by:matthew harrison, research & corporate development, hkex bonnie chan, listing, hkex hong kong...

By : Matthew Harrison, Research & Corporate Development, HKEXBonnie Chan, Listing, HKEx

HONG KONG DEPOSITARY RECEIPTS (HDRs)

Seminar on 17 September 2008

At Hong Kong Securities Institute

2

AGENDA Page

1. Nature of DRs 3

2. Global DR landscape 7

3. Why HDRs? 14

4. HDR framework 16

5. HDR operations 25

Appendix

Further details on HDR operations

Hong Kong Depositary Receipts (HDRs)

3

1. Nature of depositary receipts

DRs are receipts issued by a depositary representing underlying shares of a corporation which have been deposited with the depositary or its nominated custodian.


Issuance of DRs Issuance of shares

DR holders Shareholders

CorporationDepositary

Corporation

DRs

Shares

Shares

4

Issuance of shares : governed by local statute and corporation’s M&A.

Issuance of DRs : governed by deposit agreement.



Issuance of DRs Issuance of shares

DR holders

Shareholders

SharesDepositary

Issuing company

DRs

Shares

Shares

Deposit agreement Statute /

M&A

Statute / M&A

5

Why DRs?

For issuers

Local regulations may discourage overseas issuance of shares or overseas share register.

Share size – DRs can be sized to fit host market practice.

For investors

Convenience – no need for local registration, compliance with foreign investor regulations, currency translation, etc.



6

DR product characteristics

Mature product – 1st DRs issued in 1927 by JP Morgan on UK retailer Selfridges.

Usually on shares, but may also be on other securities such as bonds, ETFs. (HDRs only on shares.)

Most share-related DRs now sponsored by issuer. (HDRs must be.)

Deposit agreement – concluded by issuer and depositary

– defines investor rights

– bridges local and host market practice

Legal character – contract, but similar to trust or custody arrangement

DR ratio – can be adjusted relatively easily (by board resolution and amendment of deposit agreement)

Depositary receipts – (strictly,) confirmations of entitlement to depositary shares



7

2. Global DR landscapeADRs – “American depositary receipts”

– Used almost universally by foreign companies listing in US– Regulation follows that applicable to securities generally– Level І : non-listed

ІІ : listed without public capital-raisingІІІ : listed with public capital-raising

GDRs – “Global depositary receipts”– Usually – a US leg (ADRs) settled in DTC

– a European leg under Reg S settled in ICSD and traded on London’s IOB

– Used by many foreign companies listing in London or Luxembourg– Concessionary regulation – viewed as professional product and listed

under European minimum regulation

“Local DRs” – DRs listed under regimes of specific markets – Singapore, Sweden, Taiwan, etc.

– Regulation may be concessionary


ICSD = International Central Securities Depository IOB = International Order Book

8

Global DR highlights

20931 sponsored DR programmes in issue (June 2008).

Indian-sponsored issues the most numerous, followed by Russia, UK, Brazil, Australia, Taiwan, China, Hong Kong.

Estimated value: US$1.8 trillion at March 2008, up 35% Year on Year.

London and NYSE vie in DR capital raised.

Over US$2.4 trillion traded YTD June 2008, up 85% on prior YTD.

NYSE leads in DR trading value, followed by Nasdaq, London.

DRs represent about 4% of world listed equity market


2. Global DR landscape

1 Statistics from Bank of New York Mellon (BoNY) The Depositary Receipt Markets 2008 Mid-Year Review.

9



New sponsored DRs

Source: BoNY Recent trend of GDR issuance

0

50

100

150

200

1999 2000 2001 2002 2003 2004 2005 2006 2007 1H2008

Number

GDR

Level I

U.S.-listed

10



Annual DR capital raising

Source: BoNYGDR capital-raising has grown

Primary and follow-on offerings ($bn)

0

10

20

30

40

50

60

1999 2000 2001 2002 2003 2004 2005 2006 2007 1H 2008

GDRs

ADRs

11



DR capital raising (US$9,159 million)

