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In addition, only a really liquidsecurities market can serve as a guarantor of the rights of shareholders,including the right to `vote with their feet' and, vice versa, deprive a potentialbuyer of a monopoly position and make market methods of determination of thevalue of shares a reality. So far the fact that it is impossible to sellone's shares without hindrance on the open market turns small shareholders intohostages of the management.

Another major problem here is that of therole of state regulation in this sphere, which may be regarded now as negativein most cases. Without touching upon the activities of the state as anissuer, let us dwell upon such aspects of the state's role as its legislativeand institutional activities.

The basic legal provisions which serve asthe rules regulating the activities of joint stock companies and the securitiesmarket proper emerged in 1990-1991. In the judgement of the Chief of theDepartment of Securities and Financial Markets of the Ministry of Finance ofthe RF, B. Zlatkis, the quintessence of these documents is as follows: ajoint stock company formed as a merger of the capital of shareholders by itsguarantees is wholly and fully accountable to all its shareholders. TheState does not interfere in the affairs of joint stock companies, whilecompanies are not responsible for the affairs of the State (Zlatkis,1994). By 1994 certain rules of taxation, licensing and anti-monopolyregulation, as well as rules on transactions, existed. In 1992-1994 quitea number of documents were issued, associated with the circulation ofsecurities of joint stock companies that appeared as a result of theprivatisation effort.

Naturally, in addition to a rapid ageing ofmany legal provisions, they also incorporate quite a few contradictions anddual interpretations (which can be associated with the lack of fundamental lawson joint stock companies and securities, and other `blank spots' - i.e. trustoperations, pledge of securities, loans of securities, new types ofinstitutional investors, bearer shares, paperless issue of securities,self-governing associations of participants in the securities market).The tax system in this sphere is quite controversial and complex and alsoserves as a brake on development of the ranks of small investors. By someestimates the existing legal basis is already retarding the development of thesecurities market and actually lessening the volume of investment insecurities. That was quite possibly true for the 1992-1993 period, butnot for the conditions that may appear in 1994-1995.

If we look into the institutional picture,the situation there is even more complex, for right now we have no specificstate-run body wholly responsible for the regulation of the securitiesmarket. The Ministry of Finance, GKI, the Central Bank, the RussianFederal Property Fund, the Anti-Monopoly Committee and other agencies are allinvolved. We also have a Commission on securities and stock exchangesoperating under the President of the RF but it lacks `interdepartmental'co-ordination of powers. This situation of diversity in matters ofregulation of securities leads (in practice) to the following negativephenomena from the point of view of development of a stable market:

- struggle between the agenciesfor their spheres of influence on the securities market, which was especiallynoticeable in summer-autumn 1994 when a new draft law on securities was beingprepared;

- the contradictory nature ofnorm-setting documents produced by different organs of state power;

- refusal of the State tosupervise the activities of non-state participants in the securities market andsee that the latter observe the rules set. All this leads to disregardfor the stipulations of the law and greatly magnifies the risk for investors,especially small investors.

It is this latter trend that led to a wholechain of financial scandals in summer-autumn 1994 (associated with MMM andother such companies). They prompted a new round of debates on the roleof the state in this area. It goes without saying that it is in theinterest of investors to have this control, but, in our view, this is not themain danger: it is the enhancement - under the pretext of such control-of administrative and bureaucratic methods of regulation of the securitiesmarket, which is in the interest of the departments concerned. So, takingthese facts into account, what should be the measures of state regulation inthis area

In terms of legislation, 1994 did see theintroduction - at least at the level of the legal system - of independentregistration of shareholders in privatised enterprises and some norms ofregulation of depository agencies (for privatised joint stock companies).What is now vitally necessary is the institutional registration of suchelements of the securities market as:

- settlement and clearingactivities, execution of operations in the collection, comparison andadjustment and preparation of the paper documents to conduct transactions withsecurities in order to effect mutual settlements and to identify the means thatshould be used to transfer assets from one account to another (in order toreduce the costs of security operations);

- development of a depositorynetwork to carry out activities associated with the safekeeping of investors'securities, execute his orders and organise the supply ofsecurities;

- a rigid and detailed system of`openness of information' on the securities of the issuer, to limit risks andprotect investors' interests;

- a Federal Commission onSecurities and Stock Exchanges, invested with all the necessary rights, thatsets forth the basic rules and standards for market participants;

- gradual selection of stockexchanges through an increase in demand for capital, number of securitieslisted, volume of turnover and so on, with corresponding facilitation offloating shares;

- support for institutionalinvestors (mediators) on the securities market, with a simultaneous increase indemands for capital adequacy, the quality of assets and liquidity of non-bankinvestment institutions;

- adjustment and elaboration of asystem of taxation incentives;

- introduction and support ofself-governing associations of participants in the securities market as anecessary condition of forming organised markets.

As we noted above, a key function of thesecurities market is the accumulation of investors' funds and provision ofaccess to capital for enterprises in order to finance investments. Today,at least as applied to the problems of privatisation, this function is not yetbeing performed, for now the market is used (and to a considerable extent) toserve the process of redistribution of property after privatisation.Today it is a market of large blocks of shares and institutional sales gearedto acquisition of a substantial share in the capital and control.However, this is only the first stage of securities market development, for inthe long term it cannot operate without being geared to the means of manyinvestors (including the population) and splitting the securities in order tobuild up investments. Most probably, the second stage of development ofthe market - if the primary structure continues to be eroded and ifsimultaneously ownership of the privatised enterprises continues to beconcentrated - will see trends toward concentration of the market as the basisof a mass and liquid market.

