Global Depositary Receipts (GDRs) have risen to prominence in recent years, becoming the favoured instrument used by companies from emerging markets, such as Russia and India, to raise capital on western stock exchanges:

• companies from more than 70 countries have depositary receipt programmes providing them with new investors outside their home markets
• more than 1,500 issuers have a sponsored depositary receipt programme
• more than 350 GDR programmes are listed on stock exchanges, of which 190 are listed on the London Stock Exchange (the 'Exchange').

For investors, GDRs facilitate investment in these foreign issuers while limiting many of the complexities and costs associated with crossborder investments, such as the settlement and custody of shares and foreign exchange transactions.

GDRs can carry many attributes of an issuer's local shares; they can provide similar economic rights (including the right to receive dividends), and if stipulated in an issuer's deposit agreement, voting rights in the issuer. For both issuers and investors, there are many more measurable benefits to establishing a GDR programme and listing on an international exchange.

GDRs have proven to be very flexible. When using GDRs to access Western capital markets, issuers interested in attracting international investors have several options:

Public offering and listing

In a public offering, GDRs are offered to institutional investors and listed on an international stock exchange outside the issuer's home market. The offering will be underwritten by an investment bank. A public offering is generally used by companies seeking to raise substantial amounts of capital and increase their profile in the market in which the offering will be conducted. A GDR offering can be aimed at European investors in a single tranche under Regulation S ('Reg S') which exempts offerings conducted outside of the US from Securities and Exchange Commission ('SEC') registration and reporting, or in two tranches: Reg S to non-US investors and to US institutional investors via Rule 144A (see below). A listing on an international exchange provides transparent trading outside the usual market hours. GDRs will typically be offered to investors in the exchange's region. For example, a listing on an exchange in Europe would be aimed at attracting a substantial portion of European investors.

Rule 144A tranche

To access a broader pool of liquidity, GDR issuers can include a US institutional element through a restricted private placement of DRs, which is exempt from US securities law registration and reporting. Institutional investors legally able to participate in Rule 144A offerings are known as Qualified Institutional Buyers ('QIBs').

Listing

Issuers can list their GDRs without raising capital – known as an 'introduction'. By listing, issuers will have access to a wider group of institutional investors as well as increasing their visibility and name recognition. From a documentation and disclosure perspective, there is generally little difference between an introduction and a capital raising, other than the description of the sale of shares that would be included in an offering prospectus. While listing alone does not raise capital, it does enable companies to enter a market and get to know the participants without incurring the expense and requirements of a capital raising. At the same time, an introduction should only be considered together with initiatives aimed at raising secondary market liquidity.

Placing (private placement)

A placing is usually a more selective process whereby GDRs are offered to a small number of selected institutions. While this route gives the issuer more control over the distribution, it can restrict the shareholder base and naturally limit liquidity. In the secondary market, such privately placed GDRs would be trading Over-The-Counter ('OTC'). Unlike in the US, where OTC platforms are regulated, GDR OTC trading in London takes place outside a dedicated platform and therefore provides little visibility to the issuer.

• offers a flexible mechanism for capital raising and a currency for mergers and acquisitions
• diversifies the shareholder base, with potentially greater liquidity for the underlying shares
• enhances visibility among international investors, consumers and commercial customers
• enables price parity with global peers through the provision of internationally recognised information
• may increase research coverage outside the home market.

• GDRs also offer tangible benefits to investors seeking to diversify their portfolios globally:
• easier to purchase and to hold than an issuer's underlying ordinary shares
• trade easily and conveniently in US dollars and settle through established clearing houses
• eliminate unfamiliar custody arrangements
• limit risks associated with limited transparency or instability resulting from changing regulatory procedures in emerging markets
• option to acquire the underlying shares
• directly upon cancellation.

A GDR is issued and administered by a depositary bank on behalf of the (underlying) corporate issuer. Depositary receipts can be created or cancelled depending on supply and demand, with brokers either bringing additional ordinary shares to the depositary to create more GDRs, or withdrawing ordinary shares to cancel from the GDR facility. GDRs are created when the shares of a foreign issuer – either those currently trading in its local market or newly-issued shares in connection with an offering of securities – are deposited with a depositary's custodian in the issuer's home market. The depositary then issues GDRs representing those shares. At any time thereafter, an investor can sell these GDRs in the secondary market (eg the Exchange's International Order Book), or deliver the GDRs to the sponsoring depositary bank for cancellation in order to receive the underlying ordinary shares for settlement or sale in the foreign issuer's local market. Typically, GDR programmes are governed by a Deposit Agreement agreed to by the issuer and the depositary bank, which, among other things, outlines the terms and conditions of the GDR programme.

