Download What is a Depository Receipt…?

An Overview of...
Agenda
What is a Depository Receipt (DR)…?
DR Structure
Levels of DR
Types of DR
Benefits of DR
Parties Involved in a DR Program
DR Issuance & Cancellation Process
Concept of DR Ratio
Payment of Dividends and Voting
UKLA Listing Requirements
Contents of Prospectus
DR Market Highlights
Glossary
By Amardeep Singh
9711071834
[email protected]
Page 2
What is a Depository Receipt…?
A Depositary Receipt is a negotiable security that represents an ownership interest
in securities of a foreign issuer typically trading outside its home market.
Depositary Receipts are created when a 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 the depositary bank to issue Depositary Receipts.
In addition, Depositary Receipts may also be purchased 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 and can be used to raise capital.
ADRs were the first type of depositary receipt to evolve. They were introduced in
1927 in response to a law passed in Britain, which prohibited British companies from
registering shares overseas without a British-based transfer agent.
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Depository Receipts Structure
While depositary receipt programs can be structured in a variety of ways, there are
two basic options:
American Depositary Receipt (ADR) programs, which give Non-U.S. companies
access to the US capital markets, and
Global Depositary Receipt (GDR) programs, which provide exposure to the global
markets (except U.S.) outside the issuer’s home market and the institutional investor market
in the U.S. Currently the London Stock Exchange (LSE) is most frequently utilized by GDR
issuers. Other exchanges which list GDRs include Luxembourg, Dubai International Financial
Exchange (DIFX), or the Singapore Stock Exchange.
Capital Raising by Structure
36%
55%
64%
45%
2002-2004
2005-2007
ADR
GDR
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Levels of DR
Issuer
Existing Shares Only
Selling New Shares
(Non-Capital Raising Transactions)
(Capital Raising Transactions)
Level I ADR
Over-the-Counter (OTC) Traded
Level I GDR
Unlisted
Level II ADR
U.S. Listed
Level III ADR
U.S. Listed
Level III GDR
Internationally Listed
Level II GDR
Internationally Listed
Rule 144A - Rule 144A ADR, or restricted ADR (RADR) are simply privately placed depositary
receipts which are issued and traded in accordance with Rule 144A. Under this program, DRs are
privately placed in the U.S. to Qualified Institutional Buyers (QIBs)
Regulation S – Regulation S programs provide for the placement of Depository Receipts offshore
to Non-US investors in compliance with SEC Regulation S
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Types of Depository Receipts
Types of DRs
Sponsored DRs
Issued by one depository
appointed by the company
under a Deposit Agreement
or service contract
May be issued in different
levels (level I, II or III)
Company bears all expenses
New capital may also be
raised under this option
Unsponsored DRs
Set up at the request of 3rd
party without any formal
agreement with company
Issued by one or more
depositories in response to
market demand
3rd party pays all set up and
maintenance expenses
No new capital is raised
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Benefits of Depository Receipts
Benefits to Issuer
Offer a new avenue for raising equity capital outside the issuer’s home market
Broaden and diversify a company’s investor base
Establish/increase total global issuer liquidity by attracting new investors
Enhance a company’s visibility, status and profile internationally among institutional
investors
Develop and/or increase research coverage outside the home market
Get an international valuation as the Company is valued alongside its peer group
Adjust share price levels to those of peers through DR Ratio
Facilitate M&A activity through use as acquisition currency
Expand opportunity to increase local share price as a result of global demand/trading
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Benefits of Depository Receipts ... cont’d
Benefits to Investors
Facilitate diversification into securities of foreign issuers
Represent a way to provide international exposure for institutional investors (mutual
funds, pension funds) despite restrictions against investing in certain countries or in
foreign investment instruments
Easier to purchase and to hold than the issuer’s underlying ordinary shares
Trade easily and conveniently in US dollars and settle through established
clearinghouses
Ability to acquire the underlying securities directly upon cancellation (two-way
fungibility)
Create accessibility of price, trading information and research
