No Water, No Float – Russian Regulator Set to Revise Listing Rules

By Trevor Barton, Senior Vice President & Managing Director - Europe, The PBN Company, London

Close your eyes and cast your mind back to the heady days of 2007 when Russian companies made the record books, topping the European IPO league table by raising a total of $29 billion.  That year, Russia’s Sberbank and VTB were the world’s largest flotations of the year, raising $8.8 billion and $8 billion, respectively.

Then came the global credit crisis, and during 2008 the flood turned to a trickle.  In 2009, the ground has been parched, and we have had to content ourselves with the hope that Russian IPOs on international exchanges will start flowing again once market conditions improve.

But will they?  Not, it seems, if the Russian authorities have anything to do with it.

On June 3, Russian business daily Kommersant released details of draft regulations that stand to have a profound impact on the ability of Russian companies to conduct share placements abroad.

At present, Russian companies conducting IPOs must have their primary share listing on a Russian stock exchange, and then have the ability to list depository receipts abroad depending on how “strategic” the company is assessed to be.  Companies considered to have no strategic importance can float up to 30% of their equity abroad; companies from the so-called strategic sectors are allowed to float up to 25%; and companies that are exploring or extracting mineral resources in strategic areas can float up to 5%.

According to Kommersant, the proposed new regulations will revise this system, basing the allowed percentage for both primary and secondary placements on the company’s domestic listing, which is determined by local liquidity.  Companies with shares on the RTS’s upper “A” list will be allowed to float 35% of their equity abroad; those with shares on the middle “B” list will be allowed 15%; and companies on the lower “V” or “I” lists will be allowed only 5%.  In addition, companies will not be able to place more that 50% of additional share issues abroad, down from the current level of 70%.

So far, so good(ish).  The catch, however, lies in the fine print.  Existing legislation requires that Russian all companies start off on the “V” list, which means that companies will be limited to floating just 5% abroad in their initial issues.  Given that many international funds lack permission to trade on Russian exchanges and can only hold Russian shares traded on international exchanges, this all but turns off the tap on the bulk of international investment in the country’s flotations.

The rationale behind the change is the desire to make the RTS and MICEX the exchanges of choice for Russian issuers, who have in recent years been particularly keen on London listings.  But this ignores the fact that it is precisely the participation of foreign investors that has driven the success of Russian IPOs over the past few years, and that having an international listing and international shareholders has tangible benefits for the company in terms of improving transparency and corporate governance.

Cutting off this key source of capital will severely limit the prospects for Russian companies looking to raise finance in a global market which, given current conditions, is already picky and becoming more so.  Although the desire to bolster Russia’s own floundering equity markets is an admirable one, the new regulations risk cutting off the nose to spite the face, in the end limiting rather than enhancing Russian companies’ ability to raise capital and grow.

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3. Russia’s IPO Market: What the Experts Think
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