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9
The Role of the Depositary Bank
| Types of DR Programs
DRs may be structured as:
• ADRs listed on a U.S. exchange such
as the NASDAQ Stock Market or the
NYSE (Level II);
• ADRs issued as a public offering
of securities on a U.S. exchange
(Level III);
• GDRs placed with QIBs in the Rule
144A market;
• GDRs placed outside the U.S. in
accordance with Reg S (note that
Reg S programs are often offered in
global markets in conjunction with
144A programs in the U.S. market);
• ADRs traded over-the-counter (OTC)
through OTC markets (Level 1).
U.S.-Listed ADR Programs
(Level II and Level III)
Listing on one of the U.S. national
exchanges can promote active trading
in ADRs and may increase the issuer’s
visibility within the U.S. Listed ADRs
typically receive wider research
coverage by U.S. analysts and the
financial media, hence providing
investors with increased information
about the issuer and its securities.
Issuers can also use ADRs to access
institutional investors that may be
prohibited or limited by their respective
charters, or by regulation, from
investing in non-U.S. securities. In
addition, U.S. investors may prefer
to purchase ADRs rather than shares
in the issuer’s home market as the
DR securities trade, clear and settle
according to U.S. market conventions.
For a Level II ADR program, in which the
ADRs are listed in the U.S., the issuer
must comply with the requirements
of the relevant stock exchange.
The issuer must also register under
the Securities Act of 1933 and the
Types of DR Programs
Securities Exchange Act of 1934, and
file an initial registration statement
and periodic financial reports. Non-U.S.
issuers that are listing their securities
must reconcile all financial statements
to U.S. generally accepted accounting
principles (U.S. GAAP) or international
financial reporting standards (IFRS),
as published by the International
Accounting Standards Board. Financial
reporting for individual business
segments need not be reconciled to
U.S. GAAP or IFRS. Listing securities
on an exchange in the U.S. exempts
non-U.S. issuers from complying with
various state securities regulations.
In a Level III ADR program, the issuer
offers new shares to U.S. investors in
ADR form. A public offering provides
the issuer with the ability to raise
capital by accessing the broadest U.S.
investor base. In order to conduct an
initial public offering (IPO) in the U.S.,
the issuer must:
• Submit Form F-1 to the Securities
and Exchange Commission (SEC) to
register the underlying securities to
be offered;
• Fully reconcile its financial
statements to U.S. GAAP or IFRS (or
include U.S. GAAP financials); and
• Submit Form F-6 to the SEC to register
the ADRs issued by the depositary.
In establishing a Level III ADR program,
the issuer also selects an investment
bank to advise on and underwrite the
offering and to market the ADRs to
U.S. investors. Once the offering has
been completed, the ADR program is
maintained as a listed facility and can
typically accept ongoing deposits from
investors for ADR issuance. An issuer
may also raise capital in subsequent
offerings. In such a follow-on offering,
the issuer may file a Form F-2 or Form
F-3 with the SEC.
GDR Programs (Rule 144A & Reg S)
GDRs allow an issuer to raise capital
through a global offering. Global
offerings allow issuers to access
shareholders in capital markets outside
the issuer’s home market. GDRs use
a global settlement convention which
may include the Depository Trust
Company, Euroclear and Clearstream to
provide global clearing and settlement,
ultimately promoting increased liquidity
through cross-border trading. GDRs
can be issued in either the public or
private market. Most GDRs include an
international tranche placed pursuant
to Regulation S outside the U.S. GDRs
placed in Europe are often listed on
the Luxembourg or London Exchanges.
Several additional listing destinations
have become viable, potentially
expanding the opportunities for DR
issuers. These include the Singapore
Exchange, Frankfurt Stock Exchange
and Nasdaq Dubai.
Additionally, GDRs can include a U.S.
tranche which can be privately placed.
These DRs are offered pursuant to Rule
144A which, adopted in 1990, greatly
increased the liquidity of privately
placed securities by allowing QIBs to
resell those securities privately to other
QIBs without a holding requirement or
other formalities.
The evolution of region-specific DRs is
evidence of the flexibility of the GDR,
allowing issuers to select the investor
base they wish to access and broaden
their shareholder base into new
markets. For example, an issuer could
establish a GDR program that targets
European, Asian and/or Latin American
investors and does not offer shares in
the U.S. Over time, the GDR program
could be enhanced to reach additional
markets and investors.