The Romanian Digest

When Will the Property Fund Finally Be Listed? 

de Rubin Meyer Doru & Trandafir     The Romanian Digest
Joi, 13 mai 2010, 14:22 English | Business

Is there any process in Romania that has moved at a more glacial pace than the listing on the Bucharest Stock Exchange (“BVB”) of Fondul Proprietatea, aka the Property Fund (the “Fund”)? If there is, The Romanian Digest is unaware of it.

Tinged with indolence, and fraught with inexplicable and intolerable indifference, the process of restitution for the victims of the former Romanian communist regime has languished pointlessly for years through successive Governments. The compensation afforded to the victims where in-kind restitution is unavailable is through shares in the Property Fund – an entity with assets that are among the finest and best performing companies in Romania. The process to finalize such compensation through listing the Fund on the BVB has dragged on for five years as more and more victims succumb to old age never to obtain justice in their lifetime. Under increasing pressure from the EU and, most significantly, from the United States, progress at listing the Fund is finally inching forward. Since the publication of our last article on the subject in the Romanian Digest™ in June 2009, see: (“What in Heaven’s Name is Happening with Fondul Proprietatea?”), the agreement to retain Franklin Templeton as the Fund’s management company was finalized and the procedure for the registration of the Fund with the Romanian National Securities Commission (“CNVM”) was initiated.

But many months have gone by without Government action to pass the amendments to Emergency Ordinance 81/2007 (“GEO 81/2007”) that are essential in order to list Fondul Proprietatea.  The Ordinance has been placed on the agenda of Government meetings by the Minister of Finance weekly but, without explanation, it was removed from the agenda as many times. Without passage of the Ordinance as amended, the process of providing restitution through the Fund is effectively suspended.  The original GEO 81/2007 was passed by the Government of Romania in 2007 in order to deal with matters related to the restitution of confiscated assets which, at the time - and rightly so - were considered as urgent (which is why the act was passed as an "emergency" ordinance). Despite the "urgency" of the situation, three years later, the Ordinance has yet to be approved by the Parliament of Romania – although last week GEO 81/2007, along with the requisite amendments, was unanimously approved (with one abstention) by the Chamber of Deputies’ Budget and Finance Commission. The Chamber is expected to debate the matter this week, leapfrogging the Government.

The amendments to the GEO 81/2007 are vital to the listing of the Fund and involve: (i) the cancellation of the existing provisions of the law according to which the listing of the Fund with the Stock Exchange would require an initial public offering; (ii) the cancellation of the Fund's unpaid shares -- failure to cancel the shares would require that the Fund sue the state in a litigation that will certainly drag on for many years before the listing could proceed; and (iii) indirectly, the payment of the dividends for 2008 and 2009, which cannot be made because the state (which is still the main shareholder of the Fund) has failed to pay for all of the shares it holds. If adopted by the Chamber of Deputies and then the Senate of Romania, the amendments would speed up the listing of the Fund with the BVB and permit the payment of dividends to the current holders of shares in the Fund.

The seemingly blasé and indifferent attitude of the Government of Romania towards Fondul Proprietatea at this stage in the process is baffling. The Fund cannot function appropriately as a restitution vehicle until it is listed with the BVB, and the delays are costing the Romanian budget millions of Euros arising from decisions continually rendered by the European Court of Human Rights forcing Romania to pay claims in cash rather than in shares in a non-functioning Fund.  Compounding the monetary cost is the fact that Romania’s capital markets are in a virtual uproar demanding a rapid listing of the Fund, and the CNVM desperately needs the fees to be rendered from the Fund’s listing as well as its trading on the BVB. In addition, the restitution claimants are dying off exponentially and the international investment community, which has an increasing stake in the Fund, is growing angry and ever more perturbed by the seeming inability of Romania to keep its commitments. So what is there left to do in order to list the Fund? Read on.

Conclusion of the agreement with Franklin Templeton
GEO 81/2007 sets forth the main steps to be accomplished to list the Fund with the BVB, among which are: (i) the evaluation of the assets held by the Fund by an independent evaluator; (ii) the selection of the management company for the Fund, which has occurred, but not fully concluded; and (iii) the registration of the Fund with the BVB. 

