1. Legal Trends and Issues in Russian IPOs 5 th Annual USRCCNE Russian Financial Markets Conference 3 May 2007 Mark Banovich Partner

2. 1 OverviewOverview  The Disappearing QIB Tranche (Or, How Do I Get a Piece of the Action?)  The Challenge of AIM IPOs by Russian Issuers  Facilitating Russian Access to AIM  Depositary Interests  Russian Depositary Receipts  Investing in Russian domestic IPOs  Open subscription structures  Listing developments  Some things to keep in mind

3. 2 The Disappearing QIB Tranche  How do I get a piece of the action?  The deals are generally Regulation S Category 1, so…  US persons can still submit buy orders offshore  On LSE  On AIM  Directly in the Russian market on RTS, MICEX or another Russian exchange  Since the Russian regulator is increasingly restricting the total percentage of share capital and the total percentage of an offering that can be placed abroad, it’s time to become familiar with the new products that will facilitate Russian offerings in the near future, as well as with the Russian on-shore rules

4. 3 The Challenge of AIM IPOs by Russian Issuers  AIM is a natural market for Russian mid-caps  Small to mid-sized development stage issuers  Receptivity by investors, particularly to emerging markets issuers and oil & gas exploration and development companies  Russian shares cannot be admitted directly to AIM  Shares listed in the UK must be traded electronically through the UK electronic settlement system (CREST)  Shares of companies incorporated in the UK, Ireland, the Isle of Man or the Channel Islands can be admitted to CREST  Shares of companies in other jurisdictions, such as Russia, cannot be admitted to CREST directly

5. 4 The Challenge of AIM IPOs by Russian Issuers (cont.)  CREST settlement for companies incorporated outside the UK, Ireland, Isle of Man or the Channel Islands  Issue Depositary Interests  A depositary incorporated in the UK, Ireland, the Isle of Man or the Channel Islands can issue depositary interests in respect of the shares of an issuer  The depositary interest mirrors the underlying shares for the purposes of UK trades, and passes through the terms and conditions of the underlying shares to investors  Depositaries have not previously offered this product to Russian issuers due to concerns over the settlement cycle for the underlying shares in the Russian share register

6. 5 The Challenge of AIM IPOs by Russian Issuers (cont.)  Form an offshore holding company in the UK, Ireland, Isle of Man or the Channel Islands and gain direct admission to AIM  Examples include a Jersey holding company established to hold Russian media operating companies, and a Guernsey holding company established to hold Russian property assets  FSFM is expanding its focus from the LSE main market GDR deals like Pyaterochka and Integra to AIM deals involving structures like this  The challenge is to structure the financial instruments that will permit Russian companies to raise capital on AIM without falling afoul of FSFM policy objectives

7. 6 Facilitating Russian Access to AIM – Depositary Interests  Making Depositary Interests a Reality  Computershare acquires control of a Russian registrar, National Registry Company, to manage settlement risk  Computershare has standard form documentation and is confirming regulatory treatment with FSFM and CREST  Regulatory positives:  Access to AIM by Russian issuers (no offshore holding company), which would facilitate regulatory oversight by FSFM  Depositary interests can trade through CREST with the ISIN of the Russian shares, which should enhance transparency and the international recognition of Russian shares  Issuer (not the investor) pays fees of the Depositary, facilitating cancellations of depositary interests trading on UK markets for shares to trade on Russian stock exchanges, which may enhance fungibility and support liquidity on Russian stock exchanges

8. 7 Facilitating Russian Access to AIM – DIs (cont.)  Structuring Consideration:  At least initially, the product is not expected to be set up to permit a primary offering of newly issued Russian shares in the form of depositary interests where a placement report relating to the shares must be registered by FSFM after closing  Nevertheless, depositary interests could be used for a capital raising offering where a core shareholder offers secondary shares in the offering and uses the proceeds to subscribe for and purchase newly issued shares from the company  Other depositaries may follow, but those unwilling to acquire a Russian share registrar may have to wait until the establishment of a central Russian securities depository  Bottom Line: Russian shares may soon trade on AIM in the form of depositary interests

9. 8 Facilitating Russian Access to AIM - RDRs  Harmonizing the offshore holding company structure with FSFM regulatory objectives  Foreign securities de facto cannot be publicly traded or listed in Russia  RDRs are Russian securities issued by a depositary that is a Russian legal entity. By depositing foreign securities with the Russian depositary against the issuance of RDRs, a foreign issuer would be able to offer and list, and its shareholders can hold and trade, a Russian security representing such foreign securities.  The RDRs can then be listed on Russian stock exchanges  Accordingly, an offshore holding company listed on an international stock exchange should be able to use this product to “return liquidity” to the Russian market

