Tide of unsponsored ADRs complicating IR
Nov 20, 2008
Companies taking control by converting to sponsored programs
Hundreds of unsponsored American depositary receipt (ADR) programs have flooded the US market after the SEC relaxed the reporting rules for ADRs traded over the counter, causing irritation in the IR community.
The change, which came into effect on October 10, has made it far easier for depositary banks to set up ADR programs without an issuer's approval. One estimate puts the number of unsponsored programs launched since the change at over 900.
Some IROs at companies with new unsponsored programs express irritation over the ADRs. ‘It’s annoying but there is little we can do about it,’ one says. Another notes: ‘It would have been nice if they [the depositary banks] had consulted us first.’
And a spokesperson for German insurer Munich Re, one of the affected companies, comments: ‘If we wanted a program we would sponsor it.’
Since the change, non-US issuers no longer need to apply in paper for exemption from US reporting rules if they wish to have an ADR program traded over the counter. Instead, issuers are exempt as long as certain home-market disclosure documents are made available in English on their websites.
Many issuers already have the necessary information on their websites, allowing banks to set up ADR programs without their consent.
‘Many depositary banks have gone out and set up unsponsored programs in a non-consultative manner,’ comments Claudine Gallagher, global head of depositary receipts at JPMorgan, ‘Issuers are coming back and saying, we didn’t want this, you didn’t advise us and we’re unhappy about it.’
Unsponsored programs can complicate the work of IR departments. A paper by Clifford Chance, the law firm, says unsponsored ADRs could limit contact with investors as the depositary bank involved is under no obligation to distribute shareholder communications or exercise voting rights on behalf of ADR holders.
Banks advise companies to take control of unsponsored ADRs by converting to a sponsored program.
The market for sponsored ADR programs has also received a boost from the rule change, with depository banks reporting increased interest from companies. The Bank of New York Mellon is currently working on 37 sponsored programs in direct response to the rule change. ‘It has focused issuers attention on the valuation and corporate finance opportunities provided by depositary receipts,’ says Michael Cole-Fontayn, BONY-Mellon’s global head of ADRs.
JPMorgan notes similar interest. ‘We have had calls from across the world interested in starting sponsored programs because of the rule change,’ states Gallagher.
Columbian investment company Suramericana de Inversiones is one firm that took advantage of the change to establish a sponsored ADR program. ‘I would say that the new changes saved us around $50,000 in legal fees required,’ says Tatiana Uribe Aristizabal, finance director at Suramericana de Inversiones. ‘It also decreased the time significantly, from months processing, transmitting and approving information, to only several weeks.’
She adds that the prospect of having unsponsored ADR programs set up influenced the company’s decision. ‘We did not want to risk having multiple unsponsored ADR programs, which, in turn, could create a lot of confusion among investors,’ explains Aristizabal. ‘Therefore, by establishing a sponsored ADR program, Suramericana would prevent any depositary banks from establishing unsponsored ADR programs, since SEC rules do not permit unsponsored programs once a sponsored ADR program is in place.’
By Tim Human