Asian ECM globalization crosses (small) milestone

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HONG KONG (Dow Jones Investment Banker) – Asian equity issues have recently seen explosive growth but, in some countries, few foreign investors can buy shares in a domestic listing. The successful sale of a Taiwanese IPO to foreign investors last week is another step in the right direction.

The $282 million initial public offering of MStar Semiconductor Inc., a supplier of integrated circuits for consumer devices, was particularly noteworthy in that, for the first time, a locally listed ECM transaction was jointly led by a foreign investment bank, Goldman Sachs. This enabled the deal to be sold to international institutions, another major innovation. Usually foreign institutional investors in Taiwan are active only in the secondary market there.

Demand from international accounts, most of which were said to have had Taiwan investor IDs, reportedly covered nine times the 70% institutional tranche.

Up till now, Taiwanese issuers tapping foreign institutions had to make do with depositary receipts. Eight companies have ADRs listed in the U.S., while 38 companies have GDRs listed either in London or in Luxembourg, according to Bank of New York Mellon. Convertible bonds have also been a common way of raising capital internationally.

Depositary receipts will not go away soon. But for Asian corporates, accessing foreign capital through the domestic listing route must be increasingly encouraged. It would heighten disclosure and transparency in many local markets (alongside the gradual adoption of IFRS as an accounting standard – now embraced by some 120 countries) and ultimately also achieve a lower cost of capital for issuers, through the introduction of international book building, and increased trading by foreign stockholders on domestic exchanges.

Apart from Taiwan, in many Asian jurisdictions companies still rely on instruments listed in foreign markets to circumvent complex or restrictive local ECM rules.

In South Korea, depositary receipts or convertible bonds have for years been the only way to access international institutions. The first time an international investment bank acted as a joint bookrunner of a domestic offering (the IPO of the Macquarie Korea Infrastructure Fund) was in 2006. The Korean authorities have now facilitated the granting of foreign investor IDs, enabling international stockholders to participate in primary market transactions. Ownership limits there, however, still cap foreign investments across a number of service sectors to below 49%.

In India, a key development has been the introduction of Qualified Institutional Placements (QIPs) by the Securities and Exchange Board of India (SEBI), also in 2006. QIPs allow Indian companies to tap money onshore, and in a more flexible and efficient manner than through Foreign Currency Convertible Bonds (FCCBs) or GDRs.

Of course, there are some limitations associated with QIPs, but these deals are open not only to Indian institutions but also to those foreign institutional investors that are registered with SEBI. Their number, according to the India Brand Equity Foundation, stood at 1,713, with more than 5,400 sub-accounts at the end of June 2010. Giant posters advertising international asset managers actually seem to dominate the urban landscape in India these days.

By contrast, there is still a significant way to go before China fully opens its capital markets. The Qualified Foreign Institutional Investor (QFII) program, which was established in 2002 to enable licensed international institutions to trade in the A shares listed in Shenzhen and Shanghai, still only includes just over 100 names — and with a current $19 billion quota to boot. That’s a rather modest amount in comparison with the $127 billion that has been raised in equity capital in Shanghai and Shenzhen in 2010.

More recent moves, such as the “mini-QFII” scheme to promote investments in China by offshore Renminbi funds (chiefly based in Hong Kong) are welcome. But the $1.5 billion quota that has been mentioned (out of roughly $33 billion in international RMB funds) means its initial impact will remain very limited. As Beijing slowly moves to reduce its dependence on the U.S. dollar, and as Hong Kong hints at the possibility of yuan-denominated IPOs for next year (with a Cheung Kong REIT including Oriental Plaza touted as the maiden issuer), this may gradually improve.

One can only hope that Asian market authorities and participants will accelerate the pace of globalizing the investor base of Asian companies.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email [email protected])

[This article was originally published on Dow Jones Investment Banker on 24 December 2010 and is reproduced with permission]

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