Source: BoNY

London and NYSE dominate in capital-raising

By exchange, 1H 2008 ($million) 97

706

539

4,129

3,678

NYSE

NASDAQ

London

Luxembourg

Other

12



Annual DR trading

Source: BoNY

DR trading is still growing strongly,despite general decline in world equity markets

U.S.-listed

0

500

1,000

1,500

2,000

2,500

3,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 1H2008

Value ($bn)

Volume (bn)

13



Global DR trading value (total US$2,460 billion)

Source: BoNY NYSE dominates trading

By exchange or market, 1H 2008 ($bn)27

70

293

1,630

440

NYSE

NASDAQ

London/IOB

OTC

Amex/Other

14

3. Why HDRs?


HKEx’s Strategic Plan: list more overseas companies.

Roadshows / marketing trips to Russia, Vietnam, Kazakhstan, India, Mongolia, etc.

Feedback: HKEx Listing Rules mandating shares and Hong Kong share register considered a barrier.

Solution: HDR framework

15

Nature of HDR framework

No policy change vis-à-vis existing regime– HDR listing requirements equivalent to those for shares

Not a concessionary regime (ie. unlike London’s). More like US-style Level ІІІ approach, ie. as for shares.

Essentially: instrumental facility for listing in DR form rather than share form.

No market consultation needed HDR framework introduced relatively quickly.

Available to all issuers which meet listing requirements.

Rule amendments apply spirit of existing rules to two-tier DR structure.


3. Why HDRs?

16

HDR framework applies only to Main Board.

New Chapter 19B, Appendices 1E and 1F; minor amendments to existing rules.

Existing Listing Rules (IPO procedures and continuing listing requirements) and CCASS Rules apply to HDRs except where specifically modified (Rule 19B.01).

SFO, Takeovers Code and prospectus provisions of Companies Ordinance apply to HDRs.

Trading, clearing and settlement procedures: same as for shares

Applicable Exchange fees and charges: same as for shares

Stamp duty: same as for shares (0.1% per side).


4. HDR framework

Key features

17

Remains unchanged and applies equally to overseas issuers listing:

– via HDRs; and

– via ordinary shares

Set out in Chapter 19, supplemented by Joint Policy Statement Regarding the Listing of Overseas Companies issued by SEHK and SFC on 7 March 2007.

Joint Policy Statement is intended to:

– clarify Listing Rules governing listing of overseas companies

– provide roadmap to overseas companies incorporated outside the Recognised Jurisdictions (i.e. Bermuda, Cayman Islands and PRC)

– state factors (not determinative) affecting eligibility for listing


4. HDR framework

Existing regime for listing overseas companies applies to HDRs

18

Issuer:– Includes a company whose shares are represented by HDRs that are listed or are the subject of an application for listing but not including the depositary (Chapter 1) – HDR issuer does not have to be already listed overseas.– Issuer cannot list shares and HDRs on the Exchange at the same time (Rule 19B.06). – Must appoint approved share registrar to maintain HDR holder register, only (Rule 19B.13)

HDRs:– may be issued in respect of newly issued shares and/or shares placed with depositary by existing shareholders (Rule 19B.06)– must be freely transferable (Rule 19B.09(a))– securities which HDRs represent must be fully paid and free from liens or

restrictions (Rule 19B.09(b))


4. HDR framework

Highlights of new Chapter 19B of Main Board Listing Rules

19

Depositary :

– must be duly incorporated and in conformity with its constitutional document (Rule 19B.14)

– must be suitably authorised and regulated financial institution acceptable to Exchange – includes overseas operators (Rule 19B.15)

– have adequate experience in issuing and managing DR programmes in Hong Kong or overseas (Rule 19B.15)

– issues HDRs as agent of issuer (Rule 19B.05)

– holds shares to which HDRs relate on trust (or equivalent arrangements) for sole benefit of HDR holders (Rule19B.16)


4. HDR framework

Highlights of new Chapter 19B of Main Board Listing Rules (cont’d)

20

Deposit Agreement (Rule 19B.16)

– Vetted by the Listing Division – shareholder protection features in Joint Policy Statement dated 7 March 2007 should be complied with

– Entered into between issuer and depositary and binding on HDR holders

– Stipulates rights, duties and obligations of depositary, issuer, HDR holders, custodian; and stipulates depositary fee structure

