Global Depositary Receipts: Old but New Capital Raising Avenues for Kenyan Companies
Dual listing (also referred to as cross listing or inter listing) is the listing of a security on two or more different stock exchanges. It involves a company listing its shares within its local securities market and undertaking a secondary listing in a foreign jurisdiction. In East Africa, Kenyan companies already lead their contemporaries in dual listings, but cross listings to or from the Nairobi Securities Exchange remain very few and limited to the region . However, with the introduction of global depositary receipts (GDRs) to the capital markets legal framework by the Kenyan Capital Markets Authority (CMA), it is hoped that the challenges of dual listing will no longer be a hinderance to local and global companies seeking to tap into new and existing investor markets.
What are GDRs
GDRs are negotiable certificates that represent ownership of shares in a company listed in another country. GDRs are classified as either sponsored or unsponsored. A sponsored GDR is issued with the direct involvement of the issuer of the underlying shares and an unsponsored GDR is offered without the involvement, participation or consent of the issuer of the underlying securities.
Depositary receipts have been available in the United States of America (USA) since the 1920s and have for numerous years been products of the financial markets such as the London Stock Exchange (LSE). Even so, they have continued to receive significant attention in the last decade with globalization of capital markets and increased competition amongst firms both regionally and internationally.
Benefits of GDRs
The immediate benefit to a Kenyan company that successfully offers GDRs is increased capital. However, there are other benefits from offering GDRs, such as:
- access to a larger pool of potential investors and conversely greater access to capital;
- enhanced reputation of a company both locally and internationally giving the company a competitive advantage amongst its peers; and
- less stringent listing requirements than a main investment market listing, resulting in reduced costs and fees in comparison to a direct public offer.
From an investor’s perspective, the benefit of a GDR offer is that it:
- allows for diversification of their investment portfolio;
- provides an alternative option for market participation; and
- increased information to assess a company’s performances, amongst others.
Requirements for Listing GDRs
The requirements for the issuance of a GDR are set out in the CMA’s Policy Guidance Note on Global Depository Receipts and Global Depositary Notes in Kenya, which specifies the eligibility, documentation and disclosure requirements. The Guidance Note also identifies the various sections of the Capital Markets (Securities) (Public Offers, Listing and Disclosure) Regulations, 2002 that are to be modified to cater for GDRs.
The Guidance Note requires that the issuer (originator of the underlying shares or the depositary bank);
- is a duly incorporated entity and operating in conformity of the laws of its jurisdiction and constitution;
- comply with the minimum capitalization and net asset guidelines in force in its jurisdiction for primary listing;
- offer securities that are freely transferable, unencumbered and not subject to any restrictions on marketability or any pre-emptive rights;
- shall not be in breach of any of its loan covenants or other contractual obligations;
- shall not be insolvent and shall have adequate working capital;
- shall, (subject to waiver by the regulator),
- over the last five years have carried on as its main activity, either by itself or its subsidiaries an independent business capable of generating revenue;
- have in at least three of the last five years completed accounting periods to the date of the application, declared profits after tax attributable to its shareholders; and
- to be listed on a permissible Exchange for a minimum of two years.
It is to be noted that the CMA also requires that following a public offer of depository receipts, 25% of the GDRs be held by public investors.
Documentation and Disclosure Requirements
The CMA shall require that that an issuer provide, inter alia:
- a legal opinion at the time of the application confirming that it has complied with the eligibility requirements and that all consents, approvals, registrations and filings to be taken, obtained or made by the issuer in its local jurisdiction have taken or obtained; and
- an issuance prospectus for prospective investors that sets out:
- the corporate information of the issuer and the depositary bank, and the capital market regulatory provisions under which they operate;
- highlight the content and conditions of the deposit agreement (agreement between the issuer and the depositary bank, if applicable);
- the class, number, issue price of shares to be held by the depositary, and whether it is a public or private placement; and
- a summary of the terms and conditions of the GDRs.
. The disclosure and reporting requirements for companies vary in each financial market. The more sophisticated the financial market the stricter the legal and disclosure requirements for listed companies. Therefore, it is important for companies issuing in-bound GDRs from markets with less stringent disclosure requirements and corporate governance policies than Kenya to note that they may need to adjust their structures to comply with Kenyan regulations.
National Oil Corporation of Kenya – An Ideal Candidate?
In 2017, the London Stock Exchange and the Kenyan Ministry of Energy and Petroleum signed a memorandum of understanding paving the way for the dual listing of the National Oil Corporation of Kenya (National Oil), a corporation wholly owned by the Government of Kenya. National Oil aims to raise USD 1 Billion through a dual listing on the LSE. It is not yet known whether GDRs or equity shares shall be utilised. Should National Oil opt for GDRs, it shall join other similar state-controlled companies such as Brazilian Petroleum Corporation, commonly known as Petrobas.
The attractiveness of the LSE has been enhanced by its creation of a new category of premium listing in July 2018, exclusively for sovereign controlled commercial companies. These are companies in which a sovereign shareholder controls 30% or more of the company’s voting rights. Under this category, a sovereign controlled commercial company can either elect to issue GDRs or equity shares on the financial market. This financial product shall be especially attractive for state owned or controlled commercial companies in oil, gas, mineral extraction and energy (extractive industries) which require a significant amount of capital outlay to accomplish their strategic objectives, but which often have local content shareholding requirements.
In the ABSA Africa Financial Markets Index 2018 (ABSA Report), Kenya was ranked third overall in Africa and first in access to foreign exchange. As a growing financial hub, it is likely that Kenya shall see a rise of in-bound GDRs, particularly in light of the existing and growing extractive industries in East Africa. Competition for local investors is therefore likely to increase. In addition, the progress made by the CMA to align its regulatory framework with the international standards for financial markets is expected to enhance the ability of Kenyan listed companies to meet the eligibility and disclosure requirements for out-bound GDRs. Kenyan companies therefore appear poised to maintain their edge over their East African peers in accessing financial markets with greater investor capacity.
Notable examples of Kenyan firms with dual listing are Kenya Airways PLC (Kenya, Uganda and Tanzania), Jubilee Holdings Limited (Kenya, Uganda and Tanzania), Nation Media Group PLC (Kenya, Uganda and Rwanda), Centum Investment Company PLC (Kenya and Uganda), East African Breweries Limited (Kenya, Uganda and Tanzania), Kenya Commercial Bank (KCB) Group Limited (Kenya, Uganda, Tanzania and Rwanda) and Equity Group Holdings PLC (Kenya Uganda and Rwanda). In November 2018 Rwandese company Bank of Kigali became the second company to cross-list on the NSE.
The CMA also introduced Global Depository Notes which are negotiable certificates that represent ownership of bonds in a company listed in another country. However, the focus of this article shall be on GDRs.
The USA refers to its depositary receipts as American Depositary Receipts (ADRs).
The depositary bank shall be a foreign entity acceptable to the CMA and whose securities are not listed or trading on a securities exchange licensed by the CMA.
Petrobas has for many decades operated a programme of ADRs to finance its expansion, exploration and production activities.
An “in-bound depository securities” are shares whose primary jurisdiction of issuance is a foreign country and which are issued as depositary receipts in Kenya. This is distinguished from “out- bound depository securities” which are shares whose primary jurisdiction is Kenya and which are to be issued as depositary receipts in another jurisdiction.