Depositary Receipts

Nate Bickley

Jaclyn Ng

Agenda

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

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: 100:1 or 1:100

Ratio American Depositary Receipt (ADR)

Payments and Receipts in US dollars Trade in US exchange markets only

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.

What is the difference between a GDR and an ADR?

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.

Issuance ProcessLevel II Sponsored ADR

US Investor (foreign investor)

US dollarsDividend

Bank of New York Mellon (Depositary Bank)

US Stock Exchange

Listing

Yen Dividend

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

Stock Search

Issuance Process

US Investor (foreign investor)

US Dollars

Bank of New York Mellon (Depositary Bank)

US Stock Exchange

Listing

Yen Dividend•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.

Dividend

Toyota (Foreign Company)

Issuance Process

US Investor (foreign investor)

US dollars

Bank of New York Mellon (Depositary Bank)

US Stock Exchange

Listing

Yen Dividend

Dividend

•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.

Toyota (Foreign Company)

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

Types of DR Programs

Unsponsored ADR Description: The foreign company has no

formal participation with issuancePurpose: Broaden the shareholder base with

the existing sharesTrading: Over-the-counter marketSEC: Minimal requirements from the SEC

Types of DR Programs

Level I Sponsored American Depositary ReceiptFormal participation by issuer companyPurpose: Broaden the shareholder base with

the existing sharesTrading: OTC marketSEC: Minimal SEC filings

Types of DR Programs

Level II Sponsored American Depositary ReceiptDescription: Listed on US exchangesPurpose: Broaden the shareholder base with

the existing sharesTrading: US stock exchangesSEC: More requirements and regulations with

SEC

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

Types of DR Programs

Private Placement of ADRsPurpose: 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.

Types of DR Programs

GDRUsed most frequently in Europe where there

are less regulations Variants

Euro Depositary Receipts, Retail Depositary Receipts, and Singapore Depositary Receipts

What is the difference between a sponsored and unsponsored ADR?

ADVANTAGES OF GDRs Allow investors to invest in foreign

companies without worrying about…Foreign trading practices Different lawsCross 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.

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.

What are some other advantages of GDRs or ADRs?

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

GDR vs. ADR

Trends

In the 1990’s, 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.

Conclusion

DRs make foreign investing easy for investors

Foreign companies are able to increase liquidity and raise capital

An increase in DRs since 1990’s