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By:Matthew Harrison, Research & Corporate Development, HKEX Bonnie Chan, Listing, HKEx HONG KONG DEPOSITARY RECEIPTS (HDRs) Seminar on 17 September 2008.

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Presentation on theme: "By:Matthew Harrison, Research & Corporate Development, HKEX Bonnie Chan, Listing, HKEx HONG KONG DEPOSITARY RECEIPTS (HDRs) Seminar on 17 September 2008."— Presentation transcript:

1 By:Matthew Harrison, Research & Corporate Development, HKEX Bonnie Chan, Listing, HKEx HONG KONG DEPOSITARY RECEIPTS (HDRs) Seminar on 17 September 2008 At Hong Kong Securities Institute

2 2 AGENDAPage 1.Nature of DRs3 2.Global DR landscape7 3.Why HDRs?14 4.HDR framework16 5.HDR operations25 Appendix Further details on HDR operations Hong Kong Depositary Receipts (HDRs)

3 3 1.Nature of depositary receipts  DRs are receipts issued by a depositary representing underlying shares of a corporation which have been deposited with the depositary or its nominated custodian. Hong Kong Depositary Receipts (HDRs) Issuance of DRsIssuance of shares DR holders Shareholders Corporation Depositary Corporation DRs Shares

4 4 Issuance of shares:governed by local statute and corporation’s M&A. Issuance of DRs:governed by deposit agreement. Hong Kong Depositary Receipts (HDRs) 1.Nature of depositary receipts Issuance of DRsIssuance of shares DR holders Shareholders Shares Depositary Issuing company DRs Shares Deposit agreement Statute / M&A

5 5 Why DRs? For issuers  Local regulations may discourage overseas issuance of shares or overseas share register.  Share size – DRs can be sized to fit host market practice. For investors  Convenience – no need for local registration, compliance with foreign investor regulations, currency translation, etc. Hong Kong Depositary Receipts (HDRs) 1.Nature of depositary receipts

6 6 DR product characteristics  Mature product –1 st DRs issued in 1927 by JP Morgan on UK retailer Selfridges.  Usually on shares, but may also be on other securities such as bonds, ETFs. (HDRs only on shares.)  Most share-related DRs now sponsored by issuer. (HDRs must be.)  Deposit agreement–concluded by issuer and depositary –defines investor rights –bridges local and host market practice  Legal character – contract, but similar to trust or custody arrangement  DR ratio – can be adjusted relatively easily (by board resolution and amendment of deposit agreement)  Depositary receipts–(strictly,) confirmations of entitlement to depositary shares Hong Kong Depositary Receipts (HDRs) 1.Nature of depositary receipts

7 7 2.Global DR landscape ADRs–“American depositary receipts” – Used almost universally by foreign companies listing in US – Regulation follows that applicable to securities generally – Level І:non-listed ІІ:listed without public capital-raising ІІІ:listed with public capital-raising GDRs–“Global depositary receipts” – Usually –a US leg (ADRs) settled in DTC –a European leg under Reg S settled in ICSD and traded on London’s IOB – Used by many foreign companies listing in London or Luxembourg –Concessionary regulation –viewed as professional product and listed under European minimum regulation “Local DRs”–DRs listed under regimes of specific markets – Singapore, Sweden, Taiwan, etc. – Regulation may be concessionary Hong Kong Depositary Receipts (HDRs) ICSD = International Central Securities DepositoryIOB = International Order Book

8 8 Global DR highlights  sponsored DR programmes in issue (June 2008).  Indian-sponsored issues the most numerous, followed by Russia, UK, Brazil, Australia, Taiwan, China, Hong Kong.  Estimated value: US$1.8 trillion at March 2008, up 35% Year on Year.  London and NYSE vie in DR capital raised.  Over US$2.4 trillion traded YTD June 2008, up 85% on prior YTD.  NYSE leads in DR trading value, followed by Nasdaq, London. DRs represent about 4% of world listed equity market Hong Kong Depositary Receipts (HDRs) 2.Global DR landscape 1 Statistics from Bank of New York Mellon (BoNY) The Depositary Receipt Markets 2008 Mid-Year Review.

