On April 16, the Russian government passed a law preventing ordinary shares underlying the global depositary receipt (GDRs) from having voting rights and receiving dividends.
Assailed by Western sanctions, Moscow took the drastic step to de-list Russian receipts from foreign exchanges to convert them into local Russian securities in a bid to reduce foreigners’ control over these companies.
Under this unfortunate scenario, GDRs can be cancelled by the investor who typically gets cash from the sale of the underlying shares, although they have the right to take custody of the shares instead.
Notable Russian names including Gazprom, Rosneft and Lukoil, issued by BNY Mellon, Deutsche Bank, Citigroup and JP Morgan, trading on US and European markets stand to be affected by the delisting law.
More importantly, the move implicitly confirms the West’s undisputable hold on the depositary receipts market — the US and Europe control 76 percent and 17 percent of the depositary receipt ownership market according to Deutsche Bank’s market review for 2021.
It is, therefore not surprising why the regional inbound depositary receipt market is non-existent, Capital raised via American Depositary Receipts surpasses the GDRs by a significant margin. In almost all the reported cases, they were all outbound depositary receipt programmes listed either in the US or the UK.
According to Deutsche Bank’s Depositary Receipt 2021 report, Africa had 44 sponsored depositary receipt programmes with unsponsored depositary receipt programmes totalling 21. This is a small number compared to China. The Asian nation had more than 240 sponsored and 262 unsponsored depositary receipt programmes.
Nonetheless, it is the concentration risk that carries some unintended risks as Russia has had to find out. Since when it began what it calls a “special military operation” in Ukraine on February 24, Western bourses have halted trading of Russian securities.
The London Stock Exchange, for instance, suspended trading in the depositary receipt of Russian companies in early March after prices crashed to record lows.
Yet despite the above, the DR market remains a crucial one, especially for capital-starved African companies.
In theory, sponsored issuers can diversify their shareholder base by enabling investors beyond the country. They not only increase any company’s permanent source of capital but also give investors a liquid instrument.
In addition, they get to eliminate the cost and complexity of establishing custody arrangements in multiple countries.
To top it all, the depositary receipt market gets to deepen Africa’s equity capital. It is important to note that mid-cap and small-cap issuers constituted the largest proportion of the sponsored programmes with 29 percent and 27 percent respectively, last year. The most likely category most African companies fit in.
In sum, as global investors seek access to growth opportunities around the world, Africa stands out.
Similarly, growing African companies are actively seeking capital, a broader investor base and more international exposure.
There is certainly a perfect match. Despite the risks, there is good reason for these companies to take advantage of this tool.
It is high time to see global investors in Africa and tap into the continent’s huge potential.
Mwanyasi is the Managing Director at Canaan Capital
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