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 Process Level II Sponsored ADR US Investor (foreign investor) US dollarsDividend Bank of New York Mellon (Depositary Bank) US Stock Exchange Listing YenDividend 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 YenDividend 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 YenDividend 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 issuance  Purpose: Broaden the shareholder base with the existing shares  Trading: Over-the-counter market  SEC: Minimal requirements from the SEC

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

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

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 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.

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

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 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.

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