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Title: By:Matthew Harrison, Research


1
HONG KONG DEPOSITARY RECEIPTS (HDRs)
Seminar on 17 September 2008 At Hong Kong
Securities Institute
  • By Matthew Harrison, Research Corporate
    Development, HKEX
  • Bonnie Chan, Listing, HKEx

2
AGENDA Page
Hong Kong Depositary Receipts (HDRs)
  • Nature of DRs 3
  • 2. Global DR landscape 7
  • Why HDRs? 14
  • HDR framework 16
  • HDR operations 25
  • Appendix
  • Further details on HDR operations

3
Hong Kong Depositary Receipts (HDRs)
1. Nature of depositary receipts
  • DRs are receipts issued by a depositary
    representing underlying shares of a corporation
    which have been deposited with the depositary or
    its nominated custodian.

4
Hong Kong Depositary Receipts (HDRs) 1. Nature of
depositary receipts
Issuance of shares governed by local statute
and corporations MA. Issuance of DRs governed
by deposit agreement.
Issuance of DRs
Issuance of shares
DR holders
Shareholders
Deposit agreement
DRs
Statute / MA
Shares
Depositary
Shares
Statute / MA
Shares
Issuing company
5
Hong Kong Depositary Receipts (HDRs) 1. Nature of
depositary receipts
Why DRs?
  • For issuers
  • Local regulations may discourage overseas
    issuance of shares or overseas share register.
  • Share size DRs can be sized to fit host market
    practice.
  • For investors
  • Convenience no need for local registration,
    compliance with foreign investor regulations,
    currency translation, etc.

6
Hong Kong Depositary Receipts (HDRs) 1. Nature of
depositary receipts
DR product characteristics
  • Mature product 1st DRs issued in 1927 by JP
    Morgan on UK retailer Selfridges.
  • Usually on shares, but may also be on other
    securities such as bonds, ETFs.
    (HDRs only on shares.)
  • Most share-related DRs now sponsored by issuer.
    (HDRs must be.)
  • Deposit agreement concluded by issuer and
    depositary
  • defines investor rights
  • bridges local and host market practice
  • Legal character contract, but similar to
    trust or custody arrangement
  • DR ratio can be adjusted relatively easily
    (by board resolution and amendment of deposit
    agreement)
  • Depositary receipts (strictly,) confirmations
    of entitlement to depositary shares

7
Hong Kong Depositary Receipts (HDRs)
2. Global DR landscape
ADRs American depositary receipts Used
almost universally by foreign companies listing
in US Regulation follows that applicable to
securities generally Level ? non-listed
?? listed without public capital-raising ???
listed with public capital-raising GDRs Glob
al depositary receipts Usually a US leg
(ADRs) settled in DTC a European leg under
Reg S settled in ICSD and traded on Londons
IOB Used by many foreign companies listing in
London or Luxembourg Concessionary regulation
viewed as professional product and listed
under European minimum regulation
Local DRs DRs listed under regimes of
specific markets Singapore, Sweden,
Taiwan, etc. Regulation may
be concessionary
ICSD International Central Securities
Depository IOB International Order Book
8
Hong Kong Depositary Receipts (HDRs) 2. Global DR
landscape
Global DR highlights
  • 20931 sponsored DR programmes in issue (June
    2008).
  • Indian-sponsored issues the most numerous,
    followed by Russia, UK, Brazil, Australia,
    Taiwan, China, Hong Kong.
  • Estimated value US1.8 trillion at March 2008,
    up 35 Year on Year.
  • London and NYSE vie in DR capital raised.
  • Over US2.4 trillion traded YTD June 2008, up 85
    on prior YTD.
  • NYSE leads in DR trading value, followed by
    Nasdaq, London.
  • DRs represent about 4 of world listed
    equity market

1 Statistics from Bank of New York Mellon (BoNY)
The Depositary Receipt Markets 2008 Mid-Year
Review.
9
Hong Kong Depositary Receipts (HDRs) 2. Global DR
landscape
New sponsored DRs
Recent trend of GDR issuance
Source BoNY
10
Hong Kong Depositary Receipts (HDRs) 2. Global DR
landscape
Annual DR capital raising
Primary and follow-on offerings (bn)
GDR capital-raising has grown
Source BoNY
11
Hong Kong Depositary Receipts (HDRs) 2. Global DR
landscape
DR capital raising (US9,159 million)
By exchange, 1H 2008 (million)
London and NYSE dominate in capital-raising
Source BoNY
12
Hong Kong Depositary Receipts (HDRs) 2. Global DR
landscape
Annual DR trading
U.S.-listed
DR trading is still growing strongly,despite
general decline in world equity markets
Source BoNY
13
Hong Kong Depositary Receipts (HDRs) 2. Global DR
landscape
Global DR trading value (total US2,460 billion)
By exchange or market, 1H 2008 (bn)
NYSE dominates trading
Source BoNY
14
Hong Kong Depositary Receipts (HDRs)
3. Why HDRs?
  • HKExs Strategic Plan list more overseas
    companies.
  • Roadshows / marketing trips to Russia, Vietnam,
    Kazakhstan, India, Mongolia, etc.
  • Feedback HKEx Listing Rules mandating shares and
    Hong Kong share register considered a barrier.
  • Solution HDR framework

