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HONG KONG DEPOSITARY RECEIPTS (HDRs). By : Matthew Harrison, Research & Corporate Development, HKEX Bonnie Chan, Listing, HKEx. Seminar on 17 September 2008 At Hong Kong Securities Institute. AGENDA Page. Hong Kong Depositary Receipts (HDRs). Nature of DRs 3 2. Global DR landscape 7

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by matthew harrison research corporate development hkex bonnie chan listing hkex

HONG KONG DEPOSITARY RECEIPTS (HDRs)

By : Matthew Harrison, Research & Corporate Development, HKEX

Bonnie Chan, Listing, HKEx

Seminar on 17 September 2008

At Hong Kong Securities Institute

agenda page
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

slide3

Issuance of DRs

Issuance of shares

DR holders

Shareholders

DRs

Shares

Corporation

Depositary

Shares

Corporation

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.
slide4

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

Statute / M&A

Shares

Depositary

Shares

Statute / M&A

Shares

Issuing company

slide5

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.
slide6

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
slide7

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

slide8

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.

slide9

Hong Kong Depositary Receipts (HDRs)

2. Global DR landscape

New sponsored DRs

Recent trend of GDR issuance

Source: BoNY

slide10

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

slide11

Hong Kong Depositary Receipts (HDRs)

2. Global DR landscape

DR capital raising (US$9,159 million)

By exchange, 1H 2008 ($million)

London and NYSE dominate in capital-raising

Source: BoNY

slide12

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

slide13

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)

NYSE dominates trading

Source: BoNY

slide14

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
slide15

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 ІІІapproach, 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.
slide16

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).
slide17

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

slide18

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))

slide19

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)

slide20

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

slide21

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 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?

slide22

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 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

slide23

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)

slide24

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.
slide25

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
slide26

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

Individual/

corporate

shareholders

DR holders

: Registered shareholders

: Beneficial owners

: Central securities depository

CSD

slide27

[See preceding slide]

Overseas issuer: local ROM

Depositary

HDR ROM

HKSCC

Nominees

Other intermediaries/

nominees

GCP/DCP/custodian participants

Individual/

corporate

HDR holders

Individual/

corporate

HDR holders

Investor

participant

HDR holders

Individual/

corporate

HDR holders

: Beneficial owners

: Registered shareholders

Hong Kong Depositary Receipts (HDRs)

5. HDR operations

(1) Structure of share- / HDR ownership (cont’d)

Structure of HDR ownership in Hong Kong market

slide28

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”.
slide29

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

slide30

SEHK

  •  Instruct broker to buy HDR, either
  • Purchase in HK or
  • Purchase underlying shares in local market and convert to HDR
  • * Roles of registration and custody of HDRs

HK investor

Buy HDR

HK Market

T-day

HK broker

CCASS

T+2 day

*Share Registrar

Notify broker to collect HDR certificate

To create HDR

Purchase underlying share

Depositary Bank (DB)

Custodian of

local broker

Underlying shares

Custodian

appointed by DB

Notification of share receipt

Local

Market

T-day

Local stock

Exchange/CSD

Local broker

Settlement day

Hong Kong Depositary Receipts (HDRs)

5. HDR operations

(3) HDR creation and cancellation

HDR creation

slide31

SEHK

Depositary Bank (DB)

  •  Instruct broker to sell HDR, either
  • Sell in HK or
  • Convert HDR to underlying shares and sell in local market
  • * Roles of register and custody of HDR

HK investor

Sell HDR

HK Market

T-day

T+2 day

HK broker

CCASS

Withdrawal of HDR certificate

Notification of HDR receipt & cancellation

* Share Registrar

Transmission of net cash proceeds

Deliver HDR certificate

Local

Market

Custodian of

local broker

Custodian

appointed by DB

Underlying shares

Instruction to release underlying share

T-day

Local stock

Exchange/CSD

Local broker

Settlement day

Hong Kong Depositary Receipts (HDRs)

5. HDR operations

(3) HDR creation and cancellation (cont’d)

