Debt capital markets in Russian Federation: regulatory overview
A Q&A guide to debt capital markets law in the Russian Federation.
The Q&A gives an overview of legislative restrictions on selling debt securities, market activity and deals, structuring a debt securities issue, main debt capital markets/exchanges, listing debt securities, continuing obligations, advisers and documents, debt prospectus/main offering document, timetables, tax, clearing and settlement, and reform.
To compare answers across multiple jurisdictions visit the Debt Capital Markets Country Q&A tool
This Q&A is part of the global guide to debt capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/debtcapitalmarkets-guide.
Legislative restrictions on selling debt securities
Main restrictions on offering and selling debt securities
Several types of debt securities can be issued in the Russian Federation. The Law on the Securities Market has general rules on security regulation that apply to issuance procedure, prospectus registration, information disclosure and restrictions on subsequent selling before full payment. The Moscow Exchange Listing Rules have additional requirements, such as that securities must be included in quotation lists.
Restrictions for offers to the public or professional investors
Corporate decisions to issue securities must state whether the securities can be sold to qualified investors only or to the general public. Under Russian Federation legislation the Central Bank of the Russian Federation (CBR) is the only body that can approve lists of securities for qualified investors (however, to date, the CBR has not approved any such list).
Only brokers can circulate securities intended for qualified investors. These securities cannot be publicly offered or advertised among an unlimited number of persons or to non-qualified investors.
Market activity and deals
The Moscow Exchange (MOEX) quotation list includes:
corporate bonds: 283 securities from 128 issuers;
stock exchange bonds: 215 securities from 87 issuers.
Foreign bonds: nine securities from one issuer.
Russian depositary receipts: one security from one issuer.
From the fourth quarter of 2014 to the fourth quarter of 2015, MOEX registered 200 issues of bonds. The most important of these were:
Rosneft: RUB800 billion.
Russian Railways: RUB45 billion.
Russian Agricultural Bank: RUB30 billion.
Two Capitals Highway (the company finances the construction of the highway Moscow in St. Petersburg): RUB26.3 billion.
SMP Bank: RUB20 billion.
Structuring a debt securities issue
Russian Federation legislation generally provides the same structure for debt securities issued for both professional investors and for other persons. However, foreign securities that have not been admitted to public offering and circulation by the Central Bank of the Russian Federation can only be offered to professional investors. The circulation of these securities is governed by the same rules as the circulation of securities intended for qualified investors.
Trust structures for issues of debt securities are not used in the Russian Federation and trusts as a legal institute are not recognised by legislation.
Under the Law on the Securities Market and the Moscow Exchange Listing Rules, domestic bond issues can be structured in the following ways:
As a direct issuance of bonds.
As an issuance performed by a Russian special purpose vehicle (created through a concession agreement).
Main debt capital markets/exchanges
Main debt markets/exchanges
Russian companies and banks usually list their bonds on the Moscow Exchange (MOEX), which is the largest domestic bond market. MOEX was created in 2011 after a merger of Moscow Interbank Currency Exchange (MICEX) and the Russian Trading System (RTS). The main shareholders of MOEX (as of 30 September 2015) are:
Central Bank of the Russian Federation: 11.730%
PAO Sberbank Rossii: 10.519%
Russian state corporation (Bank of Foreign Economic Activity) (Vnesheconombank): 8.398%
European Bank for Reconstruction and Development: 6.064%
Approximate total issuance on each market
According to the official web page of MOEX (see www.moex.com) 1,035 issues of domestic bonds are currently traded on MOEX (as of 1 October 2015).
The Central Bank of the Russian Federation is the regulatory body for both the debt securities markets in the Russian Federation and the equity securities markets.
The legal requirements and the legislation governing debt securities markets are similar as those for equity securities markets (see Equity Capital Markets in the Russian Federation, Question 2 ( www.practicallaw.com/3-518-7086) ).
Listing debt securities
There are general listing requirements applicable to all kinds of securities (that is, stocks, depositary receipts and so on), including, among others, bonds and notes (see Equity Capital Markets in the Russian Federation, Questions 3 and 4 ( www.practicallaw.com/3-518-7086) ).
However, certain specific requirements apply to different kinds of bonds. For example, a domestic issuer of bonds, an issuer of stock exchange bonds, an issuer of mortgage-backed bonds (or such issues or its guarantors) must have a specific credit rating.
It is also provided, for example, for bonds issued by a domestic issuer (stock exchange bonds) that gross balance in profit and loss figures for the previous two years must be positive; an issue must have a security (pledge, suretyship, bank guarantee and so on). There are also specific corporate governance requirements.
