Forget about the threat from Iran and the reclassification of Israel as a developed rather than an emerging market, Gazit-Globe Ltd. (NYSE: GZT; TASE: GLOB) chairman and controlling shareholder Chaim Katzman is convinced that the sharp fall in trading volume on the Tel Aviv Stock Exchange (TASE) stems more than anything else from over-regulation.
Katzman, a TASE veteran, said in an interview with "Globes", "Many people will say that the fall in turnover is due to the tension with Iran but that is not the main problem. There is a failure of leadership that is causing uncertainty over capital market regulation, and as usual those who act as if they are helping the small investor are causing irreversible damage. The regulator's attack only intensifies the lack of transparency and the institutions are leaving the market and investing abroad instead and other places where they are not getting black looks."
What makes you certain that this is the reason for the fall in activity?
"The institutions openly tell us this that with the regulatory and other difficulties that have built up here, they prefer to invest abroad. There they do not need to come to shareholders meetings and detail every vote. In the long term something very bad is happening. Israeli institutions have an advantage and added value in investing in the Israeli market by intimately knowing the TASE. In contrast, where is their advantage in investing in IBM, Oracle or Apple?"
What is so bad about going abroad? It spreads risk
"This panicked exodus abroad sows the seeds of the next capital market crisis. In 2017, we will be setting up a commission of enquiry for the many eulogies, which will make us miss those written in 2008 about all those investments in Eastern Europe. The commission of enquiry will investigate the major mistakes in selecting investments, and expose the double management fees charged for these investments made via private equity funds."
Katzman believes that the increased regulation is not only pushing the institutions out of the stock market but making new companies withdraw plans for IPOs. He said, "Today there is a way to bypass the public option and still benefit from institutional investment. There are all kinds of private equity investments without exposure to regulators or any supervision. Why set up a public company and meet tough demands if there is a less transparent way? Salaries do not become a public issue and nobody knows if the institution is giving a haircut. The institutions have no right to vote and everybody is happy.
When you talk to foreign investors do they tell you why they are leaving the Israeli market?
"Firstly there are objective reasons: Israel left the index of emerging nations and moved to the developed index and its weight is relatively lower. This cannot be ignored. It will take a long time until we capture a respectable place in the developed markets index. The second issue is security, although in conversations I have had I do not get the impression that it plays too major a role."
The main thing bothering foreign investors is the uncertainty surrounding the authorities. This begins with taxation changes which began with promises to lower taxation. This does not contribute to a sense of security for the investor and when changing policy this should be taken into account. You don't need to add new regulatory changes to controls that make it more difficult for investors to understand what is happening here."
Can you give an example?
"A year ago there was amendment 16 on the subject of corporate governance, and then a year after that a new committee was set up, the concentrations committee, which also dealt with corporate governance. What a lack of sensitivity that another new committee comes along and sets new rules. What does that say? That amendment 16 was made by people who are no good or that everything is allowed. And what will be in future? Another committee in another year's time on the same subject? It causes uncertainty among investors."
"Today every regulator can determine everything in his small kingdom and the public encourages this with its demands. There is nobody to call everyone to order. Anyone one who comes along with more deluded decisions is more popular - it is a crisis of leadership."
Don't the regulatory changes stem from real obstacles like debt settlements and crazy salaries for top executives?
It's true that not everything is perfect in the capital market, and there are things that must change but it is all a question of degree. 99% of people in the capital market are fair and only want to improve their companies. There are problematic phenomena in every place and these must be dealt with but we shouldn't throw out the baby with the bathwater.
He added, "There are enough existing enforcement authorities. For example, on executive pay clear limits were fixed in amendment 16, and shareholders have a stronger say. I do not agree with everything set by that amendment but overall it is measured and fair."
How should the market failures be dealt with?
With all due respect to the economy's leaders, there is no need to invent the wheel. At Gazit-Globe we operate on six global stock markets and there are clear rules how to operate. Israel is no different and there is no need to create different products. There is no place in the world that I know of with regulation more rigid than Israel."
"The market has not been functioning for a long time"
He said, "There are only two people who can change the situation: the prime minister and the minister of finance because the regulators goes through them. If they would display leadership and take measures to balance the various interests in the economy in a better way, the market would respond accordingly."
Published by Globes, Israel business news - www.globes-online.com - on March 1, 2012
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