(NAIROBI, KENYA) – Kenya’s Capital Markets Authority has delayed approval of a financial instrument that would allow local investors to buy into the Dangote Petroleum Refinery share sale for as little as KES 490 ($3.79 / GBP 2.85).
The regulator says promoters of the instrument, known as global depository receipts, must resolve undisclosed pending issues before receiving approval to market the Dangote initial public offering locally and list a copy of the shares on the Nairobi Securities Exchange.
The CMA says it needs a few days to complete the approval, raising the risk of a delay in the local sale of shares in the Lagos refinery owned by Aliko Dangote.
Investment bank Renaissance Capital, which is behind the Dangote depository receipts, had expected to receive the CMA approval on 1st October. That would have allowed it to sell the shares between 5th October and 13th October, matching the close of the IPO in Nigeria.
Depository receipts are bank certificates that represent ownership of a specific number of shares in a foreign company. They allow investors to trade on stock exchanges outside the issuer’s home market.
The Dangote IPO, Africa’s largest ever, was approved and issued in Lagos. It cannot be marketed and sold in Kenya.
Under the depository receipts, which will represent the underlying Dangote shares listed on the Nigerian Exchange, Kenyan investors can buy the share at KES 49 ($0.38 / GBP 0.29) a piece and trade the certificates at the Nairobi bourse.
“We have received an application for the Dangote depository receipts which is under consideration,” Wyckliffe Shamia, chief executive officer at the CMA, told the Business Daily. “Once all issues have been addressed, the requisite approval shall be granted and thereafter listing will take place. This could take a few days from now.”
“This will allow investors to participate in trading where they could not own the shares directly.”
Stanbic Bank will serve as custodian in the deal. It will directly purchase the Dangote shares, which will then be packaged as depository receipts for local investors. Those investors will be able to buy and sell the receipts on the NSE.
Without the instrument, ordinary Kenyan investors were struggling to buy shares in Africa’s largest IPO. The issue was not locally approved, and the alternatives were costly.
At present, local investors can only buy Dangote shares through Kenyan stockbrokers with partnerships in Nigeria. They are required to meet a higher minimum subscription of up to KES 259,520 ($2,000 / GBP 1,505).
“Local investors could invest through authorised agents in Nigeria or local players who are working with those in Nigeria,” Mr Shamia said.
“In this case, with depository receipts, the local players are advised to seek consent from the CMA if they get involved in marketing this issue.”
The IPO seeks to raise KES 207.5 billion ($1.6 billion / GBP 1.2 billion). It runs between 14th September and 13th October with the sale of 4.1 billion ordinary shares. That is equivalent to about 3.4% shareholding of the Dangote Petroleum Refinery.
Depository receipts work like derivatives by mirroring the change in price of the underlying asset. In this case, the price movement of the NSE listed instrument will match that of Dangote shares traded on the Nigerian Exchange in Lagos.
The sponsoring broker and custodian bank will receive dividends accruing from the purchased shares. They will distribute them to depository receipt holders in the same way unit trust schemes distribute gains to unit holders.
Investors in depository receipts may, however, face higher administrative fees relative to buying shares at the NSE. They also face potential liquidity risks if supply and demand fail to match.
Upon approval of the transaction by the CMA and the NSE, Dangote will deposit shares with the Nigerian custodian bank, Stanbic Bank. The lender will then confirm the deposit with its Kenyan peer.
Stanbic Bank Kenya will subsequently issue depository receipts, which are derivatives of the Dangote shares in its custody.
After being listed on the NSE, the depository units will be settled in Kenyan shillings through the ordinary Central Depository and Settlement System. That system supports the trading of other listed shares.
Kenyan investors will be able to buy and sell the receipts through licensed local brokers.
The sponsoring broker says depository receipts have been chosen as the most efficient vehicle to bring the Dangote shares to the public. The cross listing of the company remains off the cards until a future date.
“With depository receipts, you get transparency on costs, pricing and trading. Our main aim is to make sure that before and after the IPO, investors will be able to have visibility,” Stanley Kariuki, chief executive officer of Renaissance Capital Kenya, said earlier.
“The second factor informing our choice for the deposit receipts is that all people can participate in the offer, irrespective of the investment class.”
Mr Dangote will deploy proceeds from the IPO to fund the expansion of his Lagos refinery. He says he expects to subsequently cross list the company’s shares on the Nairobi bourse. He is also considering a local listing of the Lamu East African refinery, whose groundbreaking took place on 30th September.
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