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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Prosperity Vosk | LSE:PVF | London | Ordinary Share | GG00BMJJHH70 | ORD USD0.01 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 1.06 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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Prosperity Voskhod Fund Limited
Financial Report and Audited Consolidated Financial Statements
For the Year Ended 31 December 2013
CONTENTS
Page(s)
Financial Statements
Directors and Advisors 1 - 2
Chairman's Statement 3 - 4
Manager's Report 5 - 8
Statement of Investing Policy 9 - 10
Directors' Report 11 - 14
Corporate Governance Statement 15 - 18
Report of the Audit Committee 19 - 20
Directors' Remuneration Report 21
Statement of Directors' Responsibilities 22
Consolidated Supplemental Schedule of Investments
A (unaudited) 23 - 27
Consolidated Supplemental Schedule of Investments
B (audited) 28
Independent Auditors' Report to the Members of Prosperity
Voskhod Fund Limited 29 - 31
Consolidated Statement of Financial Position 32
Consolidated Statement of Comprehensive Income 33
Consolidated Statement of Changes in Equity 34
Consolidated Statement of Cash Flows 35
Notes to the Consolidated Financial Statements 36 - 68
Supplemental Unaudited Information 69
Directors Julian Reid (Chairman)
Robert Boyle
Anthony Hall
Roger Phillips (resigned 9 July 2013)
Paul Tierney, Jr. (resigned 9 July 2013)
All Directors are Independent Non-executive Directors
Registered Office Dorey Court
Admiral Park
St Peter Port
Guernsey GY1 2HT
Channel Islands
Manager Prosperity Capital Management Limited
PO Box 897
Windward 1
Regatta Office Park
Grand Cayman KY1 1103
Cayman Islands
Advisor Prosperity Capital Management (RF) Limited
PO Box 897
Windward 1
Regatta Office Park
Grand Cayman KY1 1103
Cayman Islands
Administrator and Kleinwort Benson (Channel Islands) Fund Services Limited
Secretary Dorey Court
Admiral Park
St Peter Port
Guernsey GY1 2HT
Channel Islands
Sub-Administrator State Street Fund Services (Ireland) Limited
(up to 31 August 2012) 78 Sir John Rogerson's Quay
Dublin 2
Ireland
Sub-Administrator Maples Fund Services (Cayman) Limited
(from 1 September 2012) Boundary Hall, Cricket Square
PO Box 1093
Grand Cayman KY1 1102
Cayman Islands
Global Custodian State Street Custodial Services (Ireland) Limited
78 Sir John Rogerson's Quay
Dublin 2
Ireland
Russian Custodian Deutsche Bank Limited
(from 20 December 2013) Building 2
82 Sadovnicheskaya Street
Moscow 115035
Russian Federation
Russian Custodian ING Bank (Eurasia) ZAO
(up to 19 December 2013) 36 Krasnoproletarskaya
Moscow 127473
Russian Federation
Nominated Advisor and Broker Cenkos Securities plc
6.7.8 Tokenhouse Yard
London EC2R 7AS
United Kingdom
Registrar Capita Registrars (Guernsey) Limited
2nd Floor
No 1 Le Truchot
St Peter Port
Guernsey GY1 4AE
Channel Islands
Independent Auditor KPMG Channel Islands Limited
PO Box 20
St Peter Port
Guernsey GY1 4AN
Channel Islands
Legal Advisors to the Group as to Stephenson Harwood
English Law 1 Finsbury Circus
London
EC2M 7SH
United Kingdom
Legal Advisors to the Group as to Ogier
Guernsey Law Ogier House
St Julian's Avenue
St Peter Port
Guernsey GY1 1WA
Channel Islands
Legal Advisors to the Group as to CMS International B.V.
Russian Law 11 Gogolevsky Boulevard
Moscow 119019
Russian Federation
Dear Fellow Shareholders,
We have much pleasure in providing the Annual Report of Prosperity
Voskhod Fund Ltd (the "Fund") covering its fiscal year 2013 - a time
which coincides with the calendar year and hereinafter is referred to as
the "Period".
Your Fund's net asset value ("NAV") per share in the second half of the
Period increased 13.8%, whilst the MSCI EM Russia Index increased 8.4%,
the Russian Trading System Index gained 6.8% and the RTS2 index gained
4.76%. For the full Period your Fund's NAV per share declined 6.8% as
compared to declines in the MSCI EM Russia Index of 2.6%, Russian
Trading System Index of 5.5% and RTS2 index of 22.9%. Your Fund's share
price in the second half of the Period increased 9.5% whilst for the
full Period it decreased 9.5%. As at the Period end the discount of the
share price to NAV stood at 10.8%
As you will be more than aware the Russian market has been subject to
extraneous factors both in and subsequent to the Period; your Manager's
report includes commentary on the Russian market.
As you will recall in June of last year shareholders supported a managed
wind down of your Fund which was commenced immediately thereafter and
which to date has resulted in a return of cash of $112 million.
On 27 March 2014 your Board announced that it had sold circa 68 per cent
of its residual holding of Bashneft preferred shares, being 714,483
shares, at a price of 1,403 rubles per share. The sale was made to
Bashneft under its publicly announced share buy back programme. The
consideration proceeds, in rubles, have now been received and amount to
$27.7 million. Your Board has therefore announced that a further
redemption of Shares will be implemented in May under which circa $50
million will be returned to Shareholders before the AGM to be held on 29
May 2014.
Given the successful progress of the realisation strategy to date and
the composition, size and nature of the current portfolio, your Board
believes that a delisting of the shares will enhance the opportunities
for the disposal of the remainder of the Fund's portfolio, and
particularly certain significant holdings, at optimal values as well as
eliminating the costs incurred in connection with the admission to
trading on AIM. This proposal has the support of several key
Shareholders and we therefore include a Shareholder circular and notice
of EGM, scheduled for 29 May 2014 with this Annual Report at which
Shareholders are being asked to approve the proposals. Your Board has
already implemented a cost reduction programme and seeks to mitigate
costs.
The Directors are keenly aware of the varying interests of all
Shareholders and in particular the need for continuing marketability of
your Fund's underlying shares albeit once they are unlisted. The
circular therefore makes specific reference to a proposed basis of
matched sales that will be continued on a best efforts basis.
If the proposals are approved, your Directors intend to follow the
Guernsey Financial Services Commission ("GFSC") Code. A copy of the
GFSC Code can be obtained from the GFSC's website www.gfsc.gg or from
the Secretary upon request.
Your Board has maintained an active role leading up to and subsequent to
the shareholder vote to instigate a managed wind down of the Fund,
having participated 16 meetings during the Period to the time of
writing: throughout your Board has endeavoured to minimise costs by
holding telephone meetings whenever possible.
As always your Board is available at any time to receive comment and
suggestions from shareholders and meanwhile takes this opportunity of
thanking you for your support in the Period.
Yours very sincerely
Julian Reid
Chairman
Prosperity Voskhod Fund Limited
Guernsey, 22 April 2014
Manager's Report
Dear Shareholders,
Performance summary
Prosperity Voskhod Fund Ltd (the "Fund") lost 6.8% after fees and
expenses in 2013 in a challenging market characterised by negative
performance of both MSCI Russia (-2.6%) and RTS Index (-5.5%). More
comparable to the investment strategy of the Fund, the RTS2 Index lost
-22.9% over the year signaling very challenging conditions for the less
liquid shares in the Russian stock market in 2013. The Fund's relative
performance suffered in 2H2013, after the shareholders' decision to wind
down the Fund resulted in the accumulation of a cash position in order
to make distributions to the shareholders. This acted as a drag on the
Fund's performance amidst the recovering market.
Overall, since the shareholders' decision to wind down the Fund a total
of 41.6% of the Fund's outstanding shares were bought back in two
tranches. On 13 September 2013, a compulsory partial redemption of
46,551,167 ordinary redeemable shares (20.7% of issued ordinary
redeemable shares) was announced, with a redemption date of 23 September
2013 for $53,999,354. And on 20 January 2014 the Board announced a
further compulsory redemption, with a redemption date of 27 January 2014
for 26.29% of the remaining ordinary redeemable shares for a total of
$58 million, paid on the 6 February 2014. Thus a total of $112 million
was returned to investors in the Fund. At the time of writing the Fund's
cash position of $46.5 mln has been accumulated to fund the next payment
to shareholders. The pace of past payments and the expectation of the
timing of the next payment are ahead of the original schedule presented
to shareholders at the time of the voting on liquidation of the Fund in
June 2013.
Top 10 Positions at the year ended 31 December 2013:
Company Name Ticker Portfolio weight 12 months price change
Bashneft
Preferred
Shares BANEP 22.75% -0.18%
Transaero
Ordinary
Shares TRNS 12.12% -2.95%
Gazprom
Ordinary
Shares and
ADRs GAZP 6.19% -10.22%
DIXY Group
Ordinary
Shares DIXY 5.40% -6.56%
RN Holding
Ordinary and
Preferred
Shares RNHS/P 4.62% 4.96%
Mostotrest
Ordinary
Shares MSTT 4.28% -31.54%
KazMunaiGaz
E&P
Ordinary/Pref
Shares GDR KMG LI 3.90% -12.78%
Highland Gold
Mining
Ordinary
Shares HGM LN 3.55% -40.84%
MHP Ordinary
Shares GDR MHPC LI 3.20% 8.34%
OGK-5 Ordinary
Shares OGKE 2.92% -36.06%
Total 68.93%
Performance and events at selected portfolio companies
The Fund's largest investment, Bashneft, in April negatively surprised
the market by cutting its payout ratio from a previous 80% to 10%. We
considered this deterioration to be temporary and indeed, in October a
large interim dividend of 1.4B USD gave us a 16% dividend yield on our
investment. During the year, Bashneft disposed of several non-core
businesses, such as its chemical business, logistics and oilfield
services. Though it was unfortunate that all three assets ended up in
the hands of the controlling shareholder Sistema with Bashneft realizing
less than optimal prices, at least management was happy to focus on the
core activities. In August, the Trebs Titov field started producing oil,
exactly in line with schedule. Finally, in December the restructuring of
Sistema-Invest was announced. Sistema-Invest owns a significant stake in
Bashneft and is itself owned by Sistema and Bashneft. We do not consider
the terms of this restructuring fair and continue to discuss this with
Sistema management. At the same time the restructuring of Sistema-Invest
is clearly a step in the right direction and the share price reacted
positively. Bashneft remained flat in terms of its share price for the
year, with dividends (a 17% yield) accounting for large outperformance
in terms of total shareholder return. The Fund disposed of 67% of its
Bashneft position in 2014 in a buy-back conducted by the company. The
company reported strong financial results for 2013 and re-iterated its
commitment for a strong dividend pay-out which translates into high
dividend yield at the low valuation of the company shares.
Performance and events at selected portfolio companies (continued)
Transaero share price increased 2.95% during 2013. This was the first
year of a new strategy emphasising efficiency over expansion. Even so
the passenger turnover in 2013 increased by 15% over 2012 and the number
of passengers flown grew 21% to 12.5 million. This is four times more
than 6 years ago in 2007 when the Fund made its investment into
Transaero. In accordance with the new strategy the company will continue
to focus on to the economic profitability. Current financial numbers in
2014 show high readings. Thus, the revenue in January-February has grown
22% in Russian rubles relative to the same period in 2013.
Gazprom's export markets improved during the year, and as a result
Gazprom achieved record export volumes. Negotiations with China over
building a pipeline from Siberia into North-East China continue and it
is not unlikely that the final contract will be signed in 2014. At the
middle of the year, the government made a decision not to increase
tariffs of natural monopolies, including Gazprom and power utilities,
for one year. We did not have to adjust our financial forecasts
significantly, as we have abandoned the 15% official annual gas tariff
increase some time ago, on account of a well-supplied domestic gas
market. Gazprom managed to avoid distributing 25% of IFRS profit as
dividends, paying instead 25% of Russian accounting profits. It is still
very likely that over the next 2 years Gazprom will pay at least 25% of
IFRS profits. In the context of various state-controlled companies in
Russia, the poor operating efficiency of Gazprom starts to look more
like an exception, as Sberbank, Alrosa (which placed shares in Moscow in
October), Aeroflot and Rosneft have demonstrated improvements in
efficiency. Gazprom lost 10% in terms of its share price,
underperforming the market for the entire year but still bouncing back
from the low point in mid-year.
RN Holding shares (formerly known as TNK BP) demonstrated good
performance in 2013 with ordinary stock up 5.0% and preferred shares up
11.6%. Performance of TNK BP masks huge volatility, as the stock first
dived when, after completing the purchase, new controlling shareholder
Rosneft in March declined to uphold good corporate governance, but then
recovered when in September Rosneft management was persuaded to make a
tender offer for the outstanding minority. We have been an active
participant in the negotiations and contacts which took place between
shareholders and Rosneft management.
Mostotrest shares lost 32% during the year. Late in 2012 its
shareholders supported the purchase of a stake in Moscow-St. Petersburg
toll-road concession from Mostotrest's largest shareholder for over $200
mln, which we considered to be an overestimated price. Although the
shareholder with the conflict of interest did not take part in the vote,
the majority of other shareholders in Mostotrest failed to be convinced
by us and sided with the management. Further developments in 2013, such
as the more evident delay of the toll-road project execution made it
absolutely clear that our position was right. Furthermore, investors
reacted very negatively to 1H2013 financial results which demonstrated
EBITDA growth offset by write-offs of bad subcontractor debts incurred
in the construction of Sochi Olympics infrastructure. An overall decline
on the bottom line relative to 2012 was 10%, but the investors
anticipated more bad fallout from crash-campaign style Sochi
construction to erode the profits further in 2H2013. Excluding the
negative Sochi effect and providing that necessary lessons will be
learned from the negative Sochi experience, the company is valued at
less than 5 times earnings.
The Highland Gold Mining share price fell 41% in 2013. Very good
operational results with production growth of 8% achieved throughout the
year and cash costs being cut failed to save the day as the gold price
slid 29% during the year, negatively affecting financial results. The
Manager considers that the gold price has a good chance of rebounding in
2014 after gold ETFs got depleted last year limiting the scope for
further speculative pressure on gold price. Indeed, since the beginning
of 2014, the gold price is up 8%.
Dixy lost 6.6%, and, though we have seen some operating improvements
they have fallen short of our initial expectations.
Among smaller investments in the Fund, KCell (added to the portfolio in
December 2012) did very well throughout the year (+48%) based on
positive operational changes and a progressive dividend policy, although
the share price declined towards the year end from previous highs. The
Fund made a good profit by selling all of its KCell shares by July
booking a 60% gain on the investment including a 10% dividend yield.
Corporate governance
One reason for the market's negative performance in 2013 was the
abundance of corporate governance scandals, some of which touched such
prominent companies as Uralkali, Pharmstandart and TNK-BP. They look
especially striking in the context of the Russian government's general
efforts to improve the attractiveness of the Russian market, for
instance through changes to dividend laws which were enacted during the
year, fully harmonizing Russian dividend rules with best international
practice or the mandatory publication of IFRS or US GAAP accounts of any
company which has listed its shares or debt. Last but not least, during
the year Russian securities market regulator FSFR was merged into the
Central Bank creating what was dubbed a mega-regulator, an organization
with far stronger financial and operational clout. In the new law on the
regulator, it was specifically highlighted that Central Bank bears
ultimate responsibility for improving corporate governance in Russia.
One extra corporate governance improvement during the year was the
landmark Supreme Arbitration Court ruling which made it far easier for
shareholders to sue company directors and managers for breach of
fiduciary duty. Prosperity started using this reform in autumn when it
brought lawsuits against directors of engineering company GAZ and
electricity and heat producer TGK-2 who, in our view, did not make
proper decisions in relation to transactions between listed companies
and their controlling shareholders.
Outlook and valuation
During 2013 global economic headwinds took their toll on the economic
standing of Russia. The GDP growth declined from 3.4% in 2012 to 1.3%.
In addition to that, net exports fell as a share of GDP as the pace of
domestic consumption remained more robust relative to the rest of
economy and the current account shrank from 3.4% to 1.5%. Increasing
pressure on the ruble has led to a decrease of Central Bank currency
reserves from $520bn at the end of 2012 to $485bn now. However, the
Central Bank allowed the ruble to depreciate from 32R to 1 USD at the
end of 2013 to 35-36R now and further pressure on the current account
and reserve depletion is expected to abate. The GDP may get a boost from
the devaluation but growth is still likely to be even lower than in
2013 without the boost to investments.
Budgetary discipline remains quite strong, even though the federal
budget closed with a 0.5% nominal deficit last year for only the second
time since 1999 and the first time since 2009. The Russian government
has accumulated sufficient surplus over the last 14 years in order to be
able to finance the current deficit from its own savings. This is in
sharp contrast to the perennial fiscal deficit of most major global
economies. The amount of leverage in the Russian economy remains rather
modest by modern standards making the system more resilient to shocks.
A revolution in the Ukraine in February of this year and subsequent
annexation of Crimea by Russia have created an additional cloud of
uncertainty about the future of the Russian economy. Prosperity has been
actively following, analyzing and publishing its research on the
Ukrainian situation based on our trips to the region and meetings with
local politicians and businesspeople. We do not expect a major
escalation of the conflict such as the break-up of the Ukraine and
further Russian annexations, although as many actors are involved and
the press coverage at times is alarmist, risks to this outcome may seem
substantial at many times before considerable political stabilization is
achieved. We view the May 25th Presidential election as an important
date, after which the situation in the Ukraine will be more conducive to
normalization. A current set of economic sanctions imposed by the West
on Russia is not particularly damaging other than in sentiment. We do
not believe that tighter sanctions will be forthcoming in the event that
the situation does not lapse into Russian military involvement or
partition of the Ukraine.
Although Russia clearly has some issues of a political nature, current
valuation levels are hardly ignoring this concern or any risk of
economic damage emanating from it. Russia is trading at more than 50%
discount to other emerging markets based on financial multiples.
Investments in our portfolio have price/earnings multiples of less than
one third of the average multiple of S&P500. The dividend yields for our
investments range from three to nine times that of S&P500 reading. We
are reasonably happy with vast majority of our investments in terms of
corporate governance, and, most importantly, we continue to see
significant improvements in the ways these companies operate. These
internal improvements will continue to take place irrespective of what
happens with the growth rate of global economy or in global equity
markets. These improvements will certainly drive the increase in the
intrinsic value of the businesses we own, which over time will manifest
itself in higher valuations of listed shares. This allows us to be
optimistic about the future.
