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Custody of DR Underlying Shares

When a company issues DR in a foreign market, the underlying shares are deposited with a domestic custodian, and the foreign depositary issues a depository receipt (DR) representing those shares, which are then traded on the stock exchange or over-the-counter. As of April 2015, KSD has in custody 360 million underlying shares of 45 DR issued by Samsung Electronics, POSCO, KT, and 39 other companies.

Procedures of DR conversion

  • Conversion of DR into underlying shares (DR release)

    Conversion occur mainly for arbitrage trading taking advantage of the price difference between underlying shares and DRs, or due to the existence of market distortions such as foreign investment limits.

    • Procedure for conversion of DR into underlying shares (DR release)

      This diagram is about procedures for conversion of DR into underlying shares(DR release).

      - This diagram is about procedures for conversion of DR into underlying shares(DR release).

      • 1 : A DR holder requests an overseas agent to release DR.
      • ① : The DR holder instructs a domestic agent to receive shares.
      • 2 : An overseas agent requests a DR depository to release DR.
      • 3 : The DR depository notifies KSD of DR release details.
      • 4 : KSD delivers shares to the domestic agent through book-entry.
    • Procedure of conversion of underlying shares into DR(DR issuance)

      This diagram explains procedures for conversion of underlying shares into DR (DR issuance).

      - This diagram explains procedures for conversion of underlying shares into DR (DR issuance).

      • 1 : An underlying share holder instructs an overseas agent to receive DR.
      • ① : The underlying share holder requests a domestic agent for DR conversion.
      • 2 : The domestic agent requests KSD for DR conversion.
      • 3 : KSD notifies a DR depositary of DR conversion details.
      • 4 : The DR depositary delivers DR to the overseas agent.
  • Exercising DR rights

    DR holders can exercise stockholder rights such as voting rights and appraisal rights, and participate in bonus issues and rights issues through the depositary bank and KSD.

Benefits of DR issuance

  • By issuing foreign DR which offers a more advantageous means of raising long-term funds than bonds, issuers can avoid threats to management caused by dilution of stock ownership. Since DRs are issued abroad, it does not affect domestic stock prices and issuers can get the added benefit of gaining greater exposure in the foreign market.
  • Investors can build an efficient portfolio by using DR for arbitrage strategies which take advantage of price differences between home and abroad. Moreover, investing in DR is convenient because the method is the same as that for the domestic market. Unlike direct investment in foreign securities, there are no additional fees paid to a global custodian, which is effective for reducing costs.