– Sets out procedures for replacement or removal of depositary and/or custodian

– Sets out procedures for amendment of deposit agreement – material changes affecting HDR holders’ rights must have HDR holders’ prior approval

– Governing law – of Hong Kong or foreign jurisdiction generally used in international practice. Must not exclude Hong Kong jurisdiction for dispute resolution


4. HDR framework


21

Public Float Requirement

– Public float requirement applies to whole class of shares represented by HDRs provided fungible with HDRs (Rule 19B.08)

– Illustration:

Company A has:

Ordinary shares 900

Depositary Receipts (HDRs) (Note 1) 100

Note 1: Each HDR represent one ordinary share of Company A

Question:

If 200 ordinary shares and 50 HDRs are held by public, does Company A meet public float requirement under Rule 8.08?


4. HDR framework


22

Public Float Requirement – Illustration (cont’d)

Issued ordinary shares 200

Ordinary shares upon full conversion of HDRs (50 x 1) 50

Shares held by the public 250 (B)

Total issued share capital 1,000 (A)

% held by the public 25% (B)/(A)

Conclusion:

Company A is able to meet public float requirement of 25% under Rule 8.08


4. HDR framework


23

Number of HDRs sought for listing (Rule 19B.07) :

– Issuer may seek to list HDRs up to any prescribed amount of share capital which HDRs represent. (Rule 8.19 does not apply)

– Headroom provision

– No further application for listing of HDRs is required for creation and cancellation of listed HDRs resulting from conversion of shares into HDRs or vice versa if sufficient headroom.

– No further application for listing of HDRs is required merely because issuer issues further shares. (Rule 8.20 does not apply)



4. HDR framework

24

Effective date of HDR framework: 1st July 2008

FAQs and further information about HDRs on HKEx website

Revised Guidance for New Listing Applications (Main Board) has been updated.

Further enhancement of listing regime for overseas companies is under consideration.


4. HDR framework

Effective date and way forward

25

(1) Structure of share- / HDR ownership

(2) HDR initial listing

(3) HDR creation and cancellation

(4) Corporate action processing

(5) Cash dividend

(6) Scrip dividend

(7) HKSCC Nominees service – voting

(8) Benefit entitlements

(9) Common fees and charges of depositary


5. HDR operations

26


5. HDR operations

Structure of overseas listed company ownership

(1) Structure of share- / HDR ownership

: Registered shareholders: Beneficial owners

Local register of members (ROM)

Local

CSD nominee

Other intermediaries /

nomineesCustodian

Individual/ corporate

shareholders

Localparticipants


shareholdersDR holders

DRs

Individual/corporate

shareholders

: Central securities depository CSD

Depositary

27


5. HDR operations

Structure of HDR ownership in Hong Kong market

: Registered shareholders : Beneficial owners

Overseas issuer: local ROM

HKSCC Nominees

Other intermediaries/nominees

Depositary

Investor participant

HDR holders

GCP/DCP/custodian participants


HDR holders

HDR ROM

[See preceding slide]


HDR holders


HDR holders

(1) Structure of share- / HDR ownership (cont’d)

28

Depositary and its custodian added to chain.

– Information flow may take longer

Two-tier structure: to maintain regulatory equivalence

– Usually look through to issuer/shares

– In a few areas, look to depositary/HDR level

A few new concepts, e.g. “headroom”.


5. HDR operations

(1) Structure of share- / HDR ownership (cont’d)

Implications

29

Listing can be by introduction – i.e. no capital raised in Hong Kong

Issuer must apply for headroom

IPO can be of HDRs,

– on new shares (i.e. newly issued by issuer)

– on existing shares (i.e. sold by major shareholder)

IPO process is same as for shares

– Public offering required (if sizeable issue)

– Yellow form, white form, etc.

