Samantha Shields in Tbilisi -

A messy change of management after a long tax dispute at one of Georgia's biggest retailers is sending signals that doing business in the country might not be as simple as recent government road shows would have potential investors believe.

Creditors led by TBC Bank sacked Anzor Kokoladze, the founder and director of Elit Electronics, a chain of electrical goods shops that had been considering an IPO of up to $120m in London before the August 2008 war between Russia and Georgia, in late February. The creditors had been running the company since last September after they helped pay off and restructure what Kokoladze claimed was a massively inflated tax bill. "The governing creditors unanimously agreed that there would be no riskless future with old management kept in place," TBC's spokeswoman Natia Gotsadze tells bne, adding that the old team resisted turning the company around according to an agreed three-month plan and spent most of their time contesting the rehabilitation team.

Kokoladze says his dismissal was a complete shock, because he believes he adhered to the rehabilitation plan. "The reason they gave for the change was that the company should have been run better and revenues should have been higher. But we made bigger sales than the three-month plan provided for," he says.

Georgia has been trying desperately to lure back some of the foreign investment that was fuelling annual growth of over 12% in the country before the war with Russia and the global economic crisis struck. Figures released mid-March showed that foreign direct investment fell by 51% in 2009 to $759m, down from $1.6bn in 2008 and more than $2.0bn in 2007.

Prime Minister Nika Gilauri visited London, New York and Abu Dhabi at the end of 2009 to highlight western-style overhauls to the economy and since October the government has been trumpeting its yet-to-be-passed "Liberty Act," a fiscal austerity bill that lays out constitutional amendments to limit state spending to a maximum 30% of GDP, the budget deficit to no more than 3% and foreign debt to no more than 60%.

Yet Elit's problems stem from more mundane concerns about the tax system, which have been made worse by the government last summer pushing through an amendment to the tax code that makes it easier for authorities to freeze accounts and assets in taxation disputes. Even before that amendment passed, a May 2009 report by the World Bank's IFC on the Georgian manufacturing sector said there was "a widespread perception that the tax authorities are overly aggressive in levying taxes and penalties on those companies that are doing their best to comply; and that they are overly slow in processing appeals."

Taxing issues

Elit's problems started in 2007 when tax police said it owed GEL14m ($8.1m) in back taxes. The company insisted it owed just GEL120,000 and that the higher figure was due to an accounting error. The government later halved its demand GEL7m, a figure that Elit still said was too high.

Elit embarked on an escalating legal battle, which went through three hearings and ended up in the Supreme Court. In July last year, the government froze the company's bank accounts and left it reduced to trading in cash only. In September, it was forced to close after tax officials seized company assets, something Kokoladze said they were able to do because of that recently adopted tax code.

The company, which Kokoladze said he started in 1996 with GEL100 and three employees, now has 24 stores and employs 510 people. Nine shops were forced to close and 200 people were dismissed during the dispute.

Creditor banks took control of a total 85% of shares, with TBC holding 55% and Bank Republic 30%. Kokoladze still holds 15% of the company's shares. Creditors, management and the rehabilitation team resolved the tax dispute with the government and Elit's stores reopened on November 1.

TBC's spokeswoman Gotsadze said creditors offered to make Kokoladze chairman of Elit's supervisory board. He said he refused on the grounds that it's not a decision-making post. Kokoladze will be replaced as director by Amiran Sherozia, a former senior advisor to Bank Republic's board of directors who has also worked for Bank of Georgia and HSBC. "The new management will make every effort to ensure that Elit Electronics retains its leading position in the Georgian electronics retail market and provides the best products and Service to its customers," Gotsadze says.