98081 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES LOAN NUMBER 8024-AZ Special-Purpose Financial Statements and Independent Auditors' Report For the Year ended December 31, 2014 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT 1-2 SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2014: Special-purpose balance sheet 3 Statement of summary of sources and uses of funds 4-5 Statement of uses of funds by project components 6-7 Statement of designated account 8 Statement of expenditure and summary sheet withdrawal schedule 9 Notes to the special-purpose fmancial statements 10-15 AKER TILLY AZERBAIJAN Audit, Tax and Consulting Demirchi Tower, 16th floor Khodjaly Avenue, 37 AZI025, Baku Azerbaijan r, + 994 c121 404 7 555 f,+ 994 (121 404 7 667 office@ba kerti II y. az www.bakertilly.az INDEPENDENT AUDITORS' REPORT To the Management of the Project Implementation Unit of the Capital Markets Modernization Project implemented by the State Committee for Securities of the Republic of Azerbaijan: We have audited the accompanying Special-Purpose Financial Statements of the Capital Markets Modernization Project implemented by the State Committee for Securities of the Republic of Azerbaijan (the "Project"), which comprise the Special-Purpose Balance Sheet as at December 31, 2014 and the Statement of Summary of Sources and Uses of Funds, the Statement of Uses of Funds by Project Components, the Statement of Designated Account and the Statement of Expenditure and Summary Sheet Withdrawal Schedule ("SOE and SSWS") for the year ended December 31, 2014, and a summary of significant accounting policies and other explanatory notes (collectively referred to as the "Special- Purpose Financial Statements") financed under the International Bank for Reconstruction and Development (the "IBRD") through loan agreement number 8024-AZ (the "Loan Agreement") and the Government of the Swiss Confederation ("SECO") through Grant Agreement. Management's Responsibility for the Special-Purpose Financial Statements Management is responsible for the preparation and fair presentation of these Special-Purpose Financial Statements in accordance with International Public Sector Accounting Standard ("IPSAS") "Financial Reporting under the Cash Basis of Accounting" issued by the International Public Sector Accounting Standards Board of the International Federation of Accountants ("IFAC-PSC") and relevant provisions of the financing agreements as described in Note 2 to the Special-Purpose Financial Statements and for such internal control as management determines is necessary to enable the preparation of the Special-Purpose Financial Statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opm10n on these Special-Purpose Financial Statements based on conducting the audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the Special-Purpose Financial Statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in these Special-Purpose Financial Statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the Special-Purpose Financial Statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the Special-Purpose Financial Statements. An independent member of Baker Tilly International We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the Special-Purpose Financial Statements present fairly, in all material respects, the financial position of the Project as at December 31, 2014, the cash receipts and disbursements on behalf of the Project and transactions passed through the Project's Designated Account for the year ended December 31, 2014 in accordance with IPSAS "Financial Reporting under the Cash Basis of Accounting" and relevant provisions of the loan agreement as described in Note 2 of the Special-Purpose Financial Statements. In addition, with respect to the SOE and SSWS, all payments reported are eligible for financing under the respective loan agreement and adequate documentation have been maintained to support the claims for withdrawal. Restriction on Distribution These Special-Purpose Financial Statements and Auditors' Report thereon are intended solely for the information and use of the Project Implementation Unit, the Government of the Republic of Azerbaijan, the IDRD and the Government of the Swiss Confederation, and are not intended to be and should not be used by anyone other than these specified parties. May 12,2015 Baku, the Republic of Azerbaijan CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES SPECIAL-PURPOSE BALANCE SHEET AS AT DECEMBER 31,2014 (Amounts expressed in the United States