 companies, to be included in
companies the 1st LAP Progress
Report” by the Amendment
No 1, dd 15 Oct 2014, to the
63
Consultant.
Expanding distribution
Expanding distribution channels for
channels for government 3.2.2 53 23/02/15
government securities
securities.
changed to “Report on
Recommendations Related to bankruptcy of investment
Report on the feasibility of the market-
Investment Companies and funds and securities market
3.2.3 makers and draft regulations governing 54 08/10/15
Securities Market participants” by the
them
Participants Bankruptcy Amendment No 1, dd 15 Oct
changed to “Organization of
Recommendations covering at least 4 workshops and
Recommendations covering the issues
the issues under activity 3.2.4 55 08/10/15 LAP launch event” by the
under activity 3.2.4. as required
3.2.4. as required Amendment No 1, dd 15 Oct
changed to
“Recommendations report
for developing the corporate
Provide recommendations for bond market, to be included
Recommendations report for developing
developing the corporate 3.3.1 56 28/04/15 in a report on initial
the corporate bond market
bond market screening of at least 4
companies” by the
Support LAP Activities – 2nd List of best Azerbaijani corporate This deliverable was
LAP Progress Report
3.3.2
candidates for corporate debt offering
57 07/08/15 changed to “List of best
Azerbaijani Corporate
64
candidates for corporate debt
offering to be included in 2
nd
LAP Progress report” by
the Amendment No 1, dd 15
Develop Presentation Published educational materials
Materials for LAP Team and 3.4.1 describing the role of the capital markets 58 15/08/14
Coordinate with Agencies and opportunities for corporate issuers
changed to “Published
Published educational materials educational materials on
Develop and publish
3.4.2 describing the benefits of good corporate 59 23/02/15 IPO” by the Amendment No
educational materials on IPO
governance and profitability 1, dd 15 Oct 2014, to the
Consultant.
Create a cadre of instructors
capable of leading corporate
education events - At least 3 At least 3 training sessions for trainers
3.4.3 60 24/11/14
training sessions for trainers leading the corporate education events
leading the corporate
education events
Develop educational
Published educational materials for
materials for investors 3.5.2 62 28/04/15
investors describing the investment funds
describing investment funds
changed to
“Recommendations report
Recommendations on Recommendations report on creating and on enabling and creating
3.5.3 63 15/08/14
creating and enabling ETFs enabling ETF ETFs and developing the
needed regulations and
published educational
materials concerning ETFs”
65
by the Amendment No 1, dd
15 Oct 2014, to the lump
sum contract with the
Consultant.
changed to “Feasibility study
Feasibility study for for implementing a market
implementing a market Recommendations report on enabling and (MTF) for foreign stocks
3.5.4 64 15/08/14
(MTF) for foreign stocks creating REITs and their regulations traded on the BSE” by the
traded on the BSE Amendment No 1, dd 15 Oct
Concept guidelines for local changed to “Concept
sponsors for trading in guidelines for local sponsors
foreign stocks (MTF) on the Published educational materials on ETF for trading in foreign stocks
3.5.5 65 15/08/14
BSE and REITs, as requested (MTF) on the BSE ” by the
Recommendation/
Recommendations on introduction of
educational materials/manual 3.5.6 66 23/02/15
Assets Backed Securities
for ABS sponsors
Recommendations on how
Recommendations report on the project
capital markets can support 3.6.1 67 28/04/15
financing through securities market
projects
Recommendations on how Capital
Market can support state companies
state companies
Recommendations on how capital
markets can support privatization
privatization
66
Review current government Recommendations report on development
support to private sector 3.7.1 of instruments to support government 71 24/11/14
development funding for the private sector
Conduct a training needs
assessment for all levels of 4.1.1 Training needs assessment report 71 30/01/13
SCS staff
Devise and provide a training Curricula for all subject matter categories
4.1.2 72 03/04/14
program of staff and all levels
Conduct in-house training for
4.1.3 Around 30 training sessions for SCS staff 73 07/08/15
SCS staff
Conduct a train-the-trainer
Conduct around 10 train-the-trainers
program for the training 4.1.4 74 28/04/15
programs
sessions
Identify external training
4.1.5 Identified external training opportunities 75 27/05/13
opportunities for SCS staff
Devise and provide a
Establish information portal and
knowledge management 4.1.6 76 24/10/13
searchable database within SCS intranet
system
Recommendations report with proposed
Review the SCS’s internal
time based road map for SCS ‘ s internal
systems, policies, structures 4.2.1 77 28/04/15
systems , structures and procedures
and procedures
realignment
Review the SCS’ current
Recommendations report on SCS’s
procedures and practices of 4.2.2 78 15/08/14
current procedures and decision making
decision-making
Review the SCS’ current Recommendations report on SCS’s
market surveillance policies 4.3.1 interim market surveillance policies and 79 28/04/15
and systems procedures
Review the SCS’ market
4.3.3 Recommendations report on SCS 81 07/08/15
enforcement capacity and
enforcement capacity and revisions to
revisions to enforcement
67
procedures enforcement procedures
Review the current systems Recommendations report on
used for reporting by market 4.3.4 improvement of the current systems of 82 07/08/15
participants reporting by market participants
Report on module descriptions,
Automation of the disclosure
parameters for the automated disclosure
of public information and 4.3.5 83 24/10/13
of public information and reports to the
reports to the regulator
regulator.
Two international
conferences have been
Conducting 2 regional conferences every 30/01/13
Promote the Azeri market to supported technically and
4.4.1 year and 2 international conferences 84
International Investors financially. Financial support
overall.
for regional conferences has
been provided.
Assist SCS in conducting Financial support for annual financial
4.5.2 85 03/04/14
annual financial surveys literacy surveys
Prepare a communications
4.5.4 Communication plan for SCS 87 24/10/13
plan for SCS
Recommendation/
educational materials/manual 4.5.5 Review and update the SCS’s website 88 23/02/15
for ABS sponsors
Assessment training Assessment report of the current situation
programs propose a model 4.6.1 and presentation of the proposed model 89 18/3/13
for the training center for the training center
Strategic business plan for
4.6.2 Business plan for the training center 90 24/10/13
establishing training center
Recommendations report on the training
Conduct needs assessment programs (such as certification programs,
and identify demand for 4.6.3 regulatory trainings, trading trainings, 91 03/05/13
training programs mini-MBA with concentration in finance,
etc.)
68
Around 3-4 training programs and
changed to “Developing a
curricula for more general public based
Developing a self-study kit self-study kit on securities
on the agreement with SCS on the
on securities trading (capital 4.6.4 92 July 2015 trading (Capital market)” by
recommendations for the task 4.6.3. At
market ) the Amendment No 1, dd 15
each training session approximate number
of participants will be around 10 to 15
changed to “Developing a
self-study guide on corporate
Developing a self-study Attracting the trainers and identifying the
4.6.5 93 July 2015 bonds” by the Amendment
guide on Corporate Bonds trainers for each program
No 1, dd 15 Oct 2014, to the
Consultant.
Start the train the trainers for Conducting the “Train the trainers”
4.6.6 94 30/05/14
the local trainers program for local staff
Prepare the marketing plan of
Marketing plan of the center and its
the center and promote the 4.6.7 95 30/07/13
execution
center
69
2.2 Component 1: Streamlining and Automating Market Infrastructure.
This Component was designed to address the outdated capital market infrastructure constraints by focusing
on: (i) increasing automation of the market through establishing one depository center and consolidating
clearance and settlement; (ii) opening the infrastructure’s membership and access; (iii) minimizing off-
market trades and improving price discovery; (iv) facilitating the operational introduction of investment
funds; and (v) building better risk protection through establishing an updated trade guarantee mechanism.
Key deliverables of the Component 1:
- The country’s post-trading architecture and environment was consolidated making the National
Depository Centre (NDC) the sole CSD for government and corporate securities, providing clearing
and settlement functions to members;
- The central role of the NDC was supported by converting it to the non-for-profit infrastructure
organization serving its members and local issuers. All other registry-keeping licenses in the country
were abolished. The securities numbering and lean registration were transferred to the NDC’s sole
operational control. The NDC was connected to the country’s RTGS (AZIPS) systems ensuring DVP
principles of both government and corporate securities.
- The securities numbering function was transferred to the NDC and its methodology was harmonized
with internationally recognized ISIN standards; the NDC is a member of the Association of National
Numbering Agencies.
- Implementation of the renewed post-trading procedures complying with the international best
practices and newly adopted securities market legislation;
- Drafting extensive, best-practices based TOR for the new electronic trading/post-
trading/surveillance platform comprising.
- Automation of the broking, trading, registry-keeping, central depository, clearing and settlement,
issuing functionalities in the market in strict compliance with the newly adopted securities market
legislation;
2.2.1 List of NDC rules and post-trading system rules adopted in accordance with the new “On
Securities Markets” Law (2015):
1. Rules on requirements to Central Depository members;

