€ AMERICAN€ DEPOSITORY€ RECEIPT€ and€ GLOBAL€ DEPOSITORY€ RECEIPT€

REPORT
SUBMITTED BY SURABHI KHANNA
AMERICAN DEPOSITORY RECEIPT GLOBAL DEPOSITORY RECEIPTS
DEPOSITORY RECEIPTS
What are depositary receipts? A depositary receipt (DR) is a type of negotiable
(transferable) financial security that is traded on a local stock exchange but r
epresents a security, usually in the form of equity that is issued by a foreign
publicly listed company. The DR, which is a physical certificate, allows investo
rs to hold shares in equity of other countries.
How does DR work? The DR is created when a foreign company wishes to list its al
ready publicly traded shares or debt securities on a foreign stock exchange. Bef
ore it can be listed to a particular stock exchange, the company in question wil
l first have to meet certain requirements put forth by the exchange. Initial pub
lic offerings, however, can also issue a DR. DRs can be traded publicly or over-
thecounter. Let us look at an example of how an ADR is created and traded.
Origin of Depository Receipts The origin of depository receipt is USA. It starte
d in 1920’s. In this period, it was difficult and risky to invest on the originals
of foreign securities by American investors and brokers. The risks in this cond
ition have been causing delays and some kind of extra expenses. In order to avoi
d the practical problems, they should have looked for solutions. In the solution
produced, it was aimed at constituting a system that will be able to eliminate
those handicaps. In those times, financial and economical system was national. F
or the system started to function badly, the investors and brokers were not able
to transit to international market in the investment and financial activities t
hey have been carried out. They were as if trapped inside a no end box and it wa
s impossible for them to open global market. Something was clearer than anything
else. The key was as if climbing up a hill in the desert under the sun in 70 C
in vein, and it was time consuming. The distance between American and European s
tock exchange markets was high, for this reason, what is to be was to reach the
international arena in world of stock exchange market. For the
reason of investor’s demand of diversifying their financial resources internationa
lly, American Depository Receipts revealed.
TYPES OF DR
There are a variety of DR program types. These can be divided into capital raisi
ng and non capital raising structures. The type of program used will depend on t
he requirements of the issuer, the features of the issuer s domestic market and
on investor attitudes. A third type of DR program is known as "unsponsored". Thi
s differs from other types in that the company whose shares are represented by u
nsponsored DRs is not involved in setting up the program.
*Source: ADR Reference Guide – JP Morgan, February 2005
NON CAPITAL RAISING DRS
SPONSORED ADR PROGRAM - LEVEL 1 A Level I sponsored ADR program is the easiest a
nd least expensive means for a company to provide for issuance of its shares in
ADR form in the US. A Level I program is initiated by the issuer and involves th
e filing of an F-6 registration statement, but allows for exemption under Rule12
g 3-2(b) from full SEC reporting requirements. The issuer has a certain amount o
f control over the ADRs issued under a sponsored Level I program, since a deposi
tary agreement is executed between the issuer and one selected depositary bank.
Level I ADRs can however only be traded over-the-counter and cannot be listed on
a national exchange in the US.
Advantages of a Level I ADR program: It avoids full compliance with the SEC s re
porting requirements. By working with a single depositary bank, the issuer has gr
eater control over its ADR program than would be the case with an unsponsored pr
ogram. The depositary acts as a channel of communication between the issuer and
its US shareholder base. Dividend payments, financial statements and details of
corporate actions will be passed on to US investors via the depositary. The depos
itary bank maintains accurate shareholder records for the issuer and can, if req
uested, monitor large stock transactions and report them to the issuer. Set-up co
sts are minimal and all transaction costs are absorbed by the ADR holder. It is
easy and relatively inexpensive to upgrade the program to Level II or III as the
issuer and depositary bank do not have to negotiate cancellation of unsponsored
ADRs with several depositaries, as would be the case if upgrading an unsponsore
d program. Disadvantages of a Level I ADR program It cannot be listed on any of
the national exchanges in the US. As a result, investor interest might be somewh
at restricted which may limit the issuer s ability to enhance its name recogniti
on in the US. Capital raising is not permitted under a Level I program.