The Manager remains committed to the original wind-down schedule
articulated in the Circular to shareholders in June 2013 when the
decision to discontinue the Fund was adopted. With the next payment
comfortably funded by the existing cash position, the distribution can
be performed by the end of May. The next payment of similar size can be
expected by the end of this year, which will conform to the initial
schedule.
PROSPERITY CAPITAL MANAGEMENT
GRAND CAYMAN
APRIL 2014
Investment Objective and Strategy (from 21 June 2013)
On 21 June 2013, Prosperity Voskhod Fund Limited (the "Company")
announced that the special resolution to adopt a new investment
objective and strategy had passed and the following objective and
strategy had been adopted with immediate effect:
The investments of the Company will be realised in an orderly and
expedient manner, that is, with a view to achieving a balance between:
(i) returning cash to shareholders at such times and
from time to time and in such manner as the Board may (in its absolute
discretion) determine; and
(ii) maximising the realisation value of the Company's
investments.
In light of the realisation strategy, there will be no specific
investment restrictions applicable to the Company's portfolio going
forward.
This policy will involve a continuing evaluation of the Company's
portfolio in order to assess the most appropriate realisation strategy
to be pursued in relation to each investment. Whilst some investments
may be considered appropriate for sale in the shorter term, other
investments may be held for a longer period with a view to enabling
their inherent value to be realised successfully.
The strategy for realising individual investments will be flexible and
may need to be altered to reflect changes in the circumstances of a
particular investment or in the prevailing market conditions.
The Company may not make new acquisitions of investments except that the
Company may make further investments where required to preserve and/or
enhance the disposal value of its existing investments.
The net cash proceeds from disposals of investments will be applied at
such times and from time to time and in such manner as the Board may (in
its absolute discretion) determine to make cash distributions to
shareholders. The Board will also take into consideration the Company's
working capital requirements and the requirements of Guernsey law.
Any cash received by the Company as part of the realisation process but
prior to its distribution to shareholders will be held by the Company as
cash on deposit and/or as cash equivalents.
This newly adopted investment objective and strategy replaced the
following objective and strategy:
Investment Objective and Strategy (up to 21 June 2013)
The investment objective of the Company was to achieve capital growth by
investing in a portfolio of securities involved in the corporate
restructurings and consolidations which were expected to take place in
Russia and other Former Soviet Union ("FSU") countries. The Company
invested primarily in small and medium-sized companies, with the aim of
being an active and influential minority shareholder. Investment was
directed towards companies considered attractive from a fundamental
value perspective.
Borrowing (up to 21 June 2013)
The Company's Articles contain standard borrowing powers for the Company
to borrow up to US$75,000,000, which could be exercised by the Company's
Board of Directors. The Board of Directors did not exercise these
powers.
Investment Restrictions (up to 21 June 2013)
Investment of the Company's assets was subject to certain restrictions
at the date the relevant investment was made as follows:
(i) The Company may not invest less than 75% of its
gross assets in the securities of companies established or having their
principal operations in Russia.
(ii) The Company may not invest more than 25% of its
gross assets in the securities of companies established or having their
principal operations in FSU countries other than Russia.
(iii) The Company may not invest more than 25% of its
gross assets in the securities of companies not listed on a recognised
stock exchange or a recognised FSU OTC market.
(iv) The Company may not invest more than 20% of its
gross assets in the securities of companies representing a weighting of
more than 5% of the RTS index.
(v) The Company may not make any investments in debt
securities other than (a) in connection with making an equity investment
or (b) when making short-term investments as contemplated in Section 5
of Part 1 of its admission document, headed "Short-Term Investments".
(vi) The Company may not invest more than 20% of its
gross assets in the securities of any one company or group, or in any
company or group which is in excess of 20% of its gross assets in any
company or group.
(vii) The Company may not invest in more than 25% of the
equity securities of any one company.
(viii) The Company may not expose more than 20% of its
gross assets to the creditworthiness or solvency of any one
counterparty. The foregoing restriction will not apply to (a)
investments in securities issued or guaranteed by a government,
government agency or instrumentality of any EU or OECD member state, or
by any supranational authority of any EU or OECD member state, or (b)
cash deposits awaiting investment.
(ix) The five largest investments of the Company may not
exceed 70% of its gross assets.
(x) The Company may not invest directly in physical
commodities or real property. The foregoing restriction shall not apply
to investments in securities of issuers that make investment in physical
commodities or real property.
(xi) The Company may not invest in any pooled investment
vehicles, other than when making short-term investments in the
circumstances referred to in clause (vi) of Section 5 of Part 1 of its
admission document, headed "Short-Term Investments".
(xii) The Company may not invest in derivatives other
than for the purposes of efficient portfolio management.
The foregoing restrictions applied at the date the relevant investment
was made.
Dividend Policy (up to 21 June 2013)
The Company's objective was to achieve capital growth. It was therefore
anticipated that all income and capital gains derived from the Company's
investment programme would continue to be re-invested. However, income
and capital gains would be distributed to shareholders, if the Directors
deemed it appropriate and any dividend declared would be paid in
compliance with any applicable laws. No dividends had been declared in
2013.
The Directors present their report and the audited consolidated
financial statements for the year ended 31 December 2013.
Prosperity Voskhod Fund Limited (the "Company") was registered on 31
August 2006 with the registered number 45426 and is domiciled in
Guernsey, Channel Islands, and commenced its operations on 6 October
2006. The Company is an authorised closed-ended investment company
incorporated in Guernsey with limited liability under the Companies
(Guernsey) Law, 2008, with its ordinary shares listed on the Alternative
Investment Market ("AIM") of the London Stock Exchange. Effective 21
June 2013, following the passing of a special resolution, the ordinary
shares were converted into redeemable shares. The Company's ordinary
shares were listed under the ISIN number GG00B1D5SN78, and following the
compulsory redemption of 46,551,167 ordinary shares on the 23 September
2013, the existing ISIN number expired and was replaced with the new
ISIN number GG00BDVOK213 on 24 September 2013. This expired in turn and
was replaced with the ISIN number GG00B1D5SN78 following the second
compulsory redemption of 46,769,898 ordinary shares on 27 January 2014.
On 26 February 2014, the Board announced that it would seek authority at
the Annual General Meeting (the "AGM") on 29 May 2014, to delist the
Company from AIM as part of the managed wind down of the Company. Such
de-listing will reduce the ongoing costs incurred by the Company and is
considered to be in the best interests of all shareholders.
The registered office of the Company is Dorey Court, Admiral Park, St
Peter Port, Guernsey GY1 2HT, Channel Islands. "Group" is defined as the
Company and its wholly owned subsidiaries, Faendo Limited and Postarevo
Limited.
Principal activity and business review
The principal activity of the Group during the year was that of an
investment group. The Group is expecting to continue its activities in
the coming year. A review of the year is provided in the Manager's
Report.
The results for the year, and the Group's financial position at the end
of the year, are shown on pages 33 and 32 respectively.
Directors
The Directors of the Company during the year and up to the date of this
report were:
Julian Reid (Chairman)
Robert Boyle
Anthony Hall
Roger Phillips (resigned 9 July 2013)
Paul Tierney, Jr. (resigned 9 July 2013)
See Note 14 for details of the Directors' interests in the share capital
of the Company at 31 December 2013 and at 31 December 2012.
Review of controls
During the year the Board of Directors has periodically met with the
Manager, Administrator and Sub-Administrator and considered the
operational and other risks of the Group. The Board of Directors is
satisfied with the effectiveness of the Group's system of internal
controls.
Risks and uncertainties
The risks and uncertainties faced by the Group include market price risk,
foreign currency risk, liquidity risk, credit risk and interest rate
risk, and are detailed in Note 13.
Significant events
Significant events during the year are detailed in Note 15.
Significant events subsequent to the year end date
Significant events subsequent to the year end date are detailed in Note
16.
Substantial interests in share capital
As at 31 December 2013 the following holdings representing three per
cent or more of the Company's issued share capital (excluding treasury
shares) had been notified to the Company or identified from the
Company's share register:
Number of ordinary shares Percentage held
Euroclear
Nominees
Limited 44,313,588 24.91%
BNY Mellon
Nominees
Limited 29,254,088 16.44%
Nortrust
Nominees
Limited 19,428,651 10.92%
Vidacos
Nominees
Limited 16,451,206 9.25%
Nortrust
Nominees
Limited 10,934,868 6.15%
HSBC
Global
Custody
Nominee
(UK)
Limited 9,511,200 5.35%
BNY Mellon
Nominees
Limited 8,985,773 5.05%
Lynchwood
Nominees
Limited 6,220,164 3.50%
State
Street
Nominees
Limited 6,134,485 3.45%
State
Street
Nominees
Limited 5,329,039 3.00%
The statutory disclosure of significant shareholders is different for a
Guernsey company than that for a company incorporated in the United
Kingdom and the level of disclosure which the Company is able to make
for the purposes of AIM Rule 17, and concerning the percentage of AIM
securities not in public hands, may not be equivalent.
The Manager
Prosperity Capital Management Limited was appointed Manager on 4 October
2006. The Directors have reviewed the performance of the Manager and are
satisfied that the continued appointment of the Manager on the terms
agreed is in the best interests of the shareholders and the Group.
Administrator and Secretary
Kleinwort Benson (Channel Islands) Fund Services Limited was appointed
as Administrator and Secretary on 4 October 2006.
On 1 September 2012, the previous sub-administration arrangement with
State Street Fund Services (Ireland) Limited was terminated and Maples
Fund Services (Cayman) Limited was appointed by the Group as
Sub-Administrator. State Street Fund Services (Ireland) Limited had been
appointed as Sub-Administrator on 17 July 2009. Maples Fund Services
(Cayman) Limited provides certain administration services to the Group
under a sub-administration agreement.
Global Custodian
On 3 February 2014 it was announced that, with effect from 31 January
2014, the previous custodial arrangements with State Street Custodial
Services (Ireland) Limited had been terminated and Deutsche Bank AG had
been appointed by the Group as a Global Custodian. State Street
Custodial Services (Ireland) Limited had been appointed as Global
Custodian on 17 July 2009.
Russian Custodian
On 20 December 2013, the previous custodian arrangement with ING Bank
(Eurasia) ZAO was terminated and Deutsche Bank Limited was appointed by
the Group as a Russian Custodian. ING Bank (Eurasia) ZAO had been
appointed as Russian Custodian on 2 October 2006.
Continuation vote and adoption of new investment strategy and objectives
In accordance with the prospectus, a continuation vote was put to the
shareholders at the Company's Extraordinary General Meeting (the "EGM")
on 3 June 2011. The shareholders voted against the special resolution to
commence an orderly realisation of the Company's investments. The
shareholders also voted to amend the timing for shareholders to consider
the continuation of the Company from an annual vote to a vote to be held
every three years.
Due to the approval of the special resolutions on 21 June 2013,
discussed below, approving the adoption of a new investment objective
and policy of orderly realisation of portfolio assets, no continuation
resolution will be put at the AGM to be held in 2014, nor at any
subsequent meeting of shareholders.
On 7 March 2013 the Company announced that the Board of Directors (the
"Board") had, further to its announcement on 3 December 2012, undertaken
a detailed strategic review of the options for the future of the
Company. As part of this review the Board and its advisors consulted
with shareholders owning circa 90 per cent of the shares in issue and,
in the context of the Company's investment objective and strategy,
shareholders' appetite for a market listing, the requirements of
Guernsey law and shareholder feedback, considered a number of
alternative options for the Company's future including a potential open
ending, a merger and/or changes to its discount control policy.
The views of the shareholder base were broadly polarised, with one group
seeking greater liquidity via, for example, an open ending to facilitate
enhanced liquidity in the Company's shares, whilst the other group was
broadly supportive of the status quo and the continuation of the
existing closed end structure.
The Board concluded that, given the Company's investment strategy and
style, an open ended structure would be impracticable to operate without
a material change to the composition of the portfolio and its investment
strategy. Given that a significant proportion of the shareholders
consulted supported the existing investment strategy and its Manager,
the Board concluded that a corporate reorganisation into an open ended
structure would not be in the best interests of the Company and its
shareholders as a whole given the continuing constraints this structure
would impose on the future investment universe and activity.
However, recognising that a significant group of shareholders was of the
view that the status quo was not viable, the Board wished to provide all
shareholders with the opportunity to vote on the adoption of a new
realisation strategy. Such a resolution was proposed as a special
resolution as was required under Guernsey law and the Company's
constitution (requiring 75 per cent or more of those holders voting to
approve the same).
This resolution was approved by the shareholders at the EGM held on 21
June 2013. In addition, the shareholders also approved a special
resolution for the Company's share capital to be converted to redeemable
shares to enable capital to be returned to holders from time to time at
the discretion of the Board, and further approved a special resolution
to change the Company's investment policy to permit the orderly and
optimal realisation of proceeds from the portfolio as discussed in the
Statement of Investing Policies (see page 9).
Subject to prevailing market conditions, the realisation programme is
expected to be completed within 3 years from the date of the 2013 EGM.
Based on the above, the Directors consider it appropriate that the
consolidated financial statements are prepared on a going concern basis,
supported by the Directors' current assessment that the Company has
adequate resources to continue in operational existence for the
foreseeable future.
Compulsory Redemption
Further to the EGM held on 21 June 2013, the Company announced a
compulsory redemption of 20.7 per cent of the ordinary redeemable shares
for a total of $54 million, with a redemption date of 23 September 2013.
Another compulsory redemption, with a redemption date of 27 January
2014, for 26.29 per cent of the remaining shares for a total of $58
million was announced on 20 January 2014. The Company further announced
that it intends to make a further significant distribution to
shareholders in the early Summer 2014.
Cancellation of shares held by Treasury
On 9 July 2013 in light of the adoption of the new investment objective
and policy as discussed in the Statement of Investing Policies (see page
9) the 18,198,730 ordinary shares in the Company held in Treasury, after
the 2 August 2012 and 12 October 2012 Tender Offers, were cancelled.
Please refer to Note 9 and Note 15 for further details.
Authorised Share Capital
Upon incorporation, 2 ordinary shares were issued and fully paid to the
subscribers with a premium of 99 cents to nominal value. The authorised
share capital of the Company comprised 2,500,000 shares of US$0.01 each.
On 25 September 2006, the authorised share capital of the Company was
increased to US$3,000,000 comprising 300,000,000 ordinary shares of
US$0.01 each.
Auditor
KPMG Channel Islands Limited is the Auditor of the Company and has
expressed its willingness to continue in office. A resolution for the
reappointment of KPMG Channel Islands Limited will be proposed at the
forthcoming AGM.
Disclosure of information to Auditor
Each of the persons who is a Director at the date of approval of the
consolidated financial statements confirms that:
(i) so far as the Director is aware, there is no
relevant audit information of which the Company's Auditor is unaware;
and
(ii) the Director has taken all steps he ought to have
taken as a Director to make himself aware of any relevant audit
information and to establish that the Company's Auditor is aware of that
information.
This confirmation is given and should be interpreted in accordance with
the provisions of Section 249 of the Companies (Guernsey) Law, 2008.
Annual General Meeting
During the upcoming AGM, at which the consolidated financial statements
will be put forward for approval, Mr Reid will retire, and being
eligible, offer himself for re-election.
Approved on behalf of the Board of Directors on 22 April 2014.
Julian Reid Anthony Hall
Director Director
The Directors are committed to ensuring that high standards of corporate
governance are maintained and have made it group policy to comply with
best practice on corporate governance is applied, insofar as the
Directors believe it is relevant and appropriate to the Company. As an
AIM listed company which is incorporated in Guernsey, the Company has no
legal obligation to comply with the UK Corporate Governance Code
published by the UK's Financial Reporting Council. However, the Company
has voluntarily adopted the UK Corporate Governance Code save for the
exceptions noted below. The Directors are cognisant of the publication
of the updated UK Corporate Governance Code in September 2012, which
applies to accounting periods beginning on or after 1 October 2012. In
the case of the Company, the updated UK Corporate Governance Code was
applicable for the year under review.
On 30 September 2011, the Guernsey Financial Services Commission Code
published its Finance Sector Code of Corporate Governance (the "GFSC
Code"), which came into effect on 1 January 2012. The GFSC Code provides
a framework which applies to all companies in the regulated finance
sector in Guernsey. The GFSC Code deals with governance issues under
several topics including the Board, accountability, risk management,
disclosure and reporting, remuneration and shareholder relations.
Companies which report under the UK Corporate Governance Code are deemed
to meet the requirements of the GFSC Code. The Company has complied with
the recommendations of the UK Corporate Governance Code, subject to the
exceptions detailed throughout this report.
Going concern
At the EGM on 21 June 2013, the shareholders resolved to begin the
gradual winding up of the Company over the following 3 years. As such,
the Directors believe it is appropriate to adopt the going concern basis
in preparing the consolidated financial statements as, they consider
that the Company has adequate resources to continue in operational
existence for the foreseeable future.
Board effectiveness
The Directors have determined that all of the members of the Board are
independent in accordance with criteria established by the Board. The
Directors intend to reassess this determination at least annually and to
publish the results in the Company's Annual Report. For the purposes of
the UK Corporate Governance Code, Mr Boyle is considered to be the
Senior Independent Director. There is no chief executive, as all of the
Directors are non-executive directors.
The following table shows the number of meetings held by the Board and
each committee for the year ended 31 December 2013, as well as the
Directors' attendance at such meetings.
Quarterly Audit Nomination Other
Board Other Board Committee Committee Committees
Number of
meetings held 5 7 2 1 1
Julian Reid
(Chairman) 5 7 1 1 -
Robert Boyle 5 2 2 1 -
Anthony Hall 5 5 2 1 1
Roger Phillips
(resigned 9 July
2013) 3 1 1 1 -
Paul Tierney, Jr.
(resigned 9 July
2013) 2 2 - - -
In accordance with the recommendation of the UK Corporate Governance
Code and the Company's Articles of Association, the Directors retire by
rotation and seek reappointment at the AGM for a term not to extend
beyond the subsequent third AGM. Therefore Mr Reid will retire at the
Company's forthcoming AGM and, being eligible, offer himself for
re-election. Biographical information on all Directors is given below.
On 9 July 2013 Mr Philips and Mr Tierney, Jr. resigned as Directors of
the Company as part of the Board's commitment to reduce on-going costs.
