Investors lobby for improved business climate
The investment and business community has a full set of demands for government to adopt in order to spur the private sector.
The drawn-out talks on creating the ukrainian Venture Capital and Private Equity Association finally ended in November. The association’s goals, committee structure and elected board have been published.
The association’s Facebook page states that it is “dedicated to attracting investors and creating one of the best investment climates.”
The group has its work cut out for it. The country is among the world’s most corrupt ones and the hryvnia has lost half its value this year as new foreign direct investment shrank to an estimated $2 billion this year. Cumulative FDI in the nation hit a meager $56.4 billion last year.
Jaanika Merilo, the organization’s executive director, is candid about the fact that the changes won’t happen overnight. The association is developing a road map of 60 items for the government officials to follow closely.
“We want to initiate new projects, not duplicate old ones,” Merilo explains. “Our goal is to focus on things which have received the least support, primarily – the creation of a favorable investment climate. With war in the country, the Ukrainian government obviously cannot raise enough funds to support the investment market, but it should at least try to reduce intrusive regulations.”
The group’s initiatives mainly focus on intellectual property protection, rule of law, reducing corruption, shrinking the barriers for foreign investment and building a healthy investment infrastructure.
With enhancing the investment climate a priority, the group plans to stress enforcement of shareholders’ agreement clauses to ensure investors have their rights protected. Another concern is converting debt to equity, for which there is no legal mechanism in ukraine.
“There should be a balance between what the government enables and what it restricts. For example, when there is a will to structure the transaction with a tag-along
clause, it cannot be legally implemented,” Merilo says. “Just enabling the main points of european Union legislation would be a significant step towards creating a good investment climate.” Establishing a fair and independent judiciary is another priority. Often the reason investors avoid or flee Ukraine is the lack of protection in court.
According to Merilo, who is an “angel” investor – someone who aims to develop a market rather than profit from it – there is no sense in investing without protection by law and courts.
Legal experts say there is a lack of political will to improve the judiciary, one of the world’s worst ones.
Andriy Popko, senior partner at PLP Law Group, says that too many bureaucratic hurdles and the failure of publicly listed companies to disclose their detailed financial transactions also need to be addressed.
“Considering the fact that the recently presented coalition agreement contains eight short points of two lines each dedicated to incorporating international corporate law standards into the Ukrainian legislative system, I don’t think they really care about it,” Popko says. “Six out of seven members of National Securities Commission fall under the lustration law. Appointing new members is the president’s task, so I doubt that changes will take place fast, because he must keep his head in other more urgent matters in the current situation.”
Popko also believes “sell-out” and “squeeze-out” clauses to protect minority and majority shareholders rights are a must. He argues that the right to appoint an independent executive director and set a quota for minority shareholders’ representatives in a company’s supervisory board should also be implemented in Ukraine’s corporate law.
Yaroslav Sverdlichenko, the head of corporate practice at OMP, believes that changes are unlikely to take place in the next six months. He says the reason for the slow progress is partly because of long negotiations among investors, parliament and the ministries.
However, Sverdlichenko remained cautiously optimistic that Dmytro Shymkiv, former chief executive officer of Microsoft Ukraine and now deputy head off the President President’ss Administration, together with many fresh parliamentnt members, may eventually be able to push through the necessary legislativeslative changes.
“Consideringg that the President’s Administration n has joined the reform process with Dmytro tro Shymkiv heading it, there is hope,” he said.
A key item on their agenda, according to Sverdlichenko,ko, should be a regulation for buying g and selling currency: “Investors must st have a clear idea of how to bring in n and withdraw investments from maa country. In terms of recent National Bank restrictions, it is hard to freely buy and sell currency at a real market rate.”
Dmytro Fedoruk, corporate practice adviser at Clifford Chance Ukraine, agrees that weak rule of law, non-transparent courts and corruption are the key problems. However, he says restrictions of investors’ ability to repatriate profits, the prohibition on use of foreign law for shareholders’ agreements, the difficulty in protecting intellectual property rights and employment law issues are also related concerns.
Anti-share dilution provisions also have to be granted. According to Fedoruk, there have been cases when shareholders weren’t notified of a share subscription. Their shareholding was diluted without their knowledge. “These issues are much more fundamental and they cannot be fixed simply by making changes to law. Obviously a deep cultural change and strong political will are required to deal with them,” Fedoruk says.
The Ukrainian Venture Capital and Private Equity Association is “dedicated to attracting investors and creating one of the best investment climates.” The group has its work cut out as the nation’s currency sinks and investors shy away from Ukraine’s corruption.