Unlocking southeastern Europe’s lost billions

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Billions of euros’ worth of shares could be lying unclaimed in dormant accounts in Romania and the Balkans, according to the European Bank for Reconstruction and Development (EBRD).

The shares are a legacy of mass privatizations undertaken by post-communist governments across the region, mainly in the 1990s. They were left unclaimed after a series of corporate scandals eroded the value of investments and damaged public faith in capital markets.

Jim Turnbull, a senior capital markets adviser at the EBRD, says putting the shares back into circulation would be a “game-changer” for local stock markets.

“The biggest issue equity markets in the region face is lack of liquidity,” he says. “This is the single most constructive thing we could do to change that.”

An EBRD-funded survey of central depositories in Romania, Bulgaria, Serbia and the former Yugoslav Republic of Macedonia suggests the total value of assets in dormant accounts – defined as ones that have been inactive for more than five years – could be as high as €8 billion.

Serbia and Bulgaria account for three quarters of the total, with around €2.9 billion of dormant shares apiece. In both cases, however, the actual value may be well below initial estimates.


Alex Bebov, managing director of BAC Securities in Sofia, puts the nominal value of dormant shares in listed companies in Bulgaria at around €1 billion, but warns that this should be heavily discounted.

“Half of these enterprises are no longer in existence,” he says.

There is more clarity on the situation in Romania, where dormant accounts are valued at around €885 million. Mass privatizations in the country were mainly done through five regional special investment funds (SIFs), which were allocated shares in Romania’s leading companies.

The SIFs are listed on the Bucharest Stock Exchange and actively traded. They have a combined market capitalization of around €1.8 billion, of which around 30% is thought to be held in dormant accounts.

While valuation of dormant shares may be less problematic in Romania than in its Balkan neighbours, however, working out what to do with them still presents substantial challenges.

The EBRD, which is running a diagnostic study of the issue in Romania, says the best solution would likely be to aggregate the shares into an actively managed fund similar to Fondul Proprietatea, the vehicle set up to compensate Romanians who lost property under communism.

Fondul has been managed since 2010 by Franklin Templeton and was listed on the London Stock Exchange in 2015. Beneficiaries of a similar restitution fund in Slovenia were assigned tradable long-term bonds.

“The only way to give owners of dormant accounts some value is to give them something that is liquid, which they can sell,” says Bebov.

If we thought this would be easy, we have been disabused of it. But it has to be done now, because if it isn’t the situation will only get worse 

 – Jim Turnbull, EBRD

The problem with this solution is that, as things stand, unilaterally converting dormant shares into fund units would be illegal. Not only would it infringe on the property rights of shareholders but it would also breach the regulations relating to SIFs, which limit holdings by any single entity to 5%.

Pushing it through would therefore require changes to Romanian legislation, which in turn would require political support. It is not clear that this would be forthcoming.

For the SIFs, having large dormant shareholdings has in some ways been beneficial. They have been able to announce handsome dividends knowing that a sizeable chunk will go unclaimed. Market sources estimate that over the last 10 years, the five SIFs have booked €150 million of returned dividends as extraordinary profit.

A high percentage of inactive shareholders has also meant less pressure on the SIFs’ management in areas such as transparency and corporate governance, adds Bebov.

“If there was one consolidated fund, it would likely be much more active in pushing for change,” he says.

Unfortunately for would-be reformers, the SIFs’ stakes in some of the largest companies in Romania gives them considerable political influence, particularly at the regional level. A recent attempt to remove the 5% limit on stakes in the funds failed to make it through parliament.

As a result, the SIFs currently trade at a discount of as much as 30% to the book value of their assets despite keen demand among international investors attracted by Romania’s outstanding GDP growth. Preliminary estimates by the IMF put economic expansion last year at 7%.

The current Romanian government has also shown little enthusiasm for either developing local capital markets or improving corporate governance.

Plans for further IPOs of state-owned enterprises (SOEs) after the listing of Electrica in 2014 appear to have been shelved. An attempt – ultimately unsuccessful – by the ruling Social Democratic Party to reverse legislation requiring SOEs to appoint independent directors was also seen as a negative signal for the privatization programme and local markets.

Raising awareness

The EBRD hopes that raising awareness of dormant accounts, both nationally and at the European level, will encourage politicians to address the issue.

“If there’s enough traction on this then the national government will get behind the resolution,” says Razvan Dumitrescu of the EBRD’s local capital markets team.

The initiative has the support of the Bucharest Stock Exchange, which is working to secure an upgrade from frontier market status. The bourse missed out on inclusion in the FTSE Russell emerging market index in September, largely due to low levels of liquidity.

Turnbull says reactivating Romania’s dormant shares, which have a nominal value equivalent to nearly 13% of the free float on the Bucharest exchange, could go a long way to solving this problem.

“It could almost double the effective daily liquidity,” he says.

He acknowledges, however, that the process will be challenging.

“We have to identify the owners of the shares, or their heirs, we have to work out what the legal impediments are to resolution and then we have to value the assets, many of which are not listed,” says Turnbull.

“If we thought this would be easy, we have been disabused of it. But it has to be done now, because if it isn’t the situation will only get worse.”