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3.2.5. Consolidation of Stock Exchanges and their Transition under the Control of the Bank of Russia and State-Owned Banks The year of 2011 saw the MICEX and RTS merger deal close. The merger will have a huge impact on the future development of Russian stock market. The establishment of a single exchange on the basis of MICEX and RTS can, given other conditions being equal, ensure a positive effect in the form of liquidity concentration, acceleration of conclusion of transactions across different segments of the financial market, saving participants in trading and investors direct and indirect transaction costs, solidification of Russias standing on international capital markets. The merger can also ensure a synergy effect by saving on staff, market makers, IT systems maintenance, operational costs and other costs. By end year-MICEX-RTS had already joined Top-20 largest global exchanges and Top-10 leading platforms in terms of the derivatives market turnover.

The substance of the merger is as follows: for the sake of merging, JSC RTS was appraised at $1.15bn, or Rb 34.5bn, while CJSC MICEX $3.45bn, or Rb 103.5bn. The reorganization is exercised in the form of takeover of RTS by MICEX. In the course of the takeover RTSs shareholders have been given a possibility to sell 35% of their stock to CJSC MICEX and convert the remaining stock into JSC MICEX shares. Meanwhile, ordinary and preferential registered uncertified shares in JSC RTS are converted into ordinary registered uncertified shares of CJSC MICEX redeemed from the CJSC MICEX shareholders and into additional ordinary registered uncertified shares of CJSC MICEX placed for the sake of conversion.

While completing the takeover, the conversion of the JSC RTS stock into the CJSC MICEX one was run using the following ratios: 0.309393 ordinary registered uncertified shares of JSC RTS with face-value of 1 Rb each and 0.309393 preferential registered uncertified shares of JSC RTS with face-value of 1 Rb each were converted into one ordinary registered uncertified shares of CJSC MICEX with face-value of 1 Rb each. The number of CJSC MICEX stock to be allocated to each shareholder in JSC RTS is calculated by dividing the number of shares of a given category he/she has in JSC RTS into a respective conversion ratio. The milestones of the merger are presented in Table 4.

Meanwhile, the first fruits of the deal raise certain controversies among different market participants. Company magazine labeled the deal as the Deal of the Year. By contrast, when between 29 June and 1 July www.exchange-integration.ru ran a survey How do you feel about the merger of the exchanges, as many as 73% out of a total of 849 visitors of the resource who took part in the ballot responded negatively to the question.

Behind concerns about a positive impact of the merger there is a string of factors. First, the merger eliminated the long-lasting competition between them MICEX and RTS which had long been a major driver of their development. Mr. A. Savatyugin, the RF Deputy Finance Minister, cited this factor in an interview to the Securities Market journal1. The dream that in that case the domestic competition between the exchanges would be substituted by the competition between MICEX-RTS and foreign exchanges may not come true, as most participants in trading currently appear loosely integrated in the global market. To this end, on I am confident in the correctness of the existing market regulation system. The Securities Market, 2012, No.1, p. 19.

RUSSIAN ECONOMY IN trends and outlooks 4 August 2011 FSFM registered and submitted to the RF Ministry of Justice an Executive Order which allows circulation on foreign exchanges of 100% (vs. the previous maximum of 25%) of Russian issuers stock in the form of receipts, except for strategic corporations for whom the ceiling is 25% and companies associated with mineral production, whose cap is 5%. However, it is envisaged that the Order shall take effect as of the date of enactment of a federal law which regulates conditions and procedure of the central depositorys operations.

Table Russian Exchanges Merger Milestones 29 December 2010 At a meeting on creation of an international financial center, market participants and representatives of agencies concerned ruled to merge to exchange holdings and have the Bank of Russia withdraw from the MICEXs capital until the end of 1 February 2011 The Top five shareholders of JSC SE RTS Troika Dialog, Aton, Alfa Bank, Renaissance Broker and the managing company Da Vinci Capital who combined owned 53.7% of the exchanges capital, signed an agreement on intention to sell their shares in the capital. The deal suggested that CJSC MICEX would acquire a control stake in JSC SE RTS and the two exchanges would then merge. RTS was appraised at $1.15bn, and it was suggested that 35% of its stock would be purchased for cash, while the remaining packages will be swapped for CJSC MICEX stock with the 1 to 31. Symbolically, the event was held on the Bank of Russias premises 10 March 201. To complete the transition to the single share within the exchange holding shareholders of CJSC MICEX ruled to increase the authorized capital by placing additional ordinary shares to be swapped for those of CJSC SE MICEX 22 June 2011 FSFM registered a report on the outcome of the issuance of JSC MICEXs shares in the frame of the transition towards the single share 29 June 2011 Signing of the deal on the merger of MICEX with RTS by taking over JSC SE RTS by CJSC MICEX.

