AMERICAN DEPOSITORY RECEIPTS AND GLOBAL DEPOSITORY RECIEPTS

Depositary receipts More generally, depositary receipts (DRs) are negotiable securities that represent the underlying securities of foreign companies that trade in a domestic market. DRs enable domestic investors to buy the securities of a foreign company without the accompanying risks or inconveniences of cross-border and cross-currency transactions. Each DR is issued by a domestic depositary bank when the underlying shares are deposited in a foreign custodian bank, usually by a broker who has purchased the shares in the open market local to the foreign company. A DR can represent a fraction of a share, a single share, or multiple shares of a foreign security. The holder of a DR has the right to obtain the underlying foreign security that the DR represents, but investors usually find it more convenient to own the DR. The price of a DR generally tracks the price of the foreign security in its home market, adjusted for the ratio of DRs to foreign company shares. In the case of companies domiciled in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government. Depositary banks have various responsibilities to DR holders and to the issuing foreign company the DR represents. ADR American depositary receipts, or ADRs, are a bit of financial magic that deliver the world to the doors of US investors. First introduced by the investment house of JP Morgan in 1927, ADRs are simple in concept. In the most basic terms, A United States bank or investment institution places a certain amount of stock of a foreign company into its vaults - the "depositary" part of the name - then allows investors to buy shares in that collection of stocks, priced in US dollars. Those shares, or receipts, can then be traded on regular stock markets almost as though they were shares held directly in the foreign company itself, only the arrangement is better for US investors. Since ADRs are traded in US dollars and are securities that originate within the United States, they carry none of the cross-border fees or other hassles that might ensue if an investor from Peoria were to try to buy stock directly in a South Korean steel mill. The worst most investors have to worry about are small fees, often a few pennies per ADR per year, charged by the depository institution to cover their costs of offering the service. Thus, in a sense, US investors gain access to the world through ADRs without having to leave the comfort of their own living rooms.

ADRs vs. Stocks Like normal stocks, ADRs tend to trade at levels that track the financial health of their underlying companies. Still, there are important differences between an ADR and a directly held stock. For example, there are different flavors of ADRs, each of which carries a different level of reporting responsibility - in other words transparency in reporting their financial health - to US regulators and investors.

ADR programs (facilities) When a company establishes an ADR program, it must decide what exactly it wants out of the program, and how much time, effort, and other resources they are willing to commit. For this reason, there are different types of programs, or facilities, that a company can choose. Unsponsored ADRs Unsponsored shares trade on the over-the-counter (OTC) market. These shares are issued in accordance with market demand, and the foreign company has no formal agreement with a depositary bank. Unsponsored ADRs are often issued by more than one depositary bank. Each depositary services only the ADRs it has issued. Due to a recent SEC rule change making it easier to issue Level I depositary receipts, both sponsored and unsponsored, hundreds of new ADRs have been issued since the rule came into effect in October 2008. The majority of these were unsponsored Level I ADRs, and now approximately half of all ADR programs in existence are unsponsored. Sponsored Level I ADRs ("OTC" facility) Level 1 depositary receipts are the lowest level of sponsored ADRs that can be issued. When a company issues sponsored ADRs, it has one designated depositary who also acts as its transfer agent. A majority of American depositary receipt programs currently trading are issued through a Level 1 program. This is the most convenient way for a foreign company to have its equity traded in the United States. Level 1 shares can only be traded on the OTC market and the company has minimal reporting requirements with the U.S. Securities and Exchange Commission (SEC). The company is not required to issue quarterly or annual reports in compliance with U.S. GAAP. However, the company must have a security listed on one or more stock exchange in a foreign jurisdiction and must publish in English on its website its annual report in the form required by the laws of the country of incorporation, organization or domicile. Companies with shares trading under a Level 1 program may decide to upgrade their program to a Level 2 or Level 3 program for better exposure in the United States markets.

