Deutsche Bank on the Joy of Depositary Receipts (part 3)
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Deutsche Bank (FWB:DBK)(NYSE: DB) has over 970 depositary receipt programs (with a market value of at least USD 100 billion) in 58 countries. Akbar Poonawala, Global Head in charge of the depositary receipts business (among many other roles), discusses depositary receipts (foreign stocks traded on local exchanges) and the role DRs play in global investing.
[continued from part 2]
Nick Slepko: Why does the NYSE do better than the NASDAQ in attracting ADRs?
Akbar Poonawala: We have listings on both NYSE and NASDAQ as well as on the OTC market. So we are exchange-agnostic as it is really a company decision that’s heavily influenced by factors like where their peers are listed, where there is greater liquidity, and where they will attract better valuation.
Slepko: Are there certain countries which are particularly enthusiastic about creating ADRs?
Poonawala: There are many markets which could be considered the flavor of the month. But you have to ask, what’s the follow-up? What’s the breadth and depth of that market and what is the market cap of the country? How many more issues are going to come from a particular market? In Vietnam, for instance, we brought the first DR issue [Hoang Anh Gia Lai] to the market last year, but then the market’s valuation corrected, which led to diminished interest amongst the four or five other companies that wanted to go to the market. They decided to delay going to the market until they could get better valuation.
Markets where there is a critical mass of programs include many of the Western European countries. Russia is active in GDRs. India has also been a very active issuer. Brazil and Mexico in particular in Latin America – we just did our first Chilean ADR [CorpBanca]. One of the differences between Deutsche Bank and the some of the other depositary banks is that we don’t offer programs for the sake of market share, we offer programs that widen investor choices, and allow companies to leverage their communications in a new market.
Slepko: Are there particular areas of the world where DRs have been rejected or restricted to the point that they are effectively prohibited?
Poonawala: Restrictions on DRs usually evolve around the ability of foreigners to hold shares in the domestic market or repatriate funds. That is what primarily limits the issuance of DRs in some places, particularly in frontier markets.
Slepko: India is not known to be the most regulation-friendly country in the world, but it has the most DR programs in the world. Why? How?
Poonawala: We’ve had a dedicated DR office in India since 1994 and currently maintain over 80 India programs – about a quarter of all Indian DRs. India has been one of the most prolific issuers of DR programs partly because most of the early programs were done in GDR form. They were smaller capital-raisings in the Middle East and Europe where there is a familiarity with Indian investments since they’ve been involved with India for a number of years. Many of the fund houses have long had offices in Mumbai and Delhi and have been buyers of Indian equity which has offered decent investment return. Plus, marquee companies like Infosys, Reliance, and Bajaj Auto have provided very good results to investors.
In addition to investors being familiar through direct investments or through fund houses, Indian issuers have had well-developed accounting standards and have been comfortable accessing the international capital markets. Many of India’s companies came of age much earlier than some of the other countries. A good example is Gujarat Ambuja Cement which has grown by consolidation and is a world-class company. Recently Holcim, of Switzerland, bought a stake in them.
Slepko: Is that a function of being used to the British system, which is largely the system today (with American characteristics)?
Poonawala: Partly, but also because of the advanced accounting standards. Also, it was because of the privatization that was unleashed in the early ’90s by the current prime minister (who was then India’s finance minister). The liberalization of the economy was really what paved the way.
Slepko: Are there certain countries now that are following India’s example and that have the political will to make DRs possible?
Poonawala: Each country has a distinct trajectory. Russia has been a prolific issuer of GDRs, and Brazil has had some very large companies issue ADRs in the US markets. China in the last few years has also seen a lot of DR activity mostly from venture capital exits and entrepreneurial/start-up ventures. Again, the more the [Chinese] economy has privatized and the more it is opening up its system to outside investors, the more companies have listed – and to the credit of the Chinese companies, they have mostly listed in the US with ADRs rather than with GDRs. They sort of went straight to home base rather than first going to second base.
[continued in part 4]
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