Committees
In accordance with the UK Corporate Governance Code, the Board
established an Audit Committee and a Nomination Committee, in each case
with formally delegated duties and responsibilities. As all of the
Directors are non-executive and paid fixed fees, it was not considered
necessary to create a Remuneration Committee and the entire Board
considers Directors' fees, with each Director abstaining from
discussions on changes to his remuneration if applicable.
A separate report from the Audit Committee is included in this annual
report, as recommended by the UK Corporate Governance Code (see pages 19
and 20).
The Nomination Committee was chaired by Mr Phillips and its other
members were Mr Reid, Mr Hall, Mr Tierney, Jr., and Mr Boyle. The
Nomination Committee reviewed the structure, size and composition of the
Board and made recommendations to the Board with regard to any changes
which might be required. The Nomination Committee was responsible for
identifying and nominating candidates to fill Board vacancies when they
arose for the approval of the Board. Following the passing of the
special resolutions on 21 June 2013 and adoption of the realisation
strategy, the Nomination Committee was disbanded on 9 July 2013.
Directors' information
Julian Reid (Chairman)
Julian Michael Ivo Reid (69) has spent over 40 years in the financial
services industry in securities research, marketing, business
development and management. Of this, some twenty five years were in Asia,
between Hong Kong and Singapore, most recently as a director within the
Jardine Fleming Group and listed companies and investment companies.
Over this time Mr Reid has developed, administered and directed numerous
investment companies that have been listed on the major stock markets of
New York, London, Hong Kong, Singapore and Karachi. Mr Reid is a partner
in Ping Yue Asset Management Limited. He is chairman of The Korea Fund
Inc. and is a director of JF China Fund Inc. both listed on the NYSE.
Robert Boyle
Robert Boyle (66) is a chartered accountant and was a partner of
PricewaterhouseCoopers (PwC) LLP, where he was responsible for
multinational client accounts, specialising in the telecoms and media
sectors. He was chairman of the PwC European Entertainment and Media
Practice for twelve years, retiring in 2006. He is a non-executive
director and chairman of the audit committee of Maxis Berhad in Malaysia,
Witan Investment Trust Plc and Centaur Media Plc.
Anthony Hall
Anthony Arthur Hall (74) has over 50 years' experience in the financial
services industry. He worked for Barclays Bank between 1955 and 1970 and
between 1970 and 1976 he held positions with N.M. Rothschild Guernsey,
Bank of London & Montreal, Nassau, and Italian International Bank (CI)
Limited, Guernsey. In 1976, Mr Hall was appointed as managing director
of Rea Brothers (Guernsey) Limited and from 1987 to 1995 he was joint
managing director of Rea Brothers Group Plc. He served as chairman of
Rea Brothers (Guernsey) Limited from 1995 to 1996. Mr Hall was founding
deputy chairman of the Guernsey International Banking Association and
was chairman of the Association of Guernsey Banks in 1994. Mr Hall
serves as a non-executive director of a number of other listed and
unlisted investment funds.
Board Self Appraisal
The Board undertakes a formal and rigorous annual evaluation of its own
performance and that of its own committees and individual Directors and
Chairman. The last such appraisal was conducted on 22 April 2014. This
appraisal was arranged and supervised by the Chairman with the
assistance of the Secretary and included, amongst other matters, an
evaluation of the size of the Board and an assessment as to whether the
members had adequate skills and experience to cover all areas of
activity of the Company.
The attendance of the Directors at Board meetings was analysed and any
shortcomings drawn to the attention of the Director concerned. Comments
were requested on the frequency and length of the Board meetings and on
the quality and quantity of information supplied to the Directors.
Particular attention was paid to whether there was sufficient debate on
compliance and risk matters.
The Audit Committee was also appraised for appropriate and effective
membership.
The interaction between the Directors and the Chairman was assessed, as
was the Board's access to the Manager.
The Directors were questioned as to whether they had sufficient
understanding of the views and issues concerning shareholders and
whether contact between the Board and Manager was appropriate.
The appraisal was conducted in a written, tabulated format and adequate
time was devoted to a thorough debate on the findings, led by the
Chairman. The Chairman abstained for part of that debate to enable the
Directors to debate his performance.
Internal Controls
The Directors are responsible for overseeing the effectiveness of the
internal financial control systems for the Company, which are designed
to ensure that proper accounting records are maintained, that the
financial information on which business decisions are made and which is
issued for publication is reliable, and that the assets of the Company
are safeguarded. Internal controls manage rather than eliminate the risk
of failure to achieve business objectives. Such a system of internal
financial controls can only provide reasonable and not absolute
assurance against material misstatement or loss.
The Board has reviewed the Company's internal control procedures. These
internal controls are implemented by the Company's main service
providers, Prosperity Capital Management Limited, Kleinwort Benson
(Channel Islands) Fund Services Limited, Maples Fund Services (Cayman)
Limited, Deutsche Bank Limited, State Street Custodial Services
(Ireland) Limited and formerly ING Bank (Eurasia) ZAO.
The Company's Audit Committee obtained confirmation from relevant
service providers that they had effective controls in place to control
the risks associated with the services that they are contracted to
provide to the Company. The Board is satisfied with the internal
controls of the Company, so does not believe that there is any
requirement to create an internal audit function at this time.
The Directors meet on a quarterly basis and at other unscheduled times
when necessary to assess the Company's operations and the setting and
monitoring of investment strategy and investment performance. At such
meetings, they receive from the Manager and Advisor a full report on the
Company's holdings and performance. The Board gives directions to the
Manager as to the investment objectives and limitations, and receives
reports from the Manager in relation to the financial position of the
Company.
Social, ethical and environmental concerns have been considered by the
Board. The Board does not consider it appropriate to put social, ethical
and environmental policies in place within a specialist fund investing a
portfolio of securities involved in the corporate restructurings and
consolidations which are expected to take place in Russia and other FSU
countries.
The Board has considered non-financial areas of risk such as disaster
recovery and investment management staffing levels and considers
adequate arrangements to be in place.
Relations with shareholders
The Board believes that sustainable financial performance and delivering
on the objectives of the Company are indispensable measures in order to
build trust with the Company's shareholders. In order to promote a clear
understanding of the Company, its objectives and financial results, the
Board aims to ensure that information relating to the Company is
disclosed in a timely manner and in a format suitable to the
shareholders of the Company.
The Board welcomes correspondence from shareholders, addressed to the
Company's registered office. All shareholders have the right to attend,
vote and put questions to the Board at the AGM.
This is the report of the Audit Committee prepared with reference to the
2012 revised UK Corporate Governance Code. The Company has an
established Audit Committee which has operated since the Company's
inception and which reports formally twice each year to the main Board.
It has formally delegated duties and responsibilities within written
terms of reference which are reviewed and reapproved annually. The
function of the Audit Committee is to ensure that the Company maintains
high standards of integrity, financial reporting and internal controls.
The Audit Committee is chaired by Mr Boyle, a non-executive independent
Director and its other members, Mr Hall and Mr Reid, are also
independent non-executive directors. Only independent non-executive
Directors serve on the Audit Committee and the members do not have any
links with the Company's external auditor. They are also independent of
the Manager, Adviser and all other service providers. The Audit
Committee meets formally no less than twice a year in Guernsey and on an
ad hoc basis if required. In addition, it meets the external auditor at
least twice a year. The membership of the Audit Committee and its terms
of reference are annually reviewed.
The Audit Committee considers the appointment of the external auditors
and discusses and agrees with the external auditors the nature and scope
of the audit, keeps under review the scope of and discusses the results
and the effectiveness of the audit and the independence and objectivity
of the external auditors and reviews the external auditors' letter of
engagement and comments arising from the audit. The Audit Committee is
also responsible for making recommendations to the Board on the
appointment of the external auditor and their remuneration. The current
Auditors were appointed in the Company's first financial year and have
therefore served the Company for over seven years. Because of the
limited future of the Company no change is contemplated.
The Audit Committee meets with the Manager, Administrator and
Sub-Administrator to discuss the extent of audit work completed to
ensure all matters of risk are covered and assesses the quality of the
draft financial statements prepared by the Administrator and
Sub-Administrator and examines the interaction between the Manager and
Auditor to resolve any potential audit issues. It also reviews, develops
and implements policy on the supply of non-audit services. All non-audit
services, if any, which are sourced from the audit firm would need to be
pre-approved by the Audit Committee after they have been satisfied that
the relevant safeguards are in place to protect the Auditor's
objectivity and independence. In addition to the statutory audit fees of
$78,000 for the year ended 31 December 2013, KPMG received fees of
EUR16,000 related to the audits of the Group's subsidiaries and fees of
$16,030 in relation to tax compliance services.
The Audit Committee is responsible for monitoring the financial
reporting process and the effectiveness of the Company's and its service
providers' internal control and risk management systems. The
Administrator and Sub-Administrator present formal reports to the Board
in this respect; these have been reviewed by the Audit Committee and no
issues arose.
The Administrator maintains a Risk Register which ranks the main risks
faced by the Company and explains the actions taken to mitigate them.
This is reviewed at each Audit Committee meeting and the content,
ranking and mitigating actions up-dated as appropriate.
Given the nature of the Company's business and assets the main issues
are the ownership, valuation (which is the most significant) and
liquidity of investments. The Audit Committee assessed reports on the
controls and procedures of the external managers and assessed the
Auditors' findings, in satisfying itself that the issues were
appropriately handled.
The Audit Committee has an active involvement and oversight of the
preparation of both half year and annual financial statements. This year
there have been a number of changes to the Financial Statements in the
light of the revised Code of Corporate Governance and the Financial
Reporting council's revised Guidance on Audit Committees. The Committee
has overseen the process to ensure compliance.
Throughout the audit process, the Audit Committee discussed with the
Auditor whether the accounts of the Company should continue to be
prepared and reported on a going concern basis whilst it realises its
portfolio and returns cash to shareholders periodically by means of
partial compulsory redemptions. The Audit Committee have considered in
consultation with the Auditor and the Manager what adjustments, if any,
might be required in preparing the financial statements. The Audit
Committee also considered and discussed with the Auditor the accounting
treatment for the compulsory redemptions. The Audit Committee also
critically reviewed the investment and liquidity profile of the Company
with the Manager and Adviser and considered in detail the redemption
strategy to be employed in realising all assets of the Company.
Ultimate responsibility for reviewing and approving the annual report
and financial statements remains with the Board.
Anthony Hall, Director
On behalf of the Audit Committee
Date: 22 April 2014
Mr Reid, as Chairman, was entitled to an annual fee of GBP45,000. Mr
Hall, Mr Phillips, Mr Boyle and Mr Tierney, Jr. were entitled to an
annual fee of GBP30,000. The Chair of the Audit Committee, Mr Boyle,
would receive an additional GBP5,000 per annum and the Chair of the
Nomination Committee, Mr Phillips, an additional GBP1,250 (31 December
2012: GBP2,500). The Board awarded Mr Reid an additional fee of GBP5,000
for the year ended 31 December 2012 for additional services provided in
connection with the Board's strategic review of the future of the
Company, including extensive shareholder consultations. On 9 July 2013,
Mr Phillips and Mr Tierney, Jr. resigned as Directors and their annual
fees were pro-rated to their date of resignation.
The following fees were charged in respect of the current and prior
years:
Year ended Year ended
31 December 2013 31 December 2012
GBP GBP
Julian Reid
(Chairman) 45,000 50,000
Robert Boyle 35,000 35,000
Anthony Hall 30,000 30,000
Roger Phillips
(resigned 9 July
2013) 17,051 32,500
Paul Tierney, Jr.
(resigned 9 July
2013) 15,740 30,000
142,791 177,500
The Directors are responsible for preparing the Directors' report and
the financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial statements for
each financial year. Under that law they have elected to prepare the
financial statements in accordance with International Financial
Reporting Standards ("IFRS") and applicable law.
The financial statements are required by law to give a true and fair
view of the state of affairs of the Company and of the profit or loss of
the Company for that year.
In preparing these financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently;
make judgements and estimates that are reasonable and prudent;
state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the
financial statements; and
prepare the consolidated financial statements on the going concern basis
unless it is inappropriate to presume that the Company will continue in
business.
The Directors are responsible for keeping proper accounting records
which disclose with reasonable accuracy at any time the financial
position of the Company and to enable them to ensure that the financial
statements comply with the Companies (Guernsey) Law, 2008. They have
general responsibility for taking such steps as are reasonably open to
them to safeguard the assets of the Company and to prevent and detect
fraud and other irregularities.
The Directors consider the Company's Annual Report, taken as a whole:
is fair balanced and understandable; and
provides the information necessary for shareholders to assess the
Company's performance, business model and strategy.
Approved on behalf of the Board of Directors on 22 April 2014.
Julian Reid Anthony Hall
Director Director
31 December 2013
Fair Value
Description Level* US$ % of Net Assets
Agriculture
Belorechenskoye 2 2,172,660 0.99%
MHP GDR 1 7,088,373 3.20%
Mriya Agro Holding GDR 2 298,398 0.13%
9,559,431 4.32%
Chemicals
Nizhnekamskneftekhim
(pref) 1 383,427 0.17%
Nizhnekamskneftekhim 1 17,354 0.01%
400,781 0.18%
Consumer Goods
Bryansk Dairy Factory 2 180,763 0.08%
Bryansk Dairy Factory
(pref) 2 268,864 0.12%
Ekvin 3 - 0.00%
449,627 0.20%
Engineering
Cheboksary Aggregate
Works 2 162,600 0.07%
IG Seismic Services GDR 2 2,043,676 0.92%
Kurganmashzavod (pref) 2 3,109 0.00%
Mostotrest 1 9,478,196 4.28%
Tverskoy
Vagonostroitelniy
Zavod 2 57,760 0.03%
Urengoytruboprovodstroy 2 100,327 0.05%
Yasinovatsky Machine GDR 3 - 0.00%
Yuzhtruboprovodtroy 3 - 0.00%
11,845,668 5.35%
Financials
Kazkommertsbank JSC GDR 2 42,534 0.02%
Kazkommertsbank JSC GDR
(pref) 2 10,634 0.00%
53,168 0.02%
Forestry Products
Solombalsky Pulp & Paper 2 152,042 0.07%
Solombalsky Pulp & Paper
(pref) 2 598,289 0.27%
750,331 0.34%
Media & IT
One Media Holding AB 3 - 0.00%
- 0.00%
Mining & Metals
Gaiskiy GOK 2 2,953,140 1.33%
High River Gold Mines 1 7,849,765 3.55%
Kuzbasskaya Toplyivnaya
Kompaniya 1 1,707,391 0.77%
Kuzocm 2 2,113,701 0.96%
Mechel OAO (pref) 1 847,499 0.38%
Nord Gold NV GDR 1 4,081,104 1.84%
19,552,600 8.83%
31 December 2013
Fair Value
Description Level* US$ % of Net Assets
Oil & Gas
Bashneft (pref) 1 50,344,191 22.75%
Gazprom 1 10,970,809 4.96%
Gazprom ADR 1 2,733,075 1.23%
Kazmunaigas Exploration
Production GDR 1 8,478,628 3.83%
Kazmunaigas Exploration
Production (pref) 1 144,482 0.07%
RN Holding 1 7,563,770 3.42%
RN Holding (pref) 1 2,660,308 1.20%
Saratovblgaz 2 212,500 0.10%
Saratovskiy
Neftepererabatyvayuschiy
Zavod 2 59,677 0.03%
Saratovskiy
Neftepererabatyvayuschiy
Zavod (pref) 2 1,453,060 0.66%
Ufa Oil Refinery (pref) 2 140,000 0.06%
Volgogradblgaz JSC 2 675,000 0.30%
Volgogradgorgaz 2 205,725 0.09%
85,641,225 38.70%
Power
Enel OGK-5 OJSC 1 6,450,955 2.92%
IDGC of Centre 1 2,320,169 1.05%
IDGC of Centre and Volga
Region 1 428,910 0.19%
IDGC of North-West 1 1,276,516 0.58%
IDGC of South 1 250,787 0.11%
TGK-5 1 113,225 0.05%
TGK-6 1 59,224 0.03%
10,899,786 4.93%
Retail
DIXY Group 1 11,957,593 5.40%
11,957,593 5.40%
Transport
Kaztransoil 1 76,426 0.04%
Transaero 1 26,824,586 12.12%
26,901,012 12.16%
TOTAL INVESTMENTS 178,011,222 80.43%
* See Note 6, fair value information, for details regarding the fair
value levels.