2. Rules on opening, closing and managing accounts in Depository Centre;
3. Rules on registration and transfer of securities;
4. Rules on safe-keeping of securities in Depository Centre;
5. Rules on forming and holding securities owners’ registry;
6. Rules on registering liens in the Depository Centre;
7. Rules on fees payment;
8. Rules on depository risks management;
9. Rules on operation of financial security in the Depository Centre;
10. Rules on depository information protection and retention;
11. Requirements on post-trading system formation and operation;
12. Requirements to clearing organization members;
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13. Rules on clearing operations;
14. Rules on information exchange in clearing operations;
15. Rules on information protection and reporting in clearing operations.
2.3. Component 2: Updating and Strengthening the Legal and Regulatory Framework.
To maximize the benefits of adopting an adequate legal and regulatory framework, this Component was
designed to focus on: (i) reviewing the draft capital market legislation, ensuring that the existing gaps are
addressed through the forthcoming new Capital Market Act and identifying key implementing regulations
needed to make the law effective; (ii) enhancing market confidence and safety by introducing minimum
capital requirements for market participants; (iii) in collaboration with the Ministry of Taxes and Ministry
of Finance, eliminating tax obstacles to capital formation for companies and avoiding double taxation of
participants in investment funds; (iv) allowing pooled investments by insurance companies; (v) fostering
competitiveness by extending market participation through new licenses and broader geographic coverage;
and (vi) ensuring effective coordination with other regulatory authorities in the financial sector to minimize
regulatory gaps and arbitrage opportunities.
Key deliverable elements of the Component 2:

- Adoption of adequate legal and regulatory framework including “On the Securities Markets” Law
harmonized with the EU directives and IOSCO principles, adoption of the 29 implementing
regulations, as well as new rule books of the Baku Stock Exchange (as a part of the Component 3)
and National Depository Centre (as a part of the Component 1) fully complying with the country’s
new governing legislation;
- Drafting tax regulation initiatives covering various aspects of the securities market operations.
The new “On Securities Markets” Law was adopted on 14th July, 2015. The adoption of the Law was
assessed as a considerable effort to improve the legal and operational framework within which securities
market will operate in the future by experts. The Law sufficiently addresses “rule of law” related issues,
including: provisions for finality of settlement, better rules of supervision administration, initiatives that
move toward the creation of a modern central depository, enhanced book entry securities “ownership”,
reporting requirements, provisions for an investor compensation fund, more intensive monitoring of market
abuses, proper conduct of business with retail market participants. In brief, the Law provisions observe the
three IOSCO core objectives of securities regulation:
- The protection of investors;
- Ensuring that markets are fair, efficient and transparent; and
- The reduction of systemic risk.
The regulator recognizes that matters which are not directly subject of the law itself, such as thorough
surveillance and compliance programs, effective enforcement and close cooperation with other regulators
are necessary to give further effect to all three objectives.
After the adoption of the Law (as well as the Presidential Decree endorsing it and subsequent Regulations)
the supervisory authority (e.g. SCS at that time) works under a clear mandate, with its responsibilities and
71
powers established by legislation and further specified within the Law for specific areas. Responsibility for
supervision of the conduct of business obligations of investment companies and other market participants
(institutions) is clearly stated. Decisions of the regulator are required to be transparent and are open to
judicial review.
On the other hand, under the new legislative platform the supervisory authority has adequate powers to carry
out its regulatory functions, and has rulemaking authority. In addition, members and staff are subject to
integrity policies that ensure high standards of professional conduct.
Under the Law provisions supervisory authority has appropriate powers to obtain information and records,
and can exercise these powers on a routine basis to ensure compliance with the laws it administers. Regulated
entities are subject to record keeping requirements directly under the LAW, including records relating to
clients’ orders. Supervisory authority has adequate powers to investigate both administrative violations of
the law. Further development of the legislative platform is agreed to consider in future enabling the
regulator(s)’criminal prosecution and sanctions ability for serious violations.
Under the Law, appropriate disclosure rules requiring public offering, material event reporting and
ownership and control reporting, which attempt to improve transparency of information and to guide
continuous disclosure has been adopted, as has the requirement for preparers and management to be liable
for the accuracy of disclosure. Issues to the public of equity and debt securities require a prospectus approved
by the supervisory authority. Secondary legislation adopted under the Law ensures disclosure requirements
for prospectuses are in line with IOSCO principles. Issuers are also required to submit reports about material
developments. Financial statements must be prepared in accordance with IFRS. The supervisory authority
has sufficient powers to enforce issuers ‘compliance with reporting standards, and to issue supporting
secondary legislation. In addition, changes of control transactions are required to comply with disclosure
requirements.
The Law provisions related to market intermediaries in general properly achieve three main objectives: to
protect client assets from insolvency of the investment company, guard against defaults and sudden
disruption to the market, either through sudden insolvency or settlement failure, and, to ensure that
intermediaries are fair and diligent in dealing with their clients.
The Law sets appropriate licensing standards (limiting the market place to those with sufficient resources
and qualification), prudential standards (protecting against sudden financial failure), internal controls and
risk management standards (reducing the possibility of default or appropriate of client assets), and business
conduct rules (ensuring proper handling of client accounts).
Provisions on secondary markets are in place to ensure the efficiency and credibility of the markets as
mechanisms for pricing and transfer of securities. Exchange is subject to licensing requirements, including
standards applicable to information technology systems and risk management, and is subject to on-going
supervision, including inspections and reporting requirements.
Potential sources of market disruption are addressed through the regulation of clearing, settlement and
depository services, including risk management mechanisms designed to ensure that intermediaries settle
their market obligations in a timely and orderly manner. Market activity is properly subject to market abuse
rules, including prohibitions on trading on insider information, market manipulation and misrepresentation.
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Exchange business is subject to licensing allowing operating both securities and derivatives markets.
Clearing and settlement facilities are performed by the NDC. Both trading and post-trading are subject to
the supervision of the supervisory authority, which has proper powers to ensure both institutions acts in
accordance with regulatory requirements. The Law has sufficient provisions that trading on the markets is
transparent, and supervisory authority has direct responsibility for detecting insider trading and other forms
of market abuse, which will be further subject of uses and assistance of technological system.
2.3.1. List of implementing regulations adopted subsequent to the “On Securities Market” Law
(2015):
1. Rules on securities issuance and conversion at reorganization of juridical entities;
2. Rules on real estate certificates in the Republic of Azerbaijan;
3. Rules on merging, splitting and par value increase of shares;
4. Requirements applicable to issuers’ management reports;
5. Rules on statutory registry of securities;
6. Rules on issuance of securities outside of the boarders of the Republic of Azerbaijan;
7. Disclosure rules for persons conducting research on securities or issuers, proposing investment
strategies recommendations;
8. Rules on lien registration, lien cancelation, pledge management;
9. Disclosure rules on securities issuers;
10. Rules on prospectuses and information memoranda;
11. Rules on transactions with investment securities;
12. Rules on investment securities subscription and allocation;
13. Rules on payment, notarial and depository registration of securities enactment contracts;
14. Regulations on market manipulation (market abuse);
15. Rules on issuers maximal limits of bond issuances;
16. Regulations on the registration of the mortgage cover and form and manner of a mortgage cover
inspection report;
17. Rules on registry-keeping of the mortgage covers, depository reports on validating mortgage covers;
18. Regulations on the procedure of stabilization of prices of securities;
19. Rules on issuance, registration and turnover of depository receipts;
20. Rules on placement and turnover of derivative financial instruments;
21. Disclosure rules for stock exchanges;
22. Rules on drafting and submission of reports by investment firms;
23. Rules on conducting investment services (transactions) by investment firms;
24. Rules on post-trading systems and clearing operations;
25. Rules on margin trading with securities;
26. Rules on conducting attestations for qualification certificates on delivering investment firm services
(transactions);
27. Rules on attestation of executives and branch managers of licensed entities in securities market;
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28. Regulations on the requirements to external auditors of the regulated institutions;
29. Rules on minimum chapter capital and sources of its formation for licensed entities in securities market;
30. Rules of capital adequacy for investment firms.
2.3.2 Tax regime initiatives:
One of the aspects of the component 2 was modernization of the tax legislation in respect of the securities
market operations. Together with the Project consultants the SCS specialists elaborated main aspects of the
taxation legislation and in 2015 proposed the following amendments to the Ministry of Taxes:
- Elimination of the double taxation on dividends (withholding tax on issuer and profit tax on
investors);
- Elimination of the double taxation on investment funds units (withholding tax on issuer and profit
tax on investors);
- Elimination of the capital gain tax in securities operations;
- Elimination of tax on profit made from difference of par value and public placement price of shares;
- Elimination of profit tax on accrued interest of fixed income instruments;
- Elimination of the VAT tax on financial services operations made with securities.
The Ministry of Taxes were handed the prepared drafts of amendments to be made into variety of legislative
acts and codes to implement the above stimulating measures. The amendments will be considered as a part
of the State Budgetary plenaries in 2016/7.
In January 2016, the Parliament adopted amendment to the Taxation Code withdrawing profits tax on
dividends and coupon payments for the next 3 fiscal years.
2.4. Component 3: Stimulating Supply
This Component was designed to promote greater use of capital markets as a financing alternative by
focusing on creating a more appropriate environment to encourage equity listings and the corporate bond
market; actively reaching out to corporations to promote benefits of financial market as a funding alternative
and working pro-actively with prospective issuers to assist them in coming to the market.
- Re-organization of the BSE listing tiers and adoption of the new listing requirements;
- BSE trading (subscription, public offer and secondary market) rules and procedures enabling
transparent and competitive price discovery and fully complying with the newly adopted securities
market regulation;
- Conducting Listing Advisory Program (LAP) to local issuers, stimulating new issues at BSE
platforms.
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2.4.1. New Listing regulations at BSE:
As a key aspect of the Component 3 the re-drafting of BSE listing/delisting rules and regulations were started
in 2014. Initial changes were made to the listing rules on the 30th of January, 2015. After the adoption of the
“On Securities Market Law” (2015) the listing rules and regulations were updated to fully comply with
certain provisions (definitions) of the new Law.
Regarding the new Listing regulations, separation of bond and stock market, the creation of market
segments, minimum capital requirements according to market segments, compulsory free float rates are the
most noteworthy changes for the description of key developments headline.
Before the modernization of Market Structure, Bond and Stock markets (requirements to Bond and Stock
issuers) were not separated. Therefore, there was sole requirement for the acceptance of companies to the
listing and disclosures for both the issuance of stocks and bonds. However, after the new regulations, the
bond and stock markets were apportioned and each was treated as an independent market as regards to listing
and disclosure requirements.
Moreover, after the approval of new Listing regulations, the transition from 2 tiers listing structure (1st tire
and the 2nd tire listing markets) to 3 tiers listing structure (Prime, Standard and Alternative segmentations)
was realized. This development made the ground for the companies to be rearranged to these market
segments according to their financial and other indicators.
One of the main contributions of new Listing regulations was to shed light on the minimum capital
requirements of the companies. Hence, companies that were to be listed in prime segment should carry at
least 2.5 million AZN of minimum capital requirement), this indicator is 0.5 million AZN for standard
market segment (in which there was not any capital requirement before new the regulation).
Another noteworthy and one of most essential changes was the creation of free-float rates required to be
listed in each tier. For the Prime market, minimum portion of shares to be on free-float if 5% to 10%
depending on the overall equity of the company and those new shares should be held by at least 50
shareholders and no more than 5 % for each singular investor.
It can be noted that there were substantial changes in the listing requirements, trading fees and the acceptance
regulation of the companies to the listing.
For the easing of burden of the listed companies and to enhance the capital market practice, some fees were
substantially lowered, even some of them totally eliminated. With respect to these modifications, one-time
fee for being accepted to the listing was canceled out which was 3000 AZN and 600 AZN for stocks and
600 AZN and 300 AZN for bonds for the 1st and the 2nd tire listings, respectively.
Annual membership fee for issuers was fixed by 1000 AZN in prime market, 500 AZN in standard market
and 200 AZN in alternative market. Previously, these numbers were 0.03% of total issue in the 1st tire listing
and 0.015% of total issue 2nd tire listing.
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Moreover, the bonds to be traded in prime market segment were required by this new regulation to be rated
by S&P and Fitch rating agencies with the rating “BBB-“, “Baa3” by Moody’s or should be rated with the
equivalent rating by other rating agencies. Otherwise, Market maker is required to be appointed for these
bonds within the whole maturity date of these securities.
Additionally, for providing the creditworthiness of issuer, it is required that 50 % of the sum of the last 3
year PBIT (which should take into consideration the outstanding bonds as well) should exceed the annual
interest payments on the new issued bonds.
2.4.1.a. Equity Market Listing Requirements:
Market
Structure
(listing Listing Requirements
levels)
 Issuer should have the legal form of OJSC
 No bankruptcy procedures should have been started for the year before
the listing application
 Net positive income for at least one of the past three years
 At least one year of operating history
 Equity capital AZN 2.5m - 5m: minimum 10% free float
Primary  Equity capital AZN 5m - 10m: minimum 7% free float
Market  Equity capital more than AZN 10m: minimum 5% free float
 Shares in free float should be divided among at least 50 shareholders,
each of whom cannot possess more than 5% of total shares.
 Financial statements prepared in accordance with IFRS and audited by
an international auditor
 No significant changes in structural management for past six months
(i.e. at least two-thirds of management staff should remain unchanged).
 Equity capital should be at least AZN 0.5m
 Financial statements in accordance with local accounting standards
Standard (GAP)
Market  Audit by an independent auditor
 Minimum of 5% free float (or at least AZN 125,000) which should be
divided among at least 20 shareholders, each of whom cannot possess
more than 5% of total shares.
Alternative  Shares of issuers that do not meet the requirements of either the Primary
Trading Market or the Standard Market will be included in the Alternative
Market Trading Market
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2.4.1.b. Bond Market Listing Requirements:
Market
Structure
(listing Listing Requirements
levels)
 Financial statements prepared in accordance with IFRS, and audited by
an international auditor
 No significant changes in structural management for past six months
(i.e. at least two-thirds of management staff should remain unchanged).
 No bankruptcy can be declared by the issuer during one year prior to the
date of submission of listing application
 Equity capital at least AZN 2.5m.
 The presence of a market-maker and/or a high credit ranking granted by
Primary
an international credit agency (i.e. at least “BBB-” from Standard &
Market
Poor's or Fitch, “Baa3” from Moody's, or equivalent of those rankings
granted from other rating agencies)
 Sound and clear debt history
 The I to be paid over one year should not be more than 50% of total
earnings before tax for the past three years.
 Government bonds can be traded in this segment
 Bonds with maturity of less than one year cannot be traded in this
market
 Equity capital should be at least AZN 0.5m
 Net positive income for at least one of the past three years
Standard
 Financial statements in accordance with local accounting standards
Market
(GAP)
 Audit by an independent auditor
 Sound and clear debt history
Alternative  Bonds of issuers that do not meet the requirements of either the Primary
Trading Market or the Standard Market will be included in the Alternative
Market Trading Market
2.4.2. Listed instruments at the BSE to the date of the document:
Segment /
Equity Bond
Instrument
Prime Ministry of Finance
DemirBank OJSC
Market Central Bank
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International Bank of Azerbaijan Mortgage Fund
Azerbaijan OJSC SOCAR
Unileasing CJSC
Azərkosmos OJSC
Finans Lizinq OJSC
Standard Finex Kredit BOKT OJSC
Market Turanbank OJSC
KredAqro CJSC
Merkuri BOKT LLC
Aqrolizinq OJSC
Amrahbank OJSC
Meqa Siğorta OJSC ProKredit BOKT OJSC
Bank BTB OJSC Premier Kredit BOKT LLC
Bakı Siğorta OJSC FinansLizinq OJSC
Muğanbank OJSC FINOKOBOKT OJSC
Alternative FINOKO BOKT OJSC
Market AXA MBASK Sığorta Şirkəti
OJSC
FinEx Kredit BOKT"OJSC
Bank of Baku OJSC
Rabita Bank OJSC
2.4.3. Listing Advisory Program:
Listing Advisory Program was established and implemented by Baku Stock Exchange within Capital Market
Modernization Project as part of the government program of “The development of the Capital Markets of
Azerbaijan for the years of 2011-2020”. The Program was launched in April 2014 and aims to build on
success in making a “highly effective securities market” in order to attract financial resources to the real
sector, move capital between sectors and increase effectiveness of the economic system, contributing to
creating better corporate governance and more transparency about economic activities of listed issuers and
increasing popular participation. Together with the consortium of the partners joining the initiative (the
country’s leading auditors, lawyers, investment firms) LAP is conducting seminars and round-tables for
prospective issuers on variety of technical topics, and, on pro-bono basis, is providing issuers with legal and
organizational guidance and support to assess their needs and potentials for capital market fund raising, and,
once decided, fulfill the whole process, from drafting comprehensive prospectus to organization of
secondary market for their issued instruments. So far, more than 40 local companies participated in the
initiative, out of 16 companies signed special agreement with LAP consortium for closer, one-to-one
cooperation and support of the capital market fund raising.
Joining Partners of the LAP:
Auditing companies: KPMG Azerbaijan, Baker Tilly Azerbaijan, PwC Azerbaijan, EY Azerbaijan;
Legal companies: Dentons Azerbaijan, Baker & McKenzie;
Investment firms: Pasha Capital, Invst Az, AzFinance Invest, UniCapital.
Key activities of LAP in 2014/5/6:

