The inspectorate's decision, made Oct. 8, requires these eight funds to freeze all trading: Hansa Russian Growth Fund, Hoiupank Russian Investment Fund, Talinvest Interest Fund, Talinvest Growth Fund, Baltic Index Fund, Centum, Tallinna Pank Talse Index Fund and Tallinna Pank East European Fund.
Each fund's management now must decide whether to liquidate the fund and divide the property or to continue operations by increasing the net value.
Marek Magi, head of the Securities Inspectorate, said the funds were managed well and the objective now is to make them work normally. Out of 23 Estonian funds, five are under the liquidation process.
Magi explained that the funds did not meet the net value requirement because the Russian market lost liquidity and some shares are valued at 0 kroons. Magi said the suspension is necessary to ensure that all shareholders are in equal position in case a fund will be liquidated.
The Securities Inspectorate applied the moratorium principle, according to which the fund continues its activities, buying and selling shares, but clients cannot take out their money for a period of time.
"If we'd started talking about low liquidity before suspension, clients would have started taking their money out. The company would have sold the liquid shares and paid the share price to those who heard about the news first. Then the fund would have had troubles with selling the less liquid shares and paying out the share price to other shareholders at a proper time," Magi said. "The suspension gives them an equal position and the fund managers can search for the money to pay out the shares or increase liquidity."
Shareholders also have the opportunity to sell their shares in one fund and buy shares in another fund on the same conditions.
Magi said it's in a shareholder's interest to do so, especially in the case of Hansa Russian Growth Fund and Hoiupank Russian Investment Fund, which have the same investment strategy and one fund manager. Both companies belong to Hansapank Assets Management.
"Hansapank Assets Management is interested in dropping one fund and increasing the other fund with clients of the liquidated fund. If a client is not interested, he would get his money," said Magi.
"It is not reasonable to manage two similar funds, but merger in this case is not permitted," said Vadim Ognestsikov, the fund manager of Hansa Russian Growth Fund and Hoiupank Russian Investment Fund.
The net value of Hansa Russian Growth Fund is 4.5 million kroons and Hoiupank Russian Investment Fund is 3.9 million kroons. The Hansa fund's share, which cost 1,000 kroons a year ago, is now worth 88 kroons. The net value of Hoiupank Russia Growth Fund's share was 1,000 kroons in August 1996, but now it has fallen to 80 kroons.
According to the law the funds which do not meet the 5 million kroon requirement will apparently pass under the depot bank's administration as of Oct. 16.
Magi said the funds would have to find a new manager, but expressed doubt any corporation would agree to manage these funds.
"If a fund does not find a manager, the inspectorate would appoint someone to liquidate it," said Magi.
Uhispanga Fondid, one of the eight managers in Estonia, might overtake Tallinna Pank's Talse Index and East European funds. After Uhispank and Tallinna Pank merged, some subsidiaries continued working separately. Now the Uhispank Group's company, Uhispanga Fondid, might shelter troubled Tallinna Pank funds.
Estib-Talinvest Assets Management is interested in keeping its Interest and Growth funds. Jan Andresoo, Estib-Talinvest's development consultant, said three Estib-Talinvest Assets Management funds, including Share Fund, will be divided among its owners according to the previous plan and clients will then increase the net value.
Andresoo said Talinvest Growth Fund needs only 500,000 kroons to meet the net value requirement. Eesti Investeerimispank will take over Talinvest Growth Fund, and Talinvest will get Talinvest Share Fund and Interest Fund.