The Float Guide How to float a company on the Russian Securities Exchange

Transcription

1 The Float Guide How to float a company on the Russian Securities Exchange Contact: Vassily Rudomino Russia vrudomino@alrud.ru Anna Amosova Russia aamosova@alrud.ru Anna Volgina Russia avolgina@alrud.ru

2 INTRODUCTION his guide gives an overview of what T is involved in listing a Russian company on the Russian Securities Exchange. It is a practical manual covering all aspects of a float from prerequisites through to life after the float.

3 CONTENTS 1 SUMMARY 1 2 LISTING A RUSSIAN COMPANY ON A RUSSIAN STOCK EXCHANGE 2 3 INTERNATIONAL LISTING OF RUSSIAN COMPANIES 4 4 LISTING OF FOREIGN SECURITIES ON A RUSSIAN STOCK EXCHANGE 5 5 TEAM ROLE OF ADVISORS 7 6 GETTING THE COMPANY READY 8 7 THE PROSPECTUS AND DISCLOSURE REQUIREMENTS 9 8 DUE DILIGENCE 11 9 PRICING OFFERING PERIOD MARKETING RESTRICTIONS DEALING WITH THE REGULATORS ONGOING OBLIGATIONS 18 FLOAT TIMETABLE 19

4 1 SUMMARY Notwithstanding the current instability of the global financial markets, more and more companies decide to prepare themselves for listing on a stock exchange and consider an IPO as one of the possibilities to raise capital. This guide provides an overview of some issues which should be taken into account by a Russian or foreign company seeking to trade and list its shares on a Russian stock exchange. In this guide we will mainly focus on the Russian legal aspects of the securities listing and the requirements of Russian stock exchanges and regulatory authorities. In this guide we will further describe the procedure of listing a Russian company on a Russian stock exchange and international listing of Russian companies, and outline the disclosure and procedural requirements which a company and its shareholders would need to satisfy before listing. We will also set out an indicative timetable for offering of shares in Russia and their inclusion in the quotation list of a Russian stock exchange.

5 2 LISTING A RUSSIAN COMPANY ON A RUSSIAN STOCK EXCHANGE Listing in Russia is generally less expensive and time consuming for a Russian company (a company incorporated in Russia). Generally the process of preparing and performing an IPO in Russia takes from four to seven months. The requirements as to the documentation and further compliance are less strict as opposed to those of international platforms. Many Russian companies launching an IPO select a Russian stock exchange as the main place to list their shares, since the companies feel more confident on the domestic market and have the possibility to become the leader in a specific sector. The securities market and securities transactions within the Russian Federation are primarily governed by Federal Law On the Securities Market, 22 April 1996 (Securities Law). The issuance and listing of securities are also governed by a number of regulations issued by the Federal Service for Financial Markets (FSFM) and other regulatory bodies, as well as by the rules of companies operating the relevant stock exchange. The FSFM is a Russian federal executive body which is responsible for regulation, control and supervision of the capital market as well as for adoption of necessary rules and regulations for facilitation of trade on the capital markets. Under the Securities Law a company seeking listing must generally take certain steps (some specific rules are applicable to particular issuers, eg, banks): adoption of the decision on placement of shares by the authorised body of the company (It should be noted that Russian law distinguishes between placement and circulation of securities where placement refers to initial sale of newly issued securities, whereas circulation refers to any subsequent purchase and sale of such securities (ie, after completion of the offering); approval by the board of directors or by general meeting of shareholders (as applicable) of the decision on the issue of shares; state registration of the share issue (alongside the registration of the prospectus when required under the Securities Law); issue of the shares; and state registration of the report on the results of the issue of shares (or notification of the FSFM of such results if the shares will be listed on a stock exchange). Admission of securities to trading does not necessarily mean listing of securities, as securities may be traded without listing. Under the Securities Law, securities listing means the inclusion of securities in the quotation lists by a stock exchange. Inclusion of securities in quotation lists of a stock exchange increases the number of possible investors, enables further listing and/or circulation of securities on foreign markets, reduces the time between an IPO and the circulation of securities on a stock exchange and, of course, enhances the company s status. In addition, listed companies must comply with certain requirements as to the management of the company, transparency, this being a certain guarantee for the investor. There are several quotation lists in Russia in which different securities may be included: quotation lists A (the first and the second level), B, V, and I, the latter accepting only shares. The quotation lists are different in terms of admission requirements; the lists are arranged on an

