While privatization continues, the market offers few attractive shares
Ukraine’s stock market has not been an inspiration for reform- minded citizens over the past few years. But, oddly enough, there still are many people cashing in on the purchase and sale of shares. They contrive to deal in securities and quite pompously pronounce such words as clearing, dealer, and broker. These people are employed by tender organizers. As of today, the First Stock Tender System (PFTS) is the most popular tender organization on the market. Iryna Zaria, president of PFTS, tells The Day about the current situation on the stock market.
“Ms. Zaria, recently the Ukrainian stock market has at last heard at least some pleasant news. The PFTS listing has restored the shares of Ukrrichflot (Ukrainian River Fleet —Ed.). This was preceded by a delisting scandal. Would you tell us your vision of this story?”
“The PFTS, like any other stock exchange, obeys strict listing and delisting rules. It is these rules that lay down the criteria of securities tenders on a stock exchange. So when the Ukrrichflot story began, it became clear to us there were ample grounds for a delisting procedure. The point is that Ukrrichflot had registered an additional issue of shares, of which we, as a stock exchange, had neither official nor unofficial information. In addition, there were far more securities on the market at the time than market operators thought. Moreover, we were told by our participants, brokers, and dealers that their clients had complaints about Ukrrichflot. Their objections read literally as follows: ‘Inaccurate submission of sometimes dubious information to shareholders, breach of business ethics, and noncompliance with a quadripartite agreement between Ukrrichflot, the possessor, the market-maker, and the dividend- paying bank.’ Under the rules, this is sufficient for us to conduct a delisting, i.e., to suspend the circulation of these securities within the tender system. When this happened, some told us we were defending the interests of foreign shareholders, others that we were defending the interests of domestic ones. In reality we were doing both. For if, suppose, the foreign shareholders had taken legal action, this could have jeopardized the stock of ten thousand new Ukrainian shareholders as well. Moreover, our decision on delisting said that we were showing goodwill to resume the circulation of Ukrrichflot securities in case all the problems were solved.
“After we had made a delisting decision, Ukrrichflot furnished us the lacking information. This was followed by several rounds of talks between Ukrrichflot, foreign shareholders, and the European Bank for Reconstruction and Development which opened a credit line for the companies. These talks finally ended in a compromise. But now we are being queried by foreign shareholders, i.e., foreign banks that played the role of market-makers to promote Ukrrichflot shares circulation on Western stock exchanges. Now they have at last been paid dividends for the past two years, and the Ukrrichflot certificates have been exchanged.
“As to the Ukrrichflot stock market, the tender system of today shows both purchase and sales bids for the securities of this issuer. True, these are small stakes, with the spread, i.e., the difference between the prices bid and asked, being not small. In other words, this is not the most liquid market. But I think that if the issuer has really opted for transparency and cooperation with investors and shareholders, this company will undoubtedly preserve chances for having a liquid market of its stocks.”
“What role did the State Commission on Securities play in the solution of this problem?”
“The State the Commission on Securities and Stock Market sent us a query. They wanted to know what was happening to Ukrrichflot and what steps we were taking. We furnished the Commission the information they sought and were prepared to offer additional information if necessary. But as, by all accounts, the State Commission was satisfied, we thought that was the end of it. Now the question is of information exchange, not of any actions. That’s all. But, from the angle of broader approaches, I think the Securities Commission should be doing much more to establish normal corporate management in Ukraine. This has now been chosen as a top priority by the securities commissions of Russia and Kazakhstan, so if our commission still addresses this the way it has been doing in the past few years, the Ukrainian market will lag behind.”
“Quite recently, the state commission appointed a new representative to the PFTS. One of his duties was defined as trying to improve the rules of tenders, so that the tender system should not be just a bulletin board. Now the PFTS is actively updating its documentation. Is this being done on the state commission’s initiative?”
“We regularly meet the PFTS state representative. Indeed, we are introducing new tender rules, but this has nothing to do with the commission’s remarks, we are simply implementing our plans. Today the PFTS is Ukraine’s only organized securities market. I don’t know if this is good or bad, but I know this is a fact. No doubt, we must allow the PFTS to become a full-fledged stock exchange, i.e., the deals made there should be obligatorily fulfilled. By the word fulfill I mean clearing and a well- functioning depository system. Naturally, this process does not involve us alone. It is here that we rely on the assistance of the state commission and the clearing depository.”
“What kind of impact did the recent ‘shadow privatization’ scandals have on the stock market?”
“Let us look at it on the example of Rosava, for it is the easiest case.
“In reality, the Rosava scandal began long ago, at a shareholders meeting held several years before. It is at that meeting that the state voted, as a shareholder, with its controlling shares to remove all more or less liquid assets from the Rosava joint-stock company. At the same time the market shareholders ran short of a few votes, unfortunately, to block this decision. And the whole market was against this. The PFTS would make statements at conferences, saying, ‘Gentlemen, you shouldn’t do so.’ This had a disastrous effect on the Rosava market, with shares immediately falling in price and then leaving the market altogether. This should have been addressed precisely then. For the number of shares circulating on the market at a normal price is the most essential factor for identifying the value of a company.
“As to the stake sold at a commodity exchange last May, it was indeed sold at a very low price. Undoubtedly, it makes no difference to the State Property Fund at what price it was sold because it will face problems in any case. But from the viewpoint of civilized market construction, merger, takeover, and bankruptcy, it is very important at what price the stake was sold. And we all must learn a lesson from this. For if you take Russia again, it is very actively debating on the problem of assessing the value of companies. This is now the No. 1 problem in corporate management there.
“Incidentally, even the existing setup could have thwarted the situation that came up. For the state commission has long been considering a proposal to exchange debts for shares. A wise version of this decision could solve the problem. Failing that, the stake was sold at a non-market price.”
“Is shadow privatization the dominant characteristic of today’s stock market in this country?”
“We cannot say it is the leading factor. It would be more logical to speak about an aggregate of factors. As to Rosava, it had an effect, of course. In addition, that story was in breach of Article 25 of the law On Economic Entities. As to the dwindling interest in shares, a great role was also played here by the ever-reducing number of shares in free market circulation. This is in fact a 2001 problem, and we will have to react fast to the fact that the number of, say, energy-sector shares is on the decline.
“In my opinion, it is equally wrong for privatization to be exclusively oriented toward either strategic or small investors. Ukraine’s stock market should by all means show the free circulation of a certain number of shares of investment-attractive enterprises. This is precisely what will make it possible for us to know whether the value of an enterprise is rising or falling, whether or not management is effective, and whether we have civilized corporate management, for otherwise the foreign investor will not come to us.
“On the other hand, it is encouraging that the market is beginning to employ new instruments. For example, the PFTS has recently accepted the corporate bonds of the Odesa Cognac Plant and the Titan Company.”
“Do you think the problem is the fear of investors to work on the Ukrainian market because of the political situation or the absence of attractive projects?”
“The most acute problem is, of course, the shortage of investment- attractive projects. Look again at Kazakhstan which began tackling the problem of private pension funds much before Ukraine did. Now Kazakhstan’s pension funds have nothing to invest in. And the point is they may have to invest in foreign securities as a last-resort. This is bad. So we have no alternative but to develop new instruments.”
