Warsaw Stock Exchange doesn’t need to share the fate of a small local shop competing with the supermarket

The Warsaw Stock Exchange has to confront the challenge, skilfully attracting issuers from our region and enlisting participants among growing family-owned private companies - says Konrad Konarski, a partner in Baker&McKenzie.

CE Financial Observer: When speaking about the successes of Polish transformation, we mention the Polish capital market as one of the key examples. But it seems that something has recently jammed.

Konrad Konarski: The Warsaw Stock Exchange is an unquestionable success, particularly, as compared to other stock exchanges in Central and Eastern European countries . However, its fate is now uncertain. Several factors have contributed to this situation.

What do you mean?

The stock exchange grew owing to the inflow of money from open pension funds  which were legally bound to purchase Polish shares. This attracted issuers who were searching for capital. Another factor was privatisation. The State Treasury conducted the policy of company exit through the stock exchange, which ensured the supply of interesting securities. Thus, on the one hand, there was a supply of capital, and on the other hand, a demand for capital. This generated trade and interesting investment situations. However, both those factors are becoming, to a large extent, thing of the past.

The privatisation has been completed, open pension funds’ sales outpace their money inflows. Are these the main reasons of market weakness?

Open pension funds do not only sell more than they buy but, in addition, their investment obligations in Poland have been eased. Accordingly, they also invest in other countries. The pool of funds that could be allocated for investments in Warsaw is much smaller, which obviously affects the attractiveness of the stock exchange as a place of capital acquisition. There is a third reason as well. The Warsaw Stock Exchange chose a good strategy to act as a regional financial centre. Ukrainian companies were particularly eager to enter, but so were issuers from Lithuania, the Czech Republic, Slovenia or Hungary. Due to the conflict in the East and the weaknesses of the Ukrainian economy this factor also ceased to exist.

If all drivers of growth have extinguished, then, in the best of cases, we can expect stagnation. Is it the right time to get out?

Not necessarily. Although the former growth factors have disappeared, there is hope that the stock exchange will be able to maintain the position held so far, that it will continue to act as an effective intermediary between companies and investors and that it will be able to grow.

How should the stock exchange respond to this challenge?

Foreign companies may still offer our stock exchange an opportunity for growth. Particularly, if the Ukrainian economy recovers and the relations between Ukraine and the European Union become closer, the Warsaw exchange would be the natural place for Ukrainian companies to search for capital. Foreign companies from the region still constitute an untapped resource for stock exchange development.

So, a real financial centre for the region. But not necessarily for Poland?

There is also potential in Poland. It is locked in family companies, companies that have already grown and reached the level of development enabling them to think of entering the stock exchange. Some of them started as small workshops and now they are big enough to attract investors’ interest. In many of them succession is taking place and sometimes the next generation turns out to be unwilling or unable to run the company on its own. In such cases, floating such a company on the stock exchange is an excellent solution. Domestic, family companies may serve as another growth driver for the Warsaw exchange.

But at the moment, they are   unwilling to enter the stock exchange.

They would like to, but they are afraid. A major part of this environment shows mistrust towards the exchange.


Owners are often afraid to lose control over the company they created from scratch. There have been a few notorious cases when family companies entered the stock exchange and later, following various transactions, families lost control over them. Such examples deter business owners from thinking about the stock exchange.

Do you mean Wojciech Kruk? The man who entered the exchange and suffered a hostile takeover of his company by Vistula?

These are isolated cases, yet they raise concerns about the danger to forfeit the effort of a whole generation. Companies are often unaware that Polish law offers various instruments for defence against hostile takeovers.

A year ago, in his interview for Obserwator Finansowy Jacek Santorski said that the biggest barrier on our path to modernity was the mentality of Polish enterprise owners – almost the same as in the case of 19th century manor owners. Rulers and dictators.

It is also a barrier for the development of companies and for considering the stock exchange as an option. The difference in the „philosophy” of running a private business, particularly a single-owner company, and a public company, is dramatic. On the public market, interests of minority shareholders have to be considered, their opinions must be taken into account and sometimes their approval for important transactions must be gained. It must also be accepted that an independent supervisory board watches the owner, that sometimes an aggressive shareholder will voice criticism at the AGM and that the dividend has to be paid regularly. It is a completely new quality as compared with private companies, and one generating very strong psychological barriers.

Transparency obligation is another issue, isn’t it?

Yes, the information disclosure obligations and open discussions on what is happening in the company, make for another revolutionary change. A private company usually guards its secrets strictly and once becoming public, it must disclose them in the prospectus or current reports.

I feel like giving up. What about you?

These problems disappear when one becomes aware of the benefits arising from the public company status. Large global companies which are not listed on the stock exchange can be counted on the fingers of one hand. Wal‐Mart and Toyota also used to be family firms once. Going public is a natural condition and almost a prerequisite for the development of an ambitious company. And the stock exchange should care about raising such awareness. So far, the sector of family companies has been slightly neglected by the stock exchange, but this is changing. Anyway, I assume that people will be led by example. I am sure that the successive debuts of family firms will find followers.

The voices heard on the Warsaw floor may suggest that the stock exchange perceives the European project of the union of capital markets more as a threat than as an opportunity. Is it an opportunity or a threat?

