Vol. 4 No.8  


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Cash in or take a spin

Romania is preparing to fully compensate victims of properties stolen by the Communist dictatorship with shares on the stock market, but where is the catch? asks Ana Maria Nitoi
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Ioan Codrut is a 34-year-old law graduate living in Targu Jiu, Dolj county. His family owned a house in the town’s centre on 1,000 sqm of land. After 1946, the Communist state seized his property and destroyed the building. Following decades of soliciting for compensation from the post-revolutionary authorities, he now has two options to retrieve the value of his lost property.
This will not be a cheque for the full price of the land and buildings or property in a similar location. Instead this is compromise. He can receive 200,000 Euro of the house’s value at today’s prices in two cash installments. The rest of the money is available to him in shares in the Fondul Proprietatea (Ownership Fund), a 3.9 billion Euro investment fund with stakes in 88 state-owned companies, including oil and gas giant Petrom, fertiliser company Azomures, the Post Office and the country’s big international airports.
Codrut will receive a piece of paper with a nominal value, but he cannot play the money markets yet. This portfolio of shares will not be listed on a stock exchange until June 2009 at the earliest. This is a date many specialists believe is optimistic - the orginal moment for the fund’s listing was meant to be in 2006.
So Codrut has a choice – he can either wait for the shares to be listed or he can sell his package on a new unofficial market. Many former owners looking to cash in quickly can find buyers on the Fondul Proprietatea website, where the fund has presented a platform match-making sellers with buyers. But these people, many of whom have waited 60 years for their property to be restituted, are selling at a loss. The current value for shares on this unofficial market is 45 per cent of their nominal value. The dilemma for former owners is to cash in quick at a reduced rate or stick it out until the stocks are listed.
In the meantime, the shareholders have a stake in the fund, which means they receive dividend payments. “The dividends are one of the main reasons why shareholders should have the patience to wait until the fund is listed and not sell their shares before,” says Codrut. “I am sure I took the right decision in not choosing money. But my neighbour, who opted for cash, has already received the money and set up an organic poultry farm.”
The main shareholders of the fund are about 2,000 Romanian private citizens and the Romanian Government, which holds 80 per cent of the shares. The majority of Romanians have asked for cash or sold their shares on the unoffical market, rather than wait for the listing.
The huge delay in the fund’s listing is a matter of great suspicion. “Fondul Proprietatea has a great potential and whoever controls this fund has great power,” says Dan Visoiu, partner at law firm Biris Goran.
At the beginning of 2008, immediately after the authorities permitted the shares to be bought and sold, they were worth about 85 per cent of the value per share. This has dropped to 45 per cent. Because the Fondul Proprietatea’s listing has been delayed, the share prices have fallen. Therefore the longer the period of time until the shares are listed, the greater opportunity investors have to pick up these shares cheaply. As soon as the fund is listed, experts predict the value of the shares will probably skyrocket.
“The fund’s listing depends on who is influencing the decision-makers of the Fondul Proprietatea and who has interests in buying shares at a small price,” Visoiu argues.
But it may not be as simple as buying cheap from former owners who have waited all their lifetime for some form of compensation and then cashing in big time when the stock is listed.
“Whoever is buying shares in these conditions takes on the high risks of these shares, such as their uncertain value, the uncertain value of the companies in the portfolio and the legislative unclarities,” says Septimiu Stoica, former president of the Bucharest Stock Exchange and now counsel at law firm Salans.
The Government could have come up with a more transparent framework for these shares to be bought and sold, such as the Romanian Over-the-Counter Market, the RASDAQ, argues Stoica. Transactions of shares on the RASDAQ are regulated, but the law is less strict than for selling and buying shares on the stock exchange.

Assets uncertain

The fund can be listed when its precise share capital is defined. But the share capital of the Fondul Proprietatea is unclear because the evaluation of the fund’s assets has not been finalised. Since last year Fondul Proprietatea has been fighting with its majority shareholder, the Ministry of Economy and Finance, over the value of its share capital. The fund argues that the Ministry owes Fondul Proprietatea 200 million Euro in share value. Before setting up the fund, the Government should have first evaluated the state companies correctly and then created the share capital for the fund, argue experts.
This dispute must be resolved before the fund is listed.
Another reason for the delay in listing is that the Government has come up with different departments, commissions and councils to make decisions for the Fondul Proprietatea. A recent example is the special commission set up by the Ministry of Economy and Finance to select the fund manager. This is a decision which the main stakeholders of the investment fund should take through the vehicle of the fund’s board of administration. “All these entities created to select other entities that the Government has come up with have only managed to prolong the listing indefinitely,” says Stoica.

