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. Last Updated: 07/27/2016

Huge Share Dilution Infuriates Investors

A group of shareholders in Russian ferrous metals plant Nosta, which recently increased the number of its shares by 39 times, are considering court action to recover massive losses suffered in the share dilution, an investment firm said Thursday.

According to Sergei Ryzhov, portfolio manager at Pioneer First asset management, a group of investors, including Renaissance Capital and Pioneer Securities, are looking for ways to combat the Oct. 24 share issue that saw the value of their holdings fall to about one-eighth their previous value.

"The position of Nosta management is to establish absolute control over the company," said Konstantin Chernyshev, senior analyst at Rinaco Plus -- another investment company damaged by the dilution.

Located in Russia's Orenburg region, Nosta, the Orsko-Khalilovsky Ferrous Metal Factory, registered 590,301,660 new ordinary shares, increasing the number of shares almost 39 times from 15,642,937 to 605,944,597. All shares have face value of 1,800 rubles.

But shareholders were given access to buy only 70 percent of new shares, with the remaining 30 percent to be sold on the free market, according to AK&M information agency.

Tim Johnson, a portfolio manager at Alfa Kapital Assets Management, said he heard that Nosta's directors had decided shareholder compensation after the emission would be determined by the size of their stake.

Any shareholder with a stake of less than 2 percent would have their number of shares multiplied by five; employee shareholders, by 10; and management shareholders by 39, ensuring no dilution of their shares, he said.

Nosta's management, its employees and daughter company Lengipromez, have a controlling stake in the company.

As a result of the emission, Pioneer First Asset Management, which Ryzhov said had held a 1.45 percent stake in Nosta, may now hold just 0.18 percent.

A representative at Nosta's share registrar confirmed Thursday that the company did conduct the share issue disproportionately. "I can understand them," he said, referring to angry shareholders.

But a legal challenge to the dilution could be difficult to wage. Andrei Trelygin, head of the department regulating emissions at the Federal Securities Commission said Thursday that Nosta applied for permission for the share issue under old regulations that allowed a disproportional share emission with a vote by the board of directors.

A new decree that came into effect Oct. 14 now prohibits disproportional share issues.

Another obstacle facing the investors is confusion surrounding the exact details of the share emission. Most shareholders don't know how many shares they have now or how many they lost.

"We don't know anything now except that it was disproportional," Chernyshev said. "We didn't see the prospectus of emission and didn't get an extract from theregistrar."

"I asked Nosta to send me the prospectus of emission two month ago. Some re-division occurred but we cannot get any information on it," Ryzhov said.

Nosta, when contacted Thursday, declined to give any details about the emission, but suggested that investors are more than welcome to come to its Novo-Troitsk headquarters 1,000 kilometers east of Moscow, to view the paperwork on the emission.

"Our press department gave out an address where investors can come to acquaint themselves with prospectus of emission," said Natalya Melnikova, who works in Nosta's securities department. "We will not send it by mail because it is too big."

Some reports have suggested that Nosta planned the emission in order to generate extra shares so that it can turn over a 35 percent stake to Gazprom, one of the factory's largest customers for metal pipes.

Anatoly Kotov, who heads Gazprom's press service, said Thursday he had not heard of the plan but could not exclude the possibility.