Risk management tools
Management of investment risks is one of the crucial aspects of investment execution, both in the model involving raising capital through Closed-end Investment Funds, and also from direct investments. Often, availability of risks minimising tools is a decisive factor concerning commitment of funds in projects implemented in selected industries. It needs to be emphasised, that there are efficient tools available on the Polish capital market, which allow to sufficiently minimise the risks, mainly through the possibility to influence the way the capital is utilised.
In the case of Closed-end Investment Funds, the following risk management tools are available:
•The Board of Investors: a fund participant can participate in the Board of Investors and regularly control realisation of the investment objectives of the investment fund and its investment policy. The members of The Board of Investors have the right to browse books and all documents of the fund, as well as request explanations from the Investment Fund Society;
•The Assembly of Investors– is a body of the Closed-end Investment Fund, and it is empowered to pass new resolutions, e.g. concerning issuing of investment certificates in order to acquire new financial funds. Participation in Assembly of Investors allows to control the process of capital raising and thus, distribute the income of the present investors;
•Participation in an entity that manages the fund assets– represents the strongest tool of risk-management, allowing to make direct decisions about the choice of investment projects, which are implemented by the fund. Thus, supervision over the entity that manages the fund assets ensures the possibility to reject too risky projects and choose only those that meet the criteria which is accepted by the investors. Additionally, it should be noted that the Investment Fund Societies, which establish Closed-end Investment Funds, remain under constant supervision of the Financial Supervision Authority. It is an additional mechanism reducing the investment risk, as the Financial Supervision Authority cares about the transparency and compliance with the applicable laws of the transactions made by the Closed-end Investment Funds. In turn, within a model that includes Sharia Investments, it is possible to use the following risk management tools:
• Provisions of the Code of Commercial Companies – is a set of applicable provisions that govern the operational principles of limited companies in Poland. They empower the shareholders of limited liability companies to have direct supervision over the activities of management boards of these companies. Therefore, the investors who acquire shares of limited liability companies under the applicable law can minimise the investment risk by verifying the decisions made by the management boards and, if required, react to unfavourable actions by passing a regulation about the replacement of persons managing the special purpose entity;
•The possibility to introduce desirable persons into the management board. It is possible to make certain arrangements which will empower the investors to introduce their representatives into the management boards of the special purpose vehicles. This tool would enable minimization of any risks any risks related to the investment execution, as the investor would have direct control over literally all decisions made by the special purpose vehicle at every stage of implementation of a given investment project;
•Creation of Supervisory Board – in the case of joint stock companies, the Polish law allows creating a Supervisory Board, which has the mandate to conduct direct supervision over the activities of the company’s management board. Thus, the optional introduction of investors’ representatives to the Supervisory Board would provide the possibility to have indirect control over the decisions of the management board concerning execution of the investment. Additionally, in certain cases the regulations impose the need on the management board to obtain the acceptance of the Supervisory Board to the performance of certain activities. This gives direct influence of the Supervisory Board on the activity of the special purpose vehicle;
•The necessity to carry out audits of financial statements by independent auditors. In accordance with the applicable law, the joint stock companies in Poland, have the obligation to perform auditing of their annual financial statements by an independent auditor, in other words, a person who has special certificates to issue opinions about the correctness of financial calculations. It is an important tool for shareholder of joint stock companies, and it minimises the risk level of such investment, as every annual financial report will undergo audit by a certified auditor. It means that the investor will obtain an independent external expert’s opinion on the correctness of the financial report compiled by the management board. Thus, this tool provides the possibility of additional verification of the activities of the special purpose entity;
•legal regulations concerning bonds. In the case of acquisition of the zero-coupon bonds by investors, if the bond issuer has any problems, the provisions of the Bonds Act give bondholders the right to receive repayment for all claims before any other creditors. It means that the risk of investors who acquire bonds of special purpose entities is comparatively lower than the risk of entities that finance the activities of the companies, e.g. by the provision of loans.