Registration. It is necessary to review the current registry with emphasis on taxpayers that are not active and looking for quality taxpayers that may be hiding as small or not even registered.
Arrears enforcement. The current stock of arrears plus fines and penalties is large but a large portion of it might not be collectable. It is necessary to make a realistic assessment of what can be collected from the stock and develop timely methods to prevent new arrears from aging, setting clear priorities.
Auditing. There should be a sustained effort to build the quality of auditing. Special attention initially could be placed on critical aspects of the VAT such as VAT refunds, cross-checking of credits and fake invoices. Important to good auditing is the development of risks profiles to guide selection and improve effectiveness. Greater information management capacities available now have to be used to develop such profiles.
LTI. The LTI in not a centre of excellence. Efforts to update the roaster of large taxpayers and to reach coverage of at least 50 percent of the revenues collected by the tax agency are worthwhile, but they have to be sustained. The LTI has to take a more proactive attitude to performance and reform and it is good place to begin developing new incentive mechanisms away from simple revenue targeting.
IDA Support to the Private Sector in Georgia
IDA's Policy. To support private sector development and attract needed foreign investment, the World Bank (namely IDA) has developed the Country Assistance Strategy (CAS), which focuses on removing key policy and institutional (including governance) constraints, as well as financial, energy and infrastructure bottlenecks. On the basis of the FY03 Integrated Trade Development Strategy IDA will provide reform support and progress monitoring through the ongoing Enterprise Rehabilitation Project, an FY06 Private Sector Development Project, and the ongoing Business Environment Surveys and Studies. IDA will also provide support (in conjunction with USAID) for improving access to affordable finance through further financial sector reform, and will help reduce trade, transit and marketing costs through the FY05 Trade and Transport Facilitation Project, building on the FY03 South Caucasus Trade and Transport Facilitation Study. IFC will complement these activities through investments in small and medium-sized businesses and, in coordination with USAID, through technical assistance for business development. Support for alleviating energy bottlenecks will be provided by IDA’s ongoing energy portfolio and dialogue.
Support to SMEs. The Small and Medium Scale Enterprise (SME) sector is a crucial area for potential private sector growth, and IDA has been supporting the sector through its ongoing Enterprise Rehabilitation Project. IDA plans, through the FY06 Private Sector Development Project to provide expanded support for management training, creation of export-oriented clusters of SMEs, advice to business associations and government, and monitoring of the business environment. Additionally, IFC will conduct a targeted study of the SME sector in Georgia to identify key obstacles to its development, and then recommend specific improvements in the regulatory and administrative environment.
IFC Financial Support to the Private Sector in Georgia
IFC's Policy. IFC’s lending and investments in Georgia have been tailored to the country’s special circumstances: limited foreign investments, the non-existence of large local companies, limited access to financing for a nascent SME sector, and the lack of advice for private companies on business related issues such as corporate governance and leasing. IFC would also provide support directly to the private sector through the Georgia Business Development Project, a five-year technical assistance program implemented by the Private Enterprise Partnership with the support of the Canadian International Development Agency (CIDA). The main components of the project, as already stated in the above, include development of the leasing sector and improvement of corporate governance practices. The corporate governance initiative is helping Georgian businesses improve their practices to build investor confidence and increase their access to financing. This component of the program also includes advice to the Government on improving corporate governance policies and regulations.
Assistance to SME Sector. To reach small and medium enterprises, IFC provided equity and long-term credit lines to TBC Bank and helped establish Georgia Microfinance Bank – the ProCredit Bank - the country’s first bank specializing in lending to micro and small enterprises. In June 2000, IFC purchased a 10 percent stake in TBC Bank. IFC’s support helped TBC to grow from a “pocket” bank into the largest and one of the best performing commercial banking institutions in Georgia. In 1999, IFC helped establish the ProCredit Bank - the first bank dedicated to lending to micro and small enterprises in the country, and now the fastest growing banking institution in Georgia. IFC has also supported other Local Companies, for example, GG&MW, a mineral water production company, where IFC’s loans supported the company’s acquisition of key strategic assets and strengthened control over its key brand, Borjomi mineral water. IFC’s equity investment helped the company rehabilitate two mineral water bottling facilities, diversify its product mix and develop the distribution network. IFC sold its stake in the company in 2002.