31 December 2012
Fair Value
Description Level* US$ % of Net Assets
Agriculture
Belorechenskoye 2 5,295,859 1.79%
MHP GDR 1 12,826,531 4.32%
Mriya Agro Holding GDR 2 2,321,837 0.78%
20,444,227 6.89%
Consumer Goods
Bryansk Dairy Factory 2 176,244 0.06%
Bryansk Dairy Factory
(pref) 2 262,142 0.09%
Cherkizovo Group GDR 2 5,645,154 1.91%
Cherkizovo Group OJSC 1 2,268,494 0.76%
Ekvin 3 - 0.00%
8,352,034 2.82%
Engineering
Cheboksary Aggregate
Works 2 356,704 0.12%
IG Seismic Services GDR 2 1,166,391 0.39%
Integra Group GDR 2 1,188,425 0.40%
Kurganmashzavod (pref) 2 16,068 0.01%
Mostotrest 1 13,893,847 4.68%
Tverskoy
Vagonostroitelniy
Zavod 2 66,300 0.02%
Urengoytruboprovodstroy 2 18,632 0.01%
Yasinovatsky Machine GDR 3 - 0.00%
Yuzhtruboprovodtroy 3 - 0.00%
16,706,367 5.63%
Fertilisers
Acron 1 13,068,761 4.41%
Phosagro OJSC GDR 1 11,957,115 4.03%
25,025,876 8.44%
Financials
Kazkommertsbank JSC GDR 2 102,447 0.03%
102,447 0.03%
Forestry Products
Solombalsky Pulp & Paper 2 253,987 0.09%
Solombalsky Pulp & Paper
(pref) 2 894,443 0.30%
1,148,430 0.39%
Media & IT
One Media Holding AB 3 436 0.00%
436 0.00%
Mining & Metals
Gaiskiy GOK 2 2,856,445 0.96%
High River Gold Mines 1 11,877,499 4.00%
Kuzbasskaya Toplyivnaya
Kompaniya 1 2,634,295 0.89%
Kuzocm 2 3,115,822 1.05%
Mechel OAO (pref) 1 3,071,681 1.04%
MMC Norilsk Nickel OJSC 1 4,322,209 1.46%
Nord Gold NV GDR 1 7,681,754 2.59%
35,559,705 11.99%
31 December 2012
Fair Value
Description Level* US$ % of Net Assets
Oil & Gas
Bashneft 1 131,490 0.04%
Bashneft (pref) 1 47,477,969 16.01%
Gazprom 1 7,154,155 2.41%
Gazprom ADR 1 5,491,078 1.85%
Kazmunaigas Exploration
Production GDR 1 8,754,286 2.95%
Kazmunaigas Exploration
Production (pref) 1 145,533 0.05%
Saratovblgaz 2 357,000 0.12%
Saratovskiy
Neftepererabatyvayuschiy
Zavod 1 37,461 0.01%
Saratovskiy
Neftepererabatyvayuschiy
Zavod (pref) 1 600,308 0.20%
Surgutneftegaz (pref) 1 13,856,165 4.67%
Tatneft (pref) 1 9,313,729 3.15%
TNK-BP Holding 1 5,051,622 1.70%
TNK-BP Holding (pref) 1 2,507,267 0.85%
Ufaorgisintez (pref)** 2 131,625 0.04%
Volgogradblgaz JSC 2 804,375 0.28%
Volgogradgorgaz 2 185,153 0.06%
101,999,216 34.39%
Power
Enel OGK-5 OJSC 1 10,106,601 3.41%
IDGC of Centre 1 6,760,926 2.28%
IDGC of Centre and Volga
Region 1 1,177,961 0.40%
IDGC of North-West 1 3,118,144 1.05%
IDGC of South 1 435,691 0.15%
TGK-5 1 195,477 0.07%
TGK-6 1 94,312 0.03%
21,889,112 7.39%
Retail
DIXY Group 1 20,378,518 6.87%
20,378,518 6.87%
Telecoms
KCell JSC GDR 1 9,102,533 3.07%
9,102,533 3.07%
Transport
AK Transneft (pref) 1 11,077,436 3.73%
Transaero 1 27,687,316 9.34%
38,764,752 13.07%
TOTAL INVESTMENTS 299,473,653 100.98%
* See Note 6, fair value information, for details regarding the fair
value levels.
31 December 2013 31 December 2012
Cost Fair Value Cost Fair Value
US$ US$ % Net Assets* US$ US$ % Net Assets*
Analysis of
investments
(unaudited):
Non-exchange
traded
financial
instruments 18,133,441 - 0.00% 18,133,441 436 0.00%
Exchange
traded
financial
instruments 187,046,363 178,011,222 80.43% 263,011,151 299,473,217 100.98%
205,179,804 178,011,222 80.43% 281,144,592 299,473,653 100.98%
See Note 5 regarding the Group's policy with respect to determining the
fair value of investments.
Except as otherwise expressly indicated, the term "net assets" (total
assets less total liabilities) as used in the financial statements
refers to net assets as determined in accordance with International
Financial Reporting Standards ("IFRS") and as reflected in the
consolidated statement of financial position.
31 December 2013 31 December 2012
Cost Fair Value % Net Cost Fair Value % Net
Description US$ US$ Assets* US$ US$ Assets*
Analysis of
investments by
industry
(audited):
Agriculture 8,329,622 9,559,431 4.32% 16,566,308 20,444,227 6.89%
Chemicals 596,480 400,781 0.18% - - 0.00%
Consumer Goods 1,477,331 449,627 0.20% 10,251,813 8,352,034 2.82%
Engineering 36,012,416 11,845,668 5.35% 45,059,277 16,706,367 5.63%
Fertilisers - - 0.00% 23,463,604 25,025,876 8.44%
Financials 17,891 53,168 0.02% 91,167 102,447 0.03%
Forestry Products 2,633,651 750,331 0.34% 2,633,650 1,148,430 0.39%
Media & IT 29,880 - 0.00% 29,880 436 0.00%
Metals & Mining 58,141,921 19,552,600 8.83% 56,954,292 35,559,705 11.99%
Oil & Gas 54,075,750 85,641,225 38.70% 65,471,156 101,999,216 34.39%
Power 22,365,264 10,899,786 4.93% 22,365,264 21,889,112 7.39%
Retail 10,124,569 11,957,593 5.40% 11,118,168 20,378,518 6.87%
Telecommunications - - 0.00% 8,282,201 9,102,533 3.07%
Transport 11,375,029 26,901,012 12.16% 18,857,812 38,764,752 13.07%
205,179,804 178,011,222 80.43% 281,144,592 299,473,653 100.98%
Concentration of investments (audited)
As at 31 December 2013 and 31 December 2012, the Group had invested in
certain companies which had fair market values that were individually in
excess of 5% of net assets*. These companies are identified in the
schedule below:
31 December 2013 31 December 2012
Fair Value Fair Value
US$ % Net Assets* US$ % Net Assets*
Bashneft 50,344,191 22.75% 47,609,549 16.05%
Transaero 26,824,586 12.12% 27,687,316 9.34%
Gazprom 13,703,884 6.19% 12,645,233 4.26%
DIXY Group 11,957,593 5.40% 20,378,518 6.87%
See Note 5 regarding the Group's policy with respect to determining the
fair value of investments.
*Except as otherwise expressly indicated, the term "net assets" (total
assets less total liabilities) as used in the consolidated financial
statements refers to net assets as determined in accordance with
International Financial Reporting Standards ("IFRS") and as reflected in
the consolidated statement of financial position.
The audited consolidated supplemental schedule of investments B forms an
integral part of the consolidated financial statements.
Independent Auditors' Report to the Members of Prosperity Voskhod Fund
Limited
Opinions and conclusions arising from our audit
Opinion on financial statements
We have audited the consolidated financial statements (the "financial
statements") of Prosperity Voskhod Fund Limited (the "Company") together
with its subsidiaries (together the "Group") for the year ended 31
December 2013 which comprise the consolidated statement of financial
position, the consolidated statement of comprehensive income, the
consolidated statement of changes in equity, the consolidated statement
of cash flows, the consolidated supplemental schedule of investments B
and the related notes. The financial reporting framework that has been
applied in their preparation is applicable law and International
Financial Reporting Standards as issued by the IASB. In our opinion, the
financial statements:
give a true and fair view of the state of the Group's affairs as at 31
December 2013 and of its result for the year then ended;
have been properly prepared in accordance with International Financial
Reporting Standards as issued by the IASB; and
comply with the Companies (Guernsey) Law, 2008.
Our assessment of risks of material misstatement
The risks of material misstatement detailed in this section of this
report are those risks that we have deemed, in our professional
judgement, to have had the greatest effect on: the overall audit
strategy; the allocation of resources in our audit; and directing the
efforts of the engagement team. Our audit procedures relating to these
risks were designed in the context of our audit of the financial
statements as a whole. Our opinion on the financial statements is not
modified with respect to any of these risks, and we do not express an
opinion on these individual risks.
In arriving at our audit opinion above on the financial statements the
risks of material misstatement that had the greatest effect on our audit
were as follows:
Valuation of investments ($178,011,222 or 80.43% of net assets)
Refer to page 19 of the Report of the Audit Committee, Note 2(f) of the
accounting policies, Note 5 'Investments in securities designated at
fair value through profit or loss upon initial recognition' and Note 6
'Fair value information'
The risk - The majority of the Group's investments (representing 100% of
the fair value of investments at 31 December 2013) consists of exchange
traded companies based in Russia and other former Soviet Union
countries. The exchange traded investments are listed on stock exchanges
and are valued as at 31 December 2013 based on the last trade price or
mid price when the last trade price is outside the closing bid - ask
spread. The valuation of the Group's investments is a significant area
of our audit as they represent the majority of the Group's net assets as
at 31 December 2013 and for instances where the last trade price is
unavailable greater judgements are exercised in determining fair value.
Our response - Our audit procedures with respect to the valuation of the
Group's listed investments included, but were not limited to, testing of
the Valuation Committee's controls in relation to investment valuations
and comparing investment prices used to third party pricing providers
and brokers. We used our own valuation specialist, to obtain from an
independent pricing source the last trade price for each listed
investment, analysed the available market evidence as to the existence
of an active market, recalculated the mid price, in accordance with the
Group's pricing methodology when the last trade price was outside the
closing bid - ask spread. Where a trade price was unavailable from a
stock exchange we obtained prices from two independent brokers and
confirmed with the brokers that that the price used was an exit price as
at 31 December 2013.
We also considered the Group's disclosures (see Note 2(d)) in relation
to the use of estimates and judgments regarding the fair value of
investments and the Group's valuation policies adopted, as well as the
fair value disclosures in Note 2(f), Note 5 and Note 6 for compliance
with International Financial Reporting Standards as adopted by the IASB.
Independent Auditors' Report to the Members of Prosperity Voskhod Fund
Limited (continued)
Our application of materiality and an overview of the scope of our audit
Materiality is a term used to describe the acceptable level of precision
in financial statements. Auditing standards describe a misstatement or
an omission as "material" if it could reasonably be expected to
influence the economic decisions of users taken on the basis of the
financial statements. The Auditor has to apply judgement in identifying
whether a misstatement or omission is material and to do so the Auditor
identifies a monetary amount as "materiality for the financial
statements as a whole".
The materiality for the financial statements as a whole was set at
$6,600,000. This has been calculated using a benchmark of the Group's
net asset value (of which it represents approximately 3%) which we
believe is the most appropriate benchmark as net asset value is
considered to be one of the principal considerations for members of the
Company in assessing the financial performance of the Group.
We agreed with the Audit Committee to report to it all corrected and
uncorrected misstatements we identified through our audit with a value
in excess of $50,000, in addition to other audit misstatements below
that threshold that we believe warranted reporting on qualitative
grounds.
Our assessment of materiality has informed our identification of
significant risks of material misstatement and the associated audit
procedures performed in those areas as detailed above.
Audit procedures for group purposes were performed by the group audit
team based on the "materiality for the financial statements as a whole"
incorporating the responses to significant risks of material
misstatements as detailed above.
Whilst the audit process is designed to provide reasonable assurance of
identifying material misstatements or omissions it is not guaranteed to
do so. Rather the Auditor plans the audit to determine the extent of
testing needed to reduce to an appropriately low level the probability
that the aggregate of uncorrected and undetected misstatements does not
exceed materiality for the financial statements as a whole. This testing
requires us to conduct significant depth of work on a broad range of
assets, liabilities, income and expense as well as devoting significant
time of the most experienced members of the audit team, in particular
the Responsible Individual, to subjective areas of the accounting and
reporting process.
An audit involves obtaining evidence about the amounts and disclosures
in the financial statements sufficient to give reasonable assurance that
the financial statements are free from material misstatement, whether
caused by fraud or error. This includes an assessment of: whether the
accounting policies are appropriate to the Group's circumstances and
have been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the Board of
Directors; and the overall presentation of the financial statements. In
addition, we read all the financial and non-financial information in the
Financial Report to identify material inconsistencies with the audited
financial statements and to identify any information that is apparently
materially incorrect based on, or materially inconsistent with, the
knowledge acquired by us in the course of performing the audit. If we
become aware of any apparent material misstatements or inconsistencies
we consider the implications for our report.
Matters on which we are required to report by exception
Under International Standards on Auditing (UK and Ireland) we are
required to report to you if, based on the knowledge we acquired during
our audit, we have identified other information in the Financial Report
that contains a material inconsistency with either that knowledge or the
financial statements, a material misstatement of fact, or that is
otherwise misleading.
In particular, we are required to report to you if:
we have identified material inconsistencies between the knowledge we
acquired during our audit and the Directors' statement that they
consider that the Financial Report and financial statements taken as a
whole is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group's performance, business
model and strategy; or
the Report of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
Independent Auditors' Report to the Members of Prosperity Voskhod Fund
Limited (continued)
Matters on which we are required to report by exception (continued)
Under the Companies (Guernsey) Law, 2008, we are required to report to
you if, in our opinion:
the Company has not kept proper accounting records; or
the financial statements are not in agreement with the accounting
records; or
we have not received all the information and explanations, which to the
best of our knowledge and belief are necessary for the purpose of our
audit.
We have nothing to report in respect of the above responsibilities.
Scope of report and responsibilities
The purpose of this report and restrictions on its use by persons other
than the Company's members as a body
This report is made solely to the Company's members, as a body, in
accordance with section 262 of the Companies (Guernsey) Law, 2008 and,
in respect of any further matters on which we have agreed to report, on
terms we have agreed with the Company. Our audit work has been
undertaken so that we might state to the Company's members those matters
we are required to state to them in an Auditor's report and for no other
purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company and the Company's
members, as a body, for our audit work, for this report, or for the
opinions we have formed.
Respective responsibilities of Directors and Auditor
As explained more fully in the Statement of Directors' Responsibilities
set out on page 22, the Directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true
and fair view. Our responsibility is to audit, and express an opinion on,
the financial statements in accordance with applicable law and
International Standards on Auditing (UK and Ireland). Those standards
require us to comply with the UK Ethical Standards for Auditors.
KPMG Channel Islands Limited
Chartered Accountants
Guernsey
22 April 2014
31 December 2013 31 December 2012
Note US$ US$
Assets
Current assets
Financial assets at fair value through profit or loss
Designated at fair value through profit or loss upon
initial recognition
Equity investments 5,6 178,011,222 299,473,653
Total financial assets at fair value through profit
or loss 178,011,222 299,473,653
Loans and receivables
Cash and cash equivalents 7 44,631,536 1,548,344
Dividends receivable - 541,185
Cash due from custodians 8 8 867,982
Other assets 384 3,569
Total loans and receivables 44,631,928 2,961,080
Total assets 222,643,150 302,434,733
Equity
Share capital 9 1,779,001 2,244,513
Share Premium 10 39,314,652 92,848,494
Other Reserves 119,656,354 119,656,354
Retained earnings 60,564,001 81,815,144
Total equity 221,314,008 296,564,505
Liabilities
Current liabilities
Financial liabilities measured at amortised cost
Accrued expenses 11 1,329,142 1,756,393
Amounts payable on investments purchased - 4,113,835
Total liabilities 1,329,142 5,870,228
Total equity and liabilities 222,643,150 302,434,733
Net asset value per share based on 177,900,103
(31 December 2012: 224,451,270) shares outstanding 1.244 1.321
These consolidated financial statements were approved by the Board of
Directors on 22 April 2014.
Signed on behalf of the Board of Directors by:
Anthony Hall
Director
The accompanying notes on pages 36 to 68 form an integral part of the
audited consolidated financial statements.
Year ended Year ended
31 December 2013 31 December 2012
Note US$ US$
Investment income
Income 3 15,715,667 12,145,364
Net foreign exchange (losses)/gains (385,103) 470,892
Net (losses)/gains on equity investments designated
at fair value through profit or loss upon initial
recognition 4 (28,590,403) 32,157,547
Net investment (loss)/income (13,259,839) 44,773,803
Operating expenses 11 (6,907,683) (7,459,473)
(Loss)/profit from operations before withholding tax (20,167,522) 37,314,330
Withholding tax 12 (1,083,621) (948,533)
Total comprehensive (loss)/income for the year (21,251,143) 36,365,797
Earnings per ordinary
share
Basic and Diluted 9 US$(0.100) US$0.153
Weighted average
ordinary shares Number of ordinary Number of ordinary
outstanding redeemable shares shares
Basic and Diluted 9 211,825,063 238,450,293
(Loss)/profit for the financial year equates to the total comprehensive
(loss)/income for the year as there are no items of other comprehensive
income arising.
The accompanying notes on pages 36 to 68 form an integral part of the
audited consolidated financial statements.
Ordinary
Ordinary redeemable Share capital Share Premium Other Reserve Retained earnings Total
Note shares shares US$ US$ US$ US$ US$
Balance at 1
January 2012 242,650,000 - 2,426,500 116,233,862 119,656,354 45,449,347 283,766,063
Repurchase of
shares in the
year 9 (18,198,730) - (181,987) (23,385,368 - - (23,567,355
Total
comprehensive
income for
the year - - - - - 36,365,797 36,365,797
Balance at 31
December
2012 9 224,451,270 - 2,244,513 92,848,494 119,656,354 81,815,144 296,564,505
Balance at 1
January 2013 224,451,270 - 2,244,513 92,848,494 119,656,354 81,815,144 296,564,505
Conversion to
ordinary
redeemable
shares 9 (224,451,270) 224,451,270 - - - - -
Redemptions of
shares 9 - (46,551,167) (465,512) (53,533,842) - - (53,999,354)
Total
comprehensive
loss for the
year - - - - - (21,251,143) (21,251,143)
Balance at 31
December
2013 9 - 177,900,103 1,779,001 39,314,652 119,656,354 60,564,001 221,314,008
The accompanying notes on pages 36 to 68 form an integral part of the
audited consolidated financial statements.
Year ended Year ended
31 December 2013 31 December 2012
Note US$ US$
Cash flows from operating activities:
Total comprehensive (loss)/income for the year (21,251,143) 36,365,797
Adjustments for:
Changes in unrealised losses/(gains) on equity investments
designated at fair value through profit or loss upon
initial recognition 4 45,497,645 (7,911,583)
Net realised gains on equity investments designated
at fair value through profit or loss upon initial
recognition 4 (16,907,242) (24,245,964)
Decrease/(increase) in receivables 544,370 (247,834)
Decrease in payables (427,251) (28,626)
Cash flows generated from operating activities 7,456,379 3,931,790
Cash flows from
investing activities
Purchases of
investments (27,204,223) (127,545,340)
Proceeds from sale of
investments 116,830,390 142,229,650
Cash flows generated
from investing
activities 89,626,167 14,684,310
Cash flows
from
financing
activities
Repurchase
of
ordinary
shares - (23,567,355)
Compulsory
redemption
of ordinary
redeemable
shares (53,999,354) -
Cash flows
used in
financing
activities (53,999,354) (23,567,355)
Net increase/(decrease) in cash and cash equivalents
during year 43,083,192 (4,951,255)
Cash and cash equivalents at beginning of year 1,548,344 6,499,599
Cash and cash equivalents at end of year 44,631,536 1,548,344
Supplementary information:
Interest received 1,615 1,507
Dividends received (net of withholding tax US$1,167,341
(31 December 2012: US$864,813)) 15,173,216 10,948,981
The accompanying notes on pages 36 to 68 form an integral part of the
audited consolidated financial statements.
