Investing in BRIC COUNTRIES This page intentionally left blank Investing in BRIC COUNTRIES Evaluating Risk and Governance in Brazil, Russia, India & China Edited by SVETLANA BORODINA OLEG SHVYRKOV with JEAN-CLAUDE BOUIS New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2010 by McGraw-Hill, Inc All rights reserved Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher ISBN: 978-0-07-174710-3 MHID: 0-07-174710-9 The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-166406-6, MHID: 0-07-166406-8 All trademarks are trademarks of their respective owners Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark Where such designations appear in this book, they have been printed with initial caps McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs To contact a representative please e-mail us atbulsales@mcgrawhill.com This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service If legal advice or other expert assistance is required, the services of a competent professional person should be sought —From a Declaration of Principles Jointly Adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc (“McGraw-Hill”) and its licensors reserve all rights in and to the work Use of this work is subject to these terms Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill’s prior consent You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited Your right to use the work may be terminated if you fail to comply with these terms THE WORK IS PROVIDED “AS IS.” McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE McGraw-Hill and its licensors not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom McGraw-Hill has no responsibility for the content of any information accessed through the work Under no circumstances shall McGrawHill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise About the Editor and Contributors Main Editor Jean-Claude Bouis has been an editor for Standard & Poor’s since 1998 after 25 years at the Associated Press and the New York Times Contributors Svetlana Borodina is director of corporate governance at Standard & Poor’s Equity Research, based in Moscow Oleg Shvyrkov is associate director of corporate governance at Standard & Poor’s Equity Research in Moscow Eduardo G Chehab is director of Standard & Poor`s corporate governance services in São Paulo Preeti S Manerkar is a senior research analyst at CRISIL Research, part of the Mumbai-based affiliate of Standard & Poor’s Peter Montagnon is chairman of the board of the International Corporate Governance Network Sergey Stepanov is assistant professor of Corporate Finance at the New Economic School, Moscow Warren Wang is partner and CEO of Institutional Investor Services, a research and consultancy firm based in Beijing • v • This page intentionally left blank Contents Foreword Good Governance Does Make a Difference Peter Montagnon Preface Why Governance Is Key to the Future of BRIC Countries xiii Svetlana Borodina and Oleg Shvyrkov PART Introducing the BRICs and Their Governance Status Chapter A Guiding Light for Investors in Brazil Eduardo G Chehab Chapter Corporate Governance Is Advancing in Russia Oleg Shvyrkov Chapter Corporate Governance Is Growing Modestly in India 49 Preeti S Manerkar Chapter Moving toward Accountability in China Warren Wang PART Fundamentals of Emerging Market Governance Analysis 109 Principal Contributor: Oleg Shvyrkov Chapter Ownership Influences: The State, Company Founders, Majority Shareholders, and Other Dangers 111 • vii • ix 81 23 viii • Contents Chapter Shareholder Rights: Do You Really Have Them? 125 Chapter Transparency, Audit, and Risk Management: Risk-Averse, Risk-Adjusted, and Just Plain Risky 147 Chapter Board Effectiveness, Strategy, and Compensation: Boards of Directors versus Potemkin Villages 175 PART Case Studies Chapter Wimm-Bill-Dann Foods OJSC (Russian Federation) 203 Oleg Shvyrkov and Anna Grishina 201 Chapter 10 EuroChem Mineral and Chemical Co OJSC (Russian Federation) 223 Oleg Shvyrkov and Anna Grishina Appendix A Transparency and Disclosure by Russian Companies 2008: Insignificant Progress along with Fewer IPOs 245 Appendix B Transparency and Disclosure 2008: Disclosure Levels for China’s Top 300 Companies Lag Far Behind Global Best Practices 279 Warren Wang Index 305 Foreword: Good Governance Does Make a Difference by Peter Montagnon Good corporate governance involves two essential things Boards of companies should be equipped to make robust strategic decisions and manage risk, and they should be accountable to the shareholders that own them In this way they will be better able to generate value over the long term for investors, secure the jobs of their employees, and be reliable partners of their customers