BNY Mellon is the leading depositary bank, managing more sponsored depositary receipt programs than all other depositary banks combined. We act as depositary for more than 1,300 sponsored programs from 67 countries; 60% of the global market. To understand the services we provide to issuers, investors and brokers in our role as depositary bank, it is essential to become familiar with depositary receipts.
Depositary receipts (DRs) are negotiable U.S. securities issued by a U.S. bank, referred to as a “depositary bank,” that typically represent a non-U.S. company’s equity. DRs trade freely in global markets and can be listed on major stock exchanges including the New York Stock Exchange, NASDAQ, the London Stock Exchange and the Luxembourg Stock Exchange.
DRs facilitate cross-border trading and may help non-U.S. companies raise capital in global equity offerings or be used as acquisition currency for mergers and acquisitions. DRs allow non-U.S. companies to make their shares available outside their home markets and allow investors in the U.S. and elsewhere to easily invest in companies on a more global basis.
Several DR structures are available to suit a company’s particular capital market needs. American Depositary Receipts (ADRs) are publicly available to U.S. investors on a national stock exchange (NYSE or NASDAQ) or on the over-the-counter (OTC) market. Global Depositary Receipts (GDRs), generally issued under Rule 144A and/or Regulation S of the U.S. Securities Act of 1933, are placed privately or offshore and sold only to qualified institutional buyers (QIBs) in the U.S. or to investors outside the United States. GDRs are often listed on the London or Luxembourg stock exchanges. BNY Mellon has developed Passport DRs for companies wanting to list their shares as DRs for local settlement in various markets. For example, B2Gold, a Canadian mining company with ordinary shares trading on the Toronto exchange and operating assets in Namibia, has listed DRs on the Windhoek exchange, the first Namibian DR.
DRs are traded on major stock exchanges and in the U.S. also on the OTC market. In the U.S. it is just as easy for an investor to trade the DRs of Toyota as it is to trade shares of General Motors. In addition, DRs can be created or cancelled to satisfy investor demand in either the market where the DR trades or in the local trading market where the ordinary shares trade.
A DR represents a specified number of ordinary shares of a company. The depositary bank may set a ratio of DRs-to-ordinary shares.
The DR is created when an investor contacts a broker to make an investment in a company with a DR program in that market. The broker can either purchase DRs in the secondary market or create DRs by purchasing the company’s shares in the local stock market and then delivering them to the depositary’s local custody bank. The broker converts the local currency received from the investor into the corresponding foreign currency and pays the local broker for the shares purchased.
The custodian bank instructs the depositary bank to issue the DRs and deliver them to the initiating broker, who then delivers the DRs to the investor. Conversely, when DRs are sold, the sale can take place in the secondary market, or the ordinary shares held outside the market can be released into the home trading market through a cross-border transaction. In this case, the DRs are cancelled and the shares held with the local custodian bank are delivered to the broker within the home market.
Investor demand for DRs is driven in large part by the desire of individuals and institutions to diversify their portfolios globally. Many U.S. investors typically do not, or for various reasons cannot, invest directly outside of the U.S., but since DRs trading in the U.S. are U.S. securities, they can use DRs to diversify their portfolios. Many U.S. investors who can invest outside the U.S. prefer DRs because they are convenient and cost effective.
There are two general classifications of DRs-sponsored or unsponsored-and four basic types of facilities:
Sponsored DRs are issued by one depositary bank appointed by an issuer company under a service contract called a deposit agreement. Sponsored DRs give an issuer input and control over the facility, and may allow the issuer the flexibility to list on a U.S. stock exchange, and to raise capital.
Unsponsored DRs are issued by one or more depositary banks in response to market demand for a particular security without a formal agreement with a non-U.S. company.
A sponsored Level I DR Program is the simplest way for non-U.S. companies to access U.S. capital markets. Level I DRs are traded in the U.S. through OTC Markets with prices reported to the U.S. Financial Industry Regulatory Authority (FINRA), which makes such information publicly available through sources such as Bloomberg, Reuters, and OTC Markets. In addition, Level I DRs trade on some markets outside the U.S. Establishing a Level I program does not require full registration with the U.S. Securities and Exchange Commission (SEC), U.S. financial or corporate disclosure beyond that required by the home market or compliance with the U.S. Sarbanes-Oxley Act. A sponsored Level I DR program may allow non-U.S. companies to enjoy the benefits of a U.S. publicly traded security without full reporting under the U.S. Securities Exchange Act of 1934.
Because Level I facilities are easy to establish, the majority of sponsored DR programs are Level I facilities. To access U.S. investors, many companies start with a Level I program, then upgrade to a Level II or Level III program.
Companies that wish to list their DRs on a U.S. stock exchange, to raise capital or to make a U.S. acquisition using DRs, establish sponsored Level II or Level III DR programs. These DR programs require SEC registration, disclosure and reporting. The companies must also meet the listing requirements of the applicable stock exchanges.
Structurally, Level II and Level III DRs are similar and both types are used for listing on a U.S. stock exchange. However, Level III DR is the term used for a company raising capital by issuing DRs. Both Level II and Level III programs may attract significant U.S. investor interest.
In addition to the three levels of sponsored DR programs that trade publicly in the U.S., a non-U.S. company can also access the U.S. and other capital markets through SEC Rule 144A and/or SEC Regulation S DR facilities without SEC registration. Rule 144A programs provide for raising capital through the private placement of DRs with qualified institutional buyers (referred to as “QIBs”) in the United States. Regulation S programs provide for raising capital through the placement of DRs offshore to non-U.S. investors in accordance with Regulation S.
These programs may be listed on international stock exchanges. A Level I program can be established in addition to a Rule 144A program, and a Regulation S program may be merged into a Level I program after the restricted period has expired.
Establishing a DR program offers companies many advantages, such as:
Investors today are increasingly pursuing global portfolio diversification. At the same time, impediments relating to settlements, currency conversions, custody services, information flow, unfamiliar market practices, tax conventions, and internal investment policies may discourage them from venturing outside their local market.
Investing in non-U.S. companies on U.S. markets through DRs provides:
The DR issuer appoints a depositary bank. BNY Mellon’s role as depositary bank, however, covers much more than serving the issuer; we actively support the needs of the three constituent groups essential to the success of any DR program: the issuer, the investor and the broker.
We work with an issuer before the launch of the DR program, guiding them through each step of the process. For instance, we listen to the needs of the issuer and work together to determine the most appropriate type of DR facility and to set an appropriate DR-to-ordinary-share ratio based on a number of factors, including peers, marketing conditions, and exchange. Once a program is launched, we provide day-to-day administration, including the coordination of DR shareholder records and reporting as well as operations. Our dedicated Transaction Structuring and Execution team supports a wide range of corporate action services, including voluntary and mandatory events processing.
Recognizing that the visibility of our clients’ DR programs is key for ongoing investor interest, we have specialized professionals dedicated to working with issuers’ investor relations teams to target the buy- and sell-side communities. We commit extensive resources to strategic market visibility initiatives on behalf of issuers and offer frequent educational and training sessions.
We keep our DR issuer clients informed of legal, corporate governance and other market developments that could affect their programs and advocate for beneficial changes on their behalf. Our experienced DR experts are leaders in the market, participating in many industry organizations. Staying abreast of developments in the industry contributes to our leading market position.
Please refer to the DR Directory for a comprehensive list of Depositary Receipt programs.