Old tools for a new globalization

What is the essence of depository receipts (DR) as a tool for facilitating the movement of capital in the stock market? The authors describe their main advantages and disadvantages from the standpoint of both investors and issuers. Paper, the basic concepts of DR types, their common features and differences, according to the standards adopted in the United States. For the first time Market Depository Receipts is seen as a project, whose goal - to provide workers in the U.S. market investors access to the best securities issuers.

The market is very straightforward
So too is arranged in capital markets that, for reasonable recovery of indexes they want growth or the global economy, the economy or a particular country. Investor typically not interested in economic growth in the world system, or a single region, as such, a specific market, where its capital.

While many look at the movement of prices in capital markets through the prism of economic growth, all are interested in more specific indicators for certain groups of securities or currencies. If the investor is not satisfied with market returns or riskiness of operations, he can leave. In doing so, the investor will have to answer at least two questions:
- How to close the position with the least loss?
- How to eliminate the position from the funds?

Unfortunately, the answers for the most part, will not depend on the investor or the market situation and the degree of freedom of the national stock market. Someone understands the freedom of impunity, someone - like the removal of administrative pressure on the market, but the investor will be determined by degree of accessibility of various categories of financial instruments. On many trading floors CIS battle today is for "good" companies.

Mitigation of the listing conditions, improving trade infrastructure, the professional market participants, the development of stock market derivatives - this is just the beginning of competition between trading venues for the "good" issuer, which often ends monopolization of trade infrastructure. At the beginning of last century, Americans and Europeans, and today, decided to change the approach to the problem of bringing to market new "good" companies. The essence of it was to attract companies from other, less developed markets. With this logic, the American investors, financial intermediaries and regulatory authorities came to a consensus, which emerged and the market depository receipts.

Depositary receipts in most countries whose legislation authorizes the issue of these instruments is defined as derivative securities. It shows that in favor of the owner of a receipt in the country of the issuer obezdvizheno a certain number of securities. The appearance of such, at first glance a simple tool was due to increased capital flows between the English-speaking countries: the United States, Britain and their colonies. In 2002 marks 75 anniversary of the release of the first depository receipts in the U.S. (American Depositary Receipt - ADR). Legally enshrined the distinction between the ADA and ADRs (American depositary shares). One ADR includes a few shares, or any part of the action. When it comes to ADA, it means the equivalent of one share issuer in the form of depository receipts (DR). For example, often companies from Western Europe reported dividend payments in U.S. dollars than one ADR, and one ADA to shareholders in the U.S. was more convenient to compare them with payments in Europe. If a DR has one share issuer, the notion of hell and ADRs match.

Since mutual interest
Depository receipts are a number of advantages. From the perspective of the issuer is:
- Getting companies from developing countries access to markets in the U.S. and EU countries. This helps to attract sufficient capital and simultaneously reduce the dependence of the issuer of the environment and the development of national market shares;
- Dissemination of information about the company in the international financial market will inevitably lead to the expansion of its business contacts and attract new partners and potential customers;
- Improving the image of the national market for the issuer in connection with access to international capital market;
- Virtually unlimited, with the competent host, the possibility of raising capital. In doing so, companies with emerging markets is becoming a very important effect of the difference scale. It appears that little to American or European foreign investors, the amount could have a decisive impact on the promotion of the company or bank in emerging markets;
- Simplification of contact with investors in the United States, based on the standardization of reporting issuers from around the world before U.S. regulatory authorities.

These advantages for the release of DR issuers will be possible only by investors with an interest in this market. They agree to buy receipts for shares of the company, because:
- Investors in developed markets need to diversify their investments, investment funds, banks, trusts are looking for markets that are already sufficiently developed but not yet integrated so as to depend on developments in major markets;
- DR denominated in U.S. dollars or in euro, dividend payments are also in hard currency. Although the issue receipts in U.S. securities denominated in Russian rubles, not relieves investors from currency risk, but also eliminates the need for currency conversion and repatriation of dividends, which is of great importance;
- If the company came to market DR, investors perceive it as the leader of the national stock market (although the success of a direct placement of DR on the market initially determined by popular national market among investors in the United States and EU countries).

Types of Depository Receipts
According to generally accepted norms, DR divided into sponsored and nesponsiruemye. By nesponsiruemym receipts are those initiated by the release was a shareholder, a group of shareholders or prospective investor. By the issuance of such Receipts in the United States have established minimum requirements in terms of accountability, but they are not allowed in the formal market and traded on the OTC market (OTC).

Issue nesponsiruemyh receipts to be in a situation where the shareholders of the company sees prospects for the sale of its shares on the market of the United States or Europe. Sam issuer does not participate in the release of DR, but because the shareholder has a sufficient level of freedom. In Ukrainian and Russian working conditions is very important that after the initiation of a shareholder (investor) release nesponsiruemyh Receipts issuer is difficult to identify the real owners of shares, and hence the distribution of votes at the shareholders meeting can be a surprise for all participants.

Nesponsiruemye DR can be applied in the privatization. In this case, the State as a shareholder initiates the release DR. But the efficiency of such privatization is questionable, especially if it is not a commodity company. Large investors and without DR may buy shares of companies to be privatized, but the minority shareholders deters uncertainty. Sponsored DR much more prevalent, because they can attract new capital. The initiator of the release sponsored Receipts must be the issuer.

In the United States provide four levels of DR (Table 1).


The first level means the maximum periods of registration and the minimum requirements. Conditions of release on the first level of DR almost coincide with the requirements for registration nesponsiruemyh receipts. The only difference is that in the first case, the initiator - the issuer, in the second - the shareholder.