Provide dividend payments in US dollars and corporate action (meetings of
shareholders, rights offerings, exchange offers, tender offers, etc.) notifications in
English
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Parties Involved in a DR Program
Issuer
Investor
Relation
Firm
Depository
PARTIES
INVOLVED
Accountants
Custodian
Legal
Counsel
I-Banks/
Underwriters
Each of the above parties have various roles to play and
must coordinate with each other effectively to ensure
that the DR issue process is carried out successfully
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Roles & Responsibilities of Parties Involved
Issuer
Depository
At the time of offering…
 Prepare documentation working
with advisors
 Interact with listing authority and
respond to all questions
 IR/ PR targeted program
Ongoing…
 Provide depositary and custodian
with notices of dividends, rights
offerings and other corporate
actions, including meeting notices
 Ongoing compliance with stock
exchange and international
regulations, including disclosure
and reporting
 Execute internationally-focused
investor relations plan
 Keeps market informed of
developments through PRs
 Regular meetings with institutional
investors holding company DRs
At the time of offering…
 Provide advice/ perspective on
type of program, exchange or
market on which to list or quote
and advise on DR ratio
 Appoint custodian
 Coordinate with all parties for
timely launch
 Coordinate with legal counsel on
Deposit
 Agreement and securities law
matters, as appropriate
 Announce DR program to market
Ongoing…
 Coordinate with issuer to
announce and process corporate
actions such as dividends and
shareholders’ meetings
 Work with Issuer to maintain
active DR program
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Roles & Responsibilities of Parties Involved … cont’d
Legal Counsel
I-Banks / Underwriters
At the time of offering…
 Prepare (issuer counsel) and/or
review (depositary counsel)
offering circular and interact with
authorities
 Prepare draft deposit agreement
(depositary bank’s counsel)
 Submit requisite documents to
local regulatory authorities and
exchanges (issuer and placement
agent counsels)
Ongoing…
 Manage compliance with securities
laws, rules and regulations and
perfect any securities law
exemptions
 Provide corporate action support,
whenever required
At the time of offering…
 Advise on size, pricing and
marketing of offering, type of
program to launch and exchange
or market on which to list or
quote, and ratio of depositary
shares to ordinary shares
 Act as placement agent or
underwriter in offering
 Conduct road shows with
management/ introduce issuer to
institutional and other investors
 Line up selected dealers and counderwriters
Ongoing…
 Cover issuer through research
reports/ promote DRs to investors
 Advise on road shows, invest or
meetings, investors to target
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Roles & Responsibilities of Parties Involved … cont’d
Custodian
Investor Relation Firm
At the time of offering…
 Receive local shares in issuer’s
home country and confirm receipt
Ongoing…
 Hold shares in custody for the
account of depositary
 Receive and deliver shares in
accordance with depositary’s
instructions
At the time of offering…
 Develop long-term plan to raise
awareness of issuer’s program in
markets in which GDRs will trade
 Develop communications plan and
information materials for launch
activities (road show and
presentations to investors, launch
day promotion, meetings with
financial media)
Ongoing…
 Coordinate with issuer’s
advertising and public relations
teams on specific program plans
to support and develop company
image
 Continue to work with the issuer
to maintain visibility and invest or
knowledge in the capital markets
 Arrange regular meetings for
issuer with investors to keep them
informed of developments/ results
Accountants
At the time of offering…
 Prepare company’s accounts for
insertion into the prospectus
 Review prospectus and interact
with authorities
Ongoing…
 Audit and prepare accounts
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DR Issuance Process
1 Investor contacts broker and requests the
purchase of shares of a DR issuer company.
If existing DRs of that company are not
available, the issuance process begins.
Investor
7
1
2 To issue new DRs, the broker contacts a
local broker in the issuer’s home market.
3 The local broker purchases ordinary shares
on an exchange in the local market.
DR Broker
2
4 Ordinary shares are deposited with a local
custodian.
5 The local custodian instructs the depositary
to issue DRs that represent the shares
received.
