SK hynix (000660.KS) registered a custody ceiling of 25 percent, or 1.779 billion shares—10 times its already-issued American Depositary Receipts (ADRs)—but it has been confirmed that no additional conversion beyond the 2.5 percent listed in the United States is actually possible. This is because the figure represents a reserve to prepare for cancellation when ADRs are converted domestically. SK hynix ADRs closed at $154.03 on the 17th, maintaining a premium of about 24.60 percent over the ordinary shares traded in Korea (1.842 million won), raising expectations of buying inflows into the ordinary shares.
According to the financial investment industry on the 19th, SK hynix specified a custody ceiling of 1.779 billion shares—10 times the 2.5 percent ADR volume (177.9 million shares)—in its depositary receipt filing (F-6) submitted to the U.S. Securities and Exchange Commission (SEC). This had prompted expectations in the market that, starting on the 29th when the Korea Securities Depository lists the new shares SK hynix issued for the ADRs domestically, 22.5 percent would be converted and narrow the share premium between Korea and the United States.
An anonymous, well-informed source explained, "The 25 percent registration is merely a reserve volume to prepare for cases where ADRs are converted domestically, extinguished in the United States, and then revived, and does not mean a conversion ceiling for the ordinary shares." In other words, converting more than 2.5 percent of ordinary shares into ADRs without procedures equivalent to an additional listing is impossible at this point.
For example, if 10 million of the 177.9 million ADR shares are converted into ordinary shares and flow into Korea, those shares disappear from the U.S. stock market. When the ordinary shares later return to ADRs, the 10 million cancelled shares must be revived. To avoid the inconvenience of having to relist cancelled shares each time during such a round-trip process, the company registered 10 times the listed ADRs as a formal custody ceiling.
In a similar case, TSMC also increased its ADR proportion not through natural conversion but through procedures equivalent to additional listings over several years. TSMC's ADR proportion was only 2.9 percent at the time of its listing in 1997, but is currently 20.5 percent. According to the SEC, TSMC's early investors, Taiwan's National Development Fund and Philips, converted existing shares into ADRs on several occasions from 2001 to 2007. This process required approval from TSMC's board and Taiwan's Financial Supervisory Commission (FSC), as well as SEC registration—procedures that were effectively no different from an additional public offering rather than arbitrary applications by individual shareholders.
As a result, the method of transferring ordinary shares into ADRs to erase the premium, regardless of when the depository registers the new shares, is impossible at this point. A financial investment industry official said, "Unless an additional conversion procedure is undertaken first—with shareholder demand and approval from authorities and SK hynix's board, as with TSMC—or the domestic system is reformed to allow free two-way conversion between ordinary shares and ADRs, resolving the premium in the short term through ADR conversion is impossible." The official added, "For the time being, there is no choice but to hope that the premium gap narrows naturally in line with market trends."
