The Bulgarian capital market has been developing rapidly in the past few years due to the successful social and economic reforms carried out in the country. With regard to Bulgaria's European Union accession, expected in 2007, a new investment culture has been developing accompanied by the introduction of new financial instruments, innovations and improvements in the legal and institutional environment.
Well organised and functioning institutions, like the Bulgarian Stock Exchange - Sofia (BSE), the Central Depository, the Financial Supervision Commission and others have paved the way for the successful development of Bulgaria's capital market.

The BSE's rapid development
Since its establishment BSE has been using the SOFIX index of the most liquid stock. 2004 brought records for SOFIX, which managed to overcome all psychological barriers, and from slightly over 440 points in January 2004, at the end of December it was marking new highs above 640 points. But the real boom for SOFIX came in February 2005, when a majority package of almost 35 per cent of the recently privatised Bulgarian telecommunication Company (BTC) - the country's largest fixed-line operator - was sold at the stock exchange. BTC shares were sold at prices unseen for the Bulgarian bourse and SOFIX managed to rise over 800 points. Thus, it became the fastest growing stock exchange index in the entire world.

How the index is calculated
Meanwhile, BSE launched on February 1 the new broader BG 40 index, based on price, not on the market capitalisation of the companies it includes. Only the prices of the shares included in it are used in calculating it, not the number of shares in each issue. BG 40 features the shares of the 40 companies with the largest number of deals in the past six months. The index started from 100 points and the number of companies has been fixed at 40, not to be changeable like that in SOFIX. The method of calculating BG 40 is similar to that of the Dow Jones Industrial Average.
In a recently prepared large-scale analysis on the situation at the local equity market, BSE found that in spite of the record high turnovers in 2004 and the beginning of 2005, and the huge market capitalisation, the liquidity of the local stock exchange remains relatively low in comparison to the situation in the developed EU equity markets. The country still finds it difficult to establish a derivatives market in such conditions.

Compensatory Instruments

Besides the BTC share sale, another factor that contributes to the direction of attention towards the capital market is the price of compensatory instruments, which soared within the last three months. With their prices exceeding their par value they proved that miracles could happen on a stock exchange.
Compensatory instruments (non-cash means of payment) have been issued by several Bulgarian governments to owners of non-agricultural land and residential and non-residential buildings (compensatory notes) and agricultural land and forests (compensatory vouchers) that could not be physically returned to them. Both are eligible as a mean of payment in privatisation transactions.

The Treasury Market
The government finances government expenditures by accessing capital markets. On a weekly basis, the Ministry of Finance holds an auction of Treasury bills. The bills are typically short-term (3-month, 6-month and 1-year maturities). Commercial banks are the primary purchasers of these instruments. Foreign banks can participate in the treasury market only through a Bulgarian bank or the branch of a foreign bank, which is licensed in Bulgaria. The foreign bank transfers the money, which is then converted into leva to make the purchase, which must be registered with the Ministry of Finance. The foreign bank must open a lev account (a "custody account") for transactions. This lev account cannot be used as a standard deposit bank account. A foreign currency account can be opened, but it is not obligatory.
The Investment Promotion Act defines securities, including treasury bills, with maturities over 6 months as investments. Repatriation of profits is possible after presenting documentation that taxes have been paid.