When ADRs Are Cancelled

Includes: DTEGY, RSHYY
by: Global Investing Editor

Russia's Federal Service for Financial Markets (FSFM), the market regulator, has revoked the license of the Moscow Central Depository, a local registrar, following an audit conducted by the FSFM. The revocation becomes effective February 1, 2011. Companies whose shareholders’ registers are currently held by the MCD will have until then to appoint a new registrar. Following this appointment, the company register will be transferred, during which time re-registration activities will not be possible and accordingly Depositary Receipt issuances and cancellations may be impacted.

The impact will be greatest on ADR and GDR shareholders in Russian utilities which were sold off to the market via MCD in recent years: tranches of TGK, OGK, Quadra, InterRAO, Rushydro (OTCQX:RSHYY), and Samaraenergo.

When ADRs are cancelled for whatever reason, it is inconvenient and can be costly. In the case of a takeover or merger, we get the same deal as the natives. But if the ADR is withdrawn it is a drag.

This happened to me with MFS pcl, a now delisted Thai mutual fund management co. which effectively only trades in Bangkok (even though it is in my IRA!), and to others with DeutscheTelekom (OTCQX:DTEGY), a blue chip. Both were on the NYSE. Much depends on share liquidity post-delisting...

MFS is in a black hole mainly because Citigroup (NYSE:C) dropped any support whereas Deutsche is still trackable. But it is hard to predict in advance which company will pay depositaries to continue to service its US shareholders.

The Russian deregisterd shares were not on the Big Board. I own a Russian GDR (traded in US$s in London) called Cherkizovo for which JP Morgan (NYSE:JPM) was depositary. It is very hard to track this meatpacker, which trades in London as CHE, even though I bought it through a US brokerage after the GDRs were “seasoned”. CHE was a legal buy for a US retail investor.

One of the rivals to my covestor.com yield portfolio claims he is investing in Canadian ADRs. There is a real problem with this strategy. There are no Canada ADRs. Canadian shares can be co-listed in the US and trade here, but the mechanism is not the same as for American Depositary Receipts.

Instead, under agreements between the stock exchanges and the tax authorities, US market makers use their Canada desks in Toronto or Vancouver to keep the shares south of the border alligned with those up north. And the tax reporting and compliance requirements for US- and Canada-traded stocks are identical. Canada withholds and we take a credit against the withholding.

In fact most of the trading is going the other way, with Canadians using real ADRs, from third countries, which trade only stateside.