WINNERS OF TRANSITION (2): How investment fund traded shares on capital market
According to the financial reports of the investment fund Eurofond and its managing company, analyzed by MANS Investigation Center and Vijesti, the investment fund received at least €57 million from selling shares, out of which it has invested 30 million in the purchase of shares and paid €19.2 million in management fees to its management company Euroinvest, in the last ten years.
At the same time, the shareholders were never paid dividends, and at the end of last year, Eurofond owed €1.5 million in income tax to the state, which it failed to pay for six years, i.e. since it has generated revenues from selling the shares in Montenegrin Electric Enterprise (Elektroprivreda Crne Gore – EPCG). Eurofond is on the Central Bank of Montenegro’s list of companies bank accounts of which have been blocked.
Founded as a privatization fund in 2001, on the eve of the mass voucher privatization, Eurofond operated as a mutual fund in the years to come. In 2012 it was divided into an open-end fund (in which 2 percent of the value of the former single fund was transferred) and closed-end fund (in which 98 percent of the value of the former single fund was transferred).
According to the data from the financial reports in the period from 2006 to the end of last year, Eurofond showed €57.1 million of “inflow from selling shares”. Thus, in 2006 it earned €4.6 million, a year later €3 million, in 2008 it generated €1.8 million, and in 2009 as much as €44.7 million, which coincides with the time when a package of shares in EPCG was sold to the company A2A.
In the next two years there is no data on the inflow, and subsequently the financial reports under the “inflows from sale of investments” showed the figure of around €200,000 in 2012, less than €70,000 in 2013 and €1.2 million in 2014. The financial report for the last year is not yet available, but the report of annual business activities of Eurofond, which was published on their website, showed profits from the sale of shares for 2015 to be nearly €1.4 million.
In the observed period, Eurofond traded most intensely from 2006 to the end of 2009. Thus, the financial reports show that it spent a total of €30 million for shares, out of which it spent €23.3 million on the stock exchange (€3.2 million in 2006, €3.5 million the following year, €2.6 million in 2008 and as much as €13.5 million in 2009), and for the purchase of shares through recapitalization it spent an additional sum of €7 million.
The specific data acquired by MANS Investigation Center show that the recapitalizations, implemented from 2007 to 2009, were aimed at increasing ownership in the Saltworks in Ulcinj and Bjelasica Rada in Bijelo Polje. However, the sum of €7 million from the financial reports of Eurofond, which was used for the recapitalization, does not match the sum of about €7.5 million recorded in the Registry of Business Entities.
In the last decade, besides buying shares, Eurofond paid €19.2 million of management fees to its managing company Euroinvest, which is in charge since its founding in 2001. According to the regulations, the managing companies are entitled to a fee which is calculated on the basis of the net asset value of the fund, which previously amounted to five percent of the net worth, but later changed to three percent.
The value is determined on the basis of a specific methodology, and net assets actually are the total assets which are registered minus total liabilities of the company (short and long-term). In practice, it was highest in the years of boom in the capital market, so the calculated fees charged by Euroinvest were at its peak in that period.
The available data show that Eurofond paid the largest amount of money to its managing company in 2009, when Euroinvest received €8.4 million, and a year later, when it earned €4.4 million. Yet, in comparison to €19.2 million, which is the sum paid in the last decade, the real sum is higher, having regard to the fact that Euroinvest has been managing the fund since 2001. Over years, the company Euroinvest has been managed by individuals linked to Veselin Barovic, who is connected to Eurofond.
In addition, Euroinvest does not only charge Eurofond fees, but it also has a stake in it, as was made possible by a decree from 2000, which entitled the managing company in the first year of operation to charge a five-percent fee in “investment units” that are later transferred into shares. In the years to come, Euroinvest had no limit concerning buying shares of the fund on the market.
Thus, at the end of 2007, Euroinvest owned 13.8 percent stake in the Eurofond, while at the close of the last year, its ownership was 5.65 percent of the share capital.
That kind of legislation initially favored managing companies and created space not only for the ownership concentration between related parties, but for the managing companies to extract money from investment funds.
Unlike Eurofond, which accumulated losses amounted to €108.8 million at the end of last year, with the additional minus of €40 million based on revaluation reserves (reducing share price to its market value), Euroinvest had retained earnings of €8.6 million at the end of last year.