5 August 2011 The deal and its parameters were approved at general shareholder meetings of JSC SE RTS and CJSC MICEX, with 93.4% of MICEXs shareholders and 99.7% of RTSs shareholders having voted in favor of it. Those shareholders who voted against the deal or failed to take partake in the voting became eligible for putting option. More specifically, it was representatives of Eurofinans Capital who voted against the merger. Plus, the RTSs shareholders voted in favor of acquisition of assets of non-commercial partnership SE RTS and planned to spend $37mn on that. Meanwhile, the MICEXs shareholders decided to run an additional stock issuance to redeem an RTS stake worth a total of Rb 553.3mn 9 September 2011 FAS approbated the deal 19 December 2011 The two exchange holdings merged legally, and MICEX-RTS kicked off its operation Q4 2012 Takeover of settlement and clearing structures of the RTS Group (the Clearing House of RTS and the Depository Clearing Company) by NCO JSC NSD Until mid-2013 JSC MICEX-RTS going for IPO The exchange merger deal resulted in an excessive strengthening of the influence the stateowned structures and banks exert on the stock market infrastructure to the detriment of private corporations interests. Furthermore, according to Mr. A. Savatyugin, the merger was carried out under administrative pressure on market participants2.

According to our estimates (Table 5) the Bank of Russia and the public banks basically have managed to retain their share in the merged exchange. But because of the merger, the exchange JSC RTS, where private structures would control managing bodies, sank in nonexistence. As a result, according solely to open sources, the newly formed exchange is at 53.53% controlled by the Bank of Russia and the four public banks, without regard to the share of controlled by Sberbank Troika Dialog. That is to say, the united group is controlled by public structures and the Bank of Russia in the first place. One of deputies to the CBR Smorodskaya P. RTS was traded with MICEX. Government has disposed the exchanges to merger. Kommersant, 2 February 2011.

I am confident in the correctness of the existing market regulation system. The Securities Market, 2012, No.1, p. 19.

Section Financial Markets and Financial Institutions Chairman presides over the Board of the exchange1. At the first stage of the deal, it was envisaged that the Bank of Russia would quit the group of owners of the exchange as early as in 2011 now it is envisaged this is going to happen between 2013 and 20152.

Table The pre- and post-Merger Structure of MICEX and RTS Shareholders Prior to the restructuring Post-restructuring, as of 13.02.JSC RTS $1,150mn JSC MICEX-RTS Aton LLC 9.82% The Bank of Russia 24.33% Renaissance Broker LLC 8.21% Sberbank of Russia 10.36% JSC Deutsche Securities3 9.00% VTB 5.35% JSC MC Troika-Dialog 10.00% VEB 8.71% JSC Alfa-Capital 9.59% Gasprombank 4.78% KIT Finance LLC4 10.03% CJSC UniCredit Bank 9.59% Da Vinci Capital 14.9% EBRD 6.29% Other shareholders 28.45% Other shareholders* 30.59% CJSC MICEX $3,450mn The Bank of Russia 28.60% Sberbank of Russia 7.51% VTB 7.08% VEB 10.52% Gasprombank 6.15% CJSC UniCredit Bank 11.59% Other shareholders 28.45% *By RBC data of 27 January 2012, EBRD and the Russian Equity Fund were going to acquire 7.54% of the MICEX-RTS stock combined, with EBRD getting 6.29% and REF - another 1.25%, according to the exchanges press release.

Source: calculated by the data of the exchanges reporting.

