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Introducing American Depositary Receipts
Education | 22 October 2010
By: jason.liew
Articles (66) Profile

The hype is official. On 22 October, American Depositary Receipts (ADRs) have finally made their way onto Singapore Exchange’s (SGX) GlobalQuote platform.

An ADR is a US security that represents ownership of a specified number of shares in a foreign corporation. In the past, foreign companies that want to gain additional exposure in the US will do so by having their shares listed on the exchange via ADRs. Having said that, investors in the local bourse will still have to keep track of the prices of ADRs in a market outside of the SGX.

Thanks to GlobalQuote, local investors can now enjoy price discovery and share depository services in a well-regulated environment. Companies quoted on GlobalQuote will allow investors easy access to such overseas securities, making it similar to trading securities in Singapore.

The conversion process of shares to ADRs would involve a custodian, which purchases holdings of a company’s shares and re-bundles them before introducing to the US market. In this case, if the price of one share costs US$5, and it’s stated that 1 ADR would equate to 10 shares, the price of 1 ADR would be US$50 (10 shares x US$5). Trading of ADRs on GlobalQuote will be in US$ and in board lot sizes of 10 ADRs. This is in contrary to the normal lot size (1 lot : 1,000 shares) for equities.

Asian Hour Advantage

Originally, ADRs are only available during the US trading hours. With the launch of GlobalQuote, investors can now trade on news, financial updates or market noises for companies such as Baidu and PetroChina for the very first time during Asian hours.

This will give investors the “one step forward” advantage to buy or sell such companies before the US market opens for trading. Furthermore, there is no additional hassle to open an overseas account, which could be subjected to foreign tax regulations or additional foreign custody fees.

In addition, all ADRs on GlobalQuote are fully fungible with the ADRs in the US. This is done via a transfer process between the two national depositories, namely the Central Depository (CDP) of Singapore and the Depository Trust and Clearing Corporation (DTCC) of the US, whereby the CDP imposes a flat charge of $10.

Based on the fact that ADRs equate to a certain number of shares in a company, investors will also receive dividend payments if the company issues them. For non-cash entitlements such as rights and bonus issues, they may be offered to ADR holders or the depositary bank may sell the entitlements and distribute net cash proceeds in US$ to ADR holders, subject to terms in the agreement.

Basic Risk Exposure

As ADRs track the well being of its original stock, the former will constantly be subjugated to risks exposed in environments outside of its “ADR Listing”. For example, China Unicom’s ADR will be greatly affected by the company’s actual performance and related macro factors.

These risks could range from the political stability of the country in which China Unicom is listed in to the currency risks associated with the country. Thus, a more macro spectrum should be cast before making a decision to buy or sell a particular ADR.

Notwithstanding the risks, the addition of ADRs on the SGX will allow investors to have a wider choice in terms of financial products/instruments. This could be the new start of a more sophisticated investing market.

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