American Depositary Receipts
Because there can be problems in dealing in unfamiliar
foreign markets, Depositary Receipts were
devised as a method of trading international securities (equity or debt) within the U.S.
This involves depositing the ordinary securities from the foreign market
with a bank (called the depositary),
who will then issue certificates in the U.S. that represent (and are backed by) the deposited
securities. These certificates are freely traded and are commonly called American Depositary Receipts (or
Depositary Receipts for short, or sometimes Global Depositary Receipts for marketing purposes).
The attractions of ADRs
The main appeal is that they are U.S. securities:
this means that they are covered by U.S. securities regulations; trade and settlement is
similar to any other U.S. security; and quoted prices and dividends are in U.S. Dollars.
Because of the above, investment by funds and institutions is possible,
where perhaps they
would otherwise be prevented from investing directly in foreign markets.
Investing directly in international securities may incur global custodian
fees - these are not
required with ADRs.
ADR prices and liquidity will track very closely the underlying security
as any deviation will be
quickly corrected by traders exploiting an easy arbitrage opportunity.
Although ADRs may have been devised originally for U.S. investors, all
of their attractions can be equally
applicable for foreign investors.
For example, an investor in Kuwait may be interested in buying shares in
Argentina, in which case the U.S. traded Depositary Receipts may be more attractive
than dealing direct in the Argentine market.
In addition to the advantages above, the investor would be able to look
at price history charts and
follow real-time prices (as with any other U.S. security), transaction fees could be less and the
foreign currency investment may be more competitive than converting funds to Argentine Dollars directly.
The types of ADR
A similarity obviously exists between ADRs and covered warrants (or OTC
options) As with the latter,
there is frequently nothing to stop anybody buying some shares in a company and then issuing Depositary
Receipts representing those shares - without consulting, or acting with the accord, of the company
itself. These are termed unsponsored Depositary Receipts, and in the early days of the ADR market
they were quite common. Today, however, nearly all ADRs are sponsored, whereby companies sign a
Deposit Agreement with a bank acting as the depositary.
There are then a few different types (or levels) of ADR:
Sponsored Level 1: this is the simplest method for foreign companies to issue tradable securities
in the U.S. markets. The ADRs are not listed, and are traded over-the-counter (OTC). The attraction
to the companies of not listing is that they do not have to adapt any reporting procedures to comply
with U.S. Generally Accepted Accounting Principles (GAAP) or Securities and Exchange
Commission (SEC) disclosure.
Sponsored Level 2: if the company wishes the shares to be listed
then they have to satisfy the
procedures mentioned above, and further comply with the listing rules of whichever exchange they
choose. This stage actually comprises many different levels, depending on the type of
visibility the company desires - and therefore the type of listing they choose.
Private placement: instead of publicly traded securities, a company
may wish to make a
private placement to large institutional investors in the U.S. (which will not require SEC
The ADR market
There are now over 1,500 ADRs from over 50 countries; and the majority
of these are OTC (Level 1
type). In many cases the ADRs may constitute 5-15% of the total shareholder base for a company.
The depositaries for the ADRs tend to be concentrated among a very few
banks; the most active of which is
the Bank Of New York, which acts as a depositary for approximately 60% of all issues.
Looking to do a little international bottom-fishing?
J.P. Morgan's new site, ADR.com,
will give you the information you need.
With an ADR you can buy shares of foreign companies on the U.S. exchanges.
You can search the database by company, country or exchange.
Each company listing provides detailed information, including earnings estimates,
historical performance and closing prices.
You can even compare ADR performance by region or by industry.
(Text in part by: www.global-investor.com)
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