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4) A new scheme of distribution ofthe privatisation revenue is introduced. While earlier almost allprivatisation revenue went into the budgets of different levels, since July1994 51% of the sale value of the enterprise (shares) is transferred to aspecial account of the enterprise itself for investment purposes. Inpractice this means that a potential buyer pays only half of the required pricesince the other half should be returned to restructure and developproduction. Although such an approach does discriminate against theenterprises that have already gone through privatisation at the first stage,nevertheless this is a powerful incentive for a potential investor toparticipate in privatisation.

5) Originally it was planned thatan absolutely new model of the benefits for workers and managers of enterpriseswould be adopted, with two possible options: receipt of 25% of privilegednon-voting shares or purchase at face value of 10% of voting shares with a 30%discount and payment deferred for a year. The grounds for such anapproach were the ending of vouchers (as a privilege for the entire population)and a new policy emphasis on the initial formation of large `external' holdersof enterprises' shares.

GKI did not manage to make such a drastic cut in benefits forthe workers in a `pure' form, since, in line with the Fundamentals, theprevious model remains in force (see Appendix 1). Yet in a veiled formthere is a provision promoting use of the new model of privileges; as Chubaissaid, indexing the value of property when its value rose many times should meanthat only new schemes will be adopted because most work collectives do not havethe means to buy out 51% of shares valued using the new prices (Karpenko,1994).

6) In order to attract `strategic'investors who will improve control and management of an enterprise, and who areinterested in its long-term progress, it is planned that rather large blocks ofshares, not less than 15-25% of the authorised capital of an enterprise, willbe put up for auction and for investment tenders. It is especiallyimportant that this is done with regard to the blocks of 10-20% secured asfederal property but with practically no one being in charge. At the sametime, on the basis of the infrastructure of the specialised voucher auctions, asystem of special money auctions should be set up to sell retail shares tosmall investors.

The Fundamentals provide for the following methods ofprivatisation:

- free transfer of shares to theworkforce;

- sale of shares to the workforce by means ofclosed subscription;

- sale of shares by an investmenttender;

- sale of shares by a commercialtender;

- sale of shares by auction, including use ofthe services of the stock exchanges;

- sale of shares at a specialisedauction;

- sale of enterprises by auction;

- sale of enterprises by a commercial tender,including a tender with a limited number of participants;

- sale of enterprises by an investmenttender;

- buy-out of leased property;

- sale of property (assets) of active, beingliquidated and already liquidated enterprises;

- sale of construction projects in progress(special procedures);

- sale of enterprises in default (specialprocedures).

With certain exceptions (enterprises belonging to the state andmunicipal agencies, banned from privatisation, with foreign participation, orsubject to sale to partnerships with special preferences) all enterprises witha book value of fixed assets over 20 million rubles on 1 January 1994 are to bechanged into public companies. Shares that have not been sold previously(except for federal blocks) that belong to the joint stock companiesestablished earlier are to be offered for sale before 1 January 1995.Sale to an investor of 35% or more of the authorised capital of the issuer, orstock that carries more than 50% of the votes of shareholders must be done insuch a way that the anti-monopoly legislation is observed. The norm thatregulates the possibility of issuing supplementary shares is more liberalnow: to do this it is enough to leave in the hands of the state as muchas 25% of the authorised capital (no more now).

Small businesses whose fixed assets have a book value of lessthan 20 million rubles are subject to privatisation by auction or through acommercial or investment tender.

7) As to foreign investors, thevery fact of the ending of vouchers is already a powerful incentive for many ofthem because it introduces the customary means of payment, in money. Moresimplified procedures for taking decisions in the area of privatisation of someenterprises and holding investment tenders are also a definite advance.At the same time all the previous restraints imposed by the secondprivatisation programme remain in force.

Despite some optimistic views of the leaders of GKI on thelikely inflow of foreign investment into privatisation, some experts associatethe question of stability and growth of the volume of foreign investment inprivatisation and the Russian economy as a whole with the results of thepresidential elections that will be held in 1996 (Fedorova, 1994), and it seemsthat these ideas are not groundless.

8) For the first time one can seelegislative provisions for enterprises which claim resources out of Westerntechnical assistance funds for purposes of reconstruction:

- the share of the state shall not exceed25%;

- enforcement of all the requirements of theRussian legislation on joint stock companies is required;

- there must be no restrictions on the purchaseand sale of the shares in the enterprise;

- there must be an independent registrar whokeeps a record of shareholders of the enterprise.

Behind these provisions lies a long ideological battle betweendepartments in the Russian Government connected with the selection of priorityobjects of help (state-owned or already privatised enterprises). Leavingaside the debate itself, it is important to note that there was such adiscussion, and at least one `ethical' consideration in favour of the approachadopted: a financial contribution to the restructuring of alreadyprivatised enterprises may be considered a kind of compensation forparticipation in voucher privatisation, which is a sure sign of shortage ofinvestment funds.

It goes without saying that it is necessaryto look into many new procedures and draw up a number of `technical' normativeacts. Many positive proposals were withdrawn from the initial version inthe course of making adjustments. On the whole the Fundamental provisionsare a progressive document which gives a good basis on which to develop theprivatisation process at the second stage. At the same time there are anumber of key issues which are beyond the Fundamental provisions but which arevital for subsequent privatisation and post-privatisation policy. Weshall focus on such problems as the development of the securities market andcorporate control.

9.2. Securities Market

As shown in Chapter 8, a major reason formaking the secondary market in shares of privatised enterprises more vigorousis the process of redistribution of ownership rights initiated afterprivatisation, which is associated with the desire to establish or at leastenhance the degree of control over the enterprises. At the same time, thekey issue to be solved by the securities market is providing effectiveconditions of the inflow of investment resources to these enterprises andensuring the enterprises' access to capital. In this sense a fundamentaltask of state regulation should be creation and provision of guarantees foradequate legal mechanisms.

