Citi on the Joy of Depositary Receipts (part 2)

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Citigroup (NYSE: C) has over 750 depositary receipt programs (with a market value of at least USD 100 billion) in 55 countries.  Nancy Lissemore, the Global Head of the Depositary Receipt business and a managing director at Citigroup, discusses depositary receipts (foreign stocks traded on local exchanges) and the role they play in global investing.

[continued from part 1]

Nick Slepko:  When Citi creates a DR or partners with someone to create them, does your profit come solely from the consulting and set-up, or does it depend on how well the DR performs?

Nancy Lissemore:  There are transaction fees charged to investors. These fees are disclosed in the depositary agreements and also for listed programs, the fees are disclosed in public filings with the SEC.

Slepko:  So, the higher the volume, the greater the profit for Citi?

Lissemore:  Not necessarily. There are no fees associated with actual ADR to ADR trading. Rather, there are fees if the transaction is associated with cross-border issuance or cancellation of the DR. 

SlepkoIs there a particular ADR that was successful that Citi likes to use as an example when talking to companies and investors considering ADRs?

LissemoreIf you look at the portfolio of our programs, and you look at the liquidity of our programs, I think you’ll see a success story.  For example, we continue to see investor interest in depositary receipts as evidenced by the success of the unsponsored programs.  In October 2008, the SEC had a rule change which made it automatic for a company to have a 12g3-2(b) exemption which allowed significant growth in unsponsored programs. Citi opens unsponsored programs (programs where the issuer is not involved) purely based on investor demand.  Since 2008, unsponsored DR trading volumes reached almost USD 1.9 billion of which we estimate that Citi has roughly 50% market share.  [Also, of Citi’s 750+ DR programs, about 450 are unsponsored.]

SlepkoDid you expect those results with the rule change?

LissemoreWe are pleased with the number. We did expect to see investor demand, especially for certain DR programs.


Slepko:  What can go wrong?  Is it the same perils of an IPO where perceptions and realities are not always the same thing?  Or are there other things more specific to DRs that companies and investors should know about?

LissemoreThe DR is a mirror of the ordinary share. So what happens in the local market which effects the ordinary shares impacts the price of the DR as well.

SlepkoHow important is it to understand local currencies if an investor is considering ADRs?

LissemoreThey need to understand the impact.  The DR is backed by the ordinary share which is a security in the local currency.

Slepko:  Does Citi prefer one exchange over the other?

Lissemore:  Citi is agnostic.  The issuers choose their exchange, and they have their own strategic reasons.

In 2011, US-listed ADR programs accounted for over 75% of overall DR trading volumes [around the world]. Of which, DR programs trading on the New York Stock Exchange and NASDAQ accounted for 74% and 26% of US-listed DR program trading volume.

Slepko:  Why does a company like Nestle : NSRGY.PK) still trade over-the-counter?  What’s their motivation?

LissemoreThey have a very successful program, so if it’s the right time and fits into their strategy they may consider a listing.  But they have a very successful DR program as a Level 1, and they have a very active investor relations program.

SlepkoBoth those characteristics are unusual for an over-the-counter ADR.  Also, when Nestle listed their ADR they were already a well-known brand name.  Does that lessen the need to seek legitimacy by listing on the NYSE or NASDAQ?

LissemoreCertainly some of the brand names can be popular with retail investors.  If you do a listing, there is more information out in the market, and there is a higher registration requirement with the SEC.  You may attract certain investors whom may need to invest in a listed-program rather than a Level-1.

SlepkoAre there certain countries which are particularly enthusiastic about creating ADRs?

Lissemore:  There are a number of countries that have DR-specific regulation.  They may have regulations that are targeted at the issuer (where the issuer has to make a filing to the local SEC before they can open a program).  They may have regulations around qualified investors.  They may have regulations on foreign ownership limits (maybe that only pertain to strategic assets).  So, there are many varieties of DR regulations.

Some countries are more open, and others are more closed and looking to open more to foreign investment…Western European countries have had DR programs for many years, and are very comfortable with foreign investors.  The trading is easy, so those markets are more open than some of the emerging markets.

Then there are markets that are new.  Frontier markets like Vietnam and Mongolia are already spending a lot of time looking at DR-specific regulations and are seriously contemplating allowing issuers from those countries to have DR programs.

Slepko:  Is Citi involved with Mongolian coal miner [Erdenes Tavan Tolgoi]?

Lissemore:  ETT is not listed yet. Mongolia does not have the regulations for DRs in place yet, though we are working with the regulators there.

[continued in part 3]



Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool owns shares of Citigroup Inc. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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