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The “Second Wave of Russian IPOs”:
Changing Platform Preferences and Other Trends
May 3, 2007
Presentation to the 5th Annual USRCCNE Financial Markets Conference
Boston
Stephen Polakoff
Assistance in preparation by Vladimir Slyshchenkov
The First Wave (1996-2002)
Snapshot of the Issuers
VimpelCom, 1996
MobileTeleSystems, 2000
New York Stock Exchange (NYSE);
American Depository Receipts (ADRs);
$110,8 m Raised.
NYSE;
ADRs;
$353 m Raised
Tatneft, 1996
Wimm-Bill-Dann, 2002
London Stock Exchange 144A (LSE);
Global Depository Receipts (GDRs);
$ 120 m Raised
NYSE;
ADRs;
$207 m Raised
Why?
- Insufficient volumes on Russian Market;
- Perception that without US investors
sufficient capital could not be raised;
- NYSE was significantly larger and more
prestigious than LSE;
- Undeveloped legal regime in Russia; and
Gazprom, 1996
LUKOIL, 2002
LSE 144A;
ADRs;
$ 430 m Raised
LSE 144A;
ADRs;
$775 m Raised
GoldenTelecom, 1999
RBC Information Systems,
2002
NASDAQ;
Ordinary shares;
$144,2 m Raised
- No DvP in Russia.
RTS/MICEX;
Ordinary shares;
$ 13,28 m Raised
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A Changing Environment (1)
 In 2006 LSE IPO Market exceeds NYSE IPO Market;
 2007 IPO pipeline from Russian companies* is expected to reach $28 bln. compared with $20 bln. in 2006;
There are now 642 active funds operating in Russia representing 50% growth since end of 2005;
Total trading on MICEX in 1Q 2007 exceeded $626.2 bln.  1.8 times greater than 1Q 2006;
 “We are very concerned about corporate governance, transparency of company financials and protection of
minority shareholders and, with a number of Russian companies, these things are called into question”, Mr. Thair,
the New York Stock Exchange (April, 2007; www.ft.com);
 Number of US listings of Russian companies since 2004: 2
• Mechel (2004)
• CTC Media (2006)
 Number of LSE/AIM listings of Russian companies greater than $200 mln. during 2005/2006: >17
* For purposes of this presentation, “Russian companies” means either Russian issuers or non-Russian issuers whose main
assets/business are Russia focused.
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A Changing Environment (2)
10,7 bln.
1,7 bln.
Color Code:
1996 – 2002
2003 – 2004
2005 – 2006
Amount Raised, $
1,3 bln.
900 mln.
500 mln.
100 mln.
Most Stringent
Russian listing
AIM
LSE
US listing
Listing and Continuing Obligations Regime
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Why the change in Platform Preference? Listing
Considerations
 Capital considerations;
 Continuing obligations and listing requirements;
 Corporate governance;
 Costs; and
 Liability.
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Listing Considerations – Capital Considerations
Minimum Value of Shares to be Listed:
•
•
•
•
LSE GDRs: GBP 700k (value of shares to be listed)
AIM: GBP 700k (value of shares to be listed)
NYSE: $100m (minimum value of publicly held shares)
NASDAQ: Standard 1 - $8m; Standard 2 - $18m; Standard 3 - $20m
Financial Standards:
• LSE shares: 75% of applicant’s business supported by revenue earning record for 3 yrs.
No such requirement for GDRs
• AIM: No minimum size
• NYSE: Pre tax earning last 3 yrs: $100m
• NASDAQ: Total Revenues and assets: Standard 3 - $75m
Who are your target investors?
• Are QIBs enough?; location of investors
• The “high tech” exception – CTC Media, others
Experience thus far with 144A tranches:
Distribution of AIM companies by market value
March 2006 to March 2007
• Informal Survey
• Really necessary?
• If necessary – the cost analysis (10B-5, SAS72, road show, etc.)
