2-1 Introduction of Depositary Receipts
The Nature of Depositary Receipts
International trading can be complicated because of the different regulations on securities, inconvenient payment of dividends, fluctuating foreign currency exchange rates, difficulties in obtaining information that may often be in a different languages, high commission fees, and so on. However, the demand for cross-national investments and financing have increased along with globalization. In consequence, many countries have relaxed restrictions on foreign companies’ investments and financing in their domestic markets, as well as those on domestic companies’ in foreign market. It was from such moves that Depositary Receipts (DRs) were developed.
DRs were created by J.P. Morgan for U.S. investors as a means of investment in British securities. A DR, issued by the depositary bank, is a negotiable certificate which represents the ownership of a foreign stock and is held by the bank in custody abroad.
After being registered with the local Stock Exchange, DRs can be traded as common stocks, providing a more convenient channel than direct investments in foreign stocks.
For example, DRs are applicable to local trading and settlement systems, while the dividends are paid to investors through depositary banks using local currency. Table 2 summarizes the advantages of DR programs for both issuers and investors.
9
Table 2
Benefits of Creating a DR Program For Issuers
Broaden and diversify a company’s investor base
Enhance a company’s visibility, status and profile internationally among institutional investors
Establish or increase global liquidity
Develop and increase market research coverage outside the home market
Get an international valuation
Offer a new avenue for raising equity capital
Meet internationally accepted corporate governance standards
For Investors
Easier to purchase and to hold than the issuer’s underlying shares
Trade easily and conveniently in domestic currency, and settle through domestic stock exchange
Facilitate diversification into securities of foreign issuers
Create accessibility of price, trading information and market research
Represent a way to provide international exposure for institutional investors despite restrictions against investing in certain countries or in foreign investment instruments
Eliminate unfamiliar custody safekeeping arrangements
Provide dividend payments in domestic currency and corporate notifications in local language.
Source: JP Morgan Global Depositary Receipts Reference Guide
Figure 2 shows five phases for the issuance and cancellation procedures of DRs. In the first phase of the issuance procedure, the investor calls their broker with an order to buy DRs. In the second phase, the broker can buy DRs from the international exchange on which they are trading. The broker can also purchase ordinary shares in the local market and convert them to DRs. If the broker chooses the latter approach, it will conduct
10
its trade via a local broker. The broker then notifies the depositary bank to expect the delivery of shares at the local DR custodian. The broker then requests the depositary bank to issue DRs to a specific account. In the third phase, the custodian credits the shares to the depositary bank’s account and notifies the depositary bank. In the fourth phase, the depositary bank issues DRs to the broker, subject to the investor’s payment of DR issuance fees. In the fifth phase, the broker delivers the DRs to the investor.
Likewise, in the first phase of the cancellation procedures, the investor calls broker with an order to sell DRs and delivers the DRs to the broker during the settlement period.
In the second phase, the broker sells DRs in the international exchange where they are trading or converts the DRs to the underlying shares, and then sells them in the local market. If the broker chooses the latter approach, the broker will conduct its trade via a local broker. The broker then delivers the DRs to the depositary bank. In the third phase, the depositary bank notifies the custodian for cancellation, subject to seller’s payment of DR cancellation fees. In the fourth phase, the custodian delivers shares, as instructed. In the fifth phase, the local broker receives shares and sells them on local market.
Figure 2
The Depositary Receipts’ Issuance and Cancellation Procedures
Source: JP Morgan Global Depositary Receipts Reference Guide
11
Types of Depositary Receipts
According to the different stock exchanges on which DRs are listed, they can be called American Depository Receipts (ADRs), European Depository Receipt (EDR), Global Depositary Receipt (GDR), Singapore Depositary Receipt (SDR), Hong Kong depositary receipt (HDR), and Taiwan depositary receipt (TDR), as shown in Table 3.
Table 3
Types of DRs by Listing Locations and Stock Exchanges
Types of DRs Listing Locations Listing Stock Exchanges
GDR
New York Europe
Asia
NYSE NASDAQ
Tokyo
London Luxembourg
Singapore
ADR New York
NYSE NASDAQ
EDR
London Luxembourg
London Luxembourg
Frankfurt
HDR Hong Kong Hong Kong
SDR Singapore Singapore
TDR Taiwan Taiwan
Source: Summary of Securities Issuance Practices
Another common classification of DRs is whether they are sponsored or unsponsored. If the DRs were initiated at the request of investors without the company’s authorization, then these are defined as unsponsored DRs. The individual consigners (which may be stockholders, banks, trust companies, security dealers, and so on) deposit their foreign shares in the custodian bank, and request the depositary banks to issue DRs
12
in the local market. The companies which issue the foreign stocks would be informed and asked to sign a no objection letter, but would not sponsor with the DRs. In contrast, sponsored DR are created by the issuance companies to raise funds or enhance visibility, and these pay the establishing and maintenance costs. The regulations on sponsored DR are stricter than on unsponsored ones. For example, the companies issuing sponsored DRs have to sign depository agreements with specified depository banks, and also need to provide periodic reports with regard to certain financial and policy information. Since the procedures of issuance and application are more complicated with sponsored DRs, and are examined more strictly by the related government bodies, this increases investor protection. Sponsored and unsponsored DRs are compared in Table 4.