– Scrip created if white form used


5. HDR operations

(2) HDR initial listing

30

SEHKHK investorHK investor

LocalLocal

Market Market

HK HK Market Market

Depositary Bank (DB)

HK brokerHK broker CCASS

*Share Registrar

Buy HDR

T-day

T+2 day

Notification of share receipt

To create HDR

Instruct broker to buy HDR, either(a) Purchase in HK or(b) Purchase underlying shares in local

market and convert to HDR

* Roles of registration and custody of HDRs

Notify broker to collect HDR certificate

Purchase underlying share

Custodian appointed by DB


Custodian oflocal broker


Underlying shares

T-day Local stock Exchange/CSD

Local stock Exchange/CSD

Settlement dayLocal brokerLocal broker

(3) HDR creation and cancellation


5. HDR operations

HDR creation

31

SEHKHK investorHK investor

LocalLocal

Market Market

HK HK Market Market

Depositary Bank (DB)

HK brokerHK broker CCASS

* Share Registrar

Sell HDR

T-dayT+2 day

Notification of HDR receipt & cancellation

Instruct broker to sell HDR, either(a) Sell in HK or(b) Convert HDR to underlying shares

and sell in local market

* Roles of register and custody of HDR

Deliver HDR certificate

Transmission of net cash proceeds

Withdrawal of HDR certificate





Underlying shares Instruction to release

underlying share

T-day Local stock Exchange/CSD

Local stock Exchange/CSD

Settlement dayLocal brokerLocal broker


5. HDR operations

HDR cancellation

(3) HDR creation and cancellation (cont’d)

32

Arbitrage between HDRs in Hong Kong and shares in local market (if not restricted) can take place.

HDR creation: no need to apply for listing – unless headroom exceeded.

HDR cancellation: no need to apply for withdrawal of listing – provided some HDRs remain listed.


5. HDR operations

Highlights

(3) HDR issuance and cancellation (cont’d)

33

(1) Issuer provides corporate action details to local custodian(2) Local custodian gives information to depositary(3) Depositary via its appointed share registrar (SR) in HK distributes information to HDR holders(4) CCASS receives notification from SR then distributes information to CCASS participants(5) CCASS will collect instruction from CCASS participants and submit to SR(6) Depositary receives instructions from HDR holders via SR and submits them to Issuer through local custodian


5. HDR operations

(4) Corporate action processing

HKSCCCCASS Participant

CCASS Participant

LocalLocal

MarketMarket

HK HK Market Market

Custodian of underlying shares

Custodian of underlying shares

Depositary

Share Registrar

IssuerIssuer

InvestorInvestor

HDR Holder

Corporate communication

Instruction

34


5. HDR operations

(5) Cash dividend

Communications flow

1. Issuer announcement• local currency amount per share• local payment date

2. Depositary notice• approximate HK$ amount per HDR• approximate HDR payment date

3. Depositary notice• actual HK$ amount per HDR• actual HDR payment date

(1) Issuer announcement of RMB amount per share

(2) Registrar notification of HK$ amount per share

HDRs (anticipated) H shares (current)

35


5. HDR operations

(6) Scrip dividend

Communications flow

1. Issuer announcement• share ratio• local payment date

2. Depositary notice• HDR ratio• approximate HDR payment date

3. Depositary notice• actual HDR payment date

Similar to flow for cash dividend

36

Upon receipt of notice of meeting, depositary fixes record date and notifies HDR holders via SR.

Beneficial owners submit instructions through CCASS Participants to HKSCC for votes to be cast on their behalf, or request to be appointed as corporate representative to attend and vote at shareholders’ meeting.

HKSCC collects instructions and passes on to depositary, who relays to local custodian for action

Share Registrar (SR)appointed by Depositary

HKSCC Nominees Limited

Non-Investor Participants

Investor Participants

Beneficial Owners

Corporate Representative instruction &/or voting instruction

Corporate Representative

instruction &/or voting instruction

Corporate Representative

instruction &/or voting instruction

Proxy form or Corporate Representative

Appointment letter

Voting


5. HDR operations

(7) HKSCC nominees service – voting

37

Examples: dividend payment, issue of bonus shares.

Upon receipt of payment (net of any fees, expenses, tax withheld and depositary’s own fee) in either HKD or USD / bonus shares in respect of HKSCC Nominees’s shareholding at record date, HKSCC will credit payment/ bonus shares to CCASS participants’ bank account (net of CCASS dividend collection fee) / stock account respectively.


