Latin American Capital Markets

14 KENROY DOWERS, FELIPE GOMEZ-ACEBO, AND PIETRO MASCIBox I -2 I Depository ReceiptsThere is an increasing shift toward depository receipts. A growing number of Latin Americanequities are being traded away from their home markets to the depository receipt market,predominantly American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).A depository receipt is a negotiable security that generally represents ownership of shares ina company domiciled in one country (for example, an emerging market) that are held by a depositorycustodian bank, which issues a certificate that can be traded in another country (mostlyin the United States), and that represents a claim on the underlying shares. ADRs, which tradein the United States, were introduced in 1927 and are the oldest form of depository receiptBefore 1990, there were few depository receipt programs from emerging countries. However;during the 1990s, emerging market companies accounted for a majority of new programs andcapital raised in most years.ADRs were developed to address some of the concerns of U.S. investors interested in investingabroad but reluctant to purchase foreign stocks. ADRs eliminate many of the disadvantagesof holding non-U.S. shares because they do the following:• Trade in accordance with U.S. clearing and settlement conventions• Are quoted in U.S. dollars and pay dividends in U.S. dollars, thus avoiding exchange risk• Eliminate global custodian safekeeping charges and can trade freely on the major U.S.exchanges.The advantages of a depository receipt program for companies include the following:• Access to capital markets outside the home market• Expansion of the shareholder base• Increased potential liquidity by enlarging the market for the company's shares that may increaseor stabilize the local share price• Enhanced shareholder communications.While these developments are driven by the maximization of the valuation of the companyand are good for shareholders, the negative implications for the stock exchanges in the LatinAmerican region include reducing volume and liquidity.in the United States and/or Europe. However few Latin American companies, typicallyin the telecommunication and media sectors, are able to reach that level and are trulyintegrated and capable of raising resources through American Depository Receipts(ADRs) and Global Depository Receipts (GDRs) (see box I -2).Substantial amounts of trading activity have shifted from Latin America to theUnited States. In 1995, ADRs trading in Argentine stocks totaled $ 15.7 billion, morethan three times the total amount transacted on the Buenos Aires market. MexicanADRs totaled $54.4 billion, that is, one and a half times all stock trading in Mexico.Chilean ADRs were $ I 1.6 billion, slightly more than total trading in Santiago. ForCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub