Much has been written of late about the state of capital markets in the UK, and how the nation appears to be lagging behind our peers when it comes both to new issuance and ongoing value generation. This comes at the same time as – at least anecdotally – many market participants appear increasingly jaded from the lack of progress when it comes to delivering on the promised reforms. But it’s worth bearing in mind that the financial market sphere is in a constant state of evolution and the way the market operated in the 1980’s when we had the last major overhaul is far different from the globalised world we live in today.
That’s why it’s important to take a holistic view when it comes to the state of the market. That’s not excusing the fact that there’s always room for improvement, but the networks that span the globe today mean that investors and issuers alike are well aware of the benefits of tapping into different pools of capital to meet their respective financing needs. To that extent we want to take a look at some of the flexible options that exist today when it comes to how international companies access the London market. Full blown IPOs or even secondary listings may have dominated the agenda but now the options are far more flexible.
Two key routes to facilitating this are Depositary Interests (DIs) and Global Depositary Receipts (GDRs). The simpler of these is a DI, which HMRC describes as being “a UK-registered security which represents rights to an underlying foreign security. Depositary interests are created to enable foreign securities to be bought and sold on the UK market and settled within the CREST system”.
Issuance of DIs is more straightforward than GDRs and can be conducted by the administrator with comparatively simple legal requirements. GDRs in comparison traditionally focus on the institutional market, typically only enabling access to a smaller pool of investors whereas DIs can be bought even by those in the retail market. As a result, DIs are often seen as suitable for a wider range of issuers.
But even with their complex structure, GDRs remain highly valuable – for example the instrument forms the backbone of the much-vaunted London-Shanghai Stock Connect and will also drive the equivalent link between London and Shenzhen which was recently agreed under an MoU between the respective exchanges. By using GDRs, a foreign listed company would appoint a bank in the UK to act as an intermediary to issue GDRs on its behalf. Hence, the appointed bank would be the central custodian for all GDRs issued, and all settlement of GDRs will be done by the appointed bank.
Obviously the London-China link is invaluable, but required a significant degree of heavy lifting by exchanges and regulators on both ends. This marquee project could become the template for cross border issuance worldwide, but ultimately the sheer flexibility a DI allows presents a far more flexible, cost effective and lower risk approach in seeking international market exposure. Avenir can offer DIs a registration solution with our partner custodian nominee issuing DIs to UK investors. Thereafter, the company can seamlessly attract investors who have access to the UK market.
So if you’re an issuer exploring the idea of tapping into overseas capital pools or an adviser who has clients wanting access to finance in London, Avenir is here to help as a supportive, experienced partner who can find a solution that meets your needs.
An amended version of this article originally appeared in the April 2023 version of AIM Journal. You can download a printable version here.