Sometimes you just have to bite the bullet. This month’s cover story questions whether depositary receipts are really necessary in a world of truly international capital markets. As the story points out, depositary receipts were originally developed in the 1920s as a means of facilitating international investment. But things have moved on since then.
Indeed, the investing world has moved on since DRs started making their presence felt in the 1980s. Then they were a means of helping US institutions take what was, for many of them, a first step into non-domestic equity investing. Today, one has to question how many institutions need help on that front. With offices across the globe, surely reticence about cross-border investment has largely disappeared?
The depositary banks were aghast when Investor Relations started calling them to casually raise the idea that the DR might have had its day. Gone past its sell-by date, even. One member of a depositary bank marketing team was truly incensed – nay, offended – that we should dare even to raise the issue.
In truth, we never expected to come to any conclusion other than that reached in the cover story. Depositary receipts remain a valid member of the investing world because there are a significant number of institutional investors – not to mention retail shareholders – who still need a facilitating mechanism for international investment.
But it is right to question the existence of depositary receipts because it gives an opportunity to discuss and clarify the issues. There is a lot of confusion regarding the subject out there in the IR world. In the past, a lot of companies have been sold depositary receipt programs for all the wrong reasons. Many companies are still stuck with expensive DR programs, with poor liquidity, which do little for the companies concerned except drain their resources. Why? Because they didn’t understand the issues when DR salespeople came knocking on their doors.
The initial inspiration for the article came from a conversation with one chief executive who quite evidently didn’t have the whole DR story at his fingertips. In this case, the company had opted not to take out a DR program – and may well have made the wrong decision. It wanted to access as wide and deep a section of the US market as possible but believed that all institutions were capable of investing internationally without the need for DRs.
Today, most of the depositary banks recognize it is not in their interests to persuade companies to take out DR programs unless they fully understand the issues – and the need for IR back-up. That being the case, they should not be afraid of a healthy discussion as to whether DRs are really necessary.
Anyway, if our conclusion is anything to go by it should help make their job easier.
