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
Hong Kong Depositary Receipts (HDRs)
AGENDA
Page
1.
Nature of DRs
3
2.
Global DR landscape
7
3.
Why HDRs?
14
4.
HDR framework
16
5.
HDR operations
25
Appendix
Further details on HDR operations
2
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.
Issuance of DRs
DR holders
DRs
Depositary
Issuance of shares
Shareholders
Shares
Corporation
Shares
Corporation
3
Hong Kong Depositary Receipts (HDRs)
1.
Nature of depositary receipts
Issuance of shares : governed by local statute and corporation’s M&A.
Issuance of DRs
: governed by deposit agreement.
Issuance of DRs
Issuance of shares
DR holders
Shareholders
Deposit
agreement
DRs
Shares
Depositary
Statute /
M&A
Statute /
M&A
Shares
Shares
Issuing
company
4
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.
5
Hong Kong Depositary Receipts (HDRs)
1.
Nature of depositary receipts
DR product characteristics
– 1st DRs issued in 1927 by JP Morgan on UK retailer Selfridges.

Mature product

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
6
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 І : non-listed
ІІ : listed without public capital-raising
ІІІ : listed with public capital-raising
GDRs
– “Global depositary receipts”
– Usually – a US leg (ADRs) settled in DTC
– a European leg under Reg S settled in ICSD and traded on
London’s 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
7
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: US$1.8 trillion at March 2008, up 35% Year on Year.

London and NYSE vie in DR capital raised.

Over US$2.4 trillion traded YTD June 2008, up 85% on prior YTD.

NYSE leads in DR trading value, followed by Nasdaq, London.
DRs represent about 4% of world listed equity market
1
Statistics from Bank of New York Mellon (BoNY) The Depositary Receipt Markets 2008 Mid-Year Review.
8
Hong Kong Depositary Receipts (HDRs)
2.
Global DR landscape
GDR
Level I
U.S.-listed
New sponsored DRs
Number
200
150
100
50
0
1999
Source: BoNY
2000
2001
2002
2003
2004
2005
2006
2007
1H
2008
Recent trend of GDR issuance
9
Hong Kong Depositary Receipts (HDRs)
2.
Global DR landscape
Annual DR capital raising
Primary and follow-on offerings ($bn)
GDRs
ADRs
60
50
40
30
20
10
0
1999
Source: BoNY
2000
2001
2002
2003
2004
2005
2006
2007
1H 2008
GDR capital-raising has grown
10
Hong Kong Depositary Receipts (HDRs)
2.
Global DR landscape
DR capital raising (US$9,159 million)
By exchange, 1H 2008 ($million)
97
706
NYSE
4,129
3,678
NASDAQ
London
Luxembourg
Other
539
London and NYSE dominate in capital-raising
Source: BoNY
11
Hong Kong Depositary Receipts (HDRs)
2.
Global DR landscape
Annual DR trading
Value ($bn)
U.S.-listed
Volume (bn)
3,000
2,500
2,000
1,500
1,000
500
0
1999
Source: BoNY
2000
2001
2002
2003
2004
2005
2006
2007
1H
2008
DR trading is still growing strongly,
despite general decline in world equity markets
12
Hong Kong Depositary Receipts (HDRs)
2.
Global DR landscape
Global DR trading value (total US$2,460 billion)
By exchange or market, 1H 2008 ($bn)
27
70
293
NYSE
NASDAQ
440
London/IOB
1,630
OTC
Amex/Other
Source: BoNY
NYSE dominates trading
13
Hong Kong Depositary Receipts (HDRs)
3. Why HDRs?

HKEx’s 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
14
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 London’s). More like US-style Level ІІІ
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.
15
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).
16
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
17
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))
18
Hong Kong Depositary Receipts (HDRs)
4.
HDR framework
Highlights of new Chapter 19B of Main Board Listing Rules (cont’d)

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)
19
Hong Kong Depositary Receipts (HDRs)
4.
HDR framework
Highlights of new Chapter 19B of Main Board Listing Rules (cont’d)

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
20
Hong Kong Depositary Receipts (HDRs)
4.
HDR framework
Highlights of new Chapter 19B of Main Board Listing Rules (cont’d)

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
Depositary Receipts (HDRs) (Note 1)
900
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?
21
Hong Kong Depositary Receipts (HDRs)
4.
HDR framework
Highlights of new Chapter 19B of Main Board Listing Rules (cont’d)

Public Float Requirement – Illustration (cont’d)
Issued ordinary shares
Ordinary shares upon full conversion of HDRs (50 x 1)
Shares held by the public
200
50
250 (B)
Total issued share capital
% held by the public
1,000 (A)
25% (B)/(A)
Conclusion:
Company A is able to meet public float requirement of 25% under Rule 8.08
22
Hong Kong Depositary Receipts (HDRs)
4.
HDR framework
Highlights of new Chapter 19B of Main Board Listing Rules (cont’d)

