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A Presidential Decree has clarified the rules concerning foreign ownership of shares of RAO Gazprom, the world's largest natural gas producer (accounting for approximately one quarter of world production). Before the Decree, Gazprom's corporate charter had established a rule that no more than 9% of its shares could be owned by "foreigners or their affiliated persons or legal entities". However, there was no clear mechanism for enforcing the limit, and the definition of 'affiliated' remained murky. Gazprom also maintained the right to approve any sale of shares to foreigners, as well as a general right of first refusal to repurchase any shares sold by Russian shareholders (except that certain shares sold to Russian shareholders by auction were exempted from the latter rule).

The Management Committee of Gazprom did approve a small number of secondary sales to foreign purchasers. Further, last year Gazprom sold about 1% of its share capital to foreign investors in the form of American Depositary Shares. This effectively created a 'two-tier' market for Gazprom shares, with a substantial price difference between the London ADS price and the Moscow price for domestically-traded shares. Creative foreign investors devised mechanisms to purchase 'domestic' shares through wholly-owned Russian legal entities, thus testing the limits of the definition of 'foreign-affiliated' in the Gazprom charter. This led to controversy, notably in the case of a well-publicized Regent Pacific fund whose use of such an approach drew heavy criticism from Gazprom management.

Presidential Decree No. 529, dated May 28 1997, seeks to resolve these controversies and establish clearer rules for foreign ownership. While re-affirming the 9% foreign ownership limit, the Decree sets forth a detailed definition of who qualifies as 'foreign'. Foreign shareholders are to include foreign citizens, legal entities established under foreign law, and 'commercial organizations' and mutual funds established under Russian law whose capital is 50% or more owned by foreigners. Henceforth, Article 5 of the Decree states that foreigners can only buy Gazprom shares or derivatives based on Gazprom shares in the Russian market with the permission of the Federal Securities Market Commission, to be given in accordance with decisions of the government. (As offshore securities, ADSs would not be affected). Transactions in violation of the Decree are invalid.

Article 3 of the Decree contained a welcome grandfather clause for existing foreign investors who had purchased Gazprom shares through Russian legal entities or other 'derivative' schemes prior to the Decree. Such shares are to be treated in the same manner as Russian-owned domestic shares, and thus their ownership is not subject to legal challenge on the grounds of purchase by 'foreign-affiliated' investors without prior permission from Gazprom. However, Article 8 (which is to come into effect on September 1 1997) and Article 9 of the Decree indicate that in the future shares owned by foreign investors and Russian legal entities should be held through Russian depositaries. Foreign holdings are to be reported to a central information agency, thus providing a mechanism to monitor the 9% foreign ownership limit.

Brian L Zimbler

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