Surgut Share Issue Violations Cited

Russia's stock market watchdog moved Tuesday to roll back a controversial share dilution by the leading blue-chip Surgutneftegaz in a decision hailed by brokers as a significant boost for shareholders' rights on the local market.

A statement from the Federal Securities Commission said Surgutneftegaz head Vladimir Bogdanov had signed a protocol pledging to "correct the violations" of Russian securities law in its supplemental share issue last month, which had been criticized for awarding management an extra block of shares at below-market prices.

The protocol would oblige Surgut Holding to convene an extraordinary shareholders meeting of its Surgutneftegaz production unit to amend the company charter to enable current holders of voting shares to acquire ordinary stock in proportion to their stakes. But it also appears to let the oil company reacquire the stake in question as long as it pays the market price.

The decision clears the way for a successful issue of American Depositary Receipts by Surgutneftegaz, Russia's third largest oil company, expected later this month. The company's ordinary shares rose on the news to close at $0.42 Tuesday night, up from $0.405 Monday. Preferred stock also gained to finish $0.29, up from Monday's $0.276.

The commission's decision came after a month-long inquiry and a meeting Monday between Bogdanov and FSC chairman Dmitry Vasiliyev. Local equity traders said it showed the ability of the commission to enforce shareholders' rights that would help improve overall investment climate in Russia.

"It's an important step forward that Western investors at large have been looking for," said Peter Halloran, head of equity trading for CS First Boston. "I think this will prove a significant starting point for further shareholders' rights action."

Other notorious share dilutions by Russian companies, including the Komineft oil concern and the Far East Shipping Company, came to light in 1995, contributing to a common investor perception of the Russian market as a "Wild East" where there were few guarantees on shareholders' rights.

Although the commission statement sets out the key principle on voting for supplemental share issues, its text appears to allow Surgutneftegaz to get what it wanted in the first place.

Surgut Holding and its investment affiliate Surgut Investments must come up with an additional payment of 200 billion rubles ($36.2 million) for the shares by next April, the decision states. The sum would apparently raise the price of the shares to market value.

The holding company last month acquired at a closed auction an entire issue of 500 million ordinary shares and 34.02 million preferred shares in Surgutneftegaz, raising its stake in the company to 43.5 percent from 38 percent.

Some shareholders have complained that the entire issue was bought by the holding below the market price at par value of $0.18 per share, compared with the average trading price of $0.46 at the date of issue.

Surgut's negotiated protocol with the FSC -- after its previously bold defense of the share issue -- also reveals the company's prudent long-term strategy, Halloran said.

"It wasn't a win-win for Bogdanov. I think he saw the bigger picture and had to make a concession to the FSC," he said. "It was necessary for Surgut to come into line to have its ADR issue."