Tel Aviv Stock Exchange

Background

Securities trading in Israel pre-dated the establishment of the State. In 1935, banks and brokerage firms founded the Exchange Bureau for Securities which functioned as an unofficial stock exchange. In 1953, The Tel Aviv Stock Exchange was formed to handle the rising number of securities and transactions in the years following the establishment of the State. The TASE is owned by its member firms which include 13 banks (including the Bank of Israel, the country�s central bank) and 15 brokerage firms.

Banks

American-Israel Bank Ltd.
Bank Hapoalim B.M.
Bank Leumi Le-Israel Ltd.
Bank Otsar Hahayal Ltd.
First International Bank of Israel Ltd.
Israel Discount Bank Ltd.
Israel General Bank Ltd.
Maritime Bank of Israel Ltd.
Mercantile Discount Bank Ltd.
The Bank of Israel
Trade Bank Ltd.
Union Bank of Israel Ltd.
United Mizrahi Bank Ltd.

Non-Bank Members

Analyst IMS Ltd.
Dovrat Shrem & Co.
Eyal Securities Ltd.
Ilanot-Batucha Investment House Ltd.
Israel Brokerage & Investment (I.B.I.) Ltd.
Jerusalem Capital Markets
Koor Investment
Kupat-Am Ltd.
Moritz & Tuchler Ltd.
Nesuah Trading & Investment in Securities Ltd.
Ofek Securities & Investments Ltd.
Sahar Securities Ltd.
The Central Securities Co. Ltd.
U.B.S. Israel Securities Ltd.
Zion Resources Ltd.

Various fund and portfolio managers have status as associate members of the exchange which permits them to take part in floor trading. Associate members are:

Emda Management Co. Ltd.
Hapoalim Mutual Fund Management Ltd.
Ilanot-Discount Ltd. Mutual Fund Management
Lahak, Mutual Fund Management of American Israeli Ltd.
Etgar Portfolio Management and Investments Ltd.
Psagot, Mutual Fund Managers Leumi-Igud Ltd.

Listing requirements

Listing criteria for the TASE were recently liberalized to enable companies with short operating histories and relatively low equity to obtain listing. Today, listing on the TASE requires firms to have a minimum one year of operating experience and equity prior to listing of at least $1 million. Equity post-listing must be at least $4 million, but for companies still in the research and development stage, it may be as low as $2 million. The public float must be valued at a minimum of $2 million, but the float for R&D firms can be as low as $1.25 million. There must be at least 275 shareholders post-offering.

In 1992 and 1993, the number of traded companies soared with the aid of a buoyant stock market. New offerings would often consist of a package of securities to enhance the issue�s marketability, which accounts for the sharp rise shown in traded securities. By mid-1994, the number of new issues dwindled due to poor market conditions and remained at relatively low levels through 1997.

Convertible issues have been widely accepted in Israel and are often used as a capital raising vehicle. Terms of these securities generally call for conversion at a price in nominal shekels, linked to the Consumer Price Index (CPI), as a hedge against inflation. Warrants are often issued as part of capital raising packages as well. Exercise prices are generally linked to the CPI.

Multiple classes of stock may have varying voting rights. These are being eliminated under exchange regulations. New share issuances may be made only if there is one class of stock and voting rights are equal for all shareholders or if a superior class of stock is issued.

Trading days

Trading Days: Sunday - Thursday. The exchange is closed on Fridays, Saturdays and holidays and often on the days preceding religious holidays. There are 11 official holidays which are based on the Hebrew calendar.

TACT trading system

In 1997, the Tel Aviv Stock Exchange introduced a new trading system known as Tel Aviv Continuous Trading or TACT. TACT is a computerized, order-driven system for continuous trading, combining the advantages of a call market with those of continuous trading. Developed at the Chicago Stock Exchange, similar systems are operating at stock exchanges in Johannesburg, the Philippines and Thailand.

TACT employs a network of mainframe computers and dedicated trading stations at banks and brokerage houses that are linked to the TASE trading engine. Orders are routed from bank and brokerage house branches to the mainframe computer and to the trading engine at the TASE.

Orders, which may be limit or market orders, are entered into the system and matched with a contra order to create a trade. Orders which do not create a trade are written in the order book - a compilation of all buy and sell orders - until a suitable contra order arrives. When matching occurs, the trading engine alerts the workstation from which the order was entered that the trade was executed. Orders may also be submitted prior to the opening of trading to be executed at the opening price, or they may be submitted during continuous trading to be executed at the closing price only. All unexecuted orders are canceled at the end of each day.

TACT is viewed as a major step forward from the previously employed floor-based auction system. It improves trading transparency and liquidity and, with market data distributed in real-time, assures fairness in trading for all investors.

Trading suspension mechanism

The TASE will halt trading in a company�s shares for 45 minutes when a company releases price sensitive information in order to ensure the reports are widely disseminated. The Exchange will also employ circuit breakers to halt trading for 45 minutes should fluctuations in the TA-25 index exceed 8% from the previous day�s close, or impose a general trading suspension should fluctuations exceed 12%.