Dollars unless otherwise indicated) Notes December 31, December 31, 2014 2013 ASSETS AND CUMULATIVE USES OF FUNDS Cash at bank 3 255,698 235,209 Cumulative uses of funds 7,044, 158 4,634,032 Accumulated exchange rate differences 103 78 TOTAL ASSETS AND CUMULATIVE USES OF FUNDS 7,299,960 4,869,319 SOURCES OF FUNDS Cumulative IBRD Funds 5,134,372 3,967,431 Cumulative SECO Funds 1,280,901 2 14, 183 Cumulative Government Funds 854,686 657,705 Front-end-Fee 30,000 30,000 TOTALSOURCESOFFUNDS 7,299,960 4,869,319 Bakhtiyar Azizov PIU Director AzuUa~ Head of Financial Division May 12,2015 May 12, 2015 Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan The notes on pages I 0-15 form an integral part of these Special-Purpose Financial Statements. 3 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES STATEMENT OF SUMMARY OF SOURCES AND USES OF FUNDS FOR THE YEAR ENDED DECEMBER 31,2014 (Amounts expressed in the United States Dollars unless otherwise indicated) December 31, December 31, Cumulative 2014 2013 to date December 31, 2014 OPENING BALANCE IBRD Designated Account 235,195 238,552 Project Account 14 TOTAL OPENING BALANCE 235,209 238,552 ADD: FUNDS RECEIVED IBRD Loan Number 8024-AZ Designated Account advaces 450,000 SOE and SSWS replenishment 201,845 259,323 461,168 Direct payments 963,825 1,746,225 4,221,933 Front-end fee 30,000 Other receipts 1,271 1,271 Subtotal IBRD Loan funds 1,166,941 2,005,548 5,164,372 SECO Grant Number TF011975 Direct payments 1,066,718 214,183 I ,280,901 Subtotal SECO Grant funds 1,066,718 214,183 1,280,901 Government of Azerbaijan Advance to Project Account 196,841 354,782 854,546 Other Receipts 140 140 Subtotal Government of Azerbaijan fonds 196,981 354,782 854,686 TOTAL FUNDS RECEIVED 2,430,640 2,574,513 7,299,960 LESS: EXPENDITURE IBRD Loan Number 8024-AZ 2. Consultant's services including audit and training I, 105,289 1,979,702 4,801,496 3. Incremental operating costs 41,288 29,203 77,317 Subtotal IBRD Loan e>,penditure 1,146,577 2,008,905 4,878,813 Front-end fee 30,000 SECO Grant Number TF011975 2. Consultant's services including audit and training I ,066,718 214,183 1,280,901 Subtotal SECO Grant expenditure 1,066,718 214,183 1,280,901 Government of Azerbaijan VAT expenses 196,831 354,711 854,426 Other expenses 18 18 Subtotal Government of Azerbaijan expenditure 196,831 354,729 854,444 TOTAL EXPENDITURE 2,410,126 2,577,817 7,044,158 FOREIGN EXCHANGE DIFFERENCE Project Account 25 39 103 TOTAL FOREIGN EXCHANGE DIFFERENCE 25 39 103 4 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES STATEMENT OF SUMMARY OF SOURCES AND USES OF FUNDS FOR THE YEAR ENDED DECEMBER 31, 2014 (Continued) (Amounts expressed in the United States Dollars unless otherwise indicated) December 31, December 31, 2014 2013 CLOSING BALANCE IBRD Designated Account 255,559 -235, 195 Project Account 139 14 TOTAL CLOSING BALANCE 255,698 235,209 Approved and signed on behalf of the Project Implementation Unit: BakhtiyarC!~ /~ PIU Director / /. -_ _,c-u-~ -A-zu-1~ ey_n_o_v _ _ _ _ _ __ _ __ Head of Financial Division May 12, 2015 May 12,20 15 Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan The notes on pages I 0- 15 form an integral part of these Special-Purpose Financial Statements. 5 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES STATEMENT OF USES OF FUNDS BY PROJECT COMPONENTS FOR THE YEAR ENDED DECEMBER 31, 2014 (Amounts expressed in United States Dollars unless otherwise indicated) December 31, December 31, Cumulative to 2014 2013 date December 31, 2014 Project Components Component A: Streamlining and Automating Market Infrastructure 1. 1 Establish Market Participant Advisory Groups 71,394 142,946 267,389 1.2 Establish a Single Central Securities Depository 142,752 214,183 463,032 1.3 Expand access to and functionality of the Depository 278,401 437,547 I A Increase automation of the Market 226,783 315,197 I .5 Establish an appropriate Market guarantee mechanism 142,752 !42,789 391,638 1.6 Reduce off-Market transactions 142,752 214,183 445,349 Total Component A 778,051 940,884 2,320,152 Component B: Updating and Strengthening the Legal and Regulatory Framework 2. I Support adaptation of a New Law on Securities 142,946 178,312 2.2 Drafting implementing Regulations 71,394 142,868 267,311 2.3 Evaluate Banks' participation in the Securities Market 71,394 124,443 2.4 Promote revised, supporting Tax Policies 285,578 356,309 2.5 Allow Pooled Investments by Insurance Companies 71,394 89,077 2.6 Minimum Capital Adequacy and risk assessment methods for Market 71,394 