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Depositary Receipts (DRs) and American Depositary Receipts (ADRs)

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Depositary Receipts and American Depositary receipts are a means for non-US companies to raise their profile with foreign investors, make their shares more easily available to them and raise new capital outside the domestic market, especially in the United States. 

FC Global Strategies, in association with World Connections Capital provides advisory services for non-US companies who desire ADR programs in the US. Services include identifying and negotiating with an appropriate depositary bank and coordinating the entire process.

Why do investors buy ADRs or DRs?

Some of the advantages of ADRs or DRs for investors include:
  • They offer investors a convenient means of holding foreign shares.
  • They simplify the trading and settlement of foreign equities.  DRs trade and settle just like US or European securities, i.e. in US dollars with settlement in the US (DTC) or European clearing systems (Euroclear/Clearstream).
  • They may offer lower trading and custody costs when compared with shares bought directly in the foreign market.
  • DR holders can vote if the issuer wishes them to and the depositary bank may facilitate that process.
  • Many US bank and pension fund portfolios may be prohibited by their charters from purchasing foreign securities.  ADRs, however, are usually recognized as US securities.
  • ADRs, and normally GDRs too, are denominated in US dollars.  Dividend payments on the underlying shares are converted into US dollars by the depositary bank.  These features minimize foreign exchange problems for international and US investors.
What are Depositary Receipts?

Depositary Receipts (DRs), including American Depositary Receipts (ADRs), are US dollar denominated negotiable instruments issued by a depositary bank, such as Bank of New York Mellon, Deutsche Bank or Citibank, representing ownership of underlying ordinary shares on a foreign stock exchange.  

DRs can be issued in the form of American Depositary Rec
eipts (ADRs) or Global Depositary Receipts (GDRs). GDRs and ADRs are issued pursuant to the same mechanism, except that ADRs are issued into the US markets, whereas GDRs are principally issued into non-US markets. 

Both enable international investors to acquire and trade foreign securities without concern for the differing settlement timetables and other problems typically associated with investing directly in overseas markets.

DRs are typically issued, settled and cleared through the US or European settlement systems in US dollars.  In the US, settlement takes place in the US clearing system The Depository Trust Company (DTC), and in Europe, through the clearing systems Euroclear and Clearstream.
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Why do companies launch DR or ADR programs?

DR and ADR programs are becoming ever more attractive to non-US corporations, as an effective means of accessing the important US market.

They have also taken on increasing importance in cross border merger and acquisition activity.
Some of the advantages to a non-US corporation of a DR or ADR program include the following:
  • An ADR program provides a simple means of diversifying a company's shareholder base and accessing the US market.
  • It may increase the liquidity of the underlying shares of the issuer.
  • ADRs can be used as an equity financing tool in both M&A transactions.
  • An ADR program helps to increase a non-US company's visibility and name recognition in the US investor community.
  • A company may raise capital in the US market through some types of ADRs
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Types of ADR Programs
Unsponsored ADR program
An unsponsored ADR program is initiated by a depositary bank without the contractual involvement from the company.  The establishment of an unsponsored ADR program is driven by broker/investor demand.  The ADRs are traded on the over-the-counter ("OTC") market in the US.
Once the depositary bank confirms that a company meets its 12g3-2(b) requirements, the depositary bank makes an initial F-6 filing to the SEC and is classified as 'first filer'. The filing is usually mirrored by the other depositary banks in the form of 'piggy-back' filings.  All four depositary banks may establish unsponsored ADR programs for a given company.


Sponsored level I ADR program

A Level I ADR program is the simplest way for a company to sponsor an ADR facility.  The ADR program is initiated by the company and involves the filing of a F-6 registration statement, but allows for exemption under Rule 12g3-2(b) from full SEC reporting requirements. 
Level I ADRs can only be traded on the OTC market and not on a US stock exchange.


Sponsored level II ADR program

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 company is also required to file SEC Form 20-F 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 (US GAAP) or International Financial Reporting Standards (IFRS).


Buying and selling DRs and ADRs


If an investor wishes to purchase shares in a foreign company, the investor 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 or ADR program, the investor can request his/her broker to buy DRs.  The broker may either purchase existing DRs or, the broker may arrange for a depositary bank to issue new ones. 


The process for issuing new DRs is 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 corresponding number of DRs to the investor via the broker.DR holders seeking to sell their investment have two options.  They can sell their DRs, in which case they trade and settle like other US or European securities as the case may be.  Or they can cancel their DRs.  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.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 US dollars. 


The investor is thus spared some of the costs and difficulties often encountered when investing directly in local markets, including currency, settlement, and language problems.

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Registration allows the issuer to list its ADRs on a major US stock exchange, namely the New York Stock Exchange (NYSE Euronext) or NASDAQ Stock Market, each of which has further reporting and disclosure requirements.
A Level II allows the company's ADRs to have greater visibility in the US but without raising capital.


Sponsored level III ADR program

Level III sponsored ADRs are similar to Level II ADRs in that the issuer initiates the program, deals with one depositary bank, lists on a major US exchange, and fully complies with SEC reporting requirements. 
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 registration statement to the SEC.
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