OPEN LETTER of Shareholders of All-Ukrainian Securities Depository OJSC and Interregional Securities Union (MFS) OJSC Regarding the Situation with the Establishment of a Merged Depository

The All-Ukrainian Securities Depository Open Joint Stock Company was established in the spring of 2008 on the initiative of the National Bank of Ukraine and leading banks and stock exchanges (22 founders in total).

The objective of the establishment of a new legal entity was the creation of a modern, technically well-equipped depository that would provide for the keeping of securities records in accordance with international standards, set up a robust system of investor rights protection and provide for clearing and settlement of exchange transactions, thus ensuring the operation of an organized securities market.

The capital structure of All-Ukrainian Securities Depository OJSC (AUSD) was designed, on the one hand, to have support from the National Bank of Ukraine as a regulator, and, on the other hand, to reflect the interests of major groups of professional stock market participants and let them have an effective impact on the formation and operation of securities record-keeping and settlement system. At the same time, in raising the share capital of a future depository, the consideration was given to the need for creating its own material and technical basis that would meet the licensing requirements of the Securities and Stock Market State Commission and make it possible to use record keeping, clearing and settlement software which is compliant with latest international standards and used internationally by depositories, stock exchanges and trading systems. This was intended to lay the groundwork for attracting foreign and domestic investments.

From the outset, the activities of AUSD were geared toward the joining of efforts with Interregional Securities Union OJSC (MFS) – the only depository which, despite an existing internal conflict, has sufficient experience in securities record keeping, has the staff capable of ensuring the uninterrupted operation of securities ownership record keeping system and executing securities trades.

MFS was established in 1997, almost simultaneously with the passage of the Law of Ukraine on the National Depository System and Specific Features of Electronic Record Keeping of Securities and until 2006 the company had been the only institution in Ukraine that actually serviced issues of book-entry securities and immobilized securities and provided the interaction of all participants in the securities record keeping system (issuers, custodians, registrars, and exchanges). Founded by state-owned and private banks and securities traders with the participation and methodological input of international bodies, MFS was a classical clearing depository, without a burden of regulatory powers, focused on providing commercial services. In spite of the National Depository of Ukraine assuming the role of a pseudo regulator of the securities record keeping system, it is MFS that has been and still remains a central link of the depository system. Currently, MFS accounts for 99% of the total volume of depository transactions.

In these circumstances, MFS was the entity chosen by AUSD shareholders as a partner for setting up a reliable and modern depository that could take the vacant place of a Central Depository as understood by developed countries.

As a result of a lengthy negotiation process with input from independent legal and financial advisors, in its December 2008 meeting, the MFS Supervisory Board accepted the proposal from AUSD and the merger of two companies was put forward to the general meeting of shareholders for consideration. In late February – early March 2009, shareholders of both companies, in the manner provided by law, agreed on the conditions for such merger and determined the mechanisms of protecting the interests of shareholders of both companies in the course of such merger.

Today the merger of two depositaries is close to completion, practically 100% of MFS shareholders have swapped their shares for those of AUSD. Thus, the steps have been made to complete the formation of a merged depository that reflects the interests of both the state and the market participants. It is the establishment of such a merged entity in the stock market of Ukraine that will become a hallmark of improving investment climate in the country.

The National Depository of Ukraine has become an active opponent of the merger that can create a civilized securities record keeping system in Ukraine and ensure the immediate and rigorous execution of securities trades in the organized market. This entity is notorious for its lack of transparency and its conflict between the management and public authorities, as a result of which the state (that owns an 86% stake in the share capital of this peculiar institution) is not able to control its activities. In February 2009, the National Depository of Ukraine acquired one MFS share for the obvious purpose of impeding the consolidation process.

Sensing a much more transparent and efficient competitor in the new merged depository, the National Depository of Ukraine took actions against both parties to the merger with the aim to impede the consolidation process, while misusing litigation rights.

During several days in early June 2009, three lawsuits were filed with the Kyiv City Commercial Court. In these lawsuits, without objective legal grounds, the National Depository of Ukraine advances a number of claims with respect to relations between AUSD and MFS. Specifically, these lawsuits contest the participation of the National Bank of Ukraine in AUSD’s share capital (although the National Bank of Ukraine carries out depository activities with respect to government securities). Also contested is AUSD’s failure to obtain the international securities code for the stock of the second issue being offered now (this is not required by law, these shares already have such code). The National Depository of Ukraine tries to use the court to impede the sale of MFS’s assets.

