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Corporate Governance Review

Estonia’s corporate governance landscape

Following its independence in 1991, Estonia, a country of 1.3 million people, embarked on a path of rapid economic, legal and regulatory change. All governments since then have had a strong commitment to open markets and limited state intervention in the economy. This has allowed Estonia to develop an open, competitive market economy with high rates of foreign direct investment, and strong economic growth up until the global financial crisis, averaging 8.2 per cent from 2001-2007 (OECD, 2009). Estonia’s market-oriented approach has also reflected a policy of rapid political and economic integration with Europe, which led to its admission into the EU in 2004 and to a series of amendments to its capital markets and company law architecture to ensure its consistency with EU directives. Estonia’s capital market, nevertheless, is quite limited, with just 14 companies listed on the Tallinn Stock Exchange’s main listing segment.

The main focus of policy and political debate during the period of this accession review has been about the country’s recent severe economic downturn and the objective of meeting budget deficit reduction requirements and other criteria necessary to be accepted to join the European Monetary Union, targeted for 2011.1 The Estonian economy contracted 3.6 per cent in 2008, and is projected to contract by 14.5 per cent in 2009, according to the MoF statistical office. This has placed severe pressure on the public sector budget, as Estonia’s fiscal deficit grew to EEK 9.3 billion (EUR 594 million), according the Ministry of Finance, or around 4.4 per cent of GDP in the first half of 2009 (Ummelas, 2009). The pressure to reach the 3 per cent euro deficit target and to cut public sector spending has dominated the attention of the government and may be limiting Estonia’s prioritisation of certain reforms that could strengthen its corporate governance framework.

Upon achieving independence, Estonia embarked on a path of mass privatisation, supported by its 1993 Privatisation Act and the establishment of an Estonian Privatisation Agency to oversee the process. That same year, Estonia established the Securities Market Act to regulate the public offer of securities and trading on regulated securities markets. Ten commercial banks, nine brokerage firms and several state players (Huvitusfond,2 Bank of Estonia and the Ministry of Finance) founded the Tallinn Stock Exchange in 1995. A year later it opened for trading with 11 securities listed. In 2004, the joint Baltic OMX market was created, bringing Estonia, Lithuania and Latvia together under a common trading platform. In 2008, the Baltic OMX market became part of the newly formed NASDAQ OMX Group, the largest publicly traded exchange company in the world. This provides single point access to seven Baltic and Nordic exchanges.3

Shortly after Estonia’s independence, there were an estimated 10 000 small SOEs and approximately 500 medium-to-large SOEs. By 1995, the privatisation process was seen as largely completed, with 90% of non-infrastructure companies privatised. By the end of 1997, virtually all small SOEs and 472 medium-to-large previously state-owned enterprises had been privatised (Estonia Institute, 1999). In 1999, the private sector generated some 80 per cent of GDP (according to official estimates), one of the highest proportions in Eastern Europe. Among the major privatisation transactions of 1996-2000 were the sale of Estonian Air, which was partly privatised in May 1996, Estonian shipping in 1997, some parts of the electricity grid in 1998 and the passenger transport arm of Eesti Raudtee (Estonian Railways). In 2001, Eesti Raudtee was partially sold to an international consortium, but the state bought back this portion of the company in 2007. On the energy side, the proposed sale of the Narva Power Plants to a US company collapsed and the renovations to the plants needed by Estonian Energy, which were part of the failed negotiations, were financed through long-term international borrowing and an EBRD loan. From the end of the 90s, some major privatisation projects were under consideration (Estonian Energy, Port of Tallinn, etc.), but positive decisions were only made in relation to the telecommunications company.

The Estonian capital market is small, with low liquidity and concentrated ownership. Table 2.1 below briefly summarises the evolution of Tallinn’s main listing segment of the NASDAQ OMX Baltic Stock Exchange from 2001 through the first half of 2009. Market capitalisation reached a peak of EUR 4.6 billion in 2004, or 49 per cent of GDP.4 Despite the emergence of seven new Initial Public Offerings (IPOs) between 2005 and 2007, the overall market capitalisation as a share of GDP continued to decline during this period, accompanied by three delistings during the same period. Market capitalisation had dropped to EUR 1.4 billion by mid 2009, or 9.4 per cent of GDP. The number of listed companies has also declined, from a peak of 18 in 2007 as shown in Table 2.1, to 14 on the main market by early 2010, following three de-listings and one company moving to a secondary level for smaller companies, which has just one listing.

