chapter 9 depositories - wordpress.com · 2017-10-29 · advantages of global depository receipt...

Chapter 9

DepositoriesIbrahim Sameer (MBA - Specialized in Finance,

B.Com – Specialized in Accounting & Marketing)

www.ibrahimsameer.wordpress.com

Introduction

• A depositary receipt (DR) is a type of negotiable

(transferable) financial security that is traded on a

local stock exchange but represents a security,

usually in the form of equity, that is issued by a

foreign publicly listed company. The DR, which is a

physical certificate, allows investors to hold shares

in equity of other countries.

Types of Depository Receipt

Global Depository

ReceiptAmerican Depository

Receipt

Global Depository Receipt (GDR)

• A global depositary receipt (GDR) is a bank

certificate issued in more than one country for

shares in a foreign company.

Global Depository Receipt (GDR)

– Process of Issue

Advantages of Global Depository

Receipt (GDR)• Less workload: because all the work is carried out

by overseas depository bank.

Advantages of Global Depository

Receipt (GDR)• GDR fetch high premium: if the foreign country

customer purchasing power is high then issuing

company can charge high premium from them.

Advantages of Global Depository

Receipt (GDR)• Broder the market share: not only Dhiraague is

issuing shares in Maldives it also issue shares to

Japan, UK, India hence company is broadening its

market share in different part of the world.

Advantages of Global Depository

Receipt (GDR)• Creating Goodwill & Its Product Image: due to

the global presence in the around the globe leads

more people know about Dhiraague hence their

reputation goes up.

Disadvantages of Global

Depository Receipt (GDR)• Issuing Company has no Control: because

share issues are done by overseas depository

bank hence Dhiraague has no control over

managing the share issue.

Disadvantages of Global

Depository Receipt (GDR)• EPS will suffer: what is EPS that is total earnings

divided by number of shares. So when Dhiraagu

issue more shares it means now there will be more

number of shares hence it effect EPS of the

company.

American Depository Receipt

(ADR)• The process of ADR is same as GDR.

Types of American Depository

Receipt (ADR)

Types of ADR

Sponsored ADR

Restricted ADR

Unrestricted ADR

1st Level ADR2nd Level

ADR3rd Level

ADR

Unsponsored ADR

Sponsored ADR

• In sponsored ADR there will be formal agreement

between issuing company (Dhiraagu) and

American Depository Bank (Citibank).

Sponsored ADR

• Sponsored ADR divided into two parts that is

restricted ADR and unrestricted ADR.

Restricted ADR

• In restricted ADR; American Depository Bank will

call selected investors and sell securities to them.

Its like private placement.

Unrestricted ADR

• In unrestricted ADR; American Depository Bank

will sell shares to whole general public who like

to invest in the company (Dhiraagu).

1st Level, 2nd Level & 3rd Level

• In America stock exchange is regulated by

Security Exchange Commission (SEC).

ADR Level Restriction

1st Level Restriction impose by SEC is

low.

2nd Level Restriction impose by SEC is

moderate.

3rd Level Restriction impose by SEC is

stringent.

1st Level ADR

• This is the most basic type of ADR where foreign

companies either don't qualify or don't wish to

have their ADR listed on an exchange. Level 1

ADRs are found on the over-the-counter market

and are an easy and inexpensive way to gauge

interest for its securities in North America. Level 1

ADRs also have the loosest requirements from

the Securities and Exchange Commission (SEC).

2nd Level ADR

• This type of ADR is listed on an exchange or

quoted on NASDAQ (National Association of

Securities Dealers Automated Quotations).

Level 2 ADRs have slightly more requirements

from the SEC, but they also get higher visibility

trading volume.

3rd Level ADR

• The most prestigious of the three, this is when an

issuer floats a public offering of ADRs on a U.S.

exchange. Level 3 ADRs are able to raise capital

and gain substantial visibility in the U.S. financial

markets.

Unsponsored ADR

• In unsponsored ADR there will not be formal

agreement between issuing company (Dhiraagu)

and American Depository Bank (Citibank).

• Practically there is no unsponsored ADR because

if there is no formal agreement USA will not give

permission to sell securities in America.

What is Over the Counter (OTC)

• An OTC security is traded through a dealer

network rather than through a centralized,

formal exchange (such as the NYSE, Nasdaq, or

London Stock Exchange). Assets traded OTC are

usually traded by private securities dealers who

negotiate directly with buyers and sellers.

How Does OTC Work?

• The primary reason a stock is traded "over the

counter" is because the company may be too

small to meet the formal exchange listing

requirements. OTC stocks may be referred to as

"unlisted stocks" because they are traded

privately through broker-dealers over the phone

and computer networks.

How Does OTC Work?

• Instead of being listed on the NYSE or another

formal exchange, OTC stocks are usually listed

in the Over the Counter Bulletin Board

(OTCBB) and/or on pink sheets. OTC stocks can

sometimes be purchased through an online

broker.

How Does OTC Work?

• Bonds are considered OTC because they are not

traded on a formal exchange. To trade a bond, an

investor must call the investment bank that the

bond is traded through and ask for rates to perform

the over the counter exchange.

Why OTC Matters?

• OTC securities are important because they offer

investors alternatives to just investing in the

listed companies on the NYSE and Nasdaq. It also

gives investors an great opportunity to invest in

stocks of small and/or overlooked companies that

have plenty of growth potential.

Why OTC Matters?

• Because most are not required to report to the

SEC, many OTC stocks are either penny stocks or

are offered by companies with bad credit records.

But not all listed OTC traded companies have

bad credit ratings; many companies simply don't

want to participate in the expensive reporting

process. Because they are less highly

regulated, potential investors should do a lot of

research before diving into this type of asset.

What else you want to know?

Questions & Answers

Thank You

Ibrahim SameerSeek knowledge from cradle to grave