The merger in question does not appear to have been quite transparent from the perspective of the property structure. As of today, the information the exchange disclose about its stockholders does not allow one to understand who makes key decisions and how the balance of interests between government and private structures, banking and non-banking institutions is maintained. It seems that the effect of item 72 of the Statute on operations on organization of trading on the securities market approbated by Executive Order of FSFM of 28 December 2010 No. 10-78/pz-n, which provides for the commitment for organizers of trading to disclose information solely about ownership of stock packages of above 5%, is an outdated one. Stock exchange is a major infrastructure organization on the stock market and as such it has a strategic significance. In this context it was not accidental that in the summer of 2010 FSFM and FSB of Russia blocked an attempt by KIT Finance to sell a stake in JSC SE RTS to a foreign bank (EBRD). Thanks to their interference, an 11% stake was ultimately acquired by a structure of the MICEX group.

According to the RBC daily Publishers of 9 February 2012, MICEX-RTS is to change the composition of its Board of Directors prior to the IPO. According to a source close to the Government, one of frontrunners will be A.S. Voloshin, the head of the task force on creation of the International Financial Center. Furthermore, he may become the Chairman of the Board in his capacity of an independent director.

Ulyukaev A. We have underperformed with regard to oversight. An interview to Vedomosti Daily of 6 June 2011; presentation of the Bank of Russia On merging CJSC MICEX with JSC RTS and the procedure of the Bank of Russia stepping out of the list of shareholders in CJSC MICEX According to mass media, this stake was acquired in favor of IC Troika Dialog proceeding from an appraisal of JSC RTS at an amount of $920mn (Asker-Zade N. How to part from RTS. Vedomosti, 21 February 2011) The stake was acquired by MICEX FINANS LLC proceeding from an appraisal of JSC RTS at an amount of $840mn. (Smorodskaya P. Investors play the merger. Kommersant, 21 February 2011).

RUSSIAN ECONOMY IN trends and outlooks Stock exchange should remain exemplary when it comes to high standards of information about the shareholder structure. The Bank of Russia currently demand from banks to fully disclose the list of their beneficiaries, while FSFM is keen to encourage all shareholders of Russian JSC to disclose themselves as beneficiaries under to the threat shareholders who fail to disclose themselves in the register of suspension of the right to vote at general meetings.

Against such a background the lenient requirements to exchanges with respect to disclosure of the structure of their owners seem incongruous.

The merger deal was accompanied with withdrawal of sizeable amounts out of both exchanges equity capital:

- payment of Rb 1.5bn in dividends to stockholders of JSC RTS by results of the 2010 performance, per the memorandum of understanding between MICEX and RTS, for the sake of equalization of valuation of both exchanges1;

- a sum to redeem JSC RST stock from shareholders who joined the takeover deal and voted for it (in a volume no more than 35% of the shareholders packages, with the rest of the stock to be converted into the united exchanges stock); according to the current calculations, this volume should not exceed Rb. 8.9bn2;

- a sum to redeem JSC MICEX stock from shareholders who voted against the takeover of JSC RTS in an amount of Rb 5.6bn (in compliance with p.1 of Art. 75 of the Federal Law On joint-stock company, no more than 10% of the amount of the companys net assets as of the last reporting date, i.e. Rb 56bn)3;

- payment of Rb 81.6mn in interim dividends to shareholders of JSC RTS for H1 2011;

- payment of $20mn, or some Rb 0.6bn, towards acquisition of assets of non-commercial partnership SE RTS, including the RTS Plaza trading system and the data processing center;

- payment of Rb 11.7bn in dividends to shareholders of JSC MICEX payable partly in shares of JSC SE RTS and partly in cash4;

- in the event the merged exchange fails to complete an IPO by mid-2013, the RTS shareholders would be able to sell their stakes in JSC MICEX-RTS proceeding from the current valuation of RTS in an amount of $1.15bn plus a 12.5% annualized interest; the amount in question can total some Rb 36.4bn.So, given all the dividends due, including those payable in the form of JSC RTS stock, the aggregate amount of payments made in favor of shareholders in the process of preparation for, and completion of, the deal on reorganization of the stock exchange holdings made up some Rb. 28.4bn, or a. $1bn. Plus, in the event of a failure with the IPO, the MICEX-RTS exchange will have to pay its participants up to Rb 36.4bn. In this context it was not accidental that, according to media sources, the acquisition of a 6.29% stake in the merged exchange by EBRD and another 1.25% stake by REF was made at a discount in the region of 10%6.

Smorodskaya P. RTS is sold in pieces. Kommersant, 13 April www.exchange-integration.ru/voprosyotvety Ibid.


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