142,789 267,232 Total Component B 571,154 428,603 1,282,684 Component C: Stimulating Supply 3.1 Create appropriate environment for raising capital! BSE 1 listing 71,394 71,394 178,154 3.2 Develop the Government securities market 53,049 3.3 Encourage development of the Corporate Debt Market 35,366 3.4 Conduct corporate education 142,789 195,838 3.5 Develop other products 209,985 316,082 3.6 Enhance and promote funding of the State companies and Projects 53,049 3.7 Enhance support to private sector and SME2 71,394 89,077 Total Component C 495,562 71,394 920,615 6 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES STATEMENT OF USES OF FUNDS BY PROJECT COMPONENTS FOR THE YEAR ENDED DECEMBER 31,2014 (Continued) (Amounts expressed in United States Dollars unless otherwise indicated) December 31, December 31, Cumulative to 2014 2013 date December 31, 2014 Component D: Capacity Building 4.1 Strengthen SCS's3 Knowledge Management 64,255 21 4,262 384,614 4.2 Strengthen SCS's3 internal systems and operating 71,357 106,723 4.3 Strengthen public information system 71,394 159,808 4.4 Promote the Azerbaij ani Market to international investors 21,318 70,923 109,924 4.5 Improve public awareness of the Capital Market 64,255 71 ,394 206,380 4.6 Create a Capital Market Training Centre 71 ,357 285,578 480,7 15 Total Component D 292,542 713,551 1,448,164 Component E: Project management PIU" staff costs 23, 141 23,591 76,237 Conversion charges 829 1,333 3,261 Bank charges 1,073 1,582 3,902 PIU4 support costs 25,073 8,235 34,378 FMS5 development costs 1,932 9,647 Translation fees 1,098 1,593 5,512 Training costs 11,208 13,950 25,1 58 Audit fees 13,564 16,458 30,022 Total Component E 75,986 68,674 188,117 Front-end fee 30,000 VAT (Government of Azerbaijan) 196,831 354,711 854,426 Total Uses of Funds by Project Components 2,410,126 2,577,817 7,044,158 1. BSE - Baku Stock Exchange 2. SME - Small and Medium Enterprises 3. SCS - State Committee for Securities 4. PIU- Project Implementation Unit 5. FMS- Financial Management System Bakhtiyar Azizov PIU Director May 12,2015 May 12,20 15 Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan The notes on pages 10-15 form an integral part of these Special-Purpose Financial Statements. 7 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES STATEMENT OF DESIGNATED ACCOUNT AS AT DECEMBER 31, 2014 (Amounts expressed in United States Dollars unless otherwise indicated) ffiRD Loan Number 8024-AZ Account held at: International Bank of Azerbaijan OJSC Account no: 3331701 840184 1605204USD Opening Designated Account balance as at January I , 20 14 235,195 Add: IBRD advances during the year from January I, 2014 to December 3 1, 20 14 20 1,845 Other Receipts 1,271 Total outstanding amount advanced to Designated Account 438,311 Less: Closing Designated Account balance as at December 31, 20 14 carried forward to the next period (255,559) Amount of eligible expenditures paid during the year (182,752) Total advanced amount during 2014 (438,311) Discrepancy Opening Designated Account balance as at January I, 2013 238,552 Add: IBRD advances during the year from January 1, 2013 to December 31, 2013 259,323 Total outstanding amount advanced to Designated Account 497,875 Less: Closing Designated Account balance as at December 31 , 2013 carried forward to the next period (235,195) Amount of eligible expenditures paid during the year (262,680) Total advanced amount during 2013 (497,875) Discrepancy Approved and signed on bS)balf of the Project Implementation Unit: ~~~ Bakhtiyar Azizov ./ PIU Director May 12,2015 May 12, 2015 Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan T he notes on pages I 0-15 form an integral part of these Special-Purpose Financial Statements. 8 CAPITAL MARKETS MODERNIZATION PROJECT OF THE STATE COMMITTEE FOR SECURITIES STATEMENT OF EXPENDITURE AND SUMMARY SHEET WITHDRAWAL SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 2014 (Amounts expressed in the United States Dollars unless otherwise indicated) IBRD Loan Number 8024-AZ AND SECO GRANT NUMBER TF011975 Advance Replenishment Direct Payments Total Total payment account for Consultants' application application services including amounts amounts audit and training submitted received CMMP/2012/01 150,000 150,000 150,000 CMMP/20 12/02 300,000 300,000 300,000 CMMP/20 12/03 33,942 CMMP/2012/04 1,51 1,883 1,5 11 ,883 1,511,883 Total applications reimbursed during the year ended December 31, 2012 450,000 1,511,883 1,995,825 1,961,883 CMMP/20 13/05 415,768 415,768 415,768 CMMP/20 13/06 259,323 