American Depositary Receipts Rule 144A Depositary Receipts

Buying stock in a foreign company is not only another way to diversify your portfolio, but some of the best growth opportunities may be in other countries, especially developing nations, such as China or India. However, investing directly in foreign companies is expensive, risky, and problematic because of the foreign language, and different foreign exchange and accounting rules. American Depositary Receipts simplifies investing in a foreign company. First created in 1927 by J.P. Morgan, to make it easier for Americans to invest in the British retailer Selfridge, American Depositary Receipts (ADR), also sometimes called American Depository Receipts, are certificates which represent the stocks of a foreign company, but are listed on American stock exchanges or over-the-counter, and all transactions are in U.S. dollars, and all communications are in English. This makes it easier for Americans to invest in foreign companies without worrying about currency exchange rates, foreign stock exchange rules, and foreign languages. Price information is more readily available and transaction costs are lower. One ADR certificate may represent 1 or more shares of the foreign stock, or if the stock is expensive, then the ADR may represent a fraction of a share, so as to give the ADR an initial moderate price, or be in the range of similar securities on the exchange where the ADR will be listed. The ratio of company stock to its ADR can range from 100,000:1 to 1:100. Because many ADRs don't have a one-to-one ratio between the depositary receipts and the shares of stock, financial ratios are often not included in stock listings. Rule 144A Depositary Receipts are special ADRs that can only be sold to Qualified Institutional Buyers as a private placement and are not subjected to the same rules and regulations as ADRs. A Qualified Institutional Buyer is an institutional investor that can trade privately placed unregistered securities with other qualified institutional buyers. Consequently, these cannot be bought on the public exchanges or over the counter. Depositary receipts can, of course, be created and sold in other countries, using the native language for communications and the native currency for monetary exchanges, and thus, are sometimes called Global Depositary Receipts (GDR) or European Depositary Receipts (EDR) if such receipts are sold in Europe. Companies can create and sell depositary receipts in several countries to broaden their base of investors, to increase awareness of their company, to raise capital, and to provide more liquidity. Receipts can also be used as currency for mergers and acquisitions in those countries where receipts are available, or as stock option alternatives for employees of a U.S. subsidiary of the foreign company.

How ADRs are Created Sponsorship Levels 1, 2, 3

ADRs may be sponsored or unsponsored; however, unsponsored ADRs are increasingly rare and cannot be listed on the major American stock exchanges because they are not registered

with the SEC, and lack other necessary qualifications. An unsponsored ADR is created by a U.S. investment bank or brokerage that buys the shares in the country where the shares trade, deposits them in a local bankthe custodian bank, which is often a branch of a U.S. bank, called the depositary bank (aka depository bank). The depositary bank then issues shares that represent an interest in the stocks and handles most of the transactions with the American investors, serving both as transfer agent and registrar for the ADR. The shares of the foreign stock that are held in the custodian bank are called American Depositary Shares (ADS), although this term is sometimes used as a synonym for ADRs. Most often, the company will sponsor the creation of its own ADR, in which case it is a sponsored ADR. There are 3 levels of sponsorship. A Level 1 sponsored ADR is created by the company to extend the market for its securities to this country, but without needing to register with the SEC, or conforming to generally accepted accounting principles (GAAP). Consequently, this ADR can only be traded in the OTC Bulletin Board or Pink Sheets trading systems, usually by institutional investors. These ADRs have more risk, and it is more difficult to compare a Level I ADR with other investments, because of the differences in accounting. Level 2 and Level 3 sponsored ADRs must register with the SEC, and financial statements must be reconciled to generally accepted accounting principles. A Level 2 ADR requires partial compliance with GAAP, while a Level 3 ADR requires complete compliance. A Level 3 sponsorship is required, if the ADR is a primary offering and is used to raise capital for the company. Only Level 2 and Level 3 sponsored ADRs can be listed on the New York Stock Exchange, the American Stock Exchange, or NASDAQ.

