Moscow Stock Exchange to Launch Corporate Governance Segment in Q3 of 2013

This has developed over the course of 2012, but we have not had the opportunity to cover it. The Moscow Stock Exchange is poised to launch a special corporate governance segment called “Novy Rynok” – New Market in Russian.

Sergei Sinkevich, Primary Market Department and Globalisation Managing Director of the Moscow Exchange formulated the motivation for the launch in an interview with FTSE Global markets:

“We are introducing this segment for two reasons: on the one hand we are planning to attract long-term investors who are ready to invest in “high-quality’’ issuers. On the other, we want to attract issuers that want to establish reputational capital and who expect to enjoy market premia, added to the price of their shares, which clearly demonstrate their exemplary practice of corporate governance and transparency.”

In essence, the rationale is the same that led to the launch of the “Novo Mercado” in Brazil 12 years ago: the stock exchange introduces a set of special listing rules, in particular concerning shareholder rights, that go beyond the host jurisdiction’s rather weak protection offered to investors. The Novo Mercado, consisting of three different tiers with increasingly stringent corporate governance requirements, has been a resounding success: virtually all new listings in Brazil occur in the special corporate governance segment and the index based on the segments has soundly outperformed the BOVESPA benchmark since its inception. Given this success story, the “Novy Rynok” is directly modeled after the Novo Mercado.

A November 2012 presentation by the Moscow Stock Exchange, available on the Russian Investor Protection Association website, lays out the details of the planned segment. The basic principles and some of the specific criteria addressing these principles are:

1. Procedures and obligations associated with public offerings to protect new shareholders. Provisions targeting this principle include the obligation that public placements must target dispersion and a 6-month lock-up period following an IPO.

2. Additional provisions for the protection of existing shareholders: Tag-along rights, a minimum of 3 independent directors on the board and a majority independent Audit Committee.

3. Transparency and disclosure: IFRS based quarterly statements in Russian and English; ongoing disclosure in English; detailed disclosure of related-party transactions and of the ultimate controlling shareholder, annual shareholder meeting material to be published in English and Russian 20 days in advance.

According to the presentation, internal approval procedures within the Moscow Stock Exchange for Novy Rynok are supposed to be finalized in the first and second quarter of 2013. The project is to be launched in the third quarter, with the first issuers joining the segment. The stated goal is to have at least 5 companies listed in the new market in 3 years. This seems overly modest. Brazil’s Novo Mercado started out with 18 back in 2001.