Minimum size requirements
The minimum volume of an issue is RUB2 billion for the first level quotation list and RUB500 million for the second level quotation list. There is no minimum size requirement for the third level quotation list.
Trading record and accounts
There are no trading record requirements. Issuers must however prepare and disclose consolidated annual accounts (or individual, if applicable) in accordance with International Financial Reporting Standards for the previous three years for the first level quotation list and for the previous year for the second level quotation list. There is no such requirement for the third level quotation list.
There is no minimum denomination requirement. Instead, there is a maximum denomination requirement, that is, a nominal issue must not exceed RUB50,000 for the first and second level quotation lists. There is no such requirement for the third level quotation list.
General requirements applicable to other types of securities are merely the same, subject to certain specifications. For example, the net asset value of the mutual fund must not be less than RUB150 million, the net asset value of the closed-end mutual fund relating to real estate funds must not be less than RUB250 million. The estimated market value of units of the exchange-traded investment fund proposed for trading must not be less than RUB25 million.
Continuing obligations: debt securities
Generally, the following three main areas of continuing obligations apply to issuers of debt securities: corporate governance, maintenance of a credit rating and disclosure.
An issuer must have a board of directors, an audit committee and an audit policy.
An issuer (or an issue or a guarantor) must maintain a certain level of a credit rating as detailed in Appendix 5 to the Moscow Exchange Listing Rules.
For example, В++ in the Rating Agency "AK&M" (long-term credit rating), ruВВВ- in Standard & Poor's (long-term credit rating by national scale), В3 in Moody's Investors Service (long-term foreign currency credit rating by international scale).
If an issuer has a registered prospectus, then the issuer must disclose certain information, including quarterly reports, consolidated accounts and corporate event notices.
Legal consequences for non-compliance with the requirements are the same as for equity securities (see Equity Capital Markets in the Russian Federation, Question 23 ( www.practicallaw.com/3-518-7086) ).
Advisers and documents: debt securities issue
The main documents produced when issuing and listing debt securities are:
Corporate approvals of an issuer.
Prospectus (if any).
Bond certificates (if any).
Report (notice) on results of the issue.
During the process of issuing and listing debt securities, advisers have merely the same role as they have within an Initial Public Offering and a Secondary Public Offering (see Equity Capital Markets in the Russian Federation, Question 9 ( www.practicallaw.com/3-518-7086) ).
Debt prospectus/main offering document
A prospectus is required when the securities issue is registered and can be divided into the following two parts:
Main part, which contains information about the volume of the issue, dates, terms and conditions of securities offering procedure and information about the guarantor of the debt issuer and conditions of such guarantee.
Additional part, which must be registered not later than one year after the registration of the main part. This part contains information about the issuer and issued securities and information about the issuer's financial and economic activities, their financial records and other financial information.
The prospectus must be:
Approved by the issuer's board of directors.
Signed by the chief executive officer and the issuer's accounting manager.
Signed by the guarantor (if the issue is guaranteed).
Drafted on the form approved by the Central Bank of the Russian Federation.
The issuer must publish the registered prospectus on its website no later than the day of the beginning of the securities' offering.
Under the provisions of the Law on the Securities Market, exemptions from the requirements for a prospectus registration apply in the following cases:
Issue of bonds of the Central Bank of the Russian Federation.
Issue of stock exchange bonds. In this case, the requirements include that the issuer must be in existence for no less than three years, the issue must be through and open placement and the bonds must be repayable in cash and so on.
Where the funds of the issuer (a bank) raised through a bond issue (in one or several tranches) during one year do not exceed RUB4 billion.
Issue of sovereign bonds.
Generally, the prospectus must contain the same information as for equity securities (see Equity Capital Markets in the Russian Federation, Question 12 ( www.practicallaw.com/3-518-7086) ). However, there is an additional requirement that information about the guarantor of the debt issuer and the conditions of such a guarantee must be included.
The procedure for execution of a prospectus is the same as for equity securities. The persons that signed and approved the prospectus are therefore jointly and vicariously liable (see Equity Capital Markets in the Russian Federation, Question 13 ( www.practicallaw.com/3-518-7086) ). The prospectus must also be signed by the guarantor of the debt issuer.
Timetable: debt securities issue
A typical debt securities issue takes several months but the process can be shorter if the issuer has previously issued bonds. The issuing and listing procedure for debt securities are closely equal to the procedure of equity securities issuing and listing; however, it takes less time and efforts.
