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Depositary Receipts

Depositary Receipts. Carmen Lodge & Eric Kranda. Topics of Interest. What are Depositary Receipts? The History of Depositary Receipts Benefits to Companies and Investors How is a Depositary Receipt created? Types of ADR Depositary Receipts Today. What are Depositary Receipts?.

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Depositary Receipts

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  1. Depositary Receipts Carmen Lodge & Eric Kranda

  2. Topics of Interest • What are Depositary Receipts? • The History of Depositary Receipts • Benefits to Companies and Investors • How is a Depositary Receipt created? • Types of ADR • Depositary Receipts Today

  3. What are Depositary Receipts? “a security designed to make investing outside of one’s home country easier”

  4. Depositary Receipt (DR) • Three forms • American Depositary Receipt (ADR) • Global Depositary Receipt (GDR) • International Depositary Receipt (IDR)

  5. History of the Depositary Receipt • 1927: Regulation on British Companies • What did this mean for U.S. investors? • Selfridge Stores in the U.K. • Creation of the first ADR by JP Morgan • Primary use of an ADR • Use of an ADR since the 1990’s

  6. History (cont’d) • 1990: Citibank issued the first GDR • Samsung Corporation • European and U.S. Markets could be reached simultaneously • Currently…. • DR Programs in over 70 countries with over 2,250 programs • Before participation it is necessary to look at the benefits

  7. Benefits to the Company • 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

  8. Company Benefits (cont’d) • 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

  9. Benefits to the Investor • Quotation in U.S. dollars and payment of dividends or interest in U.S. dollars (or in general, a persons home currency) • 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

  10. Investor Benefits (cont’d) • 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

  11. Investor Benefits (cont’d) • Competitive U.S. dollar/foreign exchange rate conversion for dividends and other cash distributions • Ability to acquire the underlying securities directly upon cancellation Bank of NY Mellon website

  12. The Formation of a Depositary Receipt Foreign Stock Exchange $ Foreign Company Shares $ Securitized (derivative) New Share ADR P $ Shares €P SecuritiesSafe DR Bank Registered? NYSE For trading

  13. Types of ADRs Non-Sponsored • The underlying company has no commitment • Traded on the OTC market • No formal agreement between bank and company Sponsored • Varying degrees of commitment a company can make to the DR Program

  14. Level 1 Sponsored • One bank acts as a transfer agent for the company • Limited reporting requirements with SEC • Periodic financials not required • Traded on the OTC market • Most common way DRs are sold in the U.S.

  15. Level 2 Sponsored • Under SEC regulation • Must file form equivalent to the U.S. Form 10-K annually in compliance with GAAP • Listed on U.S. Stock Exchanges like NYSE, NASDAQ, and AMEX • Provides more exposure in U.S. markets for company

  16. Level3Sponsored • Requirements for listing similar to the strictness of a U.S. company • Form F-1 required, which resembles the U.S. prospectus • Registered with SEC • Information on company can be easily found by investors • Necessary if company intends to issue new shares in U.S. market

  17. Restricted Programs • Private placement under SEC Rule 144(a) • Only Qualified Institutional Buyers (QIBs) can obtain and trade the ADRs • Most commonly organized and traded through the Depositary Trust & Clearing Corporation

  18. Depositary Receipts Today • The Bank of New York Mellon is currently the largest DR bank in the world • In the GDR market, the London Stock Exchange dominates • The number of programs has increased dramatically since the 1990’s, rising from 352 programs to over 2,250 programs in 2007

  19. DRs Today (cont’d) • Recent explosion in use of DR Programs is credited to: • Ease of information flow in technology era • Investor desire to diversify internationally • Increased liquidity in market due in large part to light regulatory procedures of the International Order Book trading platform • Perceived success of DR Programs internationally • Decreased cost of programs by standardization

  20. Annual DR Trading via International Order Book

  21. Total Sponsored DRs By Country in 2007

  22. Conclusion Depositary Receipt Programs are an effective strategy for international investment, while using procedures that the investor is comfortable with and accustomed to. But, as with any investment, all the risks of investing are not eliminated. Now…. A little competition to see who was listening….

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