Share quotes

Share prices are published in agorot (100 agorot equal one New Israeli Shekel). For example, a stock which is quoted at 4650 trades at NIS 46.50. This method, which went into effect in 1997, replaced a more complex system under which share prices were quoted as a percentage of a stock�s nominal par value.

As of March 31, 1997, the TASE officially adopted symbols used by Reuters for identification of listed shares.

Sources of daily share quotes

Quotations on US-traded stocks are readily accessible through Nasdaq, ASE and NYSE listings, electronically and in the press.

In addition to the Hebrew language press, daily share quotes for the TA-100 companies are available in the English language newspaper, The Jerusalem Post. Real-time quotes for all Israeli stocks are available electronically from Reuters. The TASE has two new agreements to disseminate trading data, one with Bloomberg and the other with DataStream.

Internet users can obtain end-of-the-day prices on locally traded Israeli securities from the TASE�s web site.

Quotations on Internet for both US and TASE-traded shares are also available at Globes� web site - Israel�s Business Arena.

Indexes

The performance of TASE-traded stocks is measured by a variety of indexes. The General Share Index: This is a price-weighted index of all shares traded on the TASE. It gives the best indication of the overall performance of the market.

The TA-100: This is a price-weighted index of the 100 stocks with the largest market capitalization. It is frequently cited by the press as an indication of how the market has performed. The TA-100 Index supersedes the Mishtanim Index which was in effect until the implementation of continuous computerized trading.

The TA-25 or MAOF Index is comprised of the 25 companies with the highest capitalization. It is a weighted index with a maximum weighting of 9.5% given to any one company.

Yeter Index: This index, which replaced the Karam Index, is comprised of all stocks with the exception of the TA-100. It is the principal measure of the performance of smaller companies with less actively traded shares. Industry Indexes: The TASE computes several other indexes according to industry.

Short selling

Short selling is permissible under the rules of the exchange but is rarely engaged in because of unfavorable tax treatment. However, short selling and margin accounts for provident funds are permissible without adverse tax consequences. Various government authorities are examining ways to eliminate impediments to short sales.

Off market block trading

Block trades in off-the-market direct-negotiated transactions are permissible. Such trades have increased somewhat in frequency among institutions and other large investors due to low liquidity in some shares. Off-market block trading generally comprises about 6% of total trading volume. In all cases, clearing is conducted through the TASE clearing house.

TA-25 index options

Trading in index options was initiated in August 1993. TA-25, the index which is traded, is comprised of the 25 companies which have the highest market value. Foreign exchange rate options (NIS/$) are also traded.

Clearing, Registration, Custody

The Tel Aviv Stock Exchange Clearing House was established in 1962. It had been owned by members of the Exchange and was legally separate from it. However, since it was operated by exchange employees and its activities were part of the Exchange�s operations, the TASE formally assumed ownership of the Clearing House in 1996.

There are 23 members of the Clearing House, 12 of which are banks including Israel�s central bank, the Bank of Israel.

The Clearing House provides clearing services for stock and government bond transactions made on the TASE and for those executed off the floor of the Exchange as well.

Clearing is a highly efficient operation. It consists of a computerized bookkeeping entry which permits clearing to take place on the same day on which a transaction is executed. There are no stock certificates which are physically transferred between buyers and sellers.

The real owner of a security is not registered on a company�s books. Rather, securities are registered by one of four nominee companies owned by either Bank Hapoalim B.M., Bank Leumi Le�Israel Ltd., Israel Discount Bank Ltd. or United Mizrahi Bank Ltd.

These nominee companies deposit share certificates with their parent banks and indicate on their books that the TASE Clearing House is the registered owner. On the books of the Clearing House, the members holding the shares are registered as owners. It is only on the books of the Clearing House members that actual shareholder names appear. All transactions must be cleared by a Clearing House member into a custody account for its customers, and the actual securities are held in the TASE Clearing House. TASE members who are not members of the Exchange (there are three) must use a Clearing House member for clearing transactions.

There is no direct contact between company and shareholder. Therefore, it is incumbent upon investors who desire company information and proxy materials to require their broker to supply all such information on a timely basis.

Other functions of the Clearing House include crediting members on behalf of their customers with dividends, interest, bond redemptions, share distributions, etc. The Clearing House collects the amount due from the companies and transfers it to the member.

All Clearing House members must mutually guarantee Clearing House debts. Members are supervised by the TASE. Member banks are also regulated by the controller of banks.

Regulation

The Securities Authority is the main body charged with oversight of the securities industry. Its responsibilities, similar to the US Securities and Exchange Commission, are to protect shareholders� rights and uncover stock manipulation, fraudulent acts and other violations of the securities laws. It also oversees regulations governing investment advisers and portfolio managers.

Backed by tougher legislation, the Securities Authority has become more vigorous in recent years. The Office of the State Attorney at the Ministry of Justice is responsible for prosecuting violations of the law.

