BURSA Malaysia achieved a new milestone last week when an Australian Stock Exchange (ASX) listed company, OM Holdings Ltd (OMH), was granted a secondary listing. The listing was deemed as a direct listing as no new shares or existing shares were sold or offered to the investors here.
The company’s listing in Australia remains the primary stock market listing. When a company’s shares are listed in two markets, investors and traders always look for potential arbitrage opportunities.
On the first day of listing itself on Bursa, the reference price adopted is based on the closing market price of OMH on the day before the Bursa listing and after adjusting for the closing Australian dollar and ringgit exchange rate on that day itself.
As this is a dual-listing, all shares listed and quoted in both Bursa or ASX (Australia Stock Exchange) are fully fungible.
This means shareholders holding the shares under the Australian register, may request to remove their shares and transfer those shares to the Malaysian register by depositingintoaCentralDepository System (CDS) account which is maintained with an Authorised Depository Agent (ADA) of Bursa Malaysia Depository, and vice-versa as well.
However, as there were no shares offered to begin with for the Bursa listing, 16.8mil OMH shares were transferred by certain shareholders to ensure liquidity is available for trading purposes. This represents some 2.3% of OMH’s total issued shares of 738.6mil shares. OMH was listed on Bursa on June 22, 2021, with a reference price of RM2.57, which was derived from the last closing price of A$0.825 in the ASX and based on the exchange rate of 3.1115.
On the secondary listing, we observed a peculiar price movement. OMH listed on Bursa closed the first day of trading at about 10% premium to the closing on ASX and this premium widened to as high as 42.9% the next day.
By Thursday’s close, this premium narrowed to just under 11% as can be seen in table 1.
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As the shares are fully fungible, investors holding the shares in ASX can transfer the shares to Bursa to make an arbitrage profit.
Based on the information provided by OMH in its secondary listing prospectus, this process takes at least three market days and that too, if the request is submitted before 10am (Sydney time) on the date of submission. A shareholder requesting the transfer must also ensure that he/ she has provided proper and timely instructions to both the share registrars in Malaysia and Australia respectively.
As there is a time gap from the time of initiating a transfer request and receiving the shares in another exchange, the arbitrage opportunity that was available at the time of initiation may or may not exist by the time the shares are received in the market that has a richer market price. Hence, while on paper the arbitrage opportunity looks attractive, in reality, it is not easily executed with a profit.
In other words, the arbitrage profit is only seen as attractive but to convert it into a profit may or may not be the same.
In this case, the ASX market price is used as the benchmark price, being the market where OMH has the primary listing.
Is there an arbitrage opportunity in American Depository Receipts (ADR)?
A couple of weeks ago and over a weekend, there was some buzz in the market when Top Glove’s ADR that are listed in the US and traded Over The Counter (OTC) had a sudden surge in price.
These ADRs priced in US dollar have an exercise ratio of one ADR into four Top Glove ordinary shares. The total number of shares that can be purchased under the ADR shall not exceed 5% of the total issued and paid-up capital of Top Glove at any point in time.
It is understood that despite the high allocation in terms of the number of shares that can be purchased via the ADR programme, there are only about 2.6mil ADR in issuance, which translates to about 10.4mil Top Glove shares.
Table 2 summarises the price points of Top Glove shares listed on Bursa and the ADR market price in US dollar.
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Here, Top Glove shares listed on Bursa are the reference point, being the primary market where the shares are listed.
In terms of the price differential, the ADRs, which were more or less efficiently priced up to June 10, 2021, had a sudden surge in price and caused the ADR to trade at a premium of 63% to the shares listed on Bursa.
Is there an arbitrage opportunity here too?
Can someone buy Top Glove shares listed on Bursa and sell them in the US OTC via the ADR programme to take advantage of the price anomaly?
The simple answer is no.
Shares under the Top Glove ADR programme are not fully fungible unlike shares of the company that are listed in the Singapore Stock Exchange (SGX), where investors can sell/buy in one market and buy/sell in the other market rather efficiently.
For now, as the Top Glove ADR is selling at a premium to the locally traded Top Glove shares, the arbitrage opportunity that exists is to buy on Bursa and sell in the US OTC market as ADR.
However, this can only be done by the depository bank, No one else can “create” these ADRs and subsequently sell them in the US OTC market.
Based on the prices seen in table 2, the huge premium of 63% that was observed on June 11, has narrowed and this premium fell to a low of 16.5% to the closing price level on Bursa Malaysia.
This has since climbed back to 26.4% as of Thursday’s closing price for the ADR.
An existing holder of the ADR itself too has an arbitrage opportunity by selling in one market and buying in another.
He or she can sell the ADR via the US OTC market, and purchase the same number of underlying shares to represent the shares held in the ADR and maintain the same level of ownership.
Overall, an arbitrage opportunity always looks easy on paper but in reality, it may not be as simple as it is.
Two key factors play an important role and the first is of course whether the shares are fully fungible or otherwise, and the second, the time needed to move from one market to another.
These are the two critical factors that would determine whether an arbitrage opportunity is a profitable one or otherwise.
Pankaj C Kumar is a long-time investment analyst. The views expressed here are his own.