ADR and GDR edited

8/7/2019 ADR and GDR edited

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ADR and GDR in CentralEurope

Abhishek Modak

PGDM IB Roll No 30


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2

The instrument of ADR/GDR

An equity instrument representing shares listed on foreign exchange History reaches back to 1927 JPMorgans first issue for the UKs

Selfridges Gained much popularity in the 1990s

CEE companies are becoming aware of the advantages of DR The most common types are the American Depositary Receipts

(ADR), Global Depositary Receipts (GDR) and European DepositaryReceipts (EDR).

Four ADR programs with different registration and reporting

requirements, trading conditions, target investors and liquidity: theLevel I, II, III and Rule 144A ADRs

GDR traded at two or more markets


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Motivations for DR - investors 1927 - response to a law passed in Britain, which prohibited British

companies from registering shares overseas The primary reason for creating DR programs was the complexity

involved in buying shares in foreign countries that trade at different pricesand currency values.

Overcome the psychological barriers of investing in a foreign security. Avoidance of custody fees, taxes, currency conversion expenses... Butnot quite the same as local shares

Not always include voting rights Lower liquidity than shares DR holders counted as a single shareholder for the purpose of petitioning the

company to include a resolution on the Boards agenda


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Motivations for DR - issuers Extended potential investors base Increased liquidity of the securities Enhanced visibility of the company

Advantages of DR compared to foreign shares: no need to satisfy listing requirements of all markets possibility to list at two or more markets through one DR program ADR ratio set in a way that the DR are traded at market usual prices vehicle of cross-border M&A and privatizations


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DR markets development (1) Depositary receipts markets grew

at a double-digit rate in the 1990s

There were 836 DR programs with

176 of them listed in the US in

1990; these figures reached 1,534

and 608 respectively in 2000. As a consequence of the global

market corrections in 2000-2002

the DR markets growth slowed

down.

Source: The Depositary Receipt Market Review 2004, The Bank of New York

Development of number of DR programs

501 520570 563 537 504 498

1 5271 681 1 729

1 791 1 819 1 847 1 8171 858

458

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

2 000

1997 1998 1999 2000 2001 2002 2003 2004

Sponsored US-listed Sponsored


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DR markets development (2)

Also the trading volumes

increased substantially from

3.8 billion shares with dollarvolume of 75 billion in 1990 to

28.7 billion shares and USD

1,185 billion in 2000. 0200

400

600

800

1 000

1 200

1 400

1997 1998 1999 2000 2001 2002 2003 2004

USDbn

0

5

10

15

20

25

30

35

40

billions of USD billions of DRs

Trading volumes of US-listed DRs

Source: The Depositary Receipt Market Review 2004, The Bank of New York


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DR vs. actual share price The price of a depositary receipt should virtually equal to the price of

underlying shares in the local market:DR price = ADR ratio * price of underlying share *exchange rate ( transaction costs) ADR ratio is the number of ordinary shares represented by one DR.

For equality: continuous buying and selling in both markets the two assets are virtually identical with basically the same pay-offs the price of both instruments reflects the same information

Against equality:

markets segmentation information lags different trading hours very temporary differences


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DR vs. actual share price results (1) On examination of 3 Czech, 3 Hungarian and 3 Polish stocks to which DRs

have been issued. It was found, that the prices of depositary receipts and their underlying

shares are very closely correlated. For all Czech and Hungarian shares the correlation coefficient was above

0.99. For two of the Polish shares lower values.

0

100

200

300

400

500

600

700

800

900

1,000

2004

/01/20

2003

/07/25

2003

/01/28

2002

/07/30

2002

/01/30

2001

/07/24

2001

/01/23

2000

/07/25

2000

/01/25

1999

/07/26

1999

/01/27

1998

/07/29

CZ

GDR ordinary share

Development of esk Telecom ordinary share and GDR prices

Source: esk Telecom, Czech National Bank


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DR vs. actual share price results (2) Price gaps usually limited by 5%, last a few days before they are

eliminated. The correlation is increasing over time and the price gaps are less marked

and become shorter-living (with small exceptions).

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2004/01/

2003/07/

2003/01/

2002/07/

2002/01/

2001/07/

2001/01/

2000/07/

2000/01/

1999/07/

1999/02/

1998/08/

1998/02/

1997/08/

Difference between prices of Komern banka ordinary share and GDR

Source: Prague Stock Exchange, Yahoo Finance, Czech National Bank


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Price reaction to the DRlisting The price of actual shares, underlying the DRs, usually reacts to the

introduction of a DR program (or its announcement). The structure of the price behavior is largely variable across

companies.

