Bank of New York Mellon on the Joy of Depositary Receipts (part 4)
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Bank of New York Mellon (NYSE: BK) has over 2,700 depositary receipt programs (with a market value exceeding USD 770 billion) in 68 countries and is the world’s leading depositary bank. Anthony Moro, Managing Director and Head of Emerging Markets for BNY Mellon's DR business, discusses depositary receipts (foreign stocks traded on local exchanges) and the role they play in global investing.
[continued from part 3]
Nick Slepko: Are there certain countries which are particularly enthusiastic about creating DRs?
Anthony Moro: Well, we are pioneering the ZDR – the Zambian depositary receipt. If you live in Zambia you can buy Canada’s First Quantum Minerals (TSX: FM)(LuSE:FQMZ) in kwacha [Zambia’s currency]. We also just did another one in Namibia for another Canadian mining company named B2Gold (TSX: BTO)(NSX:B2G), and we have others in the pipeline. The reasons for them are largely political. Both First Quantum and B2Gold have mining concessions in the local markets, and as part of their commitment to those countries they are listing their security in a local market so locals can participate in the wealth and mineral resources of their own country.
In those local emerging markets, it’s all about the will of the local government. Once you have a government that wants to accomplish something they help with the regulatory side pretty actively. And that’s what’s happened in Namibia and Zambia…Incidentally, Jim O’Neill, Chairman of Goldman Sachs Assets Management [father of the terms “BRIC” and “Next 11”], spoke at a [BNY Mellon] event and he was big on Nigeria, though its not his number one pick, he thinks there’s huge potential there.
Slepko: In other countries, are you only working with the private businesses or do you have to talk to government officials in those countries to get the DRs to work?
Moro: Absolutely, it's market infrastructure, local SEC, local custody network, sometimes there are exchange controls like in South Africa, Taiwan, or Korea. So there are number of local regulators we have to deal with. Sometimes we have to get the regulations changed or amended to suit the product.
Slepko: Which country is the easiest to work with?
Moro: Easy is a – it’s never easy, but some markets have developed an infrastructure that allows DRs to trade. Brazil has a very well adapted infrastructure for DRs. Australia, one of the big developed markets, has recently introduced new rules to allow depositary receipts to trade there.
Exchanges are competing for products with other exchanges. In my opinion, we are never going to see a consolidation of national exchanges, despite the best intentions of the European Union and others. Countries don’t want to give up their airlines, they don’t want to give up their local regulators, they don’t want to give up their taxation ability, and they certainly don’t want to give up their stock exchanges.
In order for stock exchanges to remain relevant, they are going to need to globalize and trade more products. Now they don’t have the infrastructure setup to trade stocks that don’t reside within their borders, so more and more they are turning to DR products that we can adapt to make foreign things look and work local.
Slepko: Are there particular countries where ADRs have become increasingly popular in recent years?
Moro: The BRIC market certainly. Over the last five or six years, they have been the source of about half of the growth in the business. Half of all capital raisings, half of all program establishments, half of all stock exchange listings have come from Brazil, Russia, India, and China.
We just did a big secondary offering of USD 5 billion for Sberbank out of Russia. I think Russia is the most interesting DR market right now. In addition to Sberbank, there’s a big pipeline of other deals hot on the heels of [Sberbank] widely discussed in the press. Right now it is one of the few global markets open to raising capital. The next ADRs we should see are a bank, Promsvyazbank, and a mobile carrier, Megafone.
Slepko: What about companies that are technically based in Cyprus, Luxembourg, or other places though they are really located somewhere else? Are there complications related to their ADRs?
Moro: It’s not a constraint for what we do…A lot of these companies aren’t listed back in their local markets, so their only capital markets listing is via depositary receipt. For a company like Baidu (NASDAQ: BIDU) – the Chinese Google – the only listing it has is the NASDAQ depositary receipt. It gives them the flexibility to list in Shanghai with ordinary shares.
Slepko: How does the Chinese government feel about [Chinese companies listing abroad]? Is it politically complicated, or does it encourage it?
Moro: The private companies have a lot more leeway. Most of the state-owned companies are only listed locally – like Bank of China or ICBC. I’m sure they were told to do that, although I’m sure they would probably get better valuations if they listed both locally and in New York via ADR.
Each local market, especially the emerging ones, have an interest in building their local capital markets. They have various ways to do that. Brazil recently enacted the IOF tax which taxes creation of ADRs in an effort to keep more investors local. In France, they are about to establish a French transaction tax (a lot like the SART tax in the UK) that will certainly hinder the trading of ordinary and DR shares.
[Anthony Moro also discusses depositary receipt basics in “DR 102”.]
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