6 ascending scale from lower to higher strictness of requirements. Securities may be included in a quotation list both at the stage of circulation and in the course of the initial public offering (placement). The listing procedure is governed by the FSFM Decree on regulation of trading activities on the securities market, 28 December It provides both general and specific requirements for listing on each of the quotation lists, some of which are named below: Quotation list A1 (the first level) the capitalisation of ordinary shares must reach 10bn RUB; one shareholder and the shareholder s affiliated persons may retain up to 75 per cent of the stock; the company must have a track record of at least three years and prepare its financial statements in compliance with IFRS/US GAAP requirements. Quotation list A2 (the second level) the capitalisation of ordinary shares must reach 3bn RUB; one shareholder and the shareholder s affiliated persons may hold up to 75 per cent of the shares; a track record of at least three years, preparation of financial statements in compliance with IFRS/US GAAP requirements. Quotation list B the capitalisation of ordinary shares must reach 1.5bn RUB; one shareholder and the shareholder s affiliates may retain up to 90 per cent of the shares; and the company must be incorporated for at least one year. Quotation list V: there are no requirements for the capitalisation of both ordinary and preferred shares, however the company must be incorporated for at least three years. Quotation list I the capitalisation of ordinary shares must reach 60m RUB; there are no requirements for the period of existence of the company or the maximum number of shares retained by one shareholder. Initial public offering of shares is performed on the V and I quotation lists. In addition to the requirements of the Securities Law, the Federal Law on the Securities Market, the Federal Law on the Issuance and Trading of Governmental and Municipal Securities (where applicable) regarding the disclosure of information about the issue and conditions of the securities offering, there are also listing rules of the stock exchange to be complied with. The principal stock exchanges in Russia are the Moscow Interbank Currency Exchange (MICEX) and the Russian Trading System Stock Exchange (RTS) which have recently merged as a united Stock Exchange, adopting its listing rules: MICEX-RTS (Rules for listing, admission and circulation of securities of the closed joint-stock company Stock exchange MICEX, effective from 14 December 2011).

7 3 INTERNATIONAL LISTING OF RUSSIAN COMPANIES Under the Securities Law and the Regulation on the procedure of issuance of authorisations on placement and/or organisation of circulation of Russian securities outside Russia by FSFM, approved by FSFM, 10 June 2009 (hereinafter the Regulation on placement and/or organisation of circulation outside Russia ), the placement and/or circulation of securities issued by Russian companies (hereinafter Russian securities ) outside Russia and securities issued by foreign issuers certifying the rights in respect of Russian securities, eg, depository receipts (hereinafter foreign securities ), are allowed only upon the respective authorisation of the FSFM. Such an authorisation can only be received by a company which is already listed on a Russian stock exchange. It is notable that Russian shares cannot be directly listed on foreign markets due to absence of a Russian central depositary and clearing service, providing prompt (three business days) settlement of securities transactions against payment. Thus in practice Russian securities are listed on foreign stock exchanges in the form of depository receipts (ie, as foreign securities as mentioned above) subject to the Regulation on placement and/or organisation of circulation outside Russia. The Federal law on the Central Depository providing the possibility of opening of accounts for foreign nominal holders of shares and thus direct listing of Russian issuers on foreign stock exchanges has been adopted and will be coming into force in As a result the practice of international listing of Russian shares may change. There are certain thresholds for the maximum number of shares (Russian and/or foreign securities) that may be placed and/or circulate outside Russia. At least 50 per cent of the newly issued shares of a Russian company (including placement as foreign securities) that are to be placed must be placed in Russia. Furthermore, the issuer must notify the FSFM about the results of the offering abroad within 30 days after the placement. The permission of the FSFM can be cancelled in certain circumstances, eg, if the underlying shares are redeemed, if the placement did not occur following one year from the date of the permission and if the post offering notification requirements have not been met. Issuers are also subject to an ongoing obligation to update the FSFM on any changes to the depositary agreement. Considering the inefficiency of certain administrative measures, the abolition of certain restrictions is currently under discussion. According to this initiative it is first planned to abolish the restrictions imposed on the listing of securities in the states with which the FSFM has signed memorandums of data exchange. The UK and the USA are not among these states, though the most securities listed abroad are listed on the stock markets of these countries. The named memorandums were signed between Russia and 15 states, including Germany. It is expected that the removal of restrictions will not only facilitate the financial activity of Russian companies but will also promote their transparency. Due to the above restrictions many companies with assets located in Russia in practice choose to place and circulate their shares abroad through offshore holding companies by offering their shares on foreign stock markets (eg, X5 Retail Group, UC Rusal, Evraz Group and Yandex). The Russian securities regulator, the FSFM, has at various times officially declared that foreign issuers with substantial assets in Russia must also list their shares in Russia, and suggested a change in the securities regulations in order to make such requirement mandatory. However, no such change has been adopted.

