M. Stulov

In 2006, Rosneft and Rosneftegaz placed almost 15% of the state company's shares on the stock exchanges, earning $10.6 billion for them: Rosneftegaz - $8.5 billion, Rosneft - $2.15 billion. Of these funds, the companies paid the organizing banks a commission of $138 million - 10 cents per share sold. Rosneft estimated other expenses on the IPO at $40 million.

The main source of income for depositories is the commission for converting receipts into local shares and back, says an investment banker who participated in the preparation of several programs for depository receipts for Russian companies. Usually, about three times more securities than free float are converted per year. Maxim Shein, head of the analytical department at BrokerCreditService, reminds us that converting Rosneft shares into GDRs and back costs 5 cents. He estimates Rosneft's free float at 5%. This means that JP Morgan can earn $79 million per year on converting its securities.

Almost a third of these expenses – $56 million – were compensated by JP Morgan, the depository for Rosneft’s GDR program. This follows from the minutes of the decision of the Rosneft board of directors on March 6 (Vedomosti has a copy). “The amount of compensation received from the JP Morgan depository for expenses paid by Rosneftegaz in connection with the placement of its Rosneft shares and the admission of GDRs issued in relation to these shares to trading on the LSE ($56,012,160.8) is subject to equal distribution between Rosneftegaz and Rosneft,” the document says (see inset).

Representatives of Rosneft and JP Morgan declined to comment on this. In essence, JP Morgan paid Rosneft for the right to be its depository, explains a source of Vedomosti familiar with the terms of the agreement between the bank and the company.

This is a common practice, says a source close to Rosneft. As a rule, the depository pays the issuer a portion of the profit from the depository program, confirm bankers and employees of the companies that have issued receipts for their shares. “The depository earns from each transaction with receipts and shares the income with the company,” explains a top manager of a Western bank familiar with the agreement between JP Morgan and Rosneft. The bank can estimate its income from the program in advance and usually pays the company money immediately after the IPO to partially cover its expenses, he explains. Then JP Morgan will transfer a portion of the income to Rosneft every year, Vedomosti’s source believes, but the amounts of the payments will be smaller. Usually, companies spend this money on promoting themselves among investors and various road shows.

The depository's expenses, especially for large programs, are incomparably small compared to the income, and it can share with the company, explains another manager of a Western investment bank. Companies often choose a depository based on the amount of compensation it offers, admits a manager of one of the companies that has a depository receipt program. Employees of three more issuers told Vedomosti that their companies receive payments from their depositories. One of them called the amount offered to Rosneft "absolutely adequate."

It is not surprising that the bank pays Rosneft tens of millions of dollars, says Troika Dialog trader Timur Nasardinov: conversion costs 5 cents, or 0.6-0.7% of the price of Rosneft shares, more than other companies. This is holding back trading volumes in Rosneft securities, the trader believes. He cites the example of Bank of New York, where conversion costs 2 cents for shares under $10. “It would be better for companies to think about the efficiency of the market and the value of shares, because high tariffs reduce it,” says a Vedomosti source who participated in the preparation of the depositary receipt programs. According to him, the depository could reduce the tariff, for example, if Rosneft refused its share of the profit. (Boris Safronov, Andrey Panov, Maria Rozhkova participated in the preparation of the article.)

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