[Edaily Reporter KIM YOON-JEONG ] Although SK Hynix’s American Depositary Receipts (ADRs) are trading at a price nearly 50% higher than its domestic common stock, arbitrage trading—involving the conversion of domestic shares into ADRs for sale on the U.S. market—is effectively blocked. This is because the conversion limit has already been fully exhausted by the initial issuance volume, and plans to expand the limit using existing shares are entangled in regulatory issues, such as whether a securities registration statement must be filed.
On the 10th, the price difference between SK Hynix’s domestic common stock and its U.S. ADRs approached 50%. As of 4:39 p.m. that day, SK Hynix’s domestic common stock was trading at 1,212,000 won. SK Hynix ADRs, listed on the Nasdaq in the U.S., were trading at $134.38 per share; when 10 ADRs are converted to one domestic common share, the price comes to 1,795,182 won. This is 48.12% higher than the price of the domestic common stock.
An ADR is an American Depositary Receipt traded on the U.S. market based on the shares of a domestic company. Ten SK Hynix ADRs are equivalent to one domestic common share. Typically, when the same asset trades at different prices in two markets, investors engage in arbitrage by buying in the relatively cheaper market and selling in the more expensive one. If domestic common shares could be converted into ADRs and sold in the U.S. market, buying pressure would flow into the domestic shares while selling pressure would flow into the ADRs, potentially narrowing the price gap.
However, it is currently difficult to convert additional SK Hynix domestic common shares into ADRs. When SK Hynix initially issued ADRs, it issued 17.79 million new common shares, and the limit set for converting domestic common shares into ADRs is also 17.79 million shares. In effect, the conversion limit has already been fully utilized by the initial issuance alone.
Reverse conversion—converting U.S. ADRs back into domestic common stock—is possible. If reverse conversion occurs, it would create room to convert additional domestic common stock into ADRs; however, there have been no reported instances of actual reverse conversion to date. This is because ADRs carry a high premium, so there is little incentive to convert them into domestic common stock, which is relatively cheaper.
To enable free conversion between domestic common stock and ADRs, the existing conversion limit must be expanded. As an alternative, there is discussion of converting existing shares—those already issued and in circulation—into ADRs, rather than issuing new shares. This approach would allow SK Hynix to increase the conversion limit and issue additional ADRs based on existing shares. Unlike issuing new shares, this would allow for an expansion of the ADR supply without diluting the equity stakes of existing shareholders. In particular, for arbitrage transactions—where domestic shares are purchased, converted into ADRs, and then sold on the U.S. market—to occur frequently, it must be possible to convert existing shares without the company issuing additional new shares.
However, it remains unclear whether ADR conversions based on existing shares are subject to the requirement to file a securities registration statement. The current Capital Markets Act classifies shares and depositary receipts (DRs) as separate securities. It is possible to interpret that, since new DRs are issued even if they are based on existing shares, a securities registration statement must be filed. On the other hand, if the process is viewed as merely changing the form of shares already in circulation without issuing new shares, it could be interpreted that a separate filing is unnecessary.
If the obligation to file a securities registration statement applies, it could impose restrictions on arbitrage trading through unrestricted conversions. This is because a securities registration statement takes a certain amount of time to take effect after submission; if the registration process must be repeated every time domestic common stock is converted into ADRs, it could make rapid arbitrage difficult. The practical effectiveness of the conversion may also vary depending on specific procedures, such as whether a single initial registration can cover subsequent conversion volumes or whether conversions over a certain period must be bundled into a single filing.
Meanwhile, even if conversions become unrestricted, the impact on the domestic stock market could be two-sided. This is because free conversion between domestic common stock and ADRs does not necessarily lead to a rise in domestic stock prices. While domestic stock prices may rise as the price disparity between the two markets narrows, there is also a possibility that relatively overvalued ADR prices could fall. If conversions become more active, we can expect the upward trend in the U.S. market to be reflected in domestic stock prices; conversely, if investor sentiment in the U.S. market deteriorates, the resulting downward pressure could quickly spread to the domestic market.
