Nigeria is planning to introduce an African Depositary Receipt (ADR) framework to make it easier for companies across the continent to access Nigerian investors and enable investors to trade securities across African markets. The initiative forms part of the Securities and Exchange Commission’s (SEC) broader ambition to grow Nigeria’s capital market to ₦750 trillion, equivalent to about $562 billion, over the next decade.
Key Highlights
- Nigeria plans to introduce an African Depositary Receipt framework to promote cross-border investment.
- The SEC aims to expand Nigeria’s capital market to ₦750 trillion over the next decade.
- The proposed framework could make it easier for African companies to access capital through Nigeria.
- Depositary receipts can help investors gain exposure to foreign securities through a local market.
- Nigeria’s strategy includes plans to increase cross-border listings from five to 40 over ten years.
- Regulatory coordination, investor protection, taxation and foreign exchange arrangements will be critical to the framework’s success.
What Are African Depositary Receipts?
A depositary receipt is a tradable financial instrument representing shares or other securities held in another market. It enables investors to gain exposure to foreign companies through a familiar trading platform, while the underlying securities remain held by a designated custodian.
Under a potential African Depositary Receipt arrangement, an investor in Kenya, for example, could buy a receipt representing shares in a Nigerian company through a local exchange, subject to the rules of the participating markets.
Such an arrangement could reduce some practical barriers to cross-border investment, including the need to navigate unfamiliar trading systems, custody arrangements and account-opening procedures in another country.
The extent of these benefits would depend on how the proposed framework handles currency conversion, settlement, investor eligibility and regulatory requirements.
Why Nigeria Wants an African Depositary Receipt Framework
Nigeria’s proposed framework is intended to deepen market liquidity, attract a wider pool of investors and strengthen the Nigerian Exchange (NGX) as a destination for African companies seeking capital.
The SEC’s broader capital-market strategy includes plans to increase cross-border listings from five to 40 over ten years and expand the number of corporate bonds from 100 to 500.
The initiative also aligns with wider efforts to improve financial cooperation among African countries under the African Continental Free Trade Area (AfCFTA).
By improving access to investors across national borders, Nigerian regulators hope to make it easier for businesses to raise funds and expand their operations.
The proposed framework could also give Nigerian investors more convenient access to selected securities from other African markets, subject to the final rules and arrangements agreed with participating exchanges.
African Exchanges Explore Cross-Border Investment
Nigeria’s initiative comes as exchanges and financial institutions across Africa explore ways to connect their markets and broaden investor access.
Discussions involving the Egyptian Exchange have included the possibility of allowing Egyptian investors to gain exposure to Dangote Group companies through Egyptian depositary receipts. Nairobi and Renaissance Capital have also reportedly discussed an inward unsponsored global depositary receipt structure that could provide East African investors with exposure to a Nigerian initial public offering.
These discussions point to growing interest in investment products that allow investors to access companies outside their domestic markets without having to navigate every aspect of a foreign exchange directly.
If Nigeria establishes a clear and workable African Depositary Receipt framework, companies from markets such as Kenya, Egypt, Ghana, Rwanda and South Africa could potentially gain access to Nigerian capital.
Nigerian companies could also benefit from improved access to investors elsewhere on the continent.
However, the actual reach of the initiative will depend on reciprocal arrangements, regulatory approval and the willingness of other exchanges to participate.
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How the Proposed Framework Could Affect Nigeria’s Capital Market
The proposed African Depositary Receipt framework could influence several areas of Nigeria’s capital market.
- Cross-border listings: African companies could gain additional routes to raise funds from Nigerian investors, depending on the structure and listing requirements.
- Investor access: Investors could gain exposure to selected foreign securities through locally accessible financial instruments.
- Market liquidity: Broader investor participation could increase trading activity, although the effect would depend on actual demand and market conditions.
- Business financing: Companies could access a wider pool of potential investors to fund expansion and development.
- Regional integration: Common rules and cooperation between exchanges could support efforts to connect African financial markets.
These are potential benefits rather than guaranteed outcomes. Their realisation would depend on implementation, investor confidence and the availability of suitable investment opportunities.
Regulatory Challenges Could Determine Success
Although the proposal could create new opportunities, introducing the framework will require more than announcing a policy.
Regulators will need to establish clear rules covering disclosure requirements, investor protection, taxation, foreign exchange conversion, custody arrangements and settlement procedures.
They will also need to determine how depositary receipts issued in one country will be recognised and supervised in another, particularly where participating markets have different legal and regulatory systems.
Reliable systems for verifying ownership of underlying securities, processing corporate actions and handling disputes will be essential to maintaining investor confidence.
Nigeria has previous experience with depositary receipts. Guaranty Trust Bank, now known as GTCO, has used global depositary receipts, and Nigerian market rules recognise depositary receipts as a possible route for securities offerings or listings.
However, extending such arrangements into a broader African framework would require rules and operational systems capable of supporting regular cross-border transactions involving multiple markets.
Can Nigeria Become Africa’s Capital-Markets Hub?
The proposed framework offers Nigeria an opportunity to strengthen its role in African finance by connecting companies seeking capital with investors across the continent.
If implemented effectively, it could help businesses access additional funding sources while giving investors more options to diversify their portfolios. It could also support the wider objective of mobilising African savings to finance African businesses.
Nevertheless, the initiative’s impact will depend on whether the SEC and participating exchanges can establish a framework that is transparent, affordable and straightforward to use.
Investors will need confidence that their rights are protected, transactions can be settled reliably and relevant risks are clearly disclosed. Companies, meanwhile, will need predictable rules and reasonable costs to make cross-border fundraising worthwhile.
Nigeria’s ambition to become a regional capital-markets hub will therefore depend not only on the proposed African Depositary Receipt framework, but also on its practical implementation and adoption by other African markets.
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