8 4 LISTING OF FOREIGN SECURITIES ON A RUSSIAN STOCK EXCHANGE Foreign financial instruments issued by a foreign issuer can be listed in the Russian Federation if they meet the following requirements: foreign financial instruments have been assigned the securities identification international code (number) and the financial instruments international classification code; and if they are qualified as securities in accordance with the procedure established by the FSFM. Foreign securities may be placed and (or) publicly circulated in the Russian Federation if they meet the above given requirements and if the issuers of such securities are: foreign entities incorporated in the states which are members of the Organization for Economic Cooperation and Development (OECD), members or observers of the Financial Action Task Force on Money Laundering (FATF) and (or) members of the EC Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL); foreign entities incorporated in the states the relevant regulatory bodies of which have entered into the agreement with the FSFM stipulating the procedure of their interaction; international financial organisations included in the list approved by the Russian Government; and foreign states specified in subparagraphs (1) and (2) above or the central banks of such foreign states. Foreign securities may be admitted by a Russian stock exchange if they are already traded outside Russia on a foreign stock exchange (the list of which is adopted by the FSFM), are eligible for public circulation in the relevant jurisdiction and meet the above criteria. In certain cases the FSFM may approve the public placement and/or circulation of foreign securities that are not listed on a foreign stock exchange. The issuer of foreign securities will need to register a prospectus in Russia with the FSFM. Such prospectus must be signed by a Russian broker (except for prospectuses of international financial organisations). After the registration of the prospectus the issuer will be subject to ongoing disclosure obligations. Under the Russian Securities Law the placement refers to an initial sale (or an initial offering) of newly issued securities, whereas the circulation refers to any subsequent purchase and sale of such securities (ie, after completion of the initial offering). Although Russian law is unclear in this respect, private sale and purchase transactions completed after initial offering (ie, circulation) should be possible without the need to register a prospectus if the buyer of foreign securities will be a qualified investor (see Chapter XI on Marketing restrictions for more detail on Russian qualified investors). Another way of accessing the Russian market with foreign securities would be issuing Russian depositary receipts (RDRs). Under the Securities Law a RDR means a registered security without nominal value, which certifies both the right to a specified amount of shares or bonds and the provision of services in connection with the realisation of rights by a RDR holder. In order to issue RDRs, the company must lodge its shares with a depositary bank which will issue

9 RDRs. Only licensed depositary banks incorporated in Russia operating a depositary business for at least three years and having equity capital in the amount of at least 200m RUB are allowed to issue RDRs. Placement of RDRs has certain benefits in comparison to the placement of shares, for example: no report on results of placement should be registered; circulation of RDRs can start immediately after the state registration of the issue. However RDRs are a relatively new instrument in Russia. The first RDRs were issued by the United Company RUSAL in 2010 and there is no strong market practice in this respect.