Price development of esk Telecom share compared to the market index

Note: The share price and value of the index on December 5, 1996 are taken as base values (100%).The second DR offering in December 2003 was not a new DR program, but an offering within the first GDR program.Source: esk Telecom, Prague Stock Exchange

0%

50 %

100%

150%

200%

250%

300%

350%

400%

450%

2004/01/20

2003/09/03

2003/04/23

2002/12/06

2002/07/30

2002/03/18

2001/10/31

2001/06/13

2001/01/30

2000/09/14

2000/05/03

1999/12/15

1999/08/05

1999/03/24

1998/11/09

1998/06/29

1998/02/13

1997/09/24

1997/05/15

1996/12/27

1996/08/14

1996/04/01

Share Pr ice

PX-50

Introduction ofDR

program, June 3, 19 98

DR offering,

December 5, 2003

0%

50 %

100%

150%

200%

250%

300%

350%

400%

450%

2004/01/20

2003/09/03

2003/04/23

2002/12/06

2002/07/30

2002/03/18

2001/10/31

2001/06/13

2001/01/30

2000/09/14

2000/05/03

1999/12/15

1999/08/05

1999/03/24

1998/11/09

1998/06/29

1998/02/13

1997/09/24

1997/05/15

1996/12/27

1996/08/14

1996/04/01

Share Pr ice

PX-50

Introduction ofDR

program, June 3, 19 98

DR offering,

December 5, 2003


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Price reaction to the DRlisting

0%

50 %

100%

150%

200%

250%

300%

2004/01/15

2003/08/08

2003/03/10

2002/10/03

2002/05/03

2001/11/27

2001/06/27

2001/01/25

2000/08/23

2000/03/21

1999/10/15

1999/05/18

1998/12/14

1998/07/16

1998/02/12

1997/09/04

1997/04/04

1996/10/29

1996/05/30

1995/12/08

1995/07/13

1995/01/26

Sha re price

PX-50

First DR program,

June 29, 1995

SecondDR program,

November25, 1996

Rights issue,

January7, 2000

0%

50 %

100%

150%

200%

250%

300%

2004/01/15

2003/08/08

2003/03/10

2002/10/03

2002/05/03

2001/11/27

2001/06/27

2001/01/25

2000/08/23

2000/03/21

1999/10/15

1999/05/18

1998/12/14

1998/07/16

1998/02/12

1997/09/04

1997/04/04

1996/10/29

1996/05/30

1995/12/08

1995/07/13

1995/01/26

Sha re price

PX-50

First DR program,

June 29, 1995

SecondDR program,

November25, 1996

Rights issue,

January7, 2000

Price development of Komern banka share compared to the market index

Note: The share price and value of the index on July 3, 1995 are taken as base values (100%).Source: Prague Stock Exchange


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Liquidity effects

Cross listing may enhance liquidity of the actual shares on the localmarket:

increased visibility of the company

reduction in the information asymmetry (better analysts coverage)

possibility of cross-border trading...

The indicator calculated here to observe the effects of DR listing on

liquidity in the stock is called Trading Volume Multiplier, which is

defined as the multiple of the average daily trading volume (number

of actual shares traded in the local market) during the previous year.


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Spillover effect on the localstock market International cross-listing can alter incentives of companies andindividuals to participate in the market and can that way contribute to

transformation of a segmented local equity market with low liquidity to an

integrated market with high liquidity and capitalization.

On the other hand, concerns are frequently expressed that migration ofmajor share of market capitalization and value traded from small

emerging stock exchanges to leading financial centers has adverse

consequences on the overall quality of the local market.

The whole market activity development is thus tightly connected with the

behavior of the two shares. We can therefore not easily differentiate

between the market wide and stock-specific influences.


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DRs and implications onMNEs raising capital necessary to finance investments

limited resources available in the emerging capital markets

privatizations

during the 1980s and 1990s almost half of the offerings associated with privatization

were international offerings

The Czech governments have never used the opportunity to privatize a state owned

company with help of depositary receipts. By contrast, Polish or Hungarian

governments employed depositary receipts in the privatization process of several

companies

M&As

to finance the transaction

as an acquisition currency


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Conclusions A range of different DR types has evolved to satisfy the needs of all

investors and issuers. The most frequently chosen approach by the CE

companies was a simultaneous offering to institutional investors in the US

and in London (or Luxembourg) pursuant to Rule 144A and Reg S.

The DR and underlying shares prices of CE companies turned out to bealmost perfectly correlated, hence there dont seem to be many

opportunities for profitable arbitrage.


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Conclusions It is usually expected that a DR issue lowers cost of capital to the company,

lower cost of capital implies higher shareholder value, which is reflected in

the DR price.

Czech companies continue to lag behind their Central European

counterparts in the number of DR programs. The advantages and

opportunities of depositary receipts have been, however, even more ignored

by Czech governments.

There doesnt remain much potential for utilization of DRs in privatizations. On the

other hand, several larger companies could exploit the chance to enhance their

visibility abroad, improve their image in the local market or raise equity capital

internationally and overcome that way the limitations of the local market.


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THANK YOU

17


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ADR and GDR edited

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