5. HDR operations

(8) Benefit entitlements / corporate actions(NOT REQUIRING exercise of discretion)


Non-Investor Participants

Investor Participants

Beneficial owners

Dividend payment / Issue of Bonus shares

Dividend / Bonus shares





38

Examples: open offer, take-over offer, subscription

HKSCC will collect instructions from CCASS Participants and take action on their behalf or to facilitate the taking of actions by Participants directly.

Rights issues– Pre-emptive rights must be

passed on to DR holder– This will entail obtaining authorisation of the rights prospectus (ie. by Exchange)


Non-Investor Participants Investor Participants

Beneficial Owners

Subscription / Take-over offer

Subscription, Take-over instruction

Expenses, shares,Form of Acceptance

Entitlement / shares








5. HDR operations

(8) Benefit entitlements / corporate actions (cont’d)(REQUIRING exercise of discretion)

39

Charges are made to the investor (via his broker or custodian)

– Issuance fee

– Cancellation fee

– Cash distribution fee

– Stock distribution / rights exercise fee

– Other distribution fee

– Annual depositary service fee


5. HDR operations

(9) Common fees & charges of depositary (based on ADR experience)

Notes: 1. The above is for reference only; the depositaries’ charges for HDRs have not yet been published.

2. It should be noted that CCASS’s normal charges will apply to HDRs in any event.

40

CCASS Depository

HDR

certificate

+Stock Deposit Form

Participants must ensure that they have full authority to deposit such HDR certificate into CCASS.

2. Inspect all the documents submitted.3. Input the deposit

details to CCASS.

10:00 a.m. to 3:45 p.m. Monday to Friday

4. Immediately credit to Participant’s stock account.

Instrument of Transfer

5. Certificates will be delivered to the share registrar for re-registration in name of HKSCC Nominees. This process will take 10 business days.

6. After 10 business days

New certificate (HKSCC) Nominee

１ .

Share Registrar (SR) appointed by depositary

FURTHER DETAILS ON HDR OPERATIONS

AppendixHong Kong Depositary Receipts (HDRs)

Deposit of HDR Certificate

41

Participants input withdrawal order (W/O) via CCASS.

Once a W/O is accepted by the system, the Participant's specified stock account will be debited by the system with the withdrawal quantity of shares.

HKSCC staff retrieves the certificates of the withdrawn stock from the vault.

The authorized representative of the Participant with the duly signed Stock Collection Authorization Form collects the Certificates from the counter.

HKSCC staff signs the Instrument of Transfer.

Stock Withdrawal Receipt, Certificates and Instrument of Transfer pass to counter of CCASS Depository.


CCASS Depository

2.

3.

4.

5.

6.


1.

Withdrawal of HDR CertificateFURTHER DETAILS ON HDR OPERATIONS (cont’d)


42

Ways to receive corporate communication through HKSCC Nominees Ltd.


Sends out corporate communication

Investor ParticipantsThey may submit a standing instruction

to receive corporate communication directly from depositary.

Registered Holders

Beneficial ownersThey may request through CCASS Participants to receive corporate

communication directly from depositary.

HKSCC will provide a list of the names and addresses of recipients to the depositary via registrar.

CCASS Participants inform HKSCC of the name & address of the recipients.

Depositary receipts registered in investors’own nameDepositary receipts registered in name of HKSCC Nominees Ltd.

FURTHER DETAILS ON HDR OPERATIONS (cont’d)


43

Corporate action processing

FURTHER DETAILS ON HDR OPERATIONS (cont’d)


CCASS participants

Beneficial owners

Corporate communication/ Entitlement

Entitlement

Entitlement Process among HKSCC, CCASS participants &

beneficial owners

Instructions

Consolidated instruction representing those submitted by CCASS participants

Instructions

Inst

ruct

ion

s

Corporate announcement /

entitlement

Process between SR and the beneficial owners

HKSCC


by:matthew harrison, research & corporate development, hkex bonnie chan, listing, hkex hong kong...

Documents

gdrsglobal depositary

overseas issuance of

underlying shares

size drs

global dr highlights

global dr landscape7

sponsored dr programmes

sharerelated drs