Ask the expert September 2012
Q: What are Hong Kong Depositary Receipts and how are they different to normal listed securities?
A: Hong Kong Depositary Receipts (HDRs) are securities that are listed and traded on the Stock Exchange of Hong Kong. HDRs offer an alternative mechanism for foreign companies not able to list directly in Hong Kong due to restrictions in their home country or because of incompatibilities between their home and their listing jurisdictions’ legal systems. Vale SA (Brazil) was the first company to list HDRs in December 2010. They have been followed by SBI Holdings (Japan) in April 2011 and Coach, Inc (USA) in December 2011.
HDR holders can become shareholders by converting their HDRs into shares in the home market; likewise, shareholders in the home market may convert their shares into HDRs in Hong Kong. The depositary agent for the HDRs facilitates the issuance and cancellation of HDRs.
HDRs are equivalent to share listings from the perspectives of listing, trading, clearing and settlement, under the current regulatory framework. However, they’re different to listed shares in several ways.
Firstly, a HDR is a ‘wrapper’ of underlying shares in the issuer’s home market. It can represent a fraction of a share, a single share or multiple shares. The depositary bank holds the shares through the local custodian, and issues HDRs in Hong Kong based on those shares. In effect, the HDR evidences holders’ ownership of interests and rights in those shares of the company under a Deposit Agreement.
A company listing through the HDR process has to comply with the same general requirements as a share listing, although in practice, waivers on certain corporate communication requirements can be granted by the stock exchange. Holders of HDRs are entitled to dividends like a normal shareholder (if the issuer announces dividend distribution), although the dividend proceeds are actually net of the applicable depositary fees: the depositary bank receives a dividend in local currency in the home market before converting it into Hong Kong or US dollars at the issuer’s discretion for distribution to the HDR holders.
For shareholders’ meetings, HDR holders are not typically entitled to physically attend the meetings in the home market, but they can submit their voting intentions to the HDR registrar for delivery to the depositary bank. The custodian will cast the votes on behalf of HDR holders at the meetings.
Lina Wynn, Head of Client Services
Computershare Hong Kong Investor Services Ltd