The first level of DR did not produce in the formal market. Pass this level is practically impossible, because with the release of the first level of DR scheme worked interaction investor, issuer and underwriter. Many of the first level of DR should be seen as an attempt by the issuer to raise their profile.

The second level involves issue receipts, which are permitted on NYSE, AMEX and NASDAQ. While this does not mean that after the registration of the issuer automatically goes to the listing of one of these trading platforms. However, the issuers that issue receipts to claim the second level, a requirement to provide regular reports on Form 20-F, which seriously spur price Release DR.

Typically, a form 20-F is a great Talmud on pages 100-300 in which the company should not only outline development plans, to address the discussion of management issues, to report on the insiders, to mention all the litigation and about the most important transactions for the year, but obscherynochnuyu and present a picture of the sector market, which considers itself a leader, as well as to inform investors about any changes in legislation and regulation in the country, which could affect the company's activities.

All financial statements of the company shall be transferred to the US GAAP, which considerably complicates the issue itself, and requires time to conduct audits and conversion reports. In addition, many issuers do not match the financial and calendar year, which raises the need to double counting. The question about the cost of such a release is very abstract, because the more the company, the more money will go to scrape reporting.

When a second level of FD from the date of the issuer prior to the date of receipt into the market is held, usually up to 14 weeks. It is important to understand that second-DR, as well as first-level enable the issuer to buy back only on the secondary market for their shares and their basis to initiate the issue of depositary receipts.

The third level. Ability to attract real capital give only the third level of DR, which are produced through the new issue of shares. Until the late 90's. prevail the opinion that the second level of receipts uninteresting issuers, and therefore they immediately register the third level of DR. Practice shows that this is not true.

Indeed, for the third-level requirements are not much higher. However, the second level of FD on qualitative characteristics gives the same advantages as the third, but it allows you to adjust the number of issued and DR are not focusing on the success of western investors, the primary location. Thus, the second level of FD is gradually becoming more popular. Many issuers prefer a period of time to be a gray horse and wait for their star hour, than to be forgotten after an unsuccessful push for the "primary".

Inappropriate level of
The fourth level of DR, there is no standard (ie E is not described in the regulations that govern this market). But usually Democratic issue defined by the rule 144А and "Registration S". Rule 144А in the United States is valid only on the trading floor for qualified investors (QIB), that is, for large investors, investment mutual funds, investment banks and other institutional investors, who, according to the SEC, acting professionally, and after the loss, as a rule, do not excite Market loud judicial affairs, Setu that they cheated.

In adopting a rule 144А, SEC as a hedge of non-market participants from companies from outside the U.S., requiring large volumes of trades and do not wish for certain reasons, to produce second-or third-DR levels.

Issue DR rule
"Registration S" somehow reminds offshore schemes work. The meaning of "Registration S" is that the SEC allows the depositary to issue receipts, which are known to be traded in London, Luxembourg, Berlin, Frankfurt, or wherever, but not in the United States. Naturally, the requirements for issuing receipts for the rule "Registration S" is minimal, similar to nesponsiruemymi DR. The very existence of "Registration S" leads to separation of receipts by geography. Thus, DR is shared by the Global (GDR) and American (ADR). But such a classification to the increasing globalization of world financial market has become conditional - and U.S. and global receipts were identical forms.

Just the name "global" is applied to the receipts, which apply mainly to European markets, but "American" - to the receipts, sold to a greater extent in the United States. Center of trade in the GDR were mainly Berlin, London, Luxembourg, Frankfurt. ADRs are traded on the NYSE, AMEX, NASDAQ, PORTAL, and OTC.

Prior to September 2001 was considered to be profitable purchase DR in Europe and selling them in the United States. However, with changing financial climate in the States began to reverse the flow.

The best-investors in the U.S.!
This slogan is very often coincides with the direction of American foreign policy. During the existence of market DR Americans really been able to select the best companies in the domestic markets of Australia, Eurasia, Latin America. Importantly, the market for DR always existed, regardless of the direction of investment flows - from the United States to Europe or vice versa.

Despite the fact that investors entering the market DR, expose themselves to additional risks, they still tend to operate on him, often in pursuit of raznovektornye purpose: from geographic diversification and balancing the portfolio - up to speculation. By itself, the idea to gather in one market the best companies from around the world spoke about the ambitious market ADR as a separate project.

However, the ambitions are justified. Many countries, such as Brazil and Moldova, tried to run the toolkit in circulation, such ADRs and establish a similar market, but the projects either failed or have not reached the planned volume, and seriously talk about them today can not.

In fact, the market ADRs in the United States provides not only the consolidation of the interests of investors, institutions, infrastructure and regulatory bodies, how much power the American economy and the large excess of liquidity, which dominate the major U.S. financial institutions. It is unlikely that market operators today ADRs attributed its existence to the orientation of the process of globalization - the market is the major investors, pursuing mercantile purposes. Issuer's market ADRs need capital to investors - the place where it can be advantageous to place.

Meanwhile, machinery etc., running in place in the United States 75 years ago, has helped investors get closer to American companies from other countries and, hence, the process of creating a "new global stock market, but already in the United States, is in full swing.

Thus, despite the long history of DR, the last few years played a growing role in world finance, replacing the subtle and not always legitimate schemes export of capital to a standardized and legal instrument for investing in foreign companies. Already, DR should be viewed as a financial tool that contributes to globalization. Of course, in such an instrument has a future, not only in the United States.

Vitaly Shapran, Natalia Shapran