The future of ADRs and GDRs
Our panel of experts offer their opinions on whether ADRs and GDRs are still an attractive option.
Nicole Burth Tschudi, head of IR, Adecco
“The history of Adecco’s US listing dates from the merger of Adia and Ecco in 1996 and the company had an ADR programme at the New York Stock Exchange from 2000 to 2007.
“Back in 2000, the equity markets were not as open as today. There were more restrictions, which meant that US investors only invested in US stocks.
"It was good to have several listings to get more liquidity and there was a price premium attached to a US listing.
“But, as it became possible to invest in European stocks, our ADR trading volumes declined steadily, except for a small rise in 2004 due to the audit delay.
"This year, ADR trading was about one to 1.5 per cent – nothing material. It is still cheaper to hold an ADR than a share but all fees have so massively reduced over the past few years that it doesn’t really make a big difference. I don’t believe the price premium really applies to the markets today.
“We were one of the first to delist. We always looked for a change in the rules that would allow us to delist and when it came earlier this year we were ready.
"For companies with low trading volume it is a no-brainer.
"The costs are not necessarily producing a 20F or complying with all the NYSE listing rules: it is just complicated to be listed in several stock exchanges because of the different sets of regulations and authorities. I
"It came to the point where we couldn’t breach any of the rules because they were all conflicting.
“The only concern with delisting is that you could harm your consumers or clients (in our case our candidates) and employees.
"We calculated that the risk of that was relatively low in terms of our corporate clients and our temps, who wouldn’t naturally be holders of the stock. For employees, it is a question of good internal communication to make sure that it is not causing a problem.
“We are a very volatile stock, given the cyclicality of the whole industry, so it is probably not a preferred play for retail investors.
"If you are a consumer brand then I guess it is a different discussion but LVMH is an important consumer brand, which also delisted, and I don’t think they do less sales because of it.”
Artur Tarnowski, head of IR, Telekomunikacja Polska
“The motivation behind the global depositary receipt (GDR) programme in 1998 was to broaden our investor base. The Polish capital market was very shallow and GDRs or ADRs were the simplest way of attracting US investors.
“Back then, investing in ordinary shares was more prohibitive because of the tedious procedures and paperwork involved in direct investment and exit from the Polish market.
"Some compliance rules prevented US funds from investing directly. Since then, the back office infrastructure – the settlement and clearing system – has improved considerably.
“If you look across the spectrum of companies in Central Europe, GDR programmes are becoming less popular because overall institutions are investing directly.
"One of our biggest shareholders is Capital Research: they have a medium to long-term view and predominantly invest in ordinary shares. The closer we get to European monetary union, there are fewer reasons to have a GDR programme.
“But there is a distinction between existing programmes and newcomers.
"For a newly listed CE company, a GDR programme still makes sense: the costs are marginal, there are no extra efforts in terms of compliance and it’s a good way to get exposure. Depositary banks do a lot to advertise the programmes.
"There are also tier two or tier three US investors who as first comers to CE stocks may prefer GDRs.
“I’m not sure if having an ADR programme is really beneficial given the amount of paperwork and additional lawyers time needed to comply with the Sarbanes Oxley Act. CE companies are all following European standards: the compliance is there and the transparency is there. I don’t see the value added.
“Electronic trading is contributing to a much more efficient market. Transactions are executed much quicker so there is no gridlock in the system as far as liquidity.
"There used to be, and still is, some arbitration between GDRs and ordinary shares if there is a difference in pricing. Some smart investors hop from one to the other. Clearly electronic trading helps. It realigns the pricing much faster.
"The downside is that if something negative happens then the domino effect spreads much faster.”
Rory Knight, chairman, Oxford Metrica
“There is good empirical evidence to show that, on average, there is a ten to 15 per cent increase in stock price when a foreign company lists an American depositary receipt.
"Why does it affect the valuation? It isn’t that the market got it wrong the day before. The reason is that it has become a new company by agreeing voluntarily to play by a different set of rules.
“That isn’t to denigrate European regulations but the principles-based approach is different from the US rules-based system.
"By ticking boxes, companies are generating extra, more granular, information and people do use it. This cost gives you the added value but there is a tipping point at which management decides the costs are too high.
“Emerging market companies, for example Chinese firms, can gain very large price premiums because they are taking a large step up in terms of the regulatory regime and management are sending out the signal that they are prepared to take on the added hardship. It is a self-selecting group.
“Our research suggests that terminating an ADR programme sends the reverse signal. It says to investors: ‘We, as management, no longer want to be subjected to this additional layer of regulation and scrutiny.’
"I suspect that many foreign companies got on to the radar of US institutions as a result of their ADR programmes.
"Those that terminate their ADR programmes will still have all the challenges of dealing with a global market in their shares even if they are all being traded in one place. They may need to give more attention to IR and corporate communication in the US market.
“There have been a lot of good names delisting over the past few months since the rule change that allowed companies to exit if their ADR trading fell below five per cent.
"There is sympathy with this first batch but eight months down the road I think people might want to examine more closely the reasons why companies are delisting.
“The number of US institutions that are prepared to invest directly outside the US has gone up. However the amount of trading in DRs hasn’t really diminished significantly.
“I suspect that over the counter trading in ADRs will grow alongside trading in listed securities. But OTC venues will have to provide some kind of good housekeeping award in order to succeed.
"There needs to be some way of distinguishing between an unlisted ADR that is still trading over the counter from the crowd.
"There needs to be collaboration between the issuers, the DR banks and the OTC trading systems in order to demonstrate how they can provide tangible, if looser, regulation of these securities.”
Cromwell Coulson, chairman and CEO, Pink Sheets
“You have to ask the question: “Are you as a company concerned with valution?
"If you are then you should make your securities as widely available as possible and a NYSE listing is a great way to do that but it has become very expensive and from a management perspective burdensome.
“That is why we at Pink Sheets have created International OTCQX, a high value, low burden, cross-listing for international securities that trade over the counter. It is a branded trading facility limited to international investment opportunities.
“The OTC market used to be dark and inefficient. Now we provide the market maker quotes in real time and we have made the trading process transparent and efficient.
"So a US investor coming in through etrade will see a US dollar price in real time and they can click and buy Roche shares. Roche trades very efficiently in the Pink Sheets and will trade more efficiently over time.
“We’re not kidding ourselves that we’re not going to become the primary market for most companies, especially large European companies.
"You will get better visibility on the NYSE but International OTCQX will give you more visibility than not having a cross-listing.
“The institutions all travel and have access to international exchanges but smaller institutions and retail investors don’t really have good access. We are going to be a valued space where companies can open themselves up to a new pool of liquidity.
“The US brokerage system, besides the large institutional system, is still dollar based. Investors don’t want multiple brokerage accounts, which is why an ADR offers such value because it’s a US dollar security.
"Currency-wise, international trading is like international travelling. The currency rate that you get is not the best price of the day. With an ADR, you don’t face custody costs, tax issues or get your dividends in another currency.
“ADR programmes can either be in Pink Sheets, which means the issuer has no relationship with us or they can apply for and go through the process of joining International OTCQX.
"Companies that take this step are saying they care about visibility, they care about valuation and it will be a self-selecting group.
"I think that differentiating securities and giving issuers the opportunity to rise to their highest level is going to add a lot of value to the market.”
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