– the risk of expansion of public and quasi-public entities in the course of privatization on the basis of contribution of state-owned property assets to the charter capital of open joint-stock companies ;
Institutional Problems – the risk of limited private fundraising, shortening of “planning horizon” by new owners and managers, and utilization of state banks’ money in privatization ;
– the risk of competition at the public level between different approaches towards privatization, and broadening of conditions for “under-the-counter” struggle of competing interests.
6. Two system priorities – “structural” and “budgetary” – appeared in the field of implementation of the national privatization policy.
The first priority if focused on a mid-term perspective, in combination with creation of conditions for development of privatized companies, reformation of the same, considerable reduction of public participation in the economy. However, implementation of this priority may be exposed to material risks related to low transparency of the processes of sale of property to strategic investors, inexplicit reciprocal obligations of the state and buyers, uncertainty of arrangements designed to discharge such obligations.
The second priority implies transparency of privatization, acquisition of a wide range of potential, including foreign, buyers, lowering barriers on participation in privatization, considerable reduction of the scale of “cashless privatization” (in particular, on the basis of contribution of federal property to the charter capital of joint-stock companies). The same priority may become a relevant incentive for activating privatization processes at the level of constituent territories of the Russian Federation. However, to implement the same priority, it is not important to what extent the degree of public control over large companies is reduced (at least in the short-term perspective), no investments are attracted for the development of companies.
7. In spite of attractiveness of the “structural” priority in terms of long-term development of the Russian economy, it is the lack of long-term and transparent “rules of the game” in interaction between the state and businesses that will become a relevant barrier. In this respect, it is the “budgetary” approach that seems to be more balanced in terms of advantages and risks in the short-term perspective. Preconditions for strengthening the structural trend of privatization in the mid-term perspective will appear, provided that a substantial progress is gained in the development of institutional environment, harmonization in interaction between the state and businesses.
8. In our opinion, to improve a privatization-based contribution to the long-term economic development, it is important to develop and take a set of measures which go beyond the scope of privatization. In particular, much efforts should be made to enhance corporate governance.
It is well known that due to weaknesses that can be found in the field corporate governance, foreign investors valuate the shares of Russian companies at a relevant discount.
In addition, the existing regulation of foreign investments in strategically important economic sectors must be improved: it is expedient to define such sectors and establish a transparent and explicit procedure for making and approval of decisions.
The policy in the field of privatization must be coordinated with the measures aimed at establishing an international financial center in the Russian Federation. Over the longer term, when decisions on discontinuing public control in specific large companies may be made, privatization of the relevant blocks of shares may become a powerful impulse for the establishment of the financial center.
9. It should be taken into account that if the state discontinues participation in the charter capital of large companies, including infrastructural companies, the lack of legislative regulation of their activity will be replaced with intervention of public officials into business deci RUSSIAN ECONOMY IN trends and outlooks sion-making. To avoid such a situation, the quality of legislative regulation in relevant business segments and industries must be improved.
It is advisable to take measures on substantial regulatory development of the option of privatization such as sale of shares based on trust management results. In our opinion, this option allows direct public control to be withdrawn from specific companies while the state retains its participating share throughout the entire period of trust management, in which case specific key objectives of business development may be defined within the framework of trust management.
10. The following measures seem to be advisable in order to avoid outgrowth of the public sector through remaining state-owned companies. First, companies in which the state holds an interest must be restricted in terms of acquiring new assets as part of privatization. Second, with regard to integrated entities whose establishment by the state is still in progress, it is advisable to decide on whether or not they can be privatized over the longer term. Third, large state-owned must be somehow held responsible for writing off non-core assets in deciding where revenues from their sale should be allocated to.
With regard to the companies whose privatization is postponed in a more distant future due to uncompleted process of restructuring thereof, these processes should be subject to strict deadlines, and managers and board members should be held responsible for observance of the deadlines.
11. Poor transparency of plans and decisions on large state-owned property assets is perfectly evident in the national policy in the field of privatization. In general, at least a general frameworks for terms and conditions for privatization of the largest companies should be gradually created. In our opinion, to ensure mitigation of risks of hidden lobbying of different decisions, it is important that ministries and agencies’ opinions on these issues should be more transparent, and final decisions should be publicly reasoned.
It is obvious that when there is a need for providing support to dynamic practical decisionmaking in the field of privatization, launching large privatization transactions for the first time, it is not always that respective terms and conditions can be worked out in advance, concurrently with discussion of different approaches, but efforts will have to be intensified in refining rules for privatization in the future.
12. In our opinion, in order to make the national policy in the field of privatization more predictable, better coordinated with other measures, a concept of privatization for a period of 6–8 years should be developed, which would set forth key principles of privatization, specifics of alienation of different types of property, some strategy guidelines for the maximum permissible level of state (not only at the federal level) participation in the economy, including specific sectors.
13. Measures aimed at promoting privatization processes at the regional and municipal levels should be continued and intensified. In addition, legal limits on setting up new SUEs and MUEs (municipal unitary enterprises), joint-stock companies in which the sate holds an interest could be imposed at the regional level.
14. It is important that regular efforts in enhancing corporate governance at companies in which the state holds an interest should be continued along with promotion of processes of privatization of state-owned property. The policy of introducing independent directors into the management of state-owned companies must be further enhanced, requirements to such directors must be elaborated, strategic objectives and milestones in activity of key stateowned companies must be defined.