10 5 TEAM ROLE OF ADVISORS In order to achieve a successful listing the company will need the assistance of a team of advisors. Types of advisors and their roles and responsibilities vary depending on the nature of the company's business. Commonly the team of advisors includes professional participants of the securities market, investment banks, lawyers and accountants, but it also may include other business consultants and PR advisors who generate interest and positive publicity as regards the listing of securities and monitor the content and wording of any public statement appearing in this context. Furthermore, the rules of various exchange markets may result in certain differences in advisors' roles. Legal advisors help the company to prepare the listing, by assisting and advising on, inter alia, any corporate restructuring required for the offering, conducting the due diligence of the issuer and its major subsidiaries, drafting and commenting on the prospectus as well as on press releases and any other publicity materials relating to the offer and negotiating the transaction documents including all ancillary documentation. Lawyers also advise the issuer s directors on their legal and regulatory duties, obligations and potential liabilities as directors of a listed company. Usually, lawyers are engaged both by the company and by investment banks, in order to achieve an unbiased legal opinion. Investment banks, together with the lawyers, often act as intermediaries between the company and the market regulators and will have to demonstrate to regulators and/or a stock exchange provider that the company complies with listing requirements. Investment banks both market the offer and act as underwriters to the offer. Accountants and auditors carry out a financial due diligence of the company. The financial due diligence may cover a wide range of areas including historical trading information, projected working capital, profit forecasts and internal management and accounting systems and control. The accountants' due diligence aims at ensuring that the financial information included in the prospectus is correct and not misleading. According to the Securities Law the prospectus must be signed by an auditor, who confirms the accuracy of the information contained in certain sections of the prospectus. Independent appraisers must in certain cases under the Securities Law sign the prospectus thus confirming the accuracy of the information contained in certain sections thereof. The independent appraiser must not be an affiliate of the issuer. Financial advisors are legal entities having a broker or dealer license providing the issuer with the services on drafting and signing of the prospectus upon the request of the issuer, and drafting the investment memorandum (where necessary). If the chosen financial advisors do not comply with the stated requirements (FSFM Ruling No 9, 11 October 1999) the prospectus may be rejected and the securities issue will not be registered. It is significant enough to think twice before choosing financial advisors. For the admission of securities to quotation list I on a Russian stock exchange a special agreement must be signed between the issuer and the authorised financial advisor or a listing agent who must sign the prospectus. Therefore in this case the participation of such an advisor is obligatory. The signatories of the prospectus bear joint and individual liability for losses suffered by the investors and the owners of securities due to misleading, incomplete or incorrect information contained in the prospectus. Therefore the above mentioned advisors signing the prospectus also provide an indemnity for investors losses. Stock exchanges also provide the issuer with wide range of services, such as consultation and advice in respect of the planned IPO, assistance in drafting the IPO documents, rendering PR support and organisation of roadshows.

11 6 GETTING THE COMPANY READY Going public is one of the most significant decisions that a company may take and in order to do it successfully the company should carefully consider if its resources are sufficient to cope with IPO demands. For these purposes a special corporate governance and a company due diligence is essential. And of course an IPO candidate must be profitable and show a clear path to prosperity and strong market growth to be attractive to investors. Once having decided to list, the company should choose a specific market and examine the listing requirements of such market. Both commercial and legal aspects should be considered, as it is even more important how the company will operate in the post-ipo period than how difficult the preparation of the IPO is. The further step is getting the company ready from the inside. And that means (among other things) working on its corporate governance. Besides this the company must have the audited financial statements prepared in accordance with IFRS/US GAAP for several preceding years. The company s board of directors has a key role in the IPO procedure. It is helpful to have board members with the background in investment banking or corporate finance, accounting or financing, legal and/or business skills in the sector where the company operates. Board members who have good connections in the business community can help to attract investors to the company. A disciplined and experienced management team apart from assistance in the IPO should keep running the company s business in the ordinary course of business to make sure the process of IPO will not have material adverse impact on the company s operations. It is very common to hire additional top management personnel for these purposes. The company shall consider a possible change of its corporate structure if the existing one is not transparent enough for possible investors. Generally the concept of proper corporate governance/corporate conduct is not yet developed in Russia and thus in practice the introducing and establishing of the corporate governance system in the company may take quite a long time. Certain corporate governance requirements are set out in the requirements on inclusion of shares into the quotation lists of stock exchanges, eg, all companies must have a board of directors; for inclusion of the shares in the quotation list A (the first and the second level) at least three directors of the board must be independent (for inclusion in the remaining quotation lists only one director must be independent).

