Description
A financial asset is an intangible asset that derives value because of a contractual claim. Examples include bank deposits, bonds, and stocks.
FINANCING ASSETS ACQUISITION AND PROJECTS THROUGH FOREIGN EQUITY CAPITAL By
ALLIANCE LAW FIRM
Legal Practitioners, Energy & Financial Services Consultants
www.alliancelf.com
INTRODUCTION Every Company would at some point need to expand its business or carry out major capital projects, and in so doing “finance” plays an important role. A Company seeking to acquire assets or finance its major developmental projects can raise capital either through debt or equity financing. Debt financing entails the acquisition of a loan from financial institution(s) or through longer fixed income products such as corporate bonds and debentures. Equity financing on the other hand entails the exchange of an amount of capital for a proportionate ownership in the business. Whatever method is adopted by a company, equity financing is typically more flexible, relatively cheaper and suitable for long term funding. Equity therefore represents the ownership interest in a company and it constitutes the pool of funds contributed by the shareholders in return for shares of the company. In opting for equity financing, the company would be compelled to show investors that there is the likelihood of appreciable returns on investment either in terms of capital appreciation, dividend yield or other accruals as compensation for taking higher investment risks. Recently, Nigerian Companies have veered towards the raising of finance through foreign equity markets. This is apt considering that certain acquisition or projects in some sectors of the economy, by their nature, require a huge pool of equity or risk capital which can be sourced from foreign investors consisting of institutional investors and high networth individuals. Obviously, the capital markets in most parts of Europe, USA, Asia and South Africa are more developed and deeper in liquidity. Recently too, significant interest have been shown in foreign portfolio investments in the form of flotation through Initial Public Offerings (IPOs) and Private Placements to Qualified Institutional Investors and eventual listings in registered investment exchanges, in the areas of financing acquisition and development of oil and gas assets, power generating plants, public infrastructure and agriculture. Such flotations could follow the route of either: · Offering the shares by way of subscription or for sale on two exchanges (also known as a Dual Equity) and Listing the shares of the company on the exchange of a foreign country with the primary listing on the exchange where the company is situated ( also known as “Dual Listing”); or Issuing the shares of the company by way of Global Depository Receipts.
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DUAL LISTING AND DUAL EQUITY OFFERING `Dual Listing’ according to Investopedia occurs when a company's securities are listed on more than one exchange for the purpose of adding liquidity to the shares and allowing investors greater choice in where they can trade their shares. However, in order to achieve a dual listing status, a company must satisfy certain rules and conditions of the primary and foreign countries of listing which include the need to be of sufficient size to attract international interest, establishment of significant business connection with the country where the listing is to take place or with a company with more international presence (with the exception of companies in the extractive industry or other companies seen as having globalised operation). The company must also ensure that its operations satisfy international standards including accounting standards, disclosure, corporate governance and best practices imperatives. Other factors which a potential company needs to consider before embarking on dual listing include the ratings of the company internationally and the levels at which the flotation can be undertaken. There must also be a sufficient level of regulation and supervision under the listing rules to protect the investors. The company will also have to meet all the specific listing requirements and pay all the associated costs which vary in different exchanges. Also critical is that there must be adequate legal and environmental regimes in place in the primary country to protect foreign investments and guide against expropriation by governments. A company might have many good reasons for having its securities listed and traded on two different exchanges at the same period. This is usually because such dual- listing would increase the pool of potential investors, which allows the company to raise more capital or obtain a better price for its securities. A duallisting also enlarges the trading market for the company’ s securities thereby increasing liquidity. It has also been acknowledged that a dual listing enhances a company’ s visibility in both the domestic and the International Capital market with the attendant coverage and global access. In Nigeria, the Securities and Exchange Commission (“SEC”) and Nigerian Stock Exchange (“NSE”) are modifying their Rules and practice to ensure conformity with international best practices and standards. Rule 388 of the SEC Consolidated Rules and Regulations provides that an issuer may list its securities on one or more exchanges provided it complies with the listing requirements of the relevant securities exchanges. Some foreign exchanges with high depth liquidity and investment appetite that can be considered for listing include the London Stock Exchange (“LSE ”), New York Stock Exchange (“NYSE”), Johannesburg Stock Exchange (“JSE”) and the Toronto Stock Exchange (“TSE”). Current Statistics of the NYSE and the LSE reveal a total market capitalization of $13.4 Trillion and £170.2 Billion respectively which are incomparably higher than the total market capitalization of equities listed on the NSE with a current value of about N7 billion (about $4.6 billion or £2.8 billion). GLOBAL DEPOSITORY RECEIPT Global Depository Receipt (“GDR ”) is a certificate issued by a depository bank (the “Depository”) which purchases domestic shares of foreign companies and holds it on its account. The shares are held by a foreign branch of the bank or an international bank as a negotiable certificate representing its ownership of the underlying domestic shares of the issuing company. It is a financial instrument usually denominated in United States Dollars. The GDRs are usually offered for sale on the international capital market.
