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Scott Clayton

020 3356 9763



Keith Wallace’s  article looks at the advantages for British investors holding, or wishing to acquire CDIs.
CDIs are Crest Depository Instruments
(taken from Issue No 16 –  July 2001)

CREST, the central UK title holding and settlement organisation is extending its services to include shares in major European and North American businesses.

Q1. What shares is CREST going to cover with its CDI service?

A1. USA, Canadian and all EU (except Greece); listed stocks only.

Q2. Any Exclusions?

A2. The few that require a `declaration of nationality` from intending shareholders are currently excluded, for operational reasons.

Q3. Will CREST be holding the actual shares for me?

A3. CREST will be offering CDIs. For all practical purposes these equate to the shares themselves but to obtain streamlined UK procedures they have to be legally slightly different. [The overseas shares will be held in the home country central securities depository. These are known as underlying `securities`. There is then an English law trust by which title in these is held for the relevant CREST members. This device therefore supports, legally, the CDIs that CREST will issue to correspond with the underlying securities.]

Q4. How do I put my existing overseas shares into CREST and get CDIs in exchange?

A4. You are likely already to have UK investments in CREST and it will be best for your overseas stocks to follow what is already set up.

Investors access CREST through their broker. There are then two routes. For most retail investors CREST holds shares (and will hold CDIs) for the `broker’s nominee pool` account and the broker is responsible for liasing with all its customers holding the CREST shares in this form.

For more sophisticated retail and institutional investors, you will be a`sponsored member` of CREST. This means CREST records ownership in the investor’s own name but accepts the investor’s broker’s instructions to settle sales, purchases and other transfers.

Q5. How will dividends reach me?

A5. In sterling via CREST (and your broker for retail customers in `brokers nominee pool` – see A.4). CREST also offers the facility to receive dividends in Euros or US Dollars.

Q6. What about taxes and dividends from overseas investments held as CDIs? How will this compare with my current arrangements and how would I deal with local withholding taxes, etc?

A6. CREST itself offers a Tax Reclaim Department who will respond to queries and assist if instructed. Alternatively the investor can originate his own tax recovery claims, where available, himself.

Q7. I don’t pay UK stamp duty on buying overseas investments. Would I pay stamp duty on buying CDIs?

A7. No. A recent SI exempts transactions for bona fide overseas companies.

Q8. Would I be sent annual reports?

A8. No, therefore write to the company or get in touch with its Shareholders Relations Department.

Q9. AGM voting, proxy contest etc?

A9. The larger companies will be offered access to the CREST record of ownership if they wish to communicate with their shareholders. This means they could but need not communicate with direct owners that are ‘sponsored members’ (see A.4). If it is important the investor can make a request to CREST on a particular issue and CREST intends to `roll out` a full CDI voting service in due time.

Q10. Many US and Canadian companies currently offer a dividend reinvestment plan. Could CREST oblige where the shares are held as CDIs?

A10. Yes CREST could enter the investor into a company’s existing Plan.

Q11. I pay custody charges to my UK broker, or direct to an overseas bank, for my overseas securities at the moment. Will custody and holding charges come down by using the CDI service?

A11. Almost certainly. CREST will make a modest charge (currently £7) for putting your existing shares into CDIs and will pass on to you/ your broker only the modest keenly negotiated annual holding charge that CREST itself has to pay to its correspondent overseas depository. Your broker may make a separate charge which will have to be disclosed to you.

Q12. Will shares held as ADRs (American Depository Receipts) in a company be the same as CDIs in that company?

A12. No. Although the economic consequences are the same (you own the share and get the dividends) ADRs and CREST CDIs take different forms, have different procedures and are not identical.

Q13. Are CDIs ‘safe’ in CREST?

A13. CREST’s preparation and procedures are as thorough as human ingenuity can contrive. There are some minor theoretical residual risks, explained in CREST’s literature.

Q14. I’ve heard of ‘daylight exposure’ or the ‘Herstatt problem’. Does this apply here?

A14. `Daylight exposure` is the risk that an investor theoretically runs in settling a buy or sell order when he parts with an asset at the beginning of a business day to a third party who becomes insolvent later in the day and before he has had time to honour his part of the bargain. For CDIs CREST has devised a very elegant English law vendor purpose trust which it and its lawyers believe will get around this theoretical risk.

Q15. If I hold, say, Dutch shares as CDIs and then (being UK resident) die, will my executors have to prove my will or re-seal it in Holland? Will my executors have to exhibit probate to CREST as well or separately?

A15. CREST has issued CDIs which are independent of the equivalent underlying securities. CREST itself is the ‘owner’ of these underlying securities at the relevant depository for the Dutch company. Even though the Dutch company may have received, at its request, a breakdown of the ownerships as supplied by CREST, this does not make the UK investors legal owners of the Dutch shares. CREST is. Hence there is no reason why the Dutch company (or the Dutch depository where CREST holds `it’s` shares) need ask for or receive anything in the way of a probate, even if it comes to know of the individual’s death. (This is confirmed by CREST’s Dutch lawyers; for other countries CREST is checking on a case-by-case basis but would expect the answer to be the same).

So far as CREST is concerned, if your shares are held in a broker’s nominee pool (see A.4), it will not know of your individual identity nor of your death. It will simply act on the broker’s instructions. If though you are one of the sophisticated ‘sponsored members’ (see A.4) you are on CREST’s records as the owner. CREST’s current thinking is that they would need to see your (UK) probate.

Q16. When I die, holding, say, Dutch shares in CDI form through CREST, will my executors have to clear Dutch estate taxes?

A16. CREST has not considered the issue and will not be involved.

Q17. I know that countries grounded in Roman law tend to have ‘forced heirship’ and restrict people’s freedom to dispose of their property in their wills as they like. Would this apply in my case to my CDIs?

A17. CREST has not considered the issue.

Q18. Can I put my CREST CDI overseas shares into an English trust.

A18. Yes.

Q19. Can I grant a charge over my CREST CDIs.

A19. Yes. You can grant either a legal mortgage (title passed to the lender) or an equitable mortgage under CREST’s machinery for opening an `escrow` account.

Q20. Can a UK corporate investor create a floating charge over CDIs?

A20. Yes, refer to CREST procedures and the Financial Markets and Insolvency Regulations 1996. CDIs are what are called ‘participating securities’. This will save the lending bank bother, legal opinions and procedural difficulties and therefore save expense to the borrower. This is a great improvement on present procedures.

[Disclaimer: This article is based on material from CREST, as to which the latter issues certain disclaimers. These are reciprocated by the author]

Keith Wallace is a consultant with Messrs Richards Butler.