Both. As the name itself indicates, this project has two elements – capital markets and the union. The current proposals of the European Commission indicate that the main purpose is the general promotion of the capital market as an effective source of capital acquisition and ensuring the growth of this market in the entire EU. But the second element is the „union”, thus, not only growth but also the consolidation.

Is our stock exchange afraid of harmonised law and harmonised rules of the game?

It is not afraid of the level playing field, but it is afraid of a roller that will arrive and level the field. One may doubt whether the union of capital markets is good for Poland, which is at its most a medium-sized market. A considerable risk exists that if markets operate under identical rules, the trade will concentrate on one or several biggest exchanges, in London or Luxembourg. The unification concept is a serious risk for the Warsaw exchange.


In the past, the Warsaw market used to jostle ahead because it had factors distinguishing it from other markets. It was competitive. It had advantages which were missing from big stock exchanges. The development opportunity for the Polish stock exchange is based exactly on the existence of such positive differences.

Obviously, a certain level of harmonisation of capital markets in Europe is necessary, particularly with respect to regulations in issues such as investor protection standards, prospectus content requirements, bankruptcy provisions or exercise of voting rights at general meetings. However, those issues have already been regulated and harmonised at the European level. One should be careful not to destroy the current, very useful competition among exchanges by further harmonisation.

The harmonisation will destroy competitiveness?

It may do so. If the market is uniform, our stock exchange may share the fate of a small local shop competing with a supermarket. If prices and goods are similar, everyone goes to the supermarket because it offers greater choice. Harmonisation poses a threat since it may lead to lack of competition among markets.

Warsaw has been developing better as it offered more – it was more friendly, more flexible or safer than Budapest or Frankfurt. Diversified trading rules, investor protection standards, the level of local regulators activity – are all elements of competition. Once these elements are the same in the entire EU, I am not sure whether the Warsaw Stock Exchange will remain attractive and retain its vigour to develop further.

In the draft amendment to the Prospectus Directive the EC proposes that below a certain value of issue a company would not have to announce the prospectus at all. Accordingly, the major part of Polish companies, also on the primary market, would not have to publish the prospectus.

It is a good example showing that the harmonisation method is flawed. Economies in the EU are at various stages of development and what will be a niche issue in Great Britain may be a big transaction in Poland, with a possible participation of retail investors. This is an argument supporting the opinion that markets should be diversified whereas regulations and standards should differ to a certain extent and be adjusted to local conditions. As in any other sector of economy, diversity and competition are key to success.

So we are small but at the same time so good that we may only lose from this change, is that it?

We can improve a lot ourselves. For instance, investors’ protection, particularly its enforcement can be improved. The Polish Financial Supervisory Authority is doing its best to prosecute market abuse, however, it is not authorised to act independently as a public prosecutor in criminal cases. It has to ask for the assistance of the prosecutor’s office which has to deal with thousands of other cases and does not understand the financial market very well. Therefore, stock exchange offenders too often avoid due punishment.

As in the case of WGI [Warsaw Investment Group, a Polish broker house notorious for having defrauded its clients’ funds]?

Such cases breed mistrust towards the market, which cannot be perceived as safe if an obvious offence goes unpunished. Perhaps the European Market Abuse Regulation will change this situation next year, granting prosecutor powers to capital market supervisory authorities.

What are our other weaknesses?

We are hamstrung by a less efficient process of admitting companies to the stock exchange. It is unacceptable that in Poland the prospectus is approved over several months when this process should take no more than several weeks, as it does in other countries. In this context competition acts as well and, unfortunately, in this case it does not favour us. Many issuers entering the Warsaw Stock Exchange consciously decide that the prospectus will be approved outside Poland.

And what are the opportunities offered by the union of capital markets?

The main advantage to be gained by our country from such a union is the improvement of those areas of the market that have been deficient in Poland so far. Besides the prospectus procedure, I mean the clarity in securities taxation matters, ensuring the efficiency of procedure in the case of issuer bankruptcy, or settlement of securitisation.

Maybe huge stock exchanges will host huge companies or at least those with considerable prospects for growth, while the small stock exchanges will attract small companies. In such a scenario, Warsaw being medium-sized would witness an inflow of smaller companies and an outflow of bigger ones.

It is a pessimistic scenario for the WSE, but anyway – not very realistic. The basic factor of market attractiveness is liquidity, which favours the biggest stock exchanges. This is where trade will concentrate following the harmonisation of markets, even for smaller companies. Specialisation of stock exchanges may, on the other hand, develop according to the industry criterion, e.g. exchanges specialised in mining or the hi-tech sector.

Does our stock exchange have any say in the matter?

The interests of our stock exchange should be cared for by the government during the negotiations on the project of the union of capital markets. It seems that our government can count on numerous allies, since all stock exchanges in Europe are afraid of being dominated by the London exchange. The Warsaw Stock Exchange should actively support the government in those negotiations. There is no doubt that an efficient national stock exchange is an element of the state sovereignty, offering Polish companies the opportunity to obtain capital and preventing the domination of economy by foreign companies. However, the stock exchange itself also has to search for new sources of capital and inflow of companies – family firms and foreign companies alike.

Interview by: Jacek Ramotowski

Otwarta licencja


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