September 2009

The FFMS has published a new draft regulation governing the issuance and trading of securities of Russian issuers in other countries (the “Draft Rules”). The Draft Rules are intended to replace the existing rules on the same matter, as approved by FFMS Order No.06-5/pz-n dated January 12, 2006 (the “Current Rules”).

The Draft Rules, if adopted, would come into effect from January 1, 2010.

If adopted in their current form, the Draft Rules would restrict access by Russian issuers to foreign capital markets, in a move that appears to be directed at enhancing domestic market liquidity. They would also introduce a number of novelties, filling in some (but not all) of the gaps contained in the Current Rules. Key provisions of the Draft Rules are outlined below.

FFMS Permit

Under the Securities Market Law, any distribution and trading outside of Russia of securities of Russian issuers, including foreign securities representing rights to Russian securities (such as GDRs and ADRs), requires prior approval from the FFMS (an “FFMS Permit”).

FFMS regulations specify certain limits on the aggregate amount of securities of a Russian issuer that may be traded abroad, as described below. Further, an FFMS Permit is granted only if the same securities are listed on a Russian stock exchange. For such domestic listing, the Russian issuer must satisfy a number of requirements, which vary depending on the type of listing on a domestic exchange.

Generally, there are four types of listing in Russia – “A” List (first and second levels), “B” List, “V” List¹ and “I” List.² In summary, the most stringent eligibility criteria (for capitalization, monthly trading volume, equity concentration and similar matters) apply to the “A” List, and the most flexible criteria apply to the “V” and “I” Lists. For this reason, Russian shares offered for the first time in international capital markets are typically listed domestically in the “V” List or the “I” List.

Overall Limits

The Current Rules limit the aggregate amount of an issuer’s shares that may be sold and traded outside of Russia to 30 percent of each of shares. Further, the limit is 25 percent for shares of companies classified as having “strategic importance” under the Law “On Foreign Investments in Legal Entities of Strategic Importance to the National Defense and State Security of the Russian Federation” (the “FSIL”) adopted in 2008.³ As an additional restriction, if the issuer is engaged in exploration and/or production of natural resources (such as oil, gas or minerals) in a “subsoil area of federal importance” (a “Strategic Subsoil Company”), then the limit is only 5 percent.

The Draft Rules, if adopted, would make these limitations even tighter. Under the Draft Rules the maximum limits on the distribution and sale of Russian issuer's securities abroad would be as follows, depending on the type of listing:

• “A” List – 25 percent of each of shares;
• “B” List – 15 percent of each of shares; and
• “V” List and “I” List – 5 percent of each of shares (25 percent if the foreign depositary bank is established in a country whose securities market has a cooperation agreement with the FFMS).

The 5 percent cap generally remains for Strategic Subsoil Companies, unless a requisite consent has been issued under the FSIL for a greater percentage of shares within the above maximum limits.

Domestic Offering Requirements

Pursuant to the Current Rules, whenever shares are offered outside of Russia (whether in a primary or secondary sale), they must also be offered in Russia in a concurrent domestic offering. This requirement is retained in the Draft Rules.

The Draft Rules would make certain other adjustments, as well. Under the Current Rules, no more than 70 percent of the aggregate number of primary shares may be sold outside Russia. In a secondary sale, the number of shares sold abroad may not exceed 70 percent of the aggregate number of shares that the seller has undertaken to sell in Russia (and such undertakings are required by the Current Rules).

The Draft Rules would reduce this 70 percent limitation to only 50 percent of the aggregate number of the primary shares being offered (or, if secondary shares are offered, of the aggregate number of secondary shares which the selling shareholder offered in Russia).

Loss of FFMS Permit

In contrast to the Current Rules, the Draft Rules provide the list of grounds for cancellation of an issuer’s FFMS Permit. These include:

• Failure to complete the offering outside Russia within one year after the FFMS Permit is issued;
• Failure to submit certain required notifications to the FFMS within the prescribed timeframes; or
• Any cancellation of the securities in respect of which the FFMS Permit was issued.

The Draft Rules also require that the FFMS be notified in writing of any amendments to a Deposit Agreement (as typically used to govern GDR and ADR offerings). The Russian translation of the amended Deposit Agreement must be submitted to the FFMS within 30 days.

This article is intended only as a general discussion of these issues. It is not considered to be legal advice.

© 2009 Dewey & LeBoeuf LLP. All rights reserved. No part of this publication may be reproduced, in whole or in part, in any form, without our prior written consent.

¹ Shares must be transferred from the “V” List into a list of another level or the non-listed trading category within six months from listing.
² Shares must be transferred from the “I” List into a list of another level or the non-listed trading category within five years from listing.
³ Federal Law No.57-FZ dated April 29, 2008.