12 7 THE PROSPECTUS AND DISCLOSURE REQUIREMENTS The prospectus is the centerpiece document of a company when listing on a stock exchange, which is the single source of information about the company for market regulators and potential investors. That s why the prospectus must be comprehensive, structured and understandable. The prospectus includes both information which is compulsory to disclose under the disclosure requirements of regulatory bodies and information which the company wants to disclose in order to attract investors. Strictly in accordance with the Securities Law the prospectus has to contain the following information: brief information on the members of the issuer's management bodies, information on the bank accounts, on the auditor, appraiser and financial consultant of the issuer, as well as on other persons that have signed the prospectus; brief information on the volume, time, procedure for, and terms of, the placement of the issued securities; basic information on the issuer's financial and economic condition and on risk factors; detailed information on the issuer; information on the issuer's financial and business activity; detailed information on the members of the issuer's bodies controlling the issuer s financial and business activities, and the brief information on the issuer's employees; the information on the issuer's shareholders and on the transactions of interest made by the issuer; the issuer's accounting reports and other financial information; the detailed information on the procedure for, and the terms of the placement of the issued securities; and additional information on the issuer and the issued securities. Of course the prospectus does not include all the information about the issuer; this is why the issuer indicates, usually in the end of the prospectus, where additional information can be found. Certain requirements are set out by the FSFM for prospectuses of foreign securities and RDRs. Ongoing disclosure requirements are set out in the Securities Law which also contains the definition of the information to be disclosed, information which is not available to the general public. The Securities Law stipulates the form in which the information relating to the issuer must be disclosed; such information should be given in the form of quarterly reports, consolidated financial statements and information on essential facts. Essential facts are those which, being disclosed, may considerably affect the securities value or their quotation. The following information can be deemed information on essential facts: reorganisation or liquidation of the issuer, companies that control the issuer or companies of major importance controlled by the issuer; convocation and holding of general meetings, decisions of general meetings as regards adopting the company s constituent documents, changing the composition of executive

13 bodies of the company, forming its dividend policy, approving of major transactions and transactions with interest (as provided by the Russian legislation), listing and other decisions to be disclosed according to the FSFM decrees; failure to make decisions that must have been taken as stipulated by law; information about companies controlling the issuer or affecting its activity; information about submission of a listing application to a stock exchange and other information. This list is not exhaustive and the law refers to other information which may affect the securities value in the issuer s opinion. All the facts that may lead to a one-time increase or decrease in the value of the issuer s assets by more than ten per cent must be disclosed. The risks to be disclosed are also specified, these are: business, financial, legal, and location (state and region) risks. Different requirements apply to companies providing banking, insurance, telecommunication services, or involved in extraction of minerals. These provisions do not apply to the Russian Central Bank and to the issuers of state and municipal securities. Another area of requirements is set by the stock market where the company will be listed. The requirements of the major Russian stock market are indicated on the website of MICEX-RTS ( Persons providing the information in accordance with the disclosure requirements are liable for the completeness and reliability of this information.

14 8 DUE DILIGENCE Due diligence under the Russian law has some peculiarities. The main purpose of carrying out due diligence apart from enclosing and confirming the relevant information in the prospectus is to provide the investment banks/underwriters with due diligence defense against the liability towards investors. Unfortunately such concept is not well developed in Russia, as the legislation doesn t contain any clear regulations in this respect and the due diligence is not strictly obligatory under the Russian law. According to the provisions set forth in the Securities Law there are certain requirements for signing of the prospectus by authorised persons, who confirm sufficiency and accuracy of the information contained in the prospectus. Thus a certain level of comfort is needed for such persons. The signatories bear joint and individual liability for losses suffered by the investors and the owners of securities due to misleading, incomplete or incorrect information contained in the prospectus. Therefore in order to include the required information in the prospectus, in practice the issuer conducts its own due diligence before or in parallel to the financial consultants and their legal advisors who conduct a comprehensive due diligence on the issuer before signing of the prospectus (if required). In the context of placement or circulation of Russian or foreign securities outside Russia (ADRs, shares of foreign companies holding assets in Russia) the careful and comprehensive due diligence usually takes place as a due diligence defense for the underwriters/investment banks and for the purposes of drafting the prospectus. For such purposes legal, tax and financial advisors of the issuer in Russia or the relevant foreign jurisdiction are engaged to conduct the due diligence on the issuer and issue formal opinions confirming due status of the issuer and other relevant points and figures.

