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Chapter 9
DepositoriesIbrahim Sameer (MBA - Specialized in Finance,
B.Com – Specialized in Accounting & Marketing)
www.ibrahimsameer.wordpress.com
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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.
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Types of Depository Receipt
Global Depository
ReceiptAmerican Depository
Receipt
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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.
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Global Depository Receipt (GDR)
– Process of Issue
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Advantages of Global Depository
Receipt (GDR)• Less workload: because all the work is carried out
by overseas depository bank.
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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.
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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.
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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.
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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.
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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.
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American Depository Receipt
(ADR)• The process of ADR is same as GDR.
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Types of American Depository
Receipt (ADR)
Types of ADR
Sponsored ADR
Restricted ADR
Unrestricted ADR
1st Level ADR2nd Level
ADR3rd Level
ADR
Unsponsored ADR
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Sponsored ADR
• In sponsored ADR there will be formal agreement
between issuing company (Dhiraagu) and
American Depository Bank (Citibank).
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Sponsored ADR
• Sponsored ADR divided into two parts that is
restricted ADR and unrestricted ADR.
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Restricted ADR
• In restricted ADR; American Depository Bank will
call selected investors and sell securities to them.
Its like private placement.
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Unrestricted ADR
• In unrestricted ADR; American Depository Bank
will sell shares to whole general public who like
to invest in the company (Dhiraagu).
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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.
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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).
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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What else you want to know?
Questions & Answers
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Thank You
Ibrahim SameerSeek knowledge from cradle to grave