1. Organisation and structure
Prosperity Voskhod Fund Limited (the "Company") was registered on 31
August 2006 with the registered number 45426 and is domiciled in
Guernsey, Channel Islands, and commenced its operations on 6 October
2006. The Company is an authorised closed-ended investment company
incorporated in Guernsey with limited liability under the Companies
(Guernsey) Law, 2008, with its ordinary shares listed on the Alternative
Investment Market ("AIM") of the London Stock Exchange. Effective 21
June 2013, subject to the passing of a special resolution, the ordinary
shares were converted into redeemable shares. The Company's ordinary
shares were listed under the ISIN number GG00B1D5SN78, and following the
compulsory redemption of 46,551,167 ordinary shares on the 23 September
2013, the existing ISIN number expired and was replaced with the new
ISIN number GG00BDVOK213 on 24 September 2013. This expired in turn and
was replaced with the ISIN number GG00B1D5SN78 following the second
compulsory redemption of 46,769,898 ordinary shares on 27 January 2014.
The registered office of the Company is Dorey Court, Admiral Park, St
Peter Port, Guernsey GY1 2HT, Channel Islands. "Group" is defined as the
Company and its wholly owned subsidiaries, Faendo Limited and Postarevo
Limited (the "Cyprus Subsidiaries").
The Group's investment objective changed on 21 June 2013 (please refer
to the Statement of Investing Policy on page 9), to a policy of orderly
realisation of portfolio assets.It is expected the Company will continue
for the approximately 3 years from the date of the EGM in June 2013 as
discussed in Note 2(c).
Prior to 21 June 2013, the Group's investment objective was, achieving
capital growth by investing in a portfolio of securities involved in the
corporate restructurings and consolidations in Russia and other Former
Soviet Union ("FSU") countries and investing primarily in small and
medium sized companies, with the aim of being an active and influential
minority shareholder.
The former investment objective included various investment restrictions
(please refer to the Statement of Investing Policy on page 9).
As at 31 December 2013 and 31 December 2012 the Group had no employees.
The Group's investment management activities are managed by Prosperity
Capital Management Limited (the "Manager"), as supervised by the Board
of Directors. The Manager was incorporated with limited liability and
registered as an exempted company under the laws of the Cayman Islands.
The Group has entered into a management agreement (the "Management
Agreement") under which the Manager, subject to the overall supervision
and control of the Directors, has responsibility for identifying,
analysing, timing and making the Group's investments, as well as
monitoring and disposing of such investments. The Manager will assist
and advise the Directors if required with the valuation of the Group's
assets generally. Under the terms of the Management Agreement, the
Company has agreed to pay the Manager a management fee and a performance
fee (see Note 11 for further details). The Company is administered by
Kleinwort Benson (Channel Islands) Fund Services Limited (the
"Administrator"). During the 2012 financial year the Group replaced
State Street Fund Services (Ireland) Limited as Sub-Administrator, with
Maples Fund Services (Cayman) Limited on 1 September 2012. Maples Fund
Services (Cayman) Limited provides certain administration services to
the Group under a sub-administration agreement.
The Company owns 100% of the share capital of Faendo Limited and
Postarevo Limited, both Cyprus companies. Faendo Limited and Postarevo
Limited are both subsidiaries of the Company as Prosperity Voskhod Fund
Limited retains control over the companies through its retention of all
the risks and rewards of the assets transferred to, or purchased from
them.
2. Significant accounting policies
(a) Statement of compliance
These consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards ("IFRS") and
interpretations approved by the International Accounting Standards Board
(the "IASB"), and are in compliance with the Companies (Guernsey) Law,
2008.
(b) Basis of consolidation
Subsidiaries are entities controlled by the Company. Control exists
where the Company has the power to govern the financial and operating
policies of an entity, so as to obtain benefits from its activities. In
assessing control, potential voting rights that evidently are
exercisable are taken into account.
As at and for the years ended 31 December 2013 and 31 December 2012, the
consolidated financial statements comprise the financial statements of
the Company and the Cyprus Subsidiaries.
The Cyprus Subsidiaries have been consolidated from the date on which
control was transferred to the Company and will cease to be consolidated
from the date on which control is transferred from the Company. At 31
December 2013 and 31 December 2012, the Cyprus Subsidiaries were the
Company's only subsidiaries.
(c) Basis of preparation
The consolidated financial statements are presented in United States
dollars which is the functional currency of the Company and its
subsidiaries reflecting the fact that the Company's shares are issued,
repurchased and traded in United States dollars and distributions to
investors are also made in United States dollars.
The principal accounting policies of the Group have been applied
consistently during the year and are consistent with those used in the
prior year, except for the introduction of IFRS 13, Fair value
measurement ("IFRS 13") (see Note 2(n)(i) for further details).
In accordance with the prospectus, a continuation vote was put to the
shareholders at the Company's Extraordinary General Meeting (the "EGM")
on 3 June 2011. The shareholders voted against the special resolution to
commence an orderly realisation of the Company's investments. The
shareholders also voted to amend the timing for shareholders to consider
the continuation of the Company from an annual vote to a vote to be held
every three years.
Due to the approval of the Special resolutions on 21 June 2013,
discussed below, approving the adoption of a new investment objective
and policy of orderly realisation of portfolio assets, the continuation
resolution will not be put at the Annual General Meeting (the "AGM")
held in 2014, nor will it be put to the shareholders at any third
anniversary thereafter.
On 7 March 2013 the Company announced that the Board of Directors (the
"Board") had, further to its announcement on 3 December 2012, undertaken
a detailed strategic review of the options for the future of the
Company. As part of this review the Board and its advisors consulted
with shareholders owning circa 90 per cent of the shares and, in the
context of the Company's investment objective and strategy, shareholder
needs for a market listing, the requirements of Guernsey law and
shareholder feedback, considered a number of alternative options for the
Company's future including a potential open ending, a merger and/or
changes to its discount control policy.
The views of the shareholder base were broadly polarised, with one group
seeking greater liquidity via, for example, an open ending to facilitate
enhanced liquidity in the Company's shares whilst the other group was
broadly supportive of the status quo and the continuation of the
existing closed end structure.
The Board concluded that, given the Company's investment strategy and
style, an open ended structure would be impracticable to operate without
a material change to the composition of the portfolio and its investment
strategy. Given that a significant majority of the shareholders
consulted supported the existing investment strategy and its Manager,
the Board concluded that a corporate reorganisation into an open ended
structure would not be in the best interests of the Company and its
shareholders as a whole given the continuing constraints this structure
would impose on the future investment universe and activity.
However, recognising that a significant group of shareholders was of the
view that the status quo was not viable, the Board wished to provide all
shareholders with the opportunity to vote on the adoption of a new
realisation strategy. Such a resolution was proposed as a special
resolution as is required under Guernsey law and the Company's
constitution (requiring 75 per cent or more of those holders voting to
approve the same).
This resolution was approved by the shareholders at the EGM on 21 June
2013. In addition, the shareholders also approved a special resolution
for the Company's share capital to be converted to redeemable shares to
enable capital to be returned to holders from time to time at the
discretion of the Board, and further approved a special resolution to
change the Company's investment policy to permit the orderly and optimal
realisation of proceeds from the portfolio as discussed in the Statement
of Investing Policies (see page 9).
Subject to prevailing market conditions, the realisation programme is
expected to be completed within 3 years from the date of the 2013 EGM.
Based on the above, the Directors consider it appropriate that the
consolidated financial statements are prepared on a going concern basis
supported by the Directors' current assessment that the Company has
adequate resources to continue in operational existence for the
foreseeable future and ongoing shareholder interest in the continuation
of the Company.
The consolidated financial statements have been prepared on the
historical cost basis with the exception of financial assets measured at
fair value through profit or loss.
(d) Use of estimates and judgements
The preparation of consolidated financial statements in accordance with
the recognition and measurement principles of IFRS requires management
to make judgements, estimates and assumptions that affect the
application of policies and the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts
of income and expenses during the year.
The estimates and associated assumptions are based on historical
experience and various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making
the judgements about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results could differ
from those estimates. Information about significant areas of estimation,
uncertainty and critical judgements in applying accounting policies that
have the most significant effect on the amounts recognised in the
consolidated financial statements are described in Note 5 and 6.
(e) Foreign currency translation
Transactions in foreign currencies are translated into the functional
currency at the foreign exchange rate prevailing on the transaction
date. Monetary assets and liabilities denominated in foreign currencies
at the consolidated statement of financial position date are translated
to United States dollars at the foreign exchange rates ruling at that
date. Non-monetary assets and liabilities denominated in foreign
currencies that are stated at fair value are translated into the
functional currency at the foreign exchange rates ruling at the dates
that the values were determined. Foreign exchange differences arising on
translation and realised gains and losses on disposals are recognised
through profit or loss in the consolidated statement of comprehensive
income.
Foreign exchange gains and losses on financial assets and financial
liabilities at fair value through profit or loss are recognised together
with other changes in fair value. Included in net foreign exchange
gains/(losses), in the consolidated statement of comprehensive income,
are net foreign exchange gains/(losses) on monetary financial assets and
financial liabilities other than those classified at fair value through
profit or loss.
(f) Financial instruments
(i) Classification
Financial instruments designated at fair value through profit or loss
upon initial recognition include investments in exchange traded and
non-exchange traded equity instruments.
A financial asset or financial liability is classified as held for
trading if it is acquired or incurred principally for the purpose of
selling or repurchasing in the near term. Derivatives are also
categorised as held for trading. The Company does not classify any
derivatives as hedges in a hedging relationship.
(ii) Recognition
The Group recognises financial assets and financial liabilities on the
date they become party to the contractual provisions of the instrument.
From this date, any gains and losses arising from changes in fair value
of the instruments are recognised in the consolidated statement of
comprehensive income. Purchases of financial assets are recognised using
trade date accounting.
(iii) Measurement
Fair value measurement
Financial instruments are measured initially at fair value. Fair value
is the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date in the principal, or in its absence, the most
advantageous market to which the Group has access at that date.
When available the Group measures the fair value of an instrument using
the quoted price in an active market for that instrument. A market is
regarded as active if transactions for the asset or liability take place
with sufficient frequency and volume to provide pricing information on
an ongoing basis. The Group measures instruments quoted in an active
market at last traded price, when within the closing bid-ask spread and
mid price when the last traded price is not within the bid-ask spread.
During the comparative year ended 31 December 2012, the Group valued its
quoted instruments at closing bid price.
Fair value measurement (continued)
If there is no quoted price in an active market, then the Group uses
valuation techniques that maximise the use of relevant observable inputs
and minimise the use of unobservable inputs.
Transaction costs on financial instruments designated at fair value
through profit or loss are expensed immediately. Subsequent to initial
recognition, all financial instruments classified at fair value through
profit or loss are measured at fair value with changes in their fair
value recognised through profit or loss in the consolidated statement of
comprehensive income.
The Group has applied IFRS 13 for the first time in the current year
(see Note 2(n)(i) for further details). During the comparative year to
31 December 2012, the Group valued its quoted investments using closing
bid prices, as in accordance with IAS 39, Financial Instruments:
Recognition and Measurement ("IAS 39"). In the current year the Manager
and Directors believe that the use of last traded price, when within the
closing bid-ask spread, and mid price when the last traded price is not
within the bid-ask spread, is a more appropriate measure of fair value
under IFRS 13.
Amortised cost measurement
All other assets and liabilities are carried at amortised cost.
The amortised cost of a financial asset or financial liability is the
amount at which the financial asset or financial liability is measured
at initial recognition, minus principal repayments, plus or minus the
cumulative amortisation using the effective interest method of any
difference between the initial amount recognised and the maturity amount,
minus any reduction for impairment.
(iv) Impairment
A financial asset not classified at fair value through profit or loss is
assessed at each reporting date to determine whether there is an
objective evidence of impairment. A financial asset or a group of
financial assets is "impaired" if there is objective evidence of
impairment as a result of one or more events that occurred after the
initial recognition of the asset(s) and that loss as a result of the
event(s) had an impact on the estimated future cash flows of that
asset(s) that can be estimated reliably.
Objective evidence that financial assets are impaired include
significant financial difficulty of a borrower or issuer, default or
delinquency by a borrower, restructuring of the amount due on terms that
the Group would not otherwise consider, indications that a borrower or
issuer will enter bankruptcy or adverse changes in the payment status of
the borrowers.
An impairment loss in respect of a financial asset measured at amortised
cost is calculated as the difference between its carrying value and the
present value of the estimated future cash flows discounted at the
asset's original effective interest rate. Losses are recognised in
profit or loss and reflected in an allowance account against
receivables. Interest on the impaired asset continues to be recognised.
If an event occurring after the impairment was recognised causes the
amount of impairment loss to decrease then the decrease in impairment
loss is reversed through the profit or loss.
(v) Derecognition
The Group derecognises a financial asset when the contractual rights to
the cash flows from the financial asset expire or it transfers the
financial asset and the transfer qualifies for derecognition in
accordance with IAS 39.
The Group uses the First In - First Out ("FIFO") method to determine
realised gains and losses on financial asset derecognition. A financial
liability is derecognised when the obligation specified in the contract
is discharged, cancelled or expired.
(vi) Offsetting
Financial assets and financial liabilities are offset and the net amount
presented in the statement of financial position when, and only when,
the Group has a legal right to offset the amounts and it intends either
to settle on a net basis or to realise the asset and settle the
liability simultaneously.
(g) Net (losses)/gains on equity investments designated
at fair value through profit or loss upon initial
recognition
Net (losses)/gains from equity investments designated at fair value
through profit or loss upon initial recognition include all realised and
unrealised fair value changes and foreign exchange differences, but
excludes interest and dividend income.
Net (losses)/gains from equity investments designated at fair value
through profit or loss upon initial recognition are calculated using the
FIFO cost method.
(h) Cash and cash equivalents
Cash and cash equivalents comprise of current deposits with banks and
with brokers.
(i) Interest income
Interest income arises from cash and cash equivalents carried at
amortised cost and is recognised through profit or loss in the
consolidated statement of comprehensive income by the Group using the
effective interest rate method on an accruals basis.
(j) Dividend income
Dividend income is recognised in the consolidated statement of
comprehensive income on the later of the day of the dividend
recommendation (meaning either the management's recommendation to the
Board of the investee company or the Board's recommendation to the
shareholders) and the ex-dividend date.
In some cases, the Group may receive or choose to receive dividends in
the form of additional shares rather than cash. In such cases the Group
recognises the dividend income for the amount of the cash dividend
alternative, with the corresponding debit treated as an additional
investment.
Dividend income received by the Group may be subject to withholding tax
imposed in the country of origin. Dividend income is recorded gross of
such taxes and the withholding tax is recognised as a finance expense.
(k) Expenses
All expenses are recognised in the consolidated statement of
comprehensive income on an accruals basis.
(l) Share capital
Capital expenses
The expenses of the Group directly attributable to the issuance of new
shares are charged to the Share Premium account.
Ordinary shares
Up to 21 June 2013
Ordinary shares of the Company represent a residual interest in the net
assets of the Company and are classified as equity.
From 21 June 2013
The ordinary shares of the Company were converted into redeemable shares
and are still classified as equity.
Repurchase of share capital (treasury shares)
Ordinary shares repurchased by the Company may be either cancelled or
held as treasury shares by the Company in accordance with the provisions
of the Companies (Guernsey) Law, 2008. The Company may not hold more
than 10% of the total number of issued ordinary shares or of the issued
shares of any other class, in treasury. The Company may not exercise any
rights (including voting rights) in respect of treasury shares whilst
such shares are held in that capacity.
When share capital recognised as equity is repurchased, the amount of
the consideration paid which includes directly attributable costs, net
of any tax effects, is recognised as a deduction from equity. The par
value of repurchased shares, which are also referred to as treasury
shares, are presented as a deduction from share capital.
When treasury shares are sold or reissued subsequently, the par value of
these treasury shares are shown as an addition to share capital. Any
premiums or discounts on par value of the treasury shares purchased,
sold or reissued are recognised as an adjustment to Share Premium or
retained earnings, or a combination thereof.
On winding-up of the Company, after paying all the debts attributable to
and satisfying all the liabilities of the Company, shareholders shall be
entitled to receive by way of capital any surplus assets of the Company
attributable to the shares as a class in proportion to their holdings.
(m) Operating segments
The Board of Directors has considered the requirements of IFRS 8,
Operating Segments. The Board of Directors is of the view that the Group
is engaged in a single segment of business, being that of investing in a
pool of assets for the purpose of meeting the Group's investment
objective.
The Board of Directors, as a whole, has been determined as constituting
the chief operating decision maker of the Group. The key measure of
performance used by the Board of Directors to assess the Group's
performance and to allocate resources is the total return on the Group's
net asset value, as calculated under IFRS, and therefore no
reconciliation is required between the measure of profit or loss used by
the Board and that contained in the consolidated financial statements.
Information on dividend income, interest income and realised gains or
losses derived from sales of investments, which forms the Group's core
source of revenue, is disclosed in the consolidated statement of
comprehensive income. The Manager manages the single segment in
accordance with the objectives and strategies outlined in the Statement
of Investing Policies (see page 9).
The Company is domiciled in Guernsey, Channel Islands. All of the
Group's income from investments is received from equity investments that
are issued by companies in the sectors of the domestic economies of
Russia and other FSU countries.
The Group has no assets classified as non-current assets.
The Group has a highly diversified portfolio of investments and no
security of a single underlying issuer accounts for more than 25% of the
Group's total equity. The Company has a diversified shareholder
population mainly held through various nominee accounts. See the
Directors' Report for further details (page 12).
(n) Changes in accounting policies
(i) New standards
In the current year, the Group has applied a number of new and revised
IFRSs issued by the IASB that are mandatorily effective for an
accounting period that begins on or after 1 January 2013.
Amendments to IFRS 7 Disclosures, Offsetting Financial Assets and
Financial Liabilities ("Amendments to IFRS 7").
The Group has applied the Amendments to IFRS 7 for the first time in the
current year. The Amendments to IFRS 7 require entities to disclose
information about rights of offset and related arrangements (such as
collateral posting requirements) for financial instruments under an
enforceable master netting agreement or similar arrangement.
The Amendments to IFRS 7 have been applied retrospectively. As the Group
does not have any offsetting arrangements in place, the application of
the amendments has had no material impact on the amounts recognised in
the consolidated financial statements.
Adoption of IFRS 13, Fair Value Measurement.
