PRIVATIZATION UPDATE: COMPANY AND BANK OPTIONS FOR THE PUBLIC

(COMMUNICATED BY GPO ECONOMICS DESK) 28 February 1995

A privatization plan based upon distributing share options in government owned companies to the Israeli public was presented today, (Tuesday), 28.2.95, to Finance Minister Avraham Shohat by David Brodet, Director- General of the Finance Ministry. Brodet is the acting chairman of a commission set up to develop a program for privatizing government owned companies and banks through the distribution of shares to the general public.

The plan, as presented to Shohat, will distribute options to buy shares in the government companies and banks which are being privatized to all Israeli citizens over the age of 18 who are registered voters; in other words, approximately 3 million people. The Brodet Commission reported that, according to the current level of activity and the current indices on the Tel Aviv Stock Exchange, it is projecting approximately $2 billion, or approximately NIS 6 billion, in income from this stage of the privatization process. Since the Government began privatizing its properties in the late 1980s, it has received approximately $3.4 billion in income, according to Brodet.

The options are to be distributed to the public free of charge. The companies involved will be determined later. The commission recommended that each option equal 20-30% of its share price, meaning that a citizen can exercise the option and buy the share at a discounted price of between 70-80% of its market worth. If a citizen decides to sell the option without buying the share, they will receive the value of the option at the time of the sale. If the citizen chooses to exercise the option and buy the share, they will pay an additional amount to the option’s value to reach the market price of the share.

The options privatization plan is expected to commence within a few months, and conclude within 2-3 years. In about three months, the Bank of Israel, in cooperation with the Finance Ministry, will send out notices to all registered voters that they may approach their bank and register to receive the options. Within three months of the end of the registration process, the trading of options is scheduled to begin. Three months afterwards, citizens may begin exercising their options in order to buy shares. Both of these processes the trading of options and the exercising of options into shares will continue concurrently for 18-30 months, depending on other privatization paths and the time it takes to privatize the company through options. A number of checks and balances will be placed on trading options such as a daily option price that will be set according to the average price of the option from the previous 20 days in order to ensure against steep price fluctuations.

The criterion for companies to be privatized via the options path is based upon each company’s current preparedness for privatization. Government owned companies which currently have a prospectus, will be the first to be privatized using this method. According to the commission, the use of the options method will not exclude other methods of privatization, such as selling a managing or controlling share in a company to an investor, The Brodet Commission also recommended that companies not be privatized piecemeal through the options method, but rather, that the options method be used for all of a company’s shares not already sold to an investor or traded on a stock exchange.

The Brodet Commission’s report marks the fourth privatization path taken by the Israeli Government in an effort to privatize government owned companies. Brodet noted that the option plan is not in any way exclusive of the other three privatization paths: selling shares on the international markets, on the Tel Aviv Stock Exchange, and selling either a managing stake or controlling stake in the companies.

The Brodet Commission was formed in mid-December 1994 and has held 8 meetings culminating in a final meeting on 24.2.95 during which it finalized its recommendations. The commission had 8 regular members, representing the Finance Ministry, academia, and private sector capital market experts. An additional 6 members were observers, representing the Israel Securities Authority, the Tel Aviv Stock Exchange, the Bank of Israel, MI Holdings, the Government Companies Authority, and the legal division of the Tax Authority.

The commission sought and received advice and recommendations from other various parties connected to the options privatization process. Among these parties were the Justice Ministry and the Industry and Trade Ministry’s Monopolies and Cartels office.

In order for the options plan to be implemented,

the commission asserted that a number of new regulations will need to be enacted, including additions to the Economic Arrangements Law and new tax regulations.