The Role of the Depositary Bank

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.