adr and gdr edited
TRANSCRIPT
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ADR and GDR in CentralEurope
Abhishek Modak
PGDM IB Roll No 30
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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
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