In accordance with the transitional provisions for IFRS 13, the Group
has applied the new definition of fair value, as set out in Note
2(f)(iii) prospectively.
IFRS 13, effective for annual periods beginning on or after 1 January
2013, improves consistency and reduces complexity by providing a precise
definition of fair value and a single source of fair value measurement
and disclosure requirements for use across IFRSs. The requirements do
not extend the use of fair value accounting but provide guidance on how
it should be applied where its use is already required or permitted by
other standards within IFRS. If an asset or a liability measured at fair
value has a bid price and an ask price, the standard requires valuation
to be based on a price within the bid-ask spread that is most
representative of fair value and allows the use of mid-market pricing or
other pricing conventions that are used by market participants as a
practical expedient for fair value measurement within a bid-ask spread.
On adoption of the standard, the Group has applied valuation inputs for
the listed financial assets based on last traded price, when within the
closing bid-ask spread, and the average of the closing bid-ask (i.e.
mid) when the last trade price is outside of the closing bid-ask spread,
on the principal market that the financial asset is actively traded on
to be consistent with the inputs in the Company's Offering Memorandum
for the calculation of the net asset value. The use of last traded
prices is recognised as a standard pricing convention within the
industry. As a consequence, the Company no longer presents a
reconciliation of its NAV per share according to its consolidated
financial statements, as compared to the NAV per share reported to the
shareholders according to the Company's Offering Memorandum. A
reconciliation is provided for the adjustment in the comparative year
(see page 69).
IFRS 13 requires prospective application from 1 January 2013. New
disclosure requirements are not included in the comparative information.
(ii) Standards issued but not yet effective or adopted
There are a number of new standards, amendments to standards and
interpretations that are effective for annual periods beginning after 1
January 2013 which have not been applied in preparing these consolidated
financial statements as they are not required to be applied yet. None of
these are expected to have a significant effect on the measurement of
the amounts recognised in the consolidated financial statements of the
Group save for IFRS 9, Financial Instruments ("IFRS 9") as described
below. The Group does not plan to adopt these new standards early.
IFRS 9 deals with recognition, derecognition, classification and
measurement of financial assets and financial liabilities. Its
requirements represent a significant change from the existing
requirements in IAS 39 in respect of financial assets. The standard
contains two primary measurement categories for financial assets: at
amortised cost and fair value. A financial asset would be measured at
amortised cost if it is held within a business model whose objective is
to hold assets in order to collect contractual cash flows, and the
asset's contractual terms give rise on specified dates to cash flows
that are solely payment of principal and interest on the principal
outstanding. All other financial assets would be measured at fair value.
The standard eliminates the existing IAS 39 categories of held to
maturity, available for sale and loans and receivables. For an
investment in an equity instrument that is not held for trading, the
standard permits an irrevocable election, on initial recognition, on an
individual share-by-share basis, to present all fair value changes from
the investment in other comprehensive income. No amount recognised in
other comprehensive income would ever be reclassified to profit or loss.
However, dividends on such investments are recognised in profit or loss,
rather than other comprehensive income unless they clearly represent a
partial recovery of the cost of the investment. Investments in equity
instruments in respect of which an entity does not elect to present fair
value changes in other comprehensive income would be measured at fair
value with changes in fair value recognised in profit or loss.
The standard requires that derivatives embedded in contracts with a host
that is a financial asset within the scope of the standard are not
separated: instead the hybrid financial instrument is assessed in its
entirety as to whether it should be measured at amortised cost or fair
value.
IFRS 9 requires that the effects of changes in credit risk of
liabilities designated at fair value through profit or loss are
presented in other comprehensive income unless such treatment would
create or enlarge an accounting mismatch in profit or loss, in which
case all gains or losses on that liability are presented in profit or
loss. Other requirements of IFRS 9 relating to classification and
measurement of financial liabilities are unchanged from IAS 39.
The requirements of IFRS 9 relating to derecognition are unchanged from
IAS 39.
The mandatory effective date of IFRS 9 is not specified but will be
determined when the outstanding phases are finalised. However, early
application of IFRS 9 is permitted. The Group does not plan to adopt
this standard early.
The other new standards, amendments to standards and interpretations
that are effective for annual periods beginning after 1 January 2013
which have not been applied in preparing these consolidated financial
statements as they are not required to be applied yet and are not
expected to have a significant effect on the measurement of the amounts
recognised in the consolidated financial statements of the Group are:
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (1
January 2014); and
IAS 32 Financial Instruments: Presentation (amendments on disclosures
relating to offsetting of assets and liabilities) (1 January 2014).
The Group does not plan to adopt these standards early.
3. Income
Year ended Year ended
31 December 2013 31 December 2012
US$ US$
Income from financial assets at fair value through
profit or loss:
Dividend income 15,714,052 12,143,857
Income from financial assets not at fair value through
profit or loss:
Interest income from cash and cash equivalents 1,615 1,507
15,715,667 12,145,364
4. Net (losses)/gains on equity investments designated
at fair value through profit or loss upon initial
recognition
Year ended Year ended
31 December 2013 31 December 2012
US$ US$
Net realised gains on equity investments designated
at fair value through profit or loss upon initial
recognition 16,907,242 24,245,964
Net unrealised (losses)/gains on equity investments
designated at fair value through profit or loss upon
initial recognition (45,497,645) 7,911,583
(28,590,403) 32,157,547
5. Investments in securities designated at fair value
through profit or loss upon initial recognition
The following is the Group's policy with respect to determining the fair
value of investments:
At the reporting date, the fair value of exchange traded financial
instruments is based on quoted market prices traded in active markets,
without any deduction for estimated future selling costs. An active
market exists if quoted prices are regularly and readily available from
an exchange, dealer, broker, industry group, pricing service or
regulatory agency and those prices represent active and regularly
occurring market transactions on an arm's length basis. For financial
instruments that are exchange traded and where the exchange has been
determined to be the appropriate active market for these instruments,
the quoted market price is based on the price obtainable from either the
Moscow Exchange (MICEX-RTS), the Ukrainian Stock Exchange (PFTS), the
Kazakhstan Stock Exchange (KASE) or other major international stock
exchanges. These securities fall into Level 1 of the fair value
hierarchy as defined by IFRS 13 (see Note 6).
At the reporting date, the fair value of (a) non-exchange traded
financial instruments and of (b) exchange traded financial instruments
where the exchange is not considered by the Directors to be an
appropriate active market for these instruments, are estimated by the
Manager using market information. The Sub-Administrator receives
confirmation of almost all of these prices from independent brokers.
Where there is only independent confirmation of those prices from the
independent broker, but it can be verified that the valuation is based
on techniques using observable inputs, the investments fall into Level 2
of the fair value hierarchy as defined by IFRS 13 (see Note 6). If it
cannot be verified that the valuation technique used is based
significantly on observable inputs, then the investments fall into Level
3 of the fair value hierarchy as defined by IFRS 13 (see Note 6).
Where independent broker confirmations are not available for
non-exchange traded financial instruments, the Manager estimates the
fair value of such financial instruments using common valuation
techniques. Where these valuations incorporate significant unobservable
market information, these securities fall into Level 3 of the fair value
hierarchy as defined by IFRS 13 (see Note 6).
The values of assets or liabilities in currencies other than United
States dollars are converted into United States dollars at the
prevailing market rate for such currencies at the close of business in
the local market as at the last available trading date in the period.
The Group invests in countries with limited and developing capital
markets. Investing in Russian and FSU securities involve risks not
normally associated with investing in more developed markets with
politically and economically stable jurisdictions. These risks, which
have been considered in estimating fair values, include political,
economic and legal uncertainties, delays in settling portfolio
transactions and the risk of loss due to Russia's and the FSU's
underdeveloped systems for share registration and transfer. The limited
size of the Russian and the FSU markets for securities also potentially
results in a lack of liquidity. As a result, the Group may be unable to
liquidate its positions easily and may not receive proceeds
approximating estimated fair values.
The Group has certain investments in relatively illiquid securities and
currencies for which there is no guarantee of a return on the investment
and no guarantee that a return or repatriation of any invested amounts
in a convertible currency will be possible. These investments may
involve greater risks than investments in more developed markets and the
prices of such investments may be volatile due to the perceived credit
risk. The consequences of political, social or economic changes in these
markets may also have disruptive effects on the market prices of the
Group's investments and the income they generate.
The Russian Federation has historically experienced political and
economic instability, which has affected and may continue to affect the
activities of enterprises operating in this environment. Consequently,
operations in the Russian Federation involve risks which do not
typically exist in other markets. These consolidated financial
statements reflect the Board's assessment of the impact of the Russian
business environment on the investments held by the Group. The future
business environment may differ from the Manager's current assessment.
The impact of such differences on the investments held by the Group may
be significant.
The immediate effects of such risks could include declines in economic
growth, a reduction in the availability of credit and borrowers' ability
to service debt, an increase in interest rates, changes and increases in
taxes, an increased rate of inflation, devaluation of the Russian Ruble,
restrictions on convertibility of the Russian Ruble and movements of
hard currency, an increase in the number of bankruptcies of entities
(including bank failures), labour unrest and strikes resulting from the
possible increase in unemployment and political turmoil. These and other
potentially significant, economic and political conditions and future
policy changes could have a material adverse effect on the operations of
the Group and the realisation and settlement of its assets and
liabilities.
6. Fair value information
Financial assets and financial liabilities are measured in the
consolidated statement of financial position at fair value. The fair
value measurements are categorised within the three-level hierarchy that
reflects the significance of inputs used in measuring the fair values.
The fair value hierarchy is as follows:
Level 1: quoted prices (unadjusted) in active markets for identical
assets or liabilities.
Level 2: inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly (i.e. as prices)
or indirectly (i.e. derived from prices). This category includes
instruments using: quoted market prices in active markets for similar
instruments; quoted prices for identical or similar instruments in
markets that are considered less than active; or other valuation
techniques in which all significant inputs are directly or indirectly
observable from market data.
Level 3: inputs that are unobservable. This category includes all
instruments for which the valuation technique includes inputs not based
on observable data and the unobservable inputs have a significant effect
on the instrument's valuation. It also includes instruments that are
valued based on quoted prices for similar instruments but for which
significant unobservable adjustments or assumptions are required to
reflect differences between the instruments.
The objective of valuation techniques is to arrive at a fair value
measurement that reflects the price that would be received to sell the
asset or paid to transfer the liability in an orderly transaction
between market participants at the measurement date, in the principal,
or in its absence, the most advantageous market to which the Group has
access at that date.
The Group recognises transfers between levels of the fair value
hierarchy as at the end of the reporting period during which the change
occurred.
(a) Fair value hierarchy analysis
The table below provides an analysis of the fair value measurement used
by the Group to fair value its financial instruments in its consolidated
statement of financial position categorised by the fair value hierarchy
as detailed above.
Financial assets designated at fair value through Level 1 Level 2 Level 3 Total
profit or loss upon initial recognition US$ US$ US$ US$
Equity investments:
At 31 December 2013 164,106,763 13,904,459 - 178,011,222
At 31 December 2012 274,258,164 25,215,053 436 299,473,653
The level in the fair value hierarchy within which the fair value
measurement is categorised in its entirety is determined based on the
lowest level input that is significant to the fair value measurement in
its entirety.
In the year ended 31 December 2013, the Manager employs a pricing
strategy which uses the last exchange traded price in an active market
when the last traded price is within the closing exchange bid-ask
spread. If the last traded price is not within the bid-ask spread then
the mid price is used.
In the year ended 31 December 2012, the Manager employed a bid pricing
strategy which used the exchange bid price when the bid-ask spread was
less than 10%. When the bid ask spread was greater than 10% the Manager
calculated the bid price using a formula of the mean of the bid and the
ask price less 2.5%. When a calculated bid price was used in the
financial statements the affected investments were classed as level 2.
(b) Transfers between levels of the fair value hierarchy
(i) Level 1 and Level 2 transfers during the year
ended 31 December 2013
Two securities that were previously valued using quoted market prices in
an active market (Level 1 inputs) on 31 December 2012, were valued based
on other observable market inputs (Level 2 inputs) on 31 December 2013,
as the securities had not been actively traded on the financial
reporting date.
There were no other securities classed as either level 2 at 31 December
2013 and 31 December 2012 or as level 1 at 31 December 2013 and 31
December 2012 that changed level during the year.
(ii) Level 1 and Level 2 transfers during the year
ended 31 December 2012
Three securities that were previously valued using quoted market prices
in an active market (Level 1 inputs) on 31 December 2011, were valued
based on other observable market inputs (Level 2 inputs) on 31 December
2012, as the securities had not been actively traded on the financial
reporting date.
Two securities that were previously valued using other observable market
inputs (Level 2 inputs) on 31 December 2011, as the securities had not
been actively traded, were valued based on quoted market prices in an
active market (Level 1 inputs) on 31 December 2012.
There were no other securities classed as either level 2 at 31 December
2012 and 31 December 2011 or as level 1 at 31 December 2012 and 31
December 2011 that changed level during the year.
The following table shows the total significant transfers during the
year ended 31 December 2013 and 31 December 2012 between Level 1 and
Level 2 of the fair value hierarchy for financial assets recognised at
fair value:
Financial assets designated at fair value through Transfers from Level 1 to Level 2 Transfers from Level 2 to Level 1
profit or loss upon initial recognition US$ US$
Equity investments:
Year ended 31 December 2013 1,512,737 -
Year ended 31 December 2012 9,155,416 637,769
(c) Level 3 reconciliation
Year ended Year ended
31 December 2013 31 December 2012
US$ US$
Financial assets designated at fair value through
profit or loss upon initial recognition
Opening balance 436 70,980
Total net losses on equity investments designated
at fair value through profit or loss upon initial
recognition in the consolidated statement of comprehensive
income (436) (148,147)
Sales - (38,463)
Transfers from Level 2 to Level 3* - 107,649
Transfers from Level 1 to Level 3** - 8,417
Closing balance - 436
* The transfer from Level 2 to Level 3 relates to Yuzhtruboprovodtroy
which was delisted in 2012.
** The transfer from Level 1 to Level 3 relates to One Media Holding AB
which was delisted in 2012.
The net unrealised loss attributable to the Level 3 securities held as
at 31 December 2013 amounted to US$436 (31 December 2012: net unrealised
loss US$115,630), which is included in the net (losses)/gains on equity
investments designated at fair value through profit or loss upon initial
recognition in the consolidated statement of comprehensive income.
As at 31 December 2013 and 31 December 2012 the value of the Level 3
securities was estimated using the latest OTC market data and
information known to the Manager. The value was also confirmed as
reasonable by two independent brokers, unless the security was in
bankruptcy proceedings, where the value was deemed to be nil.
(d) Effect of change in significant assumptions of
Level 3 financial instruments
In relation to the Level 3 holdings at 31 December 2013 and at 31
December 2012, the Manager is of the opinion that a change in valuation
assumptions would not result in a significant corresponding change in
the estimated fair value of Level 3 financial instruments.
(e) Financial instruments not measured at fair value
The financial instruments not measured at fair value through profit or
loss are short-term financial assets and financial liabilities whose
carrying amounts approximate fair value. All financial assets and
liabilities not measured at fair value have been analysed as Level 2 in
the fair value hierarchy.
7. Cash and cash equivalents
As at 31 December 2013, cash balances were held by HSBC Bank (Cayman)
Limited, ING Bank (Eurasia) ZAO, Bank of Cyprus and State Street
Custodial Services (Ireland) Limited.
Year ended Year ended
31 December 2013 31 December 2012
US$ US$
State
Street
Custodial
Services
(Ireland)
Limited 44,619,635 1,504,315
HSBC Bank
(Cayman)
Limited 8,667 9,250
ING Bank
(Eurasia)
ZAO 2,490 10,154
Bank of
Cyprus* 744 -
Cyprus
Popular
Bank
Public
Company
Limited* - 24,625
44,631,536 1,548,344
* On 25 March 2013, Cypriot authorities made the decision to place the
Cyprus Popular Bank Public Company Limited under administration.
Subsequently, the cash balance at Cyprus Popular Bank was transferred to
the Bank of Cyprus.
The credit ratings of the parent companies of the Custodians, as rated
by Standard & Poor's, and of Cyprus Popular Bank Public Company Limited
and Bank of Cyprus, as rated by Moody's, as at 31 December 2013 and 31
December 2012 were as follows:
31 December 2013 31 December 2012
Credit rating Credit ratings
State AA- AA-
Street
Custodial
Services
(Ireland)
Limited
HSBC Bank A+ A+
(Cayman)
Limited
ING Bank A A+
(Eurasia)
ZAO
Bank of Ca Caa1
Cyprus
Cyprus Not rated Caa1
Popular
Bank
Public
Company
Limited*
Deutsche A A+
Bank
Limited
* On 30 July 2013, Moody's withdrew their rating of Cyprus Popular Bank
Public Company Limited. As of 31 December 2013 there are no cash
balances held at this bank.
8. Cash due from Custodians
As at 31 December 2013 and 31 December 2012, the Group had the following
cash balances outstanding with its Custodians:
Year ended Year ended
31 December 2013 31 December 2012
US$ US$
ING Bank
(Eurasia)
ZAO - 865,573
State
Street
Custodial
Services
(Ireland)
Limited 8 2,409
8 867,982
9. Share capital
Capital management
The Company has issued one class of ordinary shares to date, which was
converted to redeemable ordinary shares on 21 June 2013. The Company's
capital managed as at the period end is represented by the value of the
shares issued to date.
Up to 21 June 2013
The investment objective of the Company was to achieve capital growth by
investing in a portfolio of securities involved in the corporate
restructurings and consolidations which were expected to take place in
Russia and other FSU countries. It was therefore anticipated that all
income and capital gains derived from the Company's investment programme
would continue to be re-invested. However, income and capital gains
would be distributed to shareholders, if the Directors deemed it
appropriate. The Company would invest primarily in small and
medium-sized companies, with the aim of being an active and influential
minority shareholder.
The Company had the ability to make market purchases of its shares of up
to 14.99% of the ordinary shares in issue at any time, if the ordinary
shares traded at a discount to the net asset value per ordinary share of
greater than 10% for 20 consecutive business days. Any such market
purchases affected pursuant to such authority would have been made by
the Company at the absolute discretion of the Directors.
In addition, any shareholder who held, as at the time of subscription or
at any time thereafter, more than 7.5% of the outstanding ordinary
shares may have requested that the Company repurchase all or part of its
ordinary shares at the expense of such shareholder at the end of that
calendar quarter. At the discretion of the Directors, the Company may
have paid the shareholder the proceeds of such repurchase by
transferring a pro rata portion of the securities in the Group's
portfolio. Any such distributions would be effected so as to avoid any
material prejudice to the interest of the remaining shareholders.
