AS THE PROPRIETATEA FUND POSTED LOSSES UNDER THE IFRS SYSTEM, The Finance Ministry pretends not to see the problem with the illegality of the cash distributions of the Proprietatea Fund in 2016

An issue raised by lawyer Gheorghe Piperea, last year - the fact that the Proprietatea Fund has reduced its share capital, even though it was posting losses in 2015, a fact which is prohibited by the Law 31/1990 concerning commercial companies - is being ignored by the Ministry of Finance.

Last year, the Proprietatea Fund made a cash distribution, as according to a new ASF norm, it switched from the Romanian to the international accounting standards, meaning that the profit of 2015 of 784.64 million lei on the RAS has changed into a loss of 565.1 million lei, according to the IFRS. Law no. 31 does not allow reducing capital if the company posts losses, but the Proprietatea Fund argued that the General Shareholder Meeting of January 2016 was summoned prior to the coming into effect of the ASF regulation, and the financial results pertaining to the year 2015, were only available after the aforementioned General Shareholder Meeting.

Upon the enquiry by «BURSA», the Finance Ministry alluded that it had no problem with the capital reduction performed by the Proprietatea Fund last year. The explanation by the Ministry of Public Finance is however different from the one provided by the Proprietatea Fund.

The representatives of the Finance Ministry gave us the following response, upon the enquiry to clarify whether the Proprietatea Fund was allowed to distribute money to shareholders, through the reduction of the social capital, according to the law: «In compliance with the provisions of art. 14 paragraph (1) letter b) and letter c) and paragraph (3) of the Regulation no. 4/2010 concerning the registration of the CNVM and the functioning of SC «Fondul Proprietatea» SA, as well as the trading of the shares issued by the Fund, with the subsequent modifications and additions, the ASF approved the amendment of the articles of incorporation of the Proprietatea Fund through Notice no. 141/25.05.2016, following the reduction of the share capital from 9,869,265,720.90 RON to 9,320,973,180.85 RON by reducing the face value of the company's shares from 0.90 RON to 0.85 RON, in line with the Decision of the Extraordinary General Shareholder Meeting of the Shareholders of SC Fondul Proprietatea SA no. 1/27.01.2016. We want to make it clear that on the date the decision of the General Shareholder Meeting to reduce the share capital was made, the latest financial statements approved by the General Shareholder Meeting were those of 2014.

We want to clarify that the decrease of the face value of the shares from 0.90 RON to 0.85 RON led to a restitution to the shareholders of the company of the respective portion of the share capital".

In other words, the Ministry uses the fact that the latest financial statements approved by the General Shareholder Meeting were those of 2014, in order to argue the legality of the restitution, rather than the difference between the RAS and IFRS, like the Proprietatea Fund does.

When the issue of the profit tax for 2016 was raised, however, the representatives of the Proprietatea Fund went with the convenient version of the IFRS accounting and they told us, in February 2016, that the Fund would not pay the profit tax, because it has posted a fiscal loss under the IFRS.

Some voices in the market claim that the repeated use of the restitution of capital to the shareholders, instead of distributing dividends, represents an abuse, as it is against the law. They have also told us that the authorities of the state should look into taxing these transfers, as capital distributions to shareholders are tax exempt.

In that case too, the Ministry of Finance told us that it sees no problem: «We want to clarify that the Order of the CNVM no. 144/2008 for the approval of the norms concerning the Norms on the calculation, withholding and payment of the capital gains taxes owed for securities sales by individual investors, with the subsequent amendments and additions does not contain any provisions concerning the taxation of amounts obtained by shareholders following the reduction of the face value of a company's shares.

Furthermore, we want to clarify that the stock market legislation does not contain any provisions that would limit the number of share capital reduction operations within a certain period of time, and in the absence of such provisions the ASF is not qualified to issue decisions on those aspects".

The Finance Ministry stated that the management of SC Fondul Proprietatea SA is within the competence of the Financial Oversight Authority.

While the Ministry of Public Finances prefers to ignore the problem, the Proprietatea Fund has just completed a new offer to buyback it own stock and is waiting for the approval of the ASF for a new capital reduction.

The ASF has postponed, for this week, the discussion of the request for the approval of the share capital reduction and amendment of the Articles of Incorporation of the Proprietatea Fund, as the fund had an ongoing offer to buy back its own shares, in the form of shares and / or GDRs, which concerned 640 million shares, at a price of 0.91 lei/share.

The offer ended on Monday, and was oversubscribed almost tenfold.

The Fund announced total subscriptions of 6,130,412,058 shares representing 957.88% of the offer (3,550,648,558 were subscribed in the form of shares and 2,579,763,500 shares have been subscribed in the form of global certificates based on shares (GDRs), respectively 51,595,270 GDRs).

The shareholders will sell a share at 9.57 subscribed in the offer.

Brokers said, upon the launch of the Proprietatea Fund, that the price is within expectations, given that the Proprietatea Fund also makes a cash distribution of 0.05 lei.

On October 11th, 2016, they have approved a special distribution - capital reimbursement of 0.05 lei, this year.