SPONSORED ADR PROGRAM - LEVEL II A sponsored Level II ADR must comply with the S
EC s full registration and reporting requirements. In addition to filing an F-6
registration statement, the issuer is also required to file SEC Form 20-F and to
comply with the SEC s other disclosure rules, including submission of its annua
l report which must be prepared in accordance with US Generally Accepted Account
ing Principles (GAAP). Registration allows the issuer to list its ADRs on one of
the three major national stock exchanges, namely the New York Stock Exchange (N
YSE), the American Stock Exchange (AMEX), or the National Association of Securit
ies Dealers Automated Quotation (NASDAQ) Stock Market, each of which has reporti
ng and disclosure requirements. Level II sponsored programs are initiated by non
-US companies to give US investors access to their stocks in the US. As with a L
evel I program, a depositary agreement is signed between the issuer and a deposi
tary bank. The agreement defines the responsibilities of the depositary, which u
sually include responding to investor enquiries, mailing annual reports and othe
r important material to shareholders and maintaining shareholder records.
Advantages of a Level II ADR program: It is more attractive to US investors than
a Level I program because the ADRs may be listed on one of the major US exchang
es. This raises the profile of the ADR program to investors, thus increasing the
liquidity and marketability of the securities. Listing and registration also en
hance the issuer s name recognition in the US. US disclosure regulations for lar
ge investors enable the issuer to monitor the ownership of its shares in the US.
Disadvantages of a Level II ADR program More detailed SEC disclosure is required
than for a Level I program. For example, the issuer s financial statements must
conform to US Generally Accepted Accounting Principles (GAAP), or else a detail
ed summary of the differences in financial reporting between the home country an
d the US must be submitted. SEC regulations do not permit a public offering of A
DRs under a Level II program. It is more expensive and time-consuming to set up
and maintain a Level II program than a Level I program because of the more strin
gent reporting requirements and higher legal, accounting and listing costs.
CAPITAL RAISING DRs
SPONSORED ADR PROGRAM - LEVEL III Level III sponsored ADRs are similar to Level
II ADRs in that the issuer initiates the program, deals with one depositary bank
, lists on one of the major US exchanges, and files Form F-6 and 20-F registrati
on statements with the SEC. The major difference is that a Level III program all
ows the issuer to raise capital through a public offering of ADRs in the US and
this requires the issuer to submit a Form F-1 Advantages of a Level III ADR prog
ram It permits public offerings of ADRs in the US which can be used for a variet
y of purposes, for example the raising of capital to finance acquisitions or the
establishment of an Employee Stock Ownership Plan (ESOP) for the issuer s US su
bsidiary. Disadvantages of a Level III ADR program SEC reporting is more onerous
than for Level I or II programs. The costs of setting up and maintaining a Leve
l III program can be high. Set-upcosts, which would include listing, legal, acco
unting, investor relations and "road show" costs, might amount to approximately
US$ 300,000 to US$ 500,000.
RULE 144(a) ADRs (RADRs) Rule 144(a) ADRs, or restricted ADRs (RADRs) are simply
privately placed depositary receipts which are issued and traded in accordance
with Rule 144(a). This rule was introduced by the SEC in April 1990 in part to s
timulate capital raising in the US by non- US issuers. Some of the former restri
ctions (under Rule 144) governing resale of privately placed securities (or "res
tricted securities") have been lifted under Rule 144(a), providing the sale is m
ade to "qualified institutional buyers" (QIBs), with the aim of adding liquidity
to the private placement market. A QIB is currently defined as an institution,
which owns and invests on a discretionary basis at least US$ 100 million (or, in
the case of registered broker-dealers, US$ 10 million) in securities of an unaf
filiated entity. At present there are believed to be in excess of 4000 QIBs but
the SEC may decide to broaden the definition of a QIB to allow a larger number t
o participate in the Rule 144(a) market. NonUS companies now have easy access to
the US equity private placement market and may thus raise capital through the i
ssue of restricted ADRs without conforming to the full SEC registration and repo
rting requirements. Additionally the cost of issuing Rule 144(a) ADRs is conside
rably less than the cost of initiating a Sponsored Level III ADR program. In Jun
e 1990, the National Association of Securities Dealers (NASD) established a clos
ed electronic trading system for RADRs called "PORTAL" (Private Offerings, Resal
e and Trading through Automated Linkages) this system is designed to provide a m
arket for privately traded securities such as RADRs and access to it is availabl
e to both investors and market makers.