9 9 Hong Kong Depositary Receipts (HDRs) 2.Global DR landscape New sponsored DRs Source: BoNY Recent trend of GDR issuance

10 10 Hong Kong Depositary Receipts (HDRs) 2.Global DR landscape Annual DR capital raising Source: BoNY GDR capital-raising has grown Primary and follow-on offerings ($bn)

11 11 Hong Kong Depositary Receipts (HDRs) 2.Global DR landscape DR capital raising (US$9,159 million) Source: BoNY London and NYSE dominate in capital-raising By exchange, 1H 2008 ($million)

12 12 Hong Kong Depositary Receipts (HDRs) 2.Global DR landscape Annual DR trading Source: BoNY DR trading is still growing strongly, despite general decline in world equity markets U.S.-listed

13 13 Hong Kong Depositary Receipts (HDRs) 2.Global DR landscape Global DR trading value (total US$2,460 billion) Source: BoNY NYSE dominates trading By exchange or market, 1H 2008 ($bn)

14 14 3.Why HDRs? Hong Kong Depositary Receipts (HDRs)  HKEx’s Strategic Plan: list more overseas companies.  Roadshows / marketing trips to Russia, Vietnam, Kazakhstan, India, Mongolia, etc.  Feedback: HKEx Listing Rules mandating shares and Hong Kong share register considered a barrier.  Solution: HDR framework

15 15 Nature of HDR framework  No policy change vis-à-vis existing regime –HDR listing requirements equivalent to those for shares  Not a concessionary regime (ie. unlike London’s). More like US-style Level ІІІ approach, ie. as for shares.  Essentially: instrumental facility for listing in DR form rather than share form.  No market consultation needed  HDR framework introduced relatively quickly.  Available to all issuers which meet listing requirements.  Rule amendments apply spirit of existing rules to two-tier DR structure. Hong Kong Depositary Receipts (HDRs) 3.Why HDRs?

16 16  HDR framework applies only to Main Board.  New Chapter 19B, Appendices 1E and 1F; minor amendments to existing rules.  Existing Listing Rules (IPO procedures and continuing listing requirements) and CCASS Rules apply to HDRs except where specifically modified (Rule 19B.01).  SFO, Takeovers Code and prospectus provisions of Companies Ordinance apply to HDRs.  Trading, clearing and settlement procedures: same as for shares  Applicable Exchange fees and charges: same as for shares  Stamp duty: same as for shares (0.1% per side). Hong Kong Depositary Receipts (HDRs) 4.HDR framework Key features

17 17  Remains unchanged and applies equally to overseas issuers listing: –via HDRs; and – via ordinary shares  Set out in Chapter 19, supplemented by Joint Policy Statement Regarding the Listing of Overseas Companies issued by SEHK and SFC on 7 March  Joint Policy Statement is intended to: –clarify Listing Rules governing listing of overseas companies – provide roadmap to overseas companies incorporated outside the Recognised Jurisdictions (i.e. Bermuda, Cayman Islands and PRC) –state factors (not determinative) affecting eligibility for listing Hong Kong Depositary Receipts (HDRs) 4.HDR framework Existing regime for listing overseas companies applies to HDRs

18 18  Issuer: –Includes a company whose shares are represented by HDRs that are listed or are the subject of an application for listing but not including the depositary (Chapter 1) – HDR issuer does not have to be already listed overseas. – Issuer cannot list shares and HDRs on the Exchange at the same time (Rule 19B.06). – Must appoint approved share registrar to maintain HDR holder register, only (Rule 19B.13)  HDRs: – may be issued in respect of newly issued shares and/or shares placed with depositary by existing shareholders (Rule 19B.06) – must be freely transferable (Rule 19B.09(a)) – securities which HDRs represent must be fully paid and free from liens or restrictions (Rule 19B.09(b)) Hong Kong Depositary Receipts (HDRs) 4.HDR framework Highlights of new Chapter 19B of Main Board Listing Rules

19 19  Depositary : – must be duly incorporated and in conformity with its constitutional document (Rule 19B.14) – must be suitably authorised and regulated financial institution acceptable to Exchange – includes overseas operators (Rule 19B.15) – have adequate experience in issuing and managing DR programmes in Hong Kong or overseas (Rule 19B.15) – issues HDRs as agent of issuer (Rule 19B.05) – holds shares to which HDRs relate on trust (or equivalent arrangements) for sole benefit of HDR holders (Rule19B.16) Hong Kong Depositary Receipts (HDRs) 4.HDR framework Highlights of new Chapter 19B of Main Board Listing Rules (cont’d)