How ADRs Work

The price of ADRs in the secondary market are, of course, determined by supply and demand, but the price will not deviate too much from the price of the underlying stock. If the ADR is trading at a higher price than the equivalent foreign shares of the company, then more shares of the company will be bought and held in the custodian bank, and more ADRs will be created. If the ADR trades below the equivalent price, then some ADRs will be canceled, and the corresponding shares of the company will be released by the custodian bank. This maintains parity between the price of the ADR and the foreign shares, after accounting for the currency exchange rate. When dividends are paid, the custodian bank receives it and withholds any foreign taxes, exchanges it for U.S. dollars, then sends it to the depositary bank, which then sends it to the investors. The depositary bank, being a U.S. bank, handles most of the interaction with the U.S. investors, such as rights offerings, stock splits, and stock dividends, but sponsored ADR investors may receive communications, such as financial statements, directly from the company. The largest United States depositary banks are the Bank of New York, J.P. Morgan, and Citibank. Note, however, that although ADR transactions are in U.S. currency, there still is a currency exchange risk. If the dollar falls, for instance, then the amount of dividend in U.S. dollars will be reduced, and the market price of the ADR will drop. There is also political risk because

the ADR still derives its value from the foreign stock, which could be adversely affected by unfavorable changes in the politics or the law of the country.

The Bank of New York ADR Index

The Bank of York, a major issuer of depositary receipts, publishes a real-time, marketcapitalization ADR index. The Composite ADR index lists all ADRs of more than 450 companies from 39 countries listed on the NYSE, AMEX, and NASDAQ. There are also numerous subsets of the Composite ADR index:

3 Regional Indexes 1. Europe 2. Asia 3. Latin America

4 Market Indexes 3 Sector Indexes 1. Developed 2. Emerging 3. Euroland 4. Telebras 1. European Telecom 2. Latin Telecom 3. European Oil and Gas

8 Select Indexes 1. International 100 2. Europe 100 3. Developed Markets 100 4. Asia 50 5. Emerging Markets 50 6. Latin America 35 7. International Telecom 35 8. BRIC Select

There are also 39 country indexes. Index Adjustments and Rebalancing New depositary receipts are added quarterly, and removed when delisted. The index is rebalanced quarterlyafter the 3rd Friday of March, June, September, and Decemberbut is also rebalanced anytime the market capitalization of an ADR changes by at least 10%.

External Links

BNY Mellon Depositary Receipts - DR Directory - Allows selection of DRs by region, country, industry, DR exchange, depositary, by date, sponsored or unsponsored, and by DRs that raise capital. Depositary Receipts with Deutsche Bank - Allows filtering of DRs by program type (Level I, II, III, unsponsored, GDR - 144A, etc.) region, country, industry, DR exchange, and depositary.

================================ Global Depositary Receipts (GDRs)

Depositary receipts (DRs) are certificates that represent an ownership interest in the ordinary shares of stock of a company, but that are marketed outside of the companys home country to increase its visibility in the world market and to access a greater amount of investment capital in other countries. Depositary receipts are structured to resemble typical stocks on the exchanges that they trade 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. American depositary receipts (ADRs) were the 1st depositary receipts issuedJP Morgan issued the 1st ADR in 1927. ADRs allowed companies domiciled outside of the United States to tap the United States capital markets. ADRs were structured to resemble other stocks on the American exchanges with comparable prices per share, shareholder notifications in English, and the use of United States currency for the sale and purchase of ADRs and for dividend payments. A global depositary receipt (GDR) is similar to an ADR, but is a depositary receipt sold outside of the United States and outside of the home country of the issuing company. Most GDRs are, regardless of the geographic market, denominated in United States dollars, although some trade in Euros or British sterling. There are more than 900 GDRs listed on exchanges worldwide, with more than 2,100 issuers from 80 countries. Although ADRs were the most prevalent form of depositary receipts, the number of GDRs has recently surpassed ADRs because of the lower expense and time savings in issuing GDRs, especially on the London and Luxembourg stock exchanges.