10. 9 Facilitating Russian Access to AIM – RDRs (cont.)  Regulatory regime for RDRs is being implemented  Enabling legislation took effect January 2007  Forthcoming FSFM regulations will have to flesh out certain details in a manner that promotes commercial viability of the product  In any Russian law prospectus relating to RDRs, the RDR issuer will have to disclose information about itself as well as about the foreign issuer and the underlying securities. Depending on the scope of such information, which is to be determined in the forthcoming regulations, Russian depositaries may feel the need to seek reimbursement and/or indemnification from the foreign issuer for preparing such disclosure.  Because Russian law generally does not recognize a distinction between legal and beneficial ownership, RDR depositaries face an accounting issue of how to record the “beneficial” rights of RDR holders to the underlying securities separately from the RDR depositary’s rights therein.  It remains to be seen whether RDRs will facilitate the creation of offshore holding companies for future direct listings on AIM (and other markets), or will merely enable companies already listed abroad to “cure” their current lack of a Russian listing

11. 10 Investing in Russian Domestic IPOs Open Subscription Structures  Pre-emptive rights  Pre-emptive rights: 20 day exercise period, and offer price for both rights holders and the public is set after bookbuilding  Allocation:  Allocation: Other than shares purchased upon exercise of pre- emptive rights, shares may be allocated in the discretion of the issuer to members of the public offering to subscribe  Placement report  Placement report: Notice filing permitted if the shares were placed in an open subscription, through a Russian broker and listed on a Russian stock exchange  What does this mean in practice?  Pre-emptive rights  Pre-emptive rights: 20 day exercise period, and offer price for both rights holders and the public is set after bookbuilding  Allocation:  Allocation: Other than shares purchased upon exercise of pre- emptive rights, shares may be allocated in the discretion of the issuer to members of the public offering to subscribe  Placement report  Placement report: Notice filing permitted if the shares were placed in an open subscription, through a Russian broker and listed on a Russian stock exchange  What does this mean in practice?

12. 11 Investing in Russian Domestic IPOs Example: OGK-5 Best efforts underwriting of new shares though open subscription under Russian law Timeline: State registration of new share issuanceState registration of new share issuance 20 day pre-emptive rights exercise period20 day pre-emptive rights exercise period Roadshow and bookbuilding based on submission of bids by investors to the ManagersRoadshow and bookbuilding based on submission of bids by investors to the Managers Managers recommend share price to the Company based on bookbuilding resultsManagers recommend share price to the Company based on bookbuilding results Offer price set by the Company’s board of directors in consultation with the ManagersOffer price set by the Company’s board of directors in consultation with the Managers Commencement of open subscription periodCommencement of open subscription period Binding bids are accepted by a Russian broker on a first-come-first-served basisBinding bids are accepted by a Russian broker on a first-come-first-served basis Any investor may bid, but in practice the Managers show up first and submit binding bids for shares based on the bids received during bookbuildingAny investor may bid, but in practice the Managers show up first and submit binding bids for shares based on the bids received during bookbuilding Notification of results of the issuance signed by the Company and the Russian broker is filed with FSFM, with shares becoming transferable on the next succeeding business dayNotification of results of the issuance signed by the Company and the Russian broker is filed with FSFM, with shares becoming transferable on the next succeeding business day Suitable for placing to portfolio investors; not as well-suited to strategic investor participation Best efforts underwriting of new shares though open subscription under Russian law Timeline: State registration of new share issuanceState registration of new share issuance 20 day pre-emptive rights exercise period20 day pre-emptive rights exercise period Roadshow and bookbuilding based on submission of bids by investors to the ManagersRoadshow and bookbuilding based on submission of bids by investors to the Managers Managers recommend share price to the Company based on bookbuilding resultsManagers recommend share price to the Company based on bookbuilding results Offer price set by the Company’s board of directors in consultation with the ManagersOffer price set by the Company’s board of directors in consultation with the Managers Commencement of open subscription periodCommencement of open subscription period Binding bids are accepted by a Russian broker on a first-come-first-served basisBinding bids are accepted by a Russian broker on a first-come-first-served basis Any investor may bid, but in practice the Managers show up first and submit binding bids for shares based on the bids received during bookbuildingAny investor may bid, but in practice the Managers show up first and submit binding bids for shares based on the bids received during bookbuilding Notification of results of the issuance signed by the Company and the Russian broker is filed with FSFM, with shares becoming transferable on the next succeeding business dayNotification of results of the issuance signed by the Company and the Russian broker is filed with FSFM, with shares becoming transferable on the next succeeding business day Suitable for placing to portfolio investors; not as well-suited to strategic investor participation

