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A country’s investment climate generally depends on the prevailing standard of corporate governance. Understanding this, Russian blue chips (particularly in the energy sector) are continually improving the quality of their corporate governance. Gazprom Neft is recognised as one Russia’s leading companies, winning the World Finance’s Best Corporate Governance in Russia award in 2014, as well as various domestic and international awards for investor relations and transparency, throughout 2013. In 2014, the company expects to amend the governing documents of around 200 of its subsidiaries to ensure payment of dividends is consistent with international best practice, and to continue the ongoing development of new corporate policies and procedures.
Russian corporate law is currently undergoing material changes as part of the phased updating of the Civil Code of the Russian Federation and the subsequent revisions to basic regulations. These changes are providing companies with opportunities to create internal corporate structures, develop corporate agreements and restructure their organisations.
Companies are expected to provide greater insight into their corporate governance systems and practices
In the last two years, all institutions operating in the financial markets have been reorganised significantly: the central bank has been appointed as the national mega financial regulator, a central depositary has been created and stock exchanges have been merged. These changes are part of a general trend to centralise financial and stock exchange infrastructures. The ‘mega regulation’ of Russia’s financial markets is welcome for many reasons, the fundamental one being its high level of systemic risk. Today, 90 percent of Russia’s largest financial companies (by asset value) are owned by other financial holding companies, which means that risks are transferred within their own holdings, creating and increasing systemic risk.
New powers
Mega regulators, in one shape or another, exist in over 55 countries, with 13 countries appointing their central banks to fulfil this function. The idea of a mega regulator in Russia has been in discussion for the past seven years and, in autumn 2013, the Central Bank of Russia was granted legal powers to regulate, control and supervise financial markets. The Bank of Russia was also authorised to protect the legal interests of shareholders and stakeholders in the areas of mandatory pension insurance, savings accounts and private pension funds.
At virtually the same time as the mega regulator was set up, the Russian securities trader – Moscow Exchange – reformed its listing rules, aligning the regulation of the securities market to international best practices in order to protect the rights and interests of investors. One of the reform’s main objectives was to simplify the structure of the securities list (there are now three sections instead of six), widen the criteria for List A companies (to enable traditional institutional investors to invest in a greater number of companies), stabilise the list of quoted companies (to prevent numerous revisions to the portfolios of institutional investors), and introduce an expert body to evaluate compliance with the rules and regulations.
Another significant event for the Russian securities market was the setting up of the Central Depositary, widely regarded as an essential element of any modern and competitive exchange infrastructure. Due to the exclusive rights enjoyed by the Central Depositary to carry out functions for nominal holders in the issuer’s securities register, conditions have been created in Russia that prevent the anonymous transactions of securities and minimise the risk of unaccounted share ownership.
Legal entities
On September 1, 2014, changes will be made to the Civil Code of the Russian Federation that will have a fundamental impact on corporate law – these relate to the status and operating proceedings of legal entities.
A key change will be made to open and closed joint stock companies of the Russian Federation. These legal entities will be replaced by ‘public joint stock companies’, the shares of which will be able to be traded openly on the exchange. All other companies, which do not meet this public trading criterion, will be deemed ‘non-public’. Public companies will be subject to strict requirements in relation to information disclosure and their management structure. However, these requirements will be compensated by the ability of these entities to attract investment in the public market. The Civil Code also provides for the right of a company to waive its public status subject to certain conditions, including the withdrawal of company shares from the exchange.
Another important modification of the Civil Code relates to the granting of powers to a sole executive body, to several persons acting jointly or to several sole executive bodies acting independently. Such persons can be both individual and legal entities.
Since January 1, 2014, a new procedure for the payment of dividends to company shareholders has been in force. A mandatory requirement has been introduced which calls for dividend payment terms (amount, form of payment, procedure of payment in kind) to be determined by resolution at the general meeting of shareholders. At that meeting the dividend record date is set (at the sole recommendation of the board of directors) and shall occur within no more than 20 days and no less than 10 days from the date of the resolution being passed (for shares in circulation). This represents a significant reduction in the timing of dividend payments – from an obligation to pay within 60 days, following the date of the resolution, to a maximum of 25 business days from the closing date of the shareholder register.
Procedures relating to delayed shareholder dividend payments have also been clarified. The shareholder can make a claim on a dividend payment up to three years from the date when the resolution for its payment was passed. Beyond three years, all declared and unclaimed dividends are to be recovered from the company’s retained profits and the obligation to pay such dividends ends.
Dividend payments
Legal changes to dividend payments have resulted in a material modification to the procedure for the payment of dividends to the holders of depositary receipts in Russian companies. In order to receive tax benefits, a company now has to disclose information about its beneficiary. Payments to beneficiaries who do not disclose this information will be subject to the 30 percent tax rate. The amount of tax charged to the beneficiary depends on the requirement to disclose the necessary information and also the existence of the Double Taxation Agreement between the beneficiary’s country of the residence and the Russian Federation.
Within three years of the dividend payment date, Russia’s supervisory agencies will have the right to audit the information disclosed by beneficiaries who have received tax benefits. According to the law, custodians are required to appoint tax agents who will bear legal responsibility for any incorrect withholding of taxes on the basis of wrong or incorrect information. Banks and brokers, as well as owners of depositary receipts applying for or obtaining any kind of tax benefits, will need to log and retain all related documentation and ensure their agents against any liability or losses.
In February 2014, the Government of the Russian Federation approved a Code of Corporate Governance for Russian companies, positioning it as a document that not only sets out the highest standards to protect shareholder rights and practical guidance to achieve this, but also one that will improve the long-term and sustainable development of corporate governance.
An important feature of the code is that it comes in two parts. The first part describes the basic principles of corporate governance; the second part contains detailed recommendations to facilitate the practical implementation of these principles, describing for example particular approaches and tools for the provision of information.
Companies are expected to provide greater insight into their corporate governance systems and practices. In particular, they will be required to list the principles and recommendations contained in the code with which they comply, or explain why they fail to do so. The Bank of Russia plans to publish its first report on the application of the principles and recommendations set out in the code by Russian public companies in 2015, based on information available in annual reports.
Full disclosure
The code draws attention to the need for simultaneous and consistent disclosure of information in Russia and abroad. This poses a challenge in the Russian Federation, since companies often delay the disclosure of important information to Russian investors. Or, if they publish information at home and abroad at the same time, there is often a discrepancy in the information provided with, for example, more detailed information often being given in English abroad (for example, in the form of a press release), whereas only basic facts are disclosed in Russia.
Another code principle, which could also present a compliance issue in Russia, is the readiness of companies to disclose balanced information about the company, i.e. not only positive, but also negative information. The code states: “A company shall not avoid disclosing any negative information about itself.”
As part of its ‘optional programme’, the code recommends that companies hold regular investment presentations with management including, for example, teleconferences and webcasts. In particular, it recommends the possibility of holding such events to coincide with the presentation of quarterly reports or the publication of strategic plans or other large investment projects. Regular meetings with analysts are also recommended.
This year, material changes have been made to the legal regulation of relations between corporate entities and the Russian Federation’s securities market to improve corporate law and to promote the protection of shareholder rights. Further changes will be made to requirements in relation to information disclosure, joint stock companies and securities by the end of this year. As a result, companies will have much to do to integrate these changes into their internal documents, organisational structure and corporate procedures.
