FFMS is looking to abolish DR conversion limits for Russian IPOs, Head Dmitry Pankin told Interfax. "The idea is to have the initial float entirely in the Russian market and a while later the issuer has unlimited trading abroad. FFMS is looking into this option”, said Pankin. The initiative came forward at the 17 October meeting with Presidential Aide Elvira Nabiullina as an incentive for Russian IPOs. The meeting, says our source, was dedicated to boosting IPOs in the Russian stock market. A FFMS source told us that the basic idea is to return the pricing of Russian shares to Russia. This year Promsvyazbank was the only issuer out of five Russian IPOs to be registered in Russia.

Another source explained the logic as follows: if a share is traded with sufficient liquidity for one year, the issuer may waive the right to unlimited conversion. "Regulators also hope that the Central Depositary, due to be launched 1 January 2013, will help foreign investors gain access to Russia through clearing houses such as Euroclear and Clearstream, making DRs less necessary".

Today, there are several limits in place for Russian shares converted into foreign depositary receipts. A maximum of 25% total float can be converted. Also, a minimum of 50% new issue must be placed in Russia. A source close to FFMS told us that for the float to be more than a technicality, more share liquidity requirements are in order, as well as a one-year timeout for the DR conversion of shares floated in Russia.

Market participants doubt that the measures will increase the volume of Russian IPOs. "A project like this implies certain issuer requirements”, says an IPO arranger. “These requirements are hard to set in a manner that would be acceptable to all issuers, therefore companies will seek loopholes”. Thus, the current requirement for a minimum of 50% new issue to be placed in Russia is avoided by placing pre-owned shares (not subject to limitation) and selling the necessary amount of new shares to the shareholders by private placement.

Besides, the Russian market is in dire need of investors. During the September Sberbank SPO some 68% of the offer was swapped up as DRs, with a further 20% local shares bought for foreign currency. "The drain of IPOs from Russia is not about infrastructure of legally set DR conversion limits, it’s about the absence of home investors", says National Settlement Depositary Advisory Board member Alexander Sheglov. Alora Managing Director Sergey Khestanov says the authorities’ offer is more of a show, rather than market support. "These initiatives are meaningless on their own, without tax incentives for issuers and investors”, he says. “Moreover, the DR conversion limit did not work for Russian companies, all it took was registering a foreign entity". For instance, UC Rusal, registered in Jersey and conducting its main business in Russia, floated over $2,2bn worth of shares in Hong Kong in 2010.

Petr Rudenko

Project Group №1, Dmitry Pankin