13. 12 Investing in Russian Domestic IPOs Example: OGK-3 Open auction placing of new shares though open subscription under Russian law Timeline: State registration of new share issuanceState registration of new share issuance 20 day pre-emptive rights exercise period20 day pre-emptive rights exercise period Investors submit binding bids to a Russian broker acting on behalf of the issuer, stating (i) the exact/maximum/minimum number of shares and (ii) the maximum price per share at which they are willing to buy the indicated amount of sharesInvestors submit binding bids to a Russian broker acting on behalf of the issuer, stating (i) the exact/maximum/minimum number of shares and (ii) the maximum price per share at which they are willing to buy the indicated amount of shares Information on the bids, including terms such as the proposed price per share, is disclosed on the Company's website on a daily basisInformation on the bids, including terms such as the proposed price per share, is disclosed on the Company's website on a daily basis Offer price set by the Company’s board of directors after review of all bidsOffer price set by the Company’s board of directors after review of all bids Company accepts bids in its sole discretion.Company accepts bids in its sole discretion. Approximately 47% stake acquired by an affiliate of Norilsk NickelApproximately 47% stake acquired by an affiliate of Norilsk Nickel Notification of the results of the issuance filed with the FSFMNotification of the results of the issuance filed with the FSFM Suitable for dual track strategic sale process and placing to portfolio investors Open auction placing of new shares though open subscription under Russian law Timeline: State registration of new share issuanceState registration of new share issuance 20 day pre-emptive rights exercise period20 day pre-emptive rights exercise period Investors submit binding bids to a Russian broker acting on behalf of the issuer, stating (i) the exact/maximum/minimum number of shares and (ii) the maximum price per share at which they are willing to buy the indicated amount of sharesInvestors submit binding bids to a Russian broker acting on behalf of the issuer, stating (i) the exact/maximum/minimum number of shares and (ii) the maximum price per share at which they are willing to buy the indicated amount of shares Information on the bids, including terms such as the proposed price per share, is disclosed on the Company's website on a daily basisInformation on the bids, including terms such as the proposed price per share, is disclosed on the Company's website on a daily basis Offer price set by the Company’s board of directors after review of all bidsOffer price set by the Company’s board of directors after review of all bids Company accepts bids in its sole discretion.Company accepts bids in its sole discretion. Approximately 47% stake acquired by an affiliate of Norilsk NickelApproximately 47% stake acquired by an affiliate of Norilsk Nickel Notification of the results of the issuance filed with the FSFMNotification of the results of the issuance filed with the FSFM Suitable for dual track strategic sale process and placing to portfolio investors

14. 13 Investing in Russian Domestic IPOs Example: TGK-[X] Fixed price placement of new shares though open subscription under Russian law Timeline: Strategic investor negotiations commenceStrategic investor negotiations commence State registration of new share issuanceState registration of new share issuance 20 day pre-emptive rights exercise period20 day pre-emptive rights exercise period Strategic investors submit non-binding expressions of interestStrategic investors submit non-binding expressions of interest Portfolio investor roadshow may be used to obtain non-binding expressions of interestPortfolio investor roadshow may be used to obtain non-binding expressions of interest Share price set by the Company’s board of directors in consultation with the ManagersShare price set by the Company’s board of directors in consultation with the Managers Holders exercising pre-emptive rights must pay for their sharesHolders exercising pre-emptive rights must pay for their shares Any investors may submit bids for up to 100% of all remaining sharesAny investors may submit bids for up to 100% of all remaining shares Company accepts one or more bids in its sole discretionCompany accepts one or more bids in its sole discretion Investor pays, and Company issues sharesInvestor pays, and Company issues shares Placement Report approved by board and filed with FSFM within 30 days after closingPlacement Report approved by board and filed with FSFM within 30 days after closing Shares are not transferable until Placement Report is registered with FSFMShares are not transferable until Placement Report is registered with FSFM If FSFM does not register Placement Report issuance is cancelledIf FSFM does not register Placement Report issuance is cancelled Portfolio investors are a stalking horse to discipline bidding by a preferred strategic investor Fixed price placement of new shares though open subscription under Russian law Timeline: Strategic investor negotiations commenceStrategic investor negotiations commence State registration of new share issuanceState registration of new share issuance 20 day pre-emptive rights exercise period20 day pre-emptive rights exercise period Strategic investors submit non-binding expressions of interestStrategic investors submit non-binding expressions of interest Portfolio investor roadshow may be used to obtain non-binding expressions of interestPortfolio investor roadshow may be used to obtain non-binding expressions of interest Share price set by the Company’s board of directors in consultation with the ManagersShare price set by the Company’s board of directors in consultation with the Managers Holders exercising pre-emptive rights must pay for their sharesHolders exercising pre-emptive rights must pay for their shares Any investors may submit bids for up to 100% of all remaining sharesAny investors may submit bids for up to 100% of all remaining shares Company accepts one or more bids in its sole discretionCompany accepts one or more bids in its sole discretion Investor pays, and Company issues sharesInvestor pays, and Company issues shares Placement Report approved by board and filed with FSFM within 30 days after closingPlacement Report approved by board and filed with FSFM within 30 days after closing Shares are not transferable until Placement Report is registered with FSFMShares are not transferable until Placement Report is registered with FSFM If FSFM does not register Placement Report issuance is cancelledIf FSFM does not register Placement Report issuance is cancelled Portfolio investors are a stalking horse to discipline bidding by a preferred strategic investor

