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. Last Updated: 07/27/2016

Investors Do Not Get What They Paid For

The greatest threat to the Russian market today is the market actors themselves. This seems like a rather bold statement, especially taking into account the results of the December elections and the presidential elections in June. Nonetheless, this is precisely what was announced last week by representatives from the First Checking Investment Fund and the securities firm Lerman and Co.


The reason that the leaders of these two companies, which are very well known on the stock market, turned to journalists is almost banal: They cannot exercise their rights as owners after having made a successful bid at an auction.


Last September, Lerman and Co., which is the leading company of the First Checking Investment Fund, bought at an auction a 29 percent share in the open joint-stock company, Central Scientific Research Institute for Radio-Electronic Systems. The name of the company does not have any real meaning. Neither the buyer nor those who are preventing this new owner from exercising its rights has any intention of investing in electronics. the Institute, however, disposes of a spacious building on Mir Prospekt that is considered extremely attractive real estate property.


But, it is not a question of the aims behind buying the shares or what the investors are preparing to do with their new acquisition. It is a matter of whether, in Russia, there exists a system that allows investors who have bought certain goods to become the legal owners of their property. The chairman of the board of directors of First Checking, Andrei Fetisov, and the director of Lerman and Co., Alexander Lerman, are firmly convinced that there is no such system.


Having agreed to pay 2 billion rubles (about $425,000) for the shares over a set term, Lerman and Co. registered its purchase agreement with the Russian Federal Property Fund. But the general director of Radio-Electronic Systems simply did not enter the new stockholder in the company's register. And, if you are not on the list of shareholders, then you clearly have no rights.


Theoretically, the investor in such a case can turn to the court and force the directors to make the necessary changes in the register with the help of a court order. But such trials usually drag on for no less than a year, which can be as costly as the sum that was paid for the shares.


Curiously, and scandalously, the federal bodies that are responsible for protecting the rights of shareholders have not made any steps to do so. The Federal Property Fund is only concerned with ensuring that the buyer pay for the shares it has acquired within a certain period. The fund refers all other aspects of such transactions to the courts.


A company can bring an action against another party in arbitration court only if there exists an agreement between them. There are no contractual relations between Lerman and Co. and its immediate offender, Radio-Electronic Systems. All agreements were made with the Russian Federal Property Fund. But for an investment company to go to court with the property fund -- a key seller on the Russian stock market -- is not the wisest strategy.


It is no wonder then that Russian investors have been wondering whether it would not be better to put their money in real estate in Cyprus or some other country, where property rights are respected.





Mikhail Berger is economics editor of Izvestia.