78
LAP organized several seminars for companies that might be interested in listing. The aim of those
seminars was to educate companies and its management about the capital markets and help them to take
advantage of this market. Key events were:
On the 16th of April 2014 LAP was introduced to the public through the initial workshop organized by
BSE.
On the 17th of October 2014 the BSE staged a workshop for companies who had potential to do initial public
offers (IPOs) or otherwise to issue and list equity or debt securities. This workshop was led by BSE team
and invited guest expert Dr. Albrecht Buerger. There was an inspiring and “lessons learned” presentation
from the first company joined LAP, Embawood Furniture Production, about their successful listing, through
which they issued AZN10 millions of corporate bonds. A guest speaker from Borsa İstanbul gave a
presentation on the similar experience, corporate governance practices in Turkey, challenges that Turkish
SME issuers are facing.
On the 22nd of May 2015 together with PWC Azerbaijan, BSE organized a workshop on the topic of “Raising
Public Equity and Debt Capital”. Over 70 representatives of 40 companies attended. The workshop was led
by Mr. Rustem Teregulov, Partner and Capital Markets Leader, PwC CIS and CEE. Issues of major
Azerbaijani companies were case studied in detail.
Issuers joined LAP and the initiative results:
Over what period have these shares ben issued?
Memorand
Type
um of Number of Par
Name of the Listing of Total Amount
# Cooperatio Issued value
Company tier instru of Issue
n (under Securities per unit
ment
LAP)
Equit AZN AZN
1 Azərkosmos ASC signed Standard
y 1,180,530 20.00 23,610,600.00
AZN
Alternati Equit AZN
2 Mega Sigorta ASC signed 5,000.0
ve y 2,500,000.00
500 0
Alternati Equit AZN AZN
3 Bank of Baku ASC signed
ve y 3,400,000 15.55 52,870,000.00
AZN
Equit AZN
1,000.0
y 5,160,000.00
Alternati 5,160 0
4 Bank BTB ASC signed
ve AZN
Equit AZN
1,000.0
y 2,000,000.00
2,000 0
79
Prokredit BOKT
AZN
ASC Alternati AZN
5 signed Debt 1,000.0
ve 400,000.00
0
400
USD USD
Debt
1,200 500.00 600,000.00
USD USD
Debt
600 500.00 300,000.00
6 Finans Lizing ASC signed Standard
USD USD
Debt
600 500.00 300,000.00
USD USD
Debt
500 500.00 250,000.00
USD USD
Debt
800 500.00 400,000.00
FinEx Kredit BOKT USD USD
7 signed Standard Debt
ASC 900 500.00 450,000.00
USD USD
Debt
390 500.00 195,000.00
USD
Debt 1,000.0 USD
Alternati
8 Finoko BOKT ASC signed 750 0 750,000.00
ve
Equit AZN AZN
y 70,000 10.00 700,000.00
AZN
Equit
1,082.0 AZN
y
43,440 0 47,002,080.00
9 Turanbank ASC signed Standard
AZN
Equit
1,082.0 AZN
y
2,773 0 3,000,386.00
AZN
10 Embawood MMC signed Standard Debt 1,000.0 AZN
10,000 0 10,000,000.00
USD
11 Nikoil Bank ASC signed Standard Debt 1,000.0 USD
5,000 0 5,000,000.00
USD
12 Unileasing QSC signed Standard Debt 1,000.0 USD
5,000 0 5,000,000.00
Azersun Holding
13 signed No issue till the moment of the report
MMC
80
Kaspiyan
14 Təhlükəsizlik signed
Baltaları MMC
15 Səba Kredit MMC signed
16 Golden Pay ASC signed
2.4.4. List of Operational Rules and Regulations by BSE:
After the endorsement of the “on Securities Markets” Law in mid-2015 and subsequent adoption of new
implementing regulations by the SCS, in early 2016, BSE has totally revised and introduced its operational
rules and procedures. New BSE rules and procedures were strictly harmonized with new technological
trading and post-trading platform (the Capital Markets Information System) launched early 2016 as well.
List of new operational trading rules and regulations implemented in early 2016 by BSE are as follows:
1. Rules on trading membership; Enacted 30 Dec. 2015