13
Table 4
The Comparisons between Sponsored and Unsponsored DRs
Items Sponsored DRs Unsponsored DRs
Need agreement of DR companies
Required Not required, but have to inform the DR companies.
Applicants DR companies The individual consigners such as stockholders, banks, trust
companies, brokers, and so on.
Application documents Complicated Relatively simple
Contractual relationship The parties of the depositary agreement are the issuer and the depositary bank. The parties of the custodian agreement are the custodian bank and the depositary bank.
The depositary bank and custodian bank enter contracts of custody and delivery. The issuers do not enter such contracts.
Costs The issuance and cancellation fees are paid by the DR holders. The costs relate to the depositary bank or the custodian bank are paid by the DR companies.
All costs are paid by the DR holders.
The reports and notifications provide to the stockholders
All necessary information should be translated into the local language and sent to shareholders and the depositary bank, such as details of the annual meeting of shareholders, business reports, annual reports, and so on.
The business reports should be delivered to the depositary bank and custodian bank. The depositary bank has to decide whether the information from issuers is related to the rights of stockholders and needs to be translated into the local language.
The number of depositary bank Only one depositary bank Unlimited
The function of issuance The issuance can raise funds. The issuance cannot raise funds.
Source: Stock Market Theory and Practice/ Summary of Securities Issuance Practices
14
2-2 The Background of TDRs
Strict regulations on TDR listings during 1996-2008
The Taiwanese government has started to promote offshore Taiwanese companies and foreign companies being listed as TDRs on the TWSE in 1996, sending representatives to Kuala Lumpur in Malaysia and Silicon Valley in the United States to do this. In 1997, these promotional efforts extended to Singapore, and a further visits were also made to the United States. Due to those efforts, ASE Test Ltd. (Stock Code:
9101), a publicly held company in Singapore, became the first TDR on January 8, 1998.9 Although many Taiwanese companies listed on Hong Kong Stock Exchange (HKSE)10 were interested in a secondary listing on the TWSE, restrictions imposed on investments or financing with Mainland China made this difficult. There were three main restrictions on this, as follows. First, foreign companies that were more than 20% shares held by Chinese natural or legal persons, or substantially influenced by Chinese natural or legal persons, were not allowed to be listed on the TWSE. Second, the funds raised in Taiwan by foreign companies were not allowed to be directly or indirectly invested in China. Third, huge fines were imposed on Taiwanese natural or legal persons who invested in China and who delayed filings about these to the Investment Commission in the Taiwan Ministry of Economic Affairs. These limitations resulted that only four TDRs listed on the TWSE during the period 1999 to 2008, including those of Eastern Asia Technology Ltd. (Stock Code: 9102) listed on April 25, 2001, Medtecs International Corp.
Ltd. (Stock Code: 9103) listed on December 31, 2002, Mustek Ltd. (Stock Code: 9104)
9 See Cho, 2011, The market performance and issuing strategy of Taiwan depositary receipts
10 We focus on HKSE, but not other Chinese Stock Exchanges, because the HKSE is the only authorized stock exchange in Mainland China. The list of authorized stock exchanges is shown in Appendix B.
15
listed on January 20, 2003, and Cal-Comp Electronics Public Company Ltd. (Stock Code:
9105) listed on September 22, 2003. The following table summarizes the major events of TDRs before deregulation was carried out in 2008.
Year Major Events
1996
The government started to promote foreign companies and offshore Taiwan companies listing TDRs on the TWSE.
1998 The first TDR, ASE Test Ltd. (Stock Code: 9101) listed on the TWSE.
1999-2003 There were four TDRs listed on the TWSE.
2003-2008 There were no new TDRs listed on the TWSE.
The deregulation policies that increased TDR listings from 2008-2011
In order to meet the demands of greater globalization, the Taiwanese government started to deregulate TDRs in 2008, with the “Promoting overseas enterprises to list in Taiwan 123 Project”11 being announced on March 5, 2008. With regard to the term “123”
in this project, 1 represents promoting primary listing (F-shares) on the TWSE; 2 represents two markets for foreign and offshore Taiwanese companies to be listed on, namely the capital and over the counter market and the emerging market; 3 represents the following three advantages of TDRs: first, foreign enterprises and offshore Taiwanese companies will be closely tied to the Taiwanese market; second, the demands of investors will be met; and third, improved internationalization and competitiveness with regard to Taiwan’s capital market.
