Case Analysis: Compania Telefonos De Chile

CTC's Fund Requirements
CTC is in need of funds as it is in the middle of an aggressive expansion program which requires substantial capital resources. The expansion program includes substantial reduction in the time to get telephone service from 10 to 4 years, and expansion of the capabilities of the company to provide some of the latest high-tech capabilities in the telecommunications industry.
Unfortunately, internally generated funds are not sufficient to meet the requirements of the expansion project. As a matter of fact there are barely internally generated funds as it has been the long time practice of CTC to distribute 100 per cent of its income to its stockholders as dividends, though this percentage was eventually decreased to 60 per cent. Hence, CTC has to look for external sources of funds.
CTC can raise funds within Chile, but there is doubt that the country's financial market can fully finance 100 per cent of the fund requirements of the telecommunications giant. First, the local stock market is relatively small. Second, Chilean banks are small and that they are legally restricted from committing majority of their funds to just one company, and also if they are allowed to do so, that would mean a very high exposure to CTC alone.

American Depositary Receipt (or ADR)
Thus, CTC is forced to look for the funds it needs outside Chile. One option is through the issuance of American Depositary Receipts (or ADR). According to the Chartered Financial Analyst (CFA�) Institute (2008), an ADR is a "certificate of ownership issued by a U.S. bank to promote local trading in a foreign stock" (p. G-2). This means that the United States' bank holds the foreign shares of stocks and issues American Depositary Receipts against them which it then sells to American investors.
US investor wishes to own ADRs in that it allows for the direct, but easy access to investment in some foreign firms. Holding an ADR in lieu of actual shares of the foreign firm allows the investor to take advantage of the diversification benefits from investing in foreign assets while at the same time improving the chances of the entire portfolio to earn alpha.

Raising Funds in the US
Given that CTC's business is directly related to the country's economy, its growth and stability, ADRs of the company's shares are attractive investment vehicles for US investors. The Chilean economy is relatively more stable than its neighboring countries. Moreover, given the dividend distribution history of CTC, raising funds in the United States is a little bit easier compared to if the company has never issued dividends to its stockholders.
Nevertheless, there are obstacles for the organization. One is that the US Securities and Exchange Commission has very lenient rules in allowing foreign companies to list in the country's exchanges. However, CTC can overcome this by hiring a US-based underwriter which has several ADR successful listings under its name. Another obstacle is the substantial dual-listing costs. Unfortunately, the company can't go away with this one. What the company can do instead is to use, as much as possible, US GAAP in its financial reports to substantially reduce financial statement translation from one accounting standard to another.