Depositary receipts (DRs) are securities issued by a depositary representing underlying shares of an issuer which have been placed with the depositary or its nominated custodian. The subject matter of listing is the underlying shares represented by DRs. DRs are purchased by investors (DR holders) in accordance with the terms of the deposit agreement. The depositary is the agent of the issuer and acts as a bridge between the DR holders and the issuer.

DRs are issued to investors in the target market (the host market) where they are traded, cleared and settled in host market currency in accordance with host market procedures. One DR will represent a number of underlying shares (or a fraction of a single share), according to the DR ratio. The depositary converts dividends into the host market currency and pays the amounts (net of its own fees) to the DR holders. The depositary also transmits other entitlements and corporate communications from the issuer to the DR holder, and transmits the DR holder’s instructions back to the issuer. The rights and obligations of the issuer, the depositary and the DR holders are set out in the deposit agreement.

‘HDR’ is the informal name for a depositary receipt programme listed on the HKEX securities market.  At this stage, the HDR framework applies on the Main Board only and it is not applicable on the GEM.

DRs provide a convenient means for Hong Kong investors to invest in an overseas issuer. Direct investment in shares in some markets entails compliance with onerous procedures on registration, withholding tax reclaims and foreign currency conversion. It may also be difficult for investors to receive corporate communications and entitlements, or to exercise their entitlements. Some overseas issuers may not be able to list their shares in Hong Kong; and in such case the Hong Kong investor wishing to invest in the company would have to do so through the local market via that market’s trading, settlement and share custody procedures.

With DRs, the above problems are mitigated. DRs are traded in Hong Kong in accordance with the standard trading, settlement and custody procedures of the Hong Kong market. The currency of trading will be Hong Kong dollars (or US dollars if the issuer so chooses); dividends will be converted into Hong Kong dollars (or US dollars), and corporate communications and entitlements will be transmitted to the investor by the depositary, in addition to the requirement that corporate communications must be posted on the HKEX website and the issuer’s website. The investor will also be able to transmit his voting instructions to the issuer and exercise his entitlements via the depositary.

To be admitted to listing on the Exchange, the HDR issuer will have to demonstrate compliance with all the shareholder protection provisions that apply to issuers of shares, as set out in the Listing Rules, the 7 March 2007 Joint Policy Statement, the Securities and Futures Ordinance, the prospectus provisions of the Companies Ordinance, and the Codes on Takeovers and Mergers and Share Buybacks. 

The HDR holder’s rights are set out in the deposit agreement, which is subject to approval by the Exchange in accordance with the provisions of Chapter 19B. Investors in HDRs should understand that they are bound by the terms of the deposit agreement. Investors are advised to carefully study the HDR issuer’s listing document and the deposit agreement, and to understand the rights and obligations of an HDR holder and how they may be exercised.  Both the listing document and the deposit agreement are available at the HKEXnews website.  Investors should note that the Exchange does not regulate the fees of the depositaries. 

As with other products, investors in HDRs should understand their own risk appetite and the details of their investments. The “Understanding the Risks of Investing in Overseas Issuers” under the “Rules & Regulations” section of the HKEX website serves as a general guide to highlight some basic facts and characteristics of investing in securities of overseas issuers.

HDR holders are not registered shareholders and so has no legal rights to attend shareholders’ meetings in the capacity of shareholders.  However, they have the contractual rights set out in the deposit agreement, including the right to vote on resolutions, receive dividends and participate in corporate actions; these rights are generally exercised on their behalf by the depositary.  HDR holders should read the deposit agreement carefully to understand those rights.   

The depositary, on behalf of the issuer, will pass the notice of meeting information from the issuer on resolutions and voting procedures through to the HDR holders, and will in turn pass the HDR holders’ voting instructions back to the issuer.  

If HDR holders entrust their HDRs with brokers who are CCASS Participants, they may exercise their vote by giving instructions to Hong Kong Securities and Clearing Company Limited (HKSCC) through his brokers.  If HDR holders have opened Investor Accounts in the Central Clearing and Settlement System (CCASS) and have deposited the HDRs into the CCASS Depository, they may vote by giving instructions directly to HKSCC. HKSCC will then pass the voting instructions to the depositary accordingly. 

Shareholders’ meeting announcements and other corporate communication of the HDR issuers can be found on the HKEXnews website.

The stock code allocated for an HDR is from 6200 to 6499.  Its stock short name also shows some basic information of the product.  Please see the following example and “Listing of Overseas Companies” under the “Rules & Regulations” section of the HKEX website.

 
Investors should note that the stock code and the stock short name of an HDR indicate only some basic information of the product. They should refer to the listing document, the deposit agreement, and to consult their brokers before trading.  

Provided there are no restrictions on the underlying shares, they should be fungible with HDRs. If the underlying shares are listed on an overseas market, arbitrage between the two markets can take place.

Where an investor or intermediary believes that the price of the HDRs is higher (taking account of the DR ratio) than the price of the underlying shares, it may wish to acquire shares in the overseas market, submit them to the custodian and take delivery of DRs in the Hong Kong market to sell and make a profit. Where the price of the HDRs is lower than that of the underlying shares, the investor/intermediary may submit the HDRs to the depositary for cancellation and take delivery of shares in the overseas market to sell and make a profit. Fees will be payable to the depositary on issuance and cancellation of the HDRs.

The arbitrage process will tend to bring the price of DRs and the price of the underlying shares into line, subject to the DR ratio. It is a normal commercial process.