Business between two regulators

The Russian authorities intend to convert securities issued before September 20, 2022 by enterprises in the Donetsk People’s Republic (DPR), Luhansk People’s Republic (LPR), Zaporozhye and Kherson regions into the ruble equivalent. Securities of the enterprises of the new territories of the Russian Federation will be converted into the ruble equivalent. The Central Bank plans to develop a normative act on this in the near future. At the same time, the capital of public enterprises in the new territories, according to Kommersant sources, does not exceed 200 billion rubles. However, lawyers see a number of risks in the conversion, in particular, the presentation of claims to the issuer by two regulators at once.

From the plan for the preparation of regulations by the Bank of Russia in 2023, it follows that before the end of March, a regulatory act will be issued on the conversion of securities of companies in the DPR, LPR, Zaporozhye and Kherson regions into the ruble equivalent. In November 2022, amendments to the Civil Code of the Russian Federation came into force, obliging legal entities located in these territories to bring constituent documents in line with Russian law. According to the State Duma, the regional registers contained information about 31.6 thousand legal entities. According to the Federal Tax Service of the Russian Federation, by the beginning of December, the data of more than 30 thousand enterprises were transferred to the Unified State Register of Legal Entities.

Now the Central Bank intends to use regulation similar to the order of August 2014, which regulates the issue of shares of companies registered in the Crimea and Sevastopol. Then, explains Ilya Zharsky, managing partner of the expert group Veta, the question arose of transferring issuers under the control of the Russian regulator. “It was necessary to bring reporting to a common standard, transfer all transactions to Russian depositories, collect information about issuers, the volume and value of securities issued before 2014, in order to exercise supervision, and so on,” he notes. The Central Bank did not answer “Kommersant”.

According to Ru.Courts partner Ilya Kavinsky, the conversion is being carried out so that the Central Bank “knows which shares are traded in the territory where it regulates the securities market, and which issuers have become controlled by it as a result of changes in geopolitics.” “The need to adopt a regulatory act is also due to the fact that some of the non-financial industrial enterprises in the new territories were created in organizational and legal forms that are different from JSCs, which requires harmonization,” says Anna Avakimyan, chief analyst at Regblok. As a result, according to Mr. Zharsky, transactions with shares “will be carried out through Russian depositories in rubles and under the supervision of the Central Bank”, at the same time there will be a transition to the reporting standards for issuers used in the Russian Federation.

There are not too many joint-stock companies in these regions. Back in 2017, a number of large enterprises of the DPR and LPR, primarily mining and smelting, were nationalized. According to the interlocutor of Kommersant in the financial market, in the DPR and LPR, large companies now mainly exist in the form of state unitary enterprises and state corporations. According to him, there are 15-20 public companies operating in the mining industry, metallurgy, agro-industrial complex and food industry in these regions.

The capital of the joint-stock company in the LDNR, according to the interlocutor of Kommersant, “before the start of active hostilities amounted to 200 billion rubles, and now it is much less.” According to the selection of the Rusprofile resource, less than a hundred companies in the form of private or public JSCs are registered in the regions. Of these, only the shares of the Stakhanov Ferroalloy Plant and the Stakhanov Carriage Works were traded on the Ukrainian stock exchange.

Conversion is not a right, but an obligation of the issuer, in case of non-fulfillment of which it is subject to administrative liability, Elena Mende, lawyer of the Anatoly Sobchak Baltic Bar Association, clarifies. The lawyer explained that the circulation of securities not registered in accordance with Russian law is prohibited. Moreover, the lack of registration directly affects the interests of shareholders, who may be limited in their corporate rights to dispose of shares and receive information about the company’s work.

At the same time, lawyers interviewed by Kommersant see a number of risks in the procedure. According to Mr. Zharsky, the main possible problem is the occurrence of duplication, when the same issuer will be subject to requirements from the regulators of two countries at once, and shares denominated in different currencies may be in circulation. Western countries do not recognize such actions of the Russian regulator, adds Ilya Kavinsky. If the owner of the shares is not located on the territory of the Russian Federation, the question arises, “what does he own and how his rights should be taken into account” – “it is obvious that right now this issue is not very relevant, but all conflicts will ever end, and then questions of ownership will arise “, he emphasizes.

Ksenia Kulikova, Ekaterina Volkova