AIM no longer a “Little Issuer” market:
•
•
•
•
•
Increase in number of International Companies (2003-Dec 2006): 7541,634
Urals Energy (2005): GBP 73,6 m
VolgaGas (2007): $125m
Raven Russia (2005): GBP 153 m
Mirland Development (2006): $270m
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Listing Considerations – Continuing Obligations and Listing
Requirements
Sarbanes Oxley Act (“SOX”): The threshold consideration
• Initial and ongoing costs
• Ticking those boxes 
Internal control (Section 404)
CEO/CFO Certifications (Section 302/906)
Non-GAAP Financial Measures
Other Key considerations:
AIM
Listing
Ongoing*
* Post Transparency
London GDR
London Share
New York ADR
• 3 yr IFRS or US GAAP audited if
available otherwise such shorter
period that issuer has been in
operation
• Long Form Report and Working
Capital Report required
• NOMAD
• 3 yr IFRS or US GAAP audited
• Long Form Report and Working
Capital Report not required
• No Sponsor
• 3 yr IFRS or US GAAP audited
• Long Form Report and Working
Capital Report not required
• Sponsor
• 3 yr US GAAP or reconcilable to US
GAAP (2yrs if IFRS)
• Disclose Compliance with NYSE
Corporate Governance requirements
• Rigid SEC review process
• Long Form Report or Working Capital
Report not required
• Full year audited (within 6 months),
half-year results (within 4 months) and
semi-annual reporting)
• Not required to disclose extent of
compliance with Combined Code for
Corporate Governance
• Not covered by transparency directive
• Full year audited (within 4 months), no
half year
• Not required to disclose extent of
compliance with Combined Code for
Corporate Governance
• Covered by transparency directive
• Full year audited (within 4 months),
half- year results (within 2 months) and
preliminary statement (optional)
• Required to disclose extent of
compliance with Combined Code for
Corporate Governance
• Covered by transparency directive
• Annual audited reports (w/in 6 months)
• Quarterly not required for foreign
issuers if publish semi-annual
• SOX Compliance
• Expensive Director’s Insurance
Directive
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Listing Considerations – Corporate Governance
 NYSE – SOX/NYSE Rules
 LSE – UK Combined Code. Governance Metrics International (2005)
ranks UK as leading country in terms of Corporate Governance
 LSE GDR/London AIM – Combined Code not required but usually
insisted by underwriters as “Best Practice”
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Listing Considerations – Costs
NYSE v. LSE:
•
•
•
•
•
SOX – initially approximately USD 5m and then significant annual costs depending on size of issuer
Directors Insurance –significantly higher for NYSE listing
Underwriting Fees – 2003 Average: LSE 3-6% ; NYSE 7%.
Accountants – increased fees for US GAAP reconciliation for NYSE listing; SAS 72
Legal costs – 10B-5
144A:
• SOX costs not incurred
• 10B-5 required
• SAS 72
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Listing Considerations – Liability
Reach and Consequences of Prospectus Liability with DRs
• US – liability attaches to directors, officers and company; 144A still attracts heightened liability even though not a
“public” offering
• UK – company responsible for prospectus, not directors as in main listing under prospectus rules; civil law liability
Other Key Systemic Differences:
• Class Action and Derivative Suits
• Contingent Fee basis
• Adverse Costs Rule in England
• Juries/ Punitive Damages
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Other Developments
SEC Deregistration:
• Ownership test: 300 Record Holders on worldwide basis or who are US residents
• Trading volume test: average daily trading Volume (ADTV) of a class of securities during a 12-month period in the
US<5% of worldwide ADTV
• The Steps
• The “talk” in Moscow
RDRs
• Old rule: No non-Russian issuers unless international treaties or agreement between securities and report on offering
prospectus filed with FSFM. Result: De Facto «no» and FSM “displeasure” with offshore listing by HoldCos
• New Regime; Issues
- Depositary
- Currency control
- Other problems
• The reality
Revival of Russian Primary Offerings and “New” Breed of Russian Issuer:
•
•
•
•
New Legislation
Changes to Russian Issuers: less “oligarch” companies; Western Managers; more independent boards
More Funds coming in at Pre IPO Stage
Changes in approach to Disclosure
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Takeaway Points
Trends:
• What happened to US listings?
• The remaining US question: to do or not to do 144A tranches
• AIM and LSE the dominant foreign platforms
• The rise of the Russian offering (with 144A but no foreign listing??)
What to expect with Russian issuer listing DRs on LSE:
• Transparency Directive Obligations
• Best Practice: Disclosure level, corporate governance
• IFRS
• Compliance with Russian standards
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What does Russian Law Provide?
