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Escrow: new developments in the area of escrow of paperless securities

14.03.2019
6 min read
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Law Firm Pepeliaev Group advises that rules for escrow of paperless securities have been clarified.

On 27 December 2018 Federal Law No. 514-FZ[1] (the “Federal Law”) was adopted. It has amended legislation on the securities market, and among other things has established the rules for making an entry about escrow of paperless securities, changing an entry or terminating it, and about payment of monetary funds when such securities are redeemed.

The above provisions of the Federal Law supplement the general provisions of the Russian Civil Code (the “Civil Code”) with respect to escrow and will come into legal force on 1 January 2020.

A new type of personal account for recording rights to securities

The Federal Law introduces an escrow agent’s account for recording rights to paperless securities (the “securities”) deposited on escrow. However, this account can be used and opened only for an escrow agent which is not the keeper of the register or is not the depositary that has opened the above account. The procedure for opening and maintaining an escrow account is determined by the Bank of Russia.

The rules for escrow of securities have been differentiated

Depending on the status of the escrow agent, the Federal Law establishes two methods for depositing securities on escrow:

  • crediting them to an escrow agent’s account
  • making an entry about escrow in a depositor’s personal account.

The second method is applied when an escrow agent is the keeper of the register or is the depository that records rights to securities being deposited. In all other cases securities are deposited by way of transfer to the escrow agent’s account.

The securities are deemed transferred to escrow from the date when an entry is made in the depositor’s account or from the date when the securities are credited to the escrow agent’s account. At the same time, for the securities to be credited to the escrow agent’s account, information about the following should be provided to the keeper of the register or depository:

  • the depositor and the beneficiary under an escrow agreement,
  • the person exercising rights with respect to the securities deposited,
  • the bank accounts to which income/payments in relation to such securities will be transferred.

The transfer of rights to the securities deposited

The Federal Law repeats the provisions of the Civil Code with respect to the rights of the parties to the escrow agreement to the property deposited. It establishes that the securities credited to escrow account belong to the depositor under the escrow agreement, and, when the circumstances specified in the escrow agreement occur, title to the securities passes to the beneficiary under the escrow agreement. At the same time the escrow agent, not later than the day following the date when the escrow agent became aware (should have become aware) that the grounds specified in the escrow agreement for the transfer of the deposited securities to the beneficiary have occurred, must notify the keeper of the register or the depository which records rights to the securities deposited.

Комментарий ПГ

The Federal Law contains no rules for the transfer of rights to securities when they are deposited by way of making an entry in the depositor’s personal account. It is apparent that in such a case, taking into account the rules of article 926.1 of the Civil Code, the keeper of the register or the depository as an escrow agent must transfer the encumbered securities to the beneficiary’s personal account when the corresponding circumstances occur.


The amendment of the terms and conditions or the termination of escrow of securities

The Federal Law has provided for special rules for amending or terminating the terms and conditions of escrow in cases when the keeper of the register or when the depository acts as escrow agent: if terms and conditions are amended or the encumbrance of the securities is terminated, the corresponding entries are made in the depositor’s account on the ground of the amendment or the termination of escrow agreement entered into with such keeper of the register or such depository. At the same time, the instructions of the owner of the securities and the beneficiary’s consent are not required to be provided.

Комментарий ПГ

The Federal Law establishes no regulation in a case of the amendment of terms and conditions or the termination of escrow under which the securities have been deposited to the escrow agent’s account. It is apparent that in such a case a general rule of article 51.6(3) of the Law on the securities market[2] applies. According to this rule entries about the amendment of terms and conditions or the termination of the encumbrance of the securities are made based on the instructions of the owner with the consent of the party in whose favour the encumbrance is established, or without such instructions if so provided for by a federal law or an agreement of the right holder with the keeper of the register or with the depository, and with the party in whose favour the encumbrance is established.

Guarantees if the securities are redeemed

In cases when the deposited securities are redeemed or acquired by a third party, the Federal Law establishes a security measure in the form of an obligation of the escrow agent to open a nominal bank account. The monetary funds from the redemption or acquisition of the securities by a third party are credited to the above nominal account, and these funds should be transferred to the beneficiary under the escrow agreement when the circumstances for the transfer of the securities redeemed / disposed of by the third party occur, unless the parties have agreed otherwise.

What to think about

The regulation of the institution of escrow has taken on a cohesive look in Russian law and allows complex transactions with respect to significant assets to be structured securely and with minimal risks to the parties.

We advise companies to bear escrow in mind as a method of ensuring their interests when undertaking mergers and acquisitions of which the subject matter is shares as well as transactions with other paperless securities.

Help from your adviser

Pepeliaev Group provides legal advice and support in escrow transactions and has provided escrow agent services ever since such construct appeared in Russian legislation.

Our flexibility in making decisions, the in-depth experience of our lawyers, and our solid reputation offer guarantees to our clients of integrity and of impartiality in discharging our obligations properly, and ensure that your transaction will be implemented successfully


[1] Federal Law No. 514-FZ “On amending the Federal Law “On the securities market” and certain items of the legislation of the Russian Federation to enhance the state regulation of the issuing of securities” dated 27 December 2018.

[2] Federal Law No. 39-FZ “On the securities market” dated 22 April 1996.

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