New federal law
This is partly due to a new federal law, that prohibits Russian issuers from selling their shares abroad through depositary receipts. It also requires issuers to take delisting measures if they don’t receive approval to maintain their depositary receipt programs.
For many years, shares of some major Russian issuers were traded on foreign exchanges through American Depositary Receipts (ADRs) or Global Depositary Receipts (GDRs) issued by American or other foreign issuers, respectively.
Although Russian depositary receipts allowed these issuers to increase the liquidity of their shares and attract capital, on April 16, 2022, Russia passed Federal Law No. 114 (hereinafter referred to as Law 114). This law prohibited Russian issuers from trading their shares abroad through depositary receipts and made it mandatory for them to stop their depositary receipt programs and end agreements with foreign entities issuing such receipts.
What are the implications of Law 114 for investors?
Considering Law 114-FZ Russian issuers are obliged to terminate programs for issuing depositary receipts. Foreign issuers holding these depositary receipts should — in line with the time limits set by depositary agreements with Russian issuers of these shares — cancel Russian depositary receipts and provide investors with an amount specified in these agreements. This sum typically falls considerably below the market value of the shares.
However, those investors who managed to convert their Russian depositary receipts will not face such issues. Even if in theory foreign issuers are obligated to liquidate depositary receipts and pay investors their value, in practice, due to sanctions and opposing restrictions, this is unfeasible. In this context, the question of converting depositary receipts becomes particularly significant for investors.
In accordance with the general provisions, owners of depositary receipts of Russian companies have the right to obtain shares on which these depositary receipts (or underlying shares) were based through conversion. At the same time, Law 114 establishes that investors with the right to obtain underlying shares are determined as of the effective date of Law 114. This implies that after the law’s enactment the purchase of depositary receipts does not grant the right to obtain underlying shares, making the conversion of such depositary receipts unattainable.
Additionally, according to Law 114, investors can demand payment of all unpaid dividends after converting their depositary receipts and acquiring shares of Russian issuers, i.e., becoming direct shareholders of such issuers. This is particularly relevant for investors holding depositary receipts of Russian issuers like PAO Gazprom and PAO Lukoil, as these Russian issuers have distributed substantial dividends that could not be paid to depositary receipt holders due to sanctions and counter-sanction restrictions.
To claim previously unpaid dividends, investors must submit a special application directly to the Russian issuer.