Source: JP Morgan
The Global Depositary Receipt as a Financial Instrument
A GDR is issued and administered by a depositary bank for the corporate issuer. The depositary bank is usually located, or has branches, in the countries in which the GDR will be traded. The largest depositary banks in the United States are JP Morgan, the Bank of New York Mellon, and Citibank. A GDR is based on a Deposit Agreement between the depositary bank and the corporate issuer, and specifies the duties and rights of each party, both to the other party and to the investors. Provisions include setting record dates, voting the issuers underlying shares, depositing the issuers shares in the custodian bank, the sharing of fees, and the execution and delivery or the transfer and the surrender of the GDR shares. A separate custodian bank holds the company shares that underlie the GDR. The depositary bank buys the company shares and deposits the shares in the custodian bank, then issues the GDRs representing an ownership interest in the shares. The DR shares actually bought or sold are called depositary shares. The custodian bank is located in the home country of the issuer and holds the underlying corporate shares of the GDR for safekeeping. The custodian bank is generally selected by the depositary bank rather than the issuer, and collects and remits dividends and forwards notices received from the issuer to the depositary bank, which then sends them to the GDR holders. The custodian bank also increases or decreases the number of company shares held per instructions from the depositary bank.

The voting provisions in most deposit agreements stipulate that the depositary bank will vote the shares of a GDR holder according to his instructions; otherwise, without instructions, the depositary bank will not vote the shares.

GDR Advantages and Disadvantages

GDRs, like ADRs, allow investors to invest in foreign companies without worrying about foreign trading practices, different laws, accounting rules, or cross-border transactions. GDRs offer most of the same corporate rights, especially voting rights, to the holders of GDRs that investors of the underlying securities enjoy. Other benefits include easier trading, the payment of dividends in the GDR currency, which is usually the United States dollar (USD), and corporate notifications, such as shareholders meetings and rights offerings, are in English. Another major benefit to GDRs is that institutional investors can buy them, even when they may be restricted by law or investment objective from buying shares of foreign companies. GDRs also overcome limits on restrictions on foreign ownership or the movement of capital that may be imposed by the country of the corporate issuer, avoids risky settlement procedures, and eliminates local or transfer taxes that would otherwise be due if the companys shares were bought or sold directly. There are also no foreign custody fees, which can range from 10 to 35 basis points per year for foreign stock bought directly. GDRs are liquid because the supply and demand can be regulated by creating or canceling GDR shares. GDRs do, however, have foreign exchange risk if the currency of the issuer is different from the currency of the GDR, which is usually USD. The main benefit to GDR issuance to the company is increased visibility in the target markets, which usually garners increased research coverage in the new markets; a larger and more diverse shareholder base; and the ability to raise more capital in international markets.

GDR Market
As derivatives, depositary receipts can be created or canceled depending on supply and demand. When shares are created, more corporate stock of the issuer is purchased and placed in the custodian bank in the account of the depositary bank, which then issues new GDRs based on the newly acquired shares. When shares are canceled, the investor turns in the shares to the depositary bank, which then cancels the GDRs and instructs the custodian bank to transfer the shares to the GDR investor. The ability to create or cancel depositary shares keeps the depositary share price in line with the corporate stock price, since any differences will be eliminated through arbitrage. The price of a GDR primarily depends on its depositary ratio (aka DR ratio), which is the number of GDRs to the underlying shares, which can range widely depending on how the GDR is priced in relation to the underlying shares; 1 GDR may represent an ownership interest in many shares of corporate stock or fractional shares, depending on whether the GDR is priced higher or lower than corporate shares.

Most GDRs are priced so that they are competitive with shares of like companies trading on the same exchanges as the GDRs. Typically, GDR prices range from $7 - $20. If the GDR price moves too far from the optimum range, more GDRs will either be created or canceled to bring the GDR price back within the optimum range determined by the depositary bank. Hence, more GDRs will be created to meet increasing demand or more will be canceled if demand is lacking or the price of the underlying company shares rises significantly. Most of the factors governing GDR prices are the same that affects stocks: company fundamentals and track record, relative valuations and analysts recommendations, and market conditions. The international status of the company is also a major factor. On most exchanges, GDRs trade just like stocks, and also have a T+3 settlement time in most jurisdictions, where a trade must be settled within 3 business days of the trading exchange. The exchanges on which the GDR trades are chosen by the company. Currently, the stock exchanges trading GDRs are the:

1. 2. 3. 4. 5.