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In practice, an identified number of the issuing company’ s equity shares are allotted to the Depository which creates the Receipts and issues it to foreign investors. Each Receipt represents a determined number of shares held by the Depository which can be exchanged for the number of shares it represents. Prices of the Global Receipts are often close to values of related shares, but they are traded and settled independently of the underlying share. The GDR therefore serves as a means of increasing global trade of domestic shares thereby facilitating increase in volume of shares of the Issuer in local and foreign markets. It is commonly used to invest in companies situated in areas of developing markets. Also, the flexibility of the GDR makes it an easy means of raising capital for an issuing company. The regulatory Rules and conditions for GDRs are less stringent than those for board listings in foreign exchanges and as such Companies that do not meet the flotation Rules could explore the possibility of issuing GDRs. Benefits of Raising Capital through Foreign Equity · Listing on foreign markets allows a Company raise capital at a lower cost than is available in their home market. Equity is considered ideal for funding corporate acquisitions and long term projects. Foreign listing also enlarges a company’s shareholder base as some institutional investors who are not allowed to hold foreign securities could then purchase shares in their home markets. Entities such as regulated institutions in the foreign country who ordinarily would not be permitted to invest in the shares of a foreign company could then invest in the shares then trading on their local exchanges. Purchasing a GDR immediately turns an investor’s portfolio into a global one. Investors gain the benefits of diversification of portfolio mix and currencies, while also trading in their own market under familiar settlement and clearance conditions. GDR investors are able to reap the benefits of the usually higher-risk, higher-return equities which are features of GDRs, without having to endure the risks of going directly into foreign markets. Foreign listing may be part of a firm’s corporate strategy to expand its foreign operations. Increased visibility and name recognition associated with foreign listing help the company’s name and brand recognition internationally. The high regulatory regime, disclosure rate, and compliance level associated with foreign flotation helps in enthroning sound corporate governance culture thereby giving the Company more credit rating in the global fund market.
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CONCLUSION The type of asset to be acquired or project to be embarked upon, capital requirement, flexibility of funds, length of time for which the capital is required and comparable costs of obtaining alternative funding are part of the key determinants of a Company’ s capital structure. Foreign equity is expected to play increased roles in providing long term capital in developing countries for the acquisition of high valued assets and for funding of large scale projects thereby reducing over-dependence on money market which is generally considered unsuitable for long term funding, hence the importance of a developed foreign equity market for Nigerian Companies can never be over-emphasized. Companies wishing to access international equity market through an IPO, or Private Placement and dual listing of securities in local and foreign exchanges should start on time to build their records, establish efficient structures and processes, embrace sound corporate governance and best practices in readiness for such exercise, as only a properly organized company can embark on foreign flotation.