HDR cancellation

slide32

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.
slide33

Depositary

CCASS

Participant

HDR Holder

HKSCC

HK Market

Investor

Share Registrar

Local

Market

Issuer

Custodian of

underlying shares

Corporate communication

Instruction

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

slide34

HDRs (anticipated)

H shares (current)

  • 1.Issuer announcement
  • local currency amount per share
  • local payment date
  • Issuer announcement of RMB amount per share
  • 2.Depositary notice
  • approximate HK$ amount per HDR
  • approximateHDR payment date

(2) Registrar notification of HK$ amount per share

  • 3.Depositary notice
  • actual HK$ amount per HDR
  • actual HDR payment date

Hong Kong Depositary Receipts (HDRs)

5. HDR operations

(5) Cash dividend

Communications flow

slide35

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
  • approximateHDR payment date
  • 3.Depositary notice
  • actualHDR payment date

Similar to flow for cash dividend

slide36

Voting

Share Registrar (SR)

appointed by Depositary

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

Corporate Representative instruction &/or voting instruction

Beneficial Owners

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
slide37

Dividend payment / Issue of Bonus shares

Share Registrar (SR)

appointed by Depositary

Dividend / Bonus shares

HKSCC Nominees Limited

Dividend / Bonus shares

Dividend / Bonus shares

Non-Investor

Participants

Investor

Participants

Dividend / Bonus shares

Beneficial owners

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 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.
slide38

Subscription / Take-over offer

Share Registrar (SR)

appointed by Depositary

Expenses, shares,

Form of Acceptance

Entitlement / shares

HKSCC Nominees Limited

Subscription, Take-over instruction

Subscription, Take-over instruction

Entitlement / shares

Entitlement / shares

Investor Participants

Non-Investor Participants

Subscription, Take-over instruction

Entitlement / shares

Beneficial Owners

Hong Kong Depositary Receipts (HDRs)

5. HDR operations

(8) Benefit entitlements / corporate actions (cont’d)(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)

slide39

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.

slide40

CCASS Depository

Participants must ensure that they have full authority to deposit such HDR certificate into CCASS.

1.

HDR certificate

10:00 a.m. to 3:45 p.m. Monday to Friday

2. Inspect all the documents submitted.

Instrument of

Transfer

+

3. Input the deposit details to CCASS.

Stock Deposit Form

4. Immediately credit to Participant’s stock account.

6. After 10 business days

5. Certificates will be delivered to the share registrar for re-registration in name of HKSCC Nominees. This process will take 10 business days.

New certificate (HKSCC) Nominee

Share Registrar (SR) appointed by depositary

Appendix

Hong Kong Depositary Receipts (HDRs)

FURTHER DETAILS ON HDR OPERATIONS

Deposit of HDR Certificate

slide41

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.

1.

Participants input withdrawal order (W/O) via CCASS.

CCASS Depository

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.

3.

HKSCC staff retrieves the certificates of the withdrawn stock from the vault.

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.

4.

HKSCC staff signs the Instrument of Transfer.

Appendix

Hong Kong Depositary Receipts (HDRs)

FURTHER DETAILS ON HDR OPERATIONS (cont’d)

Withdrawal of HDR Certificate

slide42

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.

Registered Holders

Depositary receipts registered in

investors’own name

Depositary receipts registered in name of HKSCC Nominees Ltd.

Appendix

Hong Kong Depositary Receipts (HDRs)

FURTHER DETAILS ON HDR OPERATIONS (cont’d)

Ways to receive corporate communication through HKSCC Nominees Ltd.

slide43

HKSCC

Share Registrar (SR)

appointed by Depositary

Consolidated instruction representing those submitted by CCASS participants

Corporate communication/ Entitlement

Instructions

Instructions

Process between SR and the beneficial owners

Entitlement

CCASS participants

Instructions

Process among HKSCC, CCASS participants & beneficial owners

Entitlement

Corporate announcement / entitlement

Beneficial owners

Appendix

Hong Kong Depositary Receipts (HDRs)

FURTHER DETAILS ON HDR OPERATIONS (cont’d)

Corporate action processing