2. Rules on trading of securities and derivative financial
Enacted 30 Dec. 2015
instruments;
3. Rules of securities and derivative financial instruments market
Enacted 30 Dec. 2015
abuse and market protection;
4. Rules dispute resolution at the Baku Stock Exchange; Enacted 30 Dec. 2015
5. Disclosure rules at the Baku Stock Exchange; Enacted 30 Dec. 2015
6. Rules on indices calculation; Enacted 30 Dec. 2015
7. Rules on ethical behavior and access to service information by Enacted 30 Dec. 2015
the exchange executives;
8. Rules of information protection, retention and security at the Enacted 30 Dec. 2015
Baku Stock Exchange
9. Rules on listing and delisting of securities Enacted 30 Jan. 2016
2.5. Component 4: Capacity Building
This Component was designed to overcome the low capacity of market participants and regulators through
launching capacity building activities. First, as the SCS was the major force leading the CMMP reform, it
was important to assure that the agency’s human and financial capacities were sufficient and effective. This
Component, was aiming to: (i) strengthen the SCS’ knowledge management, its policy formation processes
and transparency of operations; and (ii) strengthen the institutional capacity of the SCS’ surveillance,
reporting and enforcement systems. Second, investor education is a key factor to the encouraging the breadth
and depth of participation in capital markets. This Component included, inter alia, activities to: (i) improve
public awareness of the capital market by carrying out a series of effective communication programs through
media, outreach sessions hosted by the SCS in major cities of Azerbaijan; (ii) increase potential investors’
understanding of capital market by series of education seminars and outreach tools to nascent investment
funds and insurance industry.
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- Conducting of the Nation-wide Education Program, including producing and disseminating printed,
visual and interactive study materials for schools, universities and general public, establishment of
the Financial Laboratory at the Azerbaijan State University of Economics;
- Establishing Capital Markets Training Centre (CMTC);
2.5.1. Nationwide Education Program:
The SCS adopted the action plan on Capital Market Related Nationwide Education Program on 25 Feb 2015.
The action plan segmented the target audience and included the following initiatives:
- For secondary schools: i) Preparing and agreeing study material brochure for pupils and teachers on
securities market topics, ii) video films on securities market topics;
- For universities: i) updating economics faculties curriculum and study materials with securities
market topics; ii) assisting preparing separate securities market securities market classes and
subjects; iii) internship programs for students at SCS, BSE, NDC and market participants; iv)
Development of the electronic securities trading simulation platform; v) Research projects for
students on securities market topics; vi) Financial Laboratory (study room) organized at a leading
economics university faculty.
Within the Action Plan securities market study material (brochure and video film) was agreed and produced,
and as a pilot project they are studied as a part of curriculum in Baku schools no 7 and 189-190 for 7th, 9th,
10th grade pupils. Test exams conducted at the end of pilot courses demonstrated positive comprehension
indications.
Capital market based case-study tournament was organized at the Azerbaijan State Economic University.
The results were studied by the academic staff of faculties and teaching materials on case study based
examination were disseminated to applicable faculty professors. Relevant capital market based library of
study material and case-studies (in the university’s all teaching languages: Azerbaijani, English, Russian
and Turkish) was created at the University and handed over to the professors and student unions. High
achieving students in capital market topics were appointed as “Capital Markets Ambassadors” by the SCS.
Ambassadors are entitled to create academic and business practice ties between students and market
participants/regulators.
Financial laboratory was created and handed over to the University by BSE. The laboratory is fully equipped
for seminar workshops, simulation trading activities, invited guess lectures, practical exercises. The Lab’s
annual activity schedule is drafted mutually by SCS and the University’s administration.
2.5.2. The Capital Market Training Centre (CMTC):
In 2013, together with the CMMP experts the SCS established a working group on planning and launching
of the Capital Markets Training Centre (CMTC) under auspices of the SCS. For the next 12 months the
CMTC’s strategic plan, development plan, management structure, financial plan, corporate identity and
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legal for was agreed and prepared. The CMTC was officially launched and presented to the public on 01
March 2014. According to its strategic and marketing plan the initial courses portfolio was elaborated.
(According to the Charter of the Financial Markets Supervision Authority (FSMA) endorsed by the
Presidential Decree dated 10 March 2016 and subsequent amendments in the CMTC’s own Charter, the
Centre was organized as non-for-profit training center under the auspices of the FSMA).
Two main audiences that the CMTC is targeting are: a/Capacity building for the SCS, BSE and NDC
personnel and b/ Capital markets based training for wider professional audience including attestation exam
preparations for market participants. Currently, CMTC is developing its potential to develop consulting
capability to capital markets involved firms.
Training and Seminars conducted by CMTC in 2015:
No of
No Date Audience Title
Participants
Notion of the financial risks and
1 2/10/2015 SCS personnel 20
financial risk management
SCS personnel Managerial skills in public
2 3/13/2015 10
sector
3 4/27/2015 SCS personnel Team building 27
The ways financial markets
4 6/8/2015 SCS/BSE/NDC 12
operate (Master Class)
5 9/7/2015 SCS personnel Corporate finance 31
Performance Management
6 10/16/2015 SCS/BSE/NDC 10
(Master Class)
1) Capital Markets, instruments,
"Fabrika Co-working Centre" participants (seminar)
7 1/30/2016 30
youth center participants 2) Foreign exchange (Master
Class)
Capital Markets financing,
Azerbaijan Architecture and
instruments, participants
8 2/9/2015 Construction Engeneering 41
(seminar)
University strudents
Investment management
9 2/11/2015 Qafqaz University students 32
(Master Class)
Public Administration Academy
10 2/12/2015 instruments, participants 26
students
(seminar)
11 2/19/2015 Qafqaz University students instruments, participants 40
(seminar)
Finance and finance
12 2/25/2015 Baku State University 27
management (seminar)
83
Azerbaijan State Economy Investment management
13 3/10/2015 10
University students (Master Class)
Azerbaijan State Economy Capital Markets financing,
14 3/11/2015 University students instruments, participants 17
(seminar)
Azerbaijan State Economy Finance and finance
15 3/17/2015 32
University students management (seminar)
Azerbaijan State Economy
16 4/1/2015 Corporate finance 10
University students
Azerbaijan State Economy
17 4/2/2015 Foreign exchange 10
University students
18 4/13/2015 Baku State University Investment management 16
Baku Business University
21 4/15/2015 instruments, participants 14
students
(seminar)
2.6. Capital Markets Information System:
procurement.
According to the TOR the winning vendor should have developed the following systems:
- Trading system,
- Depository system,
- Clearing system,
- Market surveillance system,
- Broker front end system
- Install appropriate hardware and network infrastructure supporting the operation of the systems,
including Disaster Recovery Centre in Sumgait City, 35 km from Baku.
The main requirement to the platform was full integration, but modularity on database level, with usage of
industry standard protocols, allowing integration to RTGS (AZIPS systems). The Platform should have been
designed in the open architecture manner enabling incorporation of broker trading functionality by users.
KOREA EXCHANGE was selected the winner of the tender and on 13 January, 2015 the contract was
signed and the integrated trading/post-trading/surveillance platform (branded CETA AZERBAIJAN) was
launched on the 17th Feb 2016. The platform performs according to the expected indicators since the official
launching ensuring automation of all major processes at the local capital market trading and post-trading.
The platform enabled major placements including USD 100 mln public bond offering by State Oil Company
SOCAR in September 2016. The platform strictly complies with newly modernized and introduced local
legislation procedures, BSE listing and trading procedures, NDC post-trading, depository-clearing and
registry-keeping rules.
84
7. Project Development Objective (PDO) Indicators and Intermediate Result Indicators:
The project’s development objective was to increase the use of equity and corporate debt as financing and/or
investment instruments through the adoption of an effective capital markets regulatory framework and
infrastructure. The PDO level results indicators are: (i) increased issuance of corporate bonds; (ii) increased
number of listed companies and (iii) improved price transparency. The Project outcome and output
indicators are measurable
PDO 1. Increased issuance of corporate bonds
2010 2011 2012 2013 2014 2015 2016 6m