London Stock Exchange Luxembourg Stock Exchange NASDAQ Dubai Singapore Stock Exchange Hong Kong Stock Exchange

Companies choose a particular exchange because it feels the investors of the exchanges country know the company better, because the country has a larger investor base for international issues, or because the companys peers are represented on the exchange. Most GDRs trade on the London or Luxembourg exchanges because they were the 1st to list GDRs and because it is cheaper and faster to issue a GDR for those exchanges. Many GDR issuers also issue privately placed ADRs to tap institutional investors in the United States. The market for a GDR program is broadened by including a 144A private placement offering to Qualified Institutional Investors in the United States. An offering based on SEC Rule 144A eliminates the need to register the offering under United States security laws, thus saving both time and expense. However, a 144A offering must, under Rule 12g32(b), provide a home country disclosure in English to the SEC or the information must be posted on the companys website.

The Details of a GDR Purchase by An Investor 1. An investor calls her broker to buy GDRs for a particular company. 2. The broker fills the order by either buying the GDRs on any of the exchanges that it trades, or by buying ordinary company shares in the home market of the company by using a broker in the issuer's country. The foreign broker then delivers the shares to the custodian bank. 3. The investors broker notifies the depositary bank that ordinary shares have been purchased in the issuer's market and will be delivered to the

custodian bank and requests depositary shares to be issued in the investors account. 4. The custodian notifies the depositary bank that the shares have been credited to the depositary banks account. 5. The depositary bank notifies the investors broker that the GDRs have been delivered. 6. The broker then debits the account of the investor for the GDR issuance fee. The Details of a GDR Sale by an Investor 1. An investor instructs his broker to sell his GDRs. The investor must deliver the shares within 3 business days if the shares are not in the street name of the broker. 2. The broker can either sell the shares on the exchanges where the GDR trades, or the GDRs can be canceled, and converted into the ordinary shares of the issuing company. 3. If the broker sells the shares on an exchange, then the broker uses the services of a broker in the issuer's market. 4. If, instead, the shares are canceled, then the broker will deliver the shares to the depositary bank for cancellation and provide instructions for the delivery of the ordinary shares of the company issuer. The investor pays the cancelation fees and any other applicable fees. 5. The depositary bank instructs the custodian bank to deliver the ordinary shares to the investors broker, who then credits the account of its customer.
Technical Notes

GDRs issued by a United States depositary bank are issued pursuant to Regulation S (Reg S) of the Securities Act of 1933. A GDR certificate is not delivered to the GDR holder, but is based on a master certificate held by a Common Depositary for clearing purposes. Most depositary receipts (DRs) are held in the street name of a bank or broker in a securities depositary institution, such as the Depositary Trust Company (DTC), Euroclear, or Clearstream, which expedites the trading and settlement of DR trades for the beneficial interest of the owners. The beneficial DR owners are the owners who receive the actual benefits of holding a depositary receipt, such as the capital gains from trading shares, dividends, and voting rights. Most GDR programs require that the issuing company notify the relevant exchanges of any information that may cause the underlying shares to greatly change in price.

====================================================== Global depositary receipt (GDR)

To raise money in more than one market, some corporations use global depositary receipts (GDRs) to sell their stock on markets in countries other than the one where they have their headquarters. The GDRs are issued in the currency of the country where the stock is trading. For example, a Mexican company might offer GDRs priced in pounds in London and in yen in Tokyo. Individual investors in the countries where the GDRs are issued buy them to diversify into international markets. GDRs let you do this without having to deal with currency conversion and other complications of overseas investing. However, since GDRs are frequently offered by newer or less-known companies, the prices are often volatile and the stocks may be thinly traded. That makes buying GDRs riskier than buying domestic stocks.