American Depositary Receipts
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An American depositary receipt (ADR, and sometimes spelled ''depository'') is a negotiable security that represents securities of a foreign company and allows that company's shares to trade in the U.S.
financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets ...
. Shares of many non-U.S. companies trade on U.S.
stock exchange A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for th ...
s through ADRs, which are denominated and pay
dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-in ...
s in
U.S. dollars The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
, and may be traded like regular shares of stock. ADRs are also traded during U.S. trading hours, through U.S.
broker-dealer In financial services, a broker-dealer is a natural person, company or other organization that engages in the business of trading securities for its own account or on behalf of its customers. Broker-dealers are at the heart of the securities and d ...
s. ADRs simplify investing in foreign securities because the depositary bank "manage all custody, currency and local taxes issues". The first ADR was introduced by J.P. Morgan in 1927 for the British retailer
Selfridges Selfridges, also known as Selfridges & Co., is a chain of high-end department stores in the United Kingdom that is operated by Selfridges Retail Limited, part of the Selfridges Group of department stores. It was founded by Harry Gordon Selfridge ...
on the New York Curb Exchange, the
American Stock Exchange NYSE American, formerly known as the American Stock Exchange (AMEX), and more recently as NYSE MKT, is an American stock exchange situated in New York City. AMEX was previously a mutual organization, owned by its members. Until 1953, it was known ...
's precursor. They are the U.S. equivalent of a
global depository receipt A global depository receipt (GDR and sometimes spelled ''depositary'') is a general name for a depositary receipt where a certificate issued by a depository bank, which purchases shares of foreign companies, creates a security on a local exchan ...
(GDR). Securities of a foreign company that are represented by an ADR are called American depositary shares (ADSs).


Depositary receipts

ADRs are one type of
depositary receipt A depositary receipt (DR) is a negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. The depositary receipt trades on a local stock exchange. Depositary receipts facilitates buying shares in f ...
(DR), which are any negotiable securities that represent securities of companies that are foreign to the market on which the DR trades. DRs enable domestic investors to buy securities of foreign companies without the accompanying risks or inconveniences of cross-border and cross-currency transactions. Companies may choose to issue depository receipts in another jurisdiction for a host of commercial reasons including signalling to their investors and clients about their enhanced corporate governance standard. Each ADR is issued by a domestic
custodian bank A custodian bank, or simply custodian, is a specialized financial institution responsible for providing securities services. It safeguards assets of asset managers, insurance companies, hedge funds, and is not engaged in "traditional" commercial ...
when the underlying shares are deposited in a foreign depositary bank, usually by a broker who has purchased the shares in the open market local to the foreign company. An ADR 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 The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
, creation of ADRs attracts a 1.5% creation fee; this creation fee is different than
stamp duty reserve tax Stamp duty is a tax that is levied on single property purchases or documents (including, historically, the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions). A physical reven ...
charge by the UK government. Depositary banks have various responsibilities to DR holders and to the issuing foreign company the DR represents.


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 Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid prescr ...
(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. Since the company is not formally involved in an unsponsored issue, the motivation of the company to list overseas is irrelevant for unsponsored programs. Instead, the dynamics of this market is determined by the incentive structure of three types of players: holders of the securities on-shore, the investors in depository receipts off-shore and the intermediaries (depository banks and exchanges).