Development of Mortgage Lending. In the financial sector, IFC has focused on supporting the development of the housing finance market. The introduction of mortgage financing has allowed individuals for the first time to leverage their residences to increase their standard of living. In 2000, IFC extended a $3 million credit line to the Bank of Georgia, and together with re-flows, this credit line financed over 500 projects totalling $4.5 million. In June 2003, IFC provided a second $5 million credit line to the Bank of Georgia for housing finance and for on-lending to small and medium enterprises. In August 2001, IFC provided a second $3 million loan to TBC Bank to support the development of its mortgage lending.
Facilitation of Foreign Investments: IFC invested in equity and provided loans to Ksani Glass Factory, a producer of high-quality glass bottles and packaging. IFC’s The $2.5 million equity investment and $6.3 million loan supported Ksani’s expansion and modernization. At project completion, the facility will be producing 40,000 tons of high quality glass bottles annually with a high level of product flexibility. In the power sector IFC provided a $30 million loan to AES Corporation to support the newly privatized Tbilisi area power distribution company. The loan was pre-paid in August 2003, when the AES Corporation sold Tbilisi electricity distribution system to UES.
General. The operation of the private companies in Georgia is mainly regulated by the following two laws: a) Law on Entrepreneurs (LoE) (Corporate Law), which sets the corporate governance principles for the private companies (i.e. Limited Liability Companies and Joint Stock Companies); and b) Securities Market Law (SML), which regulates the activities of the private companies permitted to issue and trade the shares on the securities market (i.e. Joint Stock Companies). Both laws are reviewed below.
Under the Law of Georgia on Entrepreneurs the following forms of commercial entities may be established in Georgia:
i. Sole proprietorship—An enterprise operated by a physical person with unlimited liability and no minimum capital requirement. A sole proprietorship is not considered a legal entity under the commercial code of Georgia.
ii. Joint Liability Company—A legal entity with unlimited liability established on the basis of a partnership of several individuals or companies.
iii. Limited Partnership—A legal entity consisting of general and limited partners. The limited partners have limited liability and general partners bear full and direct liability for the obligations of the company.
iv. Limited Liability Company—A legal entity that is separate and distinct from its shareholders (one or more legal or physical persons). The company’s liability is limited to its authorized capital. Founders and shareholders are not liable for the obligations of the company.
v. Joint Stock Company—A legal entity characterized by the limited liability of the partners. The company’s liability is limited to its authorized capital.
vi. Cooperative—A legal entity characterized by the limited liability of the shareholders. In Georgia, this is a common form of organization for agricultural enterprises.
Sole proprietorships, joint liability, limited partnerships and cooperatives are rarely established by foreign investors in Georgia. Therefore, the following focuses on the legal requirements for Limited Liability Companies (LLCs) and Joint Stock Companies (JSCs), which are the most popular forms of incorporation used by foreign investors in Georgia.
The Law on Entrepreneurs does not set limitations on the domicile of partners. A partner in a legal enterprise can be a citizen or resident of any country. Foreign companies can be established as fully foreign-owned enterprises or in partnership with Georgian companies or physical persons. In accordance with the Law on the Promotion and Guarantees of Investment Activities of November 12, 1996, companies with foreign investments enjoy national treatment and the same rights as Georgian companies.
Provisions of the Law on Entrepreneurs for Limited Liability Companies (LLC):
· An LLC can have a maximum of 50 shareholders. The minimum equity capital requirement is 2,000 GEL. The share of the equity capital to be covered by each of the partners may be determined freely, but it must be divisible by 10;
· At least 50 percent of the equity capital must be paid up at the time of incorporation, with the remaining 50 percent due within one year;
· The Law stipulates that a partners’ meeting be held at least annually. Special meetings may be called at the request of partners or directors of the firm;
· Partners’ meetings are required to consider issues such as amendments to regulations, reorganization or liquidation of the company, appointment of directors, and so on;
· Day-to-day management of the company is carried out by one or more directors who are appointed and dismissed by the general meeting or the supervisory board, when such a board is established at the discretion of the general partners meeting;
· A partner may sell his shares without seeking consent of other partners, unless otherwise stated in the charter of the company;
· Partners who posses 5 percent and more of the equity capital are authorized to call a general meeting.
