Conversion of ADRs- and GDRs
Secure your investment
Because of the present sanctions against Russian companies there is a high degree of uncertainty concerning private and institutional investments in so-called ADRs and GDRs. Anyone who does not exchange their depositary receipts for Russian companies into shares soon will be faced, in the worst-case scenario, with the total loss of their whole investment. But such an exchange currently presents enormous challenges. We of the international business law firm Goldenstein have therefore developed solutions for the existing problems and successfully support investors with the conversion of their DRs for Russian companies.
Rapid Action is called for
Total Loss threatens
Free Examination and Counselling Service
Fill out form
We review your case
Conversion of your ADRs
This is how investing in Russian ADRs and GDRs works
Russian shares may only be traded on the Moscow Stock Exchange. For this, however, investors require a depositary account in Russia. In order that investors from all over the world may nonetheless be able to invest in the Russian stock market via their domestic banks and brokers, many Russian companies launched so-called Depositary Receipt Programs in the past few years. Depositary receipts are receipts for shares that may be traded on international stock exchanges without any significant regulatory effort or expense.
Anyone who, in the past few years, has invested money in Russian companies from a base in Germany or any other country, has thus, in the normal case, purchased not Russian shares but such depositary receipts. In Europe it is essentially American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs) and, in part, also European Depositary Receipts (EDRs) that have been issued.
Until recently, such investments posed no challenges to investors. However, since the Russian war against the Ukraine and the western sanctions connected therewith, uncertainty prevails. This is because many Depositary Receipt Programs of major Russian companies such as Gazprom or Lukoil had to be stopped due to a new Russian law. DRs that have been issued must therefore be exchanged for shares within just a few months. This is currently not so simple, however.
Normally, the conversion of ADRs or GDRs to shares works as follows: the investor informs their broker or their bank that they wish to exchange their depositary receipts. This bank then approaches the European custodian of depositary receipts. This, in turn, passes this information on to the Russian custodian – the National Settlement Depositary (NSD). There, the deposited shares are then transferred to the Russian depositary account of the investor, which must be opened beforehand.
Until recently, the conversion of their depositary receipts was not attractive for international investors as the opening of a Russian depositary account involves a lot of bureaucratic effort for Europeans. The ending of many Depositary Receipt Programs now renders such an exchange indispensable, however. Due to the sanctions against Russian companies, this process is now also much more complicated than before.
These Russian Companies are ending their ADR and GDR Programs
In April 2022 Russia passed a law that is forcing many Russian companies to cease trading in depositary receipts within the coming months. The Russian legislator thus wishes to achieve that shares of Russian companies, in the future, are tradable only in Russia.
It is indeed the case that Russian companies still had the option of applying for the continuation of their Depositary Receipt Programs. But many companies did not exercise this option. So far it is only known that shares in the following companies will also be globally tradable in the future: Polyus, Tatneft, Severstal, Surgutneftegas, PhosAgrom, Sistema and Novatek.
Conversely, this also means that shares of major companies such as Gazprom, Magnit, Lukoil, Mobile TeleSystems, RusHydro, the LSR Group and the Federal Grid Company of Unified Energy System (FGC UES) will, soon already, only be tradable on the Moscow Stock Exchange. Partly this is already the case. Investors affected must therefore convert their depositary receipts to shares as quickly as possible. Otherwise, they risk the total loss of their own investment.
In fact, all conversion periods for Russian depositary receipt programs have already expired. Accordingly, the responsible banks will probably try to sell the deposited securities that have not been converted by their owners in a timely manner.
Fortunately, no case of such a forced sale has been reported so far. Therefore sometimes it is still possible to exchange depositary receipts for common shares again, although the respective ADR programs have already expired. However, it is completely unclear how long this will be the case. Therefore, affected investors should act quickly to protect their securities from forced sale.
In any case, if there were a forced sale of the deposited shares, many securities would come onto the market at the same time. This will most likely lead to enormous price slumps. While German investors must reckon with uncontrollable losses because of such a forced sale, investors from countries such as Russia or China could buy securities of German investors cheaply and benefit from the forced sale.
|Company||Expire date of the DR-program|
|Federal Grid Company of Unified Energy System (FGC UES)||09/12/2022|
Chart 1: The deadlines for the conversion of depositary receipts of selected Russian companies
This is how the conversion of Russian Depositary Receipts works despite sanctions
In general, quick action is required when it comes to converting depositary receipts from Russian companies into shares. The conversion of Russian DRs is always only possible for a limited time and is also extremely complicated.
One of the reasons for this is that the European depository company for depositary receipts – Clearstream – has been refusing to initiate the conversion of Russian depositary receipts since summer 2022, citing alleged sanctions.
In this regard, on June 23, 2023, the European Commission provided legal certainty by amending EU Regulation 269/2014 to allow brokers, financial institutions and custodians to apply for authorization to exchange Russian ADRs. In the future, these institutes will enjoy legal certainty during the conversion process. Only applications relating to securities of sanctioned companies may be rejected. This does not include Gazprom, for example.
Therefore, the biggest challenge for affected investors is that some US issuers of Russian depositary receipts have closed their books. In this regard, there is currently good news, because J.P. Morgan, Chase Bank and BNY Mellon have recently reopened their books for the ADR programs of Magnet, Federal Grid Company (FGC UES), Cherkisovo, Inter RAO UES, Rosseti, PIK Group and Mobile Telesystems. In addition, Citibank recently announced that it would reopen the books for the Lukoil ADR program and a few smaller ADR programs.
The depositary receipts of Inter RAO, Rosseti and the Federal Grid Company cannot currently be converted into common stock due to sanctions imposed on these companies. For the other listed companies, however, the conversion is currently possible in principle and is also partially successful. In addition, it is very likely that the conversion of depositary receipts from companies such as Gazprom will also be possible again in the coming weeks.
However, since it is currently unclear when this will be the case, investors should at least collect all the documents needed to convert their securities in the traditional way because so far, the exchange has only been possible within a short time window. The commercial law firm Goldenstein advises affected investors in this regard free of charge and without obligation. We would be happy to help you to carry out the preparatory actions that are already possible in Russia in order to be able to use any exchange option that arises at short notice.