3
Local Stock
Market
6
6 The depositary issues DRs and delivers them
in physical form or book entry form.
7 The broker delivers DRs to the investor or
credits the investor’s account.
Local Broker
4
Depository
5
Local
Custodian
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DR Cancellation Process
1 The investor instructs the broker to cancel DRs.
Investor
1
2 The broker delivers the DRs to the depositary for
cancellation.
3 The depositary cancels the DRs and instructs the
local custodian to release and deliver the underlying
shares to the seller’s broker in the issuer’s home
market.
DR Broker
2
Depository
3
4 The local custodian delivers the underlying ordinary
shares as instructed to the local broker. The local
broker safekeeps the ordinary shares or delivers
them to or on behalf of the new investor.
Local
Custodian
4
Local Broker
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Concept of DR Ratio
Each DR is backed by a specific number of an Issuer’s local shares (or a fraction
thereof). This is called the DR ratio.
The ratio is designed to set the price of each DR in a price range that is competitive
with the Issuer’s international peer group or the peer group on the exchange on
which the DR trades.
DRs are most commonly priced between $7 and $20.
The ratio of DRs to ordinary shares is usually changed if the GDR price goes well over
$20 (e.g., $50) or if it falls substantially below $7.
Changing the ratio allows the Company to keep its DR price in line with its peers and
maintain investor interest.
Note: In case the DR ratio is unity, then the depository receipts are also referred to as
depository shares
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Payment of Dividends
The issuing company intimates the depository when the dividend record and payment
dates for the underlying shares is established.
The Depositary will:
Set a DR record date & payment date, and communicate these dates to markets.
Announce preliminary (estimated) dividend payment rates based upon the
exchange rate between the domestic currency and the currency of DR on the
date of the announcement.
On the dividend payment date in the home market, the custodian receives the
dividend owed on the underlying shares. The depositary will then arrange for the
dividend received to be converted from domestic currency into currency of DR.
Distribute the net dividend amount, net of any required tax withholding and any
fees, to the DR holders entitled thereto.
As the DR investor carries the foreign currency risk, the amount of the dividend will
affected by any movement of the currency of DR against the home market currency.
In case of a stock dividend, additional DRs are distributed to DR holders.
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Voting at Shareholders’ Meeting by DR Holders
DR holders have no direct voting rights on the shares underlying the DRs.
In case the issuer gives its DR holders the right to vote in shareholders’ meeting, it
instructs the depository to initiate the DR proxy process.
Depository (complying with the applicable legal provisions) establishes the record
date, mailing date, and voting cut-off date.
Depository informs key dates to issuer and local custodian bank (LCB).
Issuer provides depository with draft of agenda items & company notice.
Depository provides draft of depository notice of meeting and voting card to issuing
company for review. Upon approval, depository arranges for final voting packages to
be prepared and mailed to DR holders.
DR holders review the voting materials & submit their votes to depository.
Depository tabulates the DR holders’ votes & sends to issuer and LCB.
LCB forwards the results to the company’s registrar, or attends the shareholders’
meeting to vote accordingly.
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UKLA Listing Requirements*
Transferability of the Underlying Shares & GDRs: The shares underlying the
GDRs as well as GDRs itself must be freely transferable, fully paid and free from
any liens & restrictions on transfer.
Free float requirement: 25% of the GDRs must be in public hands. This 25%
should not include any investor taking more than 5%.
Admission to trading on a Recognized Stock Exchange.
Market capitalization: The expected aggregate market value of all GDRs to be
listed must be at least £700,000. The FSA may modify this rule to admit shares of a
lower value if it is satisfied there will be an adequate market for the securities
concerned.
Continuing obligations: Various ongoing obligations on the part of issuing company
include:
Publication of an annual financial report within four months of its year end.
Publication of price sensitive information to enable investors to trade in a
knowledgeable manner.
* These are specifically applicable to companies seeking to list its GDRs on LSE
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Contents of Prospectus
A prospectus is the company’s information and sales document which enables market
participants to create opinions and decide whether to participate in the offering.