Provisions of the Law on Entrepreneurs for Joint Stock Companies (JSC):
· An entity with more than 50 partners is required to have a legal form of a Joint Stock Company (JSC);
· Minimum equity capital for JSC is 15,000 GEL;
· A JSC with more than 100 shareholders is required to maintain its share registry through an independent registrar (In 2003 amendments were adopted into the law requiring that a JSC with more than 50 shareholders is required to maintain its share registry through an independent registrar);
· A general shareholders' meeting must be held in two months time form publishing annual financial accounts;
· A general shareholders' meeting is entitled to elect the supervisory board members, make amendments into the charter of the company, approve the annual report presented by the company directors, elect auditors and so on;
· Creation of a supervisory board is mandatory for a JSC. Supervisory boards must have between 3 and 21 members, but the number must be divisible by 3. The Law provides for representation of company staff on the supervisory board (up to 1/3 of the members);
· Supervisory board is elected for the period of 4 years. The company directors may not be the members of the supervisory board;
· Supervisory board meeting must be held al least once in a quarter;
· Day-to-day management of the company is carried out by one or more directors who are appointed and dismissed by the supervisory board;
· Supervisory board oversees the activities carried out by the company directors, checks the annual financial accounts, appoints and dismisses the company directors, etc.;
· The consent of the supervisory board is needed to conduct the following activities: purchasing or selling more than 50% share of entities, purchasing or selling the assets of the company, setting up or liquidating the branches of the company, etc.;
The law envisages a cumulative voting for electing the members of a supervisory board to protect minority shareholders, but this is not a mandatory requirement.
Representative Offices and Branches. A foreign company may operate a branch or a representative office in Georgia. A branch is not a separate legal entity and it is allowed to engage in commercial activities that would constitute all or part of the activities of foreign head office. For purposes of registration, representative offices are treated as branches and are obliged to fulfil the same requirements.
All actions on behalf of a company can be performed by the head of the company (executive body) or by any person authorized to perform such actions by a power of attorney of the relevant body of the company. Foreign legal entities bear full liability for the activities of branches or representative offices.
Analysis - Law on Entrepreneurs (LoE). As the main company law for Georgia, the Law on Entrepreneurs provides a good basis for corporate governance for all the private companies including those with traded securities. However, based on the experience of other central and eastern European countries, there are several provisions in the Law on Entrepreneurs that could be amended to further strengthen the corporate governance provisions. They are: (1) although the LoE envisages a cumulative voting for electing the members of a supervisory board to protect minority shareholders, it should be made a mandatory requirement. As a result, there will be a mandatory cumulative voting for members of supervisory boards as a means of allowing shareholders with small shareholdings to vote at least one member of the supervisory board; (2) requirement that the shareholders’ meeting approve the auditing company’s contract (covering the scope of work and annual auditing fees) so that shareholders interested in a highly quality audit, requiring more time from the auditing company, can obtain such an audit, and (3) There is a need to establish a minimum quorum below which no shareholders’ meeting may be considered valid; (4) although the LoE requires the financial statements of JSCs to be prepared on the basis of the International Accounting Standards (IAS), it does not specifically require that audits are conducted in accordance with the International Standards on Auditing (ISA), which needs to be amended; and (5) the LoE does not provide takeover rules to protect the interests of minority shareholders.
More specifically, the World Bank (WB) and the International Monetary Fund (IMF) conducted the Assessment of the Implementation of the Corporate Governance Principles of the Organisation of Economic Co-operation and Development (OECD) in Georgia. It is interesting to note that the assessment identified a number of the shortcomings in the corporate governance practice existing in Georgia. Namely, according to the study: (i) There are uncertainties in knowing if shareholders are sharing in company’s profits; (ii) It is not uncommon practice of failing to hold the required shareholders’ meetings; (iii) Markets for corporate control are limited; (iv) Court system has not yet made any decisions on the cases concerning corporate disputes; (v) Minor role is played by supervisory boards in the strategic guidance of companies; (vi) There is a less than complete disclosure by most reporting companies, particularly of financial and operating results; (vii) There are weak auditing practices;
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