An Overview of Depositary Receipts

Bank of New York Mellon Depositary Receipts (DRs), which include ADRs, GDRs, Euro DRs and NYSs, are negotiable U.S. securities that generally represent a non-U.S. company's publicly traded equity. Although typically denominated in U.S. dollars, Depositary Receipts can also be denominated in Euros. Depositary Receipts can be eligible to trade on all U.S. stock exchanges as well as on many European stock exchanges. The increasing demand for Depositary Receipts is driven by the desire of individual and institutional investors to diversify their portfolios, reduce risk and invest internationally in the most efficient manner possible. While most investors recognize the benefits of global diversification, they also understand the challenges presented when investing directly in local trading markets. These obstacles can include inefficient trade settlements, uncertain custody services and costly currency conversions. Depositary Receipts overcome many of the inherent operational and custodial hurdles of international investing. In fact, cost benefits and conveniences.

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What are Depositary Receipts? Benefits to a Company Benefits to an Investor Types of Depositary Receipt Facilities Sponsored Level I Depositary Receipts Sponsored Level II and Sponsored Level III Depositary Receipts Privately Placed and Offshore (SEC Rule 144A/Reg. S) Depositary Receipts How Depositary Receipts Trade World Leader in Depositary Receipts 10. What are Depositary Receipts? What are Depositary Receipts? A Depositary Receipt is a negotiable U.S. security that generally represents a company's publicly traded equity or debt. Depositary Receipts are created when a broker purchases the non-U.S. company's shares on the home stock market and delivers those to the depositary's local custodian bank, which then instructs the depositary bank, such as The Bank of New York, to issue Depositary Receipts. In addition, Depositary Receipts may also be purchased in the U.S. secondary trading market. Depositary Receipts 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. Depositary Receipts may be more specifically called American Depositary Receipts (ADRs), Rule 144A Depositary Receipts or Global Depositary Receipts (GDRs). These names typically identify the market in which the Depositary Receipts are available: ADRs are publicly available to U.S. investors on a national stock exchange or in the over-the-counter market; Rule 144A ADRs are privately placed and resold only to Qualified Institutional Buyers (QIBs) in the U.S. QIB PORTAL market; and GDRs are generally available in one or more markets outside the foreign company's home country, although these may also be known as ADRs. Benefits to a Company Currently, there are over 2,000 Depositary Receipt programs for companies from over 70 countries. The establishment of a Depositary Receipt program offers numerous advantages to non-U.S. companies. The primary reasons to establish a Depositary Receipt program can be divided into two broad considerations: capital and commercial.

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Quotation in U.S. and non-U. Types of Depositary Receipt Facilities Depositary Receipt facilities may be unsponsored and sponsored. obstacles such as undependable settlements. Competitive U.S. unfamiliar market practices. investors aim to diversify their portfolios internationally. However. 3. Sponsored Level I Depositary Receipts A Sponsored Level I Depositary Receipt program is the simplest method for companies to access the U. Elimination of global custodian safekeeping charges. the flexibility to list on a U. Familiar trade. unreliable custody services.S. Ability to acquire the underlying securities directly upon cancellation. confusing tax conventions and internal investment policy may discourage institutions and private investors from venturing outside their local market. In addition. 4. Flexible mechanism for raising capital and a vehicle or currency for mergers and acquisitions. or European stock exchange and the ability to raise capital.S. Today. but without a formal agreement with the company. companies to invest more easily in the parent company. clearance and settlement procedures. because of the benefits of Depositary Receipt investing. dollars and payment of dividends or interest in U.S. which may increase or stabilize the share price. it is not unusual for a company with a Level I program to obtain 5 percent to 15 percent of its shareholder base in Depositary Receipt form. 2. Many well- 2 . over-thecounter (OTC) market with prices published in the Pink Sheets and on some exchanges outside the United States. Sponsored Depositary Receipts may be issued in different levels available in various trading markets and are issued by one depositary appointed by the company under a Deposit Agreement or service contract. costly currency conversions. Expanded market share through broadened and more diversified investor exposure with potentially greater liquidity. 6. capital markets. subsidiaries of non-U.S. Benefits to an Investor Increasingly. Enhanced visibility and image for the company's products. Level I Depositary Receipts are traded in the U. Depositary Receipt advantages may include: 1.S. potentially saving Depositary Receipt investors up to 10 to 40 basis points annually. a Sponsored Level I Depositary Receipt program allows companies to enjoy the benefits of a publicly traded security without changing its current reporting process. Sponsored Depositary Receipts offer control over the facility. dollars.S. 5. Unsponsored Depositary Receipts are issued by one or more depositaries in response to market demand. poor information flow. Enables employees of U. The Sponsored Level I Depositary Receipt market is the fastest growing segment of the Depositary Receipt business. unsponsored Depositary Receipts are considered obsolete and are rarely established due to lack of control over the facility and potential hidden costs. services and financial instruments in a marketplace outside its home country.Advantages may include: 1.S. Diversification without many of the obstacles that mutual funds. 2. The majority of sponsored programs are Level I facilities. dollar/foreign exchange rate conversions for dividends and other cash distributions. Essentially. 3.S. 4. Generally Accepted Accounting Principles (GAAP) or provide full Securities and Exchange Commission (SEC) disclosure. Establishment of a Level I program does not require full SEC registration and the company do not have to report its accounts under U. pension funds and other institutions may have in purchasing and holding securities outside of their local market.

