The Role of the Depositary Bank

4 Issuer Services DRs were created in 1927 to assist U.S. investors seeking to purchase shares of non-U.S. corporations. Since then, DRs have grown into widely accepted flexible instruments that provide issuers worldwide with access to investors outside their home markets. Historical and recent data point to the growing size of this opportunity. According to the U.S. Federal Reserve, total U.S. investment in non-U.S. equities, including DRs and non-U.S. shares, has increased steadily over the last 23 years, rising from $279 billion in 1991 to $6.6 trillion in 2014. Additionally, overall DR trading volumes totaled 152.0 billion shares in 2014, growing at a compound annual growth rate of 9% since 2006, reinforcing the long-term trend of constant growth in cross-border trading. Moreover, stock exchange enhancements such as the International Order Book, a dedicated depositary receipt trading service on the London Stock Exchange, further deepens market liquidity for DRs as an access product. Similarly, capital raised in the form of DRs by non-U.S. companies reached $37.3 billion in 2014, with approximately $32.8 billion (or 88%) coming from initial public offerings. Features and Benefits of Depositary Receipts Issued by a depositary bank, a DR is a negotiable instrument evidencing ownership of shares in an overseas corporation. Each DR evidences depositary shares (DSs), representing a specific number of underlying shares on deposit with a custodian in the issuer’s home market. The term “DR” is commonly used to refer to both the physical certificate as well as the security itself. DRs are generally subject to the trading and settlement procedures of the market in which they trade. The different types of DRs are frequently identified by the markets in which they are available, or the rules and regulations associated with the structures. For example: • American Depositary Receipts (ADRs) are DRs that are publicly available to investors in the U.S.; • Global Depositary Receipts (GDRs) are DRs that may be offered to investors in two or more markets outside the issuer’s home country, usually pursuant to Rule 144A and Regulation S (Reg S) under the U.S. Securities Act of 1933; • Local Depositary Receipts (LDRs) extend the traditional ADR concept to various markets globally. Examples include Hong Kong Depositary Receipts (HDRs), Japanese Depositary Receipts (JDRs), and Brazilian Depositary Receipts (BDRs). DRs can be publicly offered in the U.S., privately placed or issued pursuant to an international offering. The structure of the DR program typically defines the segment of investors that can purchase the securities. In the U.S., publicly offered securities are available to the broadest spectrum of investors and trade either on a national stock exchange (e.g., NASDAQ or the New York Stock Exchange (NYSE)) or in the over-the-counter (OTC) market. GDRs are usually offered to institutional investors through a private offering, in reliance on exemptions from registration under the U.S. Securities Act of 1933. These exemptions are Reg S for non- U.S. investors and Rule 144A for U.S. investors that are Qualified Institutional Buyers (QIBs). QIBs in the U.S. include institutions that own and invest in at least $100 million in securities of non- affiliates and registered broker-dealers that own or invest on a discretionary basis at least $10 million in securities of non-affiliates. A GDR offering often has a Rule 144A component as well as a placement to non-U.S. investors pursuant to Reg S. Issuance and Cancellation: Fungibility of DRs with Ordinary Shares Based upon availability and market conditions, an investor may acquire DRs either by purchasing existing DRs or by converting shares purchased in the issuer’s home market to new DRs. New DRs are created subsequent to the deposit by an investor (or broker) of shares with the depositary’s local market custodian. The depositary then issues new DRs, which represent the shares on deposit, to the investor or broker. This is referred to as an issuance of DRs. Conversely, an investor may cancel the DRs and sell the underlying ordinary shares in the relevant home market upon delivery of the DRs The Role of the Depositary Bank A Depositary Receipts (DR) program is an effective option for companies seeking to further tap global capital markets and expand their equity base outside their home market. Issuers establishing DR programs may benefit from a broadened investor base, potentially increasing liquidity as a result of an expanded market, and enhanced visibility. From the investor perspective, DRs have long been a popular instrument in worldwide capital markets, particularly where the elimination of custody and cross-border safe-keeping charges are a key benefit.