In accordance with the course set by GKI toensure priority backing of the voucher privatisation, the regulationsstipulated a rigid sequence in the sale of the shares of an enterprise: aclosed subscription for workers, sale of shares (it should be stressed that wespeak here about shares and not blocks of shares) at a voucher auction, andonly then out of the fund for incorporation for the workers of enterprises andother techniques. All enterprises that were forced to effectincorporation were divided into 5 arbitrary groups, and for those thatincorporated voluntarily the group depended on the period of registration as astock company. Each group would have a time limit to conduct voucherauctions (see Radygin, 1994a).
The number of shares subject to sale at avoucher auction was determined as the total number of shares that were subjectto sale for vouchers (from 35% to 90% depending on the level of property),minus the number of shares sold for vouchers via a closed subscription and tothe officials of the administration on preferential terms. Later a singlemandatory quota of shares that were put up for voucher auction, 29% of thetotal number, was determined. The first type of application - withoutindication of the minimum of shares per voucher - should be satisfiedcompletely, and the second type of application - with an indication of theprice - should be satisfied depending on the demand for shares. Takinginto account the experience of the first auctions, provision was also made forsplitting the nominal value of the shares to satisfy all the applications ofthe first type.
Despite rather rigid legislation, duringthe entire period of the conduct of auctions negative trends such as resistanceby the authorities persisted in a number of regions (according to theAnalytical Centre of the Administration of the President of the RF, in 1993 insome 30-40% of the regions less than 3% of the vouchers were used, while 10regions accounted for 50% of all sales of shares) and in a number ofministries.
The first model-type voucher auctions werecarried out in December 1992 in Moscow, St. Petersburg, Vladimir,Nizhny-Novgorod and some other cities. All in all, in December 1992-June1994 more than 15,000 enterprises were put up for auction (in 86 regions ofRussia), with a total authorised capital of over 1.1 trillion rubles andemploying over 16 million people or half of those in industry (see Table8). On average 18.9% of the shares of each enterprise were put up forauction (against 29% required by the law), and all in all (taking into accountthe closed subscription) - on average 71% of shares were sold for vouchers(against 80% required by the regulations). The authorised capital of thejoint stock companies whose shares were put up for auction fluctuated from 1-2million up to 30 billion (RAO Norilsky Nikel) rubles, while the average isabout 100 million rubles. Almost the same spread is characteristic of theproportion of the authorised capital put up for auction: the minimum was3%, in the joint stock company Stroitel' in the city of Vladivostok, and themaximum 60%, in the joint stock company Sverdlovskdorstroi.
According to GKI estimates, the mostpopular (until the shares of the fuel and energy complex appeared) were certaintypes of enterprises in mechanical engineering, and in the food, tobacco,furniture and wood-working industries, as well as hotels, enterprises locatedin the most prestigious regions, the largest enterprises (in view of theliquidity of their shares) and small businesses (the hope here being that itwould be easier to establish control). A marked spread of the rates canbe observed, depending on the region, with the weighted average for all regionsbeing 1.8. The `cheapest' shares were in enterprises in provincial areas(up to 405,000 rubles in nominal value of shares per voucher) and the mostexpensive were in enterprises in the capital which were small in size andlocated in the centre. Here there was a direct relationship between thenumber of shares put up for sale (and accordingly the size of the authorisedcapital) and the auction rate.
Analysis of the sectoral structure of thevouchers invested in the actions shows that enterprises of eight branches ofindustry accounted for 70% of the vouchers; the distribution by sectors ofindustry is as follows: mechanical engineering (11.4%), metallurgy(11.1%), chemical industry (10.5%), oil and gas extraction (9.1%), oil-refiningindustry (8.9%), power industry (8.1%), postal services and communications(5.8%), transport engineering industry (5.0%) (Privalov, Bessonov, Kalinichenkoet al., 1994, p.61).
