The main appeal to investors is that ADRs are U.S. securities, which mean that they are covered by U.S. securities regulations, buying and selling them are similar to any other U.S. security, prices for the shares are quoted in U.S. dollars and dividends are paid in U.S. dollars. While you may be buying shares in a country with uncertain financial regulation, you know that the company is required to abide by the strict securities regulation applied in the USA.

While ADRs were originally devised for U.S. investors, and one of the attractive features is the fact they are registered on an exchange and subject to the regulations of the SEC, the concept can be easily duplicated in any well regulated jurisdiction. Hence, the formation of the BDR.

A BDR differs from an ADR in so far as The Bahamas will be the jurisdiction in which the shares will be held and the foreign company (for example Kerzner) is traded in the U.S. Specifically a BDR is a deposit of the original US traded shares which will be held by a Bahamian financial institution. These certificates can then be treated in two different ways:

1. The certificates can be registered with the international Registrar and Transfer Agent to clearly identify the individual Bahamian owners by name or account number. In this structure subsequent trades would be conducted by placing an order through a U.S. broker and dividends would flow through in US dollars (but if it is deemed to be too costly to pay to the foreign jurisdiction due to foreign exchange conditions they could be subject to withholding until it was deemed cost effective to pay through to The Bahamas). This structure would retain the original structure of the shares and thus an almost identical price to the shares traded in the U.S. market. This structure has challenges in markets with exchange controls due the flow of capital across financial markets.

2. The other form and the one we believe will be employed in this instance, requires the formation of a new security, which does not trade in the U.S. This structure requires a Bahamian bank to hold the shares as a collateral pool which would only be traded in the U.S. market if it needed to be liquidated to pay the local investors. In this way the shares can be repackaged and sold in different increments and can carry significantly different prices than the original shares. This structure would only permit a selling shareholder to sell within the Bahamian jurisdiction and while the parent company may enjoy liquidity in the foreign market the BDRs are likely to be subject to similar liquidity limitations facing other shares listed in the local market. This would be the case even though the local institution may have been given the authority to be the "market maker" in the BDRs.

It should be noted that the BDR would not be identical to owning U.S. listed shares in the Company. There will be pricing differences which will result in part from local liquidity, foreign exchange transaction fees and other management fess charged by the local banks. These added costs should surface as either an added premium on the certificate price itself or in the form of a sales commission.

Another important consideration is how will the shares be listed for sale and what will be the markup on the commissions charged. In the case where the shares will be traded directly on the NYSE, such trades must be made through registered brokerage facilities. US discount brokers currently get commissions of only 5 to 15 cents or a $20 minimum ticket price. The question here is what premium will the local brokers attach to this rate.

There are other questions and concerns specifically related to the offering of KZL that needed clarification.

* Are all regulatory approvals in fact in place?

We understand that while the Ministry of Finance is willing to consider it has not yet granted their approval to allow for temporary residents or foreign companies to invest directly in the BDRs. This requires a policy change and the Government needs to fully consider the resulting impact.

Temporary residents and foreign companies already have the ability to invest directly in the NYSE listed shares. What would be the incentive for the Bahamas Government to allow such persons to invest in BDRs unless they do so using only foreign currency?

The more important issue to consider would be the easing of exchange controls generally to allow for a restricted number of certificates to be set aside in a direct US traded style of the BDR. The deployment of such a structure would limit the exposure of the Central Bank reserves to the initial amount listed (which must be addressed regardless of the structure) and then only to the capital appreciation on future purchases.

From The Nassau Guardian and Colinafinancial.com