Corporate Finance: Asia's Hot Depositary Receipts

by Cesar Bacani, 08 April 2011

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Finance and Banking

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BNY Mellon depositary receipts IPO Level I Level II Level III sponsored DR unsponsored DR

When Brazil’s Vale, the world’s largest iron ore company, listed depositary receipts (DRs) in Hong Kong in December, it marked a watershed of sorts for Asia’s CFOs. A new and liquid market has now joined traditional DR leaders New York and London for capital-raising and other purposes.

Also last year, India listed its first DR, a rupee-denominated instrument issued by Standard Chartered Bank. Brazil’s stock exchange launched its first DR last April. More is to come, says BNY Mellon, which acted as depositary bank for 62% of all sponsored DR programs last year.

J.P. Morgan, another major depositary bank, expects a surge in issuers from China and Singapore listing DRs on the Taiwan Stock Exchange, and global companies and Asian companies doing the same in Hong Kong and elsewhere.

“With the continued recovery of capital markets globally and in improvement in corporate earnings generally, we’re expecting 2011 to deliver another strong year of growth in the Asia Pacific depositary receipts space,” says Kenneth Tse, Asia Pacific Head of J.P. Morgan’s depositary receipts group.

For CFOs, the question is whether their company should tap the growing DR markets, particularly those in Asia. What are the gains and potential challenges? What role, if any, can DRs play in capital-raising, enhancement of investor profile, M&A strategies and other business aims? Is it the most cost-efficient and effective instrument to reach these goals?

What Is a DR?

First, a short review. As finance professionals know, a depositary receipt is not a stock. It is a tradeable security that represents ownership of an equity share (or debt instrument, preferred share or other asset that can be equitised). While they are different instruments, a DR and a stock confer on their holders the same rights and obligations, including voting rights and dividends.

One obvious use of DRs is to give companies access to capital outside of their home market. PetroChina’s shares, for example, are denominated in Hong Kong dollars and trade on the Hong Kong stock exchange. The company has also issued depositary receipts, which are denominated in US dollars and trade on the New York Stock Exchange. One PetroChina ADR (American Depositary Receipt) represents ownership of 100 ordinary shares.

By issuing ADRs, PetroChina has in effect done a dual listing, tapping capital in both Hong Kong and the U.S. using essentially the same set of documentation. That’s one beauty of a DR, says Gregory Roath, Managing Director of BNY Mellon Depositary Receipts.

“The DR and the documentation around it allows you to translate that share and create a U.S. form of equity, as opposed to trying to transport a Hong Kong share to the U.S.,” he explains. “And now we see here in Asia numerous exchanges across the region also adopting DR rules to facilitate cross listings to their exchanges as well.”

This means that a company listed on the Philippine Stock Exchange, for example, may issue a DR in Hong Kong, thereby enlarging its investor base outside of its home market. The company need not even be listed. Chinese search engine Baidu, for one, issued DRs in the U.S. without listing the underlying shares anywhere.

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