A nonfinancial company, a financial company, organic growth and managed assets — the Knesset Finance Committee has thrown around lots of terms over the past few weeks. It's all about who owns what in the Israeli economy and the measures being considered for the bill to decentralize the economy – the Business Concentration Law.
On Tuesday, the Finance Committee approved a major plank in the bill, barring cross-holdings between financial and nonfinancial companies. This follows the approval two weeks ago of sections dealing with holding groups structured as pyramids. Those rules bar a group from comprising more than two tiers – a parent company and a subsidiary. The following are answers to a few key questions.
What's a nonfinancial company?
A nonfinancial company is just that – a company in any industry other than financial management. The Finance Committee says a nonfinancial company shall be restricted by the Concentration Law if its annual turnover tops NIS 6 billion or if its annual debt minus cash on its balance sheet tops NIS 6 billion. If the company is a monopoly, this threshold is lowered to NIS 2 billion per year.
What's a financial institution?
A financial institution is a company that manages funds such as a bank, an insurance firm, an investment house or a provident fund that manages the public's funds. The Finance Committee says a financial institution shall be restricted by the Concentration Law if it manages funds and financial assets belonging to the public (such as deposits, trust funds and exchange-traded funds) valued at more than NIS 40 billion.
Why is the separation necessary?
The Finance Committee is barring nonfinancial companies from owning major financial institutions to foster competition and prevent distortions in allocating credit. For example, this effort prevents a business group that owns a financial-management firm from using the public's money for its own purposes – or the purposes of the controlling shareholders. The committee also feared that business groups that owned financial institutions would dig up information on their competitors in various industries.
Is cross-ownership completely forbidden?
No. Nonfinancial companies may continue to own financial institutions, but only stakes up to 5%; that is, before the shareholder becomes an “interested party” in a public company. The committee is assuming that such as stake would not let a nonfinancial company get involved in the firm's day-to-day management or decision-making.
Will banks be allowed to own nonfinancial companies?
A limit on financial institutions’ ownership of nonfinancial companies already exists. In 1995, the Brodet Committee ruled that banks could hold up to 20% of nonfinancial companies. The Finance Committee took a tougher line – up to 10%. For example, Bank Leumi, which holds 18% of The Israel Corporation, will have to sell an 8% stake.
Which groups will have to sell off assets?
Nochi Dankner's IDB group will have to sell Clal Insurance, which is already up for sale. Yitzhak Tshuva's Delek Group will have to sell Phoenix Insurance and Excellence Nessuah Investment House. Delek Group CEO Asaf Bartfeld has already unveiled Delek’s plan to offload assets and concentrate on its core business, energy.
David Azrieli, the controlling owner of the Azrieli Group, will have to sell his 20% stake in Leumi Card. Zadik Bino will have to choose between his controlling stake in First International Bank of Israel and Paz Oil. Liora, Eyal and Doron Ofer, who control Bank Mizrahi-Tefahot, will have to choose between the bank and the Melisron real-estate firm. Apax Partners, a UK-based private equity and venture-capital firm, will have to sell its holdings in food giant Tnuva or Psagot Investment House.
What about the monopolies?
Two business groups hold major monopolies. Muzi Wertheim's group, which controls Bank Mizrahi-Tefahot with the Ofers, owns the Central Bottling Company, a monopoly in the soft-drink market. Central Bottling's annual turnover of colas alone is estimated at NIS 1.2 billion to NIS 1.5 billion. But the company may eventually be declared a monopoly in other fields as well. If this happens, it will cross the NIS 2 billion threshold and be compelled to offload some of its holdings.
The other monopoly is Israel Salt Industries, owned by the Arison Group. But since this company's annual sales fall below NIS 2 billion, it's in the clear.
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