and suppliers, thus contributing to the general wealth There is a great deal of academic research about whether and how governance does actually add value, but seen from this perspective it is surely little more than common sense Should company boards actually be expected to make weak decisions and ignore risk management? Of course not We all know that is the way to failure, not success The issue is more about what boards actually need to to deliver on these basic principles Sometimes an approach to governance can seem very prescriptive, almost as if it were an alternative form of regulation Governance that is imposed from outside in this way is less likely to succeed, because the boards that undertake it will not have understood what it is trying to achieve Rather, good governance is something that directors should aspire to, because they know it will help their company Shareholders, too, have a role to play, because accountability to shareholders can help boards deliver If there is no accountability, • ix • Appendix B • 303 Company 277 278 279 280 281 282 283 284 285 286 287 288 289 290 291 292 293 294 295 296 297 298 299 300 XJ Electric Co., Ltd Xuzhou Construction Machinery Science & Technology Co., Ltd Yantai Changyu Pioneer Wine Co., Ltd Yantai Dongfang Electronics Information Industry Co., Ltd Yantai Wanhua Polyurethane Co., Ltd Yantai Xinchao Industry Co., Ltd Yanzhou Coal Mining Co., Ltd Youngor Group Co., Ltd Yunnan Aluminium Co., Ltd Yunnan Baiyao Grp Co., Ltd Yunnan Chihong Zinc & Germanium Co., Ltd Yunnan Copper Co., Ltd Yunnan Tin Co., Ltd Yunnan Yuntianhua Co., Ltd Zhe Jiang Xinan Chemical Industrial Group Co., Ltd Zhejiang China Commodities City Group Co., Ltd Zhejiang China Light & Textile Industrial City Group Co., Ltd Zhejiang Huahai Pharmaceutical Co., Ltd Zhejiang Longsheng Group Co., Ltd Zhengzhou Coal Industry & Electric Power Co., Ltd Zhengzhou Yutong Bus Co., Ltd Zhongjin Gold Co., Ltd Zhuhai Zhongfu Enterprise Co., Ltd ZTE Corp This page intentionally left blank INDEX ABC See Agricultural Bank of China ABSs See Asset-backed securities Accessibility, disclosure, 157–160, 210–212, 279–282 Accountability Rating, 235 Accounting Law, PRC, 102 Accounting practices and standards ASBE, 83, 103 in China, 102–104 disclosure, 150–153 GAAP, 19, 25, 47, 76, 78–79, 147, 150, 152–153, 208, 211, 260 in India, 76–79 RAS, 36, 45–46, 215, 235 Accounting Standards for Business Enterprises (ASBE), 83, 103 ADR/GDR See American Depositary Receipt/Global Depositary Receipt Aggregate market capitalization (AMC), 262–263, 265 AGMs See Annual general meetings Agribusiness sector, Agricultural Bank of China (ABC), 87 AIM See Alternative Investment Market Alternative Investment Market (AIM), 250, 267–269, 278 AMC See Aggregate market capitalization American Depositary Receipt/Global Depositary Receipt (ADR/GDR), 33, 42, 133, 205, 250 AMFI See Association of Mutual Funds in India ANBID See National Association of Investment Banks Annual general meetings (AGMs), 37, 97, 132, 260 Annual report, 234, 243, 257, 285 Anti-Monopoly Law, 95 Antitakeover provisions, 142 Appraiser, 232–233 ARCs See Asset Reconstruction Companies ASBE See Accounting Standards for Business Enterprises Asset Reconstruction Companies (ARCs), 59 Asset-backed securities (ABSs), 9–10 Association of Mutual Funds in India (AMFI), 72 Attendance policies, 190 Audit(s) charters, 167–168 committee, 162, 166–169, 212–213, 237–238 fees, 284 importance of, 147–148 internal, 168–169, 212, 237 process, 161–167, 212, 236–237 standards for, 163–165 Auditor appointment, 163 choice, 163 external, 237 fees, 284 independence, 21–22, 48, 79, 106–107, 166, 212 selection, 165 Authority, 185–191, 215, 240 Bajaj, Rahul, 67 Bank credit notes (CCBs), 12 Bank deposit certificates (CDBs), 12 Bank deposit receipts (RDBs), 12 Bank of China (BOC), 86–88, 96 • 305 • 306 • Index Bank of Russia, 44 Banking industry Chinese, 86–87, 96 creditor banks in, 236 Indian, 57–59 Banking ombudsman, 71 Bankruptcy Law, 95 BCB See Brazilian Central Bank Bearer shareholders, 133 Beneficial ownership and control disclosure, 151 BFS See Board for Financial Supervision Birla Code, 67–68 Blockholders affiliations with, 180 assessment of, 150 multiple large, 116–120 single large, 113–114 WBD, 207 BM&FBovespa S.A., 9–10, 14–16, 20, 126 Board for Financial Supervision (BFS), 59 Board of directors See also Director(s) appointments, 31–32 attendance policies, 190 authority, 185–191, 215, 240 in China, 93–94, 98–100 code of ethics, 189 committees, 182, 214–215, 218, 240, 242 compensation, 191–200, 217–218, 243–244, 277, 281 competitors on, 214 composition, 37, 185–186, 214–215, 226, 239–240 effectiveness, 176–177, 189, 215–216, 