Page 5 - The Role of the Depositary Bank

5 The Role of the Depositary Bank | Introduction
Table 1
Investor Investor
DR Broker DR Broker Local Broker
DTC/Euroclear/
Clearstream Depositary Local Stock
Market
Depositary Local Custodian
Local Broker
Local Custodian
DR Issuance Process
Investor contacts
broker and requests
the purchase of a
DR issuer company’s
shares. If existing DRs
of that company are not
available, the issuance
process begins
To issue new DRs, the
broker contacts a local
broker in the issuer’s
home market
The local broker
purchases ordinary
shares on an exchange
in the local market
Ordinary shares are
deposited with a local
custodian
The local custodian
instructs the depositary
to issue DRs that
represent the shares
received
The depositary issues
DRs and delivers them
in physical form or book
entry form through DTC/
Euroclear/Clearstream
(as applicable)
The broker delivers
DRs to the investor or
credits the investor’s
account
DR Cancellation Process
The investor instructs
the broker to cancel DRs
The broker delivers the
DRs to the depositary
for cancellation and
instructs the depositary
to deliver the ordinary
shares to a local
custody account
The depositary cancels
the DRs and instructs
the local custodian to
release and deliver the
underlying shares to
the seller’s broker in the
issuer’s home market
The local custodian
delivers the underlying
ordinary shares as
instructed to the local
broker. The local broker
safe-keeps the ordinary
shares or delivers them
to or on behalf of the
new investor
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and cancellation instructions to the
depositary, which in turn, cancels the
DRs and notifies its custodian to release
the underlying shares. The investor or
broker may then either safe-keep or sell
the ordinary shares in the local market.
Liquidity
For many DR market participants,
liquidity – the breadth and depth of
trading activity – is considered the best
measure for long-term success of a DR
program. Without the ability to move
into and out of positions of sufficient
size, institutions are often reluctant
to add the security to their managed
portfolios. Likewise, brokers prefer to deal
in liquid securities, and both sell-side and
buy-side analysts prefer to cover liquid
securities with high standards of financial
disclosure providing an important added
protection. Once established, liquidity
can be facilitated and maintained
through a strong Investor Relations
(IR) effort and the resources of the
depositary bank and other partners.
The findings of Citi’s The Liquidity
Premium study (published in 2007
by the Rutgers University School of
Law Business Law Journal) built upon
academic research showing that firms
cross-listed on a U.S. exchange, such as
the NYSE or NASDAQ, benefit from, on
average, a sustainable valuation premium
of 33% over companies that do not cross-
list. The Citi study demonstrated that,
on average, companies with liquid DRs,
whether cross-listed or direct-listed,
had higher valuations, as measured by
their price-to-book-value ratios, than
those with less liquid DRs.
Limited Two-Way Market
Some countries, such as India, Taiwan
and Korea, maintain restrictions on
the reissuance of DRs. In this limited
two-way market environment, after
withdrawal and sale of ordinary shares
from the DR facility, the shares are
subject to limitations on redeposit into
the DR facility. Deposits may, for example,
occur only up to a certain prescribed limit.
Once that limit has been reached, the
DR facility may be closed for reissuance
pending receipt of required permissions.
In contrast, most countries have an
unlimited or free two-way market, where
foreign investors may purchase at any