DepositaryDepositary Receipts Receipts

Carmen LodgeCarmen Lodge &&

Eric KrandaEric Kranda

Topics of InterestTopics of Interest

What are Depositary Receipts?What are Depositary Receipts?The History of Depositary ReceiptsThe History of Depositary ReceiptsBenefits to Companies and InvestorsBenefits to Companies and InvestorsHow is a Depositary Receipt created?How is a Depositary Receipt created?Types of ADRTypes of ADRDepositary Receipts TodayDepositary Receipts Today

What are Depositary Receipts?What are Depositary Receipts?

““a security designed to make investing a security designed to make investing outside of one’s home country easier”outside of one’s home country easier”

Depositary Receipt (DR)Depositary Receipt (DR)

Three formsThree formsAmerican Depositary Receipt American Depositary Receipt

(ADR)(ADR)Global Depositary Receipt Global Depositary Receipt

(GDR)(GDR)International Depositary Receipt International Depositary Receipt

(IDR)(IDR)

History of the Depositary History of the Depositary ReceiptReceipt

19271927: Regulation on British Companies: Regulation on British CompaniesWhat did this mean for U.S. investors?What did this mean for U.S. investors?

Selfridge Stores in the U.K.Selfridge Stores in the U.K.Creation of the first ADR by JP MorganCreation of the first ADR by JP Morgan

Primary use of an ADRPrimary use of an ADRUse of an ADR since the Use of an ADR since the 19901990’s’s

History (cont’d)History (cont’d)19901990: Citibank issued the first GDR: Citibank issued the first GDR

Samsung CorporationSamsung CorporationEuropean and U.S. Markets could be European and U.S. Markets could be

reached simultaneouslyreached simultaneouslyCurrently….Currently….

DR Programs in over DR Programs in over 7070 countries with countries with over over 2,2502,250 programs programs

Before participation it is necessary to Before participation it is necessary to look at the benefitslook at the benefits

Benefits to the CompanyBenefits to the Company Expanded market share through broadened Expanded market share through broadened

and more diversified investor exposure and more diversified investor exposure with potentially greater liquidity, which with potentially greater liquidity, which may increase or stabilize the share pricemay increase or stabilize the share price

Enhanced visibility and image for the Enhanced visibility and image for the company’s products, services and financial company’s products, services and financial instruments in a marketplace outside its instruments in a marketplace outside its home countryhome country

Company Benefits (cont’d)Company Benefits (cont’d)

Flexible mechanism for raising capital and Flexible mechanism for raising capital and a vehicle or currency for mergers and a vehicle or currency for mergers and acquisitionsacquisitions

Enables employees of U.S. subsidiaries of Enables employees of U.S. subsidiaries of non-U.S. companies to invest more easily non-U.S. companies to invest more easily in the parent companyin the parent company

Benefits to the InvestorBenefits to the Investor Quotation in U.S. dollars and payment of Quotation in U.S. dollars and payment of

dividends or interest in U.S. dollars (or in dividends or interest in U.S. dollars (or in general, a persons home currency)general, a persons home currency)

Diversification without many of the Diversification without many of the obstacles that mutual funds, pension funds obstacles that mutual funds, pension funds and other institutions may have in and other institutions may have in purchasing and holding securities outside purchasing and holding securities outside of their local marketof their local market

Investor Benefits (cont’d)Investor Benefits (cont’d)

Elimination of global custodian Elimination of global custodian safekeeping charges, potentially saving safekeeping charges, potentially saving Depositary Receipt investors up to Depositary Receipt investors up to 1010 to to 4040 basis points annuallybasis points annually

Familiar trade, clearance and settlement Familiar trade, clearance and settlement proceduresprocedures

Investor Benefits (cont’d)Investor Benefits (cont’d)

Competitive U.S. dollar/foreign exchange Competitive U.S. dollar/foreign exchange rate conversion for dividends and other rate conversion for dividends and other cash distributionscash distributions

Ability to acquire the underlying securities Ability to acquire the underlying securities directly upon cancellationdirectly upon cancellation

Bank of NY Mellon website

Foreign Company$

Shares Securities Safe

$

Shares

Foreign Stock Exchange

New ShareADR

NYSEFor trading

Registered?