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)
23
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
under consideration.
of
listing
regime
for
overseas
companies
is
24
Hong Kong Depositary Receipts (HDRs)
5. HDR operations
(1)
Structure of share- / HDR ownership
(2)
HDR initial listing
(3)
HDR creation and cancellation
(4)
Corporate action processing
(5)
Cash dividend
(6)
Scrip dividend
(7)
HKSCC Nominees service – voting
(8)
Benefit entitlements
(9)
Common fees and charges of depositary
25
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
Local
CSD nominee
Local
participants
Custodian
Depositary
DRs
Individual/
corporate
shareholders
CSD
Individual/
corporate
shareholders
: Registered shareholders
: Central securities depository
Individual/
corporate
shareholders
DR holders
: Beneficial owners
26
Hong Kong Depositary Receipts (HDRs)
5.
HDR operations
(1) Structure of share- / HDR ownership (cont’d)
Structure of HDR ownership in Hong Kong market
[See preceding slide]
Overseas issuer: local ROM
Depositary
HDR ROM
HKSCC
Nominees
Other intermediaries/
nominees
GCP/DCP/custodian participants
Investor
participant
HDR holders
Individual/
corporate
HDR holders
: Registered shareholders
Individual/
corporate
HDR holders
Individual/
corporate
HDR holders
: Beneficial owners
27
Hong Kong Depositary Receipts (HDRs)
5.
HDR operations
(1) Structure of share- / HDR ownership (cont’d)
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”.
28
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
29
Hong Kong Depositary Receipts (HDRs)
5.
HDR operations
(3) HDR creation and cancellation
HDR creation
HK investor
HK
Market

T-day
HK broker
Purchase
underlying share
Local
Market
Buy HDR
SEHK
T+2 day
Notify broker to
collect HDR
certificate
Custodian of
local broker
Underlying
shares
T-day
Local broker
CCASS
*Share
Registrar
 Instruct broker to buy HDR, either
(a)
(b)
Purchase in HK
or
Purchase underlying shares in local
market and convert to HDR
* Roles of registration and custody of HDRs
To create HDR
Depositary
Bank (DB)
Custodian
appointed by DB
Notification of
share receipt
Local stock
Exchange/CSD
Settlement day
30
Hong Kong Depositary Receipts (HDRs)
5.
HDR operations
(3) HDR creation and cancellation (cont’d)
HDR cancellation
HK investor
HK
Market

Sell HDR
T-day
 Instruct broker to sell HDR, either
(a)
(b)
Sell in HK
or
Convert HDR to underlying shares
and sell in local market
T+2 day
HK broker
Transmission of
net cash proceeds
SEHK
CCASS
Withdrawal of
HDR certificate
* Share
Registrar
Deliver HDR
certificate
* Roles of register and custody of HDR
Notification of HDR
receipt & cancellation
Depositary
Bank (DB)
Local
Market
Custodian of
local broker
Underlying
shares
Custodian
appointed by DB
T-day
Local broker
Settlement day
Instruction to release
underlying share
Local stock
Exchange/CSD
31
Hong Kong Depositary Receipts (HDRs)
5.
HDR operations
(3) HDR issuance and cancellation (cont’d)
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.
32
Hong Kong Depositary Receipts (HDRs)
5.
HDR operations
(4) Corporate action processing
HK
Market
CCASS
Participant
HKSCC
Investor
Share
Registrar
HDR
Holder
Depositary
Local
Market
Issuer
Custodian of
underlying shares
Corporate communication
Instruction
(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
33
Hong Kong Depositary Receipts (HDRs)
5.
HDR operations
(5) Cash dividend
Communications flow
HDRs (anticipated)
H shares (current)
1. Issuer announcement
• local currency amount per share
• local payment date
(1) Issuer announcement of
RMB amount per share
2. Depositary notice
• approximate HK$ amount per HDR
• approximate HDR payment date
(2) Registrar notification of
HK$ amount per share
3. Depositary notice
• actual HK$ amount per HDR
• actual HDR payment date
34
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
35
Hong Kong Depositary Receipts (HDRs)
5.
HDR operations
(7) HKSCC nominees service – voting  Upon receipt of notice of meeting,
depositary fixes record date
notifies HDR holders via SR.
Voting
Share Registrar (SR)
appointed by Depositary

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
Proxy form or Corporate
Representative
Appointment letter
HKSCC Nominees Limited
Corporate
Representative
instruction
&/or voting
instruction
Corporate
Representative
instruction
&/or voting
instruction
Non-Investor
Participants
Investor
Participants
and
Corporate Representative
instruction &/or voting instruction
Beneficial Owners
36
Hong Kong Depositary Receipts (HDRs)
5.
HDR operations
(8) Benefit entitlements / corporate actions
(NOT REQUIRING exercise of discretion)
Dividend payment /
Issue of Bonus shares

Examples: dividend
issue of bonus shares.

