Presentation on theme: "An Overview of.... Page 2 Agenda What is a Depository Receipt (DR)…? DR Structure Levels of DR Types of DR Benefits of DR Parties Involved in a DR Program."— Presentation transcript:
An Overview of...
Page 2 Agenda What is a Depository Receipt (DR)…? DR Structure Levels of DR Types of DR Benefits of DR Parties Involved in a DR Program DR Issuance & Cancellation Process Concept of DR Ratio Payment of Dividends and Voting UKLA Listing Requirements Contents of Prospectus DR Market Highlights Glossary By Amardeep Singh
Page 3 What is a Depository Receipt…? A Depositary Receipt is a negotiable security that represents an ownership interest in securities of a foreign issuer typically trading outside its home market. Depositary Receipts are created when a broker purchases a non-U.S. company's shares on its home stock market and delivers the shares to the depositary's local custodian bank, and then instructs the depositary bank to issue Depositary Receipts. In addition, Depositary Receipts may also be purchased in the secondary trading market. They 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. ADRs were the first type of depositary receipt to evolve. They were introduced in 1927 in response to a law passed in Britain, which prohibited British companies from registering shares overseas without a British-based transfer agent.
Page 4 Depository Receipts Structure Capital Raising by Structure While depositary receipt programs can be structured in a variety of ways, there are two basic options: American Depositary Receipt (ADR) programs, which give Non-U.S. companies access to the US capital markets, and Global Depositary Receipt (GDR) programs, which provide exposure to the global markets (except U.S.) outside the issuer’s home market and the institutional investor market in the U.S. Currently the London Stock Exchange (LSE) is most frequently utilized by GDR issuers. Other exchanges which list GDRs include Luxembourg, Dubai International Financial Exchange (DIFX), or the Singapore Stock Exchange.
Page 5 Level I ADR Over-the-Counter (OTC) Traded Level I GDR Unlisted Level II ADR U.S. Listed Level II GDR Internationally Listed Level III ADR U.S. Listed Level III GDR Internationally Listed Selling New Shares (Capital Raising Transactions) Existing Shares Only (Non-Capital Raising Transactions) Rule 144A - Rule 144A ADR, or restricted ADR (RADR) are simply privately placed depositary receipts which are issued and traded in accordance with Rule 144A. Under this program, DRs are privately placed in the U.S. to Qualified Institutional Buyers (QIBs) Regulation S – Regulation S programs provide for the placement of Depository Receipts offshore to Non-US investors in compliance with SEC Regulation S Issuer Levels of DR
Page 6 Issued by one depository appointed by the company under a Deposit Agreement or service contract May be issued in different levels (level I, II or III) Company bears all expenses New capital may also be raised under this option Set up at the request of 3 rd party without any formal agreement with company Issued by one or more depositories in response to market demand 3 rd party pays all set up and maintenance expenses No new capital is raised Types of DRs Sponsored DRsUnsponsored DRs Types of Depository Receipts
Page 7 Benefits of Depository Receipts Benefits to Issuer Offer a new avenue for raising equity capital outside the issuer’s home market Broaden and diversify a company’s investor base Establish/increase total global issuer liquidity by attracting new investors Enhance a company’s visibility, status and profile internationally among institutional investors Develop and/or increase research coverage outside the home market Get an international valuation as the Company is valued alongside its peer group Adjust share price levels to those of peers through DR Ratio Facilitate M&A activity through use as acquisition currency Expand opportunity to increase local share price as a result of global demand/trading
Page 8 Benefits of Depository Receipts... cont’d Benefits to Investors Facilitate diversification into securities of foreign issuers Represent a way to provide international exposure for institutional investors (mutual funds, pension funds) despite restrictions against investing in certain countries or in foreign investment instruments Easier to purchase and to hold than the issuer’s underlying ordinary shares Trade easily and conveniently in US dollars and settle through established clearinghouses Ability to acquire the underlying securities directly upon cancellation (two-way fungibility) Create accessibility of price, trading information and research Provide dividend payments in US dollars and corporate action (meetings of shareholders, rights offerings, exchange offers, tender offers, etc.) notifications in English
Page 9 Parties Involved in a DR Program Each of the above parties have various roles to play and must coordinate with each other effectively to ensure that the DR issue process is carried out successfully PARTIES INVOLVED IssuerDepository Legal Counsel I-Banks/ Underwriters CustodianAccountants Investor Relation Firm
Page 10 Roles & Responsibilities of Parties Involved IssuerDepository At the time of offering… Prepare documentation working with advisors Interact with listing authority and respond to all questions IR/ PR targeted program Ongoing… Provide depositary and custodian with notices of dividends, rights offerings and other corporate actions, including meeting notices Ongoing compliance with stock exchange and international regulations, including disclosure and reporting Execute internationally-focused investor relations plan Keeps market informed of developments through PRs Regular meetings with institutional investors holding company DRs At the time of offering… Provide advice/ perspective on type of program, exchange or market on which to list or quote and advise on DR ratio Appoint custodian Coordinate with all parties for timely launch Coordinate with legal counsel on Deposit Agreement and securities law matters, as appropriate Announce DR program to market Ongoing… Coordinate with issuer to announce and process corporate actions such as dividends and shareholders’ meetings Work with Issuer to maintain active DR program
