On August 4, 2011 the Federal Service for Financial Markets of the Russian Federation (FSFM) registered and sent to the Ministry of Justice the Draft Order "On the Amendments to the Regulations of Offerings and/or Trading of Securities of Russian Issuers Outside the Russian Federation"1 (Draft Order), which is expected to introduce significant changes to the existing rules for depositary receipts programs governing Russian issuers’ shares abroad (American depositary receipts [ADRs]/ global depositary receipts [GDRs]). The Draft Order was developed by the FSFM in response to a proposal by President Medvedev to remove existing limitations on Russian securities trading outside Russia.
The Draft Order provides for the liberalization of rules applicable to offerings by Russian issuers, namely:
- Under the existing rules, the number of shares of a Russian issuer offered and traded abroad (in the form of depositary receipts) may not exceed 25 percent of the issuer’s total number of shares. The Draft Order increases this cap to 100 percent, regardless of the level of listing obtained on the relevant Russian stock exchange. Companies therefore will have greater flexibility to raise capital outside Russia.
Pursuant to the Draft Order, those issuers with strategic importance for national defense and national security will be able to trade abroad no more than 25 percent of shares.2 For issuers of strategic importance that perform geological studies of natural resources and/or explore and produce mineral resources at subsoil sites of federal importance, the cap is 5 percent.
- The requirement for international offerings of depositary receipts to be accompanied by offerings of the underlying shares and the requirement to involve a Russian stock exchange in an offering that has a depositary receipt tranche would be removed.
- The requirement that no more than half of the number of shares offered in Russia can be sold outside Russia in the form of depositary receipts would be removed.
The Draft Order, when adopted, will change the current procedure and streamline Russia’s regulation of depositary receipts. However, a number of issues would have to be resolved. One is the status of the foreign depositaries issuing the depositary receipts; these depositaries are treated as shareholders of Russian companies according to Russian law. They therefore are required to extend a mandatory tender offer to all other shareholders when acquiring more than 30 percent of the shares in a Russian company. Consequently, unless the current legislation is amended to eliminate these requirements regarding foreign depositaries, any particular depositary will have to make an extra effort to have an effective cap exceeding 30 percent on the depositary receipts program.
The amendments will become effective when the Federal Law on Central Securities Depositary (Law on CSD) goes into effect. The draft Law on CSD was prepared in the spring of 2007 and has been adopted by the State Duma of the Russian Federation in the first reading. The draft granted monopolistic authority to the CSD in relation to accounts being opened in registers of securities owners. The creation of the CSD was one of the steps in the process of the formation of the International Financial Centre aimed at removing restrictions against Russian issuers placing securities outside Russia. This initiative was encapsulated in instructions from President Medvedev, who asked the Russian government to undertake certain steps prior to September 1, 2011. However, the Law on CSD has not yet been enacted, and therefore there is no current indication as to when the Draft Order would be adopted.