DR Overview - Depository Receipts

Depositary Receipts (DRs) are an important element in the process of securities market integration. They permit investors to acquire and trade in foreign securities, while at the same time giving the issuing companies access to the major international markets. The most commonly used DR instruments are American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), and European Depositary Receipts (EDRs). Penn Capital Canada (PCC) has been introducing its DR products with J.P. Morgan, Deutsche Bank in Korean Market since the year 2000. A full-service corporate securities consulting firm has designed a strategic program that offers its clients the ability to capitalize on the benefits of DR instruments. Foreign companies, which are publicly trading overseas and seek access to U.S. or international capital markets, can employ the services of PCC to get the company listed and trading on U.S. or European equities markets. The unique structure of the PCC's DR program and thorough expertise in securities consulting allow PCC to provide a complete service package in a timely and efficient manner and at a fraction of the cost of alternative programs. How do DRs work? If an investor wishes to purchase shares in a foreign company, he can either buy the foreign shares in the local market through a broker in that country or, providing the foreign company in question has a DR program, the investor can request his broker to buy DRs. The broker may either purchase existing DRs or, if none are available, he may arrange for a depositary bank to issue new ones. The process for issuing new DRs is very simple. The investor's broker contacts a broker in the issuing company's home market and acquires shares in that company. These shares are then deposited with the depositary bank's local custodian. Upon confirmation that the custodian has received the shares, the depositary issues the requisite number of DRs to the investor via the broker. In some exceptional cases, DR programs may not provide for issuance of new DRs (e.g. Indian GDR programs) because of local regulations. DRs can be sold in DR form, in which case they trade and settle like other U.S. or Euro securities. They can also, however, be cancelled. In this case the broker acting on behalf of the owner of the DRs will request the depositary bank to cancel the DRs and release the underlying shares to a domestic broker in the issuing company's home market. The domestic broker will then sell the shares locally and the proceeds will be remitted to the investor who cancelled those DRs. DRs certify that a stated number of underlying shares have been deposited with the depositary's custodian in the foreign country. DR holders are entitled to all the dividends payable on the underlying foreign shares and, furthermore, to have these paid in the currency in which the DRs are denominated - usually U.S. dollars. The DRs may be bought or sold through investors' own brokers, and they clear and settle through a Depositary Trust Company (DTC) for ADRs, through Euroclear and Cedel for EDRs and through all three (and possibly other clearing systems) in the case of GDRs, depending on which markets they trade. Shareholder information such as annual reports, notices of general meetings and corporate actions, and official news releases are provided by the issuer to the depositary and to the receipt holders, either direct or through the local custodian. The investor is thus spared the costs and difficulties often encountered when direct investment is made in local markets, where currency, settlement, and linguistic problems may be compounded by an excessive number of intermediaries. What is ADR? ADRs are U.S. dollar denominated negotiable instruments issued in the U.S. by a depositary bank, representing ownership in non-U.S. securities, usually referred to as the underlying ordinary shares. ADRs enable U.S. investors to acquire and trade non-U.S. securities denominated in U.S. dollars without concern for the differing settlement timetables and the problems typically associated with overseas markets. They also provide non-U.S. companies with access to the U.S. capital markets, the largest domestic investor base in the world. There are several types of ADR, each of which involves a different level of disclosure of information and compliance with the regulations of the SEC. But perhaps the most important distinction for issuers of ADRs is that some structures allow the company to raise capital in the U.S., while others simply provide a mechanism which makes it easy for U.S. investors to buy and trade existing shares. There are 4 different levels of ADR :
Level I is exempt from full compliance with the SEC's reporting requirements and cannot be listed on the national exchanges or NASDAQ.
Level II should be in full compliance with the SEC's registration, disclosure and reporting requirements, which allows ADR's to be listed on NYSE, AMEX, NASDAQ, or NASD OTC but this type of ADR cannot be used to raise capital through a public offering in US.
Level III has the same requirements and privileges as Level II plus it is allowed to raise capital through a public offering provided that the issuer submits appropriate information to the SEC. Rule 144(A) is a restricted ADR which is not required to comply with the full SEC's registration and reporting requirements, and is used for private placement to qualified institutional buyers. What are GDR and EDR? In the last few years, the depositary receipt concept has developed considerably. Issuers in a variety of countries have realized that there are advantages in making their stock available in a form convenient not only to U.S. investors but also, or alternatively, to investors in the Euro-markets or elsewhere. This has prompted the development of European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs). The EDR accesses the Euromarkets but not the U.S. market. It settles and trades through the Euromarket clearing systems, Euroclear and Cedel, and may be listed on a European Stock Exchange, normally London or Luxembourg. A GDR will access two or more markets, usually the Euromarkets (like an EDR) and the U.S. (like an ADR). GDRs are often launched for capital raising purposes, so the U.S. element is generally either a Rule 144(a) ADR or a Level III ADR, depending on whether the issuer aims to tap the private placement or public U.S. markets. However, non-capital raising unsponsored and Level I ADR are also available. EDRs and GDRs are generally denominated in U.S. dollars, but may be denominated in any currency. They represent the underlying shares in exactly the same way as ADRs, and make it possible for foreign investors to trade in the issuing company's stock without the problems associated with custody and settlement in foreign markets.