Prospective investors should have noted that the exercise of the
Company's power to repurchase ordinary shares was entirely discretionary
and they should have placed no expectation or reliance on the Directors
exercising such discretion on any one or more occasions.
From 21 June 2013
The investment objective of the Company was amended at the EGM on 21
June 2013 to realise the portfolio of investments in an orderly and
expedient manner, that is, with a view to achieving a balance between:
returning cash to shareholders at such times and from time to time and
in such manner as the Board may (in its absolute discretion) determine;
and
maximising the realisation value of the Company's investments.
The net cash proceeds from disposals of investments will be applied at
the Board's discretion to make cash distributions to shareholders. The
Board will also take into consideration the Company's working capital
requirements and the requirements of Guernsey law (see page 9 for
further information).
Per the amendments to the Company's Articles of Association made at the
2013 EGM, the Directors, in their absolute discretion, have the power to
compulsorily redeem all or part of the issued share capital, on a
pro-rata basis across all shareholders, at the redemption price defined
in the Articles on the relevant redemption date.
The Company is not subject to any externally imposed capital
requirements.
Authorised share capital
Year ended
Number of 31 December 2013
ordinary redeemable shares US$
Ordinary
redeemable
shares of
par value
US$0.01
each 300,000,000 3,000,000
Issued and fully paid
Year ended
31 December 2013
Number of ordinary redeemable shares Number of ordinary shares US$
Balance at
beginning of
year - 242,650,000 2,426,500
Conversion to
ordinary
redeemable
shares 242,650,000 (242,650,000) -
Cancellation
of ordinary
redeemable
Treasury
shares (18,198,730) - (181,987)
Compulsory
redemption
of ordinary
redeemable
shares (46,551,167) - (465,512)
Balance at
end of year 177,900,103 - 1,779,001
Shares held in Treasury
Year ended
31 December 2013
Number of ordinary redeemable shares Number of ordinary shares US$
Balance at
beginning of
year - 18,198,730 181,987
Conversion to
ordinary
redeemable
Treasury
shares 18,198,730 (18,198,730) -
Cancellation
of ordinary
redeemable
Treasury
shares (18,198,730) - (181,987)
Balance at - - -
end of year
Authorised share capital
Year ended
Number of 31 December 2012
ordinary shares US$
Ordinary
shares
of par
value
US$0.01
each 300,000,000 3,000,000
Issued and fully paid
Year ended
Number of 31 December 2012
ordinary shares US$
Balance at the beginning of the year, being balance
at end of year 242,650,000 2,426,500
Shares held in Treasury
Year ended
Number of 31 December 2012
ordinary shares US$
Balance at
the
beginning
of the
year - -
Purchase
of own
shares
into
Treasury
in the
year 18,198,730 181,987
Balance at
the end
of the
year 18,198,730 181,987
The authorised share capital of the Company on incorporation was
US$25,000, divided into 2,500,000 ordinary shares of US$0.01 each. By
special resolution dated 25 September 2006, the authorised share capital
of the Company was increased to US$3,000,000, divided into 300,000,000
ordinary shares of US$0.01 each. These were converted to ordinary
redeemable shares by special resolution on 21 June 2013.
The holders of ordinary redeemable shares have the right to receive, in
proportion to their holdings, all the profits of the Company
attributable to the ordinary redeemable shares as a class available for
distribution and determined to be distributed by way of interim or final
dividend at such times as the Directors may, at their absolute
discretion, determine.
On a winding-up of the Company, after paying all the debts attributable
to, and satisfying all the liabilities of the Company, shareholders
shall be entitled to receive, by way of capital, any surplus assets of
the Company attributable to the shares as a class in proportion to their
holdings.
On 5 March 2010, the Company repurchased 7,350,000 ordinary shares in
the Company at a price of US$0.86 per share, amounting to US$6,321,000,
for cancellation. This repurchase of its own shares is in accordance
with the authority granted by shareholders. Following the cancellation
of the shares repurchased, 242,650,000 ordinary shares in the Company
remained in issue.
Further to the announcement made by the Company on 3 June 2011 regarding
the passing of the resolution at the AGM to give effect to the tender
offer for shares in the Company, on 27 June 2011, the Board announced
that the net asset value as at the calculation date was US$1.555 per
share. Accordingly, the tender price, which was calculated in accordance
with the circular to shareholders dated 9 May 2011, was US$1.512 per
share.
Upon review of the terms of the tender offer an institutional investor
with Cenkos Securities plc acting as its agent sought to purchase the
shares which the Company had offered to repurchase from its
shareholders. 24,264,985 shares were purchased by Cenkos Securities plc
on the institutional investors' behalf at the tender offer price of
US$1.512, the proposed repurchase price per the tender offer. As a
result, the Board determined that the proposed repurchase and
cancellation of tendered shares under the tender offer would not
proceed. Following completion of the sale of shares to Cenkos Securities
plc, the Company's issued share capital remained unchanged.
On 3 June 2011, the shareholders approved the proposal to implement
another tender offer by no later than 2 December 2012 for up to 7.5% of
the shares in issue excluding any treasury shares, on the same terms as
the tender offer implemented during 2011.
The Tender Offer was announced by the Company to the shareholders on 2
August 2012 and on 12 October 2012 the Company repurchased 18,198,730
ordinary shares in the Company at a price of US$1.295 per share
amounting to $23,567,355. This repurchase of its own shares was in
accordance with the authority granted by shareholders. The Treasury
shares were cancelled on 9 July 2013 in light of the adoption of the new
investment objective and policy as discussed in Note 15.
On 13 September 2013, further to the powers granted to the Board at the
21 June 2013 EGM, a compulsory partial redemption of 46,551,167 ordinary
redeemable shares (20.7% of issued ordinary redeemable shares) was
announced, with a redemption date of 23 September 2013 for $53,999,354.
Restrictions on transfer of shares
Subject to the restrictions noted below as may be applicable, any
shareholder may transfer all or any of his/her shares in any form which
the Directors may accept. Any written instrument of transfer of a share
must be signed by, or on behalf of, the transferor and, in the case of a
partly paid share, the transferee and the transferor will be deemed to
remain the holder of such share until the name of the transferee is
entered in the register.
The Directors may, at their absolute discretion and without assigning
any reasons, refuse to register a transfer of any share in certificated
form which is not fully paid or on which the Company has a lien,
provided that such restriction will only be exercised if this would not
prevent dealings in the shares from taking place on an open and proper
basis.
The Directors may only decline to register a transfer of a share in
uncertificated form in the circumstances set out in the CREST*
regulations or where there are four or more joint holders.
The Directors may also refuse to register any transfer of a share:
unless it is in respect of only one class of shares;
unless it is in favour of a single transferee or not more than four
joint transferees;
unless it is delivered for registration to the office, or such other
place as the Directors may decide, accompanied by the certificate for
the shares to which it relates and such other evidence as the Directors
may reasonably require to prove title of the transferor and the due
execution by him of the transfer or, if the transfer is executed by some
other person on his behalf, the authority of that person to do so; and
where such transfer may give rise to or constitute (at the absolute
discretion of the Directors) a legal, regulatory, fiscal, tax or
pecuniary disadvantage to the Company, provided, in the case of a listed
share, that this would not prevent dealings in the share from taking
place on an open and proper basis and would not be in contravention of
any of the requirements or the rules of any recognised investment
exchange (including but not limited to AIM) to which the Company may be
subject from time to time.
If the Directors refuse to register a transfer they must, within two
months of the date on which the instrument of transfer was lodged with
the Company, send notice of the refusal to the transferee.
Subject to the Companies (Guernsey) Law, 2008, registration of transfers
may be suspended and the register of members closed by the Directors at
their discretion, provided that the register of members shall not be
closed for more than 30 days in any year.
* CREST is the computerised settlement system to facilitate the transfer
of title of shares in uncertificated form.
Other Reserves
During the year ended 31 December 2006, the Company passed a special
resolution cancelling the amount standing to the credit of its Share
Premium account. In accordance with the Companies Law, the Directors
applied to the Royal Court in Guernsey for an order confirming such
cancellation of the Share Premium account. The Other Reserve created on
cancellation is available as distributable profits to be used for all
purposes permitted by the Companies Law, including the buy back of
ordinary shares and the payment of dividends.
Earnings per share
The calculation of basic earnings as at 31 December 2013 was based on
the loss attributable to ordinary shareholders for the year of
US$21,251,143 (31 December 2012: income of US$36,365,797) and the
weighted average number of ordinary redeemable shares outstanding during
the year of 211,825,063 shares (31 December 2012: 238,450,293 ordinary
shares). The Group does not have any instruments issued with dilutive
effect on the basic earnings per share.
10. Share Premium
Year ended Year ended
31 December 2013 31 December 2012
US$ US$
Balance at
beginning
of year 92,848,494 116,233,862
Redemption
of ordinary
redeemable
shares (53,533,842) -
Share
Premium
paid on
repurchase
of shares - (23,385,368)
Balance at
end of
year 39,314,652 92,848,494
The ordinary redeemable shares of the Company have a par value of
US$0.01 each. Share Premium represents the excess of the issue and
repurchase price of the ordinary shares issued and repurchased over this
par value.
11. Operating expenses and material agreements
Year ended Year ended
31 December 2013 31 December 2012
US$ US$
Expenses
Management fees 5,285,170 6,128,986
Sub-administration
fees 225,976 295,163
Directors' fees 220,602 272,781
Legal fees 216,141 82,279
Consultancy fees 192,525 -
Transaction fees 143,893 -
Russian Custodians'
fees 122,694 134,735
Other expenses 107,423 122,834
Statutory audit
fees 105,646 86,766
Company secretarial
service fees 77,833 46,978
Directors' business
expenses 49,331 40,309
Nominated Advisers'
fees 48,732 42,524
Tender offer
expenses 45,399 146,173
Administrator's
fees 42,000 36,000
Tax advisory
service fees 15,176 12,929
Global Custodian's
fees 9,142 11,016
Total operating
expenses 6,907,683 7,459,473
Manager
The Group is party to a Management Agreement with Prosperity Capital
Management Limited, dated 4 October 2006, pursuant to which the Manager
provides investment management services to the Group.
The Group pays the Manager a management fee and a performance fee.
Management fees
The Group has agreed to pay the Manager a management fee, which is equal
to 2% per annum of the net asset value, payable quarterly in arrears.
The management fees charged for the year ended 31 December 2013 amounted
to US$5,285,170 (31 December 2012: US$6,128,986). At 31 December 2013,
US$1,099,882 (31 December 2012: US$1,465,093) were payable.
Manager (continued)
Performance fees
The Group has agreed to pay the Manager a performance fee, payable
annually and calculated on a share by share basis, of 20% of the
cumulative return since issuance, in excess of the return provided by
the RTS index over the same period, subject to a high water mark.
At 31 December 2013 and 31 December 2012, the cumulative return of the
Company's shares did not exceed the cumulative return of the Company's
shares as at 31 December 2010 (the high water mark set the last time
performance fees became payable) and therefore no performance fee was
accrued.
Administrator's, Sub-Administrator's and Secretary's fees
The Group is party to an Administration Agreement with Kleinwort Benson
(Channel Islands) Fund Services Limited dated 4 October 2006, pursuant
to which the Administrator has agreed to provide administrative and
company secretarial services to the Group. The Administrator and
Sub-Administrator will receive a fee of 0.0125% and 0.080% of the net
asset value of the Group per annum respectively from the Group for its
services. The Sub-Administrator changed on 1 September 2012 from State
Street Fund Services (Ireland) Limited to Maples Fund Services (Cayman)
Limited, the new fees are paid quarterly and based on the following
sliding scale:
0.08% of the first US$250 million of net assets;
0.07% of the next US$250 million of net assets; and
0.06% of net assets in excess of US$500 million.
The new Sub-Administrator is entitled to receive a minimum monthly fee
of US$5,000. The Administrator is responsible for the fees of the
Sub-Administrator. The Group will reimburse the Administrator and the
Sub-Administrator for all reasonable out-of-pocket expenses incurred by
the Administrator and the Sub-Administrator solely in connection with
the performance of its services.
The Administrator's charged for the year ended 31 December 2013 amounted
to US$42,000 (31 December 2012: US$36,000). At 31 December 2013,
US$3,500 were payable to the Administrator (31 December 2012: US$nil).
The Sub-Administrator's fees charged for the year ended 31 December 2013
amounted to US$225,976 (31 December 2012: US$295,163). At 31 December
2013, US$43,995 were payable to the Sub-Administrator (31 December 2012:
US$58,293).
The Secretary's fees charged for the year ended 31 December 2013
amounted to US$77,833 (31 December 2012: US$46,978). At 31 December
2013, US$18,123 were payable to the Secretary (31 December 2012:
US$9,098).
Custodians' fees
Global Custodian
The Company has appointed State Street Custodial Services (Ireland)
Limited as the Global Custodian. The Global Custodian will act as
custodian of the US Dollar and non-Russian securities of the Group and
will provide the Group with execution and settlement services. The Group
will pay the Global Custodian an annual fee of 0.015% of assets held in
custody, payable monthly in arrears. The Company will also reimburse the
Global Custodian's reasonable out-of-pocket expenses.
The Global Custodian fees charged for the year ended 31 December 2013
amounted to US$9,142 (31 December 2012: US$11,016). At 31 December 2013,
US$830 (31 December 2012: US$3,574) were payable.
Custodians' fees (continued)
Russian Custodian
The Group was party to a custody agreement between the Cyprus
Subsidiaries and ING Bank (Eurasia) ZAO (the "Russian Custodian") dated
4 October 2006, pursuant to which the Russian Custodian acted as
custodian of the assets of the Cyprus Subsidiaries. In addition to
individual transaction fees, which were paid by the Group at normal
commercial rates, the Russian Custodian received a portfolio maintenance
fee from the Group, paid monthly in arrears. This fee, of a varying
range of up to 0.080% of the value of the securities held per annum
depending on the securities country of incorporation, was applied to
equities, international securities and exchange-traded securities held
by the Cyprus Subsidiaries. The Group also covered the Custodian's
out-of-pocket expenses reasonably and properly incurred in respect to
the services provided to the Group.
On 20 December 2013 the Cyprus Subsidiaries changed the Russian
Custodian to Deutsche Bank Limited. In addition to individual
transaction fees, which are paid by the Group at normal commercial rates,
the Russian Custodian receives a portfolio maintenance fee from the
Group, payable monthly in arrears, of 0.0225% per annum of the value of
the equities held by the Cyprus Subsidiaries, with a minimum flat fee of
$200 per month.
The Russian Custodian's fees charged for the year ended 31 December 2013
amounted to US$122,694 (31 December 2012: US$134,735). At 31 December
2013, US$4,292 (31 December 2012: US$16,518) were payable.
Directors' fees and business expenses
During the year ended 31 December 2013, the Directors charged fees of
US$220,602 (GBP142,791) (31 December 2012: US$272,781 (GBP177,500)) and
business expenses of US$49,331 (31 December 2012: US$40,309). At 31
December 2013 Director fees of US$44,518 (31 December 2012: US$57,497)
were payable. At 31 December 2013 Directors' business expenses of
US$13,897 (31 December 2012: US$nil) were payable.
Auditor's remuneration
Statutory audit fees
The statutory audit fees charged for the year ended 31 December 2013
amounted to US$105,646 (31 December 2012: US$86,766). At 31 December
2013, US$46,969 (31 December 2012: US$82,743) were payable.
Tax advisory service fees
The tax advisory service fee charged for the year ended 31 December 2013
amounted to US$15,176 (31 December 2012: US$12,929). At 31 December
2013, US$13,072 (31 December 2012: US$12,929) was payable.
Other non-audit service fees for the year ended 31 December 2013
amounted to US$nil (31 December 2012: US$nil). No other non-audit
service fees were payable at 31 December 2013 or 31 December 2012.
Nominated Advisors fees
During the year Nominated Advisor fees charged by Cenkos Securities plc
amounted to US$48,732 (31 December 2012: US$42,524). Nominated Advisor
fees payable as at 31 December 2013 were US$21,340 (31 December 2012:
US$31,717).
12. Taxation
Guernsey taxation
The Company has applied for and been granted exempt status for Guernsey
income tax purposes under the Income Tax (Exempt Bodies) (Bailiwick of
Guernsey) Ordinance 1989. Under the provision of the Ordinance, the
Company will pay an annual fee to States of Guernsey Income Tax, which
is currently fixed at GBP600 (31 December 2012: GBP600), but will not be
liable to Guernsey income tax, other than on Guernsey source income
(excluding, by concession, Guernsey bank deposit interest).
Cyprus taxation
Effective from 1 January 2009, Cypriot companies are not subject to
corporation tax in Cyprus on dividends received from a Russian company.
No withholding tax will be due on the payment of dividends by a Cypriot
company to a company in Guernsey, under a domestic law exemption which
is available when the owner of the Cyprus entity is a corporation
residing outside Cyprus.
The Group makes the majority of its investments through the Cyprus
Subsidiaries. Management and control of the Cyprus Subsidiaries is in
Cyprus and they are treated as resident in Cyprus for tax purposes. As a
result, investments in securities are subject to reduced withholding
taxes in Russia on dividend income received in Cyprus. Under the
Russia/Cyprus Double Taxation Treaty, the rate of Russian withholding
tax on dividends may be reduced to 5% (10% if the amount of investment
in the Russian company is less than US$100,000).
Russian taxation
Taxation of dividends
Currently, dividends distributable by a Russian company to a foreign
investor who does not have a permanent establishment in Russia are
generally subject to withholding tax on Russian source income at 15%,
unless a reduced rate of taxation is provided by a double taxation
treaty ("DTT").
Pursuant to the effective Russia/Cyprus DTT, Russian withholding tax on
income at a rate of 5% applies to dividends paid by Russian companies to
the Cyprus Subsidiaries when the latter has invested at least US$100,000
in the Russian company. A 10% withholding rate applies if this condition
is not met. The reduced tax rates can only be applied in accordance with
the Russia/Cyprus DTT, if the Cyprus Subsidiaries do not have a
permanent establishment in Russia.
