Hong Kong depositary receipts
- Listing Hong Kong Depositary Receipts (HDRs) in Hong Kong may be a way for a foreign company to tap the local capital market if regulations of the company's home country discourage overseas listings. You can get exposure to foreign companies through trading their HDRs.
- Depositary receipts (DRs) are typically certificates issued by a depositary as agent of a foreign company. It represents a company's shares held by the depositary.
- A DR is the evidence of its holder's right to obtain the foreign shares that it represents. The depositary acts as a bridge between the DR holders and the overseas company.
Companies operating in Hong Kong and/or Mainland China wishing to go public typically apply for listing of their shares on The Stock Exchange of Hong Kong Limited (SEHK). But for foreign companies where local regulations may discourage overseas listings, issuing Hong Kong Depositary Receipts (HDRs) may be a way to tap the capital market here.
For local investors, HDRs are a means to get exposure to foreign companies listed on overseas exchanges through trading these companies' HDRs listed on the Hong Kong stock market. Direct investment in shares of overseas listed companies involves onerous procedures in share registration, application for withholding tax refunds and the inconvenience of cross currency transactions. Investors may also find it difficult in some cases to receive corporate communications on time and to exercise their entitlements. HDRs serve to mitigate these problems, allowing Hong Kong investors to invest in overseas equities conveniently.
How DRs work
Depositary receipts (DRs) are typically certificates issued by a depositary (usually a bank) as agent of a foreign company to represent the shares of such company that the depositary or its nominated custodian holds. The depositary acts as a bridge between the DR holders and the foreign company, while the certificates or receipts evidence the DR holders' ownership interests and rights in those shares (i.e. a DR holder has the right to obtain the foreign shares that such DR represents).
It is up to the company to fix the ratio of DRs to the number of underlying shares in the home market. In other words, a DR may represent a fraction of a share, a single share or multiple shares. The price of a DR often tracks the price of the underlying shares trading in the home market, as adjusted for the DR ratio, depending on amongst other things the liquidity of the DRs.
In Hong Kong, as with the listing of shares, HDRs can be listed through IPO or by introduction. To list and trade HDRs, a company must meet essentially the same requirements as those for the listing of shares on the Main Board of SEHK. Besides satisfying one of three financial tests, the company must go through the same listing process and observe the same continuing obligations subsequent to listing, subject to any specific waivers granted by the SEHK on a case-by-case basis. However, being listed on an exchange elsewhere is not a pre-requisite.
Trading and settlement
The trading, settlement and custodial arrangements for HDRs are the same as for shares, meaning that HDRs can be traded according to the standard Hong Kong market procedures. You can trade HDRs through your usual stock account. Trades executed in the HKEx's trading system will be settled through the Central Clearing and Settlement System (CCASS) on the second settlement day after trading (T+2). Upon settlement, HDR holdings will be credited to or debited from your account with CCASS, or the CCASS account of your designated custodian or brokers. Although HDRs are deposited, traded and settled electronically, you also have the option of withdrawing them in scrip (as certificates) from, or depositing the scrip into CCASS.
HDRs are also subject to short-selling rules intended for shares. If the HDR issuer meets the HKEx's criteria and the relevant HDRs are placed on the list of eligible stocks, short selling in the normal manner will be permitted.
Various charges are associated with investing in HDRs. Although fees charged by depositaries are not regulated by HKEx, you may find out about them in the deposit agreements between the depositary and the HDR issuer. Therefore, read a deposit agreement carefully to find out the related charges. As with buying and selling stocks, investors need to pay brokerage commission, transaction levy, trading fee and stamp duty. HDRs can be denominated either in HK dollars or US dollars.
Dividends from the company in the original currency will be converted into HK dollars or US dollars by the depositary at the appropriate market rate. The proceeds, less any applicable taxes and the depositary's own fees, will then be remitted to the HDR holders. If your HDRs are held in CCASS, the dividend will be credited to your CCASS account or the CCASS account of your broker or custodian, net of CCASS's dividend collection fee.
Voting, entitlements and corporate communications
Communications from or to the company are done via the depositary. Notification of entitlements and corporate news from the company will be sent to HDR holders via the depositary. Similarly, the depositary will also process instructions (including voting instructions) of the HDR holders to the company. If you hold HDRs through your broker, you must rely on the procedures of your broker to assert the rights of an HDR holder. In addition, you may also obtain corporate news, such as notice of shareholders' meetings, from the HKEx website.
The respective rights and obligations of the company, the depositary and the HDR holders are set out in the deposit agreement. Although HDR holders are not shareholders of the company and you need to rely on the depositary to exercise your rights, your rights as an HDR holder will be broadly equivalent to those of a shareholder.
Investments in HDRs are covered by the existing investor compensation regime. If you suffer a loss in respect of your HDRs as a result of a default (through insolvency, bankruptcy, winding up, breach of trust, defalcation, fraud or misfeasance) by your intermediary, you may be able to claim compensation from the Investor Compensation Fund (ICF) (note) of up to HK$150,000, provided you qualify as per certain conditions.
Note: The ICF is administered by Investor Compensation Company Limited (ICC), a recognized investor compensation company under the Securities and Futures Ordinance.
|Shares listed in Hong Kong||Hong Kong Depositary Receipts|
|Can be listed on main board||Yes|
|Can be listed on Growth Enterprise Market (GEM) board||Yes||No|
|Trading & settlement||Subject to standard Hong Kong market procedures|
|Related charges||Brokerage commission, transaction levy, trading fee and stamp duty||Brokerage commission, transaction levy, trading fee and stamp duty
Fees charged by depositaries
|Entitled to dividends||Yes||Yes, net of any applicable taxes and the depositary's fees|
|Entitled to voting rights||Yes|
|Corporate communications||Via related share registrar||Via related depositary|