15 9 PRICING As set in the Securities Law the prospectus should contain information about the price of shares placement or method of its determination. The information on the price should also be disclosed by the issuer on its internet page or in mass media news on the stage of shares issue. Determination of a share price on a stock exchange may be done: by applying formulas with certain variables such as currency rate, quotation of certain securities on a stock exchange, etc, (this method cannot be modified at the discretion of the issuer and makes it possible to determine the price of the placement on any date during the whole period of the placement); or by determination by the board of directors. Procedure of the determination of the placement price of securities by the board of directors may include (i) determination of offering price in the course of trade; (ii) the minimum price of placement of securities (cut-off price) below which the securities cannot be placed; (iii) other requirements or conditions under which the offering price of securities is determined. In case the securities price is determined in the course of trade participants shall have the right to file applications of two types: (i) competitive bids (containing the number of securities purchased and the price of their purchase) and (ii) noncompetitive bids (containing the total amount of securities that the participant is obliged to purchase without specifying the number of securities purchased and the price of their purchase). Unless otherwise is provided by the issue documentation, competitive applications containing the highest price of the purchase are preferred. If the bidding terms envisage the filing of both competitive and non-competitive bids, priority is given to competitive bids. The offering price can be set out before the start of the preemptive right period or after the end of the preemptive right period. The basic differences between these two options are as follows: In case of price determination before the start of the preemptive right period, the final offering price must not be more than ten per cent different than the initial price and in such a case the duration of the preemptive right is 45 days. In case of price determination after the end of the preemptive right period the duration of the preemptive right is 20 days.

16 10 OFFERING PERIOD It is obligatory to observe the offering and marketing restrictions (which are explained further herein) in respect of offering of shares. As a general rule the issuer can start placement of securities only after the state registration of the securities issue. Save for the placement of Russian depository receipts the issuer is obliged to complete the placement of securities within one year from the date of the state registration of the securities issue. The issuer should also state in issue documentation the term (the date of start and the date of completion) of the placement of shares or the method of its determination, as well as provide the terms and conditions for investors offers in case the shares are offered to an unlimited circle of buyers. The Securities Law prohibits starting the placement of securities earlier than two weeks after the date of the respective notification about the state registration of the securities issue or, in case securities are offered to qualified investors, earlier than three days after the date of the respective notification.

17 11 MARKETING RESTRICTIONS Distribution of any information on the offering in Russia is subject to rules relating to the offering and advertising of securities, as set forth in the Securities Law, Federal Law On Advertising dated 13 March 2006, as amended ( Law on Advertising ), Federal Law On the Protection of Rights and Interests of Investors in the Securities Market dated 5 March 1999, as amended, and Decree On adoption of standards of securities issue and registration of the prospectus for securities issue dated 25 January 2007 issued by the FSFM. Under the legislation mentioned above the advertisement of securities placed through subscription is not permitted before the prospectus for such securities has been registered, except for cases when no registration of the prospectus is required for the public offer or public trading of securities under the federal law. It is also prohibited to advertise and/or offer securities to an unlimited group of persons, if the issuer of such securities does not properly disclose the information such as financial information, information on payments of the dividends, failure to perform the obligations towards securities holder and other information as stipulated by the Securities Law. An advertisement of securities must also contain information on the persons responsible for the securities being advertised. Any information on securities that is intended for qualified investors (as defined below) may not be distributed among the general public, including by means of advertisements, except for information to be disclosed as provided by the securities legislation. It is allowed to disclose the information on securities that is intended for qualified investors, including the information on the issuer, to the owners of such securities, qualified investors, government agencies and local governments for performance of their functions, as well as to other persons provided by the relevant regulations of the FSFM. Securities to be offered to qualified investors can t be offered to the general public or an unlimited number of qualified investors, including by means of advertising. In addition there are other requirements stipulated by the Russian legislation on advertisements of issued securities, such as: An advertisement of issued securities must contain: the name of the issuer; and the source of the information subject to disclosure under the Russian legislation on securities. An advertisement of securities must not contain: a promise to pay out dividends on securities (unless permitted); or forecasts of an increase in value of the securities. As regards foreign securities the regulation is basically the same as for Russian securities. Under the Securities Law foreign securities not admitted to public placement and/or public circulation in Russia, as well as foreign financial documents which are not classified as securities, may not be offered in any form and by any means, in particular with the use of advertising, to an unlimited (indefinite) group of persons or to persons who are not qualified investors. Any information on the offering and the securities that is disclosed to an unlimited number of persons (eg, to the public), an unlimited number of qualified investors, or to persons who are not qualified investors may constitute an advertising of the securities. The dissemination of such information may result in violation of the restrictions on offering of the securities.