Page 11 Roles & Responsibilities of Parties Involved … cont’d At the time of offering… Prepare (issuer counsel) and/or review (depositary counsel) offering circular and interact with authorities Prepare draft deposit agreement (depositary bank’s counsel) Submit requisite documents to local regulatory authorities and exchanges (issuer and placement agent counsels) Ongoing… Manage compliance with securities laws, rules and regulations and perfect any securities law exemptions Provide corporate action support, whenever required Legal Counsel At the time of offering… Advise on size, pricing and marketing of offering, type of program to launch and exchange or market on which to list or quote, and ratio of depositary shares to ordinary shares Act as placement agent or underwriter in offering Conduct road shows with management/ introduce issuer to institutional and other investors Line up selected dealers and co- underwriters Ongoing… Cover issuer through research reports/ promote DRs to investors Advise on road shows, invest or meetings, investors to target I-Banks / Underwriters
Page 12 Roles & Responsibilities of Parties Involved … cont’d At the time of offering… Receive local shares in issuer’s home country and confirm receipt Ongoing… Hold shares in custody for the account of depositary Receive and deliver shares in accordance with depositary’s instructions Custodian At the time of offering… Develop long-term plan to raise awareness of issuer’s program in markets in which GDRs will trade Develop communications plan and information materials for launch activities (road show and presentations to investors, launch day promotion, meetings with financial media) Ongoing… Coordinate with issuer’s advertising and public relations teams on specific program plans to support and develop company image Continue to work with the issuer to maintain visibility and invest or knowledge in the capital markets Arrange regular meetings for issuer with investors to keep them informed of developments/ results Investor Relation Firm At the time of offering… Prepare company’s accounts for insertion into the prospectus Review prospectus and interact with authorities Ongoing… Audit and prepare accounts Accountants
Page 13 DR Issuance Process DR Broker Depository Local Broker Local Custodian Investor Local Stock Market Investor contacts broker and requests the purchase of shares of a DR issuer company. If existing DRs of that company are not available, the issuance process begins. To issue new DRs, the broker contacts a local broker in the issuer’s home market. The local broker purchases ordinary shares on an exchange in the local market. Ordinary shares are deposited with a local custodian. The local custodian instructs the depositary to issue DRs that represent the shares received. The depositary issues DRs and delivers them in physical form or book entry form. The broker delivers DRs to the investor or credits the investor’s account
Page 14 DR Cancellation Process DR Broker Local Broker Depository Local Custodian Investor The investor instructs the broker to cancel DRs. The broker delivers the DRs to the depositary for cancellation. The depositary cancels the DRs and instructs the local custodian to release and deliver the underlying shares to the seller’s broker in the issuer’s home market. The local custodian delivers the underlying ordinary shares as instructed to the local broker. The local broker safekeeps the ordinary shares or delivers them to or on behalf of the new investor
Page 15 Concept of DR Ratio Each DR is backed by a specific number of an Issuer’s local shares (or a fraction thereof). This is called the DR ratio. The ratio is designed to set the price of each DR in a price range that is competitive with the Issuer’s international peer group or the peer group on the exchange on which the DR trades. DRs are most commonly priced between $7 and $20. The ratio of DRs to ordinary shares is usually changed if the GDR price goes well over $20 (e.g., $50) or if it falls substantially below $7. Changing the ratio allows the Company to keep its DR price in line with its peers and maintain investor interest. Note: In case the DR ratio is unity, then the depository receipts are also referred to as depository shares
Page 16 Payment of Dividends The issuing company intimates the depository when the dividend record and payment dates for the underlying shares is established. The Depositary will: Set a DR record date & payment date, and communicate these dates to markets. Announce preliminary (estimated) dividend payment rates based upon the exchange rate between the domestic currency and the currency of DR on the date of the announcement. On the dividend payment date in the home market, the custodian receives the dividend owed on the underlying shares. The depositary will then arrange for the dividend received to be converted from domestic currency into currency of DR. Distribute the net dividend amount, net of any required tax withholding and any fees, to the DR holders entitled thereto. As the DR investor carries the foreign currency risk, the amount of the dividend will affected by any movement of the currency of DR against the home market currency. In case of a stock dividend, additional DRs are distributed to DR holders.
