Citi on the Joy of Depositary Receipts (part 4)

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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 3]

Nick Slepko:  Are DRs perceived as a threat by local governments to taxes and development?  Are ADRs a threat to local capital markets, or are there benefits?

Nancy Lissemore:  I don’t see DRs as a threat to local capital markets at all.  DRs increase the pool of capital for the issuers and allow international investors to participate in a market they would not otherwise would have been able to access.  Also, through the conversion process, local investors can access the DR market when their market is closed.

Slepko:  The argument that is usually made is that Brazil has the tax not just to generate revenue, but they want to encourage/force investors to go through Brazil itself to get the stock, rather than just going to New York to get their Petrobras ). 

Lissemore:  Petrobras and other Brazilian stocks have huge liquidity on the New York Stock Exchange…It is important that DRs be viewed as providing incremental liquidity and not as detracting liquidity from the issuer’s home market. Since there are many investors that may not be able to access the issuer’s home market, DRs serve as an investment tool that allows US and other international investors to access liquidity overseas.  For example, it could be a pension fund that has a mandate to only consider dollar-denominated securities.  Another example could be a brokerage firm that doesn’t have local custody or that only wants to trade in the US because of convenience.  There are many reasons to see DRs as creating additional capital coming to the issuer.

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?

Lissemore:  For a DR program you need investor interest. 

So, if a company is doing capital raising and perhaps their home market isn’t large enough to absorb the offering, they would want to access the international capital markets.

You also have to have a company that is committed to their DR program and committed to the international investor base.  Companies listed on a US exchange also have obligations to the SEC and the Sarbanes-Oxley requirements.  We would also like companies to have an active investor relations program to help maintain and grow their DR program.  There are many factors to come into play when considering whether a company wants or needs a DR program, but it comes down to the right investor demand and active involvement of the issuer.

Slepko:  How do you measure the success of a DR?

Lissemore:  We measure success by creating value.  Some programs take time, but we look at DR programs as a partnership with our clients.  So, we want to work with our clients on investor relations.  One way Citi differentiated itself was by pioneering the role as investor relations counsel.  We have a team that works with issuers on strategic plans, presentation advice, corporate governance, shareholder identification, targeting new shareholders, working on road shows and post-road show feedback, setting up retail investor programs (if that’s their strategy).  Our partnership is about cultivating the DR program with our issuers.




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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