15. 14 Investing in Russian Domestic IPOs “V” and “I” Listing Eligibility Requirements  Available for primary offerings via open subscription, and secondary offerings conducted through a Russian broker  Available only if shares are being offered for the first time through a Russian stock exchange or broker  Minimum corporate existence of 3 years for “V”; no such requirement for “I”  No losses in 2 of the last 3 years for “V”; no such requirement for “I”  Certain additional undertakings by the financial consultant in “I” listing  No minimum trading volume requirement for admission to listing  No unaffiliated public float requirement for admission to listing  Must move up to “B” or “A” listing after six months of “V” listing, or after 5 years of “I” listing  Available for primary offerings via open subscription, and secondary offerings conducted through a Russian broker  Available only if shares are being offered for the first time through a Russian stock exchange or broker  Minimum corporate existence of 3 years for “V”; no such requirement for “I”  No losses in 2 of the last 3 years for “V”; no such requirement for “I”  Certain additional undertakings by the financial consultant in “I” listing  No minimum trading volume requirement for admission to listing  No unaffiliated public float requirement for admission to listing  Must move up to “B” or “A” listing after six months of “V” listing, or after 5 years of “I” listing

16. 15 Investing in Russian Domestic IPOs Some other things to keep in mind…  Back-to-back IPO structure: Some capital raising Russian IPOs will still be structured as a secondary offering by a controlling shareholder who agrees to use the proceeds of the offering to buy primary shares in a closed subscription - so don’t just assume that an offering of secondary shares is a cash out without reading further into the offering circular  Form of Holding: Don’t open an account with the share registrar – it’s expensive, and in any case you’ll need a depo account at a Russian licensed custodian approved by the relevant exchange in order to be able to use its trading facilities (e.g., DCC for RTS, or NDC for MICEX)  Temporary ticker symbol: If you are buying primary shares, remember that some exchanges (e.g., MICEX) require newly issued shares to trade under a separate ticker symbol until FSFM consolidates the new issuance with previous issuances (3-5 months after closing depending on the open subscription structure being used)  Back-to-back IPO structure: Some capital raising Russian IPOs will still be structured as a secondary offering by a controlling shareholder who agrees to use the proceeds of the offering to buy primary shares in a closed subscription - so don’t just assume that an offering of secondary shares is a cash out without reading further into the offering circular  Form of Holding: Don’t open an account with the share registrar – it’s expensive, and in any case you’ll need a depo account at a Russian licensed custodian approved by the relevant exchange in order to be able to use its trading facilities (e.g., DCC for RTS, or NDC for MICEX)  Temporary ticker symbol: If you are buying primary shares, remember that some exchanges (e.g., MICEX) require newly issued shares to trade under a separate ticker symbol until FSFM consolidates the new issuance with previous issuances (3-5 months after closing depending on the open subscription structure being used)

17. 16 INFO@LLGM.RU WWW.RUSSIANLAWS.COM Tel.: 7 (495) 737-5000 Fax: 7 (495) 737-5050 QUESTIONS?QUESTIONS? Legal Trends and Issues in Russian IPOs