Brief Introduction to ADRs (Part I)

By Rui Li

Based on what we have discussed today, I would like to share my internship experience in Deutsche Bank with you guys. I interned in Global Equity Service Department this year and mainly focused on ADRs. The followings are the brief introduction to ADRs, which is from the Deutsche Bank's advertisement materials to clients. Hope it may be some help.

What are Depositary Receipts?

Depositary Receipts (DRs) are a derivative-type instrument issued by a depositary bank, an agent of the underlying issuer of securities.

DRs evidence ownership of certain rights and entitlements to the underlying shares, as well as imposing obligations on the holders and beneficial owners of DRs by virtue of such ownership.

Shares underlying DRs are held in custody in the applicable local market of the foreign issuer by the depositary bank are registered in the name of the depositary bank or its appointed nominee.

DRs are customarily issued in book-entry form through the U.S. clearing system of DTC and/or the European clearing systems of Euroclear and Clearstream, depending on the structure of the DR program, but may also be issued in physical certificated form in the case of ‘American’ depositary receipts.

DRs trade in U.S. dollars and settle and clear in either the U.S. markets (through DTC), in the Euromarkets of London and Luxembourg (through Euroclear and Clearstream, Luxembourg), or in a combination of both the U.S. and Euromarkets with settlement through all three clearing systems.

Historically, DR program establishments tended toward international public offerings listed on major U.S. stock exchanges by blue-chip, mostly European, non-U.S. issuers.  More recently, tendencies have seen greater focus from emerging market issuers completing international offerings listed on European stock exchanges.

Why Do Investors Buy Depositary Receipts?

DRs enable investors to acquire and trade non-U.S. securities with ease of settlement, foreign exchange procedures, absent the need for local custody set up and associated costs

DRs are usually denominated in U.S. dollars with dividend and other payments paid in a foreign currency other than U.S. dollars in respect of the DRs being converted into U.S. dollars by the depositary bank and distributed, net of conversion and distribution costs, to DR holders

DRs diversify an issuer’s investor base and widen the portfolio pool available to investors in satisfying U.S. and European investor appetite for overseas, particularly emerging, markets

DRs simplify the trading and settlement of foreign equities - trading and settling just like U.S. or European securities

Many U.S. bank and pension fund portfolios may be prohibited by their charters from purchasing foreign securities.  American Depositary Receipts (ADRs), however, are recognized as U.S. domestic securities and are eligible for investment by such portfolios

Why Do Companies Issue Depositary Receipts?

To raise capital by extending into a wider pool of capital and investors

To facilitate higher valuation of stock

To diversify shareholder base into wider geographies

To increase visibility and issuer name recognition in international markets

To improve liquidity of underlying shares

To create an equity financing tool for use in mergers and acquisitions

To enable the structure and set-up of Employee Stock Option Plans

(to be continued...)