A depositary trust agreement (DTA) is a legal document that governs the relationship between the issuer of a security and its depositary. The depositary is responsible for holding the physical assets and documents that represent the security, such as stocks, bonds, or other financial instruments, on behalf of the security holders.
DTAs are particularly important for issuers of securities that are traded internationally. They enable the issuers to create global depositary receipts (GDRs) or American depositary receipts (ADRs) that represent ownership in the underlying securities and allow investors to trade them in foreign markets without having to physically hold the securities.
One of the primary functions of a DTA is to establish the terms and conditions of the depositary receipt program. This includes defining the rights and obligations of the issuer, depositary, and the security holders, as well as the procedures for issuing, withdrawing, and transferring depositary receipts.
DTAs also specify the fees and expenses associated with the depositary receipt program, including the depositary`s compensation, registration fees, and other administrative costs. This allows issuers and depositaries to manage the costs associated with the program and ensure that it remains financially viable.
Another important function of a DTA is to establish the procedures for voting rights attached to the underlying securities. Typically, depositary receipts do not grant the right to vote on corporate matters, but instead, the depositary may act as an intermediary between the security holders and the issuer to facilitate voting.
Overall, depositary trust agreements play an essential role in facilitating cross-border investment and providing investors with access to global markets. They enable issuers to expand their investor base, increase liquidity, and raise capital more efficiently, while providing investors with a secure and convenient way to invest in foreign securities.