By Marriott, Cherie
Global Finance , Vol. 11, No. 5
There are increasing signs that companies around the world are unhappy with their depositary receipt programs, which were supposed to expand their shareholder pool to major US and European markets and open the floodgates to cheap international capital. Lesserknown Asian companies in particular are frustrated: Their depositary receipts are languishing-and often trading at disappointing discounts to share prices in the companies' home markets.
The reasons appear to be several. As foreign stock markets become modernized and liquidity deepens, major institutional investors prefer to bypass depositary receipts and buy and sell actual shares in companies' home markets-though some public pension and other funds are still forbidden to invest directly in emerging markets.
"When the home market offers better liquidity, and is more open to foreign institutions, you have to sell ADRs at a discount," says Ajmal Rahman, Hongkong head of equity capital markets for Merrill Lynch. Says Danilo Feliciano, director of corporate finance at Exchange Capital in Manila: "Investors now want to be where the bulk of the float is listed." They can also trade in real time-when news happens, rather than 12 hours later. And Asia-rather than Latin America or Eastern Europe-is where institutional investors most want to be. Peter Burnett, head of equity capital markets for Union Bank of Switzerland in Hongkong, notes that more and more institutions are opening their own offices in Asia.
Meantime, retail investors in Europe and the United States may know big Asian exporters, such as Korea's Samsung Electronics, whose products they buy. But Korea's Dong Ah Construction or Teco, a Taiwan maker of electric motors, is a mystery. And anyway, retail investors interested in foreign markets tend to put their money in mutual funds and country-specific closed-end trusts.
Finally, restrictions on trading in both the home markets and the depositary receipt markets prevent arbitrage from supplying liquidity and keeping prices in line. Asian markets are especially troublesome: All restrict foreign ownership to one degree or another. Given all these problems, the future of depositary receipts may be open to question-at least, for all but the best-known multinationals. Says Jarvis Cromwell, who is working up a study for Citibank: "There may be companies that don't need ADRs."
Depositary receipts are certificates issued by a small group of banks (Bank of New York, Citibank, J.P. Morgan, Bankers Trust) against foreign shares held in special accounts. American depositary receipts (ADRs) are issued in the United States; global depositary receipts (GDRs) are issued in London and sometimes listed in Luxembourg as well. The idea is to give US and European investors easy access, in their own currencies, to foreign stocks.
But in many cases US and European investors aren't rushing to snap up Asian companies' receipts. Figures on trading volume from Bank of New York show that major European companies, such as Royal Dutch Petroleum, plus a few Latin American companies, such as Mexican telecom company Telmex, dominate the list of most popular ADRs. No Asian ADRs rank in the top 40. Meantime, the top 20 account for two-thirds of all ADR trading, leaving 1,600 others to languish. America's unlisted over-the-counter market (the "pink sheets") is littered with moribund ADRs that nobody much wants.
A poll by an Asian finance journal found that four of the 10 worst-performing equity issues out of Asia last year were GDRs, two from India and two from South Korea. Worst was an issue by Indian electronics company Crompton Greaves, which dropped 47% in the first 10 months of trading, while that of South Korea's blue chip Hyundai Engineering and Construction fell 44% in seven months.
Some of the blame goes to the local markets. Last year India and South Korea were two of Asia's worst performing bourses. Korea's LGs Electronics issued two GDRs listed in London and Luxembourg, one in 1994 and another in 1995, together worth $145 million. …