Institutional Problems 6.2. The 2006-2010 Corporate Law: Some Results and Novelties Adopted in the mid-2000s, the Concept of development of corporate law for the period through 2008 pursued fairly ambitious objectives of reforming the emerged by then corporate law system for the sake of creation of institutional conditions of economic growth. A whole string of its fundamental provisions nonetheless formed a rationale for that conclusion regarding a radical re-orientation of the corporate regulation model towards majority shareholders.
Certain moves with regard to implementation of measures provided for by the Concept became concomitant with the process of activation of the state (largest state-owned corporations’) operations on the market for corporate control. This necessitates an evaluation of results of the Concept implementation in the first place. To this end, we deliberately picked the period until 1 January 2010, for, while measures of urgent anti-crisis regulation had already kicked off by then, the factor of the 2008-09 crisis had not yet affected corrections of measures provided for by the Concept.
As evidenced by Table 16 and Fig. 2, the progress in implementation of the Concept across multiple directions appeared fairly different.
Table Progress in Implementation of the Concept of Development of Corporate Law for the Period through 2008* Specific weight of Specific weight of novelties of the legislative impleKey directions of development Spheres of modification of regulation block in the Con- mentation of proof corporate law cept’s general posed measures of structure, as % the block, as % Block I – prevention of corporate 1) Solving corporate disputes; 25 conflicts and their regulation 2) Public registration of legal entities;
3) Account of securities Block II – development of the 1) Structure of corporate management bodies and 44 corporate governance system allocation of competences between them;
2) Responsibility of individuals engaged in management bodies;
3) Conflicts of interests (prevention and regulation);
4) Profit allocation;
5) Non-arm’s length transactions and large transactions Block III – organizational and 1) Commercial organizations; 15 legal forms of legal entities 2) Non-profits Block IV – development of inte- 1) Reorganization of legal entities; 16 grate business structures (IBS) 2) Peculiarities of regulation of IBSs;
3) Tax regulation of a group of affiliated entities;
4) Affiliated entities * Quantitative assessments presented in Table 16 and Fig. 2 are exclusively of estimated and illustrative nature It was measures aimed at regulation and prevention of corporate conflicts that enjoyed the greatest demand (the level of their implementation accounts for more than 60%). Meanwhile, despite their impressive volume (slightly under 50% of all the novelties in the Concept), the measures on development of corporate governance were implemented in a volume of roughly 1/3. The measures on development of IBSs likewise were implemented in roughly the same volume, while those in the area of organizational and legal forms of legal entities were implemented in a volume less than 1/5. That said, the levels of legislative implementation of new legal norms differ substantially across the spheres of regulation.
RUSSIAN ECONOMY IN trends and outlooks 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% ADOPTED NOT ADOPTED Fig. 2. Implementation of the Concept of Development of Corporate Law for the Period through 2008 across Directions of Regulation by 1 January 2010.
Out of measures the RF Government planned and approved in the frame of the Concept in 2006 practically untouched remained novelties that concern:
- Conflicts of interests;
- Regulation of integrate business structures;
- Tax regulation of affiliated entities;
- Profit allocation.
So, the changes to the least extent affected the most controversial and potentially lucrative for fixers directions of the corporate governance law reform1.
As to tax regulation of affiliated entities’ operations, because of numerous large corporations’ increasingly complex financial standing between late 2008 and 2009, the problem was once again became a pressing one. In May 2009, the RF Ministry of Finance unveiled a concept of the bill on consolidated group of taxpayers. By July 210 the bill had been passed in the first reading at the State Duma and was set to be passed, together with bill on transfer pricing, in the second reading; however, as of March 2011, the bills failed to be signed into law.
The bill introducing changes into the law on affiliated entities was presented by the RF ministry of Economy in February 2010. The document provides for a broadening of the concept of affiliation and its introduction into the Non-profits entities system entities profit allocation responsibility entities IBSs Corporate heads’ transactions Non-profits Corporate conflicts Conflicts of interests Regulation of affiliated Corporate governance The securities account Large non arm’s length Reorganization of legal tax regulation of affiliated Public registr. of legal ent.
Commercial organizations Peculiarities of regulation of Section 6.
Institutional Problems Meanwhile, some directions of development of corporate law underwent insignificant changes, with individual mechanisms, which today are capable of protecting the largest creditors, being improved, while fundamental objectives left for the future. Specifically, measures in the sphere of responsibility of persons sitting on management bodies were implemented with a great deal of selectivity. The month of July 2009 saw implementation of the mechanism of collective lawsuits, which provides for the possibility for one person to file a lawsuit on behalf of a whole group of entities concerning corporate disputes in particular. The sizes of fines for economic offenses were slightly changed too (in February 2009). Since June the clause of the Labor Code, which caps the amount of recovery of losses resulted from individuals sitting on management bodies of an economic company causing damage to the company, has no longer applicable to the individuals in question.
Meanwhile, a string of challenges remained untouched, such as:
- Reasons for the torts liability of individuals who hold positions in management bodies, including the right to claim for compensation of losses;
- Matters relating to insurance of individuals who hold positions in corporate management bodies;
- The shareholders’ right to disqualify directors and managers by judicial means;
- Development of the procedures of regulation of collateral actions.
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