344 907 751 1,340 3,940 4,418 2,619
corporate debt
Non-oil GDP 18,443 24,165 28,474 32,638 35,969 37,670 10,939
corporate debt/Non-oil 1.9% 3.8% 2.6% 4.1% 11.0% 11.7% 23.9%
GDP
This indicator represents the ratio of outstanding amount of corporate debt to non-oil GDP (the outstanding
amount of corporate debt to 2010 non-oil GDP, 1.9% was taken as a baseline for the indicator).
In 2016 outstanding amount of corporate debt to non-oil GDP increased to 23.9%. The baseline indicator
was 1.9% and the target was 3.8%.
The major factor for increase in indicator was a significant increase of corporate bond issuance including by
organizations like Azerbaijan Mortgage Fund (AMF). From 2011 to 2015 total issuance of AMF bonds
amounted to 256.6 mln AZN. Optimized REPO procedures, introduced incentives for market makers,
awareness programs to treasury managers resulted in total amount of corporate debt issuance from 2011 to
2016 was 2,400 mln AZN. The outstanding amount of corporate debt at the end of the project to baseline
year’s (2010) non-oil GDP is 14.2%, which is still considerably higher than expected target of 3.8%.
PDO 2. Increased number of companies with listed equity
2010 2011 2012 2013 2014 2015 2016 6M

Prime Market - 1 1 1 1 2 2
Standard Market - - - - - 3 3
In 2016 number of companies with listed equity is 5. The baseline was 2 and the target was 8-10 companies.
There was only one listed company during 2010 - 2014 periods. The company was listed in the first Tier.
However, most of the transactions occurred in the Alternative Trading Market (ATM) without needing to
fulfill extensive listing and disclosure requirements. The first listing took place in the first tier in 2011 which
was Demir Bank OJSC with market capitalization of 23.11 million AZN. Due to the low volatility in the
market, this number has not significantly changed during the period from 2011 to 2014. In 2015 four new
85
companies were listed in BSE. 1 – International Bank of Azerbaijan in Prime Market 2 – Azerkosmos,
Turanbank and Aqrolising in Standard market. Overall market capitalization increased to 1,019 million
AZN. The Listing Advisory Program and other initiatives worked with tens of local potential IPO
candidates. Global financial crisis consequences, geo-political and regional instability and volatilities in
national currencies in all neighboring countries as well as in commodity prices turned local issuers to
conservative mood, making them consider bond issuances as more applicable capital market fund raising
tool, if any at all.
PDO 3. Improved price transparency
2010 2011 2012 2013 2014 2015 2016 6M

Price Transparency - 0% 0% 0% 100% 100% 100%
In 2016 overall price transparency indicator was 100%. The target for that period was 90%.
In 2014 the SCS, BSE and NDC took a number of measures to increase transparency and accessibility of
trades to all categories of traders and investors. First, a special regime was adopted at BSE for all cross
transactions at secondary market (cross transactions are transactions conducted by the same broker from the
buying and the selling side). Thus, a crossing transaction cannot be matched (finalized) unless within next
30 minutes of trade session any other broker bids with better conditions (price) for the buying or the selling
side of the transaction. If the latter happens, the auction starts. If no interest was shown the original transition
was finalized. In 2015 the holding period of cross transactions was prolonged to 60 minutes. Secondly, in
2014 the special regime was introduced by the NDC to let smaller and less financially advanced brokers to
participate instantly in cross transaction. The NDC eliminated funds pre-validation regime for all categories
of brokers and let them deliver funds after the transaction matched. The funds provision is ensured by liquid
assets pledged or bank guaranty mechanisms. Elimination of funds pre-validation allows brokers and all
categories of investors to promptly react on bid quotes in the trading system. All transactions that appear on
BSE trading system are a non-block transaction which means that all of the transactions are counted as being
competitive transactions. Thus all transactions in BSE trading system are transparent and competitive.
Intermediate Results:
Intermediate Result One (Component One): Streamlining and Automating Market

Infrastructure:
2010 2011 2012 2013 2014 2015 2016 6M

Ratio of market
participants
electronically linked to 0% 0% 75% 90% 100% 100%
0%
market infrastructure
(trading, clearing and 100% 100% 100% 100% 100% 100%
settlements)
Despite the project planning phase expectations of gradual grow of number of market participants
electronically connected to trading and post-trading operations at BSE, NDC and other involved entities, the
transformation was instant due to the decision of BSE and NDC to conduct all the necessary changes at once
and at their own expense. Thus, in 2011 BSE and NDC agreed the electronic protocol of data exchange,
86
developed the connection facilities and handed over them to all brokers. Later, in 2016 the achievement was
reinforced by implementation of the Korean technologies, through which, inter alia, the surveillance, market
watch and DVP processes were also processed and automated.
Intermediate Result Two (Component Two): Updating and Strengthening the Legal and
Regulatory Framework
2010 2011 2012 2013 2014 2015 2016 6M
Enactment of a new No Yes Yes Yes Yes Yes

No
Capital Market Act
No No No No Yes Yes
After inter-ministerial, parliamentary and Presidential Administration discussions, the “On Securities
Markets” Law was enacted in July 2015.
Intermediate Result indicator Three (Component Two): Promulgation of capital markets

regulation required upon enactment of Law
2010 2011 2012 2013 2014 2015 2016 6M

Promulgation of capital
markets regulation No Yes Yes Yes Yes Yes
No
required upon
enactment of Law No No No No Yes Yes
All implementing regulations required by the enactment of the “On Securities Markets” Law were adopted
by end of the 2015.
Intermediate Result indicator Four (Component Three): Number of companies involved in

the listing advisory program (debt and equity)
2010 2011 2012 2013 2014 2015 2016 6M

