What it means
A depositary bank buys or takes custody of shares in a foreign company on its home exchange and then issues claims against them for trading in the United States. Each claim is an American depositary share, and one such share may represent one, several or a fraction of an underlying ordinary share depending on the chosen ratio.
The arrangement matters because it removes most of the friction that stops ordinary investors buying overseas. There is no need for a foreign brokerage account, no foreign currency settlement, and dividends arrive converted into dollars, which widens the pool of buyers a foreign issuer can reach.
The ratio is the detail most people miss. If one unit equals four ordinary shares, the traded price should be roughly four times the home-market price converted into dollars, and any persistent gap invites arbitrage that closes it quickly.
Programmes come in levels of increasing commitment. An unsponsored or basic level programme trades over the counter with minimal disclosure, while a higher level programme lists on a major exchange, meets US reporting requirements and can be used to raise fresh capital.
The costs are real but modest. The depositary bank charges a small fee per unit, typically deducted from dividends, and holders may face foreign withholding tax on those dividends before the dollars reach their account.
In practice
Real-world examples.
Example
A US retail investor wants exposure to a Japanese robotics maker but has no foreign trading account. She buys 200 depositary shares at $46 each through her normal broker, receives dividends in dollars, and never touches yen directly.
Example
A Brazilian mining company wants access to US capital, so it establishes an exchange-listed programme, files US-standard financial statements, and raises $600 million by issuing new units alongside a home-market placing.
Example
A fund manager notices that a British consumer group's units are trading at a 1.2% premium to the London price after currency conversion. He sells units, buys the London shares, and delivers them to the depositary to capture the difference.
Formula
Calculation
Fair value per unit = home-market share price x exchange rate x number of ordinary shares per unit
A European manufacturer's ordinary shares trade at 12.50 euros on their home exchange, and the exchange rate is $1.10 per euro. In dollars, one ordinary share is worth 12.50 x $1.10 = $13.75. The depositary programme uses a ratio of one unit to four ordinary shares, so the fair value of one American depositary share is $13.75 x 4 = $55.00. If the units are actually quoted at $55.60, the $0.60 gap is the arbitrage a market maker would close by buying ordinary shares abroad and delivering them to the depositary in exchange for new units.Case study
Seen in the real world.
The following case is illustrative and fictional. Nordlys Marine, an invented Scandinavian shipping company, found that fewer than 4% of its shareholders were based in North America despite most of its charter revenue being earned in dollars. Its board set up an exchange-listed depositary programme with a ratio of one unit to two ordinary shares.
Within eighteen months North American holders accounted for close to a fifth of the register, and the company's average daily traded value roughly doubled. The finance team also found that analyst coverage grew, because US brokers could now write on a name their clients could actually buy.
The costs were not trivial. Nordlys spent about $1.4 million on the initial listing and around $500,000 a year on US reporting and the depositary relationship, which the board judged worthwhile only because the improved liquidity lowered its cost of equity on the next raise.
Watch out
Common mistakes.
- Using the terms depositary share and depositary receipt interchangeably in legal or accounting documents. The share is the unit of ownership and the receipt is the instrument evidencing it, and contracts frequently turn on the distinction.
- Comparing the quoted price directly with the home-market price. Without applying the ratio and the exchange rate, the comparison is meaningless.
- Forgetting currency exposure. Buying in dollars does not remove foreign exchange risk, because the underlying business and its share price still move with the home currency.
Questions
People also ask.
Do holders get voting rights?
Sometimes; the depositary bank usually passes voting instructions through, but the mechanics and deadlines are clumsier than holding the ordinary shares directly.
What fees apply?
The depositary typically charges a small annual servicing fee per unit, often a few cents, usually netted off dividend payments.
What happens if the company is taken over?
Holders receive the cash or shares due on the underlying ordinary shares, converted and passed through by the depositary, less any fees and taxes.
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