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| American
Depository Receipt |
What
is an ADR?
An American depository receipt is a negotiable certificate
that represents a company's publicly traded equity or debt.
They are created when a broker purchases the company's shares
on the home stock market and delivers those to the depository's
local custodian bank, which then instructs the depository
bank, to issue Depository Receipts. Depository receipts could
be traded freely just like |
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any
other security, either by exchange or in the over-the-counter market
and could be used to raise capital.
Types of Depository Receipt Facilities
Usually companies have four kinds of depository receipt facilities.
They are:
1. Unsponsored Depository Receipts
They are issued by one or more depositories based on the market
demand, but without a formal agreement with the company. In the
present day situation these depository receipts are considered obsolete
and, under most circumstances, are no longer established due to
lack of control over the facility and its hidden costs.
2. Sponsored Depository Receipts
are issued by one depository appointed by the company under a Deposit
Agreement or service contract. Sponsored Depository Receipts offer
control over the facility, the flexibility to list on a national
exchange in the US and the ability to raise capital. There are three
levels of sponsored depository receipts.
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Level I Depository Receipt program is the simplest method
for companies to access the US and non-US. capital markets.
Level I Depository Receipts are traded in the US over-the-counter
("OTC") market and on some exchanges outside the United
States. The company does not have to comply with US Generally
Accepted Accounting Principles ("GAAP") or full Securities
and Exchange Commission ("SEC") disclosure.
- Companies
that wish to either list their securities on an exchange
in the US or raise capital use sponsored Level II or III
Depositary Receipts respectively. These types of Depository
Receipts can also be listed on some exchanges outside
the United States. Each level requires different SEC registration
and reporting, plus adherence to US GAAP. Each higher
level of Depository Receipt program generally increases
the visibility and attractiveness of the Depository Receipt.
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3. Private Placement (144A) Depository Receipt
In addition to the three levels of sponsored Depository Receipt
programs that trade publicly, a company can also access the US and
other markets outside the US through a private placement of sponsored
Depository Receipts. Through the private placement of Depository
Receipts, a company can raise capital by placing Depository Receipts
with large institutional investors in the United States, avoiding
SEC registration and to non-US investors in reliance on Regulation
S. A Level I program can be established alongside a 144A program.
How are they issued?
Depository Receipts are issued or created when investors decide
to invest in a non-US. company and contact their brokers to make
a purchase. These brokers, through their own international offices
or through a local broker in the company's home market, purchase
the actual ordinary shares and request that the shares are delivered
to the depository bank's custodian in that country. The broker who
initiated the transaction will convert the US dollars received from
the investor into the corresponding foreign currency and pay the
local broker for the shares purchased.
On the same day that the shares are delivered to the custodian bank,
the custodian notifies the depository bank. Upon such notification,
Depository Receipts are issued and delivered to the initiating broker,
who then delivers the Depository Receipts to the investor. |
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