American Depository Receipts (ADRs) are created when a broker or investor purchases a non-US company’s shares in its local market, delivers the shares to the depositary bank’s local custodian, and instructs the depositary bank to issue ADRs to the broker or investor in the US. These ADRs can then be traded freely, just like any other security, on a US national stock exchange or over-the-counter market. With the launch of ADRs on SGX, these ADRs can now be traded freely on SGX, just like any SGX Mainboard security. Brokers and investors can also instruct the depositary bank to issue ADRs into Singapore.
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Key Benefits of Trading ADRs
1. Time Zone Advantage
On-screen trading during Asian hours allows traders to react instantly to economic and company news.
2. Cost Efficient Tool for International Investing
Trade on SGX without capital gain tax, stamp duty, etc that are common in many Asian markets
3. Convenient Tool for Trading Internationally
Trade Internationally without opening foreign broker account
Trade in U.S. dollars and payment of dividends or interest in U.S. dollars
Risks of Trading ADRs
S/N
Risk Description
Implication to Investors
1
Issuer of ADRs are not subject to requirement of SGX listing rules as ADRs are quoted but not listed on CLOB
Investor protection is accorded by US SEC and US Exchanges
2
Limitations on transfer of ADRs may be imposed by DR Bank from time to time
Be familiar with BCD and other corporate action events
3
Risk relating to difficulties that holders of ADRs may face to enforce their right or take legal action against the company or the Sponsor
Legal rights enforceable under NY laws, similar to trading into US stocks
4
Risk relating to the limitation on obligations and liability of Sponsor and the underlying company to ADR holders
Be familiar with the ADR Deposit Agreement
5
Holders of ADRs may face difficulty in protecting their interests, and their ability to protect their rights through the U.S. federal court may be limited, because the underlying companies may be incorporated and conduct substantially all of the operations outside the U.S.
Caveat emptor, this is a risk of international investing
Prior to investing in ADR, you should ensure that you have understood the risks associated with investing in ADR. If you are in any doubt regarding ADR, you should consult your stockbroker, bank manager, solicitor, accountant or other professional adviser prior to any subscription or acquisition. Please click here for detailed risk warning.
Frequently Asked Questions
1. Are ADR holders able to participate in corporate actions?
Corporate actions are supported except for
Capital raising activities and offer of shares On behalf of depositors, CDP will elect to encash all offers possible and onward distribute to depositors.
Voting
On behalf of depositors, CDP will abstain on all voting matters.
Nevertheless, ADR holders who wish to participate in corporate action activities in US or in the local market can transfer ADR positions from CDP to DTC or cancel ADR positions and hold ordinary shares in the local market.
2. Which regulatory jurisdiction do ADR companies fall under?
In order to have its securities traded, listed or offered in the US through an ADR facility, a non-US company must comply with US securities laws and regulations. The Securities and Exchange Commission (SEC) is the agency charged with enforcing the US federal securities laws.
3. Since the ADRs fall under US SEC regulation, can I search for ADR company information through SEC EDGAR?
Yes, you can. The Electronic Data Gathering and Retrieval (EDGAR) is used by the SEC to transmit company documents to investors publicly.
4. Since the ADRs fall under US SEC regulation, what is the avenue for recourse for holders of ADRs?
The avenue of recourse action by holders of ADRs is at the Court in the U.S.
5. Are there market makers for ADRs?
Yes, there will be market makers for ADRs.
6. Is research available for ADRs?
Yes, research on ADRs can be obtained through brokers and independent research houses, eg. MorningStar.
7. Are clients required to complete the W-8BEN before trading?
SGX and CDP do not require investors to submit W-8BEN before trading. Broking houses and members may still require clients to complete W-8BEN.
Disclaimer
Information contained herein is for informational purposes only and is not to be construed as investment advice or recommendations by OCBC Securities Private Limited (“OSPL”) and OSPL is not making an offer to buy or sell, or a solicitation of an offer to buy or sell the securities of any issuer. The information contained herein does not take into account the particular investment objectives, financial situations, or needs of individual investors. You may wish to seek advice from financial advisers before making a commitment to purchase any investment product. In the event that you choose not to seek advice from financial advisers, you should consider whether the investment product in question is suitable for you. You should not assume that any recommendations, insights, charts, theories, or philosophies will ensure profitable investment and you are encouraged to always consult with and obtain advice from your professional licensed financial advisor, including your tax advisor, to determine the suitability of any investment. You acknowledge and agree that past performance is not necessarily a guide to future performance. OSPL recommends that anyone making an investment or trading in securities do so with caution. You should perform full due diligence and investigate any security fully (including the careful review of annual reports and other publicly available company information to complete your own due diligence in any investment) before making an independent investment or before the execution of a security trade based upon information contained herein. OSPL is not responsible (i) for any investment decision made by you, (ii) for any loss incurred by you, directly or indirectly, in connection with, or arising from the use of the information contained herein; and (iii) for determining the suitability, appropriateness or advisability of any transaction you may enter into in connection with such investment decision. Trading in securities can be very risky, and you may lose the principal amount invested. This is particularly so when you need to (i) make your own trading decisions; and (ii) ensure each trade is specifically suitable for you – the only basis for any trading through or with OSPL.
