mitry Vasiliev: Shareholders' Rights Program.

Dmitry Vasiliev: Shareholders' Rights Program
Feb. 29, 1996

Dmitry Vasiliev, Chairman
Commission Director Announces Shareholders' Rights Program

This article is excerpted from a speech presented at a conference, "Investing in Russia: Direct and Portfolio Investment Outlook for 1996," Dow Jones Telerate and Sachs Associates, New York, Feb. 29, 1996.

Two questions concern those of us who are responsible for developing Russia's capital market. Are foreign investors interested in the Russian market? And, if so, why is the level of foreign investment so low?

In January, the Russian Federal Securities Commission surveyed 174 emerging market fund managers from the United States, Great Britain, France, and Germany about their interest in Russia. Forty percent of them told us that they are seriously interested in investing in Russia -- regardless of upcoming political events. Our surveys of Russian investors also show interesting results: we believe that as much as $3 billion in domestic savings now held "under people's beds" could be attracted into the capi tal market by good collective investment funds.

So why is foreign investment in Russia still lower than in other post-communist countries, such as Hungary and the Czech Republic? There are four reasons for this: political instability; economic instability; a weak legal and regulatory system; and inad equate information about the Russian market. I will focus on the third and fourth problems, as these fall under the authority of the Commission.

Reforms in Legislation and Regulation

It is often said that no one in Russia is really interested in protecting investors' rights. But this is not true. In fact, a policy of improving protection for investors is supported by the highest levels of the Russian Government -- that is, by Presid ent Yeltsin himself. Currently, the Russian Government is implementing a Comprehensive Program on Protecting Shareholders Rights, which will establish this area as a top priority for the upcoming year.

The first crucial steps were taken in 1995. In the middle of 1995, it was still difficult, and sometimes impossible, to find legal solutions to problems in the Russian market. For example, it was very difficult for us to deal with the well-known scandal over Komineft Oil Company's share dilution last year because provisions necessary to protect shareholders in such a case simply did not exist in Russian legislation at the time. Since then, however, we have seen the passage of a new Law on Joint Stock Companies, as well as the issue of several Presidential decrees and Commission regulations addressing shareholders' rights. As a result, most violations of shareholders' rights are now illegal in Russia.

However, I must say that I remain concerned by a tendency toward legal nihilism among investors in Russia. By this I mean that investors are reluctant to use the courts; instead, they try to appeal to various bureaucratic officials when they have a pro blem. However, those who take this route soon discover that, for every individual bureaucrat prepared to give one answer, another is just as ready to say something else. I would urge investors to start appealing to the courts to resolve disputes. I rec ognize that this is still quite difficult, but if we don't use the courts, they will never get better. We must be constantly pressuring them to learn this area of law and improve their work.

Enforcement

Improving the legislative base is only the first step in achieving real protection for shareholders rights, and we have much work still to do. For example, amendments to the administrative, criminal and civil-procedural codes need to be adopted in order to strengthen enforcement of capital market regulations. In their current draft form, these amendments would introduce criminal penalties, including prison sentences for the most serious types of fraud and market irregularities. They would also allow t he Commission to impose fines for violations by professional market participants and would introduce class-action lawsuits in Russia. All these legislative projects are included in the Comprehensive Program on Protecting Shareholders Rights, which sets a deadline of the spring of this year for drafting and passing them.

Another crucial task for this year is coordinating enforcement activities among different agencies of the Russian Government. In particular, we intend to develop cooperation between market regulators and law enforcemen agencies. At the same time, we wi ll be trying to improve the enforcement work of the Commission. Right now, 18 members of the Commission's staff are attending a 2-week training program on enforcement at the US Securities and Exchange Commission.

Investment Funds

In addition to improving protections for shareholders, the Commission's other priority for this year is developing collective investment funds. We are now working on the regulatory base for these new funds, called unit investment funds. Since November , more than 20 regulations have been written and issued.

Russian investors have changed very much over the past few years. In 1994, they were still interested in dubious pyramid schemes. Now, they have become extremely cautious. For this reason, our goal is to make sure that the new funds meet the highest int ernational standards. The Commission is also in the process of eliminating all unlicensed investment funds in Russia. The President wants us to close this chapter in the history of the Russian market.

To summarize, then, our main priorities for this year are: To complete the legislative and regulatory base necessary to protect investors against crimes on the capital market To improve enforcement To continue work on developing unit investment funds To continue work on supporting infrastructure development. In addition, the Commission will remain committed to disclosing information about the progress of this work. All the official documents issued by the Commission, as well as updates about ongoing projects, are available on Reuters and on a Web Page on the Internet, as well as in printed newsletters issued by the Commission.

Investors should know that we -- the President, the Russian Government, the Securities Commission and myself -- are aware of the problems that still exist in the Russian market and are implementing a program to resolve them. In 1996, we intend to focus on realizing this program.

At this point, you might be asking yourself whether you can really have faith in these promises. In response, I would say that one thing is certainly true of this government -- that we have always done what we said we would do. Back at the very beginni ng, President Yeltsin said that he would liberalize prices, and he did. We said that we would privatize Russian companies, and we did this rapidly and successfully. More recently, we pledged to bring inflation down, and we already see signs of success i n this area. Now, having said that we will protect shareholders' rights this year, we will do this.