Disclosure

Material events must be reported to the Securities Authority and the TASE no later than one day after their occurrence. The TASE will immediately disseminate reports to member firms and to subscribers of the TASE�s distribution service.

Publicly traded companies on the TASE are required to publish annual reports and file them with the TASE and Securities Authority. These reports must contain audited financial statements. A report from the directors is due within four months of the close of the company�s fiscal year. As Israeli companies are required to be on a calendar year basis, audited reports must be filed by April 30.

Quarterly reports must be filed within two months of the close of each quarter and must contain financial statements that have been reviewed, although they are not required to be audited, by an independent accountant.

Regulations also call for companies to disclose transactions with interested parties. This is aimed at mitigating conflicts of interest that could develop because many firms are closely held.

Investors who acquire 5% or more of a firm�s stock must disclose such to the company. The Securities Authority and the TASE must be informed of any subsequent transactions by an investor who holds 5% or more of a company�s shares. Investors intending to purchase 10% or more of a bank must receive authorization in advance from the Bank of Israel.

Accounting practices

Israeli accounting principles are similar in most respects to Generally Accepted Accounting Principles in the United States. The principal exception is accounting for inflation.

Income and balance sheet accounts are adjusted for changes in purchasing power as expressed in the Israeli Consumer Price Index (with the exception of cash, accounts payable and accounts receivable). In order to maintain comparability, prior-year statements are also adjusted. Some companies translate shekel accounts into dollars. Firms that trade in the US adjust their financial statements based on the exchange rate of the US dollar.

Dual Listings/American Depository Receipts and Shares

Several Israeli companies that trade on the Tel Aviv Stock Exchange are also traded on overseas exchanges either directly or through American Depository Receipts (ADRs), American Depository Shares (ADSs) or Global Depository Shares (GDSs). Arbitrage possibilities exist due to these companies� dual listings.

Keeping Updated (in English)

Electronic

Both Bloomberg and Reuters carry extensive and frequently updated information on the Israeli economy and on individual stocks traded in Tel Aviv and the US. Both services have daily market reports, news on company developments, and analyst and brokerage recommendations. Company profiles and financial data on most US-traded Israeli stocks are available on S&P MarketScope.

Globes, Israel�s leading Hebrew language financial newspaper, maintains an English language Internet web site called Israel�s Business Arena. Globes covers daily market action as well as business and company developments.

Many US and European investment banking firms active in Israel report on the Israeli economy and produce research reports on companies followed by their analysts. Until recently, these reports focused almost exclusively on US-traded stocks. However, TASE-traded firms are beginning to be followed with greater frequency.

The Giza Investment Letter is published by Giza Group, an independent Tel Aviv-based investment banking firm. This highly regarded, informative newsletter covers both TASE and US-traded stocks with an emphasis on high-growth technology issues.

The Jerusalem Technology Investor, affiliated with investment bank Jerusalem Global Ltd., focuses on high-technology industries.

English-language economic analysis is also available from Bank Hapoalim, Bank Leumi and other large banks. Several of the large banks publish company reports on an irregular basis.

Buying and selling shares on the TASE

Foreign investors may purchase securities on the Tel Aviv Stock Exchange without restriction.

The simplest way for overseas investors to make transactions on the TASE is through their local broker. Most US brokerage firms have relationships with Israeli banks or TASE-member brokerage firms which will effect requested transactions thereby eliminating the need for an individual to open new bank and brokerage accounts directly.

Investors may nevertheless prefer to have their own accounts with Israeli banks or brokerage firms. This course could have advantages in securing research information and asset management services.

Foreign investors who deal directly with a bank or brokerage firm must open a separate account with an Israeli bank. When securities purchases are made through a TASE member firm, the foreign currency is converted into shekels and the bank account is debited. When sales are made, the bank account is credited in shekels. Investors may continue to hold the proceeds in shekels or convert them back into foreign currency. Foreign investors may repatriate proceeds from an investment, including profits, provided that the investment was originally made in foreign currency from abroad.

It should be noted that small commission charges will be incurred for changing foreign currency into shekels and converting shekels into foreign currency.

Commissions on stock transactions

Commission rates to buy and sell securities will vary according to the size of the transaction. Commissions on most transactions are generally in the area of 0.6% to 0.8%. However, brokerage customers can negotiate lower commissions on large orders, reducing rates significantly.

Dividends

Non-resident shareholders are liable for taxes on dividends of up to 25%, which will be deducted at the source. The actual rate is dependent on double taxation treaties and the source of the dividend. If it is attributable to a government-designated Approved Enterprise, the maximum tax withheld is 15%.

Capital gains taxes

Profits made from securities traded on the Tel Aviv Stock Exchange are generally not subject to capital gains tax in Israel. Certain tax liabilities may exist on profits made by dealers in securities or if an investor held 10% or more of the voting power of a company in the year prior to the shares� disposition. Investors should consult a competent tax adviser regarding the tax consequences of specific investments.