Monday, May 14, 2012

American Depository Receipts

American Depository Receipts

American Depository Receipts

Authors

A depository receipt is a security that represents ownership in a foreign security.
 
They provide opportunity for investors in a country to trade or transact on their domestic stock exchanges a security whose underlying is a foreign security. They have the benefit of trading the instrument through their familiar broker in the same way they trade their country's securities.
 
The concept of depository receipts has existed in US capital market or securities market since 1927. 
 
A Depositary Receipt is a negotiable U.S. security that generally represents a company's publicly traded equity or debt. Depositary Receipts are created when a stock broker purchases a non-U.S. company's shares on its home stock market and delivers the shares to the depositary's local custodian bank, and then instructs a depositary bank to issue Depositary Receipts.
 
The  Depositary Receipts, being negotiable instruments,  may  be traded in the  secondary trading market. They may trade freely, just like any other security, either on an exchange or in the over-the-counter market.
 
 
Till mid-eighties, depository banks issued them without the consent and involvement of the concerned issuers of securities. When issuers are involved, depository issues can be used for raising additional capital by the issuer.
 

Regulation

 
But in 1983, the Securities Exchange Commission made certain disclosure requirements mandatory for ADR issues.
 
 

Benefits to a Company

The establishment of a Depositary Receipt program offers numerous advantages to non-U.S.companies. The primary reasons to establish a Depositary Receipt program can be divided into two broad considerations: capital and commercial.
Advantages may include:

  • Expanded market share through broadened and more diversified investor exposure with potentially greater liquidity, which may increase or stabilize the share price.
  • Enhanced visibility and image for the company's products, services and financial instruments in a marketplace outside its home country.
  • Flexible mechanism for raising capital and a vehicle or currency for mergers and acquisitions.
  • Enables employees of U.S. subsidiaries of non-U.S. companies to invest more easily in the parent company.

Benefits to an Investor

Increasingly, investors aim to diversify their portfolios internationally. However, obstacles such as undependable settlements, costly currency conversions, unreliable custody services, poor information flow, unfamiliar market practices, confusing tax conventions and internal investment policy may discourage institutions and private investors from venturing outside their local market. Depositary Receipt advantages may include:

  • Quotation in U.S. dollars and payment of dividends or interest in U.S. dollars.
  • Diversification without many of the obstacles that mutual funds, pension funds and other institutions may have in purchasing and holding securities outside of their local market.
  • Elimination of global custodian safekeeping charges, potentially saving Depositary Receipt investors up to 10 to 40 basis points annually.
  • Familiar trade, clearance and settlement procedures.
  • Competitive U.S. dollar/foreign exchange rate conversions for dividends and other cash distributions.
  • Ability to acquire the underlying securities directly upon cancellation.

 

Types of Depository Receipts

 
Depositary Receipts may be more specifically called American Depositary Receipts (ADRs), Rule 144A Depositary Receipts or Global Depositary Receipts (GDRs). These names typically identify the market in which the Depositary Receipts are available: ADRs are publicly available to U.S. investors on a national stock exchange or in the over-the-counter market; Rule 144A ADRs are privately placed and resold only to Qualified Institutional Buyers (QIBs) in the U.S. QIB PORTAL market; and GDRs are generally available in one or more markets outside the foreign company's home country and in USA through Rule 144A ADRs.
 
Sponsored Level I Depositary Receipts 

 Level I Depositary Receipts are traded in the U.S. over-the-counter (OTC) market with prices published in the Pink Sheets.  Establishment of a Level I program does not require full SEC registration and the company does not have to report its accounts under U.S. Generally Accepted Accounting Principles (GAAP) or provide full Securities and Exchange Commission (SEC) disclosure. Essentially, a Sponsored Level I Depositary Receipt program allows companies to enjoy the benefits of a publicly traded security in USA without changing its current reporting process.

The Sponsored Level I Depositary Receipt market is the fastest-growing segment of the Depositary Receipt business. The majority of sponsored programs are Level I facilities.  Many well-known multinational companies have established such programs.

Sponsored Level II and Sponsored Level III Depositary Receipts

Companies that wish to list their Depositary Receipts on a U.S. stock exchange (NASDAQ, American or New York), raise capital, use Sponsored Level II or Sponsored Level III Depositary Receipts. Level II and Level III Depositary Receipt programs require SEC registration and adherence to applicable requirements for U.S. GAAP. Level II Depositary Receipts are exchange-listed securities but do not involve raising new capital. Level III programs typically generate the most U.S. investor interest because capital is being raised. .

Privately Placed and Offshore (SEC Rule 144A / Regulation S) Depositary Receipts

In addition to the three levels of sponsored Depositary Receipt programs that trade publicly in the U.S., a company can also access the U.S. and other capital markets through SEC Rule 144A and/or SEC Regulation S Depositary Receipt facilities without SEC registration. Rule 144A programs provide for raising capital through the private placement of Depositary Receipts with large institutional investors (often referred to as QIBs) in the United States.
 
Regulation S programs provide for raising capital through the placement of Depositary Receipts offshore to non-U.S. investors in reliance on Regulation S.
 
A Level I program can be established in addition to a Rule 144A
 
 

References

 
 

No comments:

Post a Comment