Capital Markets Board of Turkey annulled the License of an Appraisal Company: What about their reports?

CMB delisted an appraisal company namely TURYAP, and annulled the licenses of 8 experts.

Two different cases are in question. One of them is as follows: according to Vatan Newspaper of Turkey, one of the banks in Turkey, namely Halkbank, wrote a complaint letter to Capital Markets Board of Turkey about an appraisal report of a building which is accepted as collateral for a given credit. The point is that the building was sold at a price of 5 Million USD to close the credit as it became nonperforming. What bank complained is that TURYAP, which was in the list of licensed real estate appraisal companies, prepared a report stating that the value of that building was 19 Million USD. Another one is a report accusing TURYAP of appraisal fraud at 03.12.2005 by High Audit Board. In the investigation report, High Audit Board demand CMB to annul the license of TURYAP.

TURYAP prepared 50.000 appraisal reports for major REITs and Banks says Vatan Newspaper. In Turkey, without TURYAP, only 12 appraisal companies are licensed to operate with 300 professionals. The public announcement made after the penalty, is very critical of CMB’s fashion and contrary to the reasons of penalty: “Problem was not the defective reports, but the format we used”. Actually answer is not satisfactory and explicit, in fact CMB is one of the serious instutions in Turkey, and the action taken for TURYAP is dramatic and unique.

The question is that from the minority shareholder’s perspective, independent appraisal is an added layer of protection in case of a conflict of interest with management and controlling shareholders. But if the independent appraisal company is announced to be incompetent by the authority, how will the REIT’s portfolio valuation will be affected? Frıom our point of view the appraisal companies that the REIT’s are working should be disclosed and the reports should be renewed.

Is History Repeating Itself

Capital Markets Board of Turkey’s extended the time given to the Board of Directors of Turk Tuborg Bira ve Malt Sanayii A.Ş. to collect the unfair amount paid to Carlsberg as a license fee and published it in the weekly bulletin. Related warning was issued in the month of September by CMB after examining the accounts of the company stating that the unfair amount paid in the years of 2002 and 2003 to Carlsberg as a license fee is considerably higher than its peers. If the amount is not collected from Carlsberg in two months period, CMB has the authority to bring the issue to the court.

It is striking what the investors suffer from Turk Tuborg. Here is the history of bad governance;

1995-1997: The majority shareholder of Turk Tuborg namely Yasar Group was ordered to compensate the company for "a series of improper share and real-estate transactions” after an audit performed by CMB.

1998-1999: Yasar authorized a series of transactions whereby Tuborg bought shares in Yasarbank, allegedly to save the bank from bankruptcy. With losses totalling over US $1 billion, Yasarbank was placed under the supervision of the Central Bank Deposit Insurance Fund in 1999.

1999: CMB warned Yasar Group for selling Turk Tuborg’s real estate under its fair value and donate some to the Selçuk Yaşar Sport and Education Foundation.

Disclosure and Transparency

According to the Corporate Governance Theory, organizations should implement procedures to independently verify and safeguard the integrity of the company's financial reporting. In Turkey publicly traded companies disclose two separate financial statements.

Capital Markets Board of Turkey has fined the Board of Directors of ERDEMIR for not preparing the financial statements in full compliance with standards set by CMB and not disclosing the results on time at Istanbul Stock Exchange (21/10/2006). The total fine amount is about USD 125.000.

In Turkey, some governmental bodies such as Ministry Of Finance require companies to prepare their financial statements with regard to Tax Procedure Laws while CMB requires its own standards which are very similar to International Financial Reporting Standards. In this case the problem is arised from paying dividends with respect to standards set by CMB. But the case is seem to be more complicated that the related directors did not accept these fines and declare that they will bring the issue to the court.

New report on Corporate Governance in Turkey from OECD

OECD says “Corporate governance is improving in Turkey but some challenges remain”

Corporate governance is improving in Turkey but some key issues, including the potential for unfair treatment of minority shareholders, need to be tackled if Turkish firms are to take full advantage of opportunities to grow in coming years, according to a new OECD report.

OECD also prepared a detailed Principle-by-Principle assessment.

Report says in some situtations controlling shareholders impose commercial conditions that go against the interests of the company as a whole and minority shareholders.

In parallel, the OECD urges Turkey to give greater scope to institutional investors in the exercise of their rights as shareholders. At present, pension and mutual funds regulated by the Capital Markets Board (CMB) cannot participate actively in governance of the companies in which they invest and are subject to portfolio limits that restrict their incentives to monitor corporate governance practices. These restrictions should be eliminated and funds should disclose the corporate governance policies that they apply to their investments.

Good governance necessitates happy investors

Tender offer is a takeover bid in the form of a public invitation to shareholders to sell their stock, generally at a price above the market price.