So far, however, this is only a proposalfor consideration. We cannot speak of any established or fixed model forthe Russian securities market. What we see in Russia now is a kind ofintermediary model, a mixture of the European model of a universal commercialbank which has a large portfolio of holdings in non-financial enterprises, andthe American model in which securities operations are conducted primarilythrough non-bank financial institutions /34/.

A final selection will occur as the outcomeof a fierce struggle between bankers and non-bank investment institutions suchas voucher investment funds, insurance and pension companies and so on (forgreater detail see Mirkin, 1994b and 1994c). It is difficult to say howthe structure of enterprise financing will affect the future situation.That structure has a direct influence on the securities market model(predominance of share capital and commercial paper, with a low portion ofdirect bank loans, as in the USA, or a german-Japanese model with a noticeableinfluence of banks on the securities market). It looks as though whatRussia will have eventually is a sort of mixed model, with both banks and otheractive investment facilities. This would reflect a general world trend toreduce the share of banks in financial assets and is in line with the situationnow prevailing on almost half the securities markets in the industrialisednations.

9.3. Corporate Control

As in the case of the securities market,one cannot yet speak about an established model of corporate management andcontrol in Russia /35/. It seems clear that two key factors will bedecisive:

- the proportions of the private,mixed and state-run sectors of the economy (GKI estimates that in theindustrial sector at the turn of 1994-1995 some 70% of enterprises will beprimarily private, with a small share owned by the state, 20% will be scheduledfor privatisation and some 10% will be turned into `budget' typeenterprises;

- the final establishment andoperation of the securities market model.

While the first factor is important for thedevelopment of a system of management of the state enterprises and state-ownedblocks of shares in privatised enterprises, the second is decisive indetermining the role of small shareholders in matters of management and theexercise of their rights.

The Anglo-American model of corporatemanagement gives primary significance to the liquidity principle, sinceshareholders' control over the managers is based on the purchase/sale of ratherdispersed shares in the corporation. In this case the controlling blockis rather small, financial information is disclosed, while the transactions assuch are under strict regulation. In the German model, on the contrary,and to some extent the Japanese model, liquidity of the shares is of smallerimportance, for from the point of view of control the role of banks is of keysignificance (often acting as a creditor and shareholder or intermediarytrustee) at the same time. In this case access to information for smallshareholders is much more limited.

In view of the mixed nature of the Russiansecurities market, it is difficult to state definitely which model is morelikely to emerge ultimately. It is clear, for example, that it makes nosense to speak about an Anglo-American model, owing to the almost totalilliquidity of the shares of Russian enterprises and their almost permanentconcentration in the hands of large shareholders. At the same time,although the trend is in the direction of large shareholders, it is not yetclear how the contest between banks and non-bank financial institutions will beresolved. Most probably even in the long run Russian practice will notfit neatly into either of the>

In this sense it is effective corporatemanagement that must provide protection for small and outside investors, aswell as ensure real access to information for shareholders and regulate theethics of behaviour of managers with regard to shareholders and corporations,and, when necessary, limit the rights of company personnel.

Regulation of the activities of joint stockcompanies in Russia started even before the wave of broad privatisation ofstate property (see MTsIER, December 1993, for details). The initialdecrees which specifically touched upon the problems of management and controlin Russian joint stock companies were adopted on 25 December 1990: theLaw of the RSFSR `On enterprises and Entrepreneurial Activity' and the`Regulations on Joint Stock Companies' approved by the decree of the Council ofMinisters of the RSFSR, No. 601 (see also Chapter 2). The decree of thePresident of the RF, No. 721 of 1 July 1992 established a procedure forincorporation and a typical charter of a joint stock company (see Chapter7). Various drafts of a full-fledged law on joint stock companiesappeared in Russia as early as 1991, though even by autumn 1994 none of themhad been approved (see Mostovoi, 1994).

To a large degree both these documents onlymodify the existing management structure, introducing some separate formalelements into it, elements that are characteristic of joint stockcompanies. This primarily concerns the unclear nature of the powers ofthe management bodies of joint stock companies. Many important managementaspects remain outside the scope of regulation so far and some items are noteven on the agenda.

As stated in decrees no. 601 and no. 721,there are three organs of management of a joint stock company: themeeting of shareholders, the Board of Directors and the Management. Inaddition each company (joint stock company) must have an AuditCommission. Neither decree provides for a clear distinction between thepowers (and, therefore, the division of power) between the various managementbodies and there are few regulations on the nature of their activities.The main shortcomings of the existing management in running a company are inthe combination and interlinking of the functions of the Board of Directors andthe Board (both personal and functional) and, as a result, the practicalabsence of any regularly operating control body of owners(shareholders/stockholders). The meeting of shareholders is described asthe supreme management body of the company but in essence this is a ratherformal proclamation.

Another problem is the fact that under theexisting legal norms the former General Director of the state enterprisebecomes an unlimited ruler in a joint stock company too, for he is the head ofthe Board of Directors and the Management. being in control of these twobodies, as well as having a major shareholding, and retaining his influenceover the workforce (who also have a considerable number of shares), the GeneralDirector can enhance his position as effective owner of the corporation (firm)while bearing only minimum responsibility for the running of thebusiness.

Formally a meeting of shareholders hasrather wide powers, including powers to control not only the use of assets(capital) but also to take other major decisions. Naturally, much dependson the shareholders themselves. (For example, 10% of the general meetingsof shareholders that were held in 1993-1994 resulted in a change in thecompany's leadership.) However, under the current system and withshareholders' lack of knowledge how to act, this is rather difficult todo.

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