It goes without saying that the specialfeatures of these industries are not associated with any serious financialanalysis (at least in most cases) prior to making investments. The basicfactor accounting for such outsider investments is psychological perception ofan industry or enterprise as a more or less `reliable' sector, this often beingan erroneous perception which affected the rates at an auction. As toinstitutional investors, the reasons here are quite different and they, as arule, are interested in a particular type of enterprise.
Among participants in voucher auctions oneshould single out the enterprises themselves (and their intermediaries),voucher investment funds and large institutional and private investors.And if small investors tried, first of all, to invest their vouchers in thoseenterprises that seemed `reliable' from the point of view of the averageperson, the motives of funds and large investors are quite different: aplot of land, a building, the actual profitability of an enterprise, re-sale ofa large block of shares, the possibilities of reconstruction and increase ofcapacity and, finally, export potential.
As to the enterprises that bought backtheir own shares, it goes without saying that they were primarily after acontrolling bock of shares an, if possible, any other blocks of shares inaddition to the controlling interest (this being done to retain dividends amongthe members of the work collective and because of the fear of job losses ifother owners appear). It is these types of enterprises that welcomedauctions; however, there are other advantages not to be overlooked: apossibility of becoming a full-fledged buyer (and thus trust-holder) inprivatisation when the share of the state is reduced to 25% of the authorisedcapital, the buy-out of a plot of land (this being possible only after avoucher auction) and some other such considerations.
Naturally, in most cases the initiative tobuy back shares would come from the management, operating on the basis of thepattern tried out recently. A typical example of such activities is oneof Russia's largest enterprises in the motor industry, AO GAZ, which used 15dummy companies and over 1 million vouchers to buy back shares at its `own'voucher auction (Romanova, 1994). In addition to the fact that suchinvestment is not legally permitted (with an assigned state share GAZ cannotoperate as a buyer in the course of privatisation), the funds used for thesepurposes are also probably state-owned. It is also evident that until thework of the Government Commission is completed the applications (and the funds)of all legitimate investors are frozen, especially if one takes into accountthe fact that the previous results of the auction may be cancelled and a newauction may be ordered.
Another trick designed to `cut out'unwanted investors that submit their applications at the very last minute isclosing the place that receives the applications earlier than it should havebeen, as was done by AVTO-VAZ in Moscow (Kalinichenko, 1994). Toattribute some appearance of legality to this trick it is necessary to obtainthe right organiser of the auction for one's shares, a trick that was quitesuccessful with the largest oil companies in Russia. Another trick isholding a formally open voucher auction but on the closed territory of anenterprise or at some other inaccessible place /30/.
Because foreign investors use the servicesof intermediaries at auctions, it is quite difficult to distinguish theirsectoral priorities or to identify their sphere of participation.
In general the participation of foreigninvestors acting through intermediaries can be estimated rather roughly ataround 10-12% of shares put up for auction. There are many reasons whythe figure is not higher: in addition to the general climate for foreigninvestment, there is the difficult access to auctions of enterprises of thefuel and energy complex, the a priori indefinite nature of the results of auctions, the impossibilityof buying a controlling interest at auctions, the desire not to make purchasespublic and other reasons. In addition to the recent problems with theacquisition of vouchers and their investment, it is the impossibility of buyinga controlling block that is perhaps the most weighty reason fornon-participation of foreign investors in auctions.
7.5. Investment Funds
It is quite clear that when investmentresources are dispersed (as is the case with the population's vouchers) andwhen the population lacks knowledge of securities markets and investments, therole of the voucher privatisation funds should be exclusively to carry out massprivatisation.
A major package of documents adopted inOctober-november 1992 (Decree of the President of the RF of 7 October 1992 `OnMeasures to Organise a Market for Securities in the Process of Privatisation ofState-Owned and Municipal Enterprises' and other such documents) determinedmost of the required procedures for the institution and operation of investmentfunds in Russia. As a result, Russia's legislation provided for thecreation of investment funds, known throughout the world, and specialisedprivatisation funds that would accumulate privatisation vouchers on behalf ofthe population. In any case, any stock companies of the open type thatsimultaneously carry out activities associated with the attraction of the fundsof the population through the offer of their shares and investments of theirresources in the securities of other issuers, as well as trading in suchsecurities, are recognised as investment funds.
