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The establishment of the network of independent specialized registrars was completed back in 1997. As of January 1, 1998 in the Russian Federation there were 201 registrars. In 1998 the FCSM of Russia issued 3 new licenses and cancelled 28 licenses for the maintenance of the registers of personalized stock owners. Under the conditions of the financial crisis of 1998 the process of consolidation of the specialized registrars continued, both through the increase of the number of issuers using this registrar’s services and the increase in their own capital as well as by mergers among registrars (or accession), liquidation of the small non-competitive register holders. By the beginning of 1999 there were altogether 126 licensed registrars.

In 1998 the licenses were issued to the major part of depositaries: 116 licenses for the depositary activity were issued (including replacement of licenses of 66 companies). At the same time under the conditions of the financial crisis and unstable system of ownership rights the task of establishment of the national depositary system including the central depositary becomes crucially important.

The collective investment institutions of different types which voluntarily or in accordance with the requirements of the law kept part of their funds in the government securities found themselves at the verge of collapse after the default of August 17. As of 31 December of 1998 33 mutual funds (21 – open, 12 – interval) and 27 management companies were registered (according to the number of issued licenses. Three funds were at the stage of primary placement, two – in the process of voluntary liquidation. The total value of the mutual funds net assets as of December 31, 1998 was 554 mln roubles. Because of the apparent reasons the crisis of this branch is directly linked with the crash of the Russian stock market.

As regards the so-called mutual funds with banking management which the commercial banks were actively setting up in the first half of 1998 as an alternative to the mutual funds their failure is also connected with the crisis of a universal bank model in Russia which manifested itself in August of 1998.

The further decrease of the overall number of investment funds is anticipated including the privatization investment funds as a result of their transformation into joint-stock companies. Less than 20 funds (out of 100 which operate now) are going to continue their activity as investment funds. Several voucher investment funds applied for the transformation into mutual funds.

In medium-term perspective the securities market would probably be characterized by the following main tendencies:

- decrease of the number, larger size (mergers) and sharper competition between the professional securities market players;

- the post-crisis redistribution of ownership in financial groups and corporations which (together with the low prices at the weak stock market) would result in mass-scale abuses and violations of the shareholders rights;

- low probability of the increasing interest towards the Russian market on the part of foreign investors both because of the still remaining internal taxation problems and in connection with the possible deepening crisis of the global monetary and financial system;

- appearance of the instruments not typical of the Russian market due to the attempts of the real sector enterprises to find alternative sources of funding (corporate bonds, warehouse receipts, mortgages);

-development of the new forms of collective investment (closed mutual funds in real estate business etc.);

more active role of the self-regulatory organizations of the professional participants of the securities market and investors (shareholders).

In general the securities market under the conditions of the transition economy can perform four major functions: attraction of investment, speculative portfolio investments, post-privatization redistribution of ownership rights in corporations, mechanism of the outside corporate governance (or pressure on the managers).

Attraction of investment into enterprises throughout 1990s remained the weak link in the market model which was shaped during this time. The speculative portfolio investments which were the market locomotive in 1996-1997 can hardly be expected to continue on the same scale, at least not until the presidential elections of the year 2000.2

232 The possibilities of the efficient start-up of the market mechanisms of corporate governance are definitely limited.

Probably in 1999-2000 the major function of the market which was also typical for all the previous years would remain the redistribution of ownership in Russian corporations but taking into account the specifics of the post-crisis situation (see Chapter 4). Correspondingly, the problem of the shareholders rights protection and strengthening of the government regulation in this field become especially urgent.

3.3. Bankruptcy procedures

The role of bankruptcy as the means to put pressure on the corporation managers in the market economy is well known and described in the abundant literature on this subject in all its aspects (both positive and negative). The threat of corporation’s bankruptcy if the managers choose the wrong market policy (and, in the most severe case, transfer of control to the creditors) is usually regarded as a major external instrument of the corporate governance. Apparently, as the outcome of the application of this mechanism (notwithstanding the advantages and disadvantages of the specific country models, whether they favor the creditors or the debtors) the financial situation of the corporation which underwent this procedure should be alleviated and its operation should become efficient.

At the same time we know well those specific objective limitations which exist under the transitional economy conditions as regards the efficient and mass-scale application of this mechanism (in respect of Russia):

- traditions of the soft budget restrictions;

- continued existence of many corporations with the state shareholding;

- need for the adequate and qualified executive and judicial infrastructure;

- social and political obstacles for conducting the real bankruptcy procedures in case of loss-making corporations, especially as regards the largest corporations or one-company towns;

- numerous technical difficulties connected with the objective evaluation of the financial situation of potential bankrupts;

- corruption and other criminal aspects of the problem including those connected with the redistribution of ownership.

Under these conditions the institution of bankruptcy in Russia since the moment of its appearance and during 1990s performed the two major functions:

- method of redistribution (obtaining, retaining, privatization) of property;

- method of permanent pressure and threat on the part of the state (both political and economical) which was used extremely rarely and very selectively.

The number of such cases during the period of 1993-1997 when the law On insolvency (bankruptcy) of enterprises (adopted by the RSFSR Supreme Soviet on November 19, 1992 and entered into force on March 1, 1993) was valid was very insignificant.2

243 Since 1993 and until March 1, 1998 the arbitration courts tried altogether 4.5 thousand of cases. As of March 1, 1998 the courts were engaged in proceedings involving 2.900 cases (Table 6 of the Addendum).

