Frequently Asked Questions  
08/02/2011 
 

Chapter 6 Products - Securities Market

6.3

Hong Kong Depositary Receipts (HDRs)


6.3.1    

What are depositary receipts? What are HDRs?

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 Growth Enterprise Market.

 

6.3.2

What are the benefits of HDRs for Hong Kong investors? 

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.

 

6.3.3

What protections are there for Hong Kong investors in HDRs? 

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.

 

6.3.4

Will retail investors be allowed to buy HDRs?  

Retail investors are allowed to buy HDRs. There are no restrictions on who may buy or sell HDRs. 

 

6.3.5

Are the rights of a HDR holder the same as those of a holder of shares? 

The rights of a shareholder and a HDR holder are not identical. For example, the rights of the HDR holder arise from the deposit agreement, which is a contractual document, whereas the rights of the shareholder will be reinforced by local statute. Also, local regulations may prohibit foreign persons from holding shares directly, but no such restriction would apply to HDRs. However, in general, the rights of a HDR holder will be equivalent to those of a shareholder.

 

6.3.6

Can HDR holders vote at the shareholders meeting? 

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.

 

6.3.7

Can investors differentiate HDRs from shares by the stock code and the stock short name?  

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.  

 

6.3.8

What charges will investors pay in respect of HDRs? 

As with buying and selling stocks, investors need to pay brokerage commission, transaction levy, trading fee and stamp duty. The fees charged by the depositary are disclosed in the deposit agreement, which is a public document; investors should read the deposit agreement to inform themselves of these fees. The Exchange does not regulate the fees of the depositaries.

 

6.3.9

Can investors hold HDRs in physical form, ie in scrip? 

Yes. However, if investors wish to trade their HDRs through the HKEX securities market they must first arrange via their broker or custodian for the HDRs to be deposited with the Central Clearing and Settlement System (CCASS).

 

6.3.10

In what currency will dividends on HDR be paid? 

The depositary will receive dividends from the issuer in the original currency and convert the amount into Hong Kong dollars (or US dollars if the issuer so chooses) at the appropriate market rate and remit the proceeds, net of any applicable taxes and the depositary’s own fee, to the HDR holder. Where the investor holds the HDRs in CCASS, the dividend will be credited to his CCASS account (in respect of an Investor Participant) or the CCASS account of his broker of custodian, net of CCASS’s dividend collection fee in accordance with the existing CCASS tariff.

 

6.3.11

Whether dividend payments on HDR are subject to overseas withholding tax?

There is no withholding tax in Hong Kong. Whether overseas withholding tax is applicable depends on the laws and regulations of the overseas jurisdiction concerned. HDR holders should refer to the relevant disclosures in the listing documents and, if necessary, seek advice from their tax advisers.

 

6.3.12

Will the trading of HDRs be suspended to keep in line with the suspension of underlying shares in the local market? 

As a practical matter a suspension of the underlying shares of HDRs in the local market will normally, though not necessarily, result in a suspension of trading of HDRs on the Exchange. The trading suspension and resumption of HDRs on the Exchange will be in accordance with the Listing Rules e.g. whether the issuer is able to keep the Hong Kong market informed of the development in the issuer's activities. Similar to issuers with their equity securities listed on the Exchange, the lack of an announcement in some situations may lead to a concern of establishment of a false market in Hong Kong and hence would require a temporary suspension of dealings in the HDRs pending an appropriate announcement to be made.

 

6.3.13

What will happen to the HDRs listed in Hong Kong if its underlying shares are undergoing a stock split or consolidation?

A stock split or consolidation of the underlying shares of the HDRs will affect the capital structure of the HDRs and consequently the HDR ratio. Further, a stock split or consolidation in the underlying shares may, or may not, affect the board lot size of the HDRs. The Exchange, in appropriate circumstances, would request for adequate arrangements to be made to enable odd lot holders are to be accommodated and issuers and depositaries are encouraged to consult with the Exchange at the earliest opportunity.

 

6.3.14

Will there be fungibility between HDRs and the underlying shares? 

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. 

For more information on HDRs, please refer to "Depositary Receipts" under the "Products & Services" section of the HKEX website.