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doc_996936797.pdf
A financial asset is an intangible asset that derives value because of a contractual claim. Examples include bank deposits, bonds, and stocks.
FINANCING ASSETS ACQUISITION AND PROJECTS THROUGH FOREIGN EQUITY CAPITAL By
ALLIANCE LAW FIRM
Legal Practitioners, Energy & Financial Services Consultants
www.alliancelf.com
INTRODUCTION Every Company would at some point need to expand its business or carry out major capital projects, and in so doing “finance” plays an important role. A Company seeking to acquire assets or finance its major developmental projects can raise capital either through debt or equity financing. Debt financing entails the acquisition of a loan from financial institution(s) or through longer fixed income products such as corporate bonds and debentures. Equity financing on the other hand entails the exchange of an amount of capital for a proportionate ownership in the business. Whatever method is adopted by a company, equity financing is typically more flexible, relatively cheaper and suitable for long term funding. Equity therefore represents the ownership interest in a company and it constitutes the pool of funds contributed by the shareholders in return for shares of the company. In opting for equity financing, the company would be compelled to show investors that there is the likelihood of appreciable returns on investment either in terms of capital appreciation, dividend yield or other accruals as compensation for taking higher investment risks. Recently, Nigerian Companies have veered towards the raising of finance through foreign equity markets. This is apt considering that certain acquisition or projects in some sectors of the economy, by their nature, require a huge pool of equity or risk capital which can be sourced from foreign investors consisting of institutional investors and high networth individuals. Obviously, the capital markets in most parts of Europe, USA, Asia and South Africa are more developed and deeper in liquidity. Recently too, significant interest have been shown in foreign portfolio investments in the form of flotation through Initial Public Offerings (IPOs) and Private Placements to Qualified Institutional Investors and eventual listings in registered investment exchanges, in the areas of financing acquisition and development of oil and gas assets, power generating plants, public infrastructure and agriculture. Such flotations could follow the route of either: · Offering the shares by way of subscription or for sale on two exchanges (also known as a Dual Equity) and Listing the shares of the company on the exchange of a foreign country with the primary listing on the exchange where the company is situated ( also known as “Dual Listing”); or Issuing the shares of the company by way of Global Depository Receipts.
1
·
DUAL LISTING AND DUAL EQUITY OFFERING `Dual Listing’ according to Investopedia occurs when a company's securities are listed on more than one exchange for the purpose of adding liquidity to the shares and allowing investors greater choice in where they can trade their shares. However, in order to achieve a dual listing status, a company must satisfy certain rules and conditions of the primary and foreign countries of listing which include the need to be of sufficient size to attract international interest, establishment of significant business connection with the country where the listing is to take place or with a company with more international presence (with the exception of companies in the extractive industry or other companies seen as having globalised operation). The company must also ensure that its operations satisfy international standards including accounting standards, disclosure, corporate governance and best practices imperatives. Other factors which a potential company needs to consider before embarking on dual listing include the ratings of the company internationally and the levels at which the flotation can be undertaken. There must also be a sufficient level of regulation and supervision under the listing rules to protect the investors. The company will also have to meet all the specific listing requirements and pay all the associated costs which vary in different exchanges. Also critical is that there must be adequate legal and environmental regimes in place in the primary country to protect foreign investments and guide against expropriation by governments. A company might have many good reasons for having its securities listed and traded on two different exchanges at the same period. This is usually because such dual- listing would increase the pool of potential investors, which allows the company to raise more capital or obtain a better price for its securities. A duallisting also enlarges the trading market for the company’ s securities thereby increasing liquidity. It has also been acknowledged that a dual listing enhances a company’ s visibility in both the domestic and the International Capital market with the attendant coverage and global access. In Nigeria, the Securities and Exchange Commission (“SEC”) and Nigerian Stock Exchange (“NSE”) are modifying their Rules and practice to ensure conformity with international best practices and standards. Rule 388 of the SEC Consolidated Rules and Regulations provides that an issuer may list its securities on one or more exchanges provided it complies with the listing requirements of the relevant securities exchanges. Some foreign exchanges with high depth liquidity and investment appetite that can be considered for listing include the London Stock Exchange (“LSE ”), New York Stock Exchange (“NYSE”), Johannesburg Stock Exchange (“JSE”) and the Toronto Stock Exchange (“TSE”). Current Statistics of the NYSE and the LSE reveal a total market capitalization of $13.4 Trillion and £170.2 Billion respectively which are incomparably higher than the total market capitalization of equities listed on the NSE with a current value of about N7 billion (about $4.6 billion or £2.8 billion). GLOBAL DEPOSITORY RECEIPT Global Depository Receipt (“GDR ”) is a certificate issued by a depository bank (the “Depository”) which purchases domestic shares of foreign companies and holds it on its account. The shares are held by a foreign branch of the bank or an international bank as a negotiable certificate representing its ownership of the underlying domestic shares of the issuing company. It is a financial instrument usually denominated in United States Dollars. The GDRs are usually offered for sale on the international capital market.
