Depositary Receipts (in New York or London) boost a company's share price by about 8 percent in the first year of listing (Photo : Reuters)
Growing demand from global investors may spur blue-chip Middle East firms to launch depository receipt (DR) programs, and help boost liquidity in a company's stock, a BNY Mellon banker said.
"The appetite has been there, but these companies knew pricing would have been unreasonably low," said Peter Gotke, BNY Mellon vice president, depository receipts.
Earlier this week, Egypt's largest listed company, Orascom Construction Industries, launched an American depository receipt programme, its third DR offering.
"OCI has one of the most liquid DR programmes on the London Stock Exchange and now has the chance to connect with demand in the U.S," Gotke said.
Egypt generates the bulk of DR issuance in the region. In November, Aluminium Bahrain raised $338 million in an initial public offering and DR programme.
Other regional companies with DR programmes include Bank Muscat, Dubai group Depa, Qatar Telecom and Commercial Bank of Qatar
Depository receipts are mostly listed in London and New York. Shares are bought in the local secondary market and then converted into DRs giving the same benefits as owning the shares outright, such as voting rights and dividend payments.
DRs could help foreign investors tap blue-chip names in Saudi Arabia, such as Saudi Basic Industries 2010.SE. Foreign buyers currently use promissory notes to buy shares in Saudi stocks. The notes do not give voting or dividend rights.
Gotke said DRs can boost a company's share price by about 8 percent in the first year of listing, while liquidity will rise 20-40 percent over the period. "By having secondary market activity, the DR and shares float higher together because each one is slowly dragging the other one up."
"There is a perception that depository receipts will draw liquidity away from secondary markets, but studies have shown that the opposite is true. Depository receipts and ordinary shares are totally fungible, so that is why they act as a spur to local market liquidity," he said.
BNY Mellon has been mandated by two companies in the UAE and Kuwait to issue depository receipts early next year. "They are significant names and are both liquid stocks locally. So while additional liquidity is attractive to them, it is really about broadening their shareholder base and broadening their visibility," Gotke said.
Global trade in depository receipts is up 30 percent to $3.5 trillion in 2010. Emerging markets accounted for 96 percent of capital raising DR programmes, most of which came from Brazil, China, India and Russia, BNY Mellon research showed.