The Federal Service for Financial Markets of the Russian Federation (FSFM) has published Regulations on the Procedure for the issuance by the FSFM of approvals for the placement and / or trading of securities of Russian issuers outside the Russian Federation (Regulations). The Regulations, which came into effect on 1 January 2010, introduce significant changes to the previous rules relating to offers of securities overseas by Russian issuers.
This briefing looks at the regime which applies to Russian companies seeking to raise equity overseas and then focuses on the key changes set out in the Regulations and what this means for Russian issuers.
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Requirement to list on a stock exchange or simultaneously offer shares (including shares underlying GDRs) in Russia
Where a company incorporated in Russia wishes to list its shares or global depositary receipts (GDR) overseas, it must first be listed on at least one stock exchange in Russia.
Except as described below, the Regulations also provide that a Russian issuer (or a shareholder intending to sell shares or GDRs of a Russian issuer overseas) must simultaneously offer those shares (or, in the case of a GDR offering, shares underlying the GDRs) for sale in the Russian Federation through a stock exchange and/or through a broker. In practice, a Russian incorporated company would enter into a broker agreement with a broker to comply with this requirement.
The requirement to offer shares (or, in the case of a GDR offering, shares underlying the GDRs) in the Russian Federation does not apply where Russian issuers are listed in the A List Quotation (large companies) in Russia. In this case, where GDRs are to be issued, the depositary will need to demonstrate that it has acted as a depositary for at least seven years and it will need to satisfy certain conditions as to its size and the value of any deposited securities. The depositary agreement must also comply with various requirements in relation to the deposit of the underlying shares and disclosure of information about underlying GDR holders to the issuer.
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Obtaining approval of the FSFM
Pursuant to the Russian Securities Market Law1, the public offer of shares of a Russian incorporated company overseas (including through the issue of GDRs) requires the approval of the FSFM. Approval is required in connection with the issue of new shares or an offer of existing shares (including transfer of new or existing shares into a GDR programme) by a company or its shareholder. The average time for obtaining the FSFM approval is one month from the date of submission of an application together with all supporting documents.
Although the approval is granted only for a period of 12 months, the Regulations now specify circumstances (mostly of a procedural nature) in which the FSFM can terminate its approval, namely: (a) if the offering of or trading in securities has not commenced within one year from the date of the FSFM approval; (b) if notification of the results of a share offering (including through a GDR issue) is not made within the prescribed 30 day period; or (c) if the securities of a Russian issuer in respect of which FSFM approval was granted are redeemed or cancelled.
- Federal Law of the Russian Federation dated 22 April 1996 No.39-FZ “On the Securities Market"
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Restrictions on the total amount of an issuer’s share capital that can be offered outside the Russian Federation
The Regulations introduce new restrictions on the percentage of the issued share capital of a Russian incorporated company that can be offered overseas; or, in the case of GDRs, the percentage of issued share capital which can be deposited into a GDR programme. The percentages depend on several factors including principally the size of the issuer and the historical volume of trading in the issuer’s shares.
As a consequence only larger, more sophisticated entities can access a wider pool of foreign investors through an issue of shares or GDRs. See the table below for the relevant percentages:
|Stock Exchange List in the Russian Federation||Percentage of entire issued share capital (at any one time) which can be offered overseas or deposited into GDR programme|
|A List Quotation (large companies)||Not more than 25 per cent.|
|B List Quotation (medium size companies)||Not more than 15 per cent.|
|V or E List Quotation (small companies)||Not more than 5 per cent.|
These restrictions are relaxed where shares are offered for sale in a jurisdiction in which a local securities regulator has entered into a cooperation agreement with the FSFM (the Cooperation Jurisdiction). This relaxation allows smaller Russian issuers that are quoted on the B, V or E Lists to offer up to 25 per cent of their shares either directly or through a GDR programme to overseas investors.
Where GDRs are to be offered by a Russian incorporated company on an overseas stock exchange], the depositary bank must also be incorporated in the Cooperation Jurisdiction in order to benefit from this relaxation. It is understood that a number of depositary banks are incorporating subsidiaries in Germany and Cyprus to take advantage of this provision.
