Development of Mortgage Lending. In the financial sector, IFC has focused on supporting the development of the housing finance market. The introduction of mortgage financing has allowed individuals for the first time to leverage their residences to increase their standard of living. In 2000, IFC extended a $3 million credit line to the Bank of Georgia, and together with re-flows, this credit line financed over 500 projects totalling $4.5 million. In June 2003, IFC provided a second $5 million credit line to the Bank of Georgia for housing finance and for on-lending to small and medium enterprises. In August 2001, IFC provided a second $3 million loan to TBC Bank to support the development of its mortgage lending.
Facilitation of Foreign Investments: IFC invested in equity and provided loans to Ksani Glass Factory, a producer of high-quality glass bottles and packaging. IFC’s The $2.5 million equity investment and $6.3 million loan supported Ksani’s expansion and modernization. At project completion, the facility will be producing 40,000 tons of high quality glass bottles annually with a high level of product flexibility. In the power sector IFC provided a $30 million loan to AES Corporation to support the newly privatized Tbilisi area power distribution company. The loan was pre-paid in August 2003, when the AES Corporation sold Tbilisi electricity distribution system to UES.
General. The operation of the private companies in Georgia is mainly regulated by the following two laws: a) Law on Entrepreneurs (LoE) (Corporate Law), which sets the corporate governance principles for the private companies (i.e. Limited Liability Companies and Joint Stock Companies); and b) Securities Market Law (SML), which regulates the activities of the private companies permitted to issue and trade the shares on the securities market (i.e. Joint Stock Companies). Both laws are reviewed below.
Under the Law of Georgia on Entrepreneurs the following forms of commercial entities may be established in Georgia:
i. Sole proprietorship—An enterprise operated by a physical person with unlimited liability and no minimum capital requirement. A sole proprietorship is not considered a legal entity under the commercial code of Georgia.
ii. Joint Liability Company—A legal entity with unlimited liability established on the basis of a partnership of several individuals or companies.
iii. Limited Partnership—A legal entity consisting of general and limited partners. The limited partners have limited liability and general partners bear full and direct liability for the obligations of the company.
iv. Limited Liability Company—A legal entity that is separate and distinct from its shareholders (one or more legal or physical persons). The company’s liability is limited to its authorized capital. Founders and shareholders are not liable for the obligations of the company.
v. Joint Stock Company—A legal entity characterized by the limited liability of the partners. The company’s liability is limited to its authorized capital.
vi. Cooperative—A legal entity characterized by the limited liability of the shareholders. In Georgia, this is a common form of organization for agricultural enterprises.
Sole proprietorships, joint liability, limited partnerships and cooperatives are rarely established by foreign investors in Georgia. Therefore, the following focuses on the legal requirements for Limited Liability Companies (LLCs) and Joint Stock Companies (JSCs), which are the most popular forms of incorporation used by foreign investors in Georgia.
The Law on Entrepreneurs does not set limitations on the domicile of partners. A partner in a legal enterprise can be a citizen or resident of any country. Foreign companies can be established as fully foreign-owned enterprises or in partnership with Georgian companies or physical persons. In accordance with the Law on the Promotion and Guarantees of Investment Activities of November 12, 1996, companies with foreign investments enjoy national treatment and the same rights as Georgian companies.
Provisions of the Law on Entrepreneurs for Limited Liability Companies (LLC):
· An LLC can have a maximum of 50 shareholders. The minimum equity capital requirement is 2,000 GEL. The share of the equity capital to be covered by each of the partners may be determined freely, but it must be divisible by 10;
· At least 50 percent of the equity capital must be paid up at the time of incorporation, with the remaining 50 percent due within one year;
· The Law stipulates that a partners’ meeting be held at least annually. Special meetings may be called at the request of partners or directors of the firm;
· Partners’ meetings are required to consider issues such as amendments to regulations, reorganization or liquidation of the company, appointment of directors, and so on;
· Day-to-day management of the company is carried out by one or more directors who are appointed and dismissed by the general meeting or the supervisory board, when such a board is established at the discretion of the general partners meeting;
· A partner may sell his shares without seeking consent of other partners, unless otherwise stated in the charter of the company;
· Partners who posses 5 percent and more of the equity capital are authorized to call a general meeting.