20 20  Deposit Agreement (Rule 19B.16) – Vetted by the Listing Division – shareholder protection features in Joint Policy Statement dated 7 March 2007 should be complied with – Entered into between issuer and depositary and binding on HDR holders – Stipulates rights, duties and obligations of depositary, issuer, HDR holders, custodian; and stipulates depositary fee structure – Sets out procedures for replacement or removal of depositary and/or custodian – Sets out procedures for amendment of deposit agreement – material changes affecting HDR holders’ rights must have HDR holders’ prior approval – Governing law – of Hong Kong or foreign jurisdiction generally used in international practice. Must not exclude Hong Kong jurisdiction for dispute resolution Hong Kong Depositary Receipts (HDRs) 4.HDR framework Highlights of new Chapter 19B of Main Board Listing Rules (cont’d)

21 21  Public Float Requirement – Public float requirement applies to whole class of shares represented by HDRs provided fungible with HDRs (Rule 19B.08) – I llustration: Company A has: Ordinary shares900 Depositary Receipts (HDRs) (Note 1)100 Note 1: Each HDR represent one ordinary share of Company A Question: If 200 ordinary shares and 50 HDRs are held by public, does Company A meet public float requirement under Rule 8.08? Hong Kong Depositary Receipts (HDRs) 4.HDR framework Highlights of new Chapter 19B of Main Board Listing Rules (cont’d)

22 22  Public Float Requirement – Illustration (cont’d) Issued ordinary shares 200 Ordinary shares upon full conversion of HDRs (50 x 1) 50 Shares held by the public 250 (B) Total issued share capital1,000 (A) % held by the public 25% (B)/(A) Conclusion: Company A is able to meet public float requirement of 25% under Rule 8.08 Hong Kong Depositary Receipts (HDRs) 4.HDR framework Highlights of new Chapter 19B of Main Board Listing Rules (cont’d)

23 23  Number of HDRs sought for listing (Rule 19B.07) : – Issuer may seek to list HDRs up to any prescribed amount of share capital which HDRs represent. (Rule 8.19 does not apply) – Headroom provision – No further application for listing of HDRs is required for creation and cancellation of listed HDRs resulting from conversion of shares into HDRs or vice versa if sufficient headroom. – No further application for listing of HDRs is required merely because issuer issues further shares. (Rule 8.20 does not apply) Highlights of new Chapter 19B of Main Board Listing Rules (cont’d) Hong Kong Depositary Receipts (HDRs) 4.HDR framework

24 24  Effective date of HDR framework: 1 st July 2008  FAQs and further information about HDRs on HKEx website  Revised Guidance for New Listing Applications (Main Board) has been updated.  Further enhancement of listing regime for overseas companies is under consideration. Hong Kong Depositary Receipts (HDRs) 4.HDR framework Effective date and way forward

25 25 (1)Structure of share- / HDR ownership (2)HDR initial listing (3)HDR creation and cancellation (4)Corporate action processing (5)Cash dividend (6)Scrip dividend (7)HKSCC Nominees service – voting (8)Benefit entitlements (9)Common fees and charges of depositary Hong Kong Depositary Receipts (HDRs) 5.HDR operations

26 26 Hong Kong Depositary Receipts (HDRs) 5.HDR operations Structure of overseas listed company ownership (1)Structure of share- / HDR ownership : Registered shareholders : Beneficial owners Local register of members (ROM) Local CSD nominee Other intermediaries / nominees Custodian Individual/ corporate shareholders Local participants Individual/ corporate shareholders DR holders DRs Individual/ corporate shareholders : Central securities depository CSD Depositary

27 27 Hong Kong Depositary Receipts (HDRs) 5.HDR operations Structure of HDR ownership in Hong Kong market : Registered shareholders : Beneficial owners Overseas issuer: local ROM HKSCC Nominees Other intermediaries/ nominees Depositary Investor participant HDR holders GCP/DCP/custodian participants Individual/ corporate HDR holders HDR ROM [See preceding slide] Individual/ corporate HDR holders Individual/ corporate HDR holders (1)Structure of share- / HDR ownership (cont’d)

28 28  Depositary and its custodian added to chain. – Information flow may take longer  Two-tier structure: to maintain regulatory equivalence –Usually look through to issuer/shares – In a few areas, look to depositary/HDR level  A few new concepts, e.g. “headroom”. Hong Kong Depositary Receipts (HDRs) 5.HDR operations (1)Structure of share- / HDR ownership (cont’d) Implications

29 29  Listing can be by introduction – i.e. no capital raised in Hong Kong  Issuer must apply for headroom  IPO can be of HDRs, – on new shares (i.e. newly issued by issuer) – on existing shares (i.e. sold by major shareholder)  IPO process is same as for shares –Public offering required (if sizeable issue) – Yellow form, white form, etc. – Scrip created if white form used Hong Kong Depositary Receipts (HDRs) 5.HDR operations (2)HDR initial listing

