Update: Russia Limits Transactions with Shares Received Upon Cancellation of DR Programs

April 29, 2022

The delisting of Russian issuers’ depositary receipts could potentially lead to a disproportional increase in sales of underlying shares in the Russian stock market and contribute to its volatility. In response to this challenge, Russia’s Central Bank introduced a limit on transactions with shares received upon cancellation of depositary receipts.

Russia’s Federal Law No. 114-FZ of April 16, 2022 (the Delisting Law) entered into force on April 27, 2022 (the Effective Date). The Delisting Law prohibits Russian issuers from having their shares (Russian shares or underlying shares) traded outside Russia via depositary receipts (DRs) absent government approval.

It is anticipated that the process of cancelling the DRs and delivering the underlying Russian shares (also known as the DR conversion) may extend well beyond the Effective Date. At the same time, the Delisting Law clearly states that only those investors who held DRs as of the Effective Date will be entitled to receive the underlying Russian shares. This creates some further practical difficulties for the DR conversion.

Obstacles Related to DR Conversion

DR holders face a number of practical issues that complicate the DR conversion:

  • International settlement and clearing systems Euroclear and Clearstream blocked or imposed restrictions on accounts with Russia’s National Settlement Depository, and this might result in difficulties (or impossibility) in transferring and converting DRs using these systems.
  • A DR holder might need to instruct a broker or similar institution to surrender the DRs and/or accept the underlying shares, and such broker may be unable to accept or fulfill this instruction in the current geopolitical environment.
  • A DR holder may be restricted from holding Russian shares directly under their investment declarations or applicable legal and sanctions regimes.
  • There are current Russian legal restrictions on disposing of, or repatriating income from, Russian shares owned by investors from the so-called “unfriendly states.”

In practice, it appears that for an investor to keep enjoying their rights to the underlying shares as to the previously held DRs, such investor should be the one who can open a shares account directly with a Russian broker or custodian and who is not an unfriendly state resident or controlled by such resident. In view of this, based on market reports, foreign DR holders were increasingly selling the DRs to Russian residents before the Effective Date, including through over-the-counter transactions.

Limitation on Transactions with Underlying Shares

The Central Bank of Russia (CBR) has noticed this trend of Russian residents acquiring DRs from nonresidents for their conversion into underlying shares and further sale in Russia. To prevent a disproportionate increase in the offering of shares on the Russian stock market, the CBR introduced restrictions on transactions with underlying shares obtained through the DR conversion.

On April 27, 2022, the CBR ordered Russian custodians to

  • keep a special record of the Russian shares received as a result of the DR conversion (the converted shares), and
  • for each deponent, limit sales of converted shares during any particular trading day to 0.2% of the total number of the converted shares obtained by the deponent from April 27, 2022, to the date preceding the date of sale.

The above rules apply for six months unless revoked earlier.

Notably, these restrictions apply to both exchange and over-the-counter transactions.

These measures do not apply to the converted shares obtained by a Russian resident, provided that such Russian resident

  • acquired the DRs before March 1, 2022, or
  • received an approval of the Government Commission on Control over Foreign Investments (the FDI Commission) in order to acquire the DRs.

Important Considerations

The Delisting Law implies that any DR holder who has purchased DRs after the Effective Date would not be able to exercise the conversion rights. In practice, this restricts the possibility of a DR holder to sell the DRs after the Effective Date, although in theory it should still be possible to sell the beneficial interest in the DRs after the Effective Date as long as the legal title to the DRs (and, following the conversion, to the underlying Russian shares) remains with the seller who held the DRs on the Effective Date.

At the same time, any DR holder who successfully completes the conversion will not be able to freely sell the converted shares. Due to the limit on the number of shares that can be sold, the sale of the converted shares may take several months. The sale of converted shares to Russian purchasers by persons from “unfriendly states” or controlled by such persons is generally prohibited absent approval from the FDI Commission. This also impacts the timing and possibility to sell.

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Trainee associate Maxim Sidorenko contributed to this LawFlash.


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