The new law On insolvency (bankruptcy) No 6-FZ of January 8, 1998 entered into force on March 1, 1998. In this study we do not endeavor to evaluate its innovations and contents (see, for example Commentary.., 1998). We would only point out that this law is more detailed and progressive as compared to the previous one.

During the first months of the new law usage (in March-June 1998) 800 applications were submitted (80 were returned). By the beginning of November of 1998 the number of applications grew 10 times (8.000), and arbitration courts appointed 3.000 arbitration managers. In general, according to the figures of the Federal insolvency agency (FIA) in 1998 12.781 applications were filed demanding the pronouncement of debtors as bankrupts including 4.573 cases involving the bankruptcies of industrial enterprises (out of which the monitoring was instituted over 1.462 enterprises, the external managers were appointed in 472 cases, the bankruptcy proceedings were begun in 2.006 cases and in 80 cases the amicable settlement between the creditors and managers was reached).

We believe that the essence of the problem is as follows: first, all the political and social and economic limitations for the mass-scale application of this law still remain (and are becoming even more relevant after the crisis of 1998).

According to the RF Goskomstat figures in 1998 55.2% of small and medium Russian enterprises were loss-makers.

Special problems arise when the enterprises have a specific status. This, in particular, applies to the military-industrial complex where, according to the RF Ministry of Economy, out of 1.500 enterprises (40% - public, 33% - joint-stock companies with the government participation 25% - companies without the government stake) about 400 are de facto bankrupts. The government arrears under the defense contracts in 1996-1998 increased 6 times. In many cases privatization is prohibited. Bankruptcy is either impossible or directly prohibited because of a number of social, political or strategic considerations. So this is a situation of the institutional crisis in this industry where the existing owner is clearly insolvent and the change of ownership is impossible.

Second, under the conditions of high level of corruption and continuing redistribution of ownership the alternative solutions envisaged by the law and the procedure of their adoption become a convenient tool of manipulation and pressure in the interests of different participants of this process (of course, this is not the problem of the quality of the law as such). First of all it’s the issue of the type of arbitration manager to be appointed and objective criteria of choice between liquidation and rehabilitation.

In this connection, any significant simplification of the bankruptcy procedure initiation (at the level of arrears equal to 500 minimum wages for legal persons) also means that it would be much easier to put into operation this procedure for the alienation of property. From the Russian experience we know well that an appointment of a friendly arbitration manager (whether temporary or liquidation or external) practically automatically means that your problems would be resolved in your favor whether it’s protection against aggression or aggression.2


Third, if we compare the number of applications with the total number of Russian enterprises and number of debtor-companies these figures, instead of impressing us, would rather put us on an alert. Apparently, the overwhelming majority of the private creditors are not exactly in a hurry to use the legal schemes offered by the new law but traditionally prefer private enforcement.

It’s indirectly confirmed by the abrupt shift in the structure of those entities which initiate these applications. By the beginning of November of 1998 94% of applications were submitted by non-governmental entities and only 6% - by the state. But the overall results of 1998 present already a different picture: the state (tax authorities) initiated the largest number of cases (30.6% of the total number of applications to courts). The bankruptcy as an institution so far has not yet gained wide recognition and become a universal and uniform system but mostly still remains the tool of selective pressure on debtors quite often motivated by political preferences of the federal and regional authorities.

Fourth, the problem of legal and practical support of the protection of rights and interests of all types of shareholders within the framework of the bankruptcy procedure still remains unresolved.

In particular, the threat of enforced bankruptcy of many large corporations in arrears to the federal budget in 1998 became one of the factors of the rapid withdrawal of portfolio investors from the market of corporate securities.

Thus today it’s hardly possible to regard the institution of bankruptcy in Russia as a stable and efficient external mechanism to alleviate the management and finances of a company. The increase of the number of applications which was mentioned above so far, apparently, doesn’t indicate the enthusiastic response of creditors to the new legal perspectives opened to them but simply a trial run of the new methods of privatization of property, protection of managers against the hostile takeovers or, on the contrary, takeover of the objects (assets) of interest. It’s not accidental that this process coincided with the general stepping up of the ownership redistribution under the conditions of 1998 crisis.

Although the new law opens certain positive perspectives for the improvement in this field a certain destabilization may result in 1999 from unreasonable legal and organizational steps. Thus, in the end of 1998 there was an attempt at the State Duma to introduce a moratorium for the operation of this law in general while leaving only the law on executive proceedings valid (i.e. the possibility of arresting only the liquid assets without penalty on the fixed assets). In 1999 the discussion of amendments to the current law continues which provide for the longer period during which the debt is allowed (from 3 to 6 months) and a considerable increase of the amount of debt after which the bankruptcy procedure is initiated (the amount should exceed the sum of current and fixed assets). Adoption of these amendments would have the same effect as moratorium.

At the same time the government in 1998-1999 has been considering the possibility of merging the Ministry of Public State Property, Russian federal property fund and the Federal insolvency agency into one entity. It’s extremely doubtful that such a measure may assist in upgrading the efficiency of the management of the state property, stepping up the privatization process and alleviation of the enterprises’ situation through the bankruptcy procedures.

3.4. Market of corporate control (takeovers)

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