Number of companies 5 10 15 15 15 15
involved in the listing 0
advisory program (debt
and equity) 0 0 1 4 16 16
The Listing Advisory program came into being after extensive negotiations with potential service providers
(brokers, auditors, lawyers and others) on 16th of April 2014.
Since its establishment LAP partners arranged numbers of company meetings and organized several group
seminars for companies that might be interested in listing. The aim of those seminars was to educate
companies and its management about the capital markets opportunities and help them to take advantage of
this market. Key events were:
87
On the 17th of October 2014 the BSE staged a workshop for companies who had potential to do initial public
offers (IPOs) or otherwise to issue and list equity or debt securities. This workshop was led by BSE team
and invited guest expert Dr. Albrecht Buerger. There was an inspiring and “lessons learned” presentation
from the first company joined LAP, Embawood Furniture Production, about their successful listing, through
which they issued AZN10 millions of corporate bonds. A guest speaker from Borsa İstanbul gave a
presentation on the similar experience, corporate governance practices in Turkey, challenges that Turkish
SME issuers are facing.
On the 22nd of May 2015 together with PWC Azerbaijan, BSE organized a workshop on the topic of “Raising
Public Equity and Debt Capital”. Over 70 representatives of 40 companies attended. The workshop was led
by Mr. Rustem Teregulov, Partner and Capital Markets Leader, PwC CIS and CEE. Issues of major
Azerbaijani companies were case studied in detail.
Since its establishment and till the end of the Project period, the LAP signed consortium contracts with 16
organizations, out of which 12 listed their instruments at Prime and Standard tier of BSE listing. Alternative
tier companies are decided not to be taken into account for the purposes of this indicator as ATM tier
companies are either offered to or traded by limited number of investors or have lower listing entrance
requirements.
Intermediate Result indicator Five (Component Four): Increased of the threshold pass rate
of the Financial Certification examination for market participants
2010 2011 2012 2013 2014 2015 2016 6M

Increased of the
threshold pass rate of
the Financial 50% 55% 60% 65% 75% 75%
Certification 50%
examination for market
participants 50% 50% 75% 75% 75% 75%
Financial Certification examinations were conducted by the SCS and lately by the FSMA. In 2013 the
methodology of the examination was completely revised based on the Consultant’s recommendations. Since
2014 the CMTC provides preparation courses for the examinations. The threshold pass rate for the Financial
Certification has been 75% for the last 4 reporting periods.
Intermediate Result indicator Six (Component Four): Consumer Awareness of Capital

Market Instruments
2010 2011 2012 2013 2014 2015 2016 6M

Consumer Awareness 28 33 37 41 45 45
of Capital Market 24%
Instruments
N/A 32 36 56 59.11 59.38
88
Consumer Awareness of Capital Market instruments was the most important indication that the SCS was
focusing on. Initiatives like establishing CMTC, launching LAP, Nation-wide Education Program initiative,
cooperation with universities, youth organizations and journalists, conducting local and international
conferences and workshops (detailed in above chapters) contributed to the increasing rates of financial
literacy and consumer awareness. Moreover, the CMMP coincided with analogous initiatives of other
financial institutions and governmental bodies, with whom the SCS cooperated closely in this regard
(CBAR, MoF, etc). The indication surveys were conducted by the external independent specialized
companies.
4. Amendments and extensions to the original project work plan.
There were 3 occasions when the Project’s work plan was amended to comply with its main direction and
goals: at the inception (October 2012), in the midst of the project span (October 2014) and at the end of
the original project period (extension negotiations, October 2015- February 2016). All amendments were
pre-approved by the World Bank and consequently confirmed by official amendments to the consulting
services contract (the provision of goods contract remained unchanged for the whole period from Jan 2015
to Feb 2016).
4.1. Inception period amendments:
In the initial meetings in October 2012 with the project team, the Consultant and the World Bank, the
SCS’ Chairman raised the issue of importance of increasing listing on BSE as a priority of the initial phase
to be supported by CMMP. The SCS had been considering the creation of a Listing Advisory Program
(LAP) to attract issuers to listing with resources to be allocated from BSE, SCS and other market
participants and professionals to actively promote Capital Market, provide training and provide
preliminary listing advisory services. The Consultant was requested to take the lead in defining the
program and provide technical and managerial support with its delivery. Supporting the LAP necessitated
changes to the activities under Component 3 namely 3.1.1, 3.1.2, 3.2.3, 3.3.1 and 3.3.2. (See table 2.1.1
above).
Moreover, other changes were also agreed in the inception phase.

Activities 2.3.1: “Review and analyze the risks and opportunities” and 2.3.2: “Recommendations on the
optimal participation of the banks and requirements” were considered no longer required as the Central
Bank had decided that commercial banks would only participate in Capital Market through their
subsidiaries and not directly. Resources of these two tasks were agreed to utilize to support BSE to
develop their rules and regulations to adapt new technological and legislative environment after launching
the Capital Markets Information system and enactment of the new “On Securities Market Law”
accordingly.
Activities 3.2.4 and 3.3.2 were similarly re-focused to concentrate on LAP activities, supporting seminars
to be provided by the LAP etc.
Activity 3.4.2: “Develop and publish educational material on Corporate Governance” was considered no
longer valid as the IFC had initiated, prepared and published extensive material on Corporate Governance
for local issuers. The Consultant was asked to assist BSE and prepare a study material on opportunities of
IPO for local issuers.
89
4.2. Mid-period amendments:
In mid-2014 the SCS initiated another round of negotiations with the World Bank and the Consultant on
updating and amending the tasks and activities in the deliverables to comply with the recent developments
at the capital markets.
The role of the NDC as an asset manager of commercial investment funds were was reconsidered based on
the experts recommendation in order to prevent the State owned NDC’s monopolization of the segment.
Thus, it was asked to re-direct the Activity 1.3.8 from NDC to providing recommendations on potential
private fund administration entities.
Activities 2.2.2 and 2.2.3 were renamed and reshaped in order to comply fully with the task of preparing
the implementing regulations that would support the new “On Securities Market Law” draft.
Activity 2.3.3 was reconsidered to concentrate more specifically on role of banks in newly proposed
settlement model for the securities market of the country.
In light of the local real estate market dynamics, Activities3.5.4 and 3.5.5 were re-organized to focus on
bringing international expertise of organizing foreign securities trade (MTF) to BSE.
Activities 4.6.4 and 4.6.5 supporting the CMTC were completed by the SCS itself before the
commencement date of the Consultant assignment. So, the Consultant was asked to prepare self-study
materials on various topics of the capital market operations.
4.3 Extension of the Project period:
In light of the complexity and significance of CMIS procurement tender as well as multiplicity of terms
and conditions to be assessed, in the first quarter of 2015 the SCS and the World Bank started negotiating
the possibility of the Project Period extension. Indeed, the procurement of the CMIS took longer time than
initially anticipated. The project closing date extension topic was eventually triggered by the need to
complete installation of CMIS in 12 months period after its inception, whereas all pre-requisite technical
agreements and future contract negotiation were completed by mid-February 2015. The implementation of
the information system could be finalized at least within 12 months, meaning a two-month slippage from
the project’s original end-date (31 Dec 2015). In turn, the assessment of the development and
implementation results of the CMIS was possible only after its go-live and required the consultants at least
one month after its launching to be able to comprehensively assess all aspects of the implementation.
At the same time, the SCS requested to consider two additional tasks for CMTC strategic development and
sustainability. In consultation with the World Bank it was decided to sign new agreement with the same
Consultant for additional services. The SCS asked the World Bank’s no-objection for SSS method and the
Bank provided SCS with NOL on February 1, 2016 and new agreement with Corporate Solutions
Consulting Ltd was signed on the same date. At the same time the existing agreement was extended to
conduct the deliverable no 1.4.5 on assessing the CMIS implementation results.
90
The Borrower, Ministry of Finance (MOF) of Azerbaijan, requested extension of the project for additional
6 months to have enough time for CMIS installation and handover and accommodating services. The Bank
provided its approval of Project Closing Date extension till July 01, 2016.
5. Financial Reports are attached to the report:
See attached XL tables
91
Capital Market Modernization Project
Sources and Uses of Funds
For the period ended: 9/30/2016
in USD
Quater: 7/1/2016 - 9/30/2016 Cumulative as of 9/30/2016 Forecast : Next

