Deutsche Bank on the Joy of Depositary Receipts (part 4)
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Deutsche Bank (FWB:DBK)(NYSE: DB) has over 970 depositary receipt programs (with a market value of at least USD 100 billion) in 58 countries. Akbar Poonawala, Global Head in charge of the depositary receipts business (among many other roles), discusses depositary receipts (foreign stocks traded on local exchanges) and the role DRs play in global investing.
[continued from part 3]
Nick Slepko: Why do the Chinese prefer to list in the US, and Russians and Indians prefer the UK?
Akbar Poonawala: It was step one, step two for many of the countries. The rules, regulations, and filing requirements were perhaps friendlier and more familiar in Europe for Russia and India. Also, the size of capital raised was not that huge initially, but as the amounts became larger and the companies became more sophisticated and started competing with more Western companies you start to see them choosing US listings with larger offerings. Local regulations also have a role to play.
Because of their proximity to the US market, Brazil and Mexico have historically chosen to list on US exchanges. As for the Chinese companies, they started a little later and decided to go straight to the ADR market – and it seems to have suited them fine.
Slepko: Can you comment on Brazil’s IOF tax [on the creation of DRs]? Are ADRs a threat to local capital markets, or are there benefits?
Poonawala: We don’t have a comment on whether or not it is appropriate for a sovereign country to charge a certain tax.
Sometimes it is misperceived that DRs are a threat to local capital markets, but if anything they offer further liquidity in the domestic market as well as better valuations, and increased transparency. It helps further deepen and broaden the local market by attracting a host of new investors that would otherwise not become involved.
Slepko: Do you hold any DRs among your own investments?
Poonawala: When you meet companies, you get impressed by their passion, their mission, their focus, the quality of their people. Over the years, I have held ADRs of half a dozen companies.
Slepko: As an Indian living in America, do you prefer to buy the ADR off a US exchange rather than an Indian one?
Poonawala: It’s easier to buy and hold ADRs than ordinary shares in most foreign markets for individual investors. One can hold them in their brokerage accounts in US dollars.
Slepko: What kind of criteria do you have for new DR clients? Why aren’t there more companies in a place like Ecuador (which only has one DR) taking advantage of DRs?
Poonawala: A question a depositary bank would ask itself is how it could add value to a country, or a certain sector in a country, or a certain company. Typically the first DRs issued in a new DR market are the telecom service provider, the banks, the large utilities, or the country’s airline or capital-intensive industries (like steel).
It then also depends on the depth of the domestic capital market. The first sort would be what’s the market cap of all the listed companies in the country? How many have critical mass? How many of those companies have investors from overseas?
In the evolution of DRs from a certain country, usually there is an interest amongst international institutional investors who invest in say, utilities. They look at companies that may offer better returns or valuations in the emerging world. But then is there sufficient liquidity in the utility provider in the new country? And how big is the market cap?
The bigger and more liquid a company, the more interesting it is for institutional investors. A country has to broaden and deepen, build a certain market cap and liquidity in the domestic market for foreign investors to get interested.
Slepko: How do you measure the success of a DR?
Poonawala: We tie the success of a DR program to client satisfaction. Companies establish DR programs with different objectives in mind – if they have successfully raised capital or completed an acquisition using the DR that can be one measure of success.
But there is not a single metric that be used to quantify the success of a DR program. Some broad measures can be used such as overall US share ownership in the case of ADRs or achieving a more diversified shareholder base. Another example is new investors coming aboard as a result of a DR program, and our clients would not have seen much of this investment without the program. Others can also point to the raising of brand recognition in the US and providing US-based employees with efficient employee share benefit plans using ADRs. Certain other academic studies look at overall shareholder value.
In short, the DR product has proved to be a robust structure over many decades and continues to be of interest to international companies as a tried and tested way to attract investors. Deutsche Bank’s commitment to the business is as strong ever.
Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool has no positions in the stocks mentioned above. 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.