11 See TWSE- http://www.twse.com.tw/ch/listed/alien_business/download/plan.pdf
16
Thereafter, the authorities began to amend the related laws and regulations, with the Taiwanese Executive Authority approving the “Punitive Provisions for Illegal Licensing Investment in or Technical Cooperation with Mainland China”12 on March 11, 2008.
These lowered the fines imposed on offshore Taiwanese companies for make-up filing on investments in Mainland China.
The Taiwanese Executive Authority further approved the “Provision for Deregulation of Oversea Enterprise Listing on TWSE”13 on July 31, 2008. This removed the prohibition of foreign companies with more than 20% of their shares held by Chinese natural or legal persons, or substantially influenced by such persons, from being listed on the TWSE. This provision also lifted the restriction on the funds raised by foreign companies from the Taiwanese capital market being invested in China.
On October 27, 2008, the Taiwanese government relaxed the rules on stockholder equity, profitability, and mandatory dispersal of stock ownership for TDRs.14 The total amount of TDR stockholders’ equity was reduced from a minimum of NT$10 billion to NT$6 billion; the average amount of TDR earnings before taxes during the past two years was reduced from a minimum of NT$4 billion to NT$2.5 billion; and the requirement of dispersed of stock ownership for TDRs was cancelled. In the same year, the TWSE allowed foreign companies listing on the Hong Kong and Korean Stock Exchanges to file for TDRs.15 The following table summarizes major events in the deregulation of TDRs.
12 See Investment Commission, Ministry of Economic Affairs -
http://www.moeaic.gov.tw/system_external/ctlr?PRO=LawsLoad&id=16
13 See Mainland Affairs Council, Republic of China-
http://www.mac.gov.tw/ct.asp?xItem=67025&ctNode=5630&mp=1
14 See Taiwanese Executive Authority - http://www.ey.gov.tw/policy7/cp.aspx?n=418E479D85AAFFA3
15 The approved stock exchanges are shown in Appendix B.
17
Date Major Events in the deregulation ofTDRs
2008/03/05
Taiwanese Executive Authority passed “Promoting overseas enterprises to list in Taiwan 123 Project”.
2008/03/11
Taiwanese Executive Authority revised “Punitive Provisions for Illegal Licensing Investment in or Technical Cooperation with Mainland China”.
2008/06/27 TWSE approved Hong Kong Stock Exchange as a qualified stock exchange.
2008/07/31
Taiwanese Executive Authority passed “Provision for Deregulation of Overseas Enterprises Listing on TWSE”.
2008/09/11 TWSE approved the Korean Stock Exchange as a qualified stock exchange.
2008/10/27
The rules on stockholders’ equity, profitability, and mandatory dispersal of stock ownership were relaxed for TDR companies.
Due to these moves, the number of TDR listings increased significantly, and by December 31, 2011 there were a total of 35 TDRs listed on the TWSE (ASE Test Ltd.
delisted on July 14, 2008 and Eastern Asia Technology Ltd. delisted on January 17, 2011).
Table 5 summarizes the listing and delisting of TDRs since 1998, and it can be clearly seen that deregulation of this market attracted more offshore Taiwanese enterprises and foreign companies to issue TDRs.
18
Table 5
Change in Total Number of TDRs Listed on the TWSE
Year Number of Listing TDRs Number of Delisting TDRs
Total Number of TDR Firms Listed on the TWSE
1998 1 0 1
1999 0 0 1
2000 0 0 1
2001 1 0 2
2002 1 0 3
2003 2 0 5
2004 0 0 5
2005 0 0 5
2006 0 0 5
2007 0 0 5
2008 0 1 4
2009 10 0 14
2010 12 0 26
2011 10 1 35
2012 0 3 32
2013 0 4 29
2014/03/31 0 1 28
Source: Taiwan Economic Journal
The delisting trend of TDRs after 2012
MIn 2012 three TDRs were delisted, including Mustek Ltd. (Stock Code: 9104), Super Group Ltd. (Stock Code: 911606), and ELPIDA Memory, Inc. In 2013 another three TDRs delisted, namely Oceanus Group Ltd. (Stock Code: 910579), Hwa Fong Rubber Public Company Ltd. (Stock Code: 911602), and Want China Holdings Ltd.