240–241 EuroChem, 239–244 expertise, 183–185, 215, 239 as heart of corporate governance, 176–178 importance of, 175–176 information, 189, 276 member criteria, 181 performance monitoring, 190 process, 185–191, 216 responsibilities, 187–188 role, 187 self-appraisal, 216, 241 shareholder meetings and, 38 size, 178–179 staggered, 143 strategic process, 191, 193, 216–217, 290 structure, 16–17, 73–75, 176–185, 276, 290 succession, 188 training, 188, 190 WBD, 206–208, 214–218 Board of supervisors (BoS), 93, 98, 100 BOC See Bank of China Bombay Stock Exchange (BSE), 50, 60 Bond market See Domestic bond market Bonus payments, 195 BoS See Board of supervisors Bovespa See BM&FBovespa S.A Bovespa Fix, 10 Brazil board of directors structure in, 16–17 capital market, 7–12 corporate governance in, 3–5, 13 disclosure in, 20–22 dividend payment processes in, 15–16 domestic bond market of, 12–13 economic history of, 5–6 family owners in, 112 GDP of, 5–6 IFRS and, 17, 19–20, 22, 46, 152 informational infrastructure, 19–20 legal infrastructure of, 17 market infrastructure of, 5–6 New Bankruptcy Law of, 17–19 stock market, 4, 9–10, 13–16 transparency in, 20–22 Brazilian Central Bank (BCB), 7–8 Brazilian Company Law, 15, 17 Brazilian Mercantile & Futures Exchange See BM&FBovespa S.A BRIC countries See Brazil; China; India; Russia Browder, William, 34 BSE See Bombay Stock Exchange Bureaucratic decision-making procedures, 30–31 CA See Chartered accountant Cadbury, Sir Adrian, 195 CAMELS approach, 59 Canada, 143 Capital markets attraction to, 23–25 Brazilian, 7–12 Index • 307 Capitalization, market, 255–256, 262–263, 265, 289–290 Capitalization-weighted transparency index (CWTI), 261–262 Cash flow rights, 127, 135, 140–141 CBRC See China Banking Regulatory Commission CCB See China Construction Bank CCBs See Bank credit notes CDBs See Bank deposit certificates CEFIR See Centre for Economic and Financial Research Center for Custody and Financial Settlement of Securities (Cetip), 11 Centre for Economic and Financial Research (CEFIR), 248, 271–272 CEO See Chief executive officer Certified Public Accountant (CPA), 106–107, 284 Cetip See Center for Custody and Financial Settlement of Securities CGS See Corporate governance score Chair, 181, 183–184, 214–215, 240 Chartered accountant (CA), 71 Chief executive officer (CEO), 16, 37, 66, 177, 180–181, 183–184, 192, 195, 207, 229, 240–241, 247 China Accounting Law of, 102 accounting practices and standards in, 102–104 auditor independence in, 21–22, 48, 79, 106–107 banking industry in, 86–87, 96 board of directors in, 93–94, 98–100 Code of Corporate Governance of, 83 Company Law of, 83, 92–94, 97–98 compensation in, 281, 284–285 corporate governance in, 81–83, 86–87, 94, 100–102 directors in, 101–102, 281 disclosure in, 99–100, 104–106, 279–295 domestic bond market of, 88–89 exchange requirements of, 282–287 finance crime law in, 100–101 financial markets in, 86–89 GAMMA scores and, 287 GDP of, 85–86 IFRS and, 25, 46, 83, 103, 152 incentive systems in, 101 independent directors in, 101–102 informational infrastructure of, 102–104 institutional and cultural factors in, 89–90 key listing rules in, 97 legal infrastructure in, 90 legal tradition in, 90–92 market infrastructure of, 83–85 Ministry of Finance in, 83, 103–104 other commercial laws of, 95 ownership structures in, 85–86, 281, 290 principal legal provisions of, 83, 92–94 regulatory framework of, 95–97 scandals in, 81 Securities Law of, 83, 93–94 shareholders in, 89–90, 94–95, 98–99 SOEs in, 82, 84–85, 103, 112, 119, 280, 284, 288 stock exchanges in, 88, 97, 105 top 20 companies in, 291–294 transparency in, 81–83, 104–106, 279–295 China Banking Regulatory Commission (CBRC), 82, 96–97 China Construction Bank (CCB), 86–87, 291 China Insurance Regulatory Commission (CIRC), 82, 96–97 China Securities Regulatory Commission (CSRC), 82–83, 88, 94, 96–97, 100, 102, 104–105, 280, 282–283 CII See Confederation of Indian Industry CIRC See China Insurance Regulatory Commission CIS See Confederation of Independent States Classified board See Staggered board CLB See Company Law Board Closed joint stock companies (ZAOs), 35–36 CMN See National Monetary Council Code of Corporate Governance, 42, 83, 94, 97, 99–101 Code of ethics, 189 Committees audit, 162, 166–169, 212–213, 237–238 board of directors, 182, 214–215, 218, 240, 242 IASC, 19 308 • Index Communist Party of China (CPC), 84–85, 92 Companies Act, 64–67, 69, 71, 77 Company Law, PRC, 83, 92–94, 97–98 Company Law Board (CLB), 70 Company secretary (CS), 72 Company value, 269–271 Compensation board of directors, 191–200, 217–218, 243–244, 277, 281 in China, 281, 284–285 consultant, 197–198 disclosure, 198, 218, 244 executive, 