259,323 259,323 CMMP/20 13/07 771,060 77 1,060 771,060 CMMP/2013/08 559,397 559,397 559,397 SCS-01 214, 183 214, 183 214,183 Total applications reimbursed during the year end to December 31, 2013 259,323 1,960,408 2,219,731 2,219,731 CMMP/2014/09 84,606 109,604 84,606 CMMP/2014/10 192,765 192,765 192,765 CMMP/20 14/11 117,239 117,239 117,239 CMMP/20 14/12 385,530 385,530 385,530 CMMP/2014/13 385,530 385,530 385,530 SCS-02 356,972 356,972 356,972 SCS-03 424, 167 424, 167 424,167 SCS-04 285,579 285,579 285,579 Total applications reimbursed during the year ended December 31.2014 201,845 2,030,543 2,257,386 2,232,388 TOTAL APPLICATIONS REIMBURSED AS AT DECEMBER 31, 2014 450,000 461,168 5,502,834 6,472,942 6,414,002 Approved and signed on behalf of the Project ImpJementa1ion Unit: "' cJ:~;c/ ~~ Bakhtiyar Azizov PIU Director May 12,2015 May 12,2015 Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan The notes on pages I 0- 15 form an integral part of these Special-Purpose Financ ial Statements. 9 CAPITAL MARKETS MODERNIZATION PROJECT OF THE STATE COMMITTEE FOR SECURITIES NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,2014 (Amounts expressed in the United States Dollars unless otherwise indicated) 1. DESCRIPTION OF THE PROJECT Capital Markets Modernization Project implemented by the State Committee for Securities of the Republic of Azerbaijan (the "Project") was formed under the loan agreement number 8024-AZ dated September 22, 2011 (the "Loan agreement") between the Republic of Azerbaijan (the "Recipient") and the International Bank for Reconstruction and Development ("IBRD") in the amount of USD 12,000,000. In addition to the Loan agreement, additional non-reimbursable contribution of up to a maximum amount of USD 1,600,000 will be provided by the Government of the Swiss Confederation according to the agreement between the Government of the Swiss Confederation and the Government of the Republic of Azerbaijan dated September 13, 2012 (the "Grant agreement") for the financing of the international labor for components B "Updating and Strengthening the Legal and Regulatory Framework" and component C "Stimulating Supply" of the Project. According to the Trust Fund Administration Agreement (the "Administration agreement") concluded between the Government of the Swiss Confederation and IBRD dated December 13, 2011, the Grant is co- ordinated and administered by IBRD. In addition to the Loan agreement and the Grant agreement, additional financing in the amount of USD 2,300,400 will be provided by the Government of the Republic of Azerbaijan. The Project's original completion date of December 31, 2015 has been extended to July 1, 2016. The overall Project objective is to assist the Recipient in increasing 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 Project consists of the following components: Component A: Streamlining and Automating Market Infrastructure This component will support: 1. Establishing capital market participant advisory groups; n. Establishing a single central independent national depository and consolidated clearance and settlement systems for all securities transactions in Azerbaijan; m. Expanding access to and functionality of the national depository by preparing and issuing new rules and procedures for a participant structure that allows custodians' access alongside broker-dealer participants; iv. Increasing automation of the capital market by adopting modern and efficient trading, risk management, clearance, settlement and depository systems; v. Establishing an appropriate capital market guarantee mechanism to ensure timely clearing and settlement of trades; VI. Revision of the rules governing the national depository to reduce off-market transactions. Component B: Updating and Strengthening the Legal and Regulatory Framework This component will provide: 1. Conducting a comprehensive review of the existing legal and regulatory framework for capital market and preparing a new capital market Jaw; n. Preparing the executive regulations for the new capital market law and the operating rules of the stock exchange, central depository and the clearing house; iii. Adopting new licensing regimes for capital market participants in line with the new capital market law; 10 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,2014 (Continued) (Amounts expressed in the United States Dollars unless otherwise indicated) iv. Supporting the SCS and the tax authorities in the development of a policy for a favourable tax environment to attract capital market participants