Advantages of RADRs ADRs offered under Rule 144(a) do not have to conform to ful
l SEC reporting and registration requirements. QIBs may demand certain financial
disclosure, however, unless the reporting exemption under Rule 12g 3-2(b) has b
een granted. RADRs provide a cheaper means of raising equity capital than throug
h a public offering and they can be issued more easily and quickly. RADRs can be
launched on their own or as part of a global offering. They can be traded throu
gh the NASDAQ s "PORTAL" system and they clear through the DTC. Disadvantages of
RADRs RADRs cannot be created for classes of share already listed on a US excha
nge. RADRs can only be sold in the US to QIBs. Although there are in excess of 4
000 potential QIBs, the RADR market is not as liquid as the public US equity mar
ket.
CAPITAL RASING VERSUS NON CAPITAL RAISING ADR PROGRAMS If the objective of the f
oreign company is to use existing shares to broaden shareholder base (i.e. non c
apital razing) it has the option of going with level 1 program that trades on no
n-NASDAQ OTC market or a more stringent level II program that is listed on NYSE,
AMEX or NASDAQ, however if it plans to raise capital through new shares, it has
the option of going with a level III program listed on NYSE. NASDAQ, AMEX, whic
h is even more stringent than a level II program or with a privately placed rule
144a ADR program. ADVANTAGES OF DRs Depository stocks are within processing mec
hanisms for foreign securities. Depository receipt agreements serve various adva
ntages to investors like transfer and exchanging dividends paid over foreign mon
ey currencies to their currency. Also, depository receipts are used in privatiza
tion, mergers, foreign governments Dept, imports and employment financing Mostly
, foreign securities are written for the bearer. For this reason, the lists of s
ecurities can not be pursued. Depository receipts try to minimize the problems o
f promissory notes written for the bearer. It makes having information about the
foreign company easier. Foreign companies having relationships with investors a
re restricted with law. Depositor or its division can learn the information and
declarations send by the foreign importer. Even though the securities are writte
n for the bearer, depository Bank has the best conditions to get this informatio
n.
BUYING AND SELLING DRS If an investor wishes to purchase shares in a foreign com
pany, he can either buy the foreign shares in the local market through a broker
in that country or, providing the foreign company in question has a DR program,
the investor can request his broker to buy DRs. The broker may either purchase e
xisting DRs or, if none are available, he may arrange for a depositary bank (e.g
. Deutsche Bank) to issue new ones. The process for issuing new DRs is very simp
le. The investor s broker contacts a broker in the issuing company s home market
and acquires shares in that company. These shares are then deposited with the d
epositary bank s local custodian. Upon confirmation that the custodian has recei
ved the shares, the depositary issues the requisite number of DRs to the investo
r via the broker.
In some exceptional cases there may be restrictions on the issuance of new DRs u
nder existing programs (e.g. Indian GDR programs) because of local regulations.