6 months
Cash receipts
GoA 157 781,11 2 094 595,42
IBRD 230 888,26 11 999 971,99
Other - 1 410,86
SECO - 1 600 000,00
Total financing 388 669,37 15 695 978,27
Less: expenditure by categories
Incremental operating cost 1 594,10 104 063,24

Consultants’ services including Audit and Training SECO - 1 385 816,56
Incremental Other - 1 295,60
Front-end fee - 30 000,00
Good 172 414,63 5 542 845,90
Consultants’ services including Audit and Training 309 777,59 8 591 166,44
Total expenditure 483 786,32 15 655 187,74
Receipts less expenditure -95 116,95 40 790,53

Add : Foreign exchange difference -8,50 -675,02
Add : Net change in advances given - -
Net change in cash -95 125,45 40 115,51
Opening cash balance

International Bank of Azerbaijan (Project A/c, AZN) 47,44
International Bank of Azerbaijan (DA,USD) 135 193,52
Total opening cash 135,240.96
Add : Net change in cash -95 125,45 40 115,51
Net cash available 40,115.51 40,115.51
Closing cash balance

Xalq BankSahil Branch (DA) 39 968,32 39 968,32
Xalq BankSahil Branch (Project, AZN) 147,19 147,19
Total closing cash balance 40 115,51 40 115,51
Note: The following rates were used for conversion:

i) Opening balance of PA in Quarter: 1 USD = 1.5078 AZN
ii) Closing balance of PA: 1 USD = 1.6102 AZN
Signator 1: / / /
signature date signator's initials position
Signator 2: / / /
93
Uses of Funds by Project Activities
For the period from: 7/1/2016 to: 9/30/2016
in USD
Quarter Cumulative
N Project Component/Activity Planned Actual Variance Planned Actual Variance
Total Project Expenditure 483,786,32 483,786,32 15,678,658,83 15,655,187,74 23,471,09
1 Streamlining and Automating Market Infrastructure 133,031,69 133,031,69 7,721,835,16 7,721,835,16
2 Updating and Strengthening the Legal and Regulatory Framework 1,425,472,68 1,425,472,68
3 Stimulating Supply 1,705,025,48 1,705,025,49 -0,01
4 Capacity Building 2,231,737,43 2,231,737,43
5 Project management 2,534,64 2,534,64 289,120,78 287,450,72 1,670,06
6 VAT 157,781,11 157,781,11 2,115,028,42 2,093,227,38 21,801,04
7 Supporting Capital Markets Training Center's Operational Efficiency and Its Divercification 190,438,88 190,438,88 190,438,88 190,438,88
Signator 1: / / /
Signator 2: / / /
94
Designated Account (DA) Statement
International Bank of Azerbaijan (DA,USD)
as of 9/30/2016
in USD
1 Opening balance as at 1/1/2016 176,598.48

2 Add: Cumulative unexplained discrepancy 235.97
3 IBRD advance during period from: 1/1/2016 to: 9/30/2016 214,000.00
390,834.45
4 Less: Refund to IBRD from DA during the period from: 1/1/2016 to: 9/30/2016
5 Present outstanding amount advanced to DA 390,834.45
6 DA closing balance as at 9/30/2016 carried forward to next period

7 Add: Amount of eligible expenditures paid during quarter 350,432.15
8 Service charges (if debited into DA) 2,074.54
9 Less: Interest earned (if credited into DA)

10 Total advance accounted for 350,432.15
11 Discrepancy (5) - (10) to be explained /i 40,402.30
NOTES
/i: The discrepancy, w hich should be explained in a separate note, may comprise eligible expenditures paid out of DA but not yet entered by the DA bank, amount
advanced by the Bank but not yet credited by the DA bank, etc.
Disclosure to Dİscrepancy (11):
Foreign exchange difference(losses (-)/gains(+) 268.22

Payables(-)/advances(+) to contractors and employees
Amounts due to other bank accounts(-) or DA (+) 174,922.02
Amount in cash on hand (retained (+)/due (-))
Total discrepancy 175,190.24
95
Signator 1: / / /
PROJECT BALANCE SHEET
as of: 9/30/2016
in USD
ASSETS
Cash and cash equivalents
International Bank of Azerbaijan (Project A/c, AZN)

International Bank of Azerbaijan (DA,USD)
Xalq BankSahil Branch (Project, AZN) 147.19
Xalq BankSahil Branch (DA) 39,968.32
Advance Payments
Cumulative Project Expenditures 1/ 15,655,187.74
Total assets 15,695,303.25
FUNDS AND LIABILITIES
Project Financing 2/ 15,695,978.27

Other income (like bid fees)
Exchange Rate Difference 3/ -675.02
Total funds and liabilities 15,695,303.25
NOTE:
1/ Total Uses of Funds (see Report 1-A)
2/ Total Sources of Funds (see report 1-A)
3/ See Report 1-A
Signator 1: / / /
Signator 2: / / /
signature date signator's initials position 96
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Document of

The World Bank

Report No: ICR00004007

IMPLEMENTATION COMPLETION AND RESULTS REPORT

Capital Markets Modernization Project (CMMP)

January 25, 2017

Finance & Markets Global Practice

(Exchange Rate Effective October 11, 2016)

Currency Unit = Azeri New Manat (AZN

ABBREVIATIONS AND ACRONYMS

Senior Global Practice Director: Gloria Grandolini

1. Project Context, Development Objectives and Design ............................................. 11

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR)

D. Sector and Theme Codes

Theme Code (as % of total Bank financing)

F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document)

(a) PDO Indicator(s)

Original Target Formally Actual Value

(b) Intermediate Outcome Indicator(s)

Original Target Actual Value

Value 0% 100% 100%

G. Ratings of Project Performance in ISRs

H. Restructuring (if any)

ISR Ratings at Amount

1.1 Context at Appraisal

1.4 Main Beneficiaries

1.5 Original Components

9. Component 1: Streamlining and Automating Market Infrastructure. This

1.6 Revised Components

15. No material changes were made to project components.

1.7 Other significant changes

17. Project funds were reallocated as follows:

Table 1: Reallocation of Proceeds

Amount of the Amount of the Percentage of

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

2.4 Safeguard and Fiduciary Compliance

29. Environmental Safeguards: Current Environmental Assessment Category: C - Not Required.

2.5 Post-completion Operation/Next Phase

3.1 Relevance of Objectives, Design and Implementation

Sub-Rating for Relevance of Objectives: Moderate

Sub-Rating for Relevance of Design: Substantial

Sub-Rating for Relevance of Implementation: Substantial

3.2 Achievement of Project Development Objectives

Overall Achievement of PDOs Rating: Substantial

Outstanding Amount of Corporate Debt to 2010 Non-oil GDP (actual)

Intermediate Results Indicators

Intermediate Indicators for Component 1.

Intermediate Indicators for Component 2

Intermediate Indicators for Component 3

Intermediate Indicators for Component 4

Rating for Efficiency: Substantial

3.4 Justification of Overall Outcome Rating

Overall this TAL is rated as Satisfactory.

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development - (N/A)

(b) Institutional Change/Strengthening

4. Assessment of Risk to Development Outcome

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry