Depositary receipts: the concept, the kinds and the mechanism of treatment
At the present time one of the features of development of the organized financial markets, pronounced trend is globalization is the emergence on the basis of the national markets of the international market. The international market can be divided into internal and external. Because of the legal, political and economic instability, problems, connected with taxation and conversion, purchase by investors of securities of foreign firms without a resident-intermediary is not made. Meanwhile, the demand for such securities exist. The opportunity to realize this need has appeared after occurrence in the USA schemes of sale of securities with the help of the so-called Depositary receipts.
The reason for the issue of Depositary receipts served as the prohibition in 1927, the law of the United Kingdom export from the country national securities.
In turn, U.S. law prohibits a free circulation in the country of securities of non-residents. They can be offered on the American stock market only through ADR (American Depositary receipts). ADR market began to develop actively in the 70-80-e gg. XX century following the integration of world capital. In the 90s this market has experienced a real boom, which was partly provoked by the falling interest rates in the USA and the search for U.S. investors opportunities to earn money on the markets of developing countries.
At the present time in the world stock markets traded more than 1 000 of Depositary receipts for shares of various issuers from more than 60 countries, a considerable part of which is represented by companies from developing countries, as well as Russian issuers.
1. The concept of Depository receipts
Depositary receipts, represent an investment tool of the international stock market.Depository receipt is a free appearing on the stock market of the secondary securities issued in the form of the certificate authority of the Depositary Bank world the value of the shares of a foreign Issuer and attesting the possession of a certain number of shares of a foreign company, deposited in the country of location of the company, the circulation of which is carried out in the other.
In the world practice there are two types of Depository receipts:
ADR (American Depositary Receipt) - American Depository receipts that are admitted to circulation on the American stock market;
GDR (Global Depositary Receipt) - the global Depositary receipts, the transactions with which can be implemented in other countries.
According to the American legislation ADR - certificate, which is not security, but certifies the right for the securities. Certificate of ADR should contain information on the Depository and a brief description of the deposited securities, the authority to vote (including by proxy), the distribution of dividends. The certificate must also reflect the size of payment for services of the Depository. The certificate should be mentioned, that the Bank is governed by the requirements of the Law of 1934, which means the possibility for any investor to obtain information on the Issuer in the United States Commission on securities and exchange Commission (the Securities and Exchange Commission - SEC).
Common and preferred shares, bonds - all of these securities, as is known, are equity securities, the objects of investment activities. For all of the issued securities may be issued by the Depositary receipts.
Developing a program to issue ADR (GDR), the company pursue the achievement of the following goals:
the attraction of additional capital for realization of investment projects;
creation of the image, attractive for foreign and domestic investors, as well as Depositary receipts on shares of companies produce well-known world banks;
growth of the exchange rate value of the shares on the domestic market as a result of increased demand for these shares;
expansion of the circle of investors, attraction of foreign portfolio investors.
The issue of Depositary receipts is rather attractive for investors. The attractiveness of ADR (GDR) for investors, as shown by the the world of experience, is the ability to:
a more profound diversification of the securities portfolio;
access through Depositary receipts for the shares of foreign companies;
getting high income in the growth of the market value of the shares of companies from developing countries;
reduction of investment risks in connection with the a-synchronous development of stock markets in different countries.
2. Types of Depositary receipts
Depositary receipts are divided into two types: non-sponsored ADR and sponsored.non-sponsored ADR are issued on the initiative of a major shareholder or a group of shareholders holding a significant number of shares of the company. Their output can not be controlled by the Issuer. The main advantage of the issue of non-sponsored ADR Depositary receipts lies in the fact, that the requirements of the U.S. securities and exchange Commission (SEC) to securities, against which produced these receipts are only in the presentation of her package of documents confirming full compliance the activities of the Issuer and its securities (shares and bonds) legislation of the country of the Issuer. The disadvantage of non-sponsored ADR is that trade is only possible on the over-the-counter market: íåñïîíñèðóåìûå ADR are not allowed to trade on the stock exchange and the NASDAQ system. Therefore, the quotations of non-sponsored ADR Depositary receipts are reference and information nature. As a result of the purchase and sale of data receipts shall be at a personal meeting, on the phone or by means of e
lectronic communication.
In recent years there has been a strong tendency to reduce the number of programs of issue of íåñïîíñèðóåìûõ receipts and growth of the sponsored ADR.
Sponsored ADR (sponsored ADR) are issued on the initiative of the Issuer. They may be issued only one Depositary Bank, the signing of a special contract with which is an obligatory condition for registration with the SEC.
Sponsored ADR are issued four levels: the first, second, third and fourth. It should be noted that the first two are available in already existing on the secondary market of shares, and the issue of ADR the third and fourth levels is expected due to a new issue.
3. The mechanism of issue and circulation of Depositary receipts and its peculiarities
Depositary receipts are physically existing paper (certificates)issued by the Depositary, in the role of which has been traditionally may be a Bank or trust company. Before the release of the sponsored ADR between the Issuer and the Depositary Bank shall be signed by the Depositary contract, retaining all of the terms and conditions of the ADR and the functions of each of the parties. Under the ADR issue the Issuer company shall issue shares and passes them on to the safekeeping of the Bank-êàñòîäè or directly to the Depositary Bank, which will issue ADRs. In Russia, these services are provided by such banks as «Credit Suisse» (Credit Suisse) and «hay EN BG Bank» (ING Bank), have officially registered subsidiaries of the company in Moscow. Bank - êàñòîäè shall exercise its functions on the basis of a contract with the Bank-Depositary, the Depositary receipts.The main functions of the Bank-êàñòîäè, working on the program of ADR representing:
implementation of accounting and re-registration of holders of shares to which the Depositary Bank has issued ADR;
part in the translation of dividends;
check yourself in the registry of joint-stock company as a nominal holder of shares, the which issued the Depositary receipts.
The shares, which are on responsible storage, are registered in the shareholders register to the name of the responsible custodian Bank-êàñòîäè, the last is the nominal holder of these shares, i.e., he holds the shares on its own behalf, not being the owner of these securities.
The total number of shares held in escrow, Depository Bank receives the global certificate of ADR, on the basis of which are issued Depositary receipts for sale to investors.
The Depositary Bank, working on the program of ADR, performs the following functions:
produces Depositary receipts on the deposited securities of a foreign Issuer and, if necessary, carries out their cancellation;
acts as an agent and the Registrar, i.e. draws operations on Depositary receipts, shall maintain a register of nominal and real owners of Depositary receipts, pay dividends, acts as an agent in the power of attorney;
provides assistance to a foreign company-the Issuer in preparing the documents to the SEC the registration of the issue of Depositary receipts, as well as the provision of the SEC forms of regular financial reporting;
carries inform a wide range of participants the securities market about the beginning of the issue of Depository receipts, i.e. ensures information support for the project of ADR;
summarizing the results of voting of holders of ADR, directs them to the Issuer, if the investor has the right of ownership of the voting shares and wish to realize their right to vote;
provides advice to investors and assists them in the preparation of the documentation to the tax authorities in order to avoid double taxation.
The leaders of the world market in the field of providing Depository services for ADR programs are: the oldest commercial Bank «the Bank of new York» (the Bank of New York, Citibank ( Citibank) and «Morgan Stanley» (Morgan Stanley).
When the issue of ADR to the company-Issuer's shares are certain requirements:
shares into which issued ADR should not be walking on any stock exchanges in the period of validity of Deposit agreement;
the shares, which are transferred to the custody may not be the subject of pledge;
shares, for which imposed any restrictions, you cannot send the safekeeping and recording of the nominal holder.
Treatment of ADR. Depositary receipts will be issued, if investors attracted to the shares or bonds of a foreign company. In this case, the investors entrust their brokers to buy securities interest of their company-Issuer. Brokers acquire securities or through their offices operating in the country of the Issuer, either through brokers operating in the stock market of the Issuer. Subsequently the securities are delivered to the Bank-êàñòîäè. The purchased securities are credited to the account of the depo account of the Depository Bank, the issuing ADR. After that, Depositary receipts are delivered to the broker, the broker sets of ADR representing the depo account specified by the investor.
The broker acting on behalf of the investor, performs the operation on the purchase of securities, which are not on the American stock market. In this scheme of purchase of Depositary receipts is as follows:
1. the investor gives an order to the broker, for example in the USA, buy Depository receipts;
2. broker, working in the United States, gives an order to the broker of the country of location of the Issuer on purchase of the equivalent amount of securities;
3. broker, working on the stock market of the country of the company-Issuer purchases securities of the company on the stock market of the country;
4. the securities act in the Bank-êàñòîäè;
5. the Bank - êàñòîäè (a custodian) writes the securities on the account of the Bank, the issuing Depositary receipts;
6. Depositary Bank produces ADR, which are delivered to the American broker through registration-clearing center;
7. registration-clearing center records Depositary receipts on the account of the broker for the further sale of the investor.
Placed Depositary receipts are freely traded on the stock market through the execution of investor transactions on purchase and sale of ADR. Changes in the composition of the owners of ADR are recorded in a register which leads the Depositary Bank that issued ADR.
For each posted Depository receipt is worth a certain number of reserved the responsible custodian (the Bank-êàñòîäè) shares of the company. The number of shares listed on one Depositary receipt is fixed in the contract concluded between the Issuer and the Depositary Bank. So, one Depository receipt issued on shares of the JSC «Surgutneftegas», consists of 50 ordinary shares of the company. If desired, the investor can exchange their ADR for shares of the company.
American investor may not sell the shares of a Russian Issuer on the American stock market, as the Russian legislation, the export of Russian shares abroad is prohibited.
The process of the sale of ADR, which are traded on the American stock exchange market, involves two variants of the implementation of ADR:
1. by direct sale of Depositary receipts on the secondary market in the United States;
2. by way of conversion of Depository receipts on shares and the sale of these shares on the market of the country of the Issuer.
In the first case, the owner of the Depositary receipt addressed to the broker with instructions to sell ADR. American broker trying to sell them on the stock market of the USA. If he manages to sell Depositary receipts, he register the transaction in the Depositary Bank, after that, Depositary receipts are issued to the new owner.
In the second case, if the broker failed to sell Depositary receipts his client on the American stock market, he appeals to the Russian broker and asks him to find a buyer in Russia. When the Russian broker will find a buyer, the Depositary Bank Annuls it has issued ADR, the Bank-êàñòîäè ceases to perform the functions of the nominal holder of the shares and the shares are reissued in the register to the new owner.
The scheme of sale of ADR is as follows:
1. the owner of ADR gives an order his broker to sell Depository receipts;
2. the broker gives an order to the Russian broker to find a buyer in Russia and at the same time returns Depositary receipts, the Depositary Bank to convert them into shares;
3. Bank the Depositary, getting ADR, withdraws them from the account of the investor, makes changes in the the register of owners of ADR;
4. the Depositary Bank shall inform the Bank-êàñòîäè to reduce the number of ADR and of the number of shares, which should be written off from the account of a nominee holder, i.e., removed from the responsible storage;
5. as a result of conversion of ADRs into shares of the Bank-êàñòîäè ceases to function the nominal holder of securities and provides information for the Registrar to make necessary changes in the register of shareholders, i.e. reduce the number of shares at the nominal holder and record these shares on the American investor;
6. shares will be credited to the personal account of the American investor;
7. instructs the Russian broker to realize the shares;
8. is the sale of shares in the Russian stock market;
9. are written-off shares to the personal account of the American owner and are recorded on the account of the new owner;
10. financial resources through the clearing system at the expense of a U.S. investor.