DRs can be sold in DR form, in which case they trade and settle like other US or
Euro securities. They can also, however, be cancelled. In this case the broker
acting on behalf of the owner of the DRs will request the depositary bank to can
cel the DRs and release the underlying shares to a domestic broker in the issuin
g company s home market. The domestic broker will then sell the shares locally a
nd the proceeds will be remitted to the investor who cancelled those DRs. • • • DRs ce
rtify that a stated number of underlying shares have been deposited with the dep
ositary s custodian in the foreign country. DR holders are entitled to all the d
ividends payable on the underlying foreign shares and, furthermore, to have thes
e paid in the currency in which the DRs are denominated – usually US dollars. The
DRs may be bought or sold through investors own brokers, and they clear and set
tle through the Depository Trust Company (DTC) for ADRs, through Euro clear and
Clear stream for EDRs and through all three (and possibly other clearing systems
) in the case of GDRs, depending on which markets they access. Shareholder infor
mation such as annual reports, notices of general meetings and corporate actions
, and official news releases are provided by the issuer to the depositary and to
the receipt holders, either direct or through the local custodian. The investor
is thus spared the costs and difficulties often encountered when direct investm
ent is made in local markets, where currency, settlement, and linguistic problem
s may be compounded by an excessive number of intermediaries.
• •
WHY DO INVESTORS BUY DRs? US investors have become increasingly interested in ov
erseas markets as a result of their higher yields compared to the US equity mark
et over recent years. International investors are also eager to diversify their
portfolios, both geographically and by industry sector, in order to increase the
ir returns while spreading their risk. They have long been active in the debt ma
rkets, as evidenced by the vast size of the Euromarkets, and sophisticated inter
national clearing systems have been developed to handle Euro instruments. Until
recently, however, cross-border equity investments have involved all the currenc
y, settlement and linguistic problems which occur when dealing with overseas equ
ity markets.
Building on the concept of the ADR, investment banks developed the EDR/GDR to so
lve these problems for international investors.
Liquidity and investor demand Liquidity is enhanced when there are a significant
number of depositary receipts eligible for trading in the United States. In a U
S public offering, retail and institutional investors are more likely to buy dep
ositary receipts that are perceived to be liquid and fairly priced. A useful str
ucturing tool While DRs are generally used to make equity more widely available
or to raise capital outside the issuer s domestic market, they can also be used
as part of many other financing structures. The concept of a receipt trading in
one market, which represents an instrument held in custody in a different market
, can be adapted to a wide variety of transactions.
*Source ADR AND GDR OVERCOMING OBSTACLES OF INTERNATIONA LINVESTING
*Source- Freidland capital guide to American depository receipt.
AMERICAN DEPOSITORY RECEIPTS
Background
ADRs were primarily created to increase investment access to widely known and of
ten multinational companies. They are typically formed by a depository bank depo
siting ordinary shares of a foreign company into a trust and issuing receipts of
interest in the underlying shares on a domestic exchange. The bank will act as
a custodian for the trust handling dividend distribution, currency exchange, pro
xies, tax reporting, and regulatory filings. It receives a management fee for th
ese services, either from the shareholders or the issuing company. Trading of AD
Rs occurs by brokers purchasing/selling outstanding ADRs in the domestic market,
or on the foreign markets if no shares are available domestically. In the case
of purchases in the foreign market, the broker then deposits the foreign shares
with the bank in exchange for newly created ADRs. In the case of sales in the lo
cal market, the broker will cancel the ADR causing the depository bank to sell t
he shares in the foreign market and deliver the proceeds in the investor’s currenc
y. Units in the trust are listed on large exchanges primarily in countries with
developed capital markets, as if they were shares of a company domiciled in the
same country as the exchange. The listing company of the ADR must adhere to the
same regulatory requirements and disclosures as the other listed issuers on the
exchange. In effect, shares of a foreign company can be purchased on a U.S. stoc
k exchange in the same manner as stock of a U.S. company. So why have the middle