A DR prospectus must include the necessary information that enables investors to
make an informed assessment of
the assets and liabilities, financial position, profits and losses and prospects of
the Company and,
the rights attached to the DRs.
An operating and financial review, audited financial information for the last three
financial years or such shorter period as the Company has been in operation. In case
the prospectus is more than nine months after the end of last financial year,
unaudited half year accounts will also be included.
The prospectus also requires details of any material contracts.
Prospectus should also include a summary describing the Company that includes any
risks associated with investing in the Company.
* The above provisions pertain to GDR listing on LSE
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DR Capital Raising
Capital raisings globally were down in the first half of 2008 as over 177 deals were
postponed, due to market conditions, according to E&Y.
In the DR sphere, the first six months of the year saw 34 initial and follow-on DR
offerings raising nearly $9.2 billion.
Majority of the DRs issued during H1-2008 were listed on NYSE and LSE accounting
for around 45% and 40% respectively.
Annual DR Capital Raising
DR Capital Raising
(Primary & Follow-on Offerings; $bn)
(By Exchange; H1-2008; $mn)
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Top 5 DR Capital Raising in H1-2008
Barclays Bank came out with a follow-on offering of $2.65 billion in April 2008
recording the largest amount raised worldwide in the H1-2008
From the Gulf region, GIH came out with the largest DR offering ever from the Middle
East raising $1.15 billion in May 2008. This was also the first DR program from
Kuwait.
Top 5 DR Capital Raising (H1-2008)
Country
Exchange
Date
Value
($ mn)
IPO or
Secondary
Offering
U.K.
NYSE
11-Apr-08
2,650
Sec
Global Investment House
Kuwait
LSE
21-May-08
1,150
IPO
Commercial Bank of Qatar
Qatar
LSE
26-Jun-08
691
IPO
National Bank of Greece
Greece
NYSE
06-Jun-08
625
Sec
GlobalTrans Investment PLC
Russia
LSE
08-May-08
494
IPO
Issuer
Barclays Bank plc
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Value of Outstanding DRs
The total value of investment in DRs increased more than 35% year-on-year and
exceeded $1.8 trillion at the end of the first quarter of 2008, an all-time high.
Investment in U.S.-listed DRs totaled more than $1.2 trillion on March 31, 2008, a
jump of 36% from the same time last year.
In terms of region, Western Europe companies accounted for the largest share of DR
value outstanding (~39%).
Value of Outstanding DRs – By Market
Value of Outstanding DRs – By Region
(As on Mar 31, 2008; $bn)
(As on Mar 31, 2008; $bn)
* DR value outstanding is defined as DRs outstanding multiplied by DR price
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DR Trading Value
Over $2.4 trillion of DRs traded on U.S. and non-U.S. markets and exchanges during
H1-2008, up 85% year-on-year, setting a new record.
The major U.S. exchanges (NYSE, NASDAQ and AMEX) were the largest markets for
DR trading, comprising 86% of all DR trading value worldwide.
China, representing a 253% growth from mid-year 2007, stood as the top-most
country with $530 billion in DR trading value.
China, Brazil and Russia, together, accounted for over 50% of total DR trading value
in the first half of 2008.
DR Trading Value
(By Exchange or Market; H1-2008; $bn)
Page 23
Glossary
Block Listing - The number of shares “listed” when the GDRs are admitted to the
LSE is the maximum number that can be issued without approval and publication of
another prospectus.
Road Show – A series of meetings with potential investors and brokers, conducted
by a company and its underwriter, prior to a securities offering. It is intended to
create interest in the securities. Also known as a "dog and pony show“.
Pilot Fishing – A type of pre-marketing of an offering that involves testing
investor sentiment to receive feedback on how the market may respond to an issue
Green-Shoe/Stabilization
-
A
provision
contained
in
an
underwriting
agreement that gives the underwriter the right to sell investors more shares than
originally planned by the issuer. This would normally be done if the demand for a
security issue proves higher than expected. Legally referred to as an over-allotment
option.
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