Sponsored Level II ADRs ("Listing" facility) Level 2 depositary receipt programs are more complicated for a foreign company. When a foreign company wants to set up a Level 2 program, it must file a registration statement with the U.S. SEC and is under SEC regulation. In addition, the company is required to file a Form 20-F annually. Form 20-F is the basic equivalent of an annual report (Form 10-K) for a U.S. company. In their filings, the company is required to follow U.S. GAAP standards or IFRS as published by the IASB. The advantage that the company has by upgrading their program to Level 2 is that the shares can be listed on a U.S. stock exchange. These exchanges include the New York Stock Exchange (NYSE),NASDAQ, and the American Stock Exchange (AMEX). While listed on these exchanges, the company must meet the exchanges listing requirements. If it fails to do so, it may be delisted and forced to downgrade its ADR program. Sponsored Level III ADRs ("offering" facility) A Level 3 American Depositary Receipt program is the highest level a foreign company can sponsor. Because of this distinction, the company is required to adhere to stricter rules that are similar to those followed by U.S. companies. Setting up a Level 3 program means that the foreign company is not only taking steps to permit shares from its home market to be deposited into an ADR program and traded in the U.S.; it is actually issuing shares to raise capital. In accordance with this offering, the company is required to file a Form F-1, which is the format for an Offering Prospectus for the shares. They also must file a Form 20-Fannually and must adhere to U.S. GAAP standards or IFRS as published by the IASB. In addition, any material information given to shareholders in the home market, must be filed with the SEC through Form 6K. Foreign companies with Level 3 programs will often issue materials that are more informative and are more accommodating to their U.S. shareholders because they rely on them for capital. Overall, foreign companies with a Level 3 program set up are the easiest on which to find information. Examples include the British telecommunications company Vodafone (VOD), the Brazilian oil companyPetrobras (PBR), and the Chinese technology company China Information Technology, Inc. (CNIT). Restricted Programs Foreign companies that want their stock to be limited to being traded by only certain individuals may set up a restricted program. There are two SEC rules that allow this type of issuance of shares in the U.S.: Rule 144-A and Regulation S. ADR programs operating under one of these 2 rules make up approximately 30% of all issued ADRs. Privately placed (SEC Rule 144A) ADRs Some foreign companies will set up an ADR program under SEC Rule 144A. This provision makes the issuance of shares a private placement. Shares of companies registered under Rule 144-A are restricted stock and may only be issued to or traded by Qualified Institutional Buyers (QIBs).

US public shareholders are generally not permitted to invest in these ADR programs, and most are held exclusively through the Depository Trust & Clearing Corporation, so there is often very little information on these companies. Offshore (SEC Regulation S) ADRs The other way to restrict the trading of depositary shares to US public investors is to issue them under the terms of SEC Regulation S. This regulation means that the shares are not, and will not be registered with any United States securities regulation authority. Regulation S shares cannot be held or traded by any U.S. person as defined by SEC Regulation S rules. The shares are registered and issued to offshore, non-US residents. Regulation S ADRs can be merged into a Level 1 program after the restriction period has expired, and the foreign issuer elects to do this. Sourcing ADRs One can either source new ADRs by depositing the corresponding domestic shares of the company with the depositary bank that administers the ADR program or, instead, one can obtain existingADRs in the secondary market. The latter can be achieved either by purchasing the ADRs on a US stock exchange or via purchasing the underlying domestic shares of the company on their primary exchange and then swapping them for ADRs; these swaps are called crossbook swaps and on many occasions account for the bulk of ADR secondary trading. This is especially true in the case of trading in ADRs of UK companies where creation of new ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government; sourcing existing ADRs in the secondary market (either via crossbook swaps or on exchange) instead is not subject to SDRT. ADR termination Most ADR programs are subject to possible termination. Termination of the ADR agreement will result in cancellation of all the depositary receipts, and a subsequent delisting from all exchanges where they trade. The termination can be at the discretion of the foreign issuer or the depositary bank, but is typically at the request of the issuer. There may be a number of reasons why ADRs terminate, but in most cases the foreign issuer is undergoing some type of reorganization or merger. Owners of ADRs are typically notified in writing at least thirty days prior to a termination. Once notified, an owner can surrender their ADRs and take delivery of the foreign securities represented by the Receipt, or do nothing. If an ADR holder elects to take possession of the underlying foreign shares, there is no guarantee the shares will trade on any US exchange. The holder of the foreign shares would have to find a broker who has trading authority in the foreign market where those shares trade. If the owner continues to hold the ADR past the effective date of termination, the depositary bank will continue to hold the foreign deposited securities and collect dividends, but will cease distributions to ADR owners. Usually up to one year after the effective date of the termination, the depositary bank will liquidate and allocate the proceeds to those respective clients. Many US brokerages can continue to hold foreign stock, but may lack the ability to trade it overseas.

ADRs' Special Risks Of course, even though they trade in US dollars and can, at least on the surface, closely mimic the look and feel of American stocks, ADRs come with their own set of special considerations to keep in mind. Currency risk: If the value of the US dollar rises against the value of the company's home currency, a good deal of the company's intrinsic profits might be wiped out in translation. Conversely, if the US dollar weakens against the company's home currency, any profits it makes will be enhanced for a US owner. For more information on how this could damage or inflate your results, read The Danger of Investing in International Bonds. Political risk: ADR status does not insulate a company's stock from the inherent risk of its home country's political stability. Revolution, nationalization, currency collapse or other potential disasters may be greater risk factors in other parts of the world than in the US, and those risks will be clearly translated through any ADR that originates in an affected nation. Inflation risk: Countries around the globe may be more, or less, prone to inflation than the US economy is at any given time. Those with higher inflation rates may find it more difficult to post profits to an US owner, regardless of the company's underlying health. In other words, ADRs are just what they seem: a representation of a foreign stock, rather than an actual holding in the company. Because of all of the considerations listed above, an ADR of a foreign company in the US. may trade a little ahead or a little behind the price the company commands in its own currency in its own home base. But it's safe to say that buying an ADR is the closest an American investor can come to participating directly in the rest of the world's economy. ADR holds many advantages for investors.