The initial price of a GDR primarily depends on the ratio between the number of GDRs and the underlying shares ('GDR ratio'). This ratio can vary widely; one GDR may represent an ownership interest in many shares of corporate stock or represent only fractional shares, depending on whether the GDR is priced higher or lower than the underlying ordinary shares.

There is no particular rule for setting the ratio, with the ease of calculation and relevance of the GDR price to the international norm for share prices being primary considerations. Most GDRs are priced comparably to shares of peer companies trading on the same exchanges. While many successful programmes are established with a ratio of 1:1, many issuers with low home market prices have GDR-to-share ratios of 1:5, 1:10, or even 1:1000 etc. Companies deciding on a GDR price and the corresponding ratio should consider that:

• liquidity is enhanced when there is a significant number of GDRs eligible for trading; investors are more likely to buy GDRs that are perceived to be liquid and fairly priced
• while the fundamentals may be the same, an investor typically prefers to buy 100 shares of a US$20 stock instead of 10 shares of a US$200 stock.

The GDR ratio initially selected may affect the transaction costs that investors will pay. For instance, since fees for issuance (and cancellation) are assessed in cents per GDR, a GDR that is priced 'too low' can add incremental transaction costs for investors. A ratio is established at the outset, but can be changed at any time by the issuer subsequently if the GDR price moves too far outside market parameters.

Most of the factors driving GDR prices are the same as those affecting the underlying shares:
company fundamentals and track record, relative valuations and analysts' recommendations and, of course, market conditions. The international status of the company is also a key factor. Investors buying GDRs pay in dollars but are investing in an asset that moves in line with a foreign currency and foreign market. The ratio is simply part of the structure surrounding the investment that makes it easier to manage.

As a first step toward establishing a GDR programme, the foreign issuer and its chosen depositary bank jointly sign a deposit agreement. This contract details the legal relationship and obligations of the depositary bank and the issuer, describes the services the depositary and issuer will provide, and sets out the rights of GDR holders and the fees they must pay the depositary bank. While some terms are standard, deposit agreement provisions may vary from programme to programme, depending on the legal requirements of the foreign issuer's home market and the objectives of the issuer.

The deposit agreement includes provisions relating to the following:

• deposit of the issuer's shares l execution and delivery of the GDRs l issuance of additional shares by the issuer in compliance with applicable securities laws
• transfer and surrender of the GDRs
• setting of record dates by the depositary bank
• voting of the foreign issuer's underlying shares (ie the shares evidenced by the GDRs)
• obligations and rights of the depositary bank and holders of the GDRs
• distribution by the depositary bank of cash dividends, stock dividends, rights to acquire additional shares of the issuer and other distributions made by the issuer
• circumstances in which reports and proxies are to be made available to GDR holders
• tax obligations of depositary receipt holders
• fees and expenses to be incurred by the issuer, the depositary bank and GDR holders
• pre-release of GDRs
• protections for the depositary bank and the issuer (ie limitations on liabilities).

There are two London Stock Exchange markets which admit GDRs to trading:

• the Main Market
• the Professional Securities Market ('PSM').

When applying to the Exchange for admission, the company specifies the market on which it would like its GDRs to trade.

Main Market

Most GDR issuers choose to list on the Main Market. GDRs traded on the Main Market are obliged to follow the rules for EU-regulated markets, which are enshrined in the FSA's Prospectus Rules, Listing Rules and Disclosure and Transparency Rules. As in the case of any other issuer, the FSA requires full disclosure of all major risk factors in the prospectuses of GDR issuers. GDR issuers are also required to comply with the London Stock Exchange's Admission & Disclosure Standards.

Listing requirements for entry include:

1. a prospectus prepared in accordance with the Prospectus Directive, including IFRS accounting (this applies to both a capital raising or listing by introduction)
2. three years of trading history (or such shorter period for which the issuer has been in operation)
3. a minimum GDR market capitalisation of £700,000; and
4. a minimum of 25 per cent of floated DRs in public hands.

By listing on the Main Market the company is agreeing to abide by the relevant continuing obligations. These include:

• publishing an annual financial report, within four months of its fiscal year-end. The annual financial report must include audited financial statements, a management report and responsibility statements and must remain publicly available for at least five years
• publication of inside or price-sensitive information via a Regulated Information Service ('RIS'). By keeping the market informed in a timely manner through press releases and other announcements, the issuer allows all investors on all its markets to trade in a knowledgeable manner and on an equal footing. Further, if the issuer believes information has been leaked regarding a confidential or price-sensitive corporate matter, it is required to communicate with the market to remove uncertainty regarding the stock.

It should also be noted that American Depositary Receipts ('ADRs') can also be listed on the Exchange. For example, several Russian ADRs have been listed by way of an introduction on the London Stock Exchange.

