STSM051010 - Depositary receipt and clearance services: depositary receipt: background

Background

Holding shares in depositary receipt form is particularly common in the United States of America, providing US investors with a convenient way to invest in non-US company securities.

This was traditionally because non-US company shares, such as United Kingdom company registered securities, could not be directly traded in America (this is now possible for uncertificated UK shares through the trading of book-entry interests in shares held by a clearance service). A depositary receipt is frequently referred to, therefore, as an American Depositary Receipt (ADR). The first ADR launched in 1927, so it is a very well-established concept.

UK companies sometimes enter into exclusive arrangements with a particular depositary bank to organise the ‘ADR programme’ in their shares. Such programmes involve “sponsored” ADRs. By contrast “unsponsored” ADR programmes are set up independently of the issuing company – for example by brokers.

ADR v ADS

The terms American Depositary Share (ADS) and ADR are often used interchangeably. In practice, while companies are often described as having “ADR programmes” in relation to their listings on exchanges such as the New York Stock Exchange (NYSE) or National Association of Securities Dealers Automation Quotation System (Nasdaq), it is the ADSs issued by depositaries (which hold the underlying UK shares) which are traded on the exchanges and the ADR is issued to holders of ADSs as evidence of ownership of the ADSs (and the underlying shares).

HMRC therefore accepts that, as a general matter, an ADS will fall within the definition of “depositary receipt” for the purposes of the stamp taxes on shares legislation. For example, an ADS that is listed on an exchange would fall within the definition of “depositary receipt” for the purposes of the exemptions for exempt listing instruments and exempt listing transfers at sections 72ZB(2) and 97AC(3) FA1986.

Format of ADRs

ADRs represent a specified number of underlying shares (whether on a 1:1 basis or otherwise) in the non-US company and were traditionally issued as physical certificates.

However, more recently it has become common for ADRs to be issued in book-entry form instead when requested, with physical certificates only provided when a request is made for them to be in that form. HMRC considers that an ADR issued in either form will fall within the definition of a "depositary receipt" for the purposes of the definitions under sections 69(1), 94(1) and 99(7) FA1986.

ADRs are typically held within a depository bank or clearance service such as the Depository Trust and Clearing Corporation (DTC) in the United States, where settlement can be undertaken on a book entry basis.

Unrestricted and restricted ADRs

Unrestricted ADRs are able to be freely traded and the underlying shares will be issued or transferred to, and be held in unrestricted ADR facilities. These are the most common form of ADR.

Sometimes restrictions are placed on the underlying shares over which ADRs will be issued, for example under US Securities and Exchange Commission (SEC) rules.

Where the restrictions are expected to be for a limited period only, shares may be initially issued or transferred to a separate restricted ADR facility (which may be operated by the same depositary bank which operates the unrestricted ADR facility), with restricted ADRs issued in respect of the shares.

Once the restrictions on the underlying shares are lifted, the restricted ADRs can be cancelled and the shares transferred to an unrestricted ADR facility, with unrestricted ADRs issued. In other cases, the restricted shares may only be transferred to the depositary once the restrictions have lifted.

Other depositary receipts

The depositary receipt concept extends to other global geographical markets. In Europe, the issuing of a depositary receipt is often known as a Global Depositary Receipt (GDR) or a European Depositary Receipt (EDR). In terms of structure and operation, there is no appreciable difference between a GDR/EDR and an ADR.