As state-run Oil and Natural Gas Corp mulls investing three billion dollars in the initial public offering (IPO) of Russia's Rosneft, the Moscow-based firm has warned potential investors that they face numerous risks including uncertain tax laws and economic instability.
Rosneft's IPO prospectus contains 25 pages of 'risk factors', including those stemming from the acquisition two years ago of Yuganskneftegaz, its main production asset, purchased in a forced auction from Russian rival Yukos.
The prospectus also warns about the potential hazards of investing in Russia, with minority shareholders likely to be offered little protection under Russian law.
Rosneft is also embroiled in legal challenges, it adds, while company auditor Ernst & Young acknowledges that Rosneft's accounting systems may be relatively unsophisticated.
Petroleum Secretary MS Srinivasan had on Wednesday stated that ONGC had two more weeks to decide on investing in the $11.6 billion IPO to take upto 5 per cent stake.
The prospectus states that "weakness relating to the Russian legal system and Russian law create an uncertain environment for investment and for business activity" and lists inconsistencies among Federal laws; decrees, orders and regulations issued by the President, the Government, Federal Ministeries and regulatory authorities; and regional and local laws, rules and regulations.
Besides a high degree of discretion on the part of governmental authorities and substantial gaps in the regulatory structures have also been pointed out.
There are weaknesses in legal protections for minority shareholders and in corporate governance standards under Russian law," the prospectus said adding Russian tax laws were not fully developed and were subject to frequent changes.
It states that "political and governmental instability could adversely affect the value of investments in Russia" and "domestic political conflicts could create an uncertain operating environment that would hinder Rosneft's long-term planning ability."
"Economic instability in Russia could adversely affect Rosneft's business," the prospectus says adding Rosneft faced inflation and foreign exchange risks.
Rosneft, the Russian state oil company built on assets seized from rival Yukos, is seeking to raise at least 10 billion dollars in the mid-July IPO in London and Moscow that will place 12.5-16 per cent of its stock in private hands.
A major risk factor is litigation linked to Rosneft s acquisition of oil firm Yugansk - an asset snapped up in a forced firesale of Yukos Oil Company s assets. But they also include warnings that the Kremlin-controlled board may not act in the interests of minority shareholders.
"The concept of fiduciary duties of management or directors to their companies or shareholders is relatively new and is not well developed," says the prospectus.
Rosneft says actions by the Russian government could create a difficult business climate in Russia. "The government has considerable discretion with respect to certain actions, such as withdrawal of licenses, tax audits and criminal prosecutions."
The prospectus states that in the recent past, the Russian economy had suffered from high rates of inflation - 10.9 per cent in 2005, 84.5 per cent in 1998, 36.5 per cent in 1999 and 20.2 per cent in 2000.
"Certain of Rosneft's costs, such as the amount it pays for pipes, valves and other equipment, as well as salaries, are affected by inflation in Russia," it said.
Over the past ten years, the Russian ruble has fluctuated dramatically against the US dollar. In earlier years, the ruble depreciated against the dollar, although in each of the past four years, it has, on average, appreciated modestly.
"Any appreciation of the ruble against the US dollar generally adversely affects Rosneft's operating results and financial condition," the prospectus said.