191–200, 217–218, 243–244, 284–285 management, 191–200 plan dilution, 199 principles for, 194 Competitors, 214 Composition, board of directors, 37, 185–186, 214–215, 226, 239–240 Concentration, ownership, 113–114, 281, 289 Confederation of Independent States (CIS), 234 Confederation of Indian Industry (CII), 67–68 Consultant compensation, 197–198 Contract Law, 95 Control rights, 127–128 Control-share provisions, 144 Corporate decisions, 39–40 Corporate governance See also Governance, Accountability, Management Metrics, and Analysis analysis of, attraction to global capital markets and, 23–25 board of directors as heart of, 176–178 Brazilian, 3–5, 13 checks and balances in, 115 in China, 81–83, 86–87, 94, 100–102 Codes of, 42, 83, 94, 97, 99–101 economic development and, 49 EuroChem, 228 Indian, 49–53, 55–57, 67–68 principles of, 119 in private companies, 123–124 risk standards, 172–173 Russian, 23–25, 29–30, 32–34, 42–44 shareholder rights and, 126–129 of strategic process, 193 transparency and, 149 Corporate governance score (CGS), 248, 287 Corporate Law, 13, 19 Corporate secretary, 186, 216 Cosale rights, 135 Country factors, 220–221 CPA See Certified Public Accountant CPC See Communist Party of China Credit rating system, 88–89 Credit receivables funds (FIDCs), 12 Creditor banks, 236 CRISIL, 54, 56–57 CS See Company secretary CSRC See China Securities Regulatory Commission CTC Media, 246, 254 CVM See Securities and Exchange Commission CWTI See Capitalization-weighted transparency index DCA See Department of Company Affairs Debenture issuances, 16 Debentures, 11–12 Debt market, 63 Debt Recovery Appellate Tribunal (DRAT), 60 Debt Recovery Tribunals (DRTs), 59–60 Decision-making procedures, 30–31 Deng Xiaoping, 84, 91 Department of Company Affairs (DCA), 69 Depositary receipts, 133, 137 Director(s) See also Independent directors attendance, 190 in China, 101–102, 281 commitments, 192 executive, 179 nomination, 281 nonemployed, 195 nonexecutive, 179–180, 243 nonindependent, 179–180, 281 outside, 186 selection, 186 shareholdings of, 199 Disclosure See also Transparency & Disclosure studies accessibility, 157–160, 210–212, 279–282 Index • 309 accounting standards, 150–153 of beneficial ownership and control, 151 in Brazil, 20–22 in China, 99–100, 104–106, 279–295 code, 280 compensation, 198, 218, 244 critical opaque areas in, 258–261 environmental, 158–161, 212, 235 EuroChem, 234–239 fair, 154–157, 283 financial, 283–284, 290 frequency of, 156–157 governance, 149–150, 152, 211, 235–236 higher market capitalization and, 255–256 importance of, 147–149 in India, 74–75, 78–79 of indirect structures, 151 by industry, 262 insignificant changes in, 257–258 operating, 154, 283–284, 290 ownership, 105, 149–150, 234, 265–266, 273, 283 pyramid, 256 quality of, 20, 78–79, 104 requirements, 155, 278 in Russia, 25, 32, 44–47, 245–248, 255–258, 265–266 shareholder criteria, 149–150 shareholder rights and, 273–274 social, 158–161, 212, 235 stakeholder engagement and, 161 timing of, 156–157, 211, 234, 236, 260 WBD, 210–212 weakest areas of, 290–291 Web, 235, 257 Dispersed shareholders, 27 Dividend payment processes in Brazil, 15–16 cash flow rights and, 141 policy, 210, 232 in Russia, 37, 210 Domestic bond market Brazilian, 12–13 Chinese, 88–89 Dominant shareholders, 55–57 Double voting rights, 143 DRAT See Debt Recovery Appellate Tribunal DRTs See Debt Recovery Tribunals Dual-class capital structures, 144 Economic development corporate governance and, 49 stages of, 54–55, 84 Effectiveness, board of directors, 176–177, 189, 215–216, 240–241 Enterprise risk management (ERM), 167, 170–173 EuroChem, 227, 238–239 WBD, 213 Environmental reporting, 158–161, 212, 235 Equity financing, 25–27 Equity issuances, 15–16 Equity markets development of, 60–62, 87–88 foreign public, 252 private, 63 ERM See Enterprise risk management Ernst & Young, 212 Ethical boundaries, 189 Eurobonds, 236 EuroChem Mineral and Chemical Co OJSC audit process, 236–237 board of directors, 239–244 disclosure, 234–239 dividend policy, 210, 232 ERM and, 227, 238–239 executive summary, 224–225 GAMMA score, 224–226 at a glance, 223 governance improvements and, 228 KϩS AG and, 228, 230 Melnichenko and, 225–229 ownership structure, 228 shareholders, 225–228, 230–233 strategic planning, 239, 242–243 strengths, 224, 226 subsidiaries, 231–233, 241 transparency, 234–239 weaknesses, 224, 226–227 Evraz Group S.A., 248 Exchange requirements, 282–287 Executive compensation, 191–200, 217–218, 243–244, 284–285 Executive contracts, 196–197 Executive director, 179 310 • Index Executive nomination, 105–106, 284–285 Executive pay, 105–106 Executive shareholdings, 199 Expertise, 183–185, 215, 239 External auditor, 