List “I”
List “V”
Listing Requirements (for ordinary shares)
•Minimum of publicly offered shares;
•Total value of the issue of shares;
•Losses in the last three years;
•Period since the company’s incorporation;
•Financial statements;
•Complying with corporate governance
requirements
Continuing Obligations
•List of affiliated persons;
•Quarterly company’s report, incl. financial
statements;
•Annual company’s report, incl. annual financial
statements;
•Disclosure of material facts (events);
Corporate Governance
•Board of Directors
•Independent directors;
•Disclosure requirements;
•Information policy;
•Auditing committee;
•Internal controls
•No less than 10% of all ordinary shares issued by the company;
•60 mln. rubles;
•Not applicable;
•Not applicable;
•According to Russian accounting standards;
•From the date of listing
•No less than 10% of all ordinary shares issued by the company;
•Not applicable;
•No losses in any two years of the last three years;
•No less than three years;
•According to Russian accounting standards;
•From the date of listing
•To be regularly submitted to the market’s officials;
•To be disclosed;
•To be regularly submitted to the market’s officials;
•To be disclosed;
•To be disclosed;
•To be disclosed;
•Not later than on the next day after the occurrence of the event
•Not later than on the next day after the occurrence of the event;
•To be formed with ¾ non-executive;
•At least one director in a BD;
•Obligations of CEO, other officers to disclose information about
holding and transactions with the company’s shares;
•BD approves a document on use of not-public information relating
to the company’s business;
•Not applicable;
•Not applicable
•To be formed with ¾ non-executive;
•At least one director;
•Obligations of CEO, other officers to disclose information about
holding and transactions with the company’s shares;
•BD approves a document on use of not-public information relating
to the company’s business;
•To be formed within the BD with chairman independent director;
•BD approves document on internal control over company’s
business
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Integra IPO case study
Factors of a successful placement
 Total placement $760 mln, of which $600 mln raised by the
Company in February, 2007
Integra IPO Statistics
1000
 LSE GDR Listing
800
 Secondary component only 22%, management was not selling
600
• Books were oversubscribed
– Major interest from institutional investors (given formal listing)
400
– Additional demand from existing pre- IPO shareholder base
200
0
Primary
Overallotment Secondary (non
management)
Total
placement
 Decision was made that 144A tranche was not necessary to fill
books
 Strong after-market demand from the US
Post IPO shareholder base (fully diluted)
Management and
BOD, 23%
Pre-IPO
shareholders,
33%
 No major “oligarch” shareholder. Largest single shareholder
currently holds 12%
Management
options, 15%
GDR's, 29%
 Placement was welcomed by the market as it did not look like a
cash-out opportunity
 Currently equity is split roughly equally between management,
pre-IPO venture capital and institutional investors
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Integra: Corporate governance
Board of Directors
 Primarily non-executive but a very involved Board Of
Directors
• Founder and former CEO, Khanty Mansiysk Oil
Corporation (KMOC)
• Founder and President, J Fitzgibbons LLC and
Brookline Partners LLC
Chairman
John B. Fitzgibbons
Non-executive director
• First VP of SUAL
• Former first VP of
TNK, head of
economy and
finance block
• Chairman, Vetco Int.
and Wellstream Int.
Ltd
• Former Executive
VP, Halliburton
• Former Group
Treasurer, Shell
• Former Executive
Director, Shell
International
Felix
Lubashevsky, CEO
• Former Executive
VP Oilfield services
and Supply Chain
Management, TNKBP
Non-executive director
Non-executive director
Non-executive director
Executive director
Iosif Bakaleinik
John W. Kennedy
Neil Gaskell
 Although not legally required, the Company adheres
to both the combined code on corporate governance
and the model code
Corporate committees
Board Level
Audit Committee
Compensation Committee
Neil Gaskell
Iosif Bakaleynik
 Governance conducted by a number of committees
covering key areas of the business
Company Level
Executive Committee
Source:
Financial
Committee
Operational
Committee
Investment
Committee
Contract Control
Committee
Compliance
Committee
A.Polevoy
F.Lubashevsky
E.Shevchenko
D.Shulman
S.Polakoff
 Compliance committee formed following the IPO
overlooking disclosure requirements as well as
shareholder and investor relations
Company data
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Questions
 About this presentation: Stephen Polakoff
General Counsel, member of the
management board
[email protected]
+7 495 933 0621
 Investor Relations:
Andrey Machanskis
[email protected]
+7 495 933 0621
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