In contrast to all other investment funds,a voucher fund had exclusive rights to exchange its own shares for citizens'privatisation vouchers and as such could only be a closed-type fund and couldobtain its license only form GKI. Although a closed-type voucher fundshould, by its very nature, stimulate long-term investment, keeping in mind thegain in the market value of shares, and limit the possibilities of a manager toestablish majority ownership and control, nevertheless the non-liquidity of theRussian fund market and the appearance of a considerable number of such finds(basically second-rate funds) considerably undercut shareholders' possibilityof `voting with their feet'. In other words, having exchanged hisprivatisation voucher for shares in the privatisation fund, the shareholderbecomes a hostage forever of the operations of this fund.
By the end of 1992 GKI had issued licencesfor 34 investment funds, and in June 1994 there were as many as 630 suchfunds. For 1993 and the first half of 1994 the funds acquired more than45 million vouchers, and more than 25 million people became shareholders inthem. By may 1994 all the funds together had invested as many as 27million privatisation vouchers (Funds..., 1994).
The most active stage in the process ofsetting up voucher funds was the first half of 1993. Then the numberslowed down from 15% in August to 1% growth rate in December 1993. In1994 there was no marked growth of funds. On the contrary, the number wasalready being reduced by reorganisation or merger, as well as bankruptcy,because some funds were closed since they had not startedoperation.
One can mention three centres with a highdegree of concentration of investment funds: Moscow and the Moscow area(143 funds), St. Petersburg and its suburbs (43), Sverdlovsk region (23), i.e.33% of all the funds in Russia. And it should be remembered that theshare of these centres, if judged by the size of their assets, the number ofvouchers accumulated and the number of shareholders attracted, is considerablyhigher because all these funds are large.
On the subject of differentiation of funds,using net assets as a criterion, 1% of funds, eg. Alfa-Capital, First VoucherFund and MN-fund, may be included in the category of the largest ones (with netassets over 10 billion rubles), 10% of funds may then be regarded as largefunds (net assets ranging from 1 to 10 billion rubles) and over 50% of fundsare medium-size funds (with net assets from 200 million to 1 billion rubles)(INIOR, 1994). First Voucher may be regarded as the largest fund inRussia by number of shareholders: 2,100,000 people. The funds mayalso be subdivided into regional, inter-regional, sectoral, intersectoral,specialised social protection funds, funds for army personnel and soon.
There are also differences between funds bythe structure of their investment portfolio. Some experts (Gorbatova,1994) distinguish the following types:
- large funds that pay primaryattention to regional enterprises when trying to buy packets of shares (theprice of shares being less than in Moscow); their main goal is obtaining alarge packet to get (in future) a controlling interest and manage theenterprise (growth funds);
- purely speculative funds,usually small or medium-size finds, which do not hold shares on their balancesheet for a long time, i.e. for more than 1-3 months (it was speculation on thedifference between the auction and post-auction prices that yielded maximumprofits in 1993-1994);
- agitation-type funds, with nostrategy of their own, and trying to invest in the most popularenterprises;
- funds with an extremelydiversified portfolio, mainly regional funds that invest in local businesseswithout any strategy of their own;
- `privileged' funds that got allsorts of benefits from the local authorities to stimulate their privatisationeffort (access to closed auctions, obtaining state packets of shares for atrust form of ownership, and other such forms).
In 1993 it was the speculative activitiesof funds on the market that became their main source of income. And theseactivities were extremely intensive in May 1993, after a Decree of thePresident of the RF `On Guaranteeing the Rights of Citizens in the Course ofPrivatisation' was issued. That Decree put an end to the funds' sale ofaccumulated vouchers and stipulated that funds should invest the vouchers onlyin shares that are put up for auction.
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