ADRs help investors to invest in big foreign companies and are good instruments for portfolio diversification. They help the investors to profit from many emerging market companies (high risk high return instruments). All transactions including buying the shares, dividend payments and capital gains are done in U.S. Dollars. The competitive rates of Euro and U.S. Dollar over other market currencies also benefit the investor. ADRs offer more transparency and stability than trading the stock directly in a foreign market.

GLOBAL DEPOSITORY RECIEPTS

A global depository receipt or global depositary receipt (GDR) is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares. Global depository receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets. Prices of global depositary receipt are often close to values of related shares, but they are traded and settled independently of the underlying share. Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York. GDRs are often listed in the Frankfurt Stock Exchange, Luxembourg Stock Exchangeand in the London Stock Exchange, where they are traded on the International Order Book (IOB). Normally 1 GDR = 10 Shares, but not always. It is negotiable instrument which is denominated in some freely convertible currency. It is a negotiable certificate denominated in US dollars which represents a NON-US Company's publicly traded local equity. A global depositary receipt (GDR) is similar to an ADR, but is a depositary receipt sold outside of the United States and outside of the home country of the issuing company. Most GDRs are, regardless of the geographic market, denominated in United States dollars, although some trade in Euros or British sterling. There are more than 900 GDRs listed on exchanges worldwide, with more than 2,100 issuers from 80 countries. Although ADRs were the most prevalent form of depositary receipts, the number of GDRs has recently surpassed ADRs because of the lower expense and time savings in issuing GDRs, especially on the London and Luxembourg stock exchanges.

Source: JP Morgan

The Global Depositary Receipt As A Financial Instrument A GDR is issued and administered by a depositary bank for the corporate issuer. The depositary bank is usually located, or has branches, in the countries in which the GDR will be traded. The largest depositary banks in the United States are JP Morgan, the Bank of New York Mellon, and Citibank. A GDR is based on a Deposit Agreement between the depositary bank and the corporate issuer, and specifies the duties and rights of each party, both to the other party and to the investors. Provisions include setting record dates, voting the issuers underlying shares, depositing the issuers shares in the custodian bank, the sharing of fees, and the execution and delivery or the transfer and the surrender of the GDR shares. A separate custodian bank holds the company shares that underlie the GDR. The depositary bank buys the company shares and deposits the shares in the custodian bank, then issues the GDRs representing an ownership interest in the shares. The DR shares actually bought or sold are called depositary shares. The custodian bank is located in the home country of the issuer and holds the underlying corporate shares of the GDR for safekeeping. The custodian bank is generally selected by the depositary bank rather than the issuer, and collects and remits dividends and forwards notices received from the issuer to the depositary bank, which then sends them to the GDR holders. The custodian bank also increases or decreases the number of company shares held per instructions from the depositary bank. The voting provisions in most deposit agreements stipulate that the depositary bank will vote the shares of a GDR holder according to his instructions; otherwise, without instructions, the depositary bank will not vote the shares. GDR Advantages And Disadvantages GDRs, like ADRs, allow investors to invest in foreign companies without worrying about foreign trading practices, different laws, accounting rules, or cross-border transactions. GDRs offer most of the same corporate rights, especially voting rights, to the holders of GDRs that investors of the underlying securities enjoy. Other benefits include easier trading, the payment of dividends in the GDR currency, which is usually the United States dollar (USD), and corporate notifications, such as shareholders meetings and rights offerings, are in English. Another major benefit to

GDRs is that institutional investors can buy them, even when they may be restricted by law or investment objective from buying shares of foreign companies. GDRs also overcome limits on restrictions on foreign ownership or the movement of capital that may be imposed by the country of the corporate issuer, avoids risky settlement procedures, and eliminates local or transfer taxes that would otherwise be due if the companys shares were bought or sold directly. There are also no foreign custody fees, which can range from 10 to 35 basis points per year for foreign stock bought directly. GDRs are liquid because the supply and demand can be regulated by creating or canceling GDR shares. GDRs do, however, have foreign exchange risk if the currency of the issuer is different from the currency of the GDR, which is usually USD. The main benefit to GDR issuance to the company is increased visibility in the target markets, which usually garners increased research coverage in the new markets; a larger and more diverse shareholder base; and the ability to raise more capital in international markets.

