Finance Committee Chair Slams Government for Capitulating to Conglomerates

High-profile bond companies such as IDB would be exempt from new restrictions on conglomerates, under the cabinet's last-minute proposal to the Finance Committee.

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Knesset Finance Committee chairman MK Nissan Slomiansky on Tuesday accused the government of making a fool of the committee by backtracking on a plan to limit the power of some of Israel's biggest conglomerates.

"Ultimately the decision belongs to the committee," Slomiansky said Tuesday during a committee debate on a measure to limit corporate pyramids. "If the government does not approve of the committee's decision, then the government is entitled to withdraw the bill, and I am almost 1,000% certain that won't happen."

Slomiansky's comments follow last-minute revisions by the cabinet Monday night to a plan that in its original form would have restricted corporate pyramids to no more than two levels.

TheMarker polled committee members during Tuesday's debate and found that 13 of the 17 members oppose the new government position.

Initially, the government had intended to submit a proposal to the Knesset Finance Committee limiting companies to one level of subsidiaries – in other words, prohibiting a subsidiary of a given company from controlling subsidiaries of its own. However, in a meeting late Monday night, the cabinet drafted a revised plan exempting existing bond companies – companies that issue bonds but not stock – from these restrictions.

Numerous high-profile bond companies fall under this category, including IDB Development, British Israel, Gindi Investments, Hot, Tempo Beverages, and the Israel Aerospace Industries.

The proposal was formulated by Prime Minister Benjamin Netanyahu, Finance Minister Yair Lapid, Justice Minister Tzipi Livni and Economy Minister Naftali Bennett, together with ministry staff.

Under the revised cabinet proposal, existing bond companies would be permitted to control subsidiaries and sub-subsidiaries, constituting three-level pyramids, while new bond companies would be restricted to two levels at most. Existing control pyramids such as IDB, the country's largest corporate pyramid, would therefore not be required to consolidate or sell off layers, under the revised plan.

"The government hasn't capitulated to the corporate bigwigs by allowing bond companies an additional level," a source close to the matter said Tuesday, "because it only involves the top level, and is designed to enable them to raise capital in order to acquire the companies that are about to be on the market."

The majority of Finance Committee members, however, want to see all control pyramids, including bond companies, limited to two levels.

Pyramid control structures have found their way into regulators' sights because they enable a person or company at the top of the pyramid to control an outside share of companies and assets further down the line.

The party at the top needs to own only slightly more than 50% of the top company's shares in order to control it, and the top company needs to control only slightly more than 50% of a subsidiary's shares in order to control the second tier. Thus, the party at the top of the pyramid can control the subsidiary despite owning, in practice, just more than 25%.

Antitrust Commissioner David Gilo suggested at the debate Tuesday that the Finance Committee explore other restrictions on diversified corporate conglomerates, in order to prevent them from amassing undue political power.

Gilo suggested, for example, the possibility of limiting the size of conglomerates and barring them from investing in media firms.

"If the Finance Committee is concerned that the size of a firm will increase its ability to apply political pressure, it's possible to consider limiting it by law," he told the committee, "so that if a certain firm gets too much control of a particular market or ownership of essential infrastructure, then that would be prohibited by law."

Gilo also warned of a "revolving door" for regulatory officials, apparently referring to the phenomenon of regulators leaving government posts for jobs in the corporate sector. 

Oded Sarig, the Finance Ministry's commissioner of capital markets (left), and Antitrust Commissioner David Gilo at a Finance Committee meeting on Tuesday, May 21, 2013.
MK Nissan Slomiansky Credit: Olivier Fitoussi

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