Bank of New York Mellon on the Joy of Depositary Receipts (part 3)
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Bank of New York Mellon (NYSE: BK) has over 2,700 depositary receipt programs (with a market value exceeding USD 770 billion) in 68 countries and is the world’s leading depositary bank. Anthony Moro, Managing Director and Head of Emerging Markets for BNY Mellon's DR business, discusses depositary receipts (foreign stocks traded on local exchanges) and the role they play in global investing.
[continued from part 2]
Nick Slepko: What can go wrong for the individual investor involved with DRs? Are there horror stories like commodities trader urban myths where they opened their front door one morning and have 5,000 tons of pork bellies on their porch. Are there ADR myths you are always having to respond to?
Anthony Moro: Not really. Companies can always misappropriate what they are trying to do. We had Parmalat which was an Italian company that did something [wrong] accounting wise – but of course Enron wasn’t an ADR. US or non-US the problems are similar.
The ADRs that trade on the New York Stock Exchange comply with Sarbanes-Oxley and all the other rules and regulations that any US company must comply with to list on the exchange.
There is another segment of the DRs, a bigger segment, which trades on the over-the-counter market in the US. With those you have to do a little more homework because the compliance they have to fulfill is local market compliance only. They don’t have to do both local market and US market. Depending on which country a company is in, local market requirements could be just as strenuous if not more strenuous. In the UK, South Africa, or Japan we hear all the time from issuers that it is harder to list in the local market than the US market.
Slepko: What specific homework should investors do when considering ADRs?
Moro: Every local regulatory body is going to have differences, though they all provide IFRS accounting. But different regimes will treat different aspects in different ways. But generally, the companies that have ADRs, are the bigger ones in their markets. So, with Russia’s Gazprom (NASDAQOTH: OGZPY.PK), which trades on the OTC, the company has a USD 150 billion market cap and people take that as it is a relatively safe company to invest in from an accounting perspective – though I’m not saying whether the stock is good or bad. (It also has the full backing of Mr. Putin’s government.)
Slepko: Why does the NYSE do better than the NASDAQ in attracting ADRs?
Moro: In the US, it’s not as competitive as it was ten years ago before Sarbanes-Oxley, when there were 50 or 60 new non-US companies listing ADRs every year and we were down at the exchange every week ringing the bell with our clients. That market has dropped off considerably in the last five years since Lehman and all that.
We don’t have an opinion on one over the other – but they are both excellent.
Slepko: Why is the OTC so overwhelmingly popular for ADRs?
Moro: Because those stocks aren’t listed there, they are simply recorded there. It is the default location. In some ways, the NYSE views the OTC as the minor leagues and that’s where they would pull all their ADR prospects from that list.
[There are three types of ADRs.] Level-1 is unsponsored DR programs with minimal filing requirements. Level-2 refers to listed programs on NYSE or NASDAQ that meet Sarbanes-Oxley requirements, and Level-3 are listed programs on an exchange that raised capital through their DR offering.
Slepko: Is there something on the horizon for Mongolia?
Moro: It has been reported that Erdenes Tavan Tolgoi (ETT) the big coal mine will be listing ordinary shares in Ulan Bator [Mongolia’s capital and major city], and depositary receipts in London and Hong Kong.
Slepko: Why would they do DRs in London and Hong Kong at the same time? Just to get out there faster and quicker?
Moro: Yeah, bigger investor base and all that.
Slepko: What does London have that New York doesn’t?
Moro: A lot of it will be Sarbanes-Oxley and that they don’t want to comply with Section 404 – documentation, auditing, and reporting of internal controls – which is tough for an emerging market company to comply with.
Also, there is a lot of Russian influence in Mongolia, and Mongolian companies trade a lot like Russian companies which tend to have their DRs listed in London.
[continued in part 4]
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.