Czech Republic, Hungary and Poland: Development of collective investment funds and securities markets
| Published date | 01 February 1999 |
| Date | 01 February 1999 |
| Pages | 114-136 |
| DOI | https://doi.org/10.1108/eb025003 |
| Author | Mark St Giles |
| Subject Matter | Accounting & finance |
Journal of Financial Regulation and Compliance Vol 7 No 2
Czech Republic, Hungary and Poland:
Development of collective investment funds
and securities markets
Mark St Giles
Received: 22nd February, 1999
Cadogan Financial, 19 Buckingham Street, London WC2N 6EF; tel: 0171 976 2500; fax: 0171 930 7402;
e-mail: cadogan@dial.pipex.com
Mark St Giles is an authority on the world-
wide investment management market, with
extensive experience of investment man-
agement, both as an investment manager
and as managing director of investment
management companies managing sub-
stantial sums for institutional and private
clients. Following an early career in secu-
rities markets he moved into asset man-
agement in the 1970s, becoming Managing
Director of Jessel Britannia in 1970, Allied
Hambro Group from 1976-83 and of GT
Management Plc from 1983-88.
Other posts he has held include those of
Chairman of the British Unit Trust Associa-
tion, President of the European Federation
of Investment Funds and Companies, a
Member of the UK Take Over Panel,
Chair-
man of first the National Association of
Securities Dealers and Investment Man-
agers and then FIMBRA; he was also a
Board Member of LAUTRO.
Until December 1996 he was Non-Execu-
tive Director of Framlington Group Plc. In
addition, he served as a member of the
Board of National Savings, a department
of HM Treasury until 1997. As a consultant
since 1989, he has worked with a range of
clients on business development, sector
development and regulatory development
projects in the asset and fund manage-
ment
sector.
ABSTRACT
The Czech Republic, Hungary and Poland are
regarded
as being among the most advanced of
the Central European countries in terms of
financial
sector
development. This paper reviews
the legislative and regulatory background to the
development of investment funds in these coun-
tries and highlights the impact that governmental
attitudes and mass privatisation programmes
have had on fund market development.
INTRODUCTION
Privatisation in Eastern Europe is being
accomplished in quite different ways in
dif-
ferent countries. Each way has been found
to have its advantages and disadvantages.
Speed has not necessarily resulted in the
most rapid economic benefits. As the tran-
sition to market economies has progressed,
there has been increasing emphasis on regu-
lation, as the importance of financial mar-
kets as a central part of the process of
allocating resources has been recognised,
and as governments have discovered that
free markets do not mean anarchic mar-
kets.
Building just part of a capital market,
however, results in severe distortions and
inefficiencies; creating investments without
institutional investors cannot result in the
good corporate governance that has been
notably absent in many countries. For this
Journal of Financial Regulation
and Compliance, Vol 7, No 2,
1999,
pp. 114-36
© Henry Stewart Publications,
1358-988
Page 114
St Giles
reason, increasing emphasis is now being
placed on the 'front end' of the market in
which savings of the population are col-
lected by a series of intermediary institu-
tions — collective investment funds,
pension funds and insurance companies.
This paper describes the evolution of
collective investment funds in three of the
most advanced countries of the former
communist bloc — Czech Republic, Hun-
gary and Poland.
It is interesting that inadequate legisla-
tion and regulatory inadequacy has caused
the legislation for the much admired Czech
model of mass privatisation by vouchers
(using collective investment funds exten-
sively as repositories for the vouchers allo-
cated to individuals), to be completely
revised and a securities commission, inde-
pendent from government, to be estab-
lished.
Poland has also had a mass privatisation,
using investment funds, but it has devised a
system that gave the same shares of funds
to all citizens and used the fact that these
shares were immediately listed on the stock
exchange to help create turnover and
liquidity in it. The National Investment
Funds have not been without their pro-
blems, particularly in trying to fulfil their
restructuring role where they have come
into conflict with unions and other
entrenched interests.
Hungary never had a mass privatisation
as such, having preferred to adopt a case
by case approach and accepting that for-
eign ownership of major enterprises was
not just inevitable but desirable. Collective
investment funds, unusually for Eastern
Europe, have had to make their own way
without the flying start that mass privatisa-
tion gave their equivalents elsewhere. As a
result they may have built a more stable
foundation.
Despite having had different starting
points and using different methods to reach
their present stage of development, all three
countries have arrived at the point where
they have recognised the importance of
good legislation and effectively enforced
regulations governing financial markets. As
a result, they all have fully operational secu-
rities markets, defined ownership rights, the
foundations for a series of institutional
investors, and, consequently, the beginnings
of genuine corporate governance.
CZECH REPUBLIC
Background to the development of
collective investment funds
The Czech Republic has been the leader
among former members of the socialist
bloc in the transition to free market capit-
alism. This has been achieved by the pio-
neering programme for mass privatisation,
starting in 1992 and continuing with a
second wave in 1994, which spread the
ownership of state enterprises among
Czech citizens and investment funds. By
1996 it had privatised 93 per cent of manu-
facturing output.
(These developments were paralleled by
those in Slovak with which the Czech
republic was federated until 1 January,
1993.
The two countries shared the first
wave of privatisation and there are signifi-
cant cross-holdings of portfolio investments
between them, but their paths have
diverged since).
The Czech government was only able to
achieve rapid privatisation by making
sacrifices. Enterprises were not restructured
before disposal. The scale and speed of the
privatisation programme meant that the
transfer of enterprise ownership to private
sector investors was not adequately accom-
panied by a transfer of managerial account-
ability to shareholders in place of the state.
The administrative and legal infrastructure
for the share trading and transfer was ad
hoc and seriously flawed. The registration
and dealing arrangements created for post-
mass privatisation retail investment activity
proved inappropriate to the needs of a
Page 115
To continue reading
Request your trial