and transactions, through the provision of consultants' services; v. Supporting the SCS and the relevant competent authorities in the development of a policy and regulatory framework to allow pooled investments by insurance companies; vi. Introducing appropriate capital market adequacy and risk assessment methods for capital market participants. Component C: Stimulating Supply This component will provide: 1. Conducting a strategic assessment on the modality of attracting local and foreign issuers to list on the Baku Stock Exchange; 11. Supporting the SCS and the Ministry of Finance to develop the government securities market; 111. Developing the policy and regulatory framework to improve the corporate debt market; IV. Supporting the SCS in developing a corporate education and outreach program on the business advantages of raising funds in the Azerbaijani capital market; v. Supporting the SCS in developing a corporate education and outreach program on the business advantages of raising funds in the Azerbaijani capital market; vi. Conducting: (a) an assessment of the impediments in the capital market and demands for introducing public- private partnerships to finance large infrastructure projects; and (b) an analysis of how the Azerbaijani capital market may support privatization by providing organized mechanisms for the bids and sales of shares. Component D: Capacity Building This component will support: 1. Conducting a training needs assessment and designing a training program to strengthen the capacity of SCS staff as well as developing a knowledge management system for the SCS; 11. Revising SCS' s internal systems, policies, structures and procedures in light of the new capital market law and adopting an action plan to strengthen the SCS's systems and operations; iii. Strengthening surveillance, enforcement and reporting systems of SCS; 1v. Supporting the SCS in the development of investment conferences domestically and internationally to attract investors; v. Undertaking a nationwide capital market public awareness campaign; v1. Establishing a capital market training centre to provide continuous professional training for SCS staff and licensed capital market participants. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Statement of compliance The Special-Purpose Financial Statements have been prepared on the cash basis of accounting in conformity with International Public Sector Accounting Standards ("IPSAS") "Financial Reporting under the Cash Basis of Accounting" issued by the International Public Sector Accounting Standards Board of the International Federation of Accountants ("IFAC-PSC") and incorporate the principal accounting policies from the "Guidelines: Annual Financial Reporting and Auditing for World Bank Financed Activities". 11 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,2014 (Continued) (Amounts expressed in the United States Dollars unless otherwise indicated) Other basis of preparation criteria The Special-Purpose Financial Statements are prepared under the historical cost basis of accounting. Source funding and government contributions are recognized when the related cash is received or paid out on the Project's behalf. Expenditures are accounted for on the basis of actual disbursement of funds from the Project's accounts. Foreign currency transactions and translation The Project uses the United States Dollar ("USD") as its functional currency for the following reasons: a) The IBRD's funding is received in USD; b) Budgets and financial reports for the Project are prepared in USD. Balance sheet monetary items denominated in currencies other than USD have been translated into USD using the exchange rate of the Central Bank of the Republic of Azerbaijan ("CBRA") effective as at appropriate date. All income and expense transactions denominated in currencies other than USD are converted into USD using the exchange rate of the CBRA prevailing on the date of transaction. 3. CASH AT BANK As at December 31, 2014 and 2013 the Project had cash at bank balances with International Bank of Azerbaijan ("IBA'') as follows: December 31, December 31, 2014 2013 IBRD Designated Account in USD 255,559 235,195 Project Account in AZN 139 14 Total cash at bank 255,698 235,209 4. DESIGNATED ACCOUNT The Recipient has established a Designated Account at a commercial bank acceptable to the IBRD in accordance with the Loan Agreement. Designated Account is established, managed, replenished and liquidated in accordance with the IBRD's "Project's Operations Manual" and detailed arrangements agreed upon between the Recipient and the IBRD. The Designated Account of the Project is maintained in USD with IBA (located in the Republic of Azerbaijan). 