American Stock Exchange

American Stock Exchange

Introduction

The Developing countries equity markets have undergone immense changes in recent years. International investors have purchased emerging-market equity shares at exceptional rates, tripling the value of their emerging-market equity portfolios between 1989 and 1992. Bigger foreign investment in rising markets has tightened their price linkages to the international financial centers. Partly as a result of these changes, emerging markets have matured considerably, achieving increased market size and an increased capacity to support equity issuance.

Investing in ASE Easy or Difficult?

A notable feature of the recent increase in equity portfolio investment in developing countries has been a large increase in international equity market placements by developing-economy companies. The vast majority of these placements have taken the form of ADRs. An ADR is essentially a claim, issued by a U.S. depository institution, to an underlying share of stock in a foreign-based company (www.citibank.com). In what is essentially a custodial arrangement, the U.S. depository institution backs the ADR by holding shares of the underlying stock on behalf of the owner of the ADR. In exchange for a fee, the depository institution provides the service of converting dividend receipts denominated in a foreign currency into dollars and distributing them to ADR holders. Owners of ADRs are entitled at any time to redeem their ADRs for shares of the underlying stock. A particular advantage of the ADR instrument is that settlement of trades between U.S. investors can be handled by the depository institution without recourse to the home equity market of the non-U.S. company that issued the equity (www.citibank.com). In this way, the ADR mechanism avoids the risks and transaction costs associated with settlement and clearance in foreign markets.

Worth of Getting Listed in ASE for Non-US Company

Developing-country companies can place ADRs in the United States by two means (Greene, 2001). The first is a public ADR offering. To offer an ADR publicly in the United States, the company must obtain a listing on a U.S. exchange-the NYSE, AMEX, or NASDAQ. In several recent cases, developing-country officials have modified domestic accounting and underwriting regulations to help domestic companies obtain listings on United States exchanges and to make public equity placements in the United States. In the case of the May 1991 public offering of ADRs by Telemex (the Mexican telephone company), the U.S. Securities and Exchange Commission worked closely with Mexican officials to facilitate the offering, granting several technical exemptions to S.E.C. underwriting rules (SEC Release).

Private placements have been a second means of issuing developing-country ADRs in international markets. During 1990-92, private ADR placements by developing-country companies were four times as numerous as public offerings (Greene, 2001). Private ADR placements by developing-country companies received stimulus from the June 1990 adoption of Rule 144A by the U.S. Securities and Exchange Commission. Rule 144A exempts qualified institutional buyers-institutions that own and invest on a discretionary basis at least $100 million in securities-from a rule that previously required them to hold privately placed securities for two years before trading them (SEC ...