Despite Romania joining the UE more than 14 years ago, some incredible cases of corruption have been able to pop up and even at a very large scale in the open. Probably the most egregious case is one that has been ongoing for years in Romania's stock market.
There are five major companies (known as SIFs – Financial Investment Companies) listed on the Bucharest Stock Exchange that are remnants of the government distribution of equity to the public that took place in the early 1990s. These five conglomerates own equity in all kinds of Romanian companies that were privatized, in the post-communist transition
Millions of Romanians received small number of shares in these five companies. These freshly-minted shareholders mostly sold their shares over time, and some died without having sold out.
Over the past three decades these five SIF conglomerates in Romania have seen their fortunes pass through many hands, but their power structure seems to have stabilised recently as two groups have taken them over.
The five conglomerates currently own a combined equity valued at more than 2 billion euros, a very large amount for Romanian standards (Romania’s equity market capitalization is around 36 billion euros) .
The way these two groups have taken over the five SIFs is what is truly fascinating, especially for a country that has been a member of the EU for so long. Although a 30-year-old law (31/1990) in Romania prohibits the purchase of own shares by a company through third parties, this is exactly how the two groups have managed to take control of the five conglomerates. They have used, over the years, the cash belonging to the SIFs to buy their own shares through various third-party funds and other financial vehicles, set up in Romania and other countries. SIFs own almost all the money in these third-party financial entities that have been set up to buy SIF shares. Having bought with SIFs' money SIFs' own shares, these entities then send representatives to general shareholder meetings and vote exclusively in the SIF management's favour who belong to either of the two controlling groups. And these financial entities are annually paid for what they do, through an administration fee which varies widely, from around 1.5% to over 12%. These amounts are practically bribes that are paid in exchange for votes in favour of those who pay the commissions i.e. SIF managements. The five SIFs are now considered Alternative Investment Funds (AIF) according to more recent EU rules, therefore obliged to comply with relevant laws. There is a European directive, 2011/61/EU, which clearly states the obligation of AIF managements to avoid creating, and maintaining, conflicts of interest that may harm the interests of shareholders. Of course the practice that was just mentioned is a case of conflict of interest between SIF managements and the intermediary funds that are paid by them and vote in their favour.
The way these two groups controlling the SIFs have been able to disregard the law in such a transparent way has deep connections to Romania's financial regulator called ASF (Financial Services Authority). A number of private investors in one of the five SIFs recently sent a well-documented request to ASF, showing how SIF Muntenia and SIF Banat Crisana (two SIFs controlled by the same group) own, indirectly through some intermediary funds, the majority of their own shares in General Shareholder Meetings (GSM). The investors asked ASF to apply the provisions of the law 31/1990 and suspend the voting rights of the own shares that SIF Muntenia held through various financial vehicles. ASF replied that they do not have the authority to interpret law 31/1990 despite ample evidence of them having interpreted, and applied, the exact same law in many other cases in the past. This very apparent protection by ASF of the two groups controlling the five SIFs may have serious corruption implications.
The negative consequences of this transparent disregard for the law and shareholder rights are far reaching. The two groups have been able to maintain their control over the five SIFs for years despite having almost no shareholder support, by simply voting for themselves in GSMs through the shares they have bought in the SIFs indirectly. As mentioned earlier, generous commissions are doled out every year to the various financial vehicles that offer the votes of the SIF shares they have bought with SIF's own money. For example, one of these funds, administered by Swiss Capital (a purely Romanian brokerage firm), owning SIF Muntenia shares, bought almost exclusively with SIF Muntenia money, receives an annual administration fee of 12.55%. Private shareholders have repeatedly complained in the Romanian press about such public displays of disregard for their rights but both the SIF Muntenia management and ASF ignored their pleas. SIF Muntenia is part of the group controlling three of the five SIFs, headed by a former politician, Bogdan Dragoi, and a convicted stock market manipulator, Najib El Lakis.
The two groups do not just dole out generous amounts to the financial vehicles offering them votes at shareholder meetings. They are also openly very generous to themselves, at the expense of their shareholders. For example, SIF Muntenia's management proposed for 2021 a management fee of 22.900.000 RON and a net profit of 23.544.000 RON. SIF Muntenia's management, transparently and shamelessly, proposed to get a fee almost equal to the profit for the whole company, and their zombie shareholders (the intermediary funds paid by SIF managements) voted for such an absurdity. Real shareholders, being heavily outnumbered by zombie shareholders, are unable to do much against SIF management abuses. Many Romanian and UE laws are broken while Romanian politicians and enforcement authorities turn a blind eye and ASF colludes with the perpetrators.
The views and opinions expressed in this article are those of the author and do notnecessarily reflect the official policy or position of Mondo Visione.