15
Hong Kong Depositary Receipts (HDRs) 3. Why HDRs?
Nature of HDR framework
  • No policy change vis-à-vis existing regime
  • HDR listing requirements equivalent to those
    for shares
  • Not a concessionary regime (ie. unlike Londons).
    More like US-style Level ??? approach, ie. as
    for shares.
  • Essentially instrumental facility for listing in
    DR form rather than share form.
  • No market consultation needed ? HDR framework
    introduced relatively quickly.
  • Available to all issuers which meet listing
    requirements.
  • Rule amendments apply spirit of existing rules to
    two-tier DR structure.

16
Hong Kong Depositary Receipts (HDRs)
4. HDR framework
Key features
  • HDR framework applies only to Main Board.
  • New Chapter 19B, Appendices 1E and 1F minor
    amendments to existing rules.
  • Existing Listing Rules (IPO procedures and
    continuing listing requirements) and CCASS Rules
    apply to HDRs except where specifically modified
    (Rule 19B.01).
  • SFO, Takeovers Code and prospectus provisions of
    Companies Ordinance apply to
    HDRs.
  • Trading, clearing and settlement procedures same
    as for shares
  • Applicable Exchange fees and charges same as for
    shares
  • Stamp duty same as for shares (0.1 per side).

17
Hong Kong Depositary Receipts (HDRs) 4. HDR
framework
Existing regime for listing overseas companies
applies to HDRs
  • Remains unchanged and applies equally to overseas
    issuers listing
  • via HDRs and
  • via ordinary shares
  • Set out in Chapter 19, supplemented by Joint
    Policy Statement Regarding the Listing of
    Overseas Companies issued by SEHK and SFC on 7
    March 2007.
  • Joint Policy Statement is intended to
  • clarify Listing Rules governing listing of
    overseas companies
  • provide roadmap to overseas companies
    incorporated outside the Recognised
    Jurisdictions (i.e. Bermuda, Cayman Islands and
    PRC)
  • state factors (not determinative) affecting
    eligibility for listing

18
Hong Kong Depositary Receipts (HDRs) 4. HDR
framework
Highlights of new Chapter 19B of Main Board
Listing Rules
  • Issuer
  • Includes a company whose shares are
    represented by HDRs that are listed or are the
    subject of an application for listing but not
    including the depositary (Chapter 1)
  • HDR issuer does not have to be already listed
    overseas.
  • Issuer cannot list shares and HDRs on the
    Exchange at the same time (Rule 19B.06).
  • Must appoint approved share registrar to
    maintain HDR holder register, only (Rule 19B.13)
  • HDRs
  • may be issued in respect of newly issued
    shares and/or shares placed with depositary by
    existing shareholders (Rule 19B.06)
  • must be freely transferable (Rule 19B.09(a))
  • securities which HDRs represent must be fully
    paid and free from liens or restrictions (Rule
    19B.09(b))

19
Hong Kong Depositary Receipts (HDRs) 4. HDR
framework
Highlights of new Chapter 19B of Main Board
Listing Rules (contd)
  • Depositary
  • must be duly incorporated and in conformity
    with its constitutional document
    (Rule 19B.14)
  • must be suitably authorised and regulated
    financial institution acceptable to Exchange
    includes overseas operators (Rule 19B.15)
  • have adequate experience in issuing and
    managing DR programmes in Hong Kong or overseas
    (Rule 19B.15)
  • issues HDRs as agent of issuer (Rule 19B.05)
  • holds shares to which HDRs relate on trust
    (or equivalent arrangements) for sole benefit
    of HDR holders (Rule19B.16)