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 stock transfer agent, transfer agent, share registry or transfer agency is an entity, usually a third party firm unrelated to security transactions, that manages the change in ownership of company stock or investment fund shares, maintains a re ...
. 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 The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
(SEC). The company is not required to issue quarterly or
annual report An annual report is a comprehensive report on a company's activities throughout the preceding year. Annual reports are intended to give shareholders and other interested people information about the company's activities and financial performance. ...
s in compliance with
U.S. GAAP Generally Accepted Accounting Principles (GAAP or U.S. GAAP, pronounced like "gap") is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC) and is the default accounting standard used by companies based in the Uni ...
. However, the company must have a security listed on one or more stock exchanges 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 SEC and is under SEC regulation. In addition, the company is required to file a
Form 20-F Form 20-F is an SEC filing submitted to the US Securities and Exchange Commission used by certain foreign private issuers to provide information. The form is used by companies where 50% or less of the total amount of voting shares are held by Ameri ...
annually. Form 20-F is the basic equivalent of an annual report (
Form 10-K A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission (SEC), that gives a comprehensive summary of a company's financial performance. Although similarly named, the annual report on Form 10-K is distinct from the of ...
) for a U.S. company. In their filings, the company is required to follow U.S. GAAP standards or the
International Financial Reporting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's f ...
(IFRS) as published by the
IASB The International Accounting Standards Board (IASB) is the independent accounting standard-setting body of the IFRS Foundation. The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). It ...
. 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 The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City. It is by far the world's largest stock exchange by market capitalization of its listed c ...
(NYSE),
NASDAQ The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City. It is the most active stock trading venue in the US by volume, and ranked second ...
, and the
NYSE MKT NYSE American, formerly known as the American Stock Exchange (AMEX), and more recently as NYSE MKT, is an American stock exchange situated in New York City. AMEX was previously a mutual organization, owned by its members. Until 1953, it was known ...
. While listed on these exchanges, the company must meet the exchange's 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 United States; it is actually issuing shares to raise capital. In accordance with this offering, the company is required to file a
Form F-1 The SEC filing is a financial statement or other formal document submitted to the U.S. Securities and Exchange Commission (SEC). Public companies, certain insiders, and broker-dealers are required to make regular SEC filings. Investors and financi ...
, which is the format for a prospectus for the shares. They also must file a
Form 20-F Form 20-F is an SEC filing submitted to the US Securities and Exchange Commission used by certain foreign private issuers to provide information. The form is used by companies where 50% or less of the total amount of voting shares are held by Ameri ...
annually 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 6-K Form 6K is an SEC filing submitted to the U.S. Securities and Exchange Commission used by certain foreign private issuers to provide information that is: * Required to be made public in the country of its domicile * Filed with and made public by ...
. 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
Vodafone Vodafone Group Public limited company, plc () is a British Multinational corporation, multinational Telephone company, telecommunications company. Its registered office and Headquarters, global headquarters are in Newbury, Berkshire, England. It ...
,
Petrobras Petróleo Brasileiro S.A., better known by the portmanteau Petrobras (), is a state owned enterprise, state-owned Brazilian multinational corporation in the petroleum industry headquartered in Rio de Janeiro, Brazil. The company's name transla ...
, and 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 United States: Rule 144-A and Regulation S. ADR programs operating under one of these two 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 Private placement (or non-public offering) is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors. Generally, these investors include friend ...
. Shares of companies registered under Rule 144-A are
restricted stock Restricted stock, also known as restricted securities, is stock of a company that is not fully transferable (from the stock-issuing company to the person receiving the stock award) until certain conditions (restrictions) have been met. Upon satisfa ...
and may only be issued to or traded by
qualified institutional buyer A qualified institutional buyer (QIB), in United States law and finance, is a purchaser of securities that is deemed financially sophisticated and is legally recognized by securities market regulators to need less protection from issuers than most p ...
s (QIBs). U.S. public shareholders are generally not permitted to invest in these ADR programs, and most are held exclusively through the
Depository Trust & Clearing Corporation The Depository Trust & Clearing Corporation (DTCC) is an American Trade (financial instrument), post-trade financial services company providing clearing (financial), clearing and settlement (finance), settlement services to the financial markets ...
, so there is often very little information on these companies. Characteristics include: * It is a secured security. * A fixed rate of interest is paid. * Can be converted into multiple shares.


Offshore (SEC Regulation S) ADRs

The other way to restrict the trading of depositary shares to U.S. 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 U.S. 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-U.S. 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 existing ADRs in the secondary market. The latter can be achieved either by purchasing the ADRs on a U.S. 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 A corporate action is an event initiated by a public company that brings or could bring an actual change to the securities—equity or debt—issued by the company. Corporate actions are typically agreed upon by a company's board of directors ...
or
merger Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
. 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 U.S. 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.


Example

In 2013 a
China China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
-based company composed of various offshore
holding companies A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies ...
called Autohome (ATHM) offered 7,820,000 American depositary shares (ADSs) representing its 7,820,000 Class A Ordinary Shares from its
initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...
. Details can be found from its prospectus dated December 16, 2013, under Registration No. 333-192085 filed pursuant to Rule 424(b)(4) of the U.S. Securities Exchange Act of 1933.


See also

*
Cross listing Cross-listing (or multi-listing, or interlisting) of shares is when a firm lists its equity shares on one or more foreign stock exchange in addition to its domestic exchange. To be cross-listed, a company must thus comply with the requirements of al ...
*
Depositary receipt A depositary receipt (DR) is a negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. The depositary receipt trades on a local stock exchange. Depositary receipts facilitates buying shares in f ...
* Form F-6 *
Foreign currency convertible bonds Foreign currency convertible bonds (FCCBs) are a special category of bonds. FCCBs are issued in currencies different from the issuing company's domestic currency. Corporates issue FCCBs to raise money in foreign currencies. These bonds retain all f ...
*
Global depository receipt A global depository receipt (GDR and sometimes spelled ''depositary'') is a general name for a depositary receipt where a certificate issued by a depository bank, which purchases shares of foreign companies, creates a security on a local exchan ...
*
Indian Depository Receipt Indian Depository Receipt (IDR) is a financial instrument denominated in Indian Rupees in the form of a depository receipt. The IDR is a specific Indian version of the similar global depository receipts. It is created by a Domestic Depository (cu ...


References


External links


SEC guide to foreign investing for U.S. citizens

Investor Bulletin: American Depositary Receipts (from 2012, includes info about fees)
{{Authority control Equity securities Depositary receipts