Promsvyazbank, one of Russias largest private
lenders, announced last month that it would launch its initial
public offering later this year by listing shares in Moscow and
global depositary receipts in London, in an attempt to raise an
estimated $500 million in capital. The bank is among the
latest in a growing number of companies that are eager to tap
the burgeoning demand for depositary receipts, which provide
investors exposure to foreign stocks without the inconvenience
and many of the risks of direct investment.
The global financial crisis has helped spur growth in this
market. As of March the value of GDRs held by investors totaled
approximately $700 billion nearly double the
$360 billion owned in 2008, according to Nancy
Lissemore, global head of Citis depositary receipt
services in New York. Issuers like them because they offer
access to a vast universe of potential investors, and buyers
like them because depositary receipts facilitate
diversification into non-U.S. securities, she says.
The process is simple: A global depository bank issues
receipts on shares purchased in the local market by a custodian
(which can either be a standalone entity or a separate division
of the issuing bank); in most cases, one receipt equals one
share, traded in hard currency on the relevant exchange. Bank
of New York Mellon Corp., No. 1 on Institutional
Investors ranking of the Worlds Largest Global
Custodians for a fifth consecutive year, is also the dominant
player in the DR space. It is the depositary bank for more than
2,500 of the 3,500 DR programs that were operating in some 75
countries as of March. That figure includes sponsored programs
those initiated with the cooperation of the companies
whose stocks back the receipts and unsponsored, which
are issued without company participation. (For more information
about our annual survey of custodians, including firms ranked
by gains in both dollar and percentage terms, please visit our
DR trading volume climbed 14 percent last year, to
171 billion, with a value of $3.8 trillion (up from
$3.4 trillion in 2010), J.P. Morgan reports; some 56
issuers raised more than $15 billion in capital through
DRs in 2011. In the first six months of this year, according to
BNY Mellons Depositary Receipts Midyear Market Review,
investors traded nearly 80 billion DRs, with a value of
$1.5 trillion. During the same period 11 transactions
raised $1.25 billion through IPOs and secondary
Although DR plans are garnering a lot of interest and
attention these days, the concept is hardly new. J.P. Morgan
created the first such offering in 1927 as a way for U.S.
investors to buy into Selfridges & Co., a popular
London-based retailer. British companies at that time were
prohibited from registering their shares overseas unless they
worked with a transfer agent located in the U.K., so the bank
pioneered a way for equivalent instruments to trade on a U.S.
exchange and clear, settle and pay dividends in dollars. Thus,
the American depositary receipt was born. Dubbed an
access product, it eliminated the very real burden
of investors having to navigate foreign banking and legal
systems, evolving financial infrastructures such as
clearinghouses and stock exchanges, and complex tax
These hardships can be especially onerous even now, in
emerging and frontier markets, where much of the current DR
growth is taking place.
The so-called BRIC countries Brazil, Russia, India
and China accounted for more than three quarters of the
DRs offered via IPOs and some 70 percent of those furnished
through follow-on deals last year, according to Christopher
Kearns, New Yorkbased deputy CEO of BNY Mellon Depositary
Receipts. That has shifted somewhat given the
macroeconomic issues, he says, but emphasizes that
emerging markets still represent the biggest opportunity
and none more so than China.
The bank recently surveyed about 650 large issuers,
30 percent of which identified greater China as the
primary focus of their efforts to reach new equity investors.
Many of these issues are done for broader strategic
reasons, such as, China is my biggest export market
or Maybe I need to better align myself with the
government or regulators in China, he says.
The Hong Kong Stock Exchange introduced depositary receipts
in 2010, and to date three companies have opted to offer HDRs:
Coach, a New Yorkbased luxury goods company; SBI
Holdings, a financial services firm headquartered in Japan; and
Brazil-based multinational mining corporation Vale.
J.P. Morgan is the depository bank for all three.
On the flip side Chinese companies offering DRs
through foreign exchanges Internet video site operator
Tudou Holdings was the best performer among the names listed on
BNY Mellons ADR index, skyrocketing 205.3 percent in the
first half of the year. (In August former rival Youku acquired
the company; the new entity is named Youku Tudou.)
China Sunergy, a manufacturer of solar panels, saw the
second-highest gain; its DRs bolted more than 118 percent
from January through June.
Frontier markets also offer promise. Last year Zambias
Lusaka Stock Exchange became the first in Africa to list DRs,
for First Quantum Minerals, a metals and mining outfit
headquartered in Canada; BNY Mellon is the depository bank.
Sub-Saharan Africa is opening up to depositary
receipts, Kearns says. They are following a typical
DR pattern: The market opens, and its very exotic and
hairy. Investors are interested but not in attendant issues
like determining how to receive corporate actions. If they were
to invest in Kenya, for example, they would have to find a
subcustodian in the country that meets their
requirements. Thus, DRs make these markets more
Were already reacting to early demand from
more-adventurous institutional investors, says
Citis Lissemore. However, she cautions that some
frontier markets are taking their time as they think through
such issues as how to protect capital flows.
Dennis Bon, New Yorkbased global head of J.P.
Morgans depositary receipts business, says the trend is
just beginning to take off. We will see more and more
issuers coming out of the frontier markets, he
One reason? Liquidity. In many places, DRs were there
before the market was, Kearns says. And liquidity
DRs offer another advantage: enabling issuers to provide
noncash compensation to employees outside the home country.
Its not just about finding investors, he
adds. Its waving the flag.