Taxation of capital gains
Under the Russia/Cyprus DTT, income from the sale of shares of a Russian
company is not taxed in Russia, as the Cyprus Subsidiaries are not
considered to have a permanent establishment in Russia. Capital gains
accruing from a disposal of property (including shares) are only taxable
in Cyprus where the value of such gains are derived directly or
indirectly from immovable property in Cyprus.
The Directors believe that the Cyprus Subsidiaries conduct their affairs
in such a way that they will not be deemed to have a permanent
establishment in Russia. Should the Russian authorities regard the
Cyprus Subsidiaries as having a permanent establishment in Russia to
which the investments in Russian companies are attributed, and over 50%
of the Cyprus Subsidiaries' assets consist of immovable property located
in Russia, capital gains from the disposal of shares in such Russian
investments would be subject to profits taxed at a rate of 20% on gross
income or 24% on the difference between sales proceeds and cost.
13. Financial risk management
Strategy in using financial instruments
The Group's activities, as dictated by its investment management
strategy, expose it to a variety of financial risks. Asset allocation is
determined by the Group's Manager who has been given discretionary
authority to manage the distribution of the assets to achieve the
Group's investment objectives. The Group's and the Manager's overall
risk management programme focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the Group's
financial performance.
The nature and extent of the risks arising on the financial instruments
outstanding at the consolidated statement of financial position date and
the respective risk management policies employed by the Group are
discussed below. There have been no significant changes to the
respective identified risk exposures of the Group and the risk
management policies and methodologies adopted by the Group during the
year.
Market price risk
Market price risk embodies the potential for both losses and gains and
includes currency risk, interest rate risk and price risk.
Market price risk arises mainly from uncertainty about future prices of
the financial instruments held. It represents the potential loss the
Group might suffer through holding market positions that fluctuate in
market value. The Manager considers the diversification of the portfolio
in order to minimise the risk associated with particular countries or
industry sectors while continuing to pursue the Group's investment
objective.
The investments of the Group are subject to market fluctuations and the
risk inherent in investing in financial instruments and there can be no
assurance that the investments will appreciate in value. All securities
investments present a risk of loss of capital. The Manager aims to
moderate this risk through the selection of securities with an
appropriate risk/reward profile. The maximum risk resulting from
financial instruments is determined by the fair value of the financial
instruments.
The Group's equity investments are susceptible to market price risk
arising from uncertainties about future prices of the investments. At 31
December 2013, the Group's market price risk is affected by two main
components: changes in actual market prices and foreign currency
movements. An analysis of securities by industry and details of
concentration of investments, where the Group invested in certain
companies which had estimated fair market values that were individually
in excess of 5% of net assets, is shown in the consolidated supplemental
schedule of investments B (see page 28) and forms part of the notes to
the audited consolidated financial statements. Foreign currency
movements are covered in the notes below.
(a) Foreign currency risk
Currency risk is the risk that the fair value or future cash flows of
financial instruments will fluctuate because of changes in foreign
exchange rates. All investments in securities are valued in United
States dollars. However the companies in which the Group invests are
almost all Russian companies which have their primary area of business
within Russia. The values of such companies will be affected by many
factors including, inter alia, the general Russian business environment
and the value of the Russian currency, the Russian Ruble, as expressed
against other currencies, particularly the United States dollar. The
degree to which a change in the exchange rate between the Russian Ruble
and the United States dollar affects the value of an investment in a
foreign company varies depending on how the market values the underlying
assets of that company. The Group also incurs foreign currency risk on
cash, dividends receivable, other receivables and payable balances that
are denominated in currencies other than United States dollars
(predominately Russian Ruble).
At 31 December 2013, the Group's exposure to foreign currency, based on
the carrying value of the monetary assets and liabilities, was as
follows:
As at 31 Net
December *Investments at fair value Cash and cash equivalents **Other net assets and (liabilities) exposure
2013 US$ US$ US$ US$
Currency
profile
Euro - 744 (22,969) (22,225)
British
Pound - - (67,848) (67,848)
Kazakhstan
Tenge 8,752,704 2,469 - 8,755,173
Russian
Ruble 161,871,747 21 - 161,871,768
Ukraine
Hryvna 7,386,771 - - 7,386,771
178,011,222 3,234 (90,817) 177,923,639
At 31 December 2012, the Group's exposure to foreign currency, based on
the carrying value of monetary assets and liabilities, was as follows:
As at 31 Net
December *Investments at fair value Cash and cash equivalents **Other net assets and (liabilities) exposure
2012 US$ US$ US$ US$
Currency
profile
Euro - 24,369 (1,470) 22,899
British
Pound - 1,500 (2,967) (1,467)
Kazakhstan
Tenge 18,104,799 - - 18,104,799
Russian
Ruble 266,220,486 (1,202) 254,044 266,473,328
Swedish
Krona - - 66,770 66,770
Ukraine
Hryvna 15,148,368 - - 15,148,368
299,473,653 24,667 316,377 299,814,697
* These investments were settled in United States dollars by the Group.
However the underlying exposure is to the local currency.
** Other net assets and (liabilities) excludes amounts due to
shareholders.
Sensitivity analysis
At 31 December 2013, had the exchange rate between the United States
dollar and other currencies increased or decreased by 20% (31 December
2012: 5%) with all other variables held constant, the increase or
decrease respectively in the value of the Group's investments
denominated in currencies other than United States dollars and the
changes in net assets attributable to holders of ordinary redeemable
shares from operations would have amounted to a maximum US$35,602,244
(31 December 2012: US$14,973,683).
At 31 December 2013, had the exchange rate between the United States
dollar and other currencies increased or decreased by 20% (31 December
2012: 5%) with all other variables held constant, the increase or
decrease respectively in cash and cash equivalents and other net assets
and liabilities (excluding investments) denominated in currencies other
than United States dollars and the changes in net assets attributable to
holders of ordinary redeemable shares from operations would have
amounted to US$17,517 (31 December 2012: US$17,053).
(b) Price risk
Price risk is the risk that the value of the investments will fluctuate
as a result of changes in market prices (other than those arising from
interest rate risk or currency risk), whether caused by factors specific
to an individual investment, its issuer or all factors affecting all
instruments traded in the market.
As the majority of the Group's financial instruments are carried at fair
value with fair value changes recognised through profit or loss in the
consolidated statement of comprehensive income, all changes in the
market conditions will directly affect net investment income.
The Consolidated Supplemental Schedule of Investments B on page 28
provides a summary of the significant sector concentrations within the
equity portfolio.
Price risk is managed by the Group's Manager by constructing a
diversified portfolio of instruments traded on various markets.
Sensitivity analysis
At 31 December 2013, 100.00% (31 December 2012: 100.00%) of the value of
the Group's equity investments are represented by securities that are
listed on MICEX-RTS and other major international stock exchanges. At 31
December 2013 a 20% (31 December 2012: 10%) increase in stock prices
would have increased the net assets attributable to holders of ordinary
redeemable shares and the changes in net assets attributable to holders
of ordinary redeemable shares by US$35,602,244 (31 December 2012:
US$29,947,365). An equal change in the opposite direction would have
decreased the net assets attributable to holders of ordinary redeemable
shares by an equal, but opposite amount.
(c) Interest rate risk
The majority of the Group's financial assets and liabilities are
non-interest bearing. As a result, the Group is not subject to
significant amounts of risk due to fluctuations in the prevailing levels
of market interest rates. Any excess cash is invested at short-term
market interest rates. The Group is subject to interest rate risk only
on cash and cash equivalents of US$44,631,536 (31 December 2012:
US$1,548,344).
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in
raising funds to meet commitments. Due to the Manager's prominence in
the Russian equities market, it is possible for total shareholdings
amongst all funds managed by the Manager to become a significant
proportion of certain of the investees' outstanding shares. Liquidity
risk may result from an inability to sell investments quickly at close
to fair value.
However, as the new investment policy gave the Board absolute discretion
in the timing of any redemptions to the holders of ordinary redeemable
shares to maximise the realisation value of the Group's investments, the
only significant commitments arise out of the investment process. The
Manager takes into account the liquidity of investee's stakes and the
required time to liquidate stakes via the market or a block trade
without impairment to fair value.
Liquidity risk is monitored through the analysis of the regular fund
cash reports, enabling the Manager to potentially foresee liquidity
shortages, and to allocate or liquidate assets accordingly to fund
additional commitments.
This information is provided by the Sub-Administrator and can be
accessed by all members of the Manager and Advisor who initiate or
monitor transactions, and is reconciled against the data delivered by
the Custodians on a regular basis.
The tables below analyse the Group's financial liabilities into relevant
maturity groupings based on the remaining period at the consolidated
statement of financial position date to the contractual maturity date.
Balances due within 12 months equal their carrying balances, as the
impact of discounting is not significant.
Less than 1 month 1-3 months 3 months-1 year 1-5 years Total
US$ US$ US$ US$ US$
As at 31
December
2013
Liabilities
Accrued
expenses 1,269,101 - 60,041 - 1,329,142
Total
liabilities 1,269,101 - 60,041 - 1,329,142
As at 31
December
2012
Liabilities
Amounts
payable on
investments
purchased 4,113,835 - - - 4,113,835
Accrued
expenses 1,660,721 - 95,672 - 1,756,393
Total
liabilities 5,774,556 - 95,672 - 5,870,228
Credit risk
Financial assets which potentially expose the Group to credit risk
consist principally of investments in cash balances and deposits with
and receivables from brokers, see Note 7 for details of associated
credit ratings. The extent of the Group's exposure to credit risk in
respect of these financial assets approximates their carrying value. The
Group will be exposed to credit risk on parties with whom it trades and
will also bear the risk of settlement default. The Group minimises
concentration of credit risk by undertaking transactions with a large
number of customers and counterparties who are recognised and reputable.
Credit risk arising on transactions with brokers relate to transactions
awaiting settlement. Risk relating to unsettled transactions is
considered small due to the short settlement period involved and the
high credit quality of the brokers used. The Advisor monitors the credit
rating and financials of the brokers used to further mitigate the risk.
Substantially all of the assets of the Group are held with the
Custodians. Bankruptcy or insolvency of the Custodians may cause the
Group's rights with respect to cash held with it to be delayed or
limited.
Depository Receipts ("DRs") are financial instruments issued by banks
which represent a foreign company's publicly traded securities. In most
cases, DRs are convertible into the foreign company's securities, at the
option of the holder. DRs are valued at fair value based on the trading
price of the DR, or if unavailable, the trading price of the underlying
securities. In addition to market risk, DRs also bear an additional
degree of credit risk as a result of the exposure to the issuer of the
DR. In consideration of this credit risk, the Manager selects issuers
with solid financial standings. The Manager does not consider the credit
risk exposure from DRs to be significant.
The Manager analyses credit concentration based on the counterparty and
the industry of the financial assets that the Group holds, as shown in
the concentration of investments table in the consolidated supplemental
schedule of investments. Other than those outlined above and discussed
in Note 5, there were no significant concentrations of credit risk to
counterparties at 31 December 2013 or 31 December 2012.
The following represents the credit risk to the Group as at year end:
Year ended Year ended
31 December 2013 31 December 2012
US$ US$
Cash and
cash
equivalents 44,631,536 1,548,344
Dividends
receivable - 541,185
Cash due
from
custodians 8 867,982
Other assets 384 3,569
44,631,928 2,961,080
14. Transactions with related parties
Certain key employees of the Advisor are also directors of other
companies in which the Group has an investment. The largest of these
investments at 31 December 2013 are IDGC of Centre, Joint Stock Company;
Kuzocm Inc.; and IDGC of Centre and Volga Region, Joint Stock Company
(31 December 2012 IDGC of Centre, Joint Stock Company; IDGC of
North-West, Joint Stock Company; and Kuzocm Inc.). The fair market value
of all 7 (31 December 2012: 8) investments which have Advisor
representatives on their boards of directors determined in accordance
with IFRS represents 2.38% (31 December 2012: 4.97%) of the fair market
value of the Group's net assets.
During the year ended 31 December 2013, the Directors charged fees of
US$220,602 (GBP142,791) (31 December 2012: US$272,781 (GBP177,500)) and
business expenses of US$49,331 (31 December 2012: US$40,309). At 31
December 2013 Director fees of US$44,518 (31 December 2012: US$57,497)
were payable. At 31 December 2013 Directors' business expenses of
US$13,897 (31 December 2012: US$nil) were payable.
Expenses charged during the year by the Administrator, Manager and
Custodians are detailed in Note 11.
During the year ended 31 December 2013, the Group entered into
transactions with other funds where the Manager acts as a Manager or
Sub-Manager. Details of transactions for the years ended 31 December
2013 and 31 December 2012 are disclosed below. These transactions were
conducted for efficiency purposes whereby the Group purchased and/or
sold securities on behalf of other funds managed by the Manager and then
purchased from or sold them to the relevant counterparties. The trades
took place at market value and therefore the Group was neither
advantaged nor disadvantaged due to these transactions.
Year ended Year ended
31 December 2013 31 December 2012
US$ US$
The Russian Prosperity (Euro) Fund
Total sales - 351,820
The Russian Prosperity Fund
Total sales 5,372,757 -
Prosperity Quest Fund
Total 5,976 -
purchases
Total sales 18,514,443 -
The Directors' interests in the share capital of the Company at 31
December 2013 and 31 December 2012 (some of which are held directly or
by entities in which the Directors may have a beneficial interest) were:
Number of Number of
ordinary shares ordinary shares
31 December 2013 31 December 2012
Julian Reid
(Chairman) 15,852 20,000
Robert Boyle - 133,596
Anthony Hall 93,527 118,000
Roger Phillips
(resigned 9 July
2013) - 40,000
Paul Tierney, Jr.
(resigned 9 July
2013) - 893,581
On 12 July 2013 Mr Phillips and Mr Tierney, Jr resigned as Directors. Mr
Boyle sold his holding of 133,596 ordinary redeemable shares on 12 July
2013 and does not hold a beneficial shareholding in the Company at 31
December 2013.
As part of the compulsory redemption on 23 September 2013, Mr Reid's and
Mr Hall's beneficial interest reduced by 20.7%.
On 3 May 2013 Mr Hall and Mr Phillips, both Directors of the Company,
resigned as directors of Prosperity Russia Domestic Fund Limited, also
managed by the Manager.
15. Significant events during the year
At the Company's EGM on 21 June 2013, a revised objective and policy,
and a new mandate to effect an orderly realisation of the portfolio (see
Note 2(c) for further information) was adopted and the ordinary shares
of the Company were converted into ordinary redeemable shares.
On 9 July 2013 the Board resolved to cancel the 18,198,730 shares
currently held by the Company in treasury in light of the new investment
objective and policy.
On 9 July 2013 Mr Philips and Mr Tierney, Jr. resigned as Directors of
the Company in light of the Board's consideration to reduce on-going
costs.
On 23 September 2013 the Company compulsorily redeemed 46.5 million
ordinary redeemable shares (20.7% of the issued shares) for $54 million.
On 20 December 2013 the previous custody arrangement with ING Bank
(Eurasia) ZAO had been terminated and Deutsche Bank Limited appointed to
replace them as Russian Custodian.
The Board will make further announcements in due course in relation to
the timing of the first compulsory redemption and return of realisation
proceeds to shareholders.
There were no other significant events during the year that require
disclosure in these audited consolidated financial statements.
16. Significant events subsequent to the year end
On 20 January 2014 the Board announced a further compulsory redemption,
with a redemption date of 27 January 2014 for 26.29% of the remaining
ordinary redeemable shares for a total of $58 million, to be paid on the
6 February 2014.
As part of the compulsory redemption on 27 January 2014, Mr Reid's and
Mr Hall's beneficial interests were reduced by 26.29% to 11,686 and
68,939 ordinary redeemable shares respectively.
On 3 February 2014 it was announced that with effect from 31 January
2014, the previous custody arrangement with State Street Custodial
Services (Ireland) Limited had been terminated and Deutsche Bank AG
appointed to replace them as Global Custodian.
On 26 February 2014 the Board announced that it would seek authority at
the AGM on 29 May 2014, to delist the Company from AIM as part of the
managed wind down of the Company and further announced that the Company
intends to make a further significant distribution to shareholders in
early Summer 2014.
On 27 March 2014 the Board announced that the Company had sold circa 68%
of its residual holding of Bashneft preferred shares, being 714,483
shares, at a price of 1,403 Russian Rubles per share. The sale was made
to Bashneft under its publicly announced share buy back programme. The
consideration proceeds, in Russian Rubles, will be paid on or before 21
April 2014 and equated to US$28.166 million at the prevailing FX rate.
There have been no other events subsequent to the year end, which
require adjustment to or disclosure in the audited consolidated
financial statements.
17. Approval of the audited consolidated financial
statements
The audited consolidated financial statements were approved by the Board
of Directors on 22 April 2014.
Reconciliation of net asset value
At each valuation point of the Company, the investments are valued in
accordance with the Information Memorandum. Under IFRS the investments
have been valued at last traded price, when within the closing bid-ask
spread and mid price, when the last traded price was not within the
bid-ask spread, as at 31 December 2013 and at bid price as at 31
December 2012.
Year ended Year ended
31 December 2013 31 December 2012
US$ US$
Net assets attributable to shareholders in accordance
with the Information Memorandum 221,314,008 299,009,712
Adjustment to value of investments at last traded
prices or mid prices
(31 December 2012 at bid prices) - (2,445,207)
Net assets attributable to shareholders as per consolidated
statement of financial position 221,314,008 296,564,505
Year ended Year ended
31 December 2013 31 December 2012
US$ US$
Net assets value per share in accordance with the
Information Memorandum 1.244 1.332
Adjustment to value of investments at last traded
prices or mid prices
(31 December 2012 at bid prices) - (0.011)
Net asset value per share attributable to shareholders
as per consolidated statement of financial position 1.244 1.321
Exchange rates
The following foreign exchange rates were used to translate assets and
liabilities into the reporting currency (United States dollars):
Year ended Year ended
31 December 2013 31 December 2012
Euro 0.7250 0.7560
British Pound 0.6064 0.6152
Kazakhstan
Tenge 153.6800 150.3700
Russian Ruble 32.8436 30.4313
Ukraine Hryvna 8.2400 8.0500
This announcement is distributed by NASDAQ OMX Corporate Solutions on
behalf of NASDAQ OMX Corporate Solutions clients.
The issuer of this announcement warrants that they are solely
responsible for the content, accuracy and originality of the information
contained therein.
Source: Prosperity Voskhod Fund Limited via Globenewswire
HUG#1778670
http://prosperitycapital.com/PVF
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