20
Hong Kong Depositary Receipts (HDRs) 4. HDR
framework
Highlights of new Chapter 19B of Main Board
Listing Rules (contd)
  • Deposit Agreement (Rule 19B.16)
  • Vetted by the Listing Division shareholder
    protection features in Joint Policy Statement
    dated 7 March 2007 should be complied with
  • Entered into between issuer and depositary
    and binding on HDR holders
  • Stipulates rights, duties and obligations of
    depositary, issuer, HDR holders, custodian and
    stipulates depositary fee structure
  • Sets out procedures for replacement or
    removal of depositary and/or custodian
  • Sets out procedures for amendment of deposit
    agreement material changes affecting HDR
    holders rights must have HDR holders prior
    approval
  • Governing law of Hong Kong or foreign
    jurisdiction generally used in international
    practice. Must not exclude Hong Kong jurisdiction
    for dispute resolution

21
Hong Kong Depositary Receipts (HDRs) 4. HDR
framework
Highlights of new Chapter 19B of Main Board
Listing Rules (contd)
  • Public Float Requirement
  • Public float requirement applies to whole
    class of shares represented by HDRs provided
    fungible with HDRs (Rule 19B.08)
  • Illustration
  • Company A has
  • Ordinary shares 900
  • Depositary Receipts (HDRs) (Note 1) 100
  • Note 1 Each HDR represent one ordinary share
    of Company A
  • Question
  • If 200 ordinary shares and 50 HDRs are held
    by public, does Company A meet public float
    requirement under Rule 8.08?

22
Hong Kong Depositary Receipts (HDRs) 4. HDR
framework
Highlights of new Chapter 19B of Main Board
Listing Rules (contd)
  • Public Float Requirement Illustration (contd)
  • Issued ordinary shares 200
  • Ordinary shares upon full conversion of HDRs (50
    x 1) 50
  • Shares held by the public 250 (B)
  • Total issued share capital 1,000 (A)
  • held by the public 25 (B)/(A)
  • Conclusion
  • Company A is able to meet public float
    requirement of 25 under Rule 8.08

23
Hong Kong Depositary Receipts (HDRs) 4. HDR
framework
Highlights of new Chapter 19B of Main Board
Listing Rules (contd)
  • Number of HDRs sought for listing (Rule 19B.07)
  • Issuer may seek to list HDRs up to any
    prescribed amount of share capital which HDRs
    represent. (Rule 8.19 does not apply)
  • Headroom provision
  • No further application for listing of HDRs is
    required for creation and cancellation of listed
    HDRs resulting from conversion of shares into
    HDRs or vice versa if sufficient headroom.
  • No further application for listing of HDRs is
    required merely because issuer issues further
    shares. (Rule 8.20 does not apply)

24
Hong Kong Depositary Receipts (HDRs) 4. HDR
framework
Effective date and way forward
  • Effective date of HDR framework 1st July 2008
  • FAQs and further information about HDRs on HKEx
    website
  • Revised Guidance for New Listing Applications
    (Main Board) has been updated.
  • Further enhancement of listing regime for
    overseas companies is
    under consideration.

25
Hong Kong Depositary Receipts (HDRs)
5. HDR operations
  • Structure of share- / HDR ownership
  • HDR initial listing
  • HDR creation and cancellation
  • Corporate action processing
  • Cash dividend
  • Scrip dividend
  • HKSCC Nominees service voting
  • Benefit entitlements
  • Common fees and charges of depositary

26
Hong Kong Depositary Receipts (HDRs) 5. HDR
operations
(1) Structure of share- / HDR ownership
Structure of overseas listed company ownership
Local register of members (ROM)
Other intermediaries / nominees
Custodian
Local CSD nominee
Depositary
Local participants
DRs
Individual/ corporate shareholders
Individual/ corporate shareholders
DR holders
Individual/ corporate shareholders
Registered shareholders
Beneficial owners
Central securities depository
CSD
27
Hong Kong Depositary Receipts (HDRs) 5. HDR
operations
(1) Structure of share- / HDR ownership (contd)
Structure of HDR ownership in Hong Kong market
28
Hong Kong Depositary Receipts (HDRs) 5. HDR
operations
(1) Structure of share- / HDR ownership (contd)
Implications
  • Depositary and its custodian added to chain.
  • Information flow may take longer
  • Two-tier structure to maintain regulatory
    equivalence
  • Usually look through to issuer/shares
  • In a few areas, look to depositary/HDR level
  • A few new concepts, e.g. headroom.

