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Russian depositary receipts: conversion complexities

In Russia, as in many other countries, depositary receipts are used to facilitate investors' purchase of shares. Russian depositary receipts are securities that confirm an investor's right to a certain number of shares.

Despite the convenience and flexibility they offer, investors may face several challenges when converting Russian depositary receipts into actual shares.

Russian depositary receipts: conversion complexities

Posted 4 September 2023

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.

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Diane, partner of GFLO Consultancy

Complexities related to converting Russian depositary receipts

Even before the adoption of Law 114 the conversion of Russian depositary receipts was associated with a number of challenges, but now this list has expanded. It might include the following:

  1. Refusal of foreign brokers or depositaries, who manage the investors’ depositary receipts, to assist in the conversion process, or their postponement of the conversion procedure;
  2. Expiration of the conversion period set by the foreign issuer of depositary receipts, which formally terminates the investor’s right to convert. Although in practice issuers allow investors to convert depositary receipts even after this period;
  3. Temporary closure of access to records needed for the cancellation of depositary receipts, a prerequisite for the investor to proceed with the conversion and acquire underlying shares;
  4. Prohibition or restriction of conversion by international clearing systems Euroclear and Clearstream, making conversion impossible;
  5. Prohibition of owning Russian shares directly due to applicable sanction restrictions;
  6. To obtain underlying shares, an investor must have the ability to open a custody or brokerage account directly with a Russian depository or broker, which is difficult to do without a representative in Russia.

It is also worth noting that the Bank of Russia has introduced temporary restrictions on transactions with underlying shares obtained through conversion of DRs. Russian depositories and brokers are now required to maintain a special record of converted shares and limit the sale of these shares for each investor to 0.2% of the total number of shares.

Generally, Russian depositories and brokers apply these rules to all investors who received underlying shares through conversion. However, if an investor acquired Russian depository receipts on or before March 1, 2022, they can submit a special request to the Russian depository or broker to cancel the application of these restrictions.

How can our services assist you?

To address these issues, GFLO Consultancy has developed a number of solutions and therefore successfully supports investors willing to convert their depositary receipts of Russian companies into underlying shares. We offer:

  • Free case assessment;
  • Free first consultation;
  • Streamline processing, which is particularly important due to the limited remaining conversion period;
  • International experience covering North America, Europe, the Middle East, and Asia;
  • One of the best conversion offers in the current market – everything is performed by our own lawyers who are qualified to practice in Russia;
  • Up-to-date practical experience in converting Russian depositary receipts.

GFLO Consultancy experts are pleased to assist and help you with any inquiries, just get in touch or leave a request through the form right below.


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Diane, partner of GFLO Consultancy