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 T o 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 7 1 1 2 3 4 4 6 5 2 3 1 2 3 4 1 2 3 4 5 6 7 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