Moscow Exchange’s listing reform has been an important step for the Russian financial market. It has created a simplified listing structure in line with international standards, and raised the corporate governance criteria for Russian issuers.
Preparations for the reform took nearly three years, during which time the Exchange worked with the regulator, market participants and issuers to analyse the best practices of foreign trading venues.
Moscow Exchange’s new listing rules took effect on 9 June 2014. The number of listing levels was reduced from six to three, with the A1 and A2 lists combined to form Level 1 (the highest list), while Level 2 includes securities from the former B, V, and I lists, and Level 3 includes all remaining names.
Issuers are now allowed to list their securities at any level during the IPO stage. Thus, the investor base for IPOs has been broadened, now prominently including the Russian Pension Fund, non-government pension funds and insurance companies authorised to buy the highest-level stocks only.
The Exchange introduced a new criterion, the free-float ratio, for the inclusion of securities on the Level 1 list; the free-float must be at least 10% for issuers with a market capitalisation of over RUB 60 mln. Issuers of stocks and bonds are required to have a history of three years of IFRS accounts instead of one year previously. In addition, bonds must have a credit rating assigned to the issuer or the guarantor, and the minimum rating has been increased two notches. The minimum corporate bond issue size is RUB 2 bln, while regional and municipal issues must be at least RUB 1 bln.
Mutual fund units must meet minimum NAV and liquidity requirements to be listed. A mutual fund must have an NAV of at least RUB 1 bln to be included at Level 1, RUB 300 mln for Level 2, and RUB 150 bln for Level 3 (RUB 250 bln for real estate mutual funds).
Foreign securities are allowed to be included at the highest level if they have been listed on one of foreign exchanges approved by the Bank of Russia.
The Exchange also raised corporate governance requirements for issuers to meet the Central Bank’s new Corporate Governance Code, adopted in spring 2014.
To be eligible for the Level 1 list, a stock issuer must have at least three independent directors on its board, who must together make up at least 20% of the board members. The board must also form audit, remuneration, and nomination (personnel and appointment) committees, comprising only independent directors if possible.
Stricter criteria for directors to be considered independent are now in place. These criteria are based on the corporate governance standards employed by the New York, London, and Hong Kong Stock Exchanges.
Issuers must appoint an officer or department to perform the functions of the corporate secretary, which must contribute to the development of the corporate governance system and practices, convocation of the company’s AGM, and support of the board’s activities.
For its stock or bond to be included at the highest level, an issuer must have an internal audit department and a policy on internal audit adopted by the board of directors.
The quality of the Exchange’s lists has improved considerably following the listing reform, bringing more transparency and clarity to the market. In turn, issuers are interested in being included at the highest level. Eleven issuers, including blue chip companies such as Gazprom, Rosneft and Megafon, made additional corporate governance commitments in order to increase the levels of their listings.
As of 31 December 2014, 1 749 securities from 720 issuers are admitted to trading on Moscow Exchange, of which 317 are stocks from 257 issuers and 1 151 are bonds from 394 issuers. Eight hundred and sixty five securities from 347 issuers are included on the lists, of which 560 securities from 221 issuers are on the Level 1 list.
One hundred and nine stocks from 98 issuers, 536 corporate bonds from 194 issuers and 131 bonds from 41 federal and municipal borrowers are on the Exchange’s lists, of which 67 stocks from 61 issuers and 457 bonds from 161 issuers are listed at Level 1.
Stock issuers were given two years starting from the launch of the reforms to bring their securities and practices in line with the new standards, after which stocks that do not comply with the new rules may be downgraded to lower lists.