29
Hong Kong Depositary Receipts (HDRs) 5. HDR
operations
(2) HDR initial listing
  • Listing can be by introduction i.e. no capital
    raised in Hong Kong
  • Issuer must apply for headroom
  • IPO can be of HDRs,
  • on new shares (i.e. newly issued by issuer)
  • on existing shares (i.e. sold by major
    shareholder)
  • IPO process is same as for shares
  • Public offering required (if sizeable issue)
  • Yellow form, white form, etc.
  • Scrip created if white form used

30
Hong Kong Depositary Receipts (HDRs) 5. HDR
operations
(3) HDR creation and cancellation
HDR creation
31
Hong Kong Depositary Receipts (HDRs) 5. HDR
operations
(3) HDR creation and cancellation (contd)
HDR cancellation
32
Hong Kong Depositary Receipts (HDRs) 5. HDR
operations
(3) HDR issuance and cancellation (contd)
Highlights
  • Arbitrage between HDRs in Hong Kong and shares in
    local market (if not restricted) can take place.
  • HDR creation no need to apply for listing
    unless headroom exceeded.
  • HDR cancellation no need to apply for withdrawal
    of listing provided some HDRs remain listed.

33
Hong Kong Depositary Receipts (HDRs) 5. HDR
operations
(4) Corporate action processing
(1) Issuer provides corporate action details to
local custodian (2) Local custodian gives
information to depositary (3) Depositary via its
appointed share registrar (SR) in HK distributes
information to HDR holders (4) CCASS receives
notification from SR then distributes information
to CCASS participants (5) CCASS will collect
instruction from CCASS participants and submit to
SR (6) Depositary receives instructions from HDR
holders via SR and submits them to Issuer through
local custodian
34
Hong Kong Depositary Receipts (HDRs) 5. HDR
operations
(5) Cash dividend
Communications flow
35
Hong Kong Depositary Receipts (HDRs) 5. HDR
operations
(6) Scrip dividend
Communications flow
  • 1. Issuer announcement
  • share ratio
  • local payment date
  • 2. Depositary notice
  • HDR ratio
  • approximate HDR payment date
  • 3. Depositary notice
  • actual HDR payment date

Similar to flow for cash dividend
36
Hong Kong Depositary Receipts (HDRs) 5. HDR
operations
(7) HKSCC nominees service voting
  • Upon receipt of notice of meeting, depositary
    fixes record date and notifies HDR holders via
    SR.
  • Beneficial owners submit instructions through
    CCASS Participants to HKSCC for votes to be cast
    on their behalf, or request to be appointed as
    corporate representative to attend and vote at
    shareholders meeting.
  • HKSCC collects instructions and passes on to
    depositary, who relays to local custodian for
    action

37
Hong Kong Depositary Receipts (HDRs) 5. HDR
operations
(8) Benefit entitlements / corporate actions(NOT
REQUIRING exercise of discretion)
  • Examples dividend payment, issue of bonus
    shares.
  • Upon receipt of payment (net of any fees,
    expenses, tax withheld and depositarys own fee)
    in either HKD or USD / bonus shares in respect of
    HKSCC Nomineess shareholding at record date,
    HKSCC will credit payment/ bonus shares to CCASS
    participants bank account (net of CCASS dividend
    collection fee) / stock account respectively.

38
Hong Kong Depositary Receipts (HDRs) 5. HDR
operations
(8) Benefit entitlements / corporate actions
(contd)(REQUIRING exercise of discretion)
  • Examples open offer, take-over offer,
    subscription
  • HKSCC will collect instructions from CCASS
    Participants and take action on their behalf or
    to facilitate the taking of actions by
    Participants directly.
  • Rights issues
  • Pre-emptive rights must be passed on to DR
    holder
  • This will entail obtaining authorisation of
    the rights prospectus (ie. by Exchange)

39
Hong Kong Depositary Receipts (HDRs) 5. HDR
operations
(9) Common fees charges of depositary (based on
ADR experience)
  • Charges are made to the investor (via his broker
    or custodian)
  • Issuance fee
  • Cancellation fee
  • Cash distribution fee
  • Stock distribution / rights exercise fee
  • Other distribution fee
  • Annual depositary service fee

Notes 1. The above is for reference only the
depositaries charges for HDRs have not yet been
published. 2. It should be noted that CCASSs
normal charges will apply to HDRs in any event.
40
Appendix
Hong Kong Depositary Receipts (HDRs)
FURTHER DETAILS ON HDR OPERATIONS
Deposit of HDR Certificate
41
Appendix
Hong Kong Depositary Receipts (HDRs)
FURTHER DETAILS ON HDR OPERATIONS (contd)
Withdrawal of HDR Certificate
42
Appendix
Hong Kong Depositary Receipts (HDRs)
FURTHER DETAILS ON HDR OPERATIONS (contd)
Ways to receive corporate communication through
HKSCC Nominees Ltd.
43
Appendix
Hong Kong Depositary Receipts (HDRs)
FURTHER DETAILS ON HDR OPERATIONS (contd)
Corporate action processing
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