237 External directorships, 192 Fair disclosure, 154–157, 283 Family owners, 112 Federal Commission for Securities Markets (FCSM), 42 Federal Financial Markets Service (FFMS), 250 Federal Service for Securities Markets (FSFM), 42, 46 FFMS See Federal Financial Markets Service FIDCs See Credit receivables funds FIIs See Foreign institutional investors Filing record, 157 FIMMDA See Fixed Income Money Market and Derivatives Association of India Finance crime law, 100–101 Financial disclosure, 283–284, 290 Financial markets Chinese, 86–89 Indian, 57–63 progress driven by, 47–48 Financial reporting See also International Financial Reporting Standards HKFRS and, 103 quality of disclosure and, 78–79 timing of, 21, 105 Financial Stability Board, 194 Fixed Income Money Market and Derivatives Association of India (FIMMDA), 72 Foreign institutional investors (FIIs), 53, 57, 62 Foreign public equity markets, 252 France, 280 Frankfurt Stock Exchange (FSE), 250, 268, 278 Freeze-out provisions, 144 FSA See U.K Financial Services Authority FSE See Frankfurt Stock Exchange FSFM See Federal Service for Securities Markets GAAP See Generally accepted accounting principles GAMMA See Governance, Accountability, Management Metrics, and Analysis Gazprom OJSC, 28, 34 GDP See Gross domestic product Generally accepted accounting principles (GAAP), 19, 25, 47, 76, 78–79, 147, 150, 152–153, 208, 211, 260 Germany, 280 Global recession, 49 Global Reporting Initiative (GRI), 160, 235 Globalization, 51–52 Golden parachute, 218 Golden shares, 143 Golden Telecom, 254–255 Governance, Accountability, Management Metrics, and Analysis (GAMMA), 4, 113–114, 116, 121 for Chinese companies, 287 country factors, 220–221 definition of, 218–219, 248 EuroChem, 224–226 scale, 219–220 WBD, 204–205 Governance disclosure, 149–150, 152, 211, 235–236 Government securities (G-Secs), 63 Government shareholders, 28–30 Government-appointed independent directors, 31–32 Government-controlled public companies, 119–122 Grasp the Large, Release the Small policy, 82, 85–86 Greenmail provisions, 144 GRI See Global Reporting Initiative Gross domestic product (GDP) Brazilian, 5–6 Chinese, 85–86 Indian, 57 Russian, 26 Groupe Danone, 206–208, 214 G-Secs See Government securities G20 summits, 194 Hermitage Capital Management, 34 Higher market capitalization, 255–256 Index • 311 Hong Kong Financial Reporting Standards (HKFRS), 103 Horizontal strategic communication, 243 IASC See International Accounting Standards Committee ICAI See Institute of Chartered Accountants of India ICBC See Industrial and Commercial Bank of China ICSI See Institute of Company Secretaries of India ICWAI See Institute of Cost and Work Accountants of India IDFC See Infrastructure Development Finance Company IEPF See Investor Education and Protection Fund IFC See International Financial Corporation IFRS See International Financial Reporting Standards Incentive systems, 101, 200, 217 Independent directors in China, 101–102 criteria, 181 decision to appoint, 178 government-appointed, 31–32 importance of, 179 nonexecutive, 180 role of, 76, 118 in Russia, 31–32, 178, 227 tenure, 181 WBD, 206 Independent registrar, 209 India accounting practices and standards in, 76–79 AMFI and, 72 banking industry of, 57–59 board structure in, 73–75 CII and, 67–68 corporate governance in, 49–53, 55–57, 67–68 debt market of, 63 disclosure in, 74–75, 78–79 economic development in, 54–55 family owners in, 112 FIMMDA and, 72 financial markets in, 57–63 GDP of, 57 ICAI and, 71–72, 76 ICSI and, 72 ICWAI and, 73 IFRS and, 46, 76, 78–79, 152 IPO grading in, 75–76 key listing rules in, 73 legal infrastructure of, 65–66 market infrastructure of, 53–54 NGOs in, 64 ownership structure in, 55–57 principal legal provisions of, 66–68 RBI and, 58–59, 69–71 regulatory framework of, 68–71 scandals in, 50–51 SEBI and, 49–53, 61–62, 67–69, 75, 79 self-regulating organizations of, 71–73 shareholders in, 64–65, 126 State Bank of, 58 transparency in, 78–79 Indirect structures disclosure, 151 Industrial and Commercial Bank of China (ICBC), 86–87, 280, 287, 291 Information accuracy, 279–282 Informational infrastructure Brazilian, 19–20 Chinese, 102–104 Russian, 44–45 Infrastructure Development Finance Company (IDFC), 61 Initial public offering (IPO), 15, 25, 28, 45, 60, 75–76, 94, 123, 207, 225, 246–247, 249, 252, 254, 257, 266–269 Insider trading, 41, 66 Institute of Chartered Accountants of India (ICAI), 71–72, 76 Institute of Company Secretaries of India (ICSI), 72 Institute of Cost and Work Accountants of India (ICWAI), 73 Internal audit, 168–169, 212, 237 Internal control, 168–169, 187–188 International Accounting Standards Board (IASB), 103 International Accounting