Depositary Receipts

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Depositary Receipts

• Carmen Lodge
• Eric Kranda

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Topics of Interest

• What are Depositary Receipts?
• The History of Depositary Receipts
• Benefits to Companies and Investors
• How is a Depositary Receipt created?
• Types of ADR
• Depositary Receipts Today

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What are Depositary Receipts?
a security designed to make investing outside of
ones home country easier
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Depositary Receipt (DR)

• Three forms
• American Depositary Receipt (ADR)
• Global Depositary Receipt (GDR)
• International Depositary Receipt (IDR)

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History of the Depositary Receipt

• 1927 Regulation on British Companies
• What did this mean for U.S. investors?
• Selfridge Stores in the U.K.
• Creation of the first ADR by JP Morgan
• Primary use of an ADR
• Use of an ADR since the 1990s

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History (contd)

• 1990 Citibank issued the first GDR
• Samsung Corporation
• European and U.S. Markets could be reached
  simultaneously
• Currently.
• DR Programs in over 70 countries with over 2,250
  programs
• Before participation it is necessary to look at
  the benefits

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Benefits to the Company

• Expanded market share through broadened and more
  diversified investor exposure with potentially
  greater liquidity, which may increase or
  stabilize the share price
• Enhanced visibility and image for the companys
  products, services and financial instruments in a
  marketplace outside its home country

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Company Benefits (contd)

• Flexible mechanism for raising capital and a
  vehicle or currency for mergers and acquisitions
• Enables employees of U.S. subsidiaries of
  non-U.S. companies to invest more easily in the
  parent company

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Benefits to the Investor

• Quotation in U.S. dollars and payment of
  dividends or interest in U.S. dollars (or in
  general, a persons home currency)
• Diversification without many of the obstacles
  that mutual funds, pension funds and other
  institutions may have in purchasing and holding
  securities outside of their local market

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Investor Benefits (contd)

• Elimination of global custodian safekeeping
  charges, potentially saving Depositary Receipt
  investors up to 10 to 40 basis points annually
• Familiar trade, clearance and settlement
  procedures

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Investor Benefits (contd)

• Competitive U.S. dollar/foreign exchange rate
  conversion for dividends and other cash
  distributions
• Ability to acquire the underlying securities
  directly upon cancellation

Bank of NY Mellon website
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The Formation of a Depositary Receipt
Foreign Stock Exchange

Foreign Company
Shares

Securitized (derivative)
New Share ADR
P
Shares
Securities Safe
P
DR Bank
Registered?
NYSE For trading
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Types of ADRs

• Non-Sponsored
• The underlying company has no commitment
• Traded on the OTC market
• No formal agreement between bank and company
• Sponsored
• Varying degrees of commitment a company can make
  to the DR Program

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Level 1 Sponsored

• One bank acts as a transfer agent for the company
• Limited reporting requirements with SEC
• Periodic financials not required
• Traded on the OTC market
• Most common way DRs are sold in the U.S.

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Level 2 Sponsored

• Under SEC regulation
• Must file form equivalent to the U.S. Form 10-K
  annually in compliance with GAAP
• Listed on U.S. Stock Exchanges like NYSE, NASDAQ,
  and AMEX
• Provides more exposure in U.S. markets for company

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Level 3 Sponsored

• Requirements for listing similar to the
  strictness of a U.S. company
• Form F-1 required, which resembles the U.S.
  prospectus
• Registered with SEC
• Information on company can be easily found by
  investors
• Necessary if company intends to issue new shares
  in U.S. market

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Restricted Programs

• Private placement under SEC Rule 144(a)
• Only Qualified Institutional Buyers (QIBs) can
  obtain and trade the ADRs
• Most commonly organized and traded through the
  Depositary Trust Clearing Corporation

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Depositary Receipts Today

• The Bank of New York Mellon is currently the
  largest DR bank in the world
• In the GDR market, the London Stock Exchange
  dominates
• The number of programs has increased dramatically
  since the 1990s, rising from 352 programs to
  over 2,250 programs in 2007

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DRs Today (contd)

• Recent explosion in use of DR Programs is
  credited to
• Ease of information flow in technology era
• Investor desire to diversify internationally
• Increased liquidity in market due in large part
  to light regulatory procedures of the
  International Order Book trading platform
• Perceived success of DR Programs internationally
• Decreased cost of programs by standardization

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Annual DR Trading via International Order Book
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Total Sponsored DRs By Country in 2007
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Conclusion

• Depositary Receipt Programs are an effective
  strategy for international investment, while
  using procedures that the investor is comfortable
  with and accustomed to. But, as with any
  investment, all the risks of investing are not
  eliminated.
• Now. A little competition to see who was
  listening.