Russian shares: Russia is mulling legal changes that would discourage ownership of companies through their own subsidiaries. That would be welcomed by investors, who have long been irritated by such structures. A pity, then, but no surprise, that the law has powerful opponents.
In Russia as in most of the world, shares can be retired in a buyback or as part of an M&A transaction, but not for the sake of increasing management control. Shares sitting in a company’s treasury have no voting rights and must be sold within a year. But Russian managers frequently evade the restriction by getting totally controlled subsidiaries to do the buying, holding and voting.
For example, the votes of the quasi-treasury stock of Russian metals giant Norilsk Nickel, 8.5 per cent of the shares outstanding, recently helped management fend off the unwanted attentions of oligarch Oleg Deripaska. And back in 2004, Western investors claimed that management indirectly controlled 62 per cent of oil company Surgutneftegaz’s shares. The investors’ lawsuit was unsuccessful.
The new law proposes to control this quasi-treasury stock. Voting and dividend rights of shares belonging to the issuer’s consolidated subsidiaries would be removed, and subsidiaries would not be allowed to buy the parent's GDRs and ADRs.
The new law would get Russia much closer to international best practice. Serious opposition is mounting, which could yet scupper the plans. The most powerful enemy is Igor Sechin, Russia’s deputy premier and chairman of state-controlled oil company Rosneft . More than 9 percent of Rosneft is owned by a corporate subsidiary. A recent directive from Sechin’s office has slammed the amendments, warning darkly of “irreversible consequences for the Russian economy”.
Big Russian companies may be so comfortable with the existing murk that the transition to a more open regime could be tricky. Companies might try to evade new restrictions with even less transparent behaviour. Yet other countries manage to have tight rules on cross-ownership without causing disaster. Russia should follow their good example.