Translated material
Strategic incident
Deutsche Bank has suspended the issuance of depositary receipts for shares of five Russian companies
Deutsche Bank has stopped issuing depository receipts for shares of several large Russian companies. Deutsche Bank attributes this decision to the recently enacted law restricting foreign investment in strategic sectors. It is possible that other banks that are authorized depositories will also suspend the issuance of depository receipts for shares of Russian enterprises. In this regard, the difference in price between receipts and local shares will increase significantly.The termination of the conversion of local shares into depositary receipts (DR-programs) affected Severstal, NOVATEK, Bashneft, NLMK and Polymetal. “On May 7, 2008, Russia adopted a law on the participation of foreign investors in strategic enterprises. Deutsche Bank is currently studying legislation in this area and its impact on a number of Russian issuers. We consider this step necessary and aimed at ensuring that Deutsche Bank’s actions comply with Russian legislation and also benefit investors,” the bank’s official commentary says.
The law defines 42 types of activities where foreigners must obtain permission from the state to acquire a block of shares. These include, in particular, the nuclear industry, space and aviation industries, as well as geological exploration of subsoil, exploration and extraction of mineral resources in subsoil areas of federal significance, extraction of aquatic biological resources, television and radio broadcasting.
The law considers depositories that hold shares and issue receipts for them as the owners of these securities. Accordingly, as shareholders, depository banks, according to the new law, must agree with the state on the acquisition of a stake that exceeds 25% (for companies conducting exploration or production in subsoil areas of federal significance, this threshold is 5%). The problem is that there is no clarification yet on how these agreements on the purchase of securities will take place.
“Since, according to the new law, the owners of the shares are banks (since they have reserved local shares for which they issue receipts), they bear all possible risks on these securities,” notes Tatyana Romanova, head of the department for work in Western markets of IC BCS. -- This is especially true if the bank maintains a program of depository receipts for companies that may be subject to the new law, where restrictions on foreign investment apply. Apparently, Deutsche Bank considered that it was these companies that would be subject to restrictions.”
Deutsche Bank became the first major depository to decide to stop issuing depositary receipts. Neither Bank of New York nor JP Morgan have yet announced their intention to close their DR programs. However, according to Elena Krasnitskaya, an analyst at Troika Dialog Investment Company, it is possible that other depository banks will follow the example of Deutsche Bank and may close their books in a number of companies, i.e. stop accepting instructions to convert local shares into depositary receipts unless changes are made to the law. Ms. Krasnitskaya did not specify exactly what amendments were needed.
According to Ms. Romanova, clarification is needed both on the law itself and on specific issuing companies. “Most likely, the bank will consult with Russian regulatory authorities in relation to each individual case (primarily companies for which depository programs are currently open at Deutsche Bank), i.e. Are restrictions possible for a specific company,” she says.
It is obvious that freezing DR programs will not have a negative impact on trading in the securities of these issuers. However, according to Ms. Krasnitskaya, due to the cessation of issuing receipts, the spread between their value and the price of local shares will increase. Thus, yesterday the fall in stock prices of NOVATEK and Polymetal was twice as large as the decline in prices for depositary receipts of these companies.