Standards Committee (IASC), 19 International appraiser, 232–233 International Financial Corporation (IFC), 43 312 • Index International Financial Reporting Standards (IFRS) Brazil and, 17, 19–20, 22, 46, 152 China and, 25, 46, 83, 103, 152 India and, 46, 76, 78–79, 152 regulatory reporting, 250 Russia and, 25, 43, 45–47, 152, 226, 234–237, 244 transparency and, 148, 150, 234, 260 International investors, 249–251, 286 International Organization of Securities Commissions (IOSCO), 19, 76 Internet, 158 Intrafirm and related-party transactions, 151 Investor Education and Protection Fund (IEPF), 64–65 Investor Protection Association (IPA), 33 Investors corporate governance analysis and, FII, 53, 57, 62 international, 249–251, 286 QFII, 82–83, 88 relations with, 211 risks to, 24 IOSCO See International Organization of Securities Commissions IPA See Investor Protection Association IPO See Initial public offering Japan, 280 Joint-Stock Company Law (JSC Law), 35–41 Joint-venture (JV) funds, 88 JSC Law See Joint-Stock Company Law Judicial reorganization, 18–19 JV funds See Joint-venture funds Know your customer (KYC) guidelines, 61–62 Kovdorskiy GOK, 233 KϩS AG, 228, 230 KYC guidelines See Know your customer guidelines Labor Law, 95 Law on Limited Liability Companies, 35 Law on the Securities Market, 41 Legal documentation, 160 Legal infrastructure Brazilian, 17 Chinese, 90 Indian, 65–66 Russian, 34–35 Liquidity, 249 Local appraiser, 232–233 London Stock Exchange (LSE), 26, 247, 250, 267–269, 278 M&A See Merger and acquisition Maher, Tony, 208 Management compensation, 191–200 information, 276 Mandatory bids, 141 Mandatory buyouts, 40 Market capitalization, 255–256, 262–263, 265, 289–290 Market economy, planned v., 84 Market for corporate control, 145 Market infrastructure Brazilian, 5–6 Chinese, 83–85 Indian, 53–54 Russian, 25–27 Mass media, 32–34 Medvedev, Dmitry, 31 Mehta, Harshad, 50 Merger and acquisition (M&A), 269 Metallurgical companies, 261–262 Methodology, 249–251, 285–287 MICEX See Moscow Interbank Currency Exchange Minin sector, Ministry of Finance, in China, 83, 103–104 Ministry of Finance (MoF), 69, 73–74 Minority shareholders, 35, 98–99, 101, 112, 127, 134–135, 143, 151, 156, 227, 232–233, 241 MMC Holding Ltd., 229 MNCs See Multinational companies Mobile TeleSystems OJSC (MTS), 246 MoF See Ministry of Finance Moscow Interbank Currency Exchange (MICEX), 26, 43, 247, 268, 278 MTS See Mobile TeleSystems OJSC Multinational companies (MNCs), 55 Multiple large blockholders, 116–120 Murthy, N R Narayana, 67 Index • 313 Nasdaq, 62, 268 National Association for Securities Market Participants (NAUFOR), 33 National Association of Financial Market Institutions, 11–12 National Association of Investment Banks (ANBID), 10–11 National Debenture System (SND), 11 National Development and Reform Commission (NDRC), 88, 95–96 National Monetary Council (CMN), National People’s Congress (NPC), 91 National Stock Exchange (NSE), 50, 60, 65 NAUFOR See National Association for Securities Market Participants NDRC See National Development and Reform Commission Negligible ownership concentration, 113–114 NES See New Economic School Nevinnomysskiy Azot, 233 New Bankruptcy Law, 17–19 New Economic School (NES), 28, 271–272 New Market (Novo Mercado), 4, 15–17, 126 New York Stock Exchange (NYSE), 26, 43, 62, 205, 247, 250, 268, 278 NF HimAgro, 229 NGOs See Nongovernmental organizations NLMK See Novolipetsk Steel Nonaudit services, 164, 212, 237 Nonemployed directors, 195 Nonexecutive director, 179–180, 243 Nonexecutive options, 200 Nongovernmental organizations (NGOs), 64, 89 Nonindependent director, 179–180, 281 Nonperforming assets (NPAs), 59 Nonpublic company See Private company Notice period and information, 130, 136 Novo Mercado See New Market Novolipetsk Steel (NLMK), 246, 254–255, 261 Novomoskovskiy Azot, 233 NPAs See Nonperforming assets NPC See National People’s Congress NSE See National Stock Exchange NYSE See New York Stock Exchange OAO Rosneft Oil Co., 246 OAOs See Open joint stock companies OECD See Organization for Economic Cooperation and Development Open joint stock companies (OAOs), 35–36, 246 Open-door policy, 85, 91 Operating disclosure, 154, 283–284, 290 Operational information, 274–276, 283–284, 290 Option plans, 195, 199–200 Organization for Economic Cooperation and Development (OECD), 30, 43, 119, 194, 271, 295 OTC market See Over-the-counter market Out-of-court restructuring, 18 Outside directors, 186 Outsourcing, 55 Over-the-counter (OTC) market, 10, 12 Ownership concentration, 262–264 Ownership controls, 144–145 Ownership disclosure, 105, 149–150, 234, 265–266, 273, 283 Ownership rights, 127, 209–210 Ownership structures Chinese, 85–86, 281, 