The Professional Securities Market

The Professional Securities Market is operated by the Exchange within the scope of its status as a Recognised Investment Exchange.

The PSM is only accessible by 'wholesale' investors and, as such, the FSA is able to exercise flexibility in the application of European directives. Issuers wishing to list on the PSM must meet the following criteria:

1. latest three years of audited accounts (or such shorter period for which the issuer has been operating)
2. minimum GDR market capitalisation of £700,000; and
3. national GAAP may be used in the preparation of the prospectus.

Flexibility with respect to accounting requirements may be a cost saving for many companies as reconciling to IFRS, or providing additional disclosure as required by the Prospectus Directive, could be very expensive. However, issuers may need to provide a description of the key differences between their local accounting standards and IFRS.

Issuers choosing the PSM will have their listing particulars approved by the UK Listing Authority (the 'UKLA', a division of the FSA). Although IFRS does not apply, disclosure obligations for listed companies do apply to companies represented on the PSM.

• Issuers admitted to trading on the PSM must meet certain continuing obligations, including:
• disclosing price-sensitive information and trading matters to the market as soon as possible
• publishing an annual report and financial accounts within six months of the year-end; and
• preparing and maintaining a list of persons considered 'insiders'.

Notable examples of celebrated GDR listings on the Exchange include Tata Steel's US$500m capital raising in July 2009 on the PSM and Rosneft's US$10.6bn offering on the Main Market in July 2006.

Trading in GDRs

GDRs, on both the Exchange's EU-regulated Main Market and the PSM, are traded on separate segments of the Exchange's International Order Book ('IOB').

The IOB trading matches and executes incoming electronic orders in DRs from over 46 countries ranging from Central and Eastern Europe, Asia and the Middle East. Central Counterparty ('CCP') is provided for over 70 of the most liquid DRs mitigating counterparty risk and ensuring both preand post-trade anonymity. Firms wishing to advertise their presence on the book can choose to identify themselves by using Named Orders. An optional netting service is available on the IOB, provided by LCH.Clearnet, which enables firms to net same-day, same-security trades at the CCP level for trades in cleared securities. Trades in DRs executed on the Exchange's Cleared IOB service settle within Euroclear.

GDRs (including those that are constituents of the Main Market and the PSM) can be traded in parallel on alternative platforms – quotation platforms of other exchanges as well as multilateral trading facilities (MTFs) such as Turquoise.

Establishing a GDR programme requires close coordination between the issuer, its chosen depositary bank and each firm's legal advisers. When raising capital, the issuer also relies on accountants, investment bankers and investor relations firms.

GDR certificates are typically not issued to investors holding GDRs or those holding 144A DRs. A master certificate is issued either directly to a securities depositary, such as the Depositary Trust Company, or to a Common Depositary which will hold the master certificate on behalf of settlement systems such as Euroclear and Clearstream, investors and the depositary bank. As GDRs are issued and cancelled, the number of GDRs represented by the master GDR is adjusted up and down accordingly.

Euroclear and Clearstream are the two central depositaries in Europe, through which the trading and settlement of GDRs is documented electronically. These two entities work under the rules of 'client confidentiality and non-disclosure' and consequently neither the issuer nor the depositary is able to obtain and confirm information regarding the identity of beneficial holders of GDRs. Specialist vendors may assist with shareholder identification using proprietary databases of custodian accounts and regulatory methods of engagement with institutional investors.

• provides advice/perspective on type of programme, exchange or market on which to list or quote
• advises on ratio of depositary shares to ordinary shares
• appoints custodian
• coordinates with all parties to complete programme implementation steps on schedule
• coordinates with legal counsel on Deposit Agreement and securities law matters
• announces GDR programme to market (brokers, traders, media, institutional investors via news releases and internet)
• works with issuer to maintain active GDR programme
• coordinates with issuer to announce and process corporate actions such as dividends and shareholders' meetings

• receives local shares in issuer's home country
• confirms deposit of underlying shares
• holds shares in custody for the account of depositary in the home market

• provides depositary and custodian with notices of dividends, rights offerings and annual and special shareholder meetings
• interacts with listing authority and responds to all questions
• IR/PR targeted programme
• adheres to stock exchange regulations and accepted corporate governance standards, including reporting and transparency

• reviews draft deposit agreement received from depositary bank
• submits requisite documents to local regulatory authorities and exchanges
• manages compliance with securities laws, rules and regulations and perfects any securities law exemptions
• provides corporate action support, as appropriate

• prepares company's accounts for insertion into prospectus
• reviews prospectus and interacts with authorities
• annual audit and prepares accounts in accordance with accepted standards such as IFRS

• develops long-term plan to raise awareness of issuer's programme in the markets in which GDRs will trade
• develops communications plan and information materials for launch activities (roadshow and presentations to investors, meetings with financial media)
• coordinates with issuer's advertising and public relations teams on specific programme plans to support and develop company image

• advise on size, pricing, marketing of offering, type of programme and selection of exchange or market, and ratio of DRs to ordinary shares
• act as placement agent or underwriter in offering
• conduct roadshows with management/introduce issuer to institutional and other investors
• lines up dealers and co-underwriters
• cover issuer through research reports/promote DRs to investors
• advise on roadshows, investor meetings, investors to target

With respect to corporate actions, the depositary bank acts as a bridge between the issuer and GDR holders outside its home market. To the extent possible, the depositary provides GDR holders with benefits comparable to those received by the issuer's domestic shareholders.

