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IMPROVEMENT OF ADR PROGRAMS ON SHARES OF RUSSIAN ISSUERS
Depository Receipts Programs on shares of Russian joint-stock companies are a very important and promising element of the Russian market (first of all, American Depository Receipts (ADRs).
Issuance of depository receipts assumes that a foreign financial institution (usually a large bank - Depository Bank) takes shares in deposit and issues depository receipts on these shares in the foreign market. Each receipt represents the right of its owner for a certain amount of deposited shares. Depository Receipts are distributed to investors, which become clients of the Depository Bank. The Depository Bank provides administrative and technical services to ADR owners, assisting them to execute the rights on underlying shares in Russia (the rights for dividends, for participation in management of the company). At the same time the Depository undertakes certain responsibilities related to execution of instructions of the Issuer: information of the ADR owner about shareholder meetings, transfer of dividends paid by the Issuer to ADR owners, etc. Factually, ADR owners are shareholders in Russian companies which have ADR programs on their shares.
Since first ADR programs were issued on Russian shares, the requirements of investors, governmental authorities and international financial organizations changed significantly. In our opinion, there is objective need to improve ADR Programs.
At the beginning of 2000 largest institutional investors began to undertake joint efforts within the framework of the project, aimed at ensuring the execution of shareholder rights by ADR through development of recommendations which may be the basis for Depository Agreements between companies and Depository Banks.
In order to facilitate coordination of investors' actions and provide support to resolution of problems faced by them, a Workgroup on ADRs. was created within the Investor Protection Association. Members of the Workgroup analyzed Depository Agreements between The Bank of New York and a number of Russian issuers, as well as the experience of investors with ADR programs (see "Analysis of Depositary Agreements between The Bank of New York and Russian issuers and suggestions for improvement of ADR Programs") and came to the following conclusions:
- The ADR scheme proposed by The Bank of New York hinders significantly the implementation by ADR owners of the right to submit items for the agenda of shareholder meetings, the right to vote on general shareholder meetings and the right to receive necessary information in accordance with the Russian securities market legislation;
- it is necessary to improve the provisions of Depository Agreements in the part of court protection of rights and legitimate interests of ADR owners, respect of their legitimate interests related to payment, conversion and distribution of dividends;
- 3) it is necessary to introduce into Depository Agreements and Charters of issuers provisions, clearly regulating the procedure of voting in general meetings with respect to votes disposed by ADR owners, including voting with multiple ballots;
- 4) it is necessary to exclude the provision establishing the possibility of transfer from The Bank of New York to the management body of the issuer of voting proxies on behalf of ADR owners who did not notify The Bank of New York about their will to vote on a given general meeting.
In the opinion of experts, the established situation leads to unjustified increase of investors' risks, lowers the investment attractiveness of ADRs and the issuer itself and prevents interested ADR owners from participating in management of the company, creates prerequisites for abuses and gives room to intentional or occasional misrepresentation of voting results in general shareholder meetings.
The main achieved results:
- main problems identified in the area of implementation of shareholder rights by ADR owners (based on the analysis of Depository Agreements and the experience of investors in ADR programs);
- proposals prepared regarding changes to the legislation and existing Depositary Agreement between BONY and Russian issuers (RAO "UES of Russia", OJSC "Surgutneftegaz", OJSC "GUM", OJSC "Rostelecom");
- September, 2000 - the session of the State Duma Investor Protection Commission on improvement of ADR programs;
- the opinion of investors was communicated to BONY, FCSM of Russia and the general public;
- Duma parliamentary hearings were held within the framework of the State Duma Banking Committee and Investor Protection Commission, the steps towards resolution of these problems at the legislative level were outlined.
The implementation of the ADR project is currently continued, including collection of information on this topic, communication of investors' opinion to issuers, depositories and legislative authorities, negotiations with Depository Banks, Russian issuers etc.
Analysis of Depositary Agreements between The Bank of New York and Russian issuers
Practical aspects of ADR circulation from the perspective of investors
If you have suggestions regarding improvement of ADR programs, you may submit them by email.
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