A general procedure of debt issue contains the following steps:
Issuer's decision on bonds placement.
Corporate approval of the decision that was taken on the first stage.
Drafting the prospectus of the issue and its registration.
Preliminary examination of the documents necessary for state registration of issue of debt securities by the Central Bank of the Russian Federation at the issuer's request.
State registration of an issue of debt securities.
Debt securities placement.
State registration of the report on the results of the debt securities.
Tax: debt securities issue
Issuance of debt securities is not subject to value-added tax or income tax by the organisation. The organisation can claim issuing expenses as extra-sale expenses for the purposes of the organisation's income tax. Interest received from the bonds is recognised as extra-sale income for the organisation's income tax purposes.
The depositary is the tax agent who calculates, withholds and pays the tax from the income on the bonds.
Amendments to the Tax Code that entered into force in 2015 determine the moment the taxable base of the organisation's income tax for the debt securities arises and the terms of issue that specify their gradual (partial) redemption. In particular, the date the taxpayer actually received the amounts of partial redemption of the nominal value of the security during the period of its circulation stipulated by the terms of its issue is deemed the date of receipt of the income from the sale of such security.
Additionally, in 2015 a new definition appeared in Russian Federation tax legislation for a "controlled foreign company". This is a company that is not a resident of the Russian Federation and is controlled by an organisation and (or) individual who is recognised as a tax resident of the Russian Federation.
The profits of a controlled foreign company are exempt from taxation if the company is any one of the following:
An issuer of circulating bonds.
An organisation authorised to receive interest income payable under circulating bonds.
An organisation that ceded its rights and obligations under the circulating bonds issued by another foreign organisation.
The following are not recognised as tax residents of the Russian Federation:
A foreign organisation that is the issuer of circulating bonds.
An organisation authorised to receive interest and other income payable under circulating bonds.
An organisation that ceded its rights and obligations under the issued circulating bonds issued by another foreign organisation.
Clearing and settlement of debt securities
The amendments to the Law on the Securities Market will come into effect on 1 July 2016. According to these amendments the issuer of bonds will be obliged to indicate the representatives of bondholders:
For secured debts placement (except for bonds secured by state or municipal guarantee) through public or private offering among the persons whose number, excluding persons who are qualified investors, does not exceed 500.
For secured debt admission for public offering (except for bonds secured by state or municipal guarantee and bonds dedicated for qualified investors).
In October 2015 the Central Bank of the Russian Federation proposed updated requirements for the admission of securities to public offering and listing, and looked at the regulations' current provisions on the procedure for this; no updated requirements have been published to date (January 2016).
Description. The main portal containing information about new legislation. Laws and rules are available in Russian only.
Central Bank of the Russian Federation (CBR)
Description. Official website of the main regulatory body on equity markets. Both Russian and English versions of the site contain topical issues on the work of the Moscow Exchange.
Moscow Exchange (MOEX)
Description. Official website of the MOEX. Both Russian and English versions of the site contain topical issues on the work of MOEX.
Moscow International Financial Centre
Description. Web-resource of current and key information regarding Russian financial markets.
National Association of Securities Market Participants (NAUFOR)
Description. NAUFOR is a statutory self-regulatory organisation with wide responsibilities in regulation, supervision and enforcement. It has over 320 member-firms including broker-dealers, investment banks, commercial banks, custodians and other companies from the securities industry. The English version of the website is less informative than the Russian version.
Evgeny Zhilin, Managing Partner
YUST Law Firm
Professional qualifications. Russian Federation, attorney-at-law
Areas of practice. Corporate law and M&A, capital markets, competition and anti-trust, contract law, international arbitration, real estate/development/land law, legal regulation of foreign investments, environmental law, insurance.
Languages. Russian, English and German.
Professional associations/memberships. An expert of the Russian-German law Institute. Member of the Non-Commercial Partnership "Assistance to Competition development".
Roman Cherlenyak, Associated Partner, Head of Corporate and Commercial
YUST Law Firm
Professional qualifications. Russian Federation, Doctor of Law
Areas of practice. Corporate law and M&A, capital markets, public-private partnerships, environmental law.
Languages. Russian and English.
Maxim Mezentsev, Senior Associate
YUST Law Firm
Professional qualifications. Russian Federation, LLM
Areas of practice. Corporate law and M&A, capital markets, contract law, legal regulation of foreign investments, competition and anti-trust, international arbitration.
Languages. Russian, English and German.