Depositary Receipts

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Depositary Receipts

• Nate Bickley
• Jaclyn Ng

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Agenda

• Basic Concepts
• History
• Basic Issuance Process
• Types of DR Programs
• Advantages and Disadvantages
• Current Trends

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Basic Concepts

• Depositary Receipt (DR)
• Certificates that represents shares of foreign
  companies
• Global Depositary Receipt (GDR)
• Negotiable instrument denominated in US dollar or
  Euros
• One GDR may represent one or more shares EX
  1001 or 1100 Ratio
• American Depositary Receipt (ADR)
• Payments and Receipts in US dollars
• Trade in US exchange markets only

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DEPOSITORY RECEIPTS

• Depositary receipts are structured to resemble
  typical stocks on the exchanges that they trade
• Designed this way so that foreigners can buy an
  interest in the company without worrying about
  differences in currency, accounting practices, or
  language barriers, or be concerned about the
  other risks in investing in foreign stock
  directly.
• Most GDRs are denominated in U.S. dollars,
  regardless of which market they are being traded
  in.

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• What is the difference between a GDR and an ADR?

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HISTORY

• GDRs were created in 1927 in London
• Selfridges, a London department store, wanted to
  expand the number of investors in the United
  States.
• Very difficult to trade across different
  countries at this time.
• Took at least 4 days to travel across the
  Atlantic.
• Orders could potentially take weeks to fully
  complete.

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Issuance ProcessLevel II Sponsored ADR
Toyota (Foreign Company)

• US Investor
• Easy process because ADRs are sold on US exchange
  markets and sold like another stock.
• Payment and receipt of dividends in US dollars

Yen
Dividend
Bank of New York Mellon (Depositary Bank)
US Stock Exchange
Listing
US dollars
Dividend
Stock Search
US Investor (foreign investor)
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Issuance Process
Toyota (Foreign Company)

• Depositary Bank
• Investors purchases are made from the depositary
  bank.
• Authorized by the issuer company to issue DRs.
• The depositary bank is the actual registered
  owner of the shares and its most important role
  is that of stock transfer agent.

Yen
Dividend
Bank of New York Mellon (Depositary Bank)
US Stock Exchange
Listing
US Dollars
Dividend
US Investor (foreign investor)
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Issuance Process
Toyota (Foreign Company)

• Foreign Company
• Seek to enhance liquidity and expand and
  diversify investors
• Responsible for preparing the issue proposal,
  determining the financial objective, deciding the
  type of program, and providing financial
  information.

Yen
Dividend
Bank of New York Mellon (Depositary Bank)
US Stock Exchange
Listing
US dollars
Dividend
US Investor (foreign investor)
10

• What is the main role of the depositary bank in
  the issuance process?

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Types of DR Programs

• Unsponsored ADR
• Description The foreign company has no formal
  participation with issuance
• Purpose Broaden the shareholder base with the
  existing shares
• Trading Over-the-counter market
• SEC Minimal requirements from the SEC

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Types of DR Programs

• Level I Sponsored American Depositary Receipt
• Formal participation by issuer company
• Purpose Broaden the shareholder base with the
  existing shares
• Trading OTC market
• SEC Minimal SEC filings

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Types of DR Programs

• Level II Sponsored American Depositary Receipt
• Description Listed on US exchanges
• Purpose Broaden the shareholder base with the
  existing shares
• Trading US stock exchanges
• SEC More requirements and regulations with SEC

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Types of DR Programs

• Level III Sponsored American Depositary Receipt
• Highest level of ADRs
• Description Shares offered and listed on the US
  exchange
• Purpose Raising capital with new issue of
  shares
• Trading AMEX, NYSE, NASDAQ
• SEC Register with the SEC

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Types of DR Programs

• Private Placement of ADRs
• Purpose Faster and cheaper way for companies to
  raise capital than level III ADRs
• Regulation S
• Shares cannot be issued or traded by any US
  person and are limited to issuance to non-US
  residents not living in the US
• Rule 144A
• Restricted issuance and trading to qualified
  institutional buyers.

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Types of DR Programs

• GDR
• Used most frequently in Europe where there are
  less regulations
• Variants
• Euro Depositary Receipts, Retail Depositary
  Receipts, and Singapore Depositary Receipts

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• What is the difference between a sponsored and
  unsponsored ADR?

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ADVANTAGES OF GDRs

• Allow investors to invest in foreign companies
  without worrying about
• Foreign trading practices
• Different laws
• Cross boarder taxes/fees

• GDRs offer most the same corporate rights,
  especially voting rights, to the holders of the
  GDRs that the investors of the underlying
  securities enjoy
• GDRs are liquid because the supply and demand can
  be regulated by creating or canceling GDR shares.

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DISADVANTAGES OF GDRs

• GDRs do have foreign exchange risk if the
  currency of the issuer is different from the
  currency of the GDR, which is usually the U.S.
  dollar.

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• What are some other advantages of GDRs or ADRs?

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Trends

• Although ADRs were the most prevalent form of
  DRs, the number of GDRs has recently surpassed
  ADRs because of the lower expense and time
  savings in issuing GDRs

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GDR vs. ADR
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Trends

• In the 1990s, the development of DRs drastically
  increased because of changes in regulations by
  the SEC and the privatization of foreign
  companies.
• The number of sponsored DR programs grew from 352
  representing 24 countries in 1990 to over 1,800
  from 78 countries in 2001.

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Conclusion

• DRs make foreign investing easy for investors
• Foreign companies are able to increase liquidity
  and raise capital
• An increase in DRs since 1990s