ADR vs GDR

American Depositary Receipts (ADRs) enable US investors to acquire and trade non-US securities denominated in US dollars. They can be listed on a major US Stock Exchange. A capital raising ADR requires the issuer to submit a Form F-1 to the SEC. They are usually listed on one of the major US exchanges, which enhances the issuer's name recognition in the US. SEC reporting is required

Global Depositary Receipts (GDRs) give access to two or more markets, most frequently the US market and the Euromarkets, with one fungible security. GDRs are most commonly used when the issuer is raising capital in the local market as well as in the international and US markets, either through private placement or public offerings. The Euromarket component is often listed on a major European exchange. The US component of a GDR is normally structured either as a Level III ADR with full disclosure and reporting to the SEC, or privately placed under Rule 144(a), in which case full compliance with the SEC's onerous reporting and registration requirements is avoided.

What is the difference between a Level I, Level II and Level III programme?

A Level I sponsored ADR program is the easiest and least expensive means for a company to provide for issuance of its shares in ADR form in the US. A Level I program involves the filing of an F-6 registration statement, but allows for exemption under Rule12g 3-2(b) from full SEC reporting requirements. The issuer has a certain amount of control over the ADRs issued under a sponsored Level I program, since a depositary agreement is executed between the issuer and one selected depositary bank. Level I ADRs can however only be traded over-the-counter and cannot be listed on a national exchange in the US.


A sponsored Level II ADR must comply with the SEC's full registration and reporting requirements. In addition to filing an F-6 registration statement, the issuer is also required to file SEC Form 20-F (see chapter 6 for details) and to comply with the SEC's other disclosure rules, including submission of its annual report which must be prepared in accordance with US Generally Accepted Accounting Principles (GAAP). Registration allows the issuer to list its ADRs on one of the three major national stock exchanges, namely the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), or the National Association of Securities Dealers Automated Quotation (NASDAQ) Stock Market, each of which has reporting and disclosure requirements. Level II sponsored programs are initiated by non-US companies to give US investors access to their stock in the US. As with a Level I program, a depositary agreement is signed between the issuer and a depositary bank.

Level III sponsored ADRs are similar to Level II ADRs in that the issuer initiates the program, deals with one depositary bank, lists on one of the major US exchanges, and files Form F-6 and 20-F registration statements with the SEC. The major difference is that a Level III program allows the issuer to raise capital through a public offering of ADRs in the US and this requires the issuer to submit a Form F-1 to the SEC.

Form 13F is the reporting form filed by institutional investment managers pursuant to Section 13(f) of the Securities Exchange Act of 1934. Congress passed Section 13(f) of the Securities Exchange Act in 1975 in order to increase the public availability of information regarding the securities holdings of institutional investors. Institutional investment managers that use the United States mail (or other means or instrumentality of interstate commerce) in the course of their business and that exercise investment discretion over $100 million or more in Section 13(f) securities must file Form 13F. They must file no later than 45 days after the end of the March, June, September, and December quarters.

Reg S & 144A

As we discussed, the US SEC 144A and REG S restrictions are related to markets in the US. 144A is restricted to QIBs (Qualified Institutional Buyers) in the US and REG S cannot be held by holders in the US. The GDR would indicate a foreign issuer established for multiple listings in and outside of the US. Since the instrument was registered and issued in the US it has a US isin and all the applicable restrictions are associated with each listing (which is why we saw 144A on listings in London, Germany, etc). The ADR would only be listed in the US. This holds true with what we saw in the data selection from Bloomberg. Association of the trading place country with the 144A does not appear valid under this scenario. Association of the trading place country for REG S may help indicate where listings are being marketed that cannot be sold to a US investor but it's not clear what the value of that would be. Joe's point about the importance of the country of risk relevent

> to the issuer of the underlying equity seems to be the most valuable piece of information in both of these scenarios.

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> Going back to the initial purpose of this CR - it seemed unusual that there was an association being created between the trading place country and the 144A restriction which is why it was requesting that the country only be associated with US listings (or if you must associate a country that it would be the US for all 144A/REG S restrictions). I think that logic still holds true. REG S is a little more of a gray area but I would still associate it as a restriction imposed by the US SEC and not a foreign country.

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> I will pend this CR for future use of the customized mapper function in 7.2 since Golden Source wants to continue the practice in their standard module of associating the trading place country with the 144A/REG S restriction. I recommend that Golden Source review their practice again however and possibly reconsider changing this mapping.

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> Regulation S and Rule 144A are sections of the US Securities Act of 1933 governing an offer or sale of securities by a non-US issuer.

