Business Removing

PROTECTING INVESTORS 51
FIGURE 7.1
Few initial public offerings outside OECD and East Asia
Number of initial public offerings, 2003
Top 5
144 United States
125 Japan
105 Canada
97 China
88 Australia
81 Korea
56 Malaysia
Source: Bloomberg and National Stock Exchange websites.
Indonesia 6
India 6
Philippines 4
South Africa 3
Poland 2
Mexico 1
Turkey 1
FIGURE 7.2
Ownership is concentrated in developing countries
Percentage ownership of the 3 largest investors
in the 10 largest publicly listed companies
68
Russia
64
Mexico
Source: World Bank (2004d).
62
Egypt
Arab Rep.
58
57
Indonesia Brazil United
States
19 18
Japan
thing in the Philippines from electricity, telecommunications,
banking, beer and tobacco, newspaper publishing,
television stations, shipping, oil and mining, hotels and
beach resorts, down to coconut milling, small farms, real
estate and insurance.” 7 With such powerful controlling
shareholders and few protections, small investors do not
risk their money buying public equity.
Firms in poor countries need private equity finance,
as seen in Kwadwo’s search for partners. But investors are
scarce. In Indonesia, for example, equity accounts for
only 2% of financing in small businesses. In Romania,
5%. In Venezuela, 7%. In contrast, it is nearly a quarter
of financing in Malaysia. 8 This is not because equity is
unnecessary. Firms in poor countries are twice as likely
to report that a lack of equity finance is an obstacle to
growth—42%, compared with 20% in rich countries. 9
But no investor will put money where it is not safe.
What encourages equity investment?
What investors fear the most is having their money expropriated.
Whether the company is private or public,
expropriation of minority shareholders may be achieved
by selling products or assets at below-market prices,
buying products or assets at above-market prices, taking
business opportunities away from the company and issuing
loans at preferential rates. In many countries with
poor legal protections, clever entrepreneurs can devise
ways to deny fair returns to investors while remaining
within the law. 10
Doing Business distinguishes 3 dimensions of investor
protection: disclosure of ownership and financial
information; legal protections of small investors; and enforcement
capabilities in the courts or securities regulator.
This year the focus is primarily on disclosure of
ownership and financial information and on shareholder
protections, with some discussion on enforcement.
Analysis of enforcement will be developed further in next
year’s report.
Disclosure
Consider 5 examples of popular expropriation methods:
• In 1996 controlling shareholders of Aeroflot, Russia’s
largest airline, set up a company to handle Aeroflot’s
overseas revenues—but with a 6-month payment delay.
Aeroflot covered the gap by borrowing from another
company—owned by the same controlling shareholders—at
above-market interest rates. More than $600
million was siphoned. 11
• In 1998 Peronnet, a French company, rented a warehouse
from SCI at above-market rates. Unbeknownst to
small investors, Peronnet’s controlling shareholder had
established SCI, which bought land and built the warehouse
to lease back to Peronnet. 12
• In 2001 LeisureNet, a fitness company in South
Africa, collapsed. The failure was triggered by a $7 million
investment in a chain of gyms in Germany. Subsequent
investigation revealed that the intermediary company,
Dalmore, was jointly owned by the managers of
LeisureNet. Each pocketed over $1 million. 13