Depositary receipt programs surged to a record last year, whetting bankers' appetites for this lucrative business.

According to data from banks, the number of outstanding issues climbed 12%, to 1,733, and trading in depositary receipts soared 25% from the 1995 level, to a record $345 billion.

Depositary receipts are used by foreign companies to sell their shares either in the United States or outside their home markets. Banks - overwhelmingly U.S. banks - serve as deposit agents. They handle record keeping, settle trades, transfer stock, and pay dividends.

Foreign companies also raised $19.5 billion in fresh capital by selling shares through depositary receipt programs, up 62% from 1995 and just below the peak $19.7 billion raised in 1994.

Judging by the bullish forecasts at banks, new issues and trading in depositary receipts should climb sharply again this year.

"Our pipeline indicates market interest is still very strong," said James P. Donovan, managing director for depositary receipts at Citicorp.

"Depositary receipts are one of the fastest-growing businesses at the bank," said Kenneth A. Lopian, senior vice president at Bank of New York. "More countries are looking to raise money, and more investors are looking for countries to invest in."

Depositary receipts fall into two main categories: American depositary receipts, or ADRs, which are listed on U.S. stock exchanges and are usually publicly traded, and global depositary receipts, or GDRs, which are usually listed on the London and Luxembourg stock exchanges. GDRs are mainly sold privately in the United States under the Securities and Exchange Commission's rule 144a.

They can be used either as a substitute for outstanding shares, which are bought up in the market and then "deposited" in banks, or for new shares issued to raise fresh capital.

Both ADRS and GDRS are usually denominated in dollars; they can gain or lose value when the underlying home-country currency fluctuates against the dollar.

ADRs were first launched by J.P. Morgan & Co. in 1927; GDRs, in 1990. But the market for them did not really gain steam until the 1990s, when capital markets began to globalize. Today, three banking companies - Bank of New York Co., Citicorp, and Morgan - dominate the business.

Bank of New York reported that by midyear 1996 it had run 57% of the 996 "sponsored," or formal, full-fledged ADR and GDR programs. Citicorp had done 24%; Morgan, slightly more than 17%; and others, slightly more than 1%.

Bankers noted that the rapid development of free market economies around the world and the sharp increase in companies competing for fresh capital were the main spurs to fast growth of depositary receipts.

"Who would have thought three years ago that companies from countries like Croatia and Russia would be looking to use depositary programs?" Mr. Lopian asked.

Foreign banks were among the biggest users of depositary receipts last year, with 31 programs. Among them: State Bank of India, which raised $367 million through a London-listed issue; South Korea's Cho Hung Bank, which raised $180 million through a Luxembourg-listed issue; and Commercial International Bank (Egypt), which raised $117.5 million.

Bankers observed that even as ADR programs increased GDR programs grew faster. According to Bankers Trust New York Corp., ADR programs rose 49% last year, to 162, while GDR programs increased 53%, to 55.

"The old ADR seems to be less attractive," observed Peter Duggan, vice president and global product manager for depositary receipts at Bankers Trust. "This could well be the year we see more GDRs than ADRs on the capital-raising side."

He and others cited three main reasons for the growing popularity of GDRs among foreign companies: They don't have to meet tough disclosure requirements of the Securities and Exchange Commission; they cost less; and they get wider international distribution.

"The GDR market is more efficient, less expensive, and less painful for issuers," Mr. Duggan said.

Other bankers didn't disagree but emphasized that GDRs are frequently only a stepping-stone to a full-fledged ADR listing. They pointed out that many companies using GDRs are from emerging markets and simply not yet in a position to meet U.S. disclosure and accounting standards.

"GDRs are only the first step in a potential progression for an issuer to access the public markets in the United States," said Mr. Donovan of Citicorp.

Bankers declined to disclose their earnings from depositary receipts but emphasized that they are highly profitable.

They also pointed out that banks get virtually nothing when a depositary receipt program is launched but make their real money from stock transfers, settlement, payment of dividends, and record keeping when trading occurs. The more depositary receipts trade, the more money banks make.

Some therefore argue that the real measure of depositary receipts' success is the extent to which they are traded. Mr. Donovan, for example, estimated that, although Citicorp had run only 28% of the 1,733 depositary receipt programs last year, trading in Citicorp-run depositary shares accounted for nearly 40% of the $345 billion volume.

"Our programs are twice as liquid as others,"' he boasted.

Given the enormous investments and global reach needed to administer depositary receipts, bankers and analysts also predicted that the three dominant institutions are likely to maintain their lead.

"Numerous other players - including BankAmerica, Chase, Bankers Trust, Morgan Stanley, and State Street - have occasionally indicated they would enter this business," noted Salomon Brothers Inc. bank analyst Diane Glossman in a recent report.

Despite those indications, she and others observed, the top three banks continue to split 99% of the business among them.

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