290 concentration and, 113–114, 281, 289 EuroChem, 228 flaws in, 118 government-controlled public company, 119–122 Indian, 55–57 private company, 121–124 public company with multiple large blockholders, 116–120 public company with negligible ownership concentration, 113–114 public company with single large private blockholder, 113–114 Russian, 27–29, 259–260 types, 288 Parekh, Ketan, 50–51 Parent company loans, 229 People’s Republic of China (PRC) See China Performance monitoring, 190 Performance-based pay, 196 Planned economy, market v., 84 Plastinin, Sergey, 207 314 • Index Poison pills, 143 PRC See China PRC Accounting Law, 102 PRC Code of Corporate Governance, 83 PRC Company Law, 83, 92–94, 97–98 PRC Securities Law, 83, 93–94 Preemptive rights, 36, 141 PricewaterhouseCoopers, 237 Principles for Sound Compensation Practices, 194 Principles of Corporate Governance for State-Owned Enterprises of the OECD, 119 Private company ownership structure, 121–124 Private equity market, 63 Privatization, 54–55, 83, 85–86 Proactive investor relations, 211 Proxy rights, 132, 137 Prudential norms, 58 PSUs See Public sector units Public companies government-controlled, 119–122 largest, 249, 258–261 with multiple large blockholders, 116–119 with negligible ownership concentration, 113–114 Russian, 249, 258–261 with single large private blockholder, 113–114 structure of, 13 Public information, 159 Public sector units (PSUs), 55 Putin, Vladimir, 42 Q&A session See Question and answer session QFII See Qualified Foreign Institutional Investor QIP See Qualified institutional placement Qualified Foreign Institutional Investor (QFII), 82–83, 88 Qualified institutional placement (QIP), 62 Question and answer (Q&A) session, 131–132 Raju, Ramalinga, 50–51 RAO UES, 26–28, 247–248, 254–255, 261, 265 RAS See Russian Accounting Standards RBI See Reserve Bank of India RDBs See Bank deposit receipts Real Plan, 5, Regional Rural Banks (RRBs), 58 Registrar, 36–37 Registrar of Companies (RoC), 70 Regulatory framework Chinese, 95–97 Indian, 68–71 Russian, 42–44 Regulatory reporting, 250 Related-party transactions, 151, 228–229 Remuneration See Compensation Reporting See also Financial reporting annual, 234, 243, 257 cycles, 156–157 environmental, 158–161, 212, 235 Global Reporting Initiative, 160, 235 quality of, 161 regulatory, 250 social, 158–161, 212, 235 Reserve Bank of India (RBI), 58–59, 69–71 Risk analysis, 238–239 Risk management culture, 172–173 enterprise, 167, 170–173, 213, 227, 238–239 firmwide approach to, 170–171 governance standards, 172–173 importance of, 147 strategic, 173, 213 RoC See Registrar of Companies Rostelecom, 255 Rotation policy, 165 RRBs See Regional Rural Banks RTS See Russian trading system Rule of law, 90 Rule of person, 90 Russia See also EuroChem Mineral and Chemical Co OJSC; Wimm-BillDann Foods OJSC Bank of, 44 bureaucratic decision-making procedures in, 30–31 corporate governance in, 23–25, 29–30, 32–34, 42–44 disclosure in, 25, 32, 44–47, 245–248, 255–258, 265–266 dividend payout in, 37, 210 Index • 315 GDP of, 26 IFRS and, 25, 43, 45–47, 152, 226, 234, 236–237, 244 independent directors in, 31–32, 178, 227 informational infrastructure of, 44–45 legal infrastructure of, 34–35 market infrastructure of, 25–27 ownership concentration in, 262–264 ownership structures in, 27–29, 259–260 progress in, 47–48 public companies in, 249, 258–261 regulatory and ownership functions in, 29–30 regulatory framework of, 42–44 shareholders in, 32–41, 126, 259 SOEs in, 28–32, 34, 112, 119 transparency in, 24, 28, 40–41, 44–45, 245–248, 252–255, 266–269 Russian Accounting Standards (RAS), 36, 45–46, 215, 235 Russian trading system (RTS), 43, 247, 268, 278 São Paulo Stock Exchange, 9–10 Sarbanes-Oxley Act of 2002, 162, 205, 268 SARFAESI Act, 59–60 SEBI See Securities and Exchange Board of India SEC See Securities and Exchange Commission Securities and Exchange Board of India (SEBI), 49–53, 61–62, 67–69, 75, 79 Securities and Exchange Commission CVM, 7, 9–11, 20–22 SEC, 19, 158, 205, 210, 250, 268, 282 Securities Law, PRC, 83, 93–94 Security of ownership, 137 Self-appraisal, 216, 241 Selic See Special Settlement and Custody System Senior executive ties, 184 Share golden, 143 registrar, 36–37 type, 288 Shareholder rights, 16–17, 33–41, 74, 94–95, 98–99, 259 cash flow rights, 127, 135, 140–141 corporate governance and, 126–129 disclosure and, 273–274 EuroChem’s, 226, 230–233 extent of, 126–128 improvements in, 125–126 meeting procedures, 129–133, 209 plans, 143 takeover defenses, 140–145 voting rights, 39, 126, 132–139, 209, 230–232 WBD, 208–210 Shareholders activism of, 32–34, 64–65, 83, 89–90 bearer, 133 blockholders, 113–120, 150, 180, 207 in China, 89–90, 