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 • Why HDRs? 14 • HDR framework 16 • HDR operations 25 Appendix Further details on HDR operations
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.
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
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.
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
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
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$2.4 trillion traded YTD June 2008, up 85% on prior YTD. • NYSE leads in DR trading value, followed by Nasdaq, London. DRs represent about 4% of world listed equity market 1 Statistics from Bank of New York Mellon (BoNY) The Depositary Receipt Markets 2008 Mid-Year Review.
Hong Kong Depositary Receipts (HDRs) 2. Global DR landscape New sponsored DRs Recent trend of GDR issuance Source: BoNY
Hong Kong Depositary Receipts (HDRs) 2. Global DR landscape Annual DR capital raising Primary and follow-on offerings ($bn) GDR capital-raising has grown Source: BoNY
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
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
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
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
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.
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).
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
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))
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)
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
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?
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
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)
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.
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
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
[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
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”.
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
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
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
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.
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
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
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
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
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.
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)
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.
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
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
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.
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