Mandotary tender offer mechanism is a common practice for unwanted anti-takeovers but is also an important provision for fair price requirements. This provision limits the range of prices a bidder can pay in two-tier offers. This typically require a bidder to pay to all shareholders the highest price paid to any during a specified period of time before the commencement of a tender offer and do not apply if the deal is approved by the board of directors or a supermajority of the target’s shareholders.

In Turkey, Capital Markets Board is the only regulatory body to impose exemptions for the mandotary tender offer. According to the communiqué (Serial IV No:8 – Principles Regarding Proxy Voting and Tender Offer) in the case of existence of some specific situations, generally exemption is requested by claiming that “the acquisition of shares and voting rights of the corporation is approved at the Shareholders’ Meeting of the corporation by the quorum mentioned in the first sentence of paragraph two in Article 388 of TCC. (It is 2/3 of total)”

Although there is no time to compare this regulation with the international standards, it is widely accepted that the meaning of tender offer is crucial for minority shareholders.

In the daily bulletin of Fortis Yatırım, it says that Sekerbank (SKBNK) disclosed to the ISE that, a suit has been filed against a decision taken at the General Assembly to ask the Capital Markets Board (SPK) for an exemption from cash call on floating Sekerbank shares. Sekerbank claims that the decision on call exemption is totally legal, since it is based on the laws of Capital Markets Board and Turkish Commercial Code, hence the law suit is unjustifiable. Back in June, Sekerbank’s main shareholders Sekerbank Pension Fund and Sekerbank Personnel Social Security Foundation signed a share sale agreement with TuranAlem Securities JSC to sell a total of 33.9787% stake for YTL424.73mn, corresponding to a price of YTL10.00/share, which is currently above Sekerbank’s closing price of YTL4.84/share as of yesterday. Previously it has been announced that share transaction would be completed by Oct. 31st. Once the transaction is completed, Sekerbank Pension Fund and TuranAlem Securites, each will have 33.98% stake, while Sekerbank Personnel Social Security Foundation will have no remaining stake at the Bank.

Metin Münir in Milliyet wrote that there has been an insider trading when the deal was made. Also in the annual meeting of Sekerbank, there has been quarrel between the minority shareholders of the company. So far there is no action taken by CMB about these allegations. But there is still a room for hope in this case to preserve the rights of individual investors and shareholders.

Rights of minority shareholders in Turkey and two examples...

If you ever examined any research on Corporate Governance practices in Turkey, you will read a lot about Galatasaray Sportif AS. In the report of “The Institute of International Finance Inc.” dated April 2005, the AIG Group’s failed relationship with Galatasaray Sportif AS is given as an example of majority shareholders can shut out minority shareholders under current Turkish Law. The story is that in August 2002, the majority shareholder of Galatasaray Sportif AS effectively prevented AIG from appointing members to the Board of Directors. The case went through the Turkish courts and later through an international arbitration court. The Court sided with AIG; however, Galatasaray Club objected to the verdict. Eventually AIG decided to exit from Galatasaray Sportif AS.

If you are thinking that Corporate Governance practices in Turkey are improving, you should better look at the recent news. QVT Fund, holding 9.5 % of Galatasaaray Sportif AS, applied for the annulment of the General Assembly, as they are deterred from using their right to vote.

There is also an announcement made for the company’s plan to merge Galatasaray Sportif AS with Galatasaray Futbol AS which is totally against their IPO prospectus. This plan will be very costly if realized.

By the way at the end of 2005, Fenerbahce Sportif AS also tried to change company’s articles of association and QVT resisted by asking CMB not to permit for the change. The change was about increasing the ratio of expenses made by company which is 10% of total income. After QVT’s resistance Fenerbahce was retreated.

New report says CG Practices remain poor

"Iyi sirket" Danısmanlık A.S. published a report on the Corporate Governance practices of ISE-100 companies. The results are not cheering. The report says % 72 of these companies are poorly governed. 3 of these  companies even do not have a web adress. 15 of them do not put their annual report to their web site.

There is a striking finding in the report that 93 of 100 companies do publish their Corporate Social and Environmental Responsibility policies. Although there is no obligatory regulation to disclose such policies, the result is said to be populist and is not related with the realities of Turkey.

Possible reoccurence of the history

Unfortunately history of the Turkish Capital Markets contains some disgusting corporate scandals and there are still problems from the same group of company owners, such as Yaşar Holding ( the case of minority shareholders), In one of the daily newpapers, the issue of existing tension between shareholders of Yasar Holding is examined and the CMB as well as small investors are warned about possible coming public offer of Yasar Holding.

As the Capital Markets Board of Turkey is the major actor in the evolution of corporate governance practices, the public offers of these groups should be evaluated carefully.

GOOD program

The Swedish Trade Council together with the Swedish Embassy in Ankara and the Capital Magazine of Turkey has taken the initiative to organize a program on the topic of “Good Corporate Governance and Sustainable Growth”.
The main objective of the GOOD program is to create awareness and differentiation on the understanding of “good corporate governance principles”, which are very important long-term assets on the way of EU for Turkey , who is among the most attractive countries for foreign investment.
The first step is to increase the familiarity and the persuasion of “good corporate governance” on a larger audience. After the analysis of the current situation, to deepen the knowledge and to determine the best practices in order to add value to the Turkish public, to the management quality of the companies and naturally to the sustainable growth of Turkey.

Turkey have 2 Corporate Governance rated companies and waiting for the third

We are still waiting for more solid steps from Turkish companies from theory to practice. I am personally curious who will be the third governance rated company?
Corporate Governance conference took place in Istanbul under Dogan Yayin Holding sponsorship. From the attendees of non-rated companies of Sabanci Holding and Garanti Bank, can we hope that they are the next?

Here are the presentations from the conference for colleagues.

Corporate Governance, a matter of trust for investors...

If you follow my blog, you will already know that there is a lack of interest in the field of corporate governance in Turkey. This is the first time Capital Markets Board fined a listed Company for not preparing its Corporate Governance Report as a part of Annual Company Report. Penguen Gıda, one of the listed companies in Istanbul Stock Exchange is fined to pay 10.000 YTL (appr. 7.400 USD). It is not a surprising decision, even lacking influence if you consider the importance of the subject. Moreover if you visit the company’s web as an investor to get some information about the company’s corporate governance policy, it won’t be possible. Although Penguen has been properly elected as the "most trusted conserves producer in Turkey" by consumers in 2004, as an investor I want Penguen to give more emphasis on disclosure and corporate governance.

First rating report from ISS to a company in Turkey

“Institutional Shareholder Services, Inc. (ISS)”, the world's leading provider of corporate governance and proxy voting solutions, for the first time assign a national corporate governance rating score to a company in Turkey…

Doğan Yayın Holding has been rated by 8,0 over 10 (81,19%) in terms of corporate governance by “Institutional Shareholder Services, Inc. (ISS)”, the leading global corporate governance rating organization...

A good example of bad governance...

Eliminating the discriminatory treatment of company shareholders by introducing the principle of "one-share, one-vote" is one of the most important pillars of Corporate Governance. A wide range of dual-class structures exist.  In some cases, the superior class benefits from dividens more than others. Essentially, the term covers any structure that confers a disproportionate amount of control on one group of shareholders in relation to their equity participation in the company.
Dual-class structures are unfair and give economic power to superior shareholders while facing the same financial risk.

Metin MUNIR from Milliyet calls for better governance to Garanti Bank which is the one of the largest private sector bank in Turkey.

There is a bad news for Garanti Bank that the stocks of companies having DCSS's tend to underperform those of companies with SCSS's.

Somebody cares about governance

"Historically, Turkey has had a poor track record in corporate governance, evidenced by the multiple bank failures, poor foreign direct investment (FDI) flows and numerous cases of violation of minority and/or foreign strategic partner rights by dominant groups/families controlling companies." says EFG Istanbul Securities in their report of "Corporate Governance Revisited" dated August 9, 2005. This is the second report about the issue, the first report (pdf) was dated February 9, 2004. For the year 2005, Denizbank is the top scoring company and charecterised by their dedicated IR effort. It is widely accepted that investors pay higher for better governance.

The basic aim of this blog is to track major devel...

The basic aim of this blog is to track major developments in the issue of Corporate Governance in Turkey and encourage professionals to be a part of this issue.

The link below given for beginners:

http://www.tkyd.org/docs/bcgraporeng.doc

Being first matters...

Isbank is the first company and the first bank in the sector, which was rated for corporate governance, in line with the corporate governance principles set by the Capital Market Board . 9 out of 10 is good news for shareholders. I hope one day we will have several companies having corporate governance rating reports..

WHAT ABOUT PRACTICE…

One of the core questions in Corporate Governance is the rights of the shareholders. Yigit BULUT from daily Radikal Newpaper asks some crucial questions to the authorities if the rights of the shareholders are properly conserved.

A report from Yurtoglu on ownership and control structures of publicly listed firms in Turkey.

www.tek.org.tr/dosyalar/tek_dp.pdf

High quality report on Corporate Governance in Turkey.

http://www.worldbank.org/ifa/rosc_cg_turkey.html

A very valuable study from Yurtoglu.

www.unece.org/ie/wp8/documents/corpgov/yurt_corpgov.pdf

Here is the ICC report on the Istanbul Roundtable on Corporate Governance- April 2005

http://www.iccwbo.org/CorpGov/ICC%20Report%20CG%20roundtable%20Istanbul%20April%202005.pdf

Very important document to read.

http://www.cmb.gov.tr/regulations/ files/corporate_governance.pdf