Level II and Level III Depositary Receipt programs require SEC registration and adherence to applicable requirements for U. Depositary Receipts are treated in the same manner as other U. When the Depositary Receipt holder sells. the Depositary Receipt can either be sold to another U.S. investors. and other potential inconveniences associated with international securities trading.S.. Level II Depositary Receipts are exchange-listed securities but do not involve raising new capital.S.S. stock exchange (NASDAQ. securities for clearance. respectively) are used to facilitate cross-border trading and to raise capital in global equity offerings or for mergers and acquisitions to U.S. In the latter case. companies to have their stock trade in the United States by reducing or eliminating settlement delays. Demand for Depositary Receipts 3 .S. Depositary Receipts can also represent debt securities or preferred stock.S. these certificates may be freely traded in the U. voting at shareholder meetings. a company can also access the U.S. securities and allow non-U. company. These types of Depositary Receipts can also be listed on some exchanges outside the United States. How ADRs Trade? A Depositary Receipt is a negotiable security which represents the underlying securities (generally equity shares) of a non-U. raise capital or make an acquisition using securities. over-the-counter market or. Additionally. investor or it can be canceled and the underlying shares can be sold to a nonU. In addition. and handling of rights offerings. A Level I program can be established along side a Rule 144A program and a Regulation S program may be merged into a Level I program after the restricted period has expired. high transaction costs. The Depositary Receipt is issued by a U.S. Level III programs typically generate the most U. depositary bank.known multinational companies have established such programs.S. Privately Placed and Offshore (SEC Rule 144A / Regulation S) Depositary Receipts In addition to the three levels of sponsored Depositary Receipt programs that trade publicly in the U.S. Once issued. The Depositary Receipt certificate states the responsibilities of the depositary bank with respect to actions such as payment of dividends. investors in reliance on Regulation S. and other capital markets through SEC Rule 144A and/or SEC Regulation S Depositary Receipt facilities without SEC registration. numerous companies have started with a Level I program and then upgraded to a Level II (listing) or Level III (offering) program. usually by a broker who has purchased the shares in the open market. transfer. on a national stock exchange. Regulation S programs provide for raising capital through the placement of Depositary Receipts offshore to non-U.S. use Sponsored Level II or Sponsored Level III Depositary Receipts. Depositary Receipts facilitate U.S. and ownership purposes.S. Generally. upon compliance with U. the Depositary Receipt holder would be able to request delivery of the actual shares at any time. companies that choose either a Level II or Level III program will attract a significant number of U. investor interest because capital is being raised.S. the Depositary Receipt certificate would be surrendered and the shares held with the local custodian bank would be released back into the home market and sold to a broker there. settlement. investors. and non-U. SEC regulations. when the underlying shares are deposited in a local custodian bank.S.S. Rule 144A programs provide for raising capital through the private placement of Depositary Receipts with large institutional investors (often referred to as QIBs) in the United States. such as The Bank of New York. American or New York). Depositary Receipts (DRs) in American or Global form (ADRs and GDRs. investor purchases of non-U.S. Sponsored Level II and Sponsored Level III Depositary Receipts Companies that wish to list their Depositary Receipts on a U. investor.S. GAAP.