Risky instruments

Initially, the restitution process had three options: return the property in its entirety, return a property to the owner of similar value or return the cash equivalent of the lost property.
In 1995 the Government allowed tenants of state-owned property to buy the houses where they were living, even if these had been stolen by the Communists from their owners. “By allowing the tenants of the nationalised properties to purchase them for a nominal value the Government committed a crime that amounts to a second nationalisation which has prompted the current unstable and unresolved situation,” says Corin Trandafir, partner at Rubin Meyer Doru & Trandafir.
The Government then privatised state-owned companies that had been taken away from Romanian businesspeople in the late 1940s. This meant the large majority of Romanian former owners could not recover their properties.
Another option, at the beginning of 2000s, was to pay Romanians the cash equivalent of their property’s value. At that time Romania was expecting to receive the green light to join the EU. Stoica says the Government feared that the burden of repayment would have been so huge that it would have damaged Romania’s economic performances and thus endanger Romania’s EU accession calendar.
The third solution was the restitution in shares of state firms at an equal value to the lost property. But Visoiu argues that the only compensation which could be paid to former owners who cannot get their property back is cash, and not risk-bearing instruments such as shares. “This fund is a speculative instrument which can give less but also more than the state owes to people,” adds Salans’ Septimiu Stoica.

Fund manger wanted

Now the Government is giving December as a final date to choose a fund manager to list and manage the portfolio and June 2009 as the date for the listing. Deutsche Bank and asset management departments of BNP Paribas, ING, the Royal Bank of Scotland, Societe Generale, Generali PPF and Allianz Global Investors are among those who have shown an interest in managing Fondul Proprietatea.
To list a large company with 1,000s of employees and different multiple assets to evaluate should take 12 months at the most, rather than the three years it will eventually need. “This fund was either created by non-professionals or is and has been managed all these years by non-professionals,” argues Stoica.
2006 and 2007 were excellent years for the Bucharest Stock Exchange (BSE), when the Government intended to list Fondul Proprietatea. Due to the international financial crisis, no one is now investing in the BSE. Financial experts cannot predict how long this situation will continue. But they argue 2009 that will not be as opportune a moment as last year.
“The long-expected listing of the fund should take place as soon as possible, but if the listing would have happened today, this would not have been the happiest moment,” says Razvan Pasol, general manager at securities brokerage company Intercapital Invest.
Romanian officials say a double listing should be considered on the Bucharest Stock Exchange and an international stock exchange such as London. “On the local market the interest is high for Fondul Proprietatea, whereas an international listing would bring more exposure to the fund,” says Intercapital Invest’s Razvan Pasol.
Stoica says the fund should be listed on only the local stock exchange. Previous examples of Romanian companies listed in London, such as pharma firm Sensiblu owners A&D Pharma, have not been successful. “It is best to list a company on the stock exchange where it is most appreciated and there is massive interest,” says Stoica.
Once listed, the Fondul Proprietatea will help boost the Romanian stock exchange. “I do not believe it will be the saviour of the local capital market but it will be a positive instrument and a good investment target,” adds Stoica.

Finishing the job

In 1948 the Communist regime confiscated the factories of Nicolae Malaxa, one of the most significant Romanian industrialists and a producer of locomotives, engines, cars and arms. Now the Malaxa family owns more than six per cent of Fondul Proprietatea’s total shares, worth around 350 million Euro. Corin Trandafir, lawyer for the Malaxa family, has confidence in the Fondul Proprietatea.
“Compared to the last three years, in the last six months many steps were made by the authorities to speed up the listing of Fondul Proprietatea,” he says.
Schroeders, the financial consultant for the auction to select the fund’s administrator, was appointed at the beginning of the year. “Now we are cautiously optimistic,” adds Trandifir. “But if the fund manager is not selected by the end of the year, as envisaged by the plan of action made in the Fund’s last general assembly, our clients would have no alternative but to go to court to obtain their rights.”
Seeking justice in an international court or through arbitration may not be the most efficient solution for a former owner. Such a case in the European Court for Human Rights takes on average three years until a decision is taken, while an international arbitration court, such as the Arbitrary Court of International Centre for Settlement of Investment Disputes (ICSID) in Washington takes about 18 months.
Neither court has issued a decision which binds the Romanian state to compensate such a large amount of money as the Malaxa family has to recover – not yet anyhow.

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