Ann: Becoming a substantial holder, page-2

An ADR is a financial product that is issued by a domestic depository bank and is traded on a domestic exchange, such as the New York Stock Exchange (NYSE) and the Nasdaq. ADRs represent shares in a foreign company, but they eliminate the need for investors to purchase those shares in the company's local market and in that market's currency.

There are many depository banks that sponsor ADRs in the United States. The biggest one being the Bank of New York Mellon (BNY) with State Street (STT) and JPMorgan Chase (JPM) not far behind. These depository banks help with the setup and operation of a company's depositary receipt program. Often, these banks will offer to provide issuing services to companies for free. This raises the question, what benefit is the bank receiving for providing such a service?

The Benefits of Issuing ADRs

When a depositary receipt is issued by a depository bank, the bank has actually purchased the equivalent amount of shares in the local market. Those shares are held by a local custodian bank for the depository bank. The ADRs can then be traded normally in the market as any other stock would trade.

If for some reason a depositary receipt is canceled, it is no longer traded in the American market. The ADRs are returned to the depository bank and the shares held by the local custodian are released back into the local market.