market through an intra-market transaction or sell the shares outside of the U. It is therefore critical that the depositary bank maintain sophisticated stock transfer systems and operating capabilities.S. will sell the shares back into the home market. the custodian notifies the depositary bank. who then delivers the Depositary Receipts evidencing the shares to the investor. dollars received from the investor into the corresponding foreign currency and pay the local broker for the shares purchased. Upon such notification.S. securities. On the same day that the shares are delivered to the custodian bank. The broker can either sell the Depositary Receipts in the U. Cancellation When investors want to sell their Depositary Receipts.S.S. enhanced liquidity and cost effectiveness Depositary Receipts offer as compared to purchasing and safekeeping ordinary shares in the home country.(Intra-Market Trading) Once Depositary Receipts are issued. they can be freely sold to other investors. this is known as an intra-market transaction. purchase the underlying ordinary shares and request that the shares be delivered to the depositary bank's custodian in that country. In cross-border transactions. utilize Depositary Receipts as a means to diversify their portfolios.S. either through their international offices or through a local broker in the company's home market. driven in large part by the increasing desire of retail and institutional investors to diversify their portfolios globally. The depositary bank will cancel the Depositary Receipt and instruct the custodian to release the underlying shares and deliver them to the local broker who purchased the shares. In many cases. they are tradable in the United States and like other U. Depositary Receipts are issued or created when investors decide to invest in a non-U. may prefer to utilize Depositary Receipts because of the convenience. a Depositary Receipt investment can save an investor up to 10-40 basis points annually as compared to all of the costs associated with trading and holding ordinary shares outside the United States. Many investors who do have the capabilities to invest outside the U. 4 . In order to settle the trade. broker will surrender the Depositary Receipt to the depositary bank with instructions to deliver the shares to the buyer in the home market.S.S. Trading . dollars for payment to the Depositary Receipt holder. typically into the home market through a cross-border transaction.S.S. invest directly outside of the U. These brokers.S. Transfer .. The broker will arrange for the foreign currency to be converted into U. the most important role of a depositary bank is that of Stock Transfer Agent and Registrar. or cannot for various reasons. company and contact their brokers to make a purchase. market (usually three percent to six percent of the company's shares in Depositary Receipt form) a true intra-market trading market emerges. Depositary Receipts are issued and delivered to the initiating broker. the U. security purchase: in U. through their international offices or through a local broker in the company's home market.S.S. dollars on the third business day after the trade date and typically through The Depository Trust Company (DTC). The broker who initiated the transaction will convert the U.S. Depositary Receipts may be sold to subsequent U. as a result. Many of these investors typically do not. they notify their broker. An intra-market transaction is settled in the same manner as any other U. Accordingly. brokers.(Pricing) Once Depositary Receipts are issued and there are an adequate number of Depositary Receipts outstanding in the U. Issuance. Your broker can also obtain Depositary Receipts by purchasing existing Depositary Receipts. which is not a new issuance. and. investors by simply transferring them from the existing Depositary Receipt holder (seller) to another Depositary Receipt holder (buyer).The demand by investors for Depositary Receipts has been growing between 30 to 40 percent annually. Intra-market trading accounts for approximately 95 percent of all Depositary Receipt trading in the market today. Until this market develops.

specialized approach to each market we service. With this pool of Depositary Receipts. Our leadership in the Depositary Receipts industry is exemplified by our appointment as depositary bank for 65 percent of all public sponsored Depositary Receipt programs. and the Depositary Receipt is selling for $12. or international market. The depositary bank will then issue the corresponding Depositary Receipts and deliver them to the members of the underwriting syndicate. in which case the local trading price is irrelevant. a regular trading market commences where Depositary Receipts can then be issued. 5 . value-added services. Equity Offerings When a non-U. brokers seek to obtain the best price by comparing the Depositary Receipt price in U. When executing a Depositary Receipt trade. at which time the broker will simply buy and sell the existing Depositary Receipts that are outstanding in the market.S. the company will deliver the shares to the depositary bank's local custodian at the time of the closing. As a result. company completes an offering of new shares. Our overall success is based upon our unique.30. about 95 percent of Depositary Receipt trading is done in the form of intra-market trading and does not involve the issuance or cancellation of a Depositary Receipt. part of which will be sold as Depositary Receipts in the U. managing substantially more sponsored Depositary Receipt programs than any other depositary bank. We currently issue Depositary Receipts for more than 1. The broker may also be holding an inventory of ordinary shares.S.28 per share after allowing for foreign currency translation. The continuous buying and selling of Depositary Receipts in either market tends to keep the price differential between the local and U. transferred or cancelled.S. markets to a minimum. technologically advanced securities servicing operating capabilities. the broker will buy shares and issue Depositary Receipts until the price of the ordinary shares increases to $12. Brokers will buy or sell in the market that offers them the best price and they can do so in three ways: by issuing a new Depositary Receipt. World Leader in Depositary Receipts The Bank of New York Mellon is the leading depositary bank. personalized administrative support and overall commitment to securities servicing.the majority of Depositary Receipt purchases result in Depositary Receipt issuances upon the deposit of shares. dollars to the dollar equivalent price of the actual shares in the home market.400 programs with companies from 70 countries.S. For example. if the price of the actual shares in the home market is $12.30. transferring an existing Depositary Receipt or cancelling a Depositary Receipt.