5. BASIS OF FUNDING AND ELIGIBLE EXPENDITURE The following table specifies the categories of eligible expenditure that may be financed out of the allocations of the amounts indicated in the Loan Agreement to each category, and the percentage of expenditure to be financed for eligible expenditure in each category: 12 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2014 (Continued) (Amounts expressed in the United States Dollars unless otherwise indicated) Amount of the Percentage of loan allocated expenditures to (expressed in be financed USD) byiBRD (Net of VAT) (l) Goods 4,300,000 100% (2) Consultants' services including audit and training 7,600,000 100% (3) Incremental Operating Costs 70,000 100% 0.25% of the total (4) Front-end fee 30,000 disbursement TOTAL 12,000,000 Amount of the Percentage of grant allocated expenditures to (expressed in be financed USD)bySECO (2) Consultants' services including audit and training 1,600,000 100% TOTAL 1,600,000 On March 4, 2015, the Recipient and IBRD agreed to extend the closing date of the captioned loan to July I, 2016, and additionally the parties agreed on reallocation of the existing loan disbursement categmies as follows: Amount of Percentage of the loan expenditures to reallocated be financed (expressed in (Net of VAT) USD) by IBRD (l) Goods 4,700,000 100% (2) Consultants' services including audit and training 7,160,000 100% (3) Incremental Operating Costs 110,000 100% 0.25% of the total (4) Front-end fee 30,000 disbursement TOTAL 12,000,000 13 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2014 (Continued) (Amounts expressed in the United States Dollars unless otherwise indicated) Amount of the Percentage of grant allocated expenditures to (expressed in be financed USD)bySECO (2) Consultants' services including audit and training 1,600,000 100% TOTAL 1,600,000 6. METHOD OF DISBURSEMENT The methods of disbursement used from the inception of the financing up to and including December 31, 2014 were as follows: Advance - the IBRD may advance loan proceeds into the Designated Account of the Recipient to finance eligible expenditure as they are incurred and for which supporting documents will be provided at a later date. Direct Funding- the IBRD may make payments, at the Recipient's request, directly to a third party for eligible expenditure. Reimbursement procedure - the IBRD may reimburse the Recipient for expenditure eligible for financing pursuant to the Loan Agreement that the Recipient has pre-financed from its own resources. Commitment procedure - the IBRD may pay amounts to a third party for eligible expenditure under special commitments entered into, in writing, at the Recipient's request and on terms and conditions agreed between the IBRD and the Recipient. 7. METHODOFWITHDRAWAL IBRD Designated Account Designated Accounts are designated disbursement accounts of the Project to effect the payment of eligible expenditure, within defined limits, which do not require individual authorization from the IBRD. Available amounts were drawn down within the limits determined by the relevant loan agreement for the payment of eligible expenditure for sub-contractors from the Designated Accounts. Direct payments from the IBRD Designated Account Under this method, the Project management prepares applications based on supporting documents which are submitted to the IBRD. Payments are made from the Loan Account directly to the contractors. Project Account The Project maintains a separate account where the Government funds are accumulated. The funds are further disbursed to sub-contractors based on the shares of expenditure to be incurred by each funding source. 14 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,2014 (Continued) (Amounts expressed in the United States Dollars unless otherwise indicated) Statement of expenditure ("SOE") Under the SOE method, the Project forwards to the IBRD an application for reimbursement of payments already made using an application for withdrawal with SOE forms as the only documentation. 8. OPERATING ENVIRONMENT The Project's principal business activities are within the Republic of Azerbaijan. Laws and regulations affecting entities operating in the Republic of Azerbaijan are subject to rapid changes and the Project's operations could be at risk due to negative changes in the political and business environment. 15