an overview of
DESCRIPTION
An Overview of. DEPOSITORY RECEIPTS. 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 - PowerPoint PPT PresentationTRANSCRIPT
An Overview of...
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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
GlossaryBy Amardeep [email protected]
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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
64%45%
36%55%
2002-2004 2005-2007
ADR GDR
Capital Raising by 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.
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Level I ADR Over-the-Counter (OTC) Traded
Level I GDR Unlisted
Level II ADRU.S. Listed
Level II GDRInternationally Listed
Level III ADRU.S. Listed
Level III GDRInternationally Listed
Selling New Shares(Capital Raising Transactions)
Existing Shares Only(Non-Capital Raising Transactions)
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
Issuer
Levels of DR
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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
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
Types of DRs
Sponsored DRs Unsponsored DRs
Types of Depository Receipts
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Benefits of Depository Receipts
Benefits to IssuerBenefits 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 InvestorsBenefits 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
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
Issuer
Depository
Legal Counsel
I-Banks/UnderwritersCustodian
Accountants
Investor Relation
Firm
PARTIESINVOLVED
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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 programOngoing… 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 marketOngoing… 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
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
Legal Counsel
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 co-underwriters
Ongoing… Cover issuer through research
reports/ promote DRs to investors Advise on road shows, invest or
meetings, investors to target
I-Banks / Underwriters
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Roles & Responsibilities of Parties Involved … cont’d
At the time of offering… Receive local shares in issuer’s
home country and confirm receiptOngoing… Hold shares in custody for the
account of depositary Receive and deliver shares in
accordance with depositary’s instructions
Custodian
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
Investor Relation Firm
At the time of offering… Prepare company’s accounts for
insertion into the prospectus Review prospectus and interact
with authoritiesOngoing… Audit and prepare accounts
Accountants
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DR Issuance Process
DR Broker
Depository
Local Broker
Local Custodian
Investor
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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.To issue new DRs, the broker contacts a local broker in the issuer’s home market.The local broker purchases ordinary shares on an exchange in the local market.Ordinary shares are deposited with a local custodian.The local custodian instructs the depositary to issue DRs that represent the shares received.The depositary issues DRs and delivers them in physical form or book entry form.The broker delivers DRs to the investor or credits the investor’s account.
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DR Cancellation Process
DR Broker
Local Broker
Depository
Local Custodian
Investor
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The investor instructs the broker to cancel DRs.
The broker delivers the DRs to the depositary for cancellation.
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.
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.
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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(Primary & Follow-on Offerings; $bn)
DR Capital Raising(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 $1.15 billion in May 2008. This was also the first DR program from Kuwait.
Issuer Country Exchange Date Value
($ mn)IPO or
Secondary Offering
Barclays Bank plc 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
Top 5 DR Capital Raising (H1-2008)
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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(As on Mar 31, 2008; $bn)
Value of Outstanding DRs – By Region(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)
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Glossary
Block ListingBlock 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 ShowRoad 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 FishingPilot 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/StabilizationGreen-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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