Even today it is absolutely essential toshift the accent toward development and strengthening of the infrastructure ofthe securities market, keeping in mind the future operation of the privatisedenterprises. Though most of the issued shares of privatised enterpriseswill not be traded on the secondary securities market, even 10-25% of theseshares are capable of forming a liquid market and will make up, in one estimate(Boiko, 1993), a sum of the order of 10-15 trillion rubles in new prices.If there is no developed infrastructure, the possible `dumping' of the sharesalready issued, as well as deterring new issuers involved in privatisation, maygive rise to some knotty social and economic problems.

The initial elements of the securitiesmarket infrastructure were formed by the share divisions of the commodityexchanges, and then the stock exchanges. In the middle of 1994 Russia hadabout 70 stock exchanges, or about half the total number in the world.Naturally, this artificial boosting of their number makes it predictable thatin future the number will be reduced to a `reasonable' level, that may bedetermined only by the evolution of the market. Despite their number,compared with the transactions on exchanges in other countries, the figures forthe Russian exchanges look more than modest (Table 14). At the same time,they clearly show the point Russia has reached (Mirkin, 1994a).

The end of 1991 saw regularly operatingstock auctions through which certain types of shares were placed, including theshares of the enterprises being privatised. At the beginning of 1992,when the necessary technical base was set up, Russia's first electronic tradenetwork, ELBIS, began to operate, just like NASDAQ, with about 80 participatinginvestment institutions in many regions of Russia, the Baltic countries and theCIS. The so-called stock shops became a special feature of the currentinfrastructure which is characteristic only of Russia and which appeared in themiddle of 1993. They provide for `retail' trade in securities, with avolume per transaction in the 10,000 - 100,000 rubles range.

A distinguishing feature of the emergingsecurities market in Russia is the high level of institutional investors,investing in securities also issued by institutional investors. Thatmeans that a considerable portion of the investments form the population andfrom non-financial institutions is re-cycled within the financial sector, whichhas greatly expanded in the course of the last few years (see Table 15).What we have as a result is a decrease of investment in the sphere ofproduction. And it should be admitted that this stage is inevitable andis closely associated with the formation of the infrastructure for the marketdistribution of investment (movement of capital).

As to the technical infrastructure(operation of depositories, clearing centres, information networks, etc.) 1994was the year of formation of that infrastructure. The institutionsprimarily engaged in this operation are commercial banks and groups of banks,because it requires considerable means, large volumes of transactions andplenty of qualified personnel. By the middle of 1994 clearing houses hadnot been created. As to the network of depository institutions, it istending to grow in number because of the appearance of the shares of privatisedenterprises and because of the demand for new services (keeping a register ofshareholders, depositing, safekeeping and cancellation of vouchers,registration of bargains and validation of property rights and so on). Atthe same time, many other functions of a depository (depositing, storage andrecording of securities, servicing dividend and interest payments, accrual andpayout of dividends, pledge of securities, loans in the form of securities andso on) are not yet in demand. As a result, the depositories set up aregeared to the execution of one or two functions and when there is a requirementto perform a more complex function the creation of a new depository isnecessary (see INIOR, 1994).

So far we cannot speak about a unifiedstock structure in Russia that would unite the exchange trading, depository andclearing networks, and information and analytical services. the latterare especially important if we take into account the fact that the publicityprovided for securities `in 99 cases out of 100 is clear disinformation'(Makarevich, 1994). The quite feeble attempts of the government to combatthis situation have not yet resulted in any truly reliable analysis ofsecurities (to judge by international standards).

A great number of problems of privatisedenterprises are associated with the keeping of registers. It is quiteclear that registration of shareholders is necessary. At the same timethe process of re-registration of exclusively registered shares (as required bythe law) and making operational entries in the register is so complex that manydealers refuse to trade even in the shares of attractive enterprises(Skatershchikov & Malakhova, 1994). In most cases, to purchase theshares of an enterprise one has to travel to the area where the business islocated, and this is possible only for rather large buyers. But even whenthere, the buyer will usually confront the resistance of the management of theenterprise, which will try both to prevent the transaction and may fail toregister it.

Usually what the management is afraid of isleakage of information and the possibility of purchase of a controllinginterest if the register (as required by the law) is maintained by anindependent registrar. As a result, the necessary data are not in factentered in the register, which undercuts the whole technical infrastructure ofthe secondary share market, which is an important condition for the operationof that market.

The poor technical market infrastructure,as well as disregard of the investment qualities of the securities (and thus ofthe functions of the secondary market as an instrument of mobility andconcentration of capital as a whole), create a situation when shares remainextremely illiquid. At the same time, many experts estimate that 1994will be the year that sees the start of mass use of the securities market as asource of investment by many privatised enterprises (Table 16), which intend tomake a second issue of shares and prepare for subsequent issues by considerablyenlarging their authorised capital. As a poll conducted in Moscow, St.Petersburg, Volgograd, Ekaterinburg and Perm showed, approximately 6-8% ofenterprises (or 700-800 potential issuers) plan to make their second issues ofshares (Vasiliev, 1994b). Other estimates (Savvateeva, 1994) put thenumber of such businesses as high as 25-30% of the total number of privatisedenterprises.

Hence it is extremely important to providea reasonable balance between satisfaction of the real needs of enterprises foradditional investment and an eventual conversion of the Russian securitiesmarket, as Makarevich put it, into a `big dumping ground'. What isessential is a marked increase in the requirements for the prospectuses ofissues, and above all, maximum disclosure of information about theissuer.

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