Provisions of the Law on Entrepreneurs for Joint Stock Companies (JSC):
· An entity with more than 50 partners is required to have a legal form of a Joint Stock Company (JSC);
· Minimum equity capital for JSC is 15,000 GEL;
· A JSC with more than 100 shareholders is required to maintain its share registry through an independent registrar (In 2003 amendments were adopted into the law requiring that a JSC with more than 50 shareholders is required to maintain its share registry through an independent registrar);
· A general shareholders' meeting must be held in two months time form publishing annual financial accounts;
· A general shareholders' meeting is entitled to elect the supervisory board members, make amendments into the charter of the company, approve the annual report presented by the company directors, elect auditors and so on;
· Creation of a supervisory board is mandatory for a JSC. Supervisory boards must have between 3 and 21 members, but the number must be divisible by 3. The Law provides for representation of company staff on the supervisory board (up to 1/3 of the members);
· Supervisory board is elected for the period of 4 years. The company directors may not be the members of the supervisory board;
· Supervisory board meeting must be held al least once in a quarter;
· Day-to-day management of the company is carried out by one or more directors who are appointed and dismissed by the supervisory board;
· Supervisory board oversees the activities carried out by the company directors, checks the annual financial accounts, appoints and dismisses the company directors, etc.;
· The consent of the supervisory board is needed to conduct the following activities: purchasing or selling more than 50% share of entities, purchasing or selling the assets of the company, setting up or liquidating the branches of the company, etc.;
The law envisages a cumulative voting for electing the members of a supervisory board to protect minority shareholders, but this is not a mandatory requirement.
Representative Offices and Branches. A foreign company may operate a branch or a representative office in Georgia. A branch is not a separate legal entity and it is allowed to engage in commercial activities that would constitute all or part of the activities of foreign head office. For purposes of registration, representative offices are treated as branches and are obliged to fulfil the same requirements.
All actions on behalf of a company can be performed by the head of the company (executive body) or by any person authorized to perform such actions by a power of attorney of the relevant body of the company. Foreign legal entities bear full liability for the activities of branches or representative offices.
Analysis - Law on Entrepreneurs (LoE). As the main company law for Georgia, the Law on Entrepreneurs provides a good basis for corporate governance for all the private companies including those with traded securities. However, based on the experience of other central and eastern European countries, there are several provisions in the Law on Entrepreneurs that could be amended to further strengthen the corporate governance provisions. They are: (1) although the LoE envisages a cumulative voting for electing the members of a supervisory board to protect minority shareholders, it should be made a mandatory requirement. As a result, there will be a mandatory cumulative voting for members of supervisory boards as a means of allowing shareholders with small shareholdings to vote at least one member of the supervisory board; (2) requirement that the shareholders’ meeting approve the auditing company’s contract (covering the scope of work and annual auditing fees) so that shareholders interested in a highly quality audit, requiring more time from the auditing company, can obtain such an audit, and (3) There is a need to establish a minimum quorum below which no shareholders’ meeting may be considered valid; (4) although the LoE requires the financial statements of JSCs to be prepared on the basis of the International Accounting Standards (IAS), it does not specifically require that audits are conducted in accordance with the International Standards on Auditing (ISA), which needs to be amended; and (5) the LoE does not provide takeover rules to protect the interests of minority shareholders.