As at the date of this briefing, the FSFM has entered into cooperation agreements with the following countries: France, Germany, Oman, Syria, Cyprus, Turkey, the United Arab Emirates, India, China, Brazil, Belarus, Kyrgyzstan and Venezuela.
Surprisingly, the Russian legislator failed to extend the 25 per cent restriction to overseas holding vehicles that control Russian corporate groups. As a result, Russian companies can easily avoid the 25 per cent limitation by interposing a foreign holding vehicle which may act as the issuer for the Russian-based group.
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Restrictions on the total amount of any offer of shares outside the Russian Federation
In addition, pursuant to the Regulations, companies are permitted to offer only 50 per cent of the total number of shares issued pursuant to an offer (whether by way of an initial share issue or any subsequent share issues) to investors located outside the Russian Federation through an overseas stock exchange.
The 50 per cent restriction on the number of shares that can be offered outside the Russian Federation does not apply if: (i) the shares of the Russian issuer are quoted in the A List Quotation; or (ii) in the case of GDRs, where the depositary complies with the requirements set out in the paragraph “Requirement to list on a stock exchange or simultaneously offer shares (including shares underlying GDRs) in Russia” above.
As is the case with the 25 per cent restriction, the 50 per cent restriction does not to apply to overseas holding companies that act as listing vehicles for Russian companies.
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Restrictions relating to “strategic companies”
The restrictions imposed by a 2008 Strategic Companies Law2 that limit to 5 per cent the number of shares in certain types of “strategic companies” which can be listed on a foreign exchange, continue to apply. Strategic companies to which the 5 per cent restriction applies include principally companies engaged in mining for certain types of rare metals and precious stones and companies engaged in production of oil and gas that hold rights to particularly large petroleum reserves. It should be noted that other companies designated as “strategic” under the Strategic Companies Law (such as sea ports and airports) can list up to 25 per cent of their shares on a foreign exchange, subject to consent by the FSFM.
Other limitations which continue to apply and affect the market for Russian shares overseas, are those imposed by the Strategic Companies Law on the number of shares in a strategic company that are owned or controlled by a foreign person or a group of related foreign persons, which are set at 10 per cent for mining and petroleum companies, and 50 per cent for other companies designated as “strategic”. It is important to note that unlike the limitations imposed on the number of shares that can be listed on a foreign stock exchange, which apply a rather formalistic approach, the ownership and control restriction seeks to use a look through approach and determine who in fact owns or controls the interest in question.
- Federal Law of the Russian Federation dated 29 April 2008 No. 57-FZ “On the manner of conducting foreign investments into companies having strategic significance for securing the defence of the country and the security of the State”
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What is the impact of the Regulations?
As described above, the Regulations have limited further the ability of foreign investors to acquire significant stakes in Russian companies (other than the large entities listed on the A Quotation in the Russian Federation).
In this context, it is likely that Russian groups looking to raise equity overseas will continue to insert a foreign incorporated holding company as the issuing vehicle for the Russian-based group rather than to list Russian shares or GDRs directly on an overseas exchange. In addition, from April 2010, issuers wishing to list on the premium segment of the Official List of the UK Listing Authority, may only do so through the listing of their shares (rather than GDRs). This means that in the future when listing in London, Russian companies may be more inclined to list their shares rather than GDRs. Where this applies, to the extent that holding companies of Russian (or other overseas) issuers are incorporated in jurisdictions other than UK, Jersey, Guernsey or the Isle of Man, such issuers will be required to set up a separate depositary interest programme to enable the electronic settlement of their shares through CREST, the UK settlement system. This will impose additional administrative costs on overseas issuers. To the extent that the popularity of the premium segment of the London Stock Exchange increases - and taking into account issuers’ desire to reduce administrative costs it is possible that Jersey, Guernsey and the Isle of Man may also become the jurisdictions of choice for Russian listing vehicles
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