Although the GEO was adopted in June 2007 as an urgent matter, two years later, in June 2009, not even the selection of the Fund manager had been finalized. In our June 2009 Romanian Digest™ article, we noted that the finalization of the second stage in the selection process of the Fund manager was a positive step demonstrating the commitment of the Romanian authorities to eventually move the Fund towards its listing and turning it into a functional mechanism for restitution. We did, however, express our concerns that each such positive step was taken only after incredibly long delays. In 2009, the third and last stage in the selection process for a Fund Manager was realized, i.e.: (i) the submission by the two candidates selected on the short list of their final financial offers; (ii) the evaluation of the offers based on the criteria of the most advantageous offer from an economic perspective; and (iii) the announcement of the winning candidate. Out of the two candidates that had remained after the finalization of the second stage of the selection process, a commission especially created for the purpose of selecting the Fund manager chose the internationally recognized firm of Franklin Templeton Investment Management Ltd.

Because the Fund manager is the entity called upon to perform the actual management of the Fund and administer its portfolio, the finalization of the selection procedure was perceived as a very significant step in the process of listing the Fund with the BVB.  However, in order to perform its role, the agreement between Franklin Templeton and the Fund had to be signed, the Fund manager had to be formally appointed, and the articles of association of the Fund amended accordingly. After a tortuous process of seemingly endless duration that included an effort by private shareholders to force approval of the agreement in a General Assembly of Shareholders, and a vote against it by the Romanian Government, finally, on February 25, 2010, Franklin Templeton Investment Management Ltd. became the Fund manager and its agreement was executed by the Fund’s representative.

But unbeknownst to many, there is still another step to be taken in order to allow the Franklin Templeton to actually perform its functions. Current law requires that any amendment of the articles of association of the Fund must be made based upon both a General Assembly decision, and a Government decision approving the GA’s aforementioned decision. Therefore, the formal appointment of the Fund manager and the amendment of the Fund’s articles of association that will allow it, await and still require a Government Decision. None has been forthcoming from the Government. If, however, the proposed amendments to GEO 81/2007 are adopted, there will be no need for that Government Decision. According to the proposed amendments, the amendment of the articles of association of the Fund will be just be made on the decision of the General Assembly of the Fund, with no need for a Government Decision. Consequently, the formal appointment of the Fund manager and the amendment of the articles of association of the Fund that are still required would then be achieved based only upon the vote of an Extraordinary General Assembly of Shareholders of the Fund. The proposed amendment conforms to the provisions of the Romanian Company Law in that any amendment of the articles of association of a company set up pursuant to the provisions of the Company Law must be made based on the decision of the general assembly of that company. Indeed, the current provisions, according to which the amendment of the articles of association of the Fund must be approved by a Government decision, actually represent an aberration in which a public authority intrudes into the operations of a private company set up in accordance with the Company law.  

Registration Procedure with CNVM
The execution of the agreement between the Franklin Templeton and the Fund allowed for the initiation of the Fund’s registration procedure with the CNVM. The registration of the Fund with the CNVM is a compulsory condition for the listing of the Fund at the BVB pursuant to the provisions of the Romanian Capital Market Law, i.e. Law 297/2004. As an executed agreement was one of the requisite documents which needed to be submitted to the CNVM, the registration procedure for the Fund with the CNVM was likewise delayed by the postponement in the execution of the agreement with Franklin Templeton. One month after its execution, on March 25, 2010, the Fund submitted to the CNVM the documents requesting registration of the Fund as “another undertaking for collective investment”, as defined in the Capital Market Law. Under current law, the Romanian state must, within 90 days from the registration of the Fund with the CNVM, initiate a public sale offer for part of its shares in the Fund. However, the proposed amendments to GEO 81/2007 eliminate the obligation for the public sale offer and, consequently, would speed the listing of the Fund with the BVB.

Valuation of the Assets of the Fund
Another significant step which is to be completed before the listing of the Fund with the BVB is the valuation of the assets of the Fund. On April 15, 2010, the tender for the selection of the company that would perform the evaluation of the assets of the Fund was announced. There were ten valuation and audit firms which initially expressed their interest. The winners are: KPMG Romania SRL, Darian DRS SA and JPA Audit & Consultanta SRL. These three firms will perform the valuation of the assets of the Fund according to international valuation standards. The execution of the agreement between these companies and the Fund is another significant step because, after the signing, the evaluators will have 60 days to finalize the valuation of the assets of the Fund, as required by the provisions of the tender. 