30 30 SEHK HK investor LocalMarket HK Market Depositary Bank (DB) HK broker CCASS *Share Registrar Buy HDR T-day T+2 day Notification of share receipt To create HDR   Instruct broker to buy HDR, either (a)Purchase in HK or (b)Purchase underlying shares in local market and convert to HDR * Roles of registration and custody of HDRs Notify broker to collect HDR certificate Purchase underlying share Custodian appointed by DB Custodian appointed by DB Custodian of local broker Custodian of local broker Underlying shares T-day Local stock Exchange/CSD Local stock Exchange/CSD Settlement day Local broker (3)HDR creation and cancellation Hong Kong Depositary Receipts (HDRs) 5.HDR operations HDR creation

31 31 SEHK HK investor LocalMarket HK Market Depositary Bank (DB) HK broker CCASS * Share Registrar Sell HDR T-day T+2 day Notification of HDR receipt & cancellation   Instruct broker to sell HDR, either (a)Sell in HK or (b)Convert HDR to underlying shares and sell in local market * Roles of register and custody of HDR Deliver HDR certificate Transmission of net cash proceeds Withdrawal of HDR certificate Custodian appointed by DB Custodian appointed by DB Custodian of local broker Custodian of local broker Underlying shares Instruction to release underlying share T-day Local stock Exchange/CSD Local stock Exchange/CSD Settlement day Local broker Hong Kong Depositary Receipts (HDRs) 5.HDR operations HDR cancellation (3)HDR creation and cancellation (cont’d)

32 32  Arbitrage between HDRs in Hong Kong and shares in local market (if not restricted) can take place.  HDR creation: no need to apply for listing – unless headroom exceeded.  HDR cancellation: no need to apply for withdrawal of listing – provided some HDRs remain listed. Hong Kong Depositary Receipts (HDRs) 5.HDR operations Highlights (3)HDR issuance and cancellation (cont’d)

33 33 (1) Issuer provides corporate action details to local custodian (2) Local custodian gives information to depositary (3) Depositary via its appointed share registrar (SR) in HK distributes information to HDR holders (4) CCASS receives notification from SR then distributes information to CCASS participants (5) CCASS will collect instruction from CCASS participants and submit to SR (6) Depositary receives instructions from HDR holders via SR and submits them to Issuer through local custodian Hong Kong Depositary Receipts (HDRs) 5.HDR operations (4)Corporate action processing HKSCC CCASS Participant CCASS Participant LocalMarket HK Market Custodian of underlying shares Custodian of underlying shares Depositary Share Registrar Issuer Investor HDR Holder Corporate communication Instruction

34 34 Hong Kong Depositary Receipts (HDRs) 5.HDR operations (5)Cash dividend Communications flow 1.Issuer announcement local currency amount per share local payment date 2.Depositary notice approximate HK$ amount per HDR approximate HDR payment date 3.Depositary notice actual HK$ amount per HDR actual HDR payment date (1)Issuer announcement of RMB amount per share (2)Registrar notification of HK$ amount per share HDRs (anticipated)H shares (current)

35 35 Hong Kong Depositary Receipts (HDRs) 5.HDR operations (6)Scrip dividend Communications flow 1.Issuer announcement share ratio local payment date 2.Depositary notice HDR ratio approximate HDR payment date 3.Depositary notice actual HDR payment date Similar to flow for cash dividend

36 36  Upon receipt of notice of meeting, depositary fixes record date and notifies HDR holders via SR.  Beneficial owners submit instructions through CCASS Participants to HKSCC for votes to be cast on their behalf, or request to be appointed as corporate representative to attend and vote at shareholders’ meeting.  HKSCC collects instructions and passes on to depositary, who relays to local custodian for action Share Registrar (SR) appointed by Depositary HKSCC Nominees Limited Non-Investor Participants Investor Participants Beneficial Owners Corporate Representative instruction &/or voting instruction Proxy form or Corporate Representative Appointment letter Voting Hong Kong Depositary Receipts (HDRs) 5.HDR operations (7)HKSCC nominees service – voting