Page 17 Voting at Shareholders’ Meeting by DR Holders DR holders have no direct voting rights on the shares underlying the DRs. In case the issuer gives its DR holders the right to vote in shareholders’ meeting, it instructs the depository to initiate the DR proxy process. Depository (complying with the applicable legal provisions) establishes the record date, mailing date, and voting cut-off date. Depository informs key dates to issuer and local custodian bank (LCB). Issuer provides depository with draft of agenda items & company notice. Depository provides draft of depository notice of meeting and voting card to issuing company for review. Upon approval, depository arranges for final voting packages to be prepared and mailed to DR holders. DR holders review the voting materials & submit their votes to depository. Depository tabulates the DR holders’ votes & sends to issuer and LCB. LCB forwards the results to the company’s registrar, or attends the shareholders’ meeting to vote accordingly.
Page 18 UKLA Listing Requirements* Transferability of the Underlying Shares & GDRs: The shares underlying the GDRs as well as GDRs itself must be freely transferable, fully paid and free from any liens & restrictions on transfer. Free float requirement: 25% of the GDRs must be in public hands. This 25% should not include any investor taking more than 5%. Admission to trading on a Recognized Stock Exchange. Market capitalization: The expected aggregate market value of all GDRs to be listed must be at least £700,000. The FSA may modify this rule to admit shares of a lower value if it is satisfied there will be an adequate market for the securities concerned. Continuing obligations: Various ongoing obligations on the part of issuing company include: Publication of an annual financial report within four months of its year end. Publication of price sensitive information to enable investors to trade in a knowledgeable manner. * These are specifically applicable to companies seeking to list its GDRs on LSE
Page 19 Contents of Prospectus A prospectus is the company’s information and sales document which enables market participants to create opinions and decide whether to participate in the offering. A DR prospectus must include the necessary information that enables investors to make an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the Company and, the rights attached to the DRs. An operating and financial review, audited financial information for the last three financial years or such shorter period as the Company has been in operation. In case the prospectus is more than nine months after the end of last financial year, unaudited half year accounts will also be included. The prospectus also requires details of any material contracts. Prospectus should also include a summary describing the Company that includes any risks associated with investing in the Company. * The above provisions pertain to GDR listing on LSE
Page 20 DR Capital Raising Capital raisings globally were down in the first half of 2008 as over 177 deals were postponed, due to market conditions, according to E&Y. In the DR sphere, the first six months of the year saw 34 initial and follow-on DR offerings raising nearly $9.2 billion. Majority of the DRs issued during H were listed on NYSE and LSE accounting for around 45% and 40% respectively. Annual DR Capital Raising (Primary & Follow-on Offerings; $bn) DR Capital Raising (By Exchange; H1-2008; $mn)
Page 21 Top 5 DR Capital Raising in H Barclays Bank came out with a follow-on offering of $2.65 billion in April 2008 recording the largest amount raised worldwide in the H From the Gulf region, GIH came out with the largest DR offering ever from the Middle East raising $1.15 billion in May This was also the first DR program from Kuwait. IssuerCountryExchangeDate Value ($ mn) IPO or Secondary Offering Barclays Bank plcU.K.NYSE11-Apr-082,650Sec Global Investment HouseKuwaitLSE21-May-081,150IPO Commercial Bank of QatarQatarLSE26-Jun-08691IPO National Bank of GreeceGreeceNYSE06-Jun-08625Sec GlobalTrans Investment PLCRussiaLSE08-May-08494IPO Top 5 DR Capital Raising (H1-2008)
Page 22 Value of Outstanding DRs The total value of investment in DRs increased more than 35% year-on-year and exceeded $1.8 trillion at the end of the first quarter of 2008, an all-time high. Investment in U.S.-listed DRs totaled more than $1.2 trillion on March 31, 2008, a jump of 36% from the same time last year. In terms of region, Western Europe companies accounted for the largest share of DR value outstanding (~39%). Value of Outstanding DRs – By Market (As on Mar 31, 2008; $bn) Value of Outstanding DRs – By Region (As on Mar 31, 2008; $bn) * DR value outstanding is defined as DRs outstanding multiplied by DR price
Page 23 DR Trading Value Over $2.4 trillion of DRs traded on U.S. and non-U.S. markets and exchanges during H1-2008, up 85% year-on-year, setting a new record. The major U.S. exchanges (NYSE, NASDAQ and AMEX) were the largest markets for DR trading, comprising 86% of all DR trading value worldwide. China, representing a 253% growth from mid-year 2007, stood as the top-most country with $530 billion in DR trading value. China, Brazil and Russia, together, accounted for over 50% of total DR trading value in the first half of DR Trading Value (By Exchange or Market; H1-2008; $bn)
Page 24 Glossary Block Listing Block Listing - The number of shares “listed” when the GDRs are admitted to the LSE is the maximum number that can be issued without approval and publication of another prospectus. Road Show Road Show – A series of meetings with potential investors and brokers, conducted by a company and its underwriter, prior to a securities offering. It is intended to create interest in the securities. Also known as a "dog and pony show“. Pilot Fishing Pilot Fishing – A type of pre-marketing of an offering that involves testing investor sentiment to receive feedback on how the market may respond to an issue Green-Shoe/Stabilization Green-Shoe/Stabilization - A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an over-allotment option.