Citi on the Joy of Depositary Receipts (part 3)

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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 2]

Nick Slepko:  Do you come in when a company wants to list, or does a country’s government approach you asking for help to get set up?

Nancy Lissemore:  It can be either.  Sometimes there might be a privatization, or sometimes it’s a large local company that is approaching the regulators, and the regulators usually want information on our experience with other countries opening up a DR market, and they ask questions like, “What if we want to set up certain limits, how would we do that?  What kind of investors would be attracted to our companies?”

Slepko:  So when Vietnam asks, which other countries do you point to?

Lissemore:  Usually other countries in Asia. Russia has also been using the DR structure quite actively.  In fact, the BRIC countries have seen tremendous growth in recent years in terms of DRs. China has done many programs in the last number of years.  In the last four years, the BRIC countries have raised USD 48 billion in DR capital, and that accounts for roughly 70% of the total DR capital that was raised during that time. 

Slepko:  With 334, India tops the list of DRs issued [if you don’t combine China, Hong Kong, and/or Taiwan], but it seems that Russia is moving along the path, and making improvements when it can, but when I think of India I don’ think of it as a big innovator when it comes to making changes and improvements in their regulations.  Is this a misperception?  Also, how does India compare with your interaction with Chinese regulators?

Lissemore:  Well, India is thoughtful and cautious.  In terms of DRs, India’s market is not fully open.  They have certain regulations on how many DRs can be issued and on what types of programs are allowed.  However, the regulators are always interested in meeting and learning more about the product…Indian companies have been actively issuing DRs since the early ’90s. When I started in ’94 we were already doing many Indian DR programs.

China is relatively new, and their culture is different and the government structure is very different from India.  There were some larger [Chinese] state-owned enterprises doing DRs originally, but in the last few years we have seen many more entrepreneurial companies using DRs in China.

Slepko:  Does China encourage DRs among its private and state-owned corporations, or is there a definite divide between the two?

Lissemore:  In the last few years, there have been a lot more private companies and many of those listing in the US have used the VIE (variable interest entity) structure. The structure uses contractual agreements to allow an offshore holding company owned by foreign investors to manage a business in China. 

Slepko:  Are there particular areas of the world where DRs have been rejected or restricted to the point that they are effectively prohibited?

Lissemore:  Not that I am aware of.

Slepko:  Can you comment on Brazil’s IOF tax?

Lissemore:  The creation tax is 150 bps [1.5%]. Brazil changed the IOF tax a few times in the last few years, and the most difficult thing for investors is the uncertainty. France’s proposed transaction tax is another example and Spain has said they might do something similar, but from official statements and draft legislation it is unclear how that will figure in. In general, the imposition of transaction related taxes that affects DRs, does limit certain activities and liquidity. However, this shouldn’t detract an issuer from having a DR program, but the full benefits to the local market may not be fully realized.

Slepko:  I’ve recently finished up a series on Cuba, and I’m curious what happens to an ADR when a company is nationalized?  Are ADR holders particularly screwed? 

Lissemore:  It’s the same as ordinary shares because the ordinary shares that underlie the depositary receipt are held in a custody account in the local market.  Those shares are on the register of the company.  ADRs are treated the same as the ordinary share.  The holder of ADRs have the same rights as those associated with the ordinary shares.

[continued in part 4]




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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