Table 2.1. Tallinn Stock Exchange in numbers 2001-2009

Tallinn Stock Exchange

2001

2002

2003

2004

2005

2006

2007

2008

20091

Market capitalization (MEUR)

1 666

2 316

3 005

4 627

3 022

4 578

4105

1 403

1 382

Market turnover (MEUR)

259

263

494

663

1 938

766

1 526

618

74

Average monthly turnover (MEUR)

21.6

21.9

41.2

55.3

161.5

63.8

127.2

51.5

12.3

Number of companies

18

15

15

14

16

16

18

18

17

Number of IPOs

-

-

-

-

3

2

2

-

0

Average company capitalisation (MEUR)

92.6

154.4

200.3

330.5

188.9

286.1

228.1

78

81.3

Market cap (% of GDP)

24.10

29.90

35.40

49.40

27.30

35.00

26.40

8.8

9.4

Market turnover (% of market cap)

15.50

11.40

16.40

14.30

64.10

16.70

37.20

44. 0

21.4

Market turnover (% of GDP)

3.70

3.40

5.80

7.10

17.50

5.90

9.80

n.a.

1. 1st half of 2009.

A major development for the Tallinn capital market was the decision by the State to sell its stake in Eesti Telekom to the majority owner Telia Sonera at the end of 2009. By far the largest company listed on the Stock Exchange, Eesti Telekom represented 44 per cent of the total market capitalisation5 before delisting from the Tallinn Stock Exchange in early 2010. This reduced total market capitalisation to EUR 1.3 billion at the end of February 2010, from EUR 1.85 billion in December 2009, the last full trading month of Eesti Telekom.

This review focused mainly on listed companies, which fall under the “public limited company” corporate form, and state-owned enterprises (SOE), one of which is currently listed on the local Stock Exchange, but the large majority of companies in Estonia fall under

Table 2.2. Tallinn equity lists, Tallinn market

Name

Deals1

Turnover2

Freefloat (%)3

Capitalisation4

Arco Vara

4 265

4 137 463.49

32.45

17 402 064.69

Baltika

1 907

1 602 746.67

69.07

14 356 534.50

Ekspress Grupp

579

523 726.21

31.64

25 435 586.02

Eesti Telekom

673

30 465 811.24

12.71

819 449 896.32

Harju Elekter

581

598 254.50

32.14

42 840 000.00

Merko Ehitus

882

2 102 573.23

28.01

119 652 000.00

Nordecon International

1 340

3 834 102.98

34.95

53 824 274.00

Norma

295

1 456 585.34

49

60 720 000.00

Olympic Entertainment Group

3 241

7 170 657.17

22.75

164 590 000.00

Silvano Fashion

466

672 936.10

57.09

43 600 000.00

Tallink Grupp

3 435

13 761 245.06

59.99

357 123 031.20

Tallinna Kaubamaja

2138

6166119.06

33

187 354 320.00

Trigon

122

72111.55

40.38

2 384 502.33

Tallinna Vesi

786

4 059 952.14

30

228 000 000.00

Viisnurk

205

130 387.08

40.38

4 544 051.61

  • 1. NASDAQ OMX Baltic. Figures for Q4 2009.
  • 2. NASDAQ OMX Baltic. Figures in euro for Q4 2009.
  • 3. NASDAQ OMX Baltic. Figures 1H 2009.
  • 4. NASDAQ OMX Baltic. Figures in euro 26 February 2010, except Eesti Telekom, 30 December 2009.

the corporate form called “private limited company”. In total there were 5 259 public limited companies and 95 271 private limited companies registered in Estonia as of 1st June 2009. However, only 74 282 of these two types of corporate entities currently are taxpaying.

 
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