(Stock Code: 9151). Most recent, and as of March 31, 2014, a further TDR, United
19
Envirotech Ltd. (Stock Code: 911610), had being delisted. Among these, Want Want China Holdings Ltd., a beverages and instant food products supplier, which delisted on October 15, 2013, was especially surprising, as it was the TDR with the highest stock price and the best prospects
There are two difficulties that TDR issuers face that may encourage them to delist.16 First, the maintenance cost of the TDRs is high, as the TWSE imposes a 7% price ceiling and floor on the market, much stricter than that seen in the home markets of the TDR companies, with 30% in Malaysia and Thailand, and no stock price fluctuation limit at all in Hong Kong and Singapore. If the company releases good news, the TDR’s stock price will increase within a smaller range than its underlying stock, which make the TDR presents at a discount giving investors a strong incentive to convert the TDR into its underlying stock and gain from the difference in prices. Such conversions then lead to insufficient outstanding shares being available for TDRs, and the related laws17 require TDRs to issue additional shares if they have had less than 10 million outstanding shares during the past three months. If within three months any additional issuance efforts are unsuccessful, the TDR will be compulsorily delisted from the TWSE. As a result, TDRs have significant costs with regard to maintaining their listing status. The second difficulty for issuers is the burdensome regulation following the delisting of ELPIDA Memory, Inc., on March 28, 2012, the Taiwanese government announced a new policy that requires that a TDR firm to repurchase all outstanding shares if they delist from the TWSE, making TDRs much unattractive to issuers.
For investors, the first problem that the level of information disclosure with regard to TDRs on the TWSE is often inconsistent with that in their home markets, and the
16 See Business Weekly - http://www.businessweekly.com.tw/KArticle.aspx?id=48509
17 See Operating Rules of the TWSE Corporation
20
resulting deferred disclosure can reduce their rights, as seen in the examples shown in Table 6. The other main problem is that TDRs have exemptions with regard to provide financial reports.18 If the home markets of the TDRs are Hong Kong or South Africa, they do not need to report first- or third-quarter financial statements, based on the regulations in their home countries. If the home markets of TDRs are Hong Kong, South Africa, Singapore or Malaysia, the first-quarter, third-quarter and semi-annual financial reports do not need to be audited or reviewed by certified public accountants, based on the regulations in their home countries. If the TDRs are registered with the Singapore Stock Exchange, the first-quarter and third-quarter financial statements need to be produced in accordance with the regulations of Singapore Stock Exchange.19
18 See Market Observation Post System- http://mops.twse.com.tw/mops/web/t132sb05
19 Appendix C provides details of the rules on TDR financial statements.
21
Table 6
Examples of Delayed Information Disclosure
Date Events
2009/08 Medtecs International Corp. Ltd. (Stock Code: 9103) received orders from Southeast Asian countries to produce 2 million isolation gowns in response to an outbreak of influenza, and buyers could raise their orders to 4 million units. The time gap in releasing this news on the Singapore and Taiwanese Stock Markets was one week.
2010/01/12 The underlying stock of Oceanus Group Ltd. (Stock Code: 910579) was suspended from trading in Singapore. However, this information was not announced on the TWSE, where the TDR stock price of the company even increased.
2010/08 Kith Holdings Ltd. (Stock Code: 911021) was suspended from trading on the Hong Kong Stock Exchange for releasing information that may affect its stock price. The news was announced at 10 am in Hong Kong, but announced at 1: 28 pm on the TWSE.
2010/10/20 Because of a delay in revealing important information, Mustek Ltd. (Stock Code: 9104) was judged as violating the regulations in relation to information disclosure, and was fined NT$50,000 by the TWSE.
2011/03/31 BH Global Corporation Ltd. (Stock Code: 9106) announced that the dividend of its TDR was $0.007 Singaporean dollar or NT$0.1635 per share, but the correct dividend was
$0.014 Singapore dollar or NT$0.327 per share. The correction was announced on April 10, 2011.
2011/04/26 Neo-Neon Holdings Ltd. (Stock Code: 911868) delayed filing the financial information required by the TWSE.
2012/07/27 olargiga Energy Holdings Ltd. (Stock Code: 9157) announced “predicted massive losses in the first half year” on the Hong Kong Stock Exchange, but the same news was not released on the TWSE until around 8 am July 30.
2013/02/06 Digital China Holdings Ltd. (Stock Code: 910861) provided false information in a case of government procurement, and was fined $3,918 yuan (about NT $16,000). It was then banned from government procurement for three years. Digital China Holdings Ltd. applied to suspend trading on the Hong Kong Stock Exchange, but this information was delayed for one hour before being released to the TWSE.
Sources: Law TW20, Liberty Times Net21/,UDN Money22, CNYES23
20 See
http://lawtw.com/article.php?template=article_content&parent_path=,1,1573,&article_category_id=204 9&job_id=177953&article_id=101473
21 See http://www.libertytimes.com.tw/2013/new/feb/7/today-e5.htm http://www.libertytimes.com.tw/2013/new/feb/7/today-e6.htm http://www.libertytimes.com.tw/2012/new/jul/31/today-e4-2.htm
21 See http://www.libertytimes.com.tw/2013/new/feb/7/today-e5.htm http://www.libertytimes.com.tw/2013/new/feb/7/today-e6.htm http://www.libertytimes.com.tw/2012/new/jul/31/today-e4-2.htm