2
In practice, an identified number of the issuing company’ s equity shares are allotted to the Depository which creates the Receipts and issues it to foreign investors. Each Receipt represents a determined number of shares held by the Depository which can be exchanged for the number of shares it represents. Prices of the Global Receipts are often close to values of related shares, but they are traded and settled independently of the underlying share. The GDR therefore serves as a means of increasing global trade of domestic shares thereby facilitating increase in volume of shares of the Issuer in local and foreign markets. It is commonly used to invest in companies situated in areas of developing markets. Also, the flexibility of the GDR makes it an easy means of raising capital for an issuing company. The regulatory Rules and conditions for GDRs are less stringent than those for board listings in foreign exchanges and as such Companies that do not meet the flotation Rules could explore the possibility of issuing GDRs. Benefits of Raising Capital through Foreign Equity · Listing on foreign markets allows a Company raise capital at a lower cost than is available in their home market. Equity is considered ideal for funding corporate acquisitions and long term projects. Foreign listing also enlarges a company’s shareholder base as some institutional investors who are not allowed to hold foreign securities could then purchase shares in their home markets. Entities such as regulated institutions in the foreign country who ordinarily would not be permitted to invest in the shares of a foreign company could then invest in the shares then trading on their local exchanges. Purchasing a GDR immediately turns an investor’s portfolio into a global one. Investors gain the benefits of diversification of portfolio mix and currencies, while also trading in their own market under familiar settlement and clearance conditions. GDR investors are able to reap the benefits of the usually higher-risk, higher-return equities which are features of GDRs, without having to endure the risks of going directly into foreign markets. Foreign listing may be part of a firm’s corporate strategy to expand its foreign operations. Increased visibility and name recognition associated with foreign listing help the company’s name and brand recognition internationally. The high regulatory regime, disclosure rate, and compliance level associated with foreign flotation helps in enthroning sound corporate governance culture thereby giving the Company more credit rating in the global fund market.
·
·
· ·
·
CONCLUSION The type of asset to be acquired or project to be embarked upon, capital requirement, flexibility of funds, length of time for which the capital is required and comparable costs of obtaining alternative funding are part of the key determinants of a Company’ s capital structure. Foreign equity is expected to play increased roles in providing long term capital in developing countries for the acquisition of high valued assets and for funding of large scale projects thereby reducing over-dependence on money market which is generally considered unsuitable for long term funding, hence the importance of a developed foreign equity market for Nigerian Companies can never be over-emphasized. Companies wishing to access international equity market through an IPO, or Private Placement and dual listing of securities in local and foreign exchanges should start on time to build their records, establish efficient structures and processes, embrace sound corporate governance and best practices in readiness for such exercise, as only a properly organized company can embark on foreign flotation.
3
doc_996936797.pdf