Issuing Depositary Receipts in Taiwan by Companies Listed Overseas: An overview of the planning process

Eric Wu and Christy LC Lin

Overseas depositary receipts (DR) are tradable securities issued by enterprises overseas. They are denominated in either U.S. dollars or local currencies and represent receipts for an enterprise’s common stock. The rights and obligations of DR holders are the same as those of stockholders possessing common stock. The main purpose of DR is to make it easy for companies to raise funds abroad, while also providing investors a convenient way to invest in the stock of companies in countries other than their own. DR issued in Taiwan by overseas listed companies, including Taiwanese-owned firms listed abroad, are known as Taiwanese depositary receipts (TDR). In addition to being denominated in “New Taiwan” (NT) dollars, the rules governing trading units, price declarations, trading hours, and units for incremental changes in price and quantity are commensurate with those for locally issued stock. Below, we present an overview of the TDR planning process.

Criteria for Issuing TDR

1. Company size:
  (1) At least 20 million shares or a market value of at least NT$300 million;
  (2) Shareholder equity equivalent to NT$600 million, as shown in the latest CPA-audited and certified financial report.
2. Profitability:
  Must show a profit in the most recent fiscal year and meet one of the following criteria:
  (1) Pre-tax profit equals at least 6% of shareholders’ equity for the most recent fiscal year;
  (2) Pre-tax profit equals at least 3% of shareholders’ equity in each of the past 2 fiscal years (or the average is at least 3%), and profitability in the most recent fiscal year is better than in the preceding year;
  (3) Pre-tax profit in each the most recent two fiscal years is NT$250 million or more.
3. Approved stock exchanges
  The applying company must have its shares listed and traded on an exchange approved by the competent authority, of which there are 16 at present: The NYSE, the American Stock Exchange, NASDAQ, the London Stock Exchange, Deutsche Börse, the Italian Stock Exchange, the Toronto Stock Exchange, the Australian Securities Exchanges, the Tokyo Stock Exchange, the Osaka Securities Exchange, the Singapore Stock Exchange, the Kuala Lumpur Stock Exchange, the Stock Exchange of Thailand, the Johannesburg Stock Exchange, the Hong Kong Stock Exchange, and the Korea Exchange.
4. Shareholding dispersion
  (1) At the time of the proposed listing, there are not less than 1,000 TDR holders in Taiwan, and;
  (2) Shareholders (excluding insiders of the company and any corporate shareholders more than 50% owned by such insiders) own at least 20% of the shares or 10 million shares.

 

 

The Taiwan Stock Exchange (TWSE) has simplified the TDR listing process and shortened the time required such that, from filling in the listing application to the listing date, the entire procedure may completed in as few as 45 business days. (Underwriters estimate that it takes at least 11 business days to complete a public issue and allotment of shares.)

Status of TDR Issued Thus Far

At present, six companies have issued TDR. A summary of their listing details is given below.

TDR Name Eastech
(9102)		 Medtecs
(9103)		 Mustek
(9104)		 Cal-Comp
(9105)		 Want Want
(9151)		 Ju Teng
(9136)
Listing Date 2001.4.25 2002.12.13 2003.1.20 2003.9.22 2009.4.28 2009.5.25
Original Market Singapore Singapore South Africa Thailand Hong Kong Hong Kong
Shares of Common Stock Offered per Unit 2 shares of common stock 1 share of common stock 1 share of common stock 1 share of common stock 1 share of common stock 1 share of common stock
Units in Circulation as of 2009/4/30 53,215,945 105,531,500 1,458,000 763,654,262 210,000,000 100,000,000
Paid-in Capital
(’000 NT dollars)		 1,751,897 593,320 4,357 3,930,923 8,818,028 466,400

Source: Market Observation Post System website maintained by the TWSE

Performance of two listings in 2009:

Want Want China listed on April 28, 2009 at NT$15.5 per unit.

  • Subscriptions from the public exceeded 190,000, of which 5.46% won lots.
  • The oversubscription ratio was nearly 20:1.

Ju Teng listed on May 25, 2009 at NT17.3 per unit.

  • Subscriptions from the public exceeded 210,000, of which 2.38% won lots.
  • The oversubscription ratio was almost 40:1.
  • When trading was halted at the upper price bound on the first day, nearly 2.05 million units in unfilled bids were listed.

From the performance of these two TDR listings, one can see that the price performance of TDRs may exceed that of shares originally listed overseas, and that TDR issues may be heavily oversubscribed due to high market demand.

 

Professional Functions of Intermediary Institutions in TDR Issues

1. Accounting firm: Issues opinion on differences due to differing accounting principles; reviews and reports on the issuer’s financial reporting.
2. Underwriter: Writes evaluation report; assists in preparation of the listing plan and prospectus; arranges road show; organizes underwriting team and completes underwriting work.
3. Law firm: Drafts legal opinions on the depositary contract(s), custodial contract(s) and prospectus; issues opinion on the depositary receipt listing plan; provides other related legal advice.
4. Custodial institution: Responsible for custodianship over shares represented by TDRs.
5. Depositary institution: Issues and trades depositary receipts; acts as agent in depositary receipt stock matters and represents holders of depositary receipts; handles matters concerning the issuing company.

 

Methods for Issuing TDR

The three basic methods are:

1. Existing stock: Majority shareholders sell stock to investors via TDR;
2. Cash injection: Company uses a cash injection approach to issue TDR with newly issued shares to raise capital;
3. Mixed method: Company uses existing stock and newly issued shares for TDR in a mixed issue.

 

Whether existing shares, newly issued shares or both are used, issuing depositary receipts offers many advantages. For example, it allows companies to raise money in other countries’ capital markets; to become more widely known in overseas markets, which can benefit future business development; and to increase the number of foreign shareholders, thus avoiding concentration of ownership among a small number of domestic shareholders and limiting the possibility of share price manipulation. Issuing overseas depositary receipts also offers a direct means for companies to obtain the funds they need for overseas expansion.

 

Conclusion

TDR give share-issuing companies another choice of listing location. When such companies consider listing securities on an exchange other than the one on which they originally listed shares, they are bound to be attracted by factors like high P/E ratios, good turnover, and large fundraising capacity. In Taiwan, moreover, the TWSE has recently taken a series of aggressive measures aimed at encouraging overseas firms to consider a Taiwan IPO or TDR option. For TDR promotion in particular, some of the measures taken are the following:

1. Improving the regulatory conditions for using TDR to raise capital. This includes: eliminating restrictions on remittances of funds from Taiwan or to mainland China (July 2008); rescinding the requirement that companies have their stock listed on an approved stock exchange or market for six months before they can apply for a TDR listing (September 2008), and; opening Taiwan’s securities market to investment by mainland Chinese corporations (May 2009). Earlier, in June 2008, Hong Kong and Seoul were added to the list of exchanges approved for TDR, and TDR were allowed to be the underlying assets of call/put warrants, convertible corporate bonds and corporate bonds with warrants.
2. Providing assistance with investor relationship services and raising the public profile of TDR issuing companies. This includes holding grand listing ceremonies, post-ceremony news conferences, performance announcements and regular press briefings, all geared towards raising the visibility and name recognition of companies using TDR for market listings, strengthening contacts between institutional investors and listing companies, and increasing familiarity with such companies.

Judging by how well two recent TDR listings performed, Taiwan’s investors have a high degree of acceptance of overseas companies listing depositary receipts in the local market, and it appears that TDR can be a very good financing option for Taiwanese-owned and non-Taiwanese-owned companies overseas.