Situation in the Capital Market of Slovakia

ISSN 1392-1258. EKONOMIKA 2004 67 SITUATION IN THE CAPITAL MARKET OF SLOVAKIA DUSan Baran Assoc. Prof. Ing., PhD Department of Management Faculty of Food and Chemical Technology Slovak University of Technology Radlinskeho 9, 812 37 Bratislava Slovak Republic Tel.: 00421-2-52495246 E-mail: [email protected] The Slovakia capital market development encompassing the beginning of 1989 when the political situation was changed till the present situation is analyzed. The main stages of privatization, namely small-scale and large-scale, and the first and second wave of the latter, are analyzed emphasizing their advantages and disadvantages. Protection of investors' rights is one of the main issues of the present capital market in Slovakia. The possible ways of dealing with this problem and consequences are discussed also. Statistical data showing the development of the Slovak capital market in the con text of European countries are presented. Introduction tions, the foundation for the private sector The Slovak capital market was established ex functioning in the business, services and in the clusively on the basis of the coupon privatization. local and small industry. In the small-scale Mter the political system had been changed privatization the public auction was utilized as in 1989 the privatization process started to be the only denationalization instrument. At that oriented mainly towards transformation of the time a stirring discussion was raised due to the economy into market conditions. This process so-called Dutch auction model which permit continued also after splitting up the common ted a gradual reduction of the opening price state. The greatest share in the transfer of to as much as a half, and in the case of the the state-owned property to other subjects repeated auction even to a fifth. After the was taken by the small- and large-scale small-scale privatization had been officially privatization. completed, 9667 subjects of the accounting The small-scale privatization was a first value of 12.3 mid. SK passed to the private sec stage proceeding from 1991 to 1993. It was the tor, the total auctioneered sum achieving al time- and size-limited first step of the trans most 14 mid. SK, i.e. approximately by 2 mid. formation which laid, together with restitu- SKmore. 22 For the first wave of the large-scale the gained money should be used for the re privatization the government issued a decree payment of bonds. In fact this was the transi about emitting and applying investment cou tion to a direct sale and the substitution of the pons. The coupon privatization ensured equal coupon privatization method by the method conditions, the well-proportioned distribution of bonds. The bond represented a certain form of property and the lowering of corruption in of compensationl . the denationalization process to a minimum. The coupon privatization was related to 503 The main objective of this process was the joint-stock companies, and 2.6 million of the transformation of enterprises into joint-stock Slovak citizens participated in it. The problem companies and the transmission of their stocks of the coupon privatization rested in the too into the hands of inhabitants not in the form scattered property ownership. From among of money but in the form of the so-called in 93% of privatized enterprises the major share vestment coupons paid by people in the was acquired by the holders of investment books and by investment funds. Since there did amount of 1000 CSK. The first wave of the not exist any regulation to allow small propri coupon privatization started on 14th May 1992 etors to defend their rights, their influence on and finished by the end of the year. For this the management of enterprises or on the in purpose the property of 484 companies vestment funds was none at all. After accom amounting to 90 mId. CSK was earmarked. In plishing the sale of stocks their departure was June 1992, the mode of the privatization was possible only to the moment of settling the also changed: the coupon method was aban proprietary relationships, or in other words, doned and the so-called standard methods, mostly to the moment when the major inves primarily direct sales, were preferred. tor gained 67% of stocks. However, the prob In the first wave of the privatization, i.e. in lem of the enforcement of the right of prop the period 1991-1993, the property of 678 state erty was faced also by much bigger owners. enterprises in the total value of 169 mId. SK With regard to the fact that corruptible courts was alienated (by means of coupons or the were willing to recognize the doubtful results standard method) to private SUbjects. of General Assemblies, even a 51 % owner From the aspect of the contents, the sec could not be sure of his position. It was suffi ond privatization wave (started in September cient if the minority owners called the Gen 1993) was characterized by several principal eral Assembly in which the majority owners changes in comparison with the first wave. could not participate, if they nominated their The Parliament accepted the governmental representatives in the Board of Directors and amendment to the Act about the large-scale the Supervisory Board; if they changed the privatization, which annulled the exchange of articles of the company, then they achieved not coupons for stocks. Thus each owner of a cou only the necessary two thirds of votes for their pon book received instead of stocks a publicly withdrawal but also a rapid incorporation into non-negotiable bond of the National Property the company's register2. Fund (NPF) of the nominal value of 10 000 SK with a due date of 31St December, 2000, I Privatization decade in the Slovak Republic, Pravda 3rd January, 2000. i.e. for a period of 5 years. The state property 2www.ineko.sklstudiazsosmarcincin.htm- More ef· from the portfolio of NPF was sold directly and fective report of busines; coripanies. 23 The object of this article is the capital mar The rights of outsiders are generally pro ket in Slovakia. The aim of this article is to tected by an enforcement of the regulation and present the situation in the capital market in laws. The regulation of the governmental agen Slovakia. Using the methods of scientific lit cies and exchange involves some critical re erature and statistical infonnation analysis, the quirements in relation to a company, namely author of this article attempts to: the publishing of data and their accounting • present the protection of the rights of interpretation. Both requirements are an in investors in conditions of the Slovak evitable condition for the infonnation acquain capital market tance of investors and for the exercise of their • analyze market capitalization of com ownership rights. A great possibility to pros panies on the Bratislava Security Ex ecute managers or any big shareholder for the change (BSE) in the present period expropriation is included in many other rights • present the development of exchange of shareholders. In most countries, the laws markets in Europe and regulations are enforced partially by mar • present the development trends of ket regulators, partially by courts, and partially Bratislava Security Exchange after the by market participants. However, the courts entry into EU. often do not want or are unable to solve com plicated disputes, they are slow and liable to 1. Protection of the rights of investors political pressures, or they are also corrupted. in conditions of the Slovak capital Consequences of the protection of inves market tors are of three kinds: According to La Portu et at (1999), a difference • the ownership model of companies. In in the proprietary structures of publicly share countries where the protection of outsid dealing companies, in the size of capital markets, ers against the expropriation is weak, the dividend policy and in the approach of compa control is concentrated in the hands of nies to external finances in different countries is entrepreneurs given by a way, in which all investors (owners and • development of financial markets and shareholders) are protected by legislation from the dividend policy. The legal protection the expropriation by managers and majority of the rights of investors helps financial shareholders. As the insiders are considered not markets. Investors protected against the only managers but also big shareholders. The ex expropriation pay higher prices for secu propriation exists either in the fonn of a simple rities, which are then more attractive for stealing of the profit or in the fonn of selling the issuers. This regards also creditors and output or assets to another company (being in the development ofcrediting the compa the ownership of insiders) for a price lower than nies the market one. Although these activities are • allocation of real sources. The develop usually perfectly legitimate, their effect is the ment offinancial markets can accelerate same; they are regarded as a theft3• the economic growth by increasing sav ings and their application in real invest ments and, as a result, by supporting capi 3 www.ineko.sklstudia zsos marcincin.btm - More ef fective report of business-companies. tal accumulation and improving the et- 24 fectiveness of the allocation of sources unresolved disputes. As an example we can after a more productive capital utiliza take Poland, which has adopted a rigorous tion. 4 Security Act aimed at the protection of share The confidence of investors proceeding holders. The Act demands the publication of from the conviction that the invested capital a lot of information from issuers. It constitutes will be protected against misapplication or a commission for securities and for the ex unjustifiable appropriation by the company's change, the enforcing power of which is inde 5 management or shareholders possessing the pendent of courts.

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