GLOBAL DEPOSITORY RECEIPTS (GDRs)

Introduction
In recent times, there has been an increase in the number of Nigerian companies that have raised equity capital through GDRs and seek listing on the London Stock Exchange. The first recorded GDR programme in Nigeria was that of UBA. The UBA GDR was issued in 1990 with 63.97 million ordinary shares as the underlying shares. However, the programme was considered not too successful due to the poor economic and political image of the country at that time. In 2007, about seven (7) banks issued GDRs.

Definition
Global Depository Receipts (GDRs) are negotiable instruments issued by a Depository Bank, representing ownership of underlying shares of a company. GDRs are usually dollar denominated, issued based on the underlying shares of a foreign company at a predetermined ratio e.g. 50 shares to 1 GDR. These shares are held in trust by a local (Nigerian) custodian and are not allowed for trading in the domestic market of the issuer company.

GDRs are traded and settled in dollars in the international clearing system e.g. EUROCLEAR and can be listed on an exchange or traded over the counter.

Each GDR evidences that the investor is registered as the holder thereof and confers on the investor a number of rights in respect of the underlying shares. These include right to receive dividend and the right to direct the Depository on how to deal with other rights attached to the underlying shares, such as voting rights. Also, the holder of a GDR is normally entitled to call for delivery of the shares (fungibility).

Who can participate in a GDR Offering?
GDRs are typically issued to international investors seeking access to conveniently structured emerging market equities. However, because of the peculiarity of the Nigerian market, the Commission allowed for local participation.

How can a Nigerian Investor participate in a Primary Issuance and Secondary Trading of GDRs?
For primary issuance, where there is a provision for local tranche, an investor can subscribe through domestic underwriters. However, if there is no local tranche, a Nigerian investor can participate by contracting an international broker who can place an order on behalf of the investor. For secondary trading, a Nigerian investor can also participate through an international broker.

Functions of a Depository Bank
- To administer depository receipts for individual investors
- To keep the register of depository holders and update the register as the result of transfer from secondary market transactions.
- To receive dividend on behalf of the GDR holders and recovery of withholding tax
- Conversion of depository receipts to shares
- Execution of corporate actions.

Reasons for Issuing GDRs
- To raise capital
- To diversify shareholders base
- To improve liquidity of the underlying shares
-To make available an equity financing tool for use in mergers and acquisitions

Benefits of GDRs
- Access to pool of international capital
- For company (“off shore balance sheet”)
- For country (foreign capital inflow assessment)

International profile and visibility
- Company’s information reported in major markets therefore get international recognition
-Respect and prestige of listing on a major exchange can attract new business opportunities and be a good reference to obtaining other sources of funding
- Country can also gain visibility as global investors become interested in it (e.g. Ghana and Ashanti Goldfields).
- International financial institutions may increase interest in local entities and country as a whole e.g. Morgan Stanley, J.P. Morgan, Deutsche Bank, Merrill Lynch growing interest in Nigeria.

- Wider shareholder base and investor pool can promote good corporate governance and liquidity.

- Exposure to international best practices and regulatory oversight by major securities regulators can:
- Induce an entity to inculcate international best practices
- Induce good corporate governance

- Promotion of local skills and capacity in international practices
- Issuers
- Operators
- Regulators

- Opportunity for local investors to participate in foreign currency denominated instruments.

- Challenges of competition for local intermediaries

- Attraction of some Nigerians in Diaspora who have been part of the structuring of GDR programme.

Downside of GDRs
- Global visibility can expose an entity to potential takeover (Ashanti Goldfield merged with Anglo gold to form Anglogold Ashanti in 2004, becoming the second largest gold producer in the world).
- Price arbitrage as securities may be traded at different prices (value) on the exchanges of listing.
- External and internal shocks may affect share prices of companies listed outside the domestic exchange more severely than those on the local exchange without exposure to foreign investors.

 

References:

(1) Linklater - Global Depository Receipts: A Guide - July, 2007

(2) Write- up from the Diamond Bank GDR Prospectus 2007

(3) FAQs on Global Depository Receipts by Afrinvest West Africa