6. What are the benefits of ADRs (American Depository Receipts) ?
(a) To the investors
(b) To the issuing company
Ans.
Benefits of American Depository Receipts
Depository Receipts are negotiable certificates issued by a US commercial bank, referred to as the “depository,” which represent shares of a non-US company that ar5e deposited with the depository’s overseas custodian. Depository receipts are registered with the US Securities and Exchange Commission and trade like any other US security in the over-the-counter market or on a national exchange. Depository Receipt investors enjoy rights which are comparable to those of holders of the underlying securities, plus they have the benefits, convenience and efficiency of trading in the US securities market.
1. Benefits to the issuing company
For issuers, there are several reasons for launching and managing an ADR programme:
2. Benefits to the investors
Given below are the principal advantages to the investors:
1. Depository receipts are US securities: Depository receipts are registered with the US securities and Exchange Commission and trade like any other US security in the over-the-counter market or on a national exchange. Depository receipt investors enjoy rights which are comparable to those of holders of the underlying securities, plus they have the benefits, convenience and efficiency of trading in the US securities markets.
2. Depository receipts are easy to buy and sell: Investors purchase and sell depository receipts through their US brokers in exactly the same ways they purchase or sell securities of US companies. Many regional NASD brokers/dealers, and virtually all New York brokers/dealers, make markets in and know how to create depository receipts.
Alternatively, investors can deposit their non-US securities directly with a depository’s custodian and request the issuance of depository receipts. Investors may also return depository receipts to the depository for cancellation and have the underlying securities released back into the local market.
3. Depository receipts are liquid: Depository receipts are as liquid as their underlying securities because they are interchangeable. For example, if a US broker/dealer cannot purchase or sell a depository receipt in the US, it can always create a depository receipt by purchasing the underlying non-US securities for deposit with the depository, which will then issue depository receipts for the securities. Alternatively, the broker/dealer can sell the underlying non-US securities, surrender the depository receipts and instruct the depository to deliver the underlying securities. Liquidity and ease of execution are major reasons why many institutions invest in depository receipts.
4. Depository receipts are global: Investors can choose from more than 1500 different equity depository receipts and several debt depository receipts from 50 countries , including Australia, Brazil, United Kingdom, France, Germany, Hongkong, Italy, Japan, Mexico, Singapore, Spain, Sweden and Thailand. Most of the companies are researched by US analysts, while others have a local following.
5. Depository receipts are convenient to own:
• Depository receipt trades clear and settle through standardized US clearance systems within three business days; while direct investments in non-US shares are subject to complicated and varied standards for international trades.
• Depository receipts are negotiable US securities. They are quoted in dollars, pay dividends or interest in dollars, and trade exactly like any other US security.
• Unlike many non-US securities, which are issued in bearer form, depository receipts are issued in registered form, thus protecting the holder in the event the certificates are lost.
• Depository receipts overcome the obstacles that many mutual funds, pensions and other institutions may have in purchasing and holding securities abroad.
6. Depository receipts are cost-effective:
• Global custodian safe keeping charges are eliminated, saving depository receipt investors up to 30 basis points annually.
• Dividends and other cash distributions are converted into dollars at competitive foreign exchange rates.
• The standard three-day settlement for depository receipts significantly lowers the fail rate on traders and consequently the costs associated with financing failed trades.
• Investors enjoy both market liquidity and arbitrage opportunities. Depository receipts may be bought and sold in the US or the depository receipts can be cancelled and the underlying securities released into their home market.
• Holding depository receipts may facilitate the process of reclaiming excess withholding on dividends and reduce transfer taxes.
(a) To the investors
(b) To the issuing company
Ans.
Benefits of American Depository Receipts
Depository Receipts are negotiable certificates issued by a US commercial bank, referred to as the “depository,” which represent shares of a non-US company that ar5e deposited with the depository’s overseas custodian. Depository receipts are registered with the US Securities and Exchange Commission and trade like any other US security in the over-the-counter market or on a national exchange. Depository Receipt investors enjoy rights which are comparable to those of holders of the underlying securities, plus they have the benefits, convenience and efficiency of trading in the US securities market.