> As a general rule, securities of a non-US company may only be offered for sale within the United States pursuant to the registration of those securities with the US Securities and Exchange Commission or pursuant to an exemption from registration. An exempt offering of securities of an non-US issuer into the United States may be effected under Rule 144A (a "restricted" offering). A restricted offering into the States is often combined with an unrestricted placement of securities offshore (i.e. outside of the US) under the provisions of Regulation S.

> In summary, the difference between Reg S and 144A is that 144A can only be held by Qualified Institutional Buyers (QIBs) in the US. Reg S can be held by holders in the rest of the world outside the US. They are therefore usually referred to as the US and European portions of a GDR.

> To give more detail, non-US issuers can apply for an exemption from the Securities Act 1933 under Rule 144A. This means the stock can only be held by QIBs. The definition of a QIB is an institution that owns at least $100 million in specified types of securities or a dealer that owns at least $10 million. The idea behind this is that these types of investors are sufficiently knowledgeable not to require certain protections provided by the Securities Act, and therefore the issuer does not need to comply with certain Securities & Exchange Commission reporting requirements. Basically, a QIB should know what it is doing and therefore shouldn't need as much SEC protection.

> Regulation S of the Securities Act 1933 is applicable to transactions outside the US (Offshore Offerings"). They are prohibited from being sold in the US and cannot be integrated with the 144A offering. Again, it exempts the issuer from certain SEC reporting requirements.

> DR programmes are either "sponsored" by an issuing company or "unsponsored". If a company sponsors a DR programme, it enters into a contractual agreement with the depositary bank (and, in the case of an American Depositary Receipt programme governed by US-law, also with the holders of the ADRs). This contractual agreement is known as the "deposit agreement" (see further, below).

> A DR programme may also be "unsponsored", meaning that it is set up without the company's participation or even its consent. A depositary will typically establish an unsponsored DR programme only if it believes that there is sufficient interest in the company's shares to generate adequate fee income, or if a broker-dealer has requested such a programme and agreed to assist with the expense.

> While unsponsored DRs are issued without its co-operation, the foreign issuer must be a reporting company under the US Exchange Act of 1934 or have obtained an exemption under Rule 12g3-2(b) from the reporting requirements of that Act. Typically, the Depositary will request a letter of non-objection from the issuer before establishing the programme. Furthermore, the SEC staff takes the position that an unsponsored programme may not coexist with a sponsored programme for the same securities because of resulting market disorder.

> Regardless of the type of depositary receipt programme an issuer chooses to adopt, the Deposit Agreement is a common element to all sponsored DR transactions.

> The Deposit Agreement sets out the rights and obligations of the Company, the Depositary and the DR holders with respect to the creation and maintenance of the deposit facility. It covers such matters as the issuance of DRs upon deposit of shares (and the withdrawal of underlying shares upon presentation of DRs), the treatment of dividends and other distributions, the procedure for voting the underlying shares, and how the deposit agreement can be amended or terminated. Generally, the Company agrees to indemnify the Depositary for liabilities arising in connection with the programme. The Deposit Agreement also specifies the fees the Depositary will charge DR holders.

> Typical Contents of the Deposit Agreement:

> Form of GDRs

> Historically, DRs have been issued in definitive or bearer form with coupons attached but owing to increased market dematerialisation now issued in registered for. There are various deposit structures available for international securities such as DRs to be held in the [European and US] clearing systems. In particular there are several "dual tranche" structures available for GDRs which are offered simultaneously across several markets inside and outside the US.

> The Deposit Agreement will specify which form of deposit structure will be employed. In a global depositary receipt programme, the receipts will invariably be issued in a global form and evidenced by a Regulation S (or "European" or "International") Master GDR and a Rule 144A (or "American") Master GDR. Regulation S offered to non-US investors, Rule 144A to QIBs. The two Global Master Notes may either, singularly or together, be deposited with, and held in a common nominee name for, a common depositary for Euroclear and Clearstream or registered in the name of, and held by a custodian for, the Depositary Trust Company.

> In a global depositary receipt programme, the Regulation S DRs are centralised within Euroclear System and Clearstream, the two International Central Securities Depositories ("ICSDs"). The Common Depositary, which may also be the depositary bank, holds the depositary receipts on behalf of the ICSDs. The Common Depository may also act as the Custodian for the Depositary Trust Company ("DTC"), holding the securities representing the interests of the DTC members. In such a case, the Common Depositary acts as agent to execute transfers between ICSD participants and DTC members.