More specifically, the World Bank (WB) and the International Monetary Fund (IMF) conducted the Assessment of the Implementation of the Corporate Governance Principles of the Organisation of Economic Co-operation and Development (OECD) in Georgia. It is interesting to note that the assessment identified a number of the shortcomings in the corporate governance practice existing in Georgia. Namely, according to the study: (i) There are uncertainties in knowing if shareholders are sharing in company’s profits; (ii) It is not uncommon practice of failing to hold the required shareholders’ meetings; (iii) Markets for corporate control are limited; (iv) Court system has not yet made any decisions on the cases concerning corporate disputes; (v) Minor role is played by supervisory boards in the strategic guidance of companies; (vi) There is a less than complete disclosure by most reporting companies, particularly of financial and operating results; (vii) There are weak auditing practices;
More detailed results of the assessment are summarised in Table 1.2.1.1 below:
Table 1.2.1.1. Georgia: Assessment of the Implementation of the OECD Principles
of Corporate Governance
| OECD Principles of Corporate Governance | O[8] | LO[9] | MNO[10] | NO[11] | NA[12] | Comments |
| Principle 1 - Basic shareholder rights. The corporate governance framework should protect shareholders’ rights. Basic shareholder rights include the right to: (i) secure methods of ownership registration; (ii) convey or transfer shares; (iii) obtain relevant information on the corporation on a timely and regular basis; (iv) participate and vote in general shareholder meetings; (v) elect members of the (supervisory) board; and (vi) share in the profits of the corporation. | X | Difficult to access the records of the court enterprise registers and uncertainties in knowing if shareholders are sharing in company’s profits | ||||
| Principle 2 - Fundamental corporate changes. Shareholders have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes, such as: (i) amendments to the governing documents of the company; (ii) the authorization of additional shares; and (iii) extraordinary transactions that in effect result in the sale of the company. | X | |||||
| Principle 3 - Shareholder meetings. Shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and should be informed of the rules, including voting procedures that govern shareholder meetings. | X | Not uncommon practice of failing to hold the required shareholders’ meetings | ||||
| Principle 4 - Proportionate control. Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed. | X | |||||
| Principle 5 - Markets for corporate control. Markets for corporate control should be allowed to function in an efficient and transparent manner. The rules and procedures governing the acquisition of corporate control in the capital markets, and extraordinary transactions such as mergers and sales of substantial portions of corporate assets, should be clearly articulated and disclosed so that investors understand their rights and recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class. Anti-takeover devices should not be used to shield management from accountability. | X | Limited by low liquidity in stock market | ||||
| Principle 6 - Equal treatment of shareholders. The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. All shareholders of the same class should be treated equally. Within any class, all shareholders should have the same voting rights. All investors should be able to obtain information about the voting rights attached to all classes of shares before they purchase. Any changes in voting rights should be subject to shareholder vote. | X | Effective redress requires review under a court system that is heavily overburdened and has not yet made any decisions on similar cases | ||||
| Principle 7 - Procedures for shareholder meetings. Processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes. | X | |||||
| Principle 8 - Insider trading. Insider trading and abusive self-dealing should be prohibited. | X | Effectiveness of legal restrictions limited by low liquidity of the stock exchange and small size of the business community | ||||
| Principle 9 - Insider disclosure. Members of the (supervisory) board and management board should be required to disclose any material interests they have in transactions or matters affecting the corporation. | X | Minor role played by supervisory boards in the strategic guidance of companies | ||||
| Principle 10 - Rights of stakeholders. The corporate governance framework should recognize the rights of the stakeholders as established by law and encourage active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. | X | |||||
| Principle 11 - Corporate disclosure. The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company. Channels for disseminating information should provide for fair, timely and cost-efficient access to relevant information by users. Disclosure should include, but not be limited to, material information on: (i) the financial and operating results of the company; (ii) major share ownership and voting rights; (iii) members of the board and key executives, and their remuneration; (iv) material foreseeable risk factors; (v) material issues regarding employees and other stakeholders; (vi) governance structures and policies. | X | Less than complete disclosure by most reporting companies, particularly of financial and operating results | ||||
| Principle 12 - Accounting and auditing. Information should be prepared, audited and disclosed in accordance with high quality standards of accounting, financial and non-financial disclosure, and audit. An annual audit should be conducted by an independent auditor in order to provide an external and objective assurance on the way in which financial statements have been prepared and presented. | X | Weak auditing practices and an audit law that allows liability to be capped in the contract between the company and the auditor | ||||
| Principle 13 - (Supervisory) Board responsibilities. The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the (supervisory) board, and the (supervisory) board’s accountability to the company and the shareholders. (Supervisory) Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interests of the company and the shareholders. | X | Absence of detailed guidelines for supervisory boards |
The Securities Market Law (SML) regulates the Joint Stock Companies whose shares are traded at Georgian Stock Exchange.