Proposed Amendments to the GEO 81/2007
For an overview of the provisions of GEO 81/2007, please visit the Romanian Digest™ Archive at, for the March 2008 article “Property Fund Plods Towards Listing”.

Credit goes to the Commission of Budget-Finance of the Chamber of Deputies for taking the bull by the horns and debating and voting on the proposed amendments to GEO 81/2007 last week without waiting for the Government to act. The amendments have been sent to the floor of the Chamber of Deputies to be debated this week. It is vital for all to understand that the proposed amendments, when adopted, will facilitate the listing process of the Fund, and finally turn this mechanism, five years after its formation, into a viable functioning entity that will save the Romanian state millions of Euros, infuse the Romanian capital markets with substantial and needed activity, and bring justice to the victims of communism.

Among other things, under the proposed amendments to GEO 81/2007, the Fund would have the obligation to submit within 30 days from the effective date of the law, a list of documents to the CNVM, in order to register the Fund as “another undertaking for collective investment”. The legislation currently in force does not provide for such term and, considering the delay in accomplishing the mandatory steps put in place by GEO 81/2007, the creation of such a time period would undoubtedly speed up the entire listing process.

Another significant feature of the proposed amendments involves the reduction of the share capital of the Fund. At the creation of the Fund in 2005, the Fund had 14,240,540,675 nominative shares and, consequently, a share capital of 14,240,540,675 lei because a nominal value of 1 share in the Fund equals 1 leu. As the share capital of the Fund was set up by in-kind contributions consisting of interests in various legal entities and since there had been no evaluation of these assets at the time that the Fund was formed attesting to the individual value of each asset contributed to the share capital, as well as the entire value of the assets, such value was to be established at a future date.  On February 4, 2010, the value of the assets composing the initial share capital of the Fund was established at 13,744,810,876 lei, smaller by 495,729,799 lei than the value of the initial share capital, the difference representing 3.4811% of the share capital of the Fund. In instances where there is a loss in the net asset value, the share capital is required to be enlarged or the nominal value of the shares reduced, before a distribution of profit by dividends is possible. Therefore, in order to be able to perform the distribution of dividends to the current owners of shares in the Fund, it is necessary to diminish the share capital of the Fund. Therefore, the passage of the proposed amendments would allow for the reduction of the share capital of the Fund from 14,240,540,675 lei to 13,744,810,876 lei, by canceling 495,729,799 shares that are unpaid and currently held by the Romanian state. The unblocking of the distribution of such dividends is extremely important. The dividends due to the Romanian state resulting from its participation in the Fund represents one of the cash sources for compensation payments in lei to restitution victims. The dividends are also of great significance to the private shareholders who have seen little but unfulfilled promises since Law 10/2001 was enacted nine years ago.

In addition, the proposed amendments to GEO 81/2007 state that the Fund can be listed on the BVB without the necessity of performing a public offer as previously discussed, which means that the listing process will be considerably shortened. Indeed, in light of the fact that 40% of the capital of the Fund is now in the hands of private owners, and not with the state, such a solution seems logical and achievable.

Virtually anyone following Fondul Proprietatea in any capacity fervently anticipates the approval by the Chamber of Deputies of the proposed amendments to GEO 81/2007, and the subsequent approval by the Senate.  There is simply no good reason not to proceed swiftly with the listing process. It is not just because the elderly claimants continue to die off waiting for justice – but the listing of the Fund is an extremely significant event for the Romanian capital market which, after listing, will become much more attractive to foreign investors, create new jobs and new business opportunities, and add significant and needed fees for the CNVM and the BVB. Moreover, listing will finally put an end to the enormous costs which the Romanian state must bear from the decisions of the European Court of Human Rights. Most importantly, a principled and praiseworthy plan to compensate the victims of Romanian communism will finally see the light of day. So when will the Property Fund finally be listed – hopefully before the end of 2010.

The article was published based upon approval of:
Rubin Meyer Doru & Trandafir

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