Ben Aris in London -
Russian companies looking to list their shares on the London Stock Exchange have a choice to make: should they try and list their shares as ordinary shares or as Global Depository Receipts (GDRs), a proxy share for shares listed on their home exchange.
At first glance it seems as this is no choice at all, as almost all the Russian companies with LSE listings have plumped for GDRs. But Reinout Koopmans, managing director of CEEMEA equity capital markets at Deutsche Bank, who has organised several of Russia's recent IPOs in London, claims their days are ultimately numbered as Russian firms become more transparent and improve their corporate governance.
Currently, Russian companies are being driven into the GDR programmes because they have little choice if they want to tap the international equity capital markets. The main problem for Russian companies looking to IPO is that their funding requirements have run way ahead of their own markets' ability to meet them. The RTS is a market with a capitalisation of over $1 trillion, but it's still not big enough to absorb IPOs in the order of $1.5bn, like industrial conglomerate Sistema did on the LSE at the start of 2006. Even the former head of the stock market watchdog the Federal Services for Financial Markets, Oleg Vyugin, admitted that the most the Russian market can bear is an offering of about $400m.
"[Bigger issues] have been done for Rosneft and VTB, but these were bought by family and friends to support the issue," says Koopmans.
Both these Kremlin-sponsored IPOs got into trouble when they tried to raise several billion dollars each on the domestic market. Demand failed to meet the supply and these high-profile floats were only completed when the Kremlin strong-armed various friendly oligarchs into coughing up billions to complete the deal.
"In Moscow, listing ordinary shares of $500m-750m is okay, but the local market can't absorb $1.5bn and so you have to issue GDRs. Politically, the maximum possible domestic listing is probably about $400m," says Koopmans.
London, on the other hand, can swallow an IPO the size of Sistema's, but using a GDR programme is restrictive because not everyone investing on the LSE can buy a GDR. This makes them the prerogative of global emerging market specialist investors, whereas listing ordinary shares on the LSE would give a Russian company access to every pension fund and retail investor ploughing money into shares, or a total of about $14 trillion of capital.
The restricted circle of investors who can buy a GDR means they enjoy about half the liquidity of ordinary shares: ordinary shares have an average liquidity of 1.46% of their total capitalisation on the LSE, whereas GDRs have only half this amount and ADRs (American depository receipts) half of that again. "GDRs' lower liquidity makes the prices more volatile and so it is harder to build a high-quality investors' register," says Koopmans.
So why bother with GDRs? Why don't Russian companies just list their shares as ordinaries on the LSE's main board?
Listing ordinary shares in London is much harder to do than simply repackaging shares already traded at home into a proxy that can be simply bought and sold in London with little extra work. Because ordinary shares can be bought by a wide set of investors, the UK regulators set high hurdles.
At the same time, despite the best intentions in the world, because most of Russia's big companies grew up in the lawlessness of the 1990s, few are in a position to actually admit how they made all their money. "If you insist on full disclosure [for Russian companies], then most of the managers will be in jail the next day. The standards need to be developed over time," says Koopmans.
And that is the appeal of the GDR. It is a halfway house between the unruly 1990s and (presumably) the respectability that most Russian companies are looking forward to in the next decade. "GDRs are temporary, but they are appropriate for the time being," says Koopmans.
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