Russian Depositary Receipts

Alexander Klochkov
Federal Law dated 30 December 2006 No. 282-FZ On Amending the Federal Law On the Securities Market (the "Law"), introducing Russian depositary receipts ("RDRs"), came into force in January 2007.

RDRs are a new type of investment instrument that represent a certain number of underlying securities (only shares or bonds) issued by a foreign issuer ("Foreign Issuer").

The Law grants RDR holders the right to require the RDR issuer to exchange the RDRs for the corresponding number of underlying securities, the right to services enabling the RDR holder to exercise his rights attached to the underlying securities, and the right to require the Foreign Issuer to properly perform its obligations if the Foreign Issuer directly assumes such obligations.

RDRs are registered securities in a non-documentary form and have no nominal value.

The Law sets forth special requirements for RDR issuers and the RDR issuance process.

Only a licensed Russian depositary ("Depositary") may issue RDRs, and the Depositary must be constituted under Russian law, have been in the depositary business for at least three years and meet certain capital requirements to be set by the Federal Financial Markets Service ("FFMS").

RDRs can be issued if the following conditions are met:

Х†the Depositary's rights in the underlying securities must be recorded by an organization on an approved list of the FFMS;

Х†the Depositary's rights in respect of the underlying securities must be recorded in an account opened in its name as a party acting on behalf of other persons;

Х†the Depositary and the Foreign Issuer must enter into a contract establishing the Foreign Issuer's obligations to RDR holders, or, in the absence of such contract, the underlying securities must be listed on a foreign stock exchange included on an approved list of the FFMS.

The issuance procedure for RDRs consists of three stages. Approval by an authorized body of the Depositary of the so-called "decision on the RDR issue," official registration of the RDR issue and lastly, placement of the RDRs.

The Law lists the information required for inclusion in the "decision on the RDR issue" and RDR prospectuses. The FFMS must establish more detailed requirements for the composition of the data to be included in RDR prospectuses. Upon registering the prospectus, the Depositary must disclose information about itself and the Foreign Issuer on a continued basis as required by the Law and regulations to be issued by the FFMS.

The "decision on the RDR issue" must set only the maximum number of RDRs that may be placed, and the Depositary will issue only such number of RDRs in respect of which it receives underlying securities. If a holder of an RDR receives a corresponding number of underlying securities from the Depositary, such an RDR will be cancelled so that the maximum number of RDRs that may be simultaneously outstanding does not change. The Depositary must file a quarterly statement with the FFMS indicating the number of outstanding RDRs and the number of underlying securities held in the Depositary's accounts.

If services are provided for an RDR holder in relation to income it has earned on the securities or other payments due him as a securities holder, the RDR holder's money generally must be kept in a special depositary account. The Law requires that the Depositary makes payments to RDR holders not later than five days after receipt of the money from the Foreign Issuer.

If a Foreign Issuer assumes obligations to RDR holders, they must be reflected in an agreement between the Foreign Issuer and the Depositary. The agreement must be filed for official registration of the RDR issue and is considered to form an integral part of the "decision on the RDR issue".

The Law requires that the deposit agreement, among other things, be governed by the Russian Law, and disputes related to a failure to perform or improper performance of the obligations under the agreement must be resolved in Russia by courts whose decisions can be recognized in the country of the Foreign Issuer.

Amending a deposit agreement does not require RDR holder's consent. However, consent is required to terminate the agreement. If an agreement is amended, the Depositary must amend the resolution to issue RDRs, which requires registration with the FFMS.

The Law introducing RDRs came into force on January 21, 2007. However, the issuance of RDRs will only be possible after the Russian regulator implements regulations made necessary by the Law.

RDRs will give Russian investors another way to invest in foreign companies' securities and will open access for foreign issuers to the Russian stock market, and will promote its infrastructure development. The future success of RDRs will, to a large extent, depend on the efficiency of such infrastructure and its ease of use for investors.