18 The Russian law (Article of the Securities Law) defines qualified investors as (a) individuals and legal entities (including brokers, dealers and managers, financial institutions, joint-stock investment funds, management companies of investment funds, share based investment funds and private pension funds, certain specified non-commercial funds, as well as some specified institutions, which have a qualified investor status under the Russian federal laws and (b) individuals and legal entities which are recognised as qualified investors in accordance with the procedure set forth in the Securities Law. Road-shows in Russia and other contacts with potential investors located in Russia must be strictly limited to contacts with qualified investors (as defined above) and special precautions should be taken.

19 12 DEALING WITH THE REGULATORS For the purposes of this guide, the Regulators are the Federal Service on Financial Markets (FSFM), the Federal Antimonopoly Service (FAS) and the Governmental Commission on Control over Procedures for Foreign Investments in the Russian Federation (the Governmental Commission). IPO procedure requires certain filings and receiving permits and approvals from the Regulators. Dealings with the Regulators can be generally split into three main parts: necessary approvals and registration of securities documentation, disclosure requirements and ongoing obligations. In the initial stage it is very important to understand the necessity of achieving clearance under the Anti-trust, Strategic Investments Law and the Law on Natural Monopolies by the respective Regulators. In accordance with the Russian Competition Law the acquisition of shares that will in total exceed 25 per cent, 50 per cent, 75 per cent or more of voting shares held by one shareholder (its group) in a Russian company requires the clearance (in the form of a pre-transaction filing or a post-transaction notification) by the FAS. The company might also operate in one of the business areas of strategic importance for the national security and defense that are subject to the state control under the Strategic Investments Law. These are for instance companies included in the Register of the subjects of natural monopolies specified by the Law on Natural Monopolies as well as some other companies, eg, performing certain mining and encryption activities, design and manufacture of equipment for nuclear installations, publishing and other activities subject to relevant criteria stipulated by law. Acquisition of the control (direct or indirect) over a company operating in a strategic area by foreign investors requires clearance by the Governmental Commission chaired by the Prime Minister of Russia. Under the Russian Law on Natural Monopolies acquisition of more than ten per cent shares/participation interest in a company operating in the sphere of natural monopolies requires a post-transaction notification to the Russian antitrust authorities. Dealing with the FSFM will include the state registration of the securities issue, supplementary securities issue (additional to the initial one) and the state registration of a report on the results of the securities issue (supplementary issue) with the FSFM, or notification of the results of the securities issue (supplementary securities issue) to the FSFM. Usually the FSFM will carry out both the state registration of the securities issue and the registration of the securities prospectus (when required). In other cases the state registration of the securities issue may be accompanied by the registration of the securities prospectus at the issuer's discretion (if the issuer envisages public circulation of the securities, etc). If both the securities issue and the securities prospectus are registered with the FSFM, then each stage of the securities issuance procedure must be accompanied by the disclosure of information to the FSFM. At each stage the issuer is required to provide to the FSFM the documents (a print-out of an extract from information agency news, a copy of a mass medium publication, a print-out from the internet website used by the issuer to disclose information etc) confirming that the issuer meets the information disclosure requirements at all stages of the state registration of the issue (supplementary issue) of securities and securities floatation. If, according to the decision on the registration of the issue (supplementary issue) of securities, the issuer has undertaken to disclose information during the period after the state registration of the issue (supplementary issue) of securities and before the end of securities floatation, the issuer is required to provide the FSFM with documents (a print-out of an extract from information agency news, a copy of a

20 mass medium publication, a print-out from the internet website used by the issuer to disclose information etc) confirming that such information has been disclosed. There are also other disclosure and reporting requirements. The FSFM s most important tasks on the securities market are: protection of investors by means of keeping information databases open and accessible by any interested party, imposing sanctions on parties committing offences on the securities market, registration of securities issue, the issue of licences and performance of general monitoring of the securities market. The FSFM is also authorised to issue notices addressed to the persons violating the securities legislation. The chosen Russian stock exchange has also an important role in the IPO procedure, as it can set its own rules of access to placing, trading and listing of securities. For example, for the purpose of the placement of securities on a stock exchange the special agreement on cooperation concluded between the issuer and the stock exchange in respect of information exchange as well as other actions are often required.