37 37  Examples: dividend payment, issue of bonus shares.  Upon receipt of payment (net of any fees, expenses, tax withheld and depositary’s own fee) in either HKD or USD / bonus shares in respect of HKSCC Nominees’s shareholding at record date, HKSCC will credit payment/ bonus shares to CCASS participants’ bank account (net of CCASS dividend collection fee) / stock account respectively. Hong Kong Depositary Receipts (HDRs) 5.HDR operations (8)Benefit entitlements / corporate actions (NOT REQUIRING exercise of discretion) Share Registrar (SR) appointed by Depositary Non-Investor Participants Investor Participants Beneficial owners Dividend payment / Issue of Bonus shares Dividend / Bonus shares HKSCC Nominees Limited

38 38  Examples: open offer, take-over offer, subscription  HKSCC will collect instructions from CCASS Participants and take action on their behalf or to facilitate the taking of actions by Participants directly.  Rights issues –Pre-emptive rights must be passed on to DR holder –This will entail obtaining authorisation of the rights prospectus (ie. by Exchange) Share Registrar (SR) appointed by Depositary Non-Investor Participants Investor Participants Beneficial Owners Subscription / Take-over offer Subscription, Take-over instruction Expenses, shares, Form of Acceptance Entitlement / shares Subscription, Take-over instruction Entitlement / shares HKSCC Nominees Limited Hong Kong Depositary Receipts (HDRs) 5.HDR operations (8)Benefit entitlements / corporate actions (cont’d) (REQUIRING exercise of discretion)

39 39  Charges are made to the investor (via his broker or custodian) – Issuance fee – Cancellation fee – Cash distribution fee – Stock distribution / rights exercise fee – Other distribution fee – Annual depositary service fee Hong Kong Depositary Receipts (HDRs) 5.HDR operations (9)Common fees & charges of depositary (based on ADR experience) Notes:1.The above is for reference only; the depositaries’ charges for HDRs have not yet been published. 2.It should be noted that CCASS’s normal charges will apply to HDRs in any event.

40 40 CCASS Depository HDR certificate + Stock Deposit Form Participants must ensure that they have full authority to deposit such HDR certificate into CCASS. 2. Inspect all the documents submitted. 3. Input the deposit details to CCASS. 10:00 a.m. to 3:45 p.m. Monday to Friday 4. Immediately credit to Participant’s stock account. Instrument of Transfer 5. Certificates will be delivered to the share registrar for re-registration in name of HKSCC Nominees. This process will take 10 business days. 6. After 10 business days New certificate (HKSCC) Nominee 1.1. Share Registrar (SR) appointed by depositary FURTHER DETAILS ON HDR OPERATIONS Appendix Hong Kong Depositary Receipts (HDRs) Deposit of HDR Certificate

41 41 Participants input withdrawal order (W/O) via CCASS. Once a W/O is accepted by the system, the Participant's specified stock account will be debited by the system with the withdrawal quantity of shares. HKSCC staff retrieves the certificates of the withdrawn stock from the vault. The authorized representative of the Participant with the duly signed Stock Collection Authorization Form collects the Certificates from the counter. HKSCC staff signs the Instrument of Transfer. Stock Withdrawal Receipt, Certificates and Instrument of Transfer pass to counter of CCASS Depository. 10:00 a.m. to 3:45 p.m. Monday to Friday CCASS Depository :00 a.m. to 5:00 p.m. Monday to Friday 1. Withdrawal of HDR Certificate FURTHER DETAILS ON HDR OPERATIONS (cont’d) Appendix Hong Kong Depositary Receipts (HDRs)

42 42 Ways to receive corporate communication through HKSCC Nominees Ltd. Share Registrar (SR) appointed by Depositary Sends out corporate communication Investor Participants They may submit a standing instruction to receive corporate communication directly from depositary. Registered Holders Beneficial owners They may request through CCASS Participants to receive corporate communication directly from depositary. HKSCC will provide a list of the names and addresses of recipients to the depositary via registrar. CCASS Participants inform HKSCC of the name & address of the recipients. Depositary receipts registered in investors’own name Depositary receipts registered in name of HKSCC Nominees Ltd. FURTHER DETAILS ON HDR OPERATIONS (cont’d) Appendix Hong Kong Depositary Receipts (HDRs)

43 43 Corporate action processing FURTHER DETAILS ON HDR OPERATIONS (cont’d) Appendix Hong Kong Depositary Receipts (HDRs) CCASS participants Beneficial owners Corporate communication/ Entitlement Entitlement Process among HKSCC, CCASS participants & beneficial owners Instructions Consolidated instruction representing those submitted by CCASS participants Instructions Corporate announcement / entitlement Process between SR and the beneficial owners HKSCC Share Registrar (SR) appointed by Depositary


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