With a view to impede the AUSD and MFS merger process, the above lawsuits filed by the National Depository of Ukraine are accompanied by requests for lawsuit provision. As a result of this, in considering case No.52/385, Ms. S.O. Chebukina, the judge of the Kyiv City Commercial Court, ruled to prohibit AUSD from taking any actions regarding the offering of its own shares and the National Bank of Ukraine – from participating in such offering (in spite of the fact that, as at the date of the ruling, the National Bank of Ukraine already acquired, paid and received in its possession AUSD’s shares, and the National Depository of Ukraine was not even a shareholder of this company). By doing that, the court in fact blocked the new issue of shares, violated the rights of all those who intend to participate in the new issue, i.e. almost all major participants of the Ukraine’s stock market (over eighty legal entities in total).

It should be specifically noted that after Judge S.O. Chebukina ruled on July 3, 2009 to provide for the lawsuit by the National Depository of Ukraine as part of case No.52/385, a cassation complaint against this ruling was filed by Odesa Privatization Center Ltd., a related party to the National Depository of Ukraine, namely, its shareholder. Due to filing the cassation complaint, case No. 52/385 is subject to consideration by the High Commercial Court of Ukraine; as a consequence of this, artificial obstacles have been created for AUSD to appeal the lawsuit provision ruling for case No.52/385 in the Kyiv Commercial Court of Appeals.

Another step of the National Depository of Ukraine to impede the AUSD and MFS merger was the mid-June filing with the Circuit Administrative Court of Kyiv of a lawsuit in which the National Depository of Ukraine asks the court to cancel the resolution of the Securities and Stock Market State Commission on issuing to AUSD the license for carrying out professional activities in the securities market – depository activities of a securities depository, and also to require that the Securities and Stock Market State Commission decide to turn down AUSD’s request to issue such license. The true objective of this lawsuit becomes obvious if one takes into consideration the fact that the plaintiff asks the court to request from the mentioned State Commission the documents filed by AUSD to obtain the license for carrying out activities of a securities depository as well as all the documents relating to the registration by the Securities and Stock Market State Commission of AUSD’s share issue. At that, AUSD is not named in the lawsuit either a defendant or an entity involved in the case in any capacity, which is evidence of the intention of the National Depository of Ukraine to get rid of a potential competitor – AUSD – using the legal proceedings in which the latter does not participate. AUSD, the actual target of the lawsuit, learned about this lawsuit by chance.

AUSD and MFS shareholders are of the view that such actions damage the image of Ukraine, demonstrate weaknesses of its legislation and unreliability of its judicial system, erode the confidence in domestic stock market. All these things add up to make Ukrainian economy unattractive for investments. In the financial crisis, of paramount importance is the stability of market institutions. The existence of a stable, modern, and efficient securities record keeping system and a well-organized settlement system for trades in the stock market is a key to attracting investments to Ukraine and restoring confidence in traded securities.

In such circumstances, it is inadmissible to ignore these facts of the illegitimate obstruction of activities of the key depository entities – AUSD and MFS. We believe that public authorities that are responsible for securing in Ukraine the rule of law, stable social development, and the right to fair and unbiased judicial protection of parties to a litigation must immediately act to ensure transparent and fair consideration of cases within reasonable time, bring to justice, as provided by Ukrainian law, those who are guilty of making illegal court rulings.

From the National Bank of Ukraine:

Governor V. Stelmakh

From Alfa-Bank:

Acting Chief Executive Officer S. Polovko

From ING Bank Ukraine:

Acting Chief Executive Officer О.Grinchenko

From Savings Bank:

Chief Executive Officer А. Gulei

From First Ukrainian International Bank:

Chief Executive Officer R. Yushchak

From Privatbank:

First Deputy Chief Executive Officer T. Novikov

From Raiffeisen Bank Aval

Chief Executive Officer V. Lavrenchuk

From Ukreximbank:

Deputy Chief Executive Officer Yu. Hramov

From Ukrsotsbank:

Chief Executive Officer B. Timonkin

From Ukrainian Interbank Currency Exchange:

Chief Executive Officer P. Pereverzev