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?
“a security designed to make investing
outside of one’s home country easier”
Depositary Receipt (DR)
 Three
forms
American
Depositary Receipt
(ADR)
Global Depositary Receipt
(GDR)
International Depositary Receipt
(IDR)
History of the Depositary
Receipt
Regulation on British Companies
 What did this mean for U.S. investors?
 1927:
 Selfridge
 Creation
 Primary
Stores in the U.K.
of the first ADR by JP Morgan
use of an ADR
 Use of an ADR since the 1990’s
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
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
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
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
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
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
The Formation of a Depositary Receipt
$
Foreign Stock Exchange
Foreign Company
Shares
$
Securitized (derivative)
€P
Shares
Securities Safe
New Share
ADR
P$
DR Bank
Registered?
NYSE
For trading
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
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.

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

Level 3 Sponsored
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

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

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

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

Annual DR Trading via
International Order Book
Total Sponsored DRs By
Country in 2007
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….