Securitized (derivative)

€ PP $

DR Bank

The Formation of a Depositary Receipt

Types of ADRsTypes of ADRsNon-SponsoredNon-Sponsored

The underlying company has no commitmentThe underlying company has no commitmentTraded on the OTC marketTraded on the OTC marketNo formal agreement between bank and No formal agreement between bank and

companycompany

SponsoredSponsoredVarying degrees of commitment a company Varying degrees of commitment a company

can make to the DR Programcan make to the DR Program

Level Level 11 Sponsored Sponsored One bank acts as a transfer agent for the One bank acts as a transfer agent for the

companycompany Limited reporting requirements with SECLimited reporting requirements with SEC Periodic financials not requiredPeriodic financials not required Traded on the OTC marketTraded on the OTC market Most common way DRs are sold in the U.S.Most common way DRs are sold in the U.S.

Level Level 2 2 SponsoredSponsored Under SEC regulationUnder SEC regulation Must file form equivalent to the U.S. Form Must file form equivalent to the U.S. Form

1010-K annually in compliance with GAAP-K annually in compliance with GAAP Listed on U.S. Stock Exchanges like NYSE, Listed on U.S. Stock Exchanges like NYSE,

NASDAQ, and AMEXNASDAQ, and AMEX Provides more exposure in U.S. markets for Provides more exposure in U.S. markets for

companycompany

LevelLevel 33 SponsoredSponsored Requirements for listing similar to the Requirements for listing similar to the

strictness of a U.S. companystrictness of a U.S. company Form F-Form F-1 1 required, which resembles the required, which resembles the

U.S. prospectusU.S. prospectus Registered with SECRegistered with SEC Information on company can be easily Information on company can be easily

found by investorsfound by investors Necessary if company intends to issue new Necessary if company intends to issue new

shares in U.S. marketshares in U.S. market

Restricted ProgramsRestricted Programs Private placement under SEC Rule Private placement under SEC Rule 144144(a)(a) Only Qualified Institutional Buyers (QIBs) Only Qualified Institutional Buyers (QIBs)

can obtain and trade the ADRscan obtain and trade the ADRs Most commonly organized and traded Most commonly organized and traded

through the Depositary Trust & Clearing through the Depositary Trust & Clearing CorporationCorporation

Depositary Receipts TodayDepositary Receipts Today The Bank of New York Mellon is currently The Bank of New York Mellon is currently

the largest DR bank in the worldthe largest DR bank in the world In the GDR market, the London Stock In the GDR market, the London Stock

Exchange dominatesExchange dominates The number of programs has increased The number of programs has increased

dramatically since the dramatically since the 19901990’s, rising from ’s, rising from 352 352 programs to over programs to over 2,250 programs 2,250 programs inin 20072007

DRs Today (cont’d)DRs Today (cont’d) Recent explosion in use of DR Programs is Recent explosion in use of DR Programs is

credited to:credited to:Ease of information flow in technology eraEase of information flow in technology era Investor desire to diversify internationallyInvestor desire to diversify internationally Increased liquidity in market due in large part Increased liquidity in market due in large part

to light regulatory procedures of the to light regulatory procedures of the International Order Book trading platformInternational Order Book trading platform

Perceived success of DR Programs Perceived success of DR Programs internationallyinternationally

Decreased cost of programs by standardizationDecreased cost of programs by standardization

Annual DR Trading via Annual DR Trading via International Order BookInternational Order Book

Total Sponsored DRs By Total Sponsored DRs By Country in Country in 20072007

ConclusionConclusionDepositary Receipt Programs are an effective Depositary Receipt Programs are an effective

strategy for international investment, while strategy for international investment, while using procedures that the investor is using procedures that the investor is comfortable with and accustomed to. But, comfortable with and accustomed to. But, as with any investment, all the risks of as with any investment, all the risks of investing are not eliminated.investing are not eliminated.

Now…. A little competition to see who was Now…. A little competition to see who was listening….listening….