Brokers take stock in M&A, corporate bond underwriting
relationship between a company’s majority and minority stockholders, Ukraine’s embryonic stock market could stay that way for some time to come.
Industry insiders say that without comprehensive legislation that protects minority shareholders’ rights, the country’s stock market will remain illiquid and continue to attract few investors. They say that such a law would also clear the way for other groundbreaking legislation on non‑government pension funds, the retail brokerage business and even the eventual introduction of mutual funds.
Serhy Oksanych, president of Kinto, a securities investment firm, said that he expects parliament to pass the improved law on joint stock companies in its entirety within the next six months. Deputies have already approved 15 of the law’s 24 articles.
“Adoption of the law would make the market attractive to minority shareholders,” Oksanych said. “If the government passes the law and identifies the relations between majority and minority shareholders, it will increase the number of portfolio investors.”
Oksanych said that minority shareholders complain that their rights are often abused by majority shareholders. The latter have been known to authorize the issuance of additional shares for the sole purpose of diluting the value of minority holdings.
He said that adopting pension reforms would help arouse more interest from investors who could use dip into their savings and invest their money in the stock market through funds.
“It would make sense for many average Ukrainians to put money in a well‑diversified fund, even one fully invested in Ukraine,” Oksanych said. He said that in addition to state pension funds, an employee should have a choice of private pension funds into which his employer can pay contributions.
Andry Rybalchenko, the head of the investment department at the State Commission for Securities and the Stock Market, agrees that a revamped law on joint stock companies and pension reforms are crucial to get the nation’s stock market off the ground.
“Under such conditions [after the new joint stock company law is adopted and the pension system is reformed], new market instruments that promise to be attractive to both investors and entrepreneurs would appear on the market by the end of the year,” Rybalchenko said.
Rybalchenko said that the commission has sent a bill to parliament that would gradually replace the current pension system with a two‑tiered system that allows for the creation of private pension funds alongside state funds. He said that this would help create a pool of savings that potential investors could funnel into the securities industry.
Governance and the ungovernable
Low investor interest is not the only problem that the stock market faces. Experts say that an undeveloped financial sector and poor corporate governance practices also impede the growth of the securities industry.
Rybalchenko said that countries with stronger corporate governance laws have more liquid capital markets.
Oleksandr Pecherytsyn, president of Alfa Capital, a Russian investment firm, said that Ukrainian corporate governance still does not recognize the rights of investors in privatized companies.
Dmytro Tarabakin, the director of Dragon Capital, an equity brokerage firm, said that the lack of transparency in most of Ukraine’s state companies is the reason behind low investor interest in the Ukrainian market.
Tarabakin said that if a bill was passed that would allow brokerage firms to provide potential investors with basic information about their investment instruments and services, Ukraine’s stock market would lure more investors.
“By bringing foreign investors into the country, the market will gain liquidity,” Tarabakin said.
Rybalchenko said that investors should be able to ask questions and buy shares in companies if they like what they see.
Kinto’s Oksanych said that once more portfolio investors appear, the Ukrainian stock market would become more liquid and shares in more companies would become worth buying as their capitalization grew.
Small and shrinking fast
Ukraine’s total market capitalization, excluding state‑owned shares in partly privatized companies, is only about $630 million. That’s about the same as the market capitalization of a single mid‑sized Central European company, analysts say.
Dragon’s Tarabakin said that Ukrnafta is the only state‑owned company that foreign investors find attractive. He said, however, that even Ukrnafta remains only a small stock market player in international terms.
“Ukrnafta, the most liquid company [in Ukraine], with a total capitalization of $250 million, is trading just less than 10 percent, or $12 million of its shares,” Tarabakin said.
He said that international investors like to trade in large share blocks worth between $500,000 to $1 million.
“For Ukrnafta, it means that an investor should buy all its shares that are circulating on the market. That’s too much, and is impossible in theory,” he added.
The global economic downturn has also had its impact on the Ukrainian stock market, and Tarabakin said that trading activities have virtually ground to a halt.
“There is almost no equity turnover here. The amount of genuine secondary trading is ridiculously low,” Tarabakin said.
In 2001 the Ukrainian equity market lost 43 percent of its value in dollar terms after posting an impressive 59 percent gain in 2000, a Dragon Capital report said.
Tarabakin said that the Ukrainian market has gotten to the point where equity prices would have to rise nearly fivefold to catch up to equity prices on the Russian market and 11‑fold to reach their 1997 levels.
He said that daily trading volumes on Ukraine’s securities market average less than $100,000 to $200,000, while daily turnover in Russia can reach $200 million to $250 million.
On the block
With Ukraine’s dormant stock market and no true retail brokerage industry, the nation’s stockbrokers have become increasingly active in merger and acquisition deals and underwriting corporate bond issues.
Both Kinto and Dragon Capital said that they have bought either controlling or blocking stakes in companies, improved the companies’ profitability and then sold the stakes for higher prices.
“If a deal closes, the company makes money. If the deal goes wrong, the company takes a loss,” Tarabakin said.
Tarabakin said that Dragon Capital also assists strategic investors in buying target companies.
He said that his firm helped Bongrain, the world’s largest cheese producer, acquire a controlling stake in the Zvenyhorodka Cheese Plant in Cherkasy Oblast.
The bonding experience
Ukraine’s corporate bond market is poised for a boom, analysts say.
Alfa Capital’s Pecherytsyn said that Ukraine’s corporate finance market saw very few bond issues until the tax code was amended in 1999. The amendment eliminated the immediate taxation of proceeds from the initial sale of corporate bonds by an issuer, allowing payment of tax upon the bond’s maturity, when the principal is returned.
Pecherytsyn said his firm recently underwrote a Hr 9 million corporate bond issue for AVK, a Donetsk‑based confectionary producer.
Ivan Hrantsev, the head of the commission’s securities registration department, said that in 1999 only five bond issues were registered, compared with more than 40 registered in the first nine months of 2001.
A report by the First Stock Trading System, a stock exchange, revealed that Ukrainian companies issued nearly Hr 422 million in corporate bonds between January and September.
“This is 341 percent growth compared to the previous year,” said Andry Kolomiets, PFTS’s public relations manager.