In the past ten years, Eurofond has never paid a dividend, while the state itself has not had any special benefit from its operations. In 2009, thanks to the sale of shares in EPCG, this investment fund was obliged to pay a little over €1 million in capital gains tax, but it failed to do so by the end of the last year, so the debt increased together with the interest.
According to the latest data on debtors from the Tax Administration, as of July this year, Eurofond owes less than €560,000 in income taxes, but it is not known whether it has paid part of the debt in the meantime, or an agreement on its rescheduling has been reached.
45 million spent in 2009
A crucial year for Eurofond business activities was 2009, when the company earned €44.7 million from selling shares. This same year Eurofond sold a 5.90 percent stake it had in EPCG.
The same year, Eurofond spent €13.5 million for the purchase of shares on the stock exchange, €1.7 million for recapitalization, €6.9 million for purchasing real estate, and €8.5 million in fees to Euroinvest.
The fund paid back the loans amounting to €15 million, which makes the total sum of about €45 million.
At the end of 2009, overview of ownership data of the investment fund shows that the fund acquired a 13.3 percent stake in the company Montepranco Bokaproduct and 11.1 percent stake in the insurance company Swiss Osuguranje. It also acquired a 20 percent stake in the company Zadrugar and 42.6 percent in Elektrogrupa, both companies being based in Bosnia and Herzegovina.
When it comes to real estate, a financial report shows that €350,000 was allocated for purchasing business premises in Podgorica, €5.4 million for land in Orahovac in Kotor, and €1.1 million for land and business premises in Becici.
Questionable loan policy
The investment fund began taking out loans intensively after 2006, when it was authorized to operate as a mutual fund. The provisions of the Law on Investment Funds from 2004 put directly this kind of funds in favorable positions and enable them to borrow without restrictions.
The available data show that in 2007 and 2008 Eurofond used to take out loans for purchasing shares on the stock market, and for recapitalizing in order to enhance production in its companies, but the money was never used for recapitalization.
In 2007, Eurofond’s overall loans amounted to €7.9 million, of which Hipotekarna banka granted €2.1 million for Bjelasica Rada and Cetinjeturist (that year the company was not recapitalized, but merged to the company Izbor from Bar), Prva banka approved €3.7 million for the purpose of financing permanent current assets, and Hypo Alpe Adria bank granted an additional sum of €2.1 million for recapitalization, as well.
In 2007, Eurofond injected €4.2 million in Bjelasica Rada.
At the end of 2008, the investment fund’s loan obligations stood at €15 million. It owed 1.6 million to Hipotekarna banka, €6.7 million to Prva banka, €4 million to Hypo Alpe Adria, while the Alps Adriat Privatbank granted €2.6 million for the purchase of shares.
In 2008, Eurofond used nearly €3 million for recapitalization.
As soon as in 2009, the investment fund repaid all loans, thanks to the money it earned from the sale of shares in EPCG. This same year, it resorted to new borrowing from Bank Alpinum Vaduz from Liechtenstein, which approved a loan of up to €5 million. Eurofond pledged shares as the loan guarantee.
Anyway, in the first years of Eurofond business, the Securities Commission found that the fund had violated the rules. It did not have enough of its own money for the purchase of shares, so it took the loans, despite the fact that at the time the regulations stipulated that privatization fund could not take a loan, pledge or otherwise encumber the shares in its portfolio.
It is not known whether any measures have been taken on the basis of this violation.
Violets financial provisions, operates through Liechtenstein bank
Eurofond Audit report for the past year is not available, but the auditor gave an opinion for 2014 audit report with a grain of salt because, as they explained, Eurofond did not keep the books in accordance with the Rulebook on the Chart of Accounts.
Furthermore, the fund’s financial operations in 2014 were performed through the custodian bank Bank Alpinum Vaduz in Liechtenstein, while there was no recorded transactions with commercial banks in the country.
The auditor pointed out that at the close of 2014 the fund had a total uncovered loss of €117.6 million and that its bank account had been blocked since 23 June 2010, all of which suggest a degree of uncertainty over future business activities of the fund.
Authors:
Ines Mrdovic
Biljana Matijasevic
This text is created with the support of the European Union within the project “Zero Tolerance to Corruption”. Network for Affirmation of Non-Governmental Sector – MANS is solely responsible for the contents of this article, and the views taken herein shall not in any case be considered as those of the European Union.
