Ukraine’s Investment Market Lost Another Year
Most leading Ukrainian companies think it necessary to do business behind closed doors so as to avoid publicity. Such was the conclusion of Oleh Mozhovy, head of the State Securities and Exchange Commission (SSEC), who summarized last year’s results. As he points out, such behavior affects companies’ attractiveness to outside investment. Yet, company owners are still not ready to increase openness. The SSEC has been sued by a number of closed corporations, some of them well-known, which believe that accountability requirements are too high. Mr. Mozhovy stressed that courts tend to side with the businessmen. He attributes such actions by company owners to the transition period mentality that combines the constant fear for one’s property with traditional shadowy practices.
Year-end results show that the number of transactions involving shares of Ukrainian companies publicly traded on stock exchanges has dropped 32%. The overwhelming majority of transactions involved undisclosed prices and inside brokers (under law, all stock exchange transactions must be carried out by licensed traders). According to Mr. Mozhovy, for the time being, the SSEC is not going to resort to administrative sanctions to bring trade into the open. It will wait until shareholders come to realize the advantages of public transactions. However, even organizers of open auctions admit that selling stocks behind closed doors is simpler and more profitable. Iryna Zoria, head of Ukraine’s First Stock Trading System (PFTS), believes it is high time a system of incentives was created to liven up the organized market. However, the SSEC is currently battling to obtain even the most elementary reports on the financial standing and lists of major stockholders of Ukrainian companies. Mr. Mozhovy called those closed corporations with tens of thousands of stockholders “abnormal.” As he put it, an enterprise exhibiting all the characteristics of a public company should be open. Olena Velychko, chief of the SSEC accounting department, believes the state should know the real owners of strategic enterprises, especially if they are closed corporations, since most corporate giants were created after privatization. By avoiding publicity, directors of the post-Soviet period found it easier to establish full control over companies.
The Ukrainian companies’ reluctance to provide information has been a cause of a majority of violations uncovered by the SSEC. Notably, 87% of stock-issuing companies checked last year were not above reproach. The most frequent violation was holding stockholders’ meetings without all company members being notified. Companies also chose not to report on changes in the ranks of stockholders whose stakes exceeded 10%. Often the list of stockholders would be given over to another registrar without the stockholders’ knowledge, which helped management maneuver when making strategic decisions.
The Law On Joint-Stock Companies, which is expected to regulate these issues once and for all, has been awaiting final approval by the parliament for some years now. There are so many conflicting interests in the Verkhovna Rada that it is unlikely the law will be adopted in the near future. In a bid to reach a compromise, the SSEC will propose by the end of March 2003 that the leading national companies voluntarily sign a corporate management code. This document will lay down the key principles of relations between management and stockholders. It is doubtful, however, that before the end of the first quarter Ukrainian management will suddenly realize all the advantages of openness. Be that as it may, a serious investor, especially a foreign one, will hardly want to deal with a closed company.
