New Wave of Listing Requirements in 2005

2004

The Russian securities market will have to withstand another round of changes to the listing requirements in 2005. The new Regulation on Trading Procedures of the Federal Service on the Financial Markets¹ (the "Regulation") has replaced the Regulation on Trading Procedures adopted by its predecessor, the Federal Commission on the Securities Market, in 2003² (the "2003 Regulation").

The Regulation has left most of the provisions of the 2003 Regulation intact, but expands the scope of listing requirements and introduces new rules, with which stock exchanges and issuers must comply by 15 July 2005. After this deadline, listed securities should be de-listed if they do not conform to or their issuers have not complied with the new rules. Certain corporate governance standards and requirements for preparation and further disclosure of annual audited accounts in accordance with IFRS and/or U.S. GAAP will apply after 15 July 2005. The new listing requirements also include new share capitalization thresholds, minimum pre-listing trading volume requirements, bonds issuance volumes, seasoning requirements and other items that should be manageable for big and medium-sized market players.

New Listing Requirements

Below is a summary of the most essential new listing requirements³.

Capitalization

The Regulation divides and increases the levels of capitalization for "A" List shares: 10 bln rubles - for first level "A" List common shares and 3 bln rubles - for first level "A" List preferred shares; 3 bln rubles - for second level "A" List common shares and 1 bln rubles - for second level "A" List preferred shares.

The Regulation introduces the following levels of capitalization for "B" List shares: 1.5 bln rubles - for common shares and 500 mln rubles - for preferred shares.

The Regulation provides special rules for calculation of the sharesТ "average weighted price," which is the basis for calculating the capitalization. Unlike the 2003 Regulation, the Regulation does not provide "capitalization" (market value) requirements for bonds.

Minimum Net Assets Requirement Eliminated

Unlike the 2003 Regulation, the Regulation does not require that issuers of shares or bonds satisfy any net assets thresholds.

Minimum Pre-Listing Trading Volumes

The Regulation re-establishes (and increases) the minimum pre-listing trading volume requirements based on the monthly value of transactions with unlisted securities conducted at a stock exchange. The minimum pre-listing trading volumes are now calculated on a three-months basis and constitute: (i) for shares: 25 mln rubles - for first level "A" List shares; 2.5 mln rubles - for second level "A" List shares, 1.5 mln rubles - for "B" List shares; (ii) for bonds: 10 mln rubles - for first level "A" List bonds; 1 mln rubles - for second level "A" List bonds; and 500,000 rubles for "B" List bonds.

Bond Issuance Volumes

The Regulation establishes the following rules concerning the minimum bond issuance volumes (i.e., the nominal value): 1 bln rubles - for first level "A" List bonds, 500 mln rubles - for second level "A" List bonds and 300 mln rubles - for "B" List bonds.

Requirements Concerning Equity Concentration

The Regulation has left intact the 2003 Regulation's requirement that common shares of an issuer are eligible for the "A" List if a shareholder and its affiliated persons hold no more than 75% of the issuer's common stock and the issuer has assumed the obligation to inform a stock exchange that a shareholder and its affiliated persons have come to hold more than 75% of the common stock within five days after the issuer knew or should have known about said occurrence.

The Regulation introduces a similar requirement for common shares to be eligible for "B" List. An issuer's common shares are now eligible for the "B" List if a shareholder and its affiliated persons hold no more than 90% of the issuer's common stock and the issuer has assumed the obligation to inform a stock exchange that a shareholder and its affiliated persons have come to hold more than 90% of the common stock within five days after the issuer knew or should have known about said occurrence.

On the other hand, the Regulation eliminates the requirement as to the minimum number of shareholders, which was previously one of the criteria to be satisfied by issuers of "A" List shares.

Seasoning Requirements

The Regulation tightens the seasoning requirement for issuers of second level "A" List securities and introduces such requirement for "B" List securities. Now issuers of first and second level "A" List securities should have been in existence for at least three years to have their securities listed, and issuers of "B" List securities should have been in existence for at least one year.

An issuer established as the result of reorganization may be exempt from the above seasoning requirements. To qualify for such exemption, an issuer should have been in existence for at least six months, disclosed information in the form of a quarterly report at least once and the securities of its predecessor entity(-ies) should have been listed with at least one stock exchange.

Financial Statements

Issuers of "A" List securities must have audited annual financial statements prepared in accordance with IFRS and/or U.S. GAAP and assume the obligation to maintain and disclose the audited statements in Russian. The Regulation does not provide the same requirements for issuers of "B" List securities.

Corporate Governance Requirements

The Regulation tends to differentiate corporate governance requirements applicable to issuers depending not only on the type of the List (i.e., "A" List or "B" List) where the securities are to be listed but also on the type of securities (i.e., shares or bonds) to be listed, setting less stringent standards for bond issuers. For example, issuers of "A" List bonds are not required to have a compensation committee or management board or to have a written policy on their disclosure principles and rules. The Regulation does not establish corporate governance requirements for issuers of "B" List bonds.

The Regulation also revises certain corporate governance requirements initially imposed by the 2003 Regulation. For example, the 2003 Regulation's requirement that an issuer must disclose the amount of compensation paid to each of the members of the board of directors, the general director and members of the management board has been abolished. While, by virtue of the Securities Market Law⁴ and other regulations, an issuer is required to disclose in a prospectus and a quarterly report the amount of compensation paid to its board of directors and the management board, such amounts should be disclosed without specifying a per-person amount.

De-listing

The Regulation sets forth substantially the same grounds for de-listing securities as the 2003 Regulation. The Regulation, however, raises the minimum trading volume of shares and bonds during the last six months required to maintain the listing to: 50 mln rubles - for first level "A" List shares and 25 mln rubles - for first level "A" List bonds; 5 mln rubles - for second level "A" List shares and 2.5 mln rubles - for second level "A" List bonds; 3 mln rubles - for "B" List shares and 1 mln rubles - for "B" List bonds. Though failure to maintain such minimum trading volumes is among the grounds for de-listing securities, the Regulation provides certain exceptions to this rule for bond issuers.

As we noted in our April 2004 Client Alert, many issuers might have difficulties satisfying the requirements of the 2003 Regulation. The Service has given additional time to stock exchanges and issuers for the transition. The new, stricter requirements established by the Regulation will prevent access to the organized securities market for many issuers.





Endnotes:
¹ The Regulation on Trading Procedures was approved by Order No. 04-1245/pz-n of the Federal Service for the Financial Markets (the "Service"), dated 15 December 2004. This Order provides that the Regulation, with the exception of certain provisions, comes into effect on 1 January 2005. However, the Order was officially published on 19 January 2005.
² The previous Regulation on Trading Procedures was approved by Resolution No. 03-54/ps of the Federal Commission on the Securities Market, dated 26 December 2003.
³ We describe here only requirements relating to corporate securities such as shares and bonds.
⁴ The Federal Law No. 39-FZ "On the Securities Market", dated 22 April 1996 (as amended).

 

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