DepositaryDepositary ReceiptsReceipts

Carmen LodgeCarmen Lodge

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Eric KrandaEric Kranda

Topics of InterestTopics of InterestWhat are Depositary Receipts?What are Depositary Receipts?The History of Depositary ReceiptsThe History of Depositary ReceiptsBenefits to Companies and Benefits to Companies and

InvestorsInvestorsHow is a Depositary Receipt How is a Depositary Receipt

created?created?Types of ADRTypes of ADRDepositary Receipts TodayDepositary Receipts Today

What are Depositary What are Depositary Receipts?Receipts?

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

Depositary Receipt Depositary Receipt (DR)(DR)

Three formsThree formsAmerican Depositary American Depositary Receipt (ADR)Receipt (ADR)

Global Depositary Receipt Global Depositary Receipt (GDR)(GDR)

International Depositary International Depositary Receipt (IDR)Receipt (IDR)

History of the History of the Depositary ReceiptDepositary Receipt

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 : Citibank issued the first GDRGDRSamsung CorporationSamsung CorporationEuropean and U.S. Markets could European and U.S. Markets could

be reached simultaneouslybe reached simultaneouslyCurrently….Currently….

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

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

Benefits to the Benefits to the CompanyCompany

Expanded market share through Expanded market share through broadened and more diversified broadened and more diversified investor exposure with potentially investor exposure with potentially greater liquidity, which may increase or greater liquidity, which may increase or stabilize the share pricestabilize the share price

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

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

Flexible mechanism for raising Flexible mechanism for raising capital and a vehicle or currency for capital and a vehicle or currency for mergers and acquisitionsmergers and acquisitions

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

Benefits to the Benefits to the InvestorInvestor

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

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

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

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

Familiar trade, clearance and Familiar trade, clearance and settlement proceduressettlement procedures

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

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

Ability to acquire the underlying Ability to acquire the underlying securities directly upon cancellationsecurities directly 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 The underlying company has no commitmentcommitment

Traded 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 Varying degrees of commitment a

company can make to the DR Programcompany can make to the DR Program

Level Level 11 Sponsored SponsoredOne bank acts as a transfer agent One bank acts as a transfer agent

for the companyfor the companyLimited reporting requirements with Limited reporting requirements with

SECSECPeriodic financials not requiredPeriodic financials not requiredTraded on the OTC marketTraded on the OTC marketMost common way DRs are sold in Most common way DRs are sold in

the U.S.the U.S.

Level Level 2 2 SponsoredSponsoredUnder SEC regulationUnder SEC regulationMust file form equivalent to the U.S. Must file form equivalent to the U.S.

Form Form 1010-K annually in compliance -K annually in compliance with GAAPwith GAAP

Listed on U.S. Stock Exchanges like Listed on U.S. Stock Exchanges like NYSE, NASDAQ, and AMEXNYSE, NASDAQ, and AMEX

Provides more exposure in U.S. Provides more exposure in U.S. markets for companymarkets for company

LevelLevel 33 SponsoredSponsoredRequirements for listing similar to Requirements for listing similar to

the strictness of a U.S. companythe strictness of a U.S. companyForm F-Form F-1 1 required, which resembles required, which resembles

the U.S. prospectusthe U.S. prospectusRegistered with SECRegistered with SEC Information on company can be Information on company can be

easily found by investorseasily found by investorsNecessary if company intends to Necessary if company intends to

issue new shares in U.S. marketissue new shares in U.S. market

Restricted ProgramsRestricted ProgramsPrivate placement under SEC Rule Private placement under SEC Rule

144144(a)(a)Only Qualified Institutional Buyers Only Qualified Institutional Buyers

(QIBs) can obtain and trade the (QIBs) can obtain and trade the ADRsADRs

Most commonly organized and Most commonly organized and traded through the Depositary Trust traded through the Depositary Trust & Clearing Corporation& Clearing Corporation

Depositary Receipts Depositary Receipts TodayToday

The Bank of New York Mellon is The Bank of New York Mellon is currently the largest DR bank in the currently the largest DR bank in the worldworld

In the GDR market, the London In the GDR market, the London Stock Exchange dominatesStock Exchange dominates

The number of programs has The number of programs has increased dramatically since the increased dramatically since the 19901990’s, rising from ’s, rising from 352 352 programs to programs to over over 2,250 programs 2,250 programs inin 2007 2007

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

Programs is credited to:Programs is credited to:Ease of information flow in technology eraEase of information flow in technology eraInvestor desire to diversify internationallyInvestor desire to diversify internationallyIncreased liquidity in market due in large Increased liquidity in market due in large

part to light regulatory procedures of the part 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 Decreased cost of programs by standardizationstandardization

Annual DR Trading via Annual DR Trading via International Order International Order

BookBook

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

20072007

ConclusionConclusionDepositary Receipt Programs are an Depositary Receipt Programs are an

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

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