men (trust)? Many investors do not have efficient means of diversifying into for
eign companies because of the administrative and implementation issues. Often, t
rading in foreign markets is more expensive relative to U.S. exchange transactio
n costs, as well as difficult to execute due to time zone differences. Also, for
eign exchanges do not usually have the same regulatory requirements that investo
rs are familiar with here in the U.S., and custody of the assets is costly. Curr
ency exchanges will also have to be utilized in order to purchase ordinary share
s of foreign companies. ADRs trade easily and pay dividends in U.S. dollars and
settle through U.S. clearinghouses. These implementation barriers coupled with t
he desire of investors to diversify internationally created a market for underwr
iters of ADR trusts. There are also Global Depository Receipts (GDRs), Internati
onal Depository Receipts (IDRs), and European Depository Receipts (EDRs), which
accomplish the same benefits already stated but trade in one or more internation
al markets. By early 1998, 429 out of 3,104 companies listed in the NYSE, 437 of
6008 listed in NASDAQ, and 61 out of 690 in the AMEX were foreign companies fro
m over 50 different countries. In addition, 412 out of about 6,200 equity securi
ties traded in the OTC Bulletin Board were from
foreign issuers. Clearly, foreign firms must find listing in the US (or more gen
erally, outside their home market) advantageous. Then, why do foreign firms list
their shares in the US? From the firm s perspective, why is it that listing in
the US is desirable, and the cost-benefit tradeoff a positive one? Listing in th
e US can take many forms. Foreign firms can list their stock directly or through
an American Depositary Receipt (ADR) program. This listing can take place in an
organized exchange (e.g. NYSE, AMEX), NASDAQ, an OTC market, or as a private pl
acement. The listing can also be accompanied by an IPO, or a seasoned equity off
ering. ADRs are issued by a U.S. bank that functions as a depositary, having ADR
being backed by a specific number of shares in the non-U.S. company. ADRs can b
e traded on any of the US stock exchange (NYSE, NASDAQ, or AMEX) and over-the-co
unter. In the case of Rule 144A, they are privately placed and traded. The same
concept for ADR has been spread into other regions with the creation of the glob
al depositary receipts (GDRs), international depositary receipts (IDRs), and Eur
opean depositary receipts (EDRs), which are generally traded or listed in one or
more international markets. As of February 2005, this instrument is used by aro
und 2,100 nonUS issuers from approximately 80 countries. About 500 of those ADRs
are listed in the US exchanges.
ADR PROGRAM TYPES SPONSORED AND UNSPONSORED ADR PROGRAMS Issuers seeking the ben
efits of ADRs generally pursue what are called sponsored ADR programs. They init
iate the process and, working with a depositary bank, actively manage the progra
m going forward. The issuer benefits by making a strategic foray into the U.S. m
arket, controlling its image and reputation in the capital markets. In general,
only sponsored ADRs can be listed on the major stock exchanges or quoted under t
he NASDAQ system. While most new ADR programs are sponsored, many unsponsored pr
ograms (in which the ADRs are created and offered to investors without a company
s active participation) still exist. THE VARIOUS TYPES OF SPONSORED ADR PROGRAM
S
ADR
PROGRAMS
LEVEL I
LEVEL II
LEVEL III
144a
Issuers can choose from four different types of sponsored ADR programs, each wit
h its own set of benefits as well as its own set of legal and regulatory require
ments: Level I, Level II, Level III, and Rule 144A/GDR. In general, American Dep
ositary Receipts are used for two objectives: raising new capital, or increasing
US ownership of shares already issued and trading in the market. There are thre
e basic ADR types, or “levels” as they are usually referred to, designed to achieve
a company’s objectives. LEVEL I ADRS-SPONSORED Level I ADRs are the simplest metho
d for companies to access the US capital markets. Level I ADRs are traded in the
over-the-counter (OTC) market, with bid and ask prices published daily and dist
ributed by the National Daily Quotation Bureau in the pink sheets. The issuing c
ompany does not have to comply with US Generally Accepted Accounting Principles
(GAAP) or provide US Securities and Exchange Commission (SEC) disclosure. Level
I ADRs essentially enable a company to obtain the benefits of a US publicly trad
ed security without altering their current reporting process. Level I DRs accoun
t for more than 60% of the US ADRs. Companies that have Level I ADR programs can
“migrate” to a Level II or Level III ADR program if they desire to trade on the New
York Stock Exchange, the American Stock Exchange, Nasdaq or the OTC Bulletin Bo
