Citibank promotes new class of shares

CITIBANK, the market leader in American Depositary Receipt (ADR) listings, is lobbying China's securities officials for the launch of ''N shares'', a new product to tap the growing US investor appetite for ADRs from mainland enterprises.

N shares are locally issued securities which will be used to back up ADRs either listed or traded over the counter in New York. Unlike H and B shares, N shares would not be listed initially, but held by Citibank as the local custodian depository bank.

At a later stage, the mainland issuers could choose to list the N shares in China's domestic stock markets. Ordinary shareholders would be able to exchange the shares for ADRs traded in New York, and vice-versa.

''Citibank is recommending this new form of capital raising to some mainland enterprises - that they should think about issuing an ADR as opposed to having a direct listing on the overseas markets,'' said Citibank's ADR sales director Mark Bach.

The bank is also talking to Beijing securities officials and some overseas underwriters for a second batch of 22 mainland enterprises to be approved for an overseas listing, he added.

Mainland enterprises have been targeted as potential candidates. Citibank and the Bank of New York are known to be competing strongly for a share of the rising market.

There are strong reasons for ADRs being a better way to enter the US markets as opposed to a direct listing, according to Mr Bach.

He recognised some of these companies, which had yet to list their shares domestically, whether in Shanghai, Shenzhen or Hong Kong, could still be able to use the ADR structure in issuing underlying N shares.

He believed Beijing officials would be interested in the idea as it would give long-term and built-in flexibility to the mainland enterprises in raising overseas capital.

''Listing requirements will be the same as other types of ADR listing. But it is expected the issue of N share-backed ADRs will take a shorter time than that of a dual listing [ADRs in the US and ordinary shares in the domestic markets],'' he said.

Mr Bach did not foresee any objections from the US Securities and Exchange Commission (SEC) to the launch of these ADRs.

ADRs have become a widely accepted corporate finance vehicle for issuers wanting to tap the US capital markets. In addition to providing issuers with a funding instrument for raising capital, ADRs can be used to gain increased visibility for an issuer's name and products in the US market.

Meanwhile, analysts said Beijing should have second thoughts about allowing a large number of mainland enterprises to go overseas for new capital.

A direct listing would hinder China from building a local market in which mainland enterprises would raise funds directly rather than rely on overseas markets, they said.

Standard Chartered Securities managing director Eugene Yang agreed Beijing should pay more attention to developing its domestic markets.

''As long as companies of good quality can be priced fairly in Shanghai or Shenzhen, there is no reason why foreign investors should not be interested in the B shares,'' he said.

Last year was a record year for ADR listings in New York with China emerging as the most promising new market.

Mr Bach attributed last year's growth to a massive re-allocation of US investment funds and the acute need for new capital in Asia.

''Fund managers are re-allocating their portfolio from zero to five per cent to non-US securities to up to about 20 per cent towards non-US securities,'' he said.

Simultaneously, privatisations and other forms of raising capital have increased tremendously, he said.

These factors, combined with the SEC's attempt to encourage foreign companies to raise capital on the US markets would help keep the ADR market robust for the next few years, he said.

Mr Bach added: ''In terms of Hong Kong and China, the pace for ADR listings will accelerate. Although not all the 22 companies authorised to raise capital will be listed this year, the number of listings is certain to double by the end of the year.'' US retail investors tend to buy ADRs rather than large lots of ordinary shares of foreign companies through brokers, he said.

Also, many institutions are prohibited by law or charter from buying non-US dollar denominated securities, and therefore have to buy ADRs.