21 13 ONGOING OBLIGATIONS Generally, after the IPO, the issuer, its major shareholders and managers will have to comply with ongoing obligations and requirements in addition to standard obligations of companies incorporated and/or operating in Russia. The company, the shares of which are traded or listed on a stock exchange, must comply with increased requirements issued by the regulators and the relevant stock exchange including but not limited to the disclosure obligations, issuer corporate conduct requirements, certain requirements to the issuer`s board of directors and committees, maintenance of internal regulations and documentation in good and proper order, dealing with investors and shareholders, maintenance of good reputation of the issuer, its major shareholders and managers, etc. Noncompliance with the above requirements may not only lead to the criminal, administrative and civil liability but also have a negative impact on the share market price and flotation of the issue s shares. Under the Decree of the FSFM of 10 October 2006 On Endorsing the Regulations on disclosure of information by issuers of equity securities (the Regulations ), the information must be disclosed in a timely manner by means of publication in the news of one of the relevant information agencies and posting on the web site. After the IPO process is completed joint-stock companies must disclose the information stipulated by the Regulations to the public, in particular: annual reports; annual accounting reporting documents; the statute and other internal documents of the company regulating the activities of its bodies; information on affiliated persons of the company; and other information specified in the Regulations. The trading in securities includes regular flow of documents between the chosen stock exchange (for example the Listing Department of RTS) and the issuer of the listed securities. For convenience of submission of documents of the issuer, stock exchanges operate a special system of electronic submission of documents through the web application. Rules for admission of securities to trading adopted by stock exchanges govern monitoring and control of the conformity of the securities admitted to trading/quotation list and issuers of such securities with requirements and rules of the relevant stock exchange as well as requirements of the regulatory legal acts of the Russian Federation. The stock exchange will monitor the above compliance on the basis of documents submitted by the issuer in accordance with the named rules, information disclosed by the issuer in accordance with the Securities Law and the regulatory legal acts of the FSFM, and information published by information agencies and in other sources. In the context of placement or circulation of Russian or foreign securities (ADRs, shares of a foreign company holding assets in Russia) outside Russia the ongoing obligations of the country where the securities will be placed/circulate, as well as of other relevant jurisdictions, the legal provisions of which are applicable to the issuer, should also be considered and duly fulfilled.

22 INDICATIVE FLOAT TIMETABLE 1 Action Item Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 1 Appointment of underwriter and project team; Carrying out a kick-off meeting; coordination of an IPO structure; corporate approval by general meeting of shareholders re. issue of shares; 2 Prepare and agree on underwriting agreement; 3 Setup data room; carry out due diligence; 4 Drafting of the prospectus; 5 Application for listing; decision of board of directors re. approval of prospectus and decision of issue of shares; signing of underwriting agreement; 6 Registration of additional issue of shares and prospectus with the Federal Service on Financial Markets; 7 Getting a listing category of V and direct a document of listing to Federal Service on Financial Markets; announcing of intention to allot the shares; prepare the materials for road- 1 This proposed timetable shows steps necessary for an initial offering of shares of Russian issuer in Russia and their inclusion in the quotation list of a Russian stock exchange

23 show; 8 Determination of price (if not determined as a fixed price in the prospectus); Pre-emptive rights period; 9 Placement of shares issue; 10 Notification of Federal Service on Financial Markets of the result of shares issue; 11 Reception of money for shares by issuer and shareholders; 12 Settlement of accounts with investors.

24 NOTES 2 floor, 17 Skakovaya Street, MOSCOW TELEPHONE + 7 (495) FACSIMILE + 7 (495) WEBSITE