GDR Market As derivatives, depositary receipts can be created or canceled depending on supply and demand. When shares are created, more corporate stock of the issuer is purchased and placed in the custodian bank in the account of the depositary bank, which then issues new GDRs based on the newly acquired shares. When shares are canceled, the investor turns in the shares to the depositary bank, which then cancels the GDRs and instructs the custodian bank to transfer the shares to the GDR investor. The ability to create or cancel depositary shares keeps the depositary share price in line with the corporate stock price, since any differences will be eliminated through arbitrage. The price of a GDR primarily depends on its depositary ratio (aka DR ratio), which is the number of GDRs to the underlying shares, which can range widely depending on how the GDR is priced in relation to the underlying shares; 1 GDR may represent an ownership interest in many shares of corporate stock or fractional shares, depending on whether the GDR is priced higher or lower than corporate shares.

Most GDRs are priced so that they are competitive with shares of like companies trading on the same exchanges as the GDRs. Typically, GDR prices range from $7 - $20. If the GDR price moves too far from the optimum range, more GDRs will either be created or canceled to bring the GDR price back within the optimum range determined by the depositary bank. Hence, more GDRs will be created to meet increasing demand or more will be canceled if demand is lacking or the price of the underlying company shares rises significantly. Most of the factors governing GDR prices are the same that affects stocks: company fundamentals and track record, relative valuations and analysts recommendations, and market conditions. The international status of the company is also a major factor. On most exchanges, GDRs trade just like stocks, and also have a T+3 settlement time in most jurisdictions, where a trade must be settled within 3 business days of the trading exchange. The exchanges on which the GDR trades are chosen by the company. Currently, the stock exchanges trading GDRs are the:
1. 2. 3. 4. 5.

London Stock Exchange Luxembourg Stock Exchange NASDAQ Dubai Singapore Stock Exchange Hong Kong Stock Exchange

Companies choose a particular exchange because it feels the investors of the exchanges country know the company better, because the country has a larger investor base for international issues, or because the companys peers are represented on the exchange. Most GDRs trade on the London or Luxembourg exchanges because they were the 1st to list GDRs and because it is cheaper and faster to issue a GDR for those exchanges. Many GDR issuers also issue privately placed ADRs to tap institutional investors in the United States. The market for a GDR program is broadened by including a 144A private placement offering to Qualified Institutional Investors in the United States. An offering based onSEC Rule 144A eliminates the need to register the offering under United States security laws, thus saving both time and expense. However, a 144A offering must, under Rule 12g3-2(b), provide a home country disclosure in English to the SEC or the information must be posted on the companys website. The Details Of A GDR Purchase By An Investor 1. An investor calls her broker to buy GDRs for a particular company. 2. The broker fills the order by either buying the GDRs on any of the exchanges that it trades, or by buying ordinary company shares in the home market of the company by

using a broker in the issuer's country. The foreign broker then delivers the shares to the custodian bank. 3. The investors broker notifies the depositary bank that ordinary shares have been purchased in the issuer's market and will be delivered to the custodian bank and requests depositary shares to be issued in the investors account. 4. The custodian notifies the depositary bank that the shares have been credited to the depositary banks account. 5. The depositary bank notifies the investors broker that the GDRs have been delivered. 6. The broker then debits the account of the investor for the GDR issuance fee. The Details Of A GDR Sale By An Investor 1. An investor instructs his broker to sell his GDRs. The investor must deliver the shares within 3 business days if the shares are not in the street name of the broker. 2. The broker can either sell the shares on the exchanges where the GDR trades, or the GDRs can be canceled, and converted into the ordinary shares of the issuing company. 3. If the broker sells the shares on an exchange, then the broker uses the services of a broker in the issuer's market. 4. If, instead, the shares are canceled, then the broker will deliver the shares to the depositary bank for cancellation and provide instructions for the delivery of the ordinary shares of the company issuer. The investor pays the cancelation fees and any other applicable fees. 5. The depositary bank instructs the custodian bank to deliver the ordinary shares to the investors broker, who then credits the account of its customer.

Technical Notes GDRs issued by a United States depositary bank are issued pursuant to Regulation S (Reg S) of the Securities Act of 1933. A GDR certificate is not delivered to the GDR holder, but is based on a master certificate held by a Common Depositary for clearing purposes. Most depositary receipts (DRs) are held in the street name of a bank or broker in a securities depositary institution, such as the Depositary Trust Company (DTC), Euroclear, or Clearstream, which expedites the trading and settlement of DR trades for the beneficial interest of the owners. The beneficial DR owners are the owners who receive the actual benefits of holding a depositary receipt, such as the capital gains from trading shares, dividends, and voting rights. Most GDR programs require that the issuing company notify the relevant exchanges of any information that may cause the underlying shares to greatly change in price.