Foreign companies’ most common way to raise capital, gain greater international visibility, access to new investors, and gain coverage by more equity analysts in the Taiwanese exchanges is through issuing Taiwan Depositary Receipts (TDRs). However, what are TDRs and how do they work? In this article, we will discuss the overall Depositary Receipts and dive further into those issued by the Taiwanese Stock Exchanges.
Definition of Depositary Receipts (DRs)
It is a negotiable certificate issued by a bank (depository institution) representing shares in a foreign Company’s publicly traded securities on a foreign stock exchange. The DR trades on a local stock exchange as any domestic shares would, and provides investors the opportunity to hold shares in the equity of foreign countries that would not otherwise be available, and gives them an alternative to trading on an international market. Foreign Companies also benefit, as DRs enable them to attract investors and capital without the hassle and expense of listing on foreign exchanges. Hence, Depositary Receipts facilitate buying shares in foreign companies because they avoid the need to trade directly with the stock exchange in the foreign market, shares do not have to leave the home country and there is no hassle to transact the trade in foreign currency or worry about exchanging currency.
DRs are created in different forms depending on where they are issued (e.g. Global Depositary Receipts, American Depositary Receipts, European Depositary Receipts, Taiwan Depositary Receipts, etc.) and serve a wide range of purposes to raise capital. Currently, more than 2,100 companies have issued depositary receipts in over 80 securities markets.
Generally speaking, they can be divided into two forms, sponsored or unsponsored, the main difference being on the involvement, participation, or even permission from the foreign Company (that issues the stock). In an unsponsored DR, the securities issuing Company is not involved in the DR process and has no disclosure obligation, and no compliance with the DR`s country exchange`s regulating authority. On the other side, in the sponsored DR, there is a depositary contract between the depositary bank (issuing the DR) and the Company possesses, and a third-party custodian institution that receives the deposit of the securities (stocks) of the Company. Please refer to the chart below to better understand the relation between the parties:
Source: Taiwan Stock Exchange, Listing in Taiwan by Foreign Issuers.
In the specific case of Taiwan, the Taiwan Depositary Receipts (TDR) can be either sponsored or unsponsored. The New Taiwan Dollar (NT) is taken as the unit of charge and the value declaration, trading hours, bid-ask patterns, fluctuation units and magnitude, and so on, are all according to Taiwan stock market regulations. TDRs are issued by depository institutions within the territory of Taiwan to represent the right in the foreign securities (stocks) of a foreign Company that deposits the stock with a third-party custodian institution. Furthermore, in Taiwan, TDRs suffer no distinction, meaning that they are listed, sold, or transacted in the same way as other securities listed in the Taiwanese stock market.
History of TDRs in Taiwan
Before entering into a deeper discussion on the current status of TDRs, a brief history introduction is needed. Taiwan’s history of fostering secondary listings started in 1998 when the Taiwan Stock Exchange (TWSE) began allowing listed companies in other countries to issue Taiwan Depositary Receipts (TDR) to raise additional capital. But, at the time, to avoid the drain of capital and the cross-strait relations, Taiwan imposed 3 major restrictions for issuing TDRs:
- Companies with more than 20% of Taiwanese investors stock shares could not move TDRs raised capital outside Taiwan;
- Companies with less than 20% of Taiwanese investors cannot invest the TDR raised capital in mainland China; and
- Companies issuing TDRs cannot be registered in mainland China.
These 3 restrictions resulted in that, during 1998 to 2008, just dozens of foreign companies listed TDRs, most composed of Taiwanese-owned companies operating in Asia, while hundreds of Taiwanese-owned companies preferred to list on the stock exchanges in Hong Kong, Singapore, and Southeast Asia.
This picture only changed when the policy in connection with foreign issuers’ listing in Taiwan was reformed in 2008, as part of Taiwan’s capital market liberalization policy, based on the vision of “enhancing the circulation of securities and economic dynamics”, the Taiwan government amended the stock exchange rules to actively encourage foreign businesses to list in Taiwan. Moreover, Taiwan also relaxed restrictions on the qualifications of foreign issuers and the use of the raised funds; furthermore, many industries have also been largely deregulated, with most sectors having no ownership limits for foreigners.
Hence, as a result, the 2008 reform removed the first two TDR restrictions, while the third one, the mainland China registration ban, remains in force. Although, a common alternative to circumvent this restriction is to form a holding company registered in a third-place (usually the Cayman Islands), and operate under that entity in mainland China. This way, the TWSE ban on TDRs issued by businesses registered in mainland China does not apply to such holding companies. The pioneer of this method, in April 2009, was Want Want China Holdings (Chinese: 中國旺旺控股有限公司), that became the first Taiwanese-owned but mainland China-based enterprise to make a secondary listing on the TWSE through TDRs.
Requirements for issuance of Taiwan Depositary Receipts (TDRs)
Beyond the requirement to already have shares listed on an authorized foreign securities exchange or securities market, it also requires approval by Taiwan’s financial regulating agency, the Financial Supervisory Commission (FSC), and conformity with the TWSE and the Taipei Exchange (TPEx). The overall requirements are the same for listing in Taiwan’s stock exchange, nevertheless, some TDR specificities must be pointed out:
- The transfer of the shares represented by the TDRs cannot be restricted.
- The rights and obligations for any shares represented by the TDRs must be the same as for any shares of the same type and the same issuance.
- At least one litigious and non-litigious agent shall be appointed in Taiwan.
- There can be no abnormal fluctuation in the price of the stock represented by the TDR within 3 months prior to the approval of the TDR listing agreement.
- After listing, the foreign issuer shall establish a reporting system with the TWSE or the TPEx for automatic synchronous reporting of material information (Prospectus document).
Due to transnational capital demand and as long as capital exchanges are not completely integrated, more and more companies choose to enter the international capital of market financing in the form of depositary receipts. In addition, the benefits of DR are clear, once it is listed at a foreign capital market, foreign investors can trade in their currency, circumventing the hassle of exchange rates and foreign exchange regulations; and foreign companies can raise capital abroad and reinvest in their business.
Hopefully, this article will result in understanding the TDR market more thoroughly and sparkle international companies to invest in Taiwan, especially when, according to data from the Taiwan Stock Exchange, the trading value of Taiwan Depository Receipts (TDRs) at the end of 2020 was up 6,716.11% from the previous year, amounting to NT163.29 billion (approximately USD6.10 million), while the amount was a mere trading value of NT2.40 billion in 2019, this from a total of 1,986,734 TDR units divided into only 13 listed companies, showing that there is much room to grow.