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. Last Updated: 07/27/2016

Investment Funds: Sorting Out the Maze

It is difficult to watch Russian television these days without being hit by a barrage of advertisements entreating you to invest your privatization vouchers in an investment fund - Peter the Great, Moscow Property, First Voucher and Almaz Neft Zoloto are among the most prolific advertisers.

With Privatization Committee Chairman Anatoly Chubai's recent announcement that some of the stringent restrictions on the activities of investment funds will most likely be lifted very soon, the legal basis, activities and current restrictions of such funds has become a topic of great interest to all types of investors.

Investment funds are less than a year old in Russia. Their legal basis is the presidential decree "On Measures to Organize a Securities Market in the Process of Privatization of State- and Municipally Owned Enterprises".

The decree provides for two types of funds - investment funds and special voucher investment funds, or, simply, voucher funds.

Basically, the funds collect assets of various kinds from the public and invest them in shares of companies in the process of privatization and into already privatized companies.

The voucher funds, in particular, are designed to enable Russian citizens to acquire a stake in diverse Russian companies with their privatization vouchers.

Both sorts of funds must be Russian joint-stock companies in form, and are therefore subject to the regulations of Decree No. 601 "On Joint-Stock Companies", which outline the specific procedure for establishing and operating, respectively, investment funds and voucher funds.

Specifically, each fund is required to include a statement in its charter which declares the principal directions, purposes and restrictions applicable to the fund's investment operations and the limit number, maximum or minimum, of shares of its charter capital that may be invested in different kinds of securities (an "investment declaration").

While the highest executive body of the fund, is the General Meeting of the Shareholders, and the Board of Directors between such meetings, the fund must enter into a management agreement with a manager, who executes the investments of the fund. The manager is allowed to purchase and sell securities independently, as long as the investments are in accordance with the above investment declaration. Managers must be specially trained and licensed.

In amassing the charter capital of either type of fund, contributions may be in cash assets, securities or real estate.

A voucher fund can also accept privatization investment vouchers as a contribution to its charter capital.

Another difference between the two types of funds is that an investment fund may be of the closed or open type; a voucher fund may only be of the closed type. This restricts a voucher fund in that it may only issue non-redeemable securities, while an investment fund has the choice to issue redeemable securities through the open option. In other words, investors can obtain money from voucher funds only through dividends.

Supervision of the two types of funds is also slightly different. Investment funds must be registered and licensed by the Russian Federation Finance Ministry and voucher funds must be registered and licensed by the Russian Property Management Committee.

The regulations place several restrictions on investments by both sorts of funds in an effort to prohibit risky investments and protect the viability of the fund's activities. For example, a fund may not:

oinvest in assets other than securities;

oinvest in securities of unlimited liability enterprises;

oinvest in securities of companies affiliated with the fund;

oagree to sell securities that it does not own or have the right to purchase;


oissue any guarantees or enter into any mortgage transactions.

In addition, the regulations also include several restrictions which are designed to ensure that funds minimize the risk of a bad investment by carrying a diverse portfolio.

Specifically, funds are prohibited from investing more than 5 percent of their net assets in securities of a single company.

Moreover, the regulations attempt to limit the ability of an individual fund to attain a controlling interest of any enterprise. A a fund may not acquire more than 10 percent of the voting shares of any joint-stock company.

To prevent a few funds from amassing too many privatization vouchers, an individual voucher fund is prohibited from acquiring or having among its assets more than 5 percent of the total number of privatization vouchers.

The funds have attracted significant voucher investment from the public, and have made highly publicized investment in such enterprises as the Kosmos and Minsk Hotels, and the Zil auto works. With the expected easing of restrictions on the fund's activities, it is likely that funds will take an even more active role in the share sales scheduled for privatized enterprises in upcoming months.

Carol Patterson is a partner with the Moscow office of the law firm Baker & McKenzie.