If dividends are to be paid on the underlying securities, the depositary bank provides for dividends to be converted and net proceeds, after deduction of any taxes and fees, to be paid out in the currency of the GDR, (typically US dollars). The GDR investor carries the foreign currency risk, as the amount of the dividend will be affected by any movement of the US dollar against the investor's home market currency. When the dividend record date and payment date for the domestic shares have been established by the issuer, the dates are given immediately to the depositary so that it can:

• set the record and payment dates for the GDR based on the agreed-upon calendar and market requirements, and then communicate these dates to the markets. For example, the Exchange expects at least three business days' notice of any record date. This allows it to notify the market and properly announce the ex-date
• announce preliminary (estimated) dividend payment amounts based upon the exchange rate between the issuer's domestic currency and US dollars on the date of the announcement
• arrange for the dividend, received from the issuer directly or via the depositary's custodian, to be converted from the domestic currency into US dollars. The final rate per GDR will be announced once the dividend has been converted and the actual rate per GDR has been calculated
• distribute to GDR holders the dividend, net of any required tax withholding and/or any fees.

Where possible the depositary bank will also facilitate dividend tax reclaim or relief at source to allow GDR investors to benefit from favourable tax rates under double taxation treaties. For more complex corporate actions, such as rights issues and corporate restructurings, the depositary is typically made a party to the transaction so that it can work with the issuer and its advisers to devise the appropriate structure and distribution channel for the GDR investors.

The deposit agreement outlines the issuer's responsibilities, if any, to GDR holders with respect to shareholder meetings. For good corporate governance purposes, issuers typically give their GDR holders the right to vote at the shareholder meeting. The issuer's depositary bank provides guidance as to the timing and mechanics for distributing information and voting cards to GDR investors.

The issuer provides the depositary bank with the necessary information as far in advance as possible of a shareholder's meeting. Six to eight weeks' notice is optimal. This timeframe enables the depositary bank to prepare the voting instruction card, distribute it through the clearing systems to the GDR holders, receive voting instructions from them and arrange to have the underlying shares voted at the meeting in accordance with those instructions.

The depositary bank also assists the issuer with preparation and review of the documentation required to comply with general GDR market practices. This includes coordination with the local custodian and regulators to prepare authorisations and documentation to comply with local market regulations and procedures for GDRs.

Some issuers are keen to get a high level of participation from their overseas holders. In this case, issuers may contact their GDR investors directly using proxy solicitation vendors to discuss any questions they have regarding the resolutions and to encourage them to submit their vote.

As a company transitions to a publicly-listed entity, it must provide the investment community with increased transparency into the organisation, comply with regulations and communicate goals, market opportunities and growth strategies. In practice, this requires the issuer to develop its readiness for IR in the pre-IPO phase and sustain clear and consistent communications after the GDRs begin trading.

Driving sufficient demand for a company's GDRs, over time, requires a comprehensive IR strategy aimed at continually raising the company's visibility among GDR investors and effectively communicating its investment story. It is important that the depositary bank is well placed to provide IR advisory services in support of the issuer's GDR programme.

A depositary bank can help enable the issuer to make the best first impression in the capital markets, immediately begin building trust with GDR investors and set the stage for optimal valuation over the long term. The services provided by a depositary bank's IR advisory team include:

• IR strategy and calendar – assistance in the development and execution of an IR action plan aimed at achieving specific goals
• investor targeting, with a focus on GDRspecific investors (analysis to identify investors for roadshows)
• best practice advice on investor communications, including performance guidance and disclosure
• internal IR reporting procedures.

Timeframes are indicative. Regulator's involvement and issuer's programme specifics may vary and can materially affect timing. The UKLA's listing rules require that the minimum amount of time between the initital submission of documents and approval is 20 working days.
Key to parties involved: UKLA = UK Listing Authority, I = Issuer, Depo = Depositary Bank, A = Accountant, L = Legal adviser; IR=Investor relations. Other parties, specific to Russian-incorporated issuers: FSFM = Federal Service for Financial Markets, FAS: Federal Antimonopoly Service.