1. Benefits to the issuing company
For issuers, there are several reasons for launching and managing an ADR programme:
- An ADR programme can stimulate investor interest, enhance a company’s visibility, broaden its shareholder base, and increase liquidity.
- By enabling a company to tap US equity markets, the ADR offers a new avenue for raising capital, often at highly competitive costs. For companies with a desire to build a stronger presence in the United States, an ADR programme can help finance US initiatives or facilitate US acquisitions.
- ADRs can provide enhanced communications with shareholders in the United States.
- ADRs provide an easy way for US employees of non-US companies to invest in their companies employee stock purchase plans.
- Features such as dividends reinvestment programmes can help ensure a continual stream of investment into an issuer’s programme.
- ADR ratios can be adjusted to help ensure that an issuer’s ADRs trade is in a comparable range with those of its peers in the US market.
- May increase local prices as a result of global demand/trading through a more broadened and a more diversified investor exposure.
2. Benefits to the investors
Given below are the principal advantages to the investors:
1. Depository receipts are US securities: Depository receipts are registered with the US securities and Exchange Commission and trade like any other US security in the over-the-counter market or on a national exchange. Depository receipt investors enjoy rights which are comparable to those of holders of the underlying securities, plus they have the benefits, convenience and efficiency of trading in the US securities markets.
2. Depository receipts are easy to buy and sell: Investors purchase and sell depository receipts through their US brokers in exactly the same ways they purchase or sell securities of US companies. Many regional NASD brokers/dealers, and virtually all New York brokers/dealers, make markets in and know how to create depository receipts.
Alternatively, investors can deposit their non-US securities directly with a depository’s custodian and request the issuance of depository receipts. Investors may also return depository receipts to the depository for cancellation and have the underlying securities released back into the local market.
3. Depository receipts are liquid: Depository receipts are as liquid as their underlying securities because they are interchangeable. For example, if a US broker/dealer cannot purchase or sell a depository receipt in the US, it can always create a depository receipt by purchasing the underlying non-US securities for deposit with the depository, which will then issue depository receipts for the securities. Alternatively, the broker/dealer can sell the underlying non-US securities, surrender the depository receipts and instruct the depository to deliver the underlying securities. Liquidity and ease of execution are major reasons why many institutions invest in depository receipts.
4. Depository receipts are global: Investors can choose from more than 1500 different equity depository receipts and several debt depository receipts from 50 countries , including Australia, Brazil, United Kingdom, France, Germany, Hongkong, Italy, Japan, Mexico, Singapore, Spain, Sweden and Thailand. Most of the companies are researched by US analysts, while others have a local following.
5. Depository receipts are convenient to own:
• Depository receipt trades clear and settle through standardized US clearance systems within three business days; while direct investments in non-US shares are subject to complicated and varied standards for international trades.
• Depository receipts are negotiable US securities. They are quoted in dollars, pay dividends or interest in dollars, and trade exactly like any other US security.
• Unlike many non-US securities, which are issued in bearer form, depository receipts are issued in registered form, thus protecting the holder in the event the certificates are lost.
• Depository receipts overcome the obstacles that many mutual funds, pensions and other institutions may have in purchasing and holding securities abroad.
6. Depository receipts are cost-effective:
• Global custodian safe keeping charges are eliminated, saving depository receipt investors up to 30 basis points annually.
• Dividends and other cash distributions are converted into dollars at competitive foreign exchange rates.
• The standard three-day settlement for depository receipts significantly lowers the fail rate on traders and consequently the costs associated with financing failed trades.
• Investors enjoy both market liquidity and arbitrage opportunities. Depository receipts may be bought and sold in the US or the depository receipts can be cancelled and the underlying securities released into their home market.
• Holding depository receipts may facilitate the process of reclaiming excess withholding on dividends and reduce transfer taxes.
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