Basic HTML Version
6
Issuer Services
time ordinary shares in the local market
for deposit into the DR facility.
Relaxed restrictions may benefit
issuers through:
• Increased opportunity for immediate
issuance of DRs;
• Enhanced liquidity over time as
the ability to issue and cancel the
company’s DRs potentially enhances
trading activity. The associated
advantages include higher investor
demand and higher valuation;
• Decreased risk resulting from lower
share price volatility — due to larger
pool of a company’s stock — changes
in supply and demand yield smaller
price changes; and
• Broadened opportunity for non-U.S.
investment in the local market.
A DR premium is the differential
between the ordinary share price in
the local currency and the price of
the DR. Historically, in limited two-
way markets, when the U.S. market
outperforms the non-U.S. market,
the premium grows. When the local
market outperforms the U.S. market,
the premium typically shrinks.
The DR Ratio
A primary step in establishing a DR
program is to determine the ratio of
underlying shares to depositary receipts
(DRs). The share-to-DR ratio may be
established as a one-to-one or as a
multiple or fraction of the underlying
shares. This ratio can influence the
price-trading range. In setting the ratio,
the issuer should consider:
• Industry peers — securities of
companies in the issuer’s industry will
often trade in a certain price range
and the issuer may want to conform
to industry norms in the market
where the DR will be listed;
• Exchange options — each exchange has
average price ranges for the shares
listed and, generally speaking, issuers
may want to conform to that range; and
• Investor appeal — U.S. Institutional
and retail investors are more likely to
buy shares that they perceive to be
well-priced and fairly valued.
While many DR programs are
established with a 1:1 ratio (one
underlying share equals one DR),
DR programs have been known to
have ratios as high as 100,000:1
and as low as 1:100. The depositary
will work with issuers to determine
the most appropriate ratio at the
inception of the DR program. In
addition, the ratio can be adjusted at
a future date, for example, to address
changes in market conditions.
Depositary Receipts compared
with a Direct Listing
Generally, depositary receipts provide
issuers with more benefits and
flexibility than direct listings of ordinary
shares. Issuers can leverage the
economies of scale and local market
expertise of the depositary bank to
maximize their strategic objectives in
cross-border listings. Specifically, DRs
provide the following advantages over
directly listing ordinary shares:
• Flexibility
—— Use of the Deposit Agreement
to facilitate local regulatory
requirements
—— DRs are easily fungible with ordinary
shares, while listing a class of
ordinary shares does not offer the
same level of seamless fungibility