Page 22 - bne_Magazine_March_2018

22 I Companies & Markets bne March 2018
bne:FinTech
The death of Russia’s DRs
Ben Aris in Moscow
There used to be only one way international portfolio investors felt comfortable about investing into
emerging marketing stocks. Opening an account with
a local brokerage in some far-flung country could be a hairy experience. So depository receipts (DRs) were created – a proxy for locally listed shares that could be listed on exchanges in New York or kept with a trusted global custodian in London. DRs give the fund managers all the security of developed world laws, regulations and infrastructure, but the exposure to the massive upside most emerging markets (EM) stocks offer.
The downside of DRs is they are very expensive to use. As emerging markets increasingly have emerged those thousand per cent returns are a thing of the past. And with the increas- ing sophistication of most EM exchanges that are being hooked
“The cost of holding a DR can be prohibitively expensive”
up to the international financial system, the rationale for depository receipts is dying.
The fact that an investor can make money on transforming their ownership from the DR to holding the underlying shares directly has only catalysed the process. In Russia in 2017 three times more DRs were cancelled than created and the number of new DRs created has fallen by almost a third in the last three years.
The DRs come in two main flavours: American depository receipts (ADRs), and later Global depository receipts (GDRs), as the instrument spread to other developed world exchanges. But because of those high costs the price of the DRs is usually a little different to that of the underlying shares so converting them makes money.
The spread between the DR price and local share price can
be significant. For example, the spread between Russian supermarket chain Magnit’s local and DR share prices – one of the most widely held Russian stocks – peaked at 25.7%
in November 2015, according to MOEX, but never fell below 8.7% in the last three years. At least that was true until Febru- ary 19 when Magnit's founder and largest shareholder Sergey Galitsky decided to call it a day and sold a 29% stake to Rus-
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MOEX CFO Max Lapin
sian state-owned VTB Bank for 138bn ($2.4bn). Investors were not happy with his decision and the share price tanked by 10% on the news. Case in point: the GDRs traded in London were
a lot more volatile than the locally listed shares.
“GDRs are more expensive to maintain for both the issuer and the holder,” Max Lapin, the new CFO of the Moscow Exchange (MOEX), told bne Intellinews in an exclusive interview. “And they are less efficient as things like dividend payments take longer to get to the shareholder.”
Another problem with DRs is that three quarters (77%) of them are never actually listed on an international exchange but kept on accounts with global custodians. That reduces the liquidity of the stock as all trading in an unlisted share has to be done over-the-counter (OTT) that also reduces price transparency.
The cost of holding a DR can be prohibitively expensive. Typical- ly the custodian takes 7% of a dividend payment as fees and the custody service of Bank of New York Mellon (BONY), one of the biggest custodians in the world, charges between 7% and 84% just to transfer the shareholder their dividends (and at below- market FX rates to boot), according to MOEX. There are no fees to pay at all to collect dividend payments on locally listed shares.
Finally while the DRs mean share ownership is governed by the investor’s home market, the rights associated with DRs are less than with holding normal domestically listed shares. While the owner of DRs has the right to do things like vote their shares in the company’s AGM and receive dividends, they are not covered by redemption laws, don't have pre-
Russia Terminated DRs vs new DRs
Source: MOEX