ard, or if the company desires to raise capital directly in the United States. L
evel I ADR programs currently require minimal SEC registration: The issuer seeks
exemption from the SEC s traditional reporting requirements under Rule 12g3-2(b
). With that exemption, the company agrees to send to the SEC summaries or copie
s of any public reporting documents required in its home market (including docum
ents for regulatory agencies, stock exchanges, or
direct shareholder communications). The depositary bank, working with the issuer
, also files the Form F-6 registration statement with the SEC in order to establ
ish the program. LEVEL II ADRS- SPONSORED Level II ADRs enable companies to list
their ADRs on NASDAQ, the American Stock Exchange, the New York Stock Exchange
and the OTC Bulletin Board, thereby offering higher visibility in the U.S. marke
t, more active trading, and greater liquidity. Level II ADRs require full regist
ration with the Securities and Exchange Commission. Companies must also meet the
listing requirements of the appropriate stock exchange. Level II ADRs require a
Form 20-F and Form F-6 to be filed with the SEC, as well as meeting the listing
requirements and filing a listing application with the designated stock exchang
e. Upon F-6 effectiveness and approval of the listing application, the ADRs begi
n trading. Level II ADR programs must comply with the full registration and repo
rting requirements of the SEC s Exchange Act, which entails the following: • Form
F-6 registration statement, to register the ADRs to be issued • Form 20-F registra
tion statement, which contains detailed financial disclosure about the issuer, i
ncluding financial statements and a reconciliation of those statements to U.S. G
AAP, to register the listing of the ADRs • Annual reports and any interim financia
l statements submitted on a regular, timely basis to the SEC Level III ADRs-SPON
SORED Level III ADRs enable to companies to list their ADRs on NASDAQ, the Amex,
the New York Stock Exchange or the OTC Bulletin Board, and make a simultaneous
public offering of ADRs in the United States. In the most high-profile form of s
ponsored ADR program, Level III, an issuer floats a public offering of ADRs in t
he United States and lists the ADRs on one of the U.S. exchanges or NASDAQ. The
benefits of a Level III program are substantial: It allows the issuer to raise c
apital and leads to much greater visibility in the U.S. market. Level III ADR pr
ograms must comply with various SEC rules, including the full registration and r
eporting requirements of the SEC s Exchange Act. This entails the following: • For
m F-6 registration statement, to register the ADRs • Form 20-F registration statem
ent, an annual filing that contains detailed financial disclosure from the issue
r, including Form F-1, to register the equity securities underlying the ADRs tha
t are offered publicly in the U.S. for the first time, including a prospectus to
inform potential investors about the company and the risks inherent in its busi
nesses, the offering price for the
securities, and the plan for distributing the shares Annual reports and any inte
rim financial statements submitted on a regular, timely basis to the SEC and to
all registered public shareholders. RULE 144A ADRS Many companies seek to raise
capital in the U.S. markets privately by issuing restricted securities under Rul
e 144A, which do not require SEC review. Rule144A facilitates the trading of pri
vately placed securities by sophisticated institutional investors (also known as
Qualified Institutional Buyers, or QIBs; they must own or manage at least $100
million in securities). SPONSORED VERSUS UNSPONSORED DR PROGRAMS Unsponsored pro
grams are issued by a depository in response to the market demand for the shares
of a foreign company, but without a formal agreement between the depository and
the foreign company. Once a depository creates an unsponsored ADR facility it i
s common for other depositories to clone it, creating numerous unsponsored facil
ities which are considered fungible. In contrast sponsored program are issued by
an exclusive depository appointed by the foreign company under a deposit agreem
ent, the depository bank agrees to issue ADR certificates and the issuer agrees
to pay certain costs of the depository such as such as dividend disbursement fee
s.
ADAVANTAGES OF USING ADRs • • • The main advantage of buying an American Depositary Re
ceipt rather than the foreign stock itself is the ease of the transaction. ADRs
are a great way to invest abroad without having to convert U.S. dollars to many
different currencies Another advantage offered by an ADR is that if the foreign
stock does pay dividends, the investment bank will convert the dividends to U.S.
dollars and remit the payment to you. In addition, if the dividend is subject t
o foreign tax, the investment