By any account, December 1990 was the most productive month in the history of Russian lawmaking.


In the course of that one month, the Supreme Soviet of what was then the Russian Socialist Federated Soviet Republic adopted the laws On Enterprises, On Property, On the Central Bank and On Banking Activity, while the government adopted the Joint-Stock Company Act. These have formed the bedrock of Russian commercial legislation and have stood fast, largely unmodified, against a background of ever-shifting tax, foreign exchange and customs regulations.


Yet, adopted before the collapse of the Soviet Union, these laws are now badly in need of an update. This is especially true of the Joint-Stock Company Act, which needs to be elevated to the status of a law and not merely a government resolution, and must take account of Russia's mass privatization program, which in the last two years created thousands of companies with millions of shareholders.


The good news is that last month the government presented to the Duma a draft company law intended to replace the existing Joint-Stock Company Act. This draft has already received initial comments from the Duma's Economic Policy Committee. The bad news is the proposed draft misses the mark in several respects.


First, there is a bizarre provision that a company which has issued securities publicly may never thereafter issue securities on a private placement basis. What must be clear is that every privatized joint-stock company has made a public share issue in the course of privatization.


Hence, the draft company law would prohibit privatized companies from placing their securities privately in the domestic and, presumably, international securities markets.


This is a strange move for a government that intends 1995 to be the year when the strongest privatized companies will raise capital abroad and others will do so in the domestic market.


If the law is adopted in its present form, the government may discover that it has unwittingly blocked direct foreign investment, which generally takes place through negotiated private placement transactions.


Second, the draft law fails to understand the support that it will lend to the entrenchment of "red directors" at privatized joint-stock companies. Although voucher privatization in Russia ostensibly transfered share ownership from the state to millions of scattered shareholders, true power and control over the enterprises largely remained with managers.


Whether 1995 brings the structural reorganization of the thousands of enterprises privatized in 1993 and 1994 will depend on the ability of shareholders to transform nominal share ownership into real ownership. This transformation can be expressed principally through the ability of shareholders to sweep aside those Soviet-era directors incapable of adjusting to the new world.


Fortunately, one thing there is no shortage of in Russia is draft legislation. There are at least eight drafts of a securities law and at least two drafts of a company law. The alternative company law draft sensibly shifts the balance in favor of investors' rights and greater flexibility of companies to raise capital in the securities market.





Leonid Rozhetskin is a graduate of the Harvard Law School and a native of St. Petersburg, now in private practice in Moscow.