Accessing The UK Equity Market Using Depositary Interests
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Accessing The UK Equity Market Using Depositary Interests

27 July 2018

London is one of the world’s leading and most established venues for company listings, with its reputation for demanding high standards of effective corporate governance providing investor comfort and a vast pool of investment capital. These factors make it first choice for many companies, as it has been since its inception in 1698.

However, Brexit is causing uncertainty for both existing issuers and companies considering an IPO. The weaker pound relative to global currencies since the 2016 referendum has resulted in UK-listed companies being devalued within the global markets, potentially opening them up to opportunistic bids from foreign companies. 

In addition, despite the markets performing better than was expected in the immediate aftermath of the referendum, the UK has slipped from being the fastest growing economy amongst G7 countries to the slowest. The lack of clarity about the status of EU nationals post-Brexit is another cause for concern, as is the post-Brexit economic outlook. These factors may make the UK a less attractive location for company headquarters.

As a consequence, some UK-listed companies are reconsidering their commitment to the UK, which may include reincorporating overseas. In many cases, these companies will have large UK investor bases, which they will want to continue to support locally. This means they will require continued access to CREST, the UK’s electronic settlement system supporting investment trades. However, as an overseas company (one not incorporated in the UK, Channel Islands or Ireland) they will no longer be eligible to have their shares settled electronically directly in CREST. This is because CREST does not accept overseas shares into its settlement system.

Overseas companies considering a London flotation face the same dilemma. London’s attractions may be temporarily diminished but at the same time, they will not want to miss out on the substantial investor base and increased liquidity that a London listing brings.

Depositary interests offer the best of both worlds. They allow companies to reincorporate into an overseas territory and retain their London listing.  

What is a Depositary Interest (DI)?

A DI is a legal wrapper which, when placed around non-UK shares, converts them to CREST eligible UK securities. The service is provided by a registrar, with the shares held in custody on the share register and converted to a UK DI through a Trust Deed Poll. The company is then able to list its shares for trading on the London markets, with the DIs settling those trades electronically within CREST. 

DIs are distinct from Global Depositary Receipts (GDRs). With DIs, the shares themselves are listed on an overseas exchange and the DIs are used to settle trades in London. They are suitable for single or dual-listed companies, who are seeking both institutional and retail investors. GDRs, in contrast, are securities in their own right and are listed, traded and settled. They are suited to dual-listed companies who want access to institutional investors.

There is also an important legal requirement for a DI, namely the recognition of trust in the territory where the company is incorporated. In practice, this means that companies in countries with a common law system (primarily the Commonwealth), or with a mixed common and civil law system, will find it significantly easier and faster to create a DI.

The benefits of DIs

DIs offer significant benefits to issuers, investors and brokers.

Issuers

The primary benefit for issuers is access to capital raising in London and the increased liquidity this brings. Issuers receive a fully sponsored programme, including a general meeting and voting service, multi-currency dividend payments and support for corporate actions. Issuers also particularly value having visibility of their investors and the ability to communicate directly with them.

Investors

DIs offer investors local access to foreign investment, with market trades settled electronically. DIs are created and cancelled on demand and give investors the same rights and entitlements as direct shareholders, including the ability to attend meetings and receive dividends and communications from the issuer.

Brokers

In many respects, DIs represent business as usual for brokers. Trades in foreign companies can be settled locally, through the same CREST system that brokers are used to. Brokers also gain access to multiple markets and benefit from the full voting and dividend service.

How to get started

Equiniti is the UK’s leading registrar and an expert in DI. Our DI service is designed with today’s ever-increasing regulatory requirements in mind. Whether you are looking to raise capital, reincorporate, offer shares as part of a global Merger and Acquisition (M&A) or switch from an existing provider, we can support you at every stage.

If you would like more information about our DI services then please get in touch with our team today.

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