The Czechs and imbalances of an emerging market

In the mid-Nineties, privatisation put 125,000 Czech companies in the hands of private investors. Malcolm Hurlston's ordeal to get his shares is a warning for the Czech government, and for other investors who may be tempted by emerging markets

In 1996 I bought shares in several companies in the Czech Republic which had been newly privatised. It seemed a good idea at the time, because the Czech market had a good reputation within the former Soviet bloc. I ended up with holdings, many small, in 62 companies. As time went by, some went to the wall, some went from the Prague Stock Exchange to the junior RM-System and an increasing number went private, leaving me with holdings in nine enterprises.

In 1996 I bought shares in several companies in the Czech Republic which had been newly privatised. It seemed a good idea at the time, because the Czech market had a good reputation within the former Soviet bloc. I ended up with holdings, many small, in 62 companies. As time went by, some went to the wall, some went from the Prague Stock Exchange to the junior RM-System and an increasing number went private, leaving me with holdings in nine enterprises.

As when the municipal bus companies were sold off in the UK, a lot fell into the hands of management and I soon found myself an unwelcome minority shareholder many times over. A quirk of Czech company law requires shareholders in an unquoted company to collect their shares in person at a set time and place, otherwise they may be auctioned, and at auction it is usual for managers to pick them up on the cheap.

I was despairing of my adventure in Czech investment when, following preliminary acceptance of the republic into the European Union, a fellow investor told me it would be worthwhile going to collect. I was reluctant, as my nine companies were inconveniently spread around the country.

I finally decided on a four-day trip, taking my attorney with me. I started in Prague, the capital, connecting with my broker and my bank, checking on my details at the national securities register and seeing the intermediaries handling the auction of one of my shares.

Brokers inevitably concentrate on shares which are quoted and tradable, so not unsurprisingly, David, my broker, knew little more about my now obscure investments than I did. But he helped with phone calls to the companies concerned. I had tried e-mailing from the UK to fix meetings, but with mixed results. By now snow was falling, but we prepared for a long journey the next day to the north for three visits, then to the south to be ready for the following day's collections.

Two helpful e-mails I had received in England, from SPMB Bruno and Texlen, indicated I needed only my passport to collect the shares but David's phone call en route elicited the information that two of the firms I was to visit would require my details from the securities exchange, though, since the companies had been delisted, they would not serve to verify ownership. As we were already an hour outside Prague, I diverted to the town of Hradec Kralove where there was a branch office of the registry. Nobody spoke English but after an hour I had a list and was off speedily to the first company, the Chrudim bus company which I understood had partly sold out to the French-based Connex and should be cash-rich (I pitied the passengers).

There were blank faces at the bus station, then aggressive, too, and I surmised they had been asked by many shareholders already. After a few phone calls David found it had been taken over by another bus company in the far east of the Czech Republic which would have to be added to our visit list if time and weather permitted.

From there it was a fast drive north to snowbound Texlen where I found a linen factory making Guinness dishcloths for export to Ireland. The managing director, Peter Vik, agreeably explained difficulties in the linen market and the company's interest in going downstream into design and clothing manufacture as well as making linen from flax. There was a factory shop and I ended up with a few dishcloths and bathrobes, plus a brochure in dodgy English and one piece of paper per share. I began to fear for the free luggage allowance in addition to the other costs.

After the visit and the detour we were late for the next visit. The managing director of Helagra in Jicin, 50km (30 miles) away, gave us an hour max to get there, so we grabbed some fruit in the local town of Trutnov and drove off in worsening conditions. At Jicin we were, again resentfully, given one piece of paper per share.

That left a long drive south through Brno to another bus company in a town so industrial it did not even warrant a mention in the Lonely Planet guide. But by a stroke of luck I had dinner at the kind of hunting lodge I had been dreaming of during the long, famished drive, peopled with the best-looking women in the country. Dinner for two was not much more than a fiver, less than the beer alone would have been back home.

Next day the managing director of the Hodonin bus company offered me a small sum for the shares, well below net asset value, and eventually we collected several thousand more sheets of A4 as share certificates. Next stop was Brno, where for once things went smoothly, the company being the Coca-Cola bottler, and courteous secretaries transacted the business speedily. We were blissfully given only one A4 certificate to represent the entire holding.

That left an additional sortie to Ostrava in the mining country near the Polish border in the east. As well as the wandering bus company, now called Csad Ostrava, another company had shares worth collecting, so that was arranged on the way with help from David. Both firms had dingy, ill-staffed post-industrial offices. It was snowing heavily when got to the second one, but an efficient woman dealt quickly with the shares.

It was now mid-afternoon, time to retrace our steps via Brno and Prague to Pilsen at the other end of the republic. Many hours later we hit Pilsen, having driven 500 miles a day for two days. I hoped I would be able to receive single certificates rather than one per share, since the bag was beginning to weigh heavy. No such luck. We drove fast back to Prague to be at the intermediaries handling the auction of another of my shares. The final pick-up went smoothly but bad weather in England meant another night in Prague. The whole trip cost £1,000.

The Czechs need to smarten up their act if foreign private investors are to be attracted in future. Minority shareholders get a rough enough ride even in the UK, but the requirement under Czech company law to collect shares in person is discriminatory and should be tidied before the country joins the EU. We were left with the impression that Czechs are likely to take advantage of legislation to rip off small shareholders. It makes sense for them to delist, become private then force investors to collect.

The first letter I received when I arrived back in London was from another Czech company, Kovohute Celakovice: it had gone private and would I collect my shares by the end of the month. I sent a stiff e-mail to the managing director, more in anger than in hope.

Mr Hurlston is chairman of the UK's Consumer Credit Counselling Service and the European Centre for Employee Ownership