Upon receipt of payment (net of
any fees, expenses, tax withheld
and depositary’s own fee) in either
HKD or USD / bonus shares in
respect of HKSCC Nominees’s
shareholding at record date,
HKSCC will credit payment/ bonus
shares to CCASS participants’
bank account (net of CCASS
dividend collection fee) / stock
account respectively.
Share Registrar (SR)
appointed by Depositary
Dividend / Bonus shares
HKSCC Nominees Limited
Dividend /
Bonus shares
Non-Investor
Participants
Dividend /
Bonus shares
Dividend /
Bonus shares
Investor
Participants
payment,
Beneficial owners
37
Hong Kong Depositary Receipts (HDRs)
5.
HDR operations
(8) Benefit entitlements / corporate actions (cont’d)
(REQUIRING exercise of discretion)
Subscription /
Take-over offer
 Examples: open offer, take-over
offer, subscription
Share Registrar (SR)
appointed by Depositary
Expenses, shares,
Form of Acceptance
 HKSCC will collect instructions
from CCASS Participants and take
action on their behalf or to facilitate
the
taking
of
actions
by
Participants directly.
Entitlement /
shares
HKSCC Nominees Limited
Subscription,
Take-over
instruction
Entitlement /
shares
Non-Investor Participants
Subscription,
Take-over
instruction
Entitlement /
shares
Subscription,
Take-over
instruction
Entitlement /
shares
Investor Participants
 Rights issues
– Pre-emptive rights must be
passed on to DR holder
– This
will
entail
obtaining
authorisation of the rights
prospectus (ie. by Exchange)
Beneficial Owners
38
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 CCASS’s normal charges will apply to HDRs in any event.
39
Appendix
Hong Kong Depositary Receipts (HDRs)
FURTHER DETAILS ON HDR OPERATIONS
Deposit of HDR Certificate
Participants must ensure that they have full authority to deposit such HDR certificate
into CCASS.
１.
HDR
certificate
Instrument of
Transfer
CCASS
Depository
10:00 a.m. to 3:45 p.m.
Monday to Friday
+
Stock Deposit Form
3. Input the deposit
details to CCASS.
2. Inspect all
the documents
submitted.
4. Immediately credit to
Participant’s stock account.
5. Certificates will be delivered to the share registrar for re-registration in
name of HKSCC Nominees. This process will take 10 business days.
Share Registrar
(SR) appointed by
depositary
6. After 10 business days
New certificate
(HKSCC)
Nominee
40
Appendix
Hong Kong Depositary Receipts (HDRs)
FURTHER DETAILS ON HDR OPERATIONS (cont’d)
Withdrawal of HDR Certificate
1. Participants input
withdrawal order (W/O)
via CCASS.
10:00 a.m. to 3:45 p.m.
Monday to Friday
6. The authorized representative of the
Participant with the duly signed Stock
Collection Authorization Form collects
the Certificates from the counter.
10:00 a.m. to 5:00
p.m. Monday to
Friday
5. Stock Withdrawal
Receipt,
Certificates and
Instrument of
Transfer pass to
counter of CCASS
Depository.
CCASS Depository
2. Once a W/O is accepted by
the system, the Participant's
specified stock account will
be debited by the system
with the withdrawal quantity
of shares.
3. HKSCC staff
retrieves the
certificates of the
withdrawn stock
from the vault.
4. HKSCC staff
signs the
Instrument of
Transfer.
41
Appendix
Hong Kong Depositary Receipts (HDRs)
FURTHER DETAILS ON HDR OPERATIONS (cont’d)
Ways to receive corporate communication through HKSCC Nominees Ltd.
Share Registrar (SR)
appointed by Depositary
Sends out corporate communication
HKSCC will provide a list of the names and addresses of
recipients to the depositary via registrar.
CCASS Participants
inform HKSCC of the name & address of the recipients.
Beneficial owners
They may request through CCASS
Participants to receive corporate
communication directly from
depositary.
Investor Participants
They may submit a standing instruction
to receive corporate communication
directly from depositary.
Depositary receipts registered in name of HKSCC Nominees Ltd.
Registered Holders
Depositary receipts registered in
investors’own name
42
Appendix
Hong Kong Depositary Receipts (HDRs)
FURTHER DETAILS ON HDR OPERATIONS (cont’d)
Corporate action processing
Share Registrar (SR)
appointed by Depositary
Instructions
Corporate
communication/
Entitlement
Consolidated instruction
representing those
submitted by CCASS
participants
HKSCC
Entitlement
Instructions
Process between SR and
the beneficial owners
CCASS participants
Instructions
Entitlement
Corporate
announcement /
Beneficial owners
entitlement
Process among HKSCC,
CCASS participants &
beneficial owners
43