94–95, 98–99 directors, 199 disclosure criteria, 149–150 dispersed, 27 dominant, 55–57 EuroChem, 225–228, 230–233 executive, 199 external agendas of, 24 government, 28–30 in India, 64–65, 126 influence of, 111–124 meetings, 38–39, 129–133, 209, 231 minority, 35, 98–99, 101, 112, 127, 134–135, 143, 151, 156, 227, 232–233, 241 proposals by, 139 in Russia, 32–41, 126, 259 significant, 111–115 WBD, 204–210 of Wimm-Bill-Dann Foods OJSC, 204–210 Significant shareholders, 111–115 Single large private blockholder, 113–114 Sisbacen, Smith Report, 162 SND See National Debenture System Social reporting, 158–161, 212, 235 SOE See State-owned enterprise SomaFix, 10 S&P See Standard & Poor’s Special Settlement and Custody System (Selic), 11 SPR See System of Protection against Financial Risks Squeeze-outs, 41, 141, 232–233 Staggered board, 143 316 • Index Stakeholder engagement and disclosure, 161 Standard & Poor’s (S&P), 4, 15, 27–28, 44, 54, 123, 183, 204, 218–221, 224, 248, 270–271, 279, 295 See also Governance, Accountability, Management Metrics, and Analysis State Bank of India, 58 State corporations, 32 State-owned enterprise (SOE) Chinese, 82, 84–85, 103, 112, 119, 280, 284, 288 Russian, 28–32, 34, 112, 119 Stock classes, 36 Stock Exchange Listing Agreement, 73 Stock exchanges AIM, 250, 267–269, 278 BM&FBovespa S.A., 9–10, 14–16, 20, 126 Brazilian, 4, 9–10, 13–16 BSE, 50, 60 Chinese, 88, 97, 105 FSE, 250, 268, 278 LSE, 26, 247, 250, 267–269, 278 MICEX, 26, 43, 247, 268, 278 Nasdaq, 62, 268 NSE, 50, 60, 65 NYSE, 26, 43, 62, 205, 247, 250, 268, 278 RTS, 43, 247, 268, 278 transparency scores, 268 Stock option plans, 195, 199–200 Strategic process board of directors, 191, 193, 216–217, 290 corporate governance of, 193 EuroChem, 239, 242–243 Strategic risk management, 173, 213 Strezhnev, Dmitry, 229 Structure, board of directors, 16–17, 73–75, 176–185, 276, 290 Succession, 188 Supermajority voting requirements, 144 Svyazinvest, 29 System of Protection against Financial Risks (SPR), 11–12 TACIS See Technical Aid to the Commonwealth of Independent States Tag-along right, 14–15, 135 Takeover Code, 52 Takeover defenses, 140–145 T&D Studies See Transparency & Disclosure Studies Technical Aid to the Commonwealth of Independent States (TACIS), 46 Technology, 158 Telecommunications companies, 261–262 10-K reports, 250, 282, 284 TMK, 254–255, 267 Training, 188, 190 Transparency in Brazil, 20–22 capitalization and, 261–262, 289–290 in China, 81–83, 104–106, 279–295 company value and, 269–271 of CTC Media, 254 CWTI for, 261–262 of EuroChem, 234–239 governance and, 149 IFRS and, 148, 150, 234, 260 importance of, 147–149, 280 index, 245, 261–262, 279 in India, 78–79 IPOs and, 266–269 of metallurgical companies, 261–262 ownership concentration and, 289 ownership type and, 288 in Russia, 24, 28, 40–41, 44–45, 245–248, 252–255, 266–269 scores, 248, 253, 267–268, 279–280, 287–290 sector and, 288 share type and, 288 of telecommunications companies, 261–262 of WBD, 210–213 Transparency & Disclosure (T&D) studies, 28, 44 criteria, 273–277, 280, 285 findings, 252–255, 287–303 methodology, 249–251, 285–287 scope, 285–287 survey, 245–246, 248–249, 251–252, 254–255, 265, 267, 271, 273, 279–281, 284–287, 289, 291, 295 20-F reports, 250, 282, 284 Index • 317 U.K See United Kingdom U.K Financial Services Authority (FSA), 250 U.K Listing Authority (UKLA), 250 United Kingdom, 127, 162, 250, 280 United States, 128, 143, 162, 195, 205, 250, 280, 282, 284 Vincent, Jacques, 208, 214–215 Voting rights and procedures, 39, 126, 132–139, 209, 230–232 WBD See Wimm-Bill-Dann Foods OJSC Web disclosure, 235, 257 Web sites, 158, 235, 257, 285–286 Wimm-Bill-Dann Foods OJSC (WBD), 116 audit process, 212 blockholders, 207 board of directors, 206–208, 214–218 disclosure of, 210–212 ERM and, 213 executive summary, 203–206 founders, 206–208 GAMMA score, 204–205 at a glance, 203 Groupe Danone and, 206–208, 214 ownership v management, 207–208 shareholders, 204–210 strengths, 204–205 transparency of, 210–213 weaknesses, 204, 206 World Trade Organization (WTO), 84, 87, 90, 92 ZAOs See Closed joint stock companies .. .Investing in BRIC COUNTRIES This page intentionally left blank Investing in BRIC COUNTRIES Evaluating Risk and Governance in Brazil, Russia, India & China Edited by SVETLANA BORODINA OLEG... and analysts understand nonfinancial risks specific to countries and individual companies around the globe Twenty years after liberalization, Brazil, Russia, India, and China are known as the BRIC. .. Why Governance Is Key to the Future of BRIC Countries xiii Svetlana Borodina and Oleg Shvyrkov PART Introducing the BRICs and Their Governance Status Chapter A Guiding Light for Investors in Brazil