You're reading: Bereshchenko: Trade auctions still non-transparent

The Deposit Guarantee Fund’s Yuliya Bereshchenko is finding it tough to sell assets in Ukraine.

The head of the fund’s asset management and sales, Bereshchenko says that much remains to be done to ensure assets sales are conducted in a transparent and efficient way. The reasons are clear: the legal system functions poorly, and the changes in legislation that would provide for more transparency in the banking system have become bogged down in bureaucracy.

Trading platforms

Today there are 32 electronic trading platforms authorized by the fund to sell the assets of the 77 banks that are undergoing liquidation. But these trading platforms function in different ways, and often serve as tools for manipulating the auction process.

“We receive a lot of complaints from potential investors, who claim the trading platforms sometimes manipulate the electronic bidding process,” Bereshchenko told the Kyiv Post in a recent interview.
Sometimes these platforms refuse to register potential buyers in an auction, disable their ability to raise their bid during an auction, or cancel the auction altogether. In May alone, Bereshchenko received 11 complaints from bidders about unfair treatment.

Before she took the job, asset sale information was not disclosed publicly, but only made available to selected trading platforms, which were given two weeks to find a buyer. Then these trading platforms would receive an asset for sale on the basis of a letter stating why the buyer wanted to purchase an asset.

“We believe that such disclosure of information is obviously non-transparent, and we cannot appoint a trading platform (only) on the basis of a letter of intent to buy,” Bereshchenko said. “It frequently happened that I would receive letters about the same assets from different trading platforms.
“We’re looking at setting up more strict criteria for such trading platforms,” Bereshchenko said.

“Unfortunately, this is a very complex subject.” For example, each of the trading platforms has its own software and technical capabilities, which makes it difficult for the fund to be consistent with the sales process.

Some progress

But Bereshenko’s team does have some progress to report. Whereas earlier the law required a minimum of only 10 days after the auction was announced to perform due diligence on assets, now there is a set minimum of 21 days between the date of the sale announcement and the actual auction. This gives the opportunity for each potential buyer to sign a non-disclosure agreement, register for the auction, and perform due-diligence.

Banks must now also provide information about assets, especially details about loans, such as their collateral. Larger assets require more detailed presentations. The information is then posted on the fund’s website. The only information that cannot be disclosed is the identity of the borrower whose loan is being auctioned.

Bureaucracy delays

All the same, these changes could have happened much faster.

The process of changing the rules is very bureaucratic, and takes a very long time. For example, it took the Justice Ministry two months to approve some relatively simple changes to asset sale regulations. “We actually didn’t expect that a small document would take such a long time,” Bereshchenko said. “This is one of the key problems in Ukraine.”

Due diligence

But then there is the problem of setting up due diligence for the sale of assets.

Right now, the process requires lawyers and potential buyers to examine physical documents. In Western countries, the information is provided through virtual data rooms — secure websites providing access to potential buyers to asset documentation after they sign a non-disclosure agreement, Bereshchenko said.

Her department has started to prepare for such a practice: Since mid April, the fund has obliged all banks to at the very least to scan all of their documents and send them to the fund. She hopes that soon there will be virtual rooms.

Bidding options

Some are also questioning the actual bidding process. Typically there are three different ways to sell assets during an auction. Currently the fund uses the Dutch auction method, where the bidders start with a high price and then reduce their bids (in 1-percent bid increments). The English auction is the reverse — bidders start low and bids increase. The third version is a sealed-bid process, where a bidder makes a single offer that is then compared with those of their competitors.

“For certain assets it is believed that a sealed bid process is better than an auction, because not everyone likes the 1-percent bid increment,” Bereshchenko said. She says that the fund is currently looking into that option, as the sealed-bid method has yet to be implemented in Ukraine.

Ultimate buyers

Meanwhile, many worry that the assets will simply get back into the hands of the original owners, or to Ukrainian or Russian oligarchs. According to British economist Tim Ash, Ukraine should not rush into selling the assets of banks that are undergoing liquidation for precisely this reason.

But Bereshchenko says that it is impossible to ultimately trace to whom the fund sells its assets, and that a transparent process is almost impossible due to poor legislation.

“I respect Tim a lot… but he’s not a practitioner, and he doesn’t know the legal framework in Ukraine, and how weak it is,” Bereshchenko said. “The problem is that in a weak legal system, the borrower is always stronger than the lender… It’s not possible in the Ukrainian legal framework to make sure that bad borrowers are prohibited from buying back the assets.”

In most countries, she said, the potential buyer signs a legal document stating that they are not the borrower or a related party. “Moreover, sellers are obliged to perform a ‘know your customer’ procedure – due diligence on potential buyers.”

But Bereshchenko says this is not likely to happen any time soon. “It took the central bank several years even to fix the problem of performing ‘know your customer’ on the owners of banking institutions. Implementing it for businesses and borrowers in Ukraine is an enormous task, and it will take years.”

In the moment, it is often the case that after the assets are sold, an intermediary company will sell them back to the original borrower in two to three months, she said.

“Whoever thinks that anyone in Ukraine can be sure that (original) borrowers don’t buy back their assets (is wrong),” Bereshenko said. “So far there are no restrictions for who can buy these assets.”