The stocks of foreign companies trading as American Depository Receipts(ADRs) on the US Over-The-Counter (OTC) market can be of two types – Sponsored ADR and Unsponsored ADR. In this post, let us discuss about the Unsponsored ADR type.
All foreign firms that are listed on the organized exchanges are sponsored. This simply means the company or the issuer asked a depository to issue ADRs and listed them on an exchange like the NYSE or NASDAQ. Sponsored ADRs can also trade on the OTC market. For example, Swiss-based Nestle is a sponsored ADR and trades on the OTC under the ticker NSRGY.
So what is an Unsponsored ADR (UADR) ?
A recent report from Deutsche Bank on UADRs had the following defintion:
An Unsponsored ADR (“UADR”) is one in which no deposit agreement and no legal relationship is entered into between a depositary bank and the issuer. An unlimited number of depositary banks may issue the depositary receipts evidencing ownership of the underlying ordinary shares held in custody in the issuer’s home market. It is not uncommon for all four of the Depositary Banks to administer an Unsponsored ADR programme for a particular issuer company. The ADRs trade in the United States on the over-the-counter (OTC) market.
The establishment of a UADR is initiated by the depositary bank, mainly in response to investor demand and requires no action on the company’s part in the form of legal documentation or otherwise. There are no costs involved to the issuer, no incremental reporting obligations on the part of the issuer, no requirements to comply with Sarbanes-Oxley and no US GAAP reconciliation (local financial statements suffice). Though there are key differences between a UADR and a sponsored Level 1 ADR programme (“Level I”), from an investor perspective – both instruments provide an opportunity to access foreign securities more easily within the framework of the US securities infrastructure.
A few facts about UADRs:
- In 2008 the SEC amended the rule allowing more issuers to establish Level 1 sponsored or an UADR program.
- Today about 1605 UARs trade on the US market up from just 169 in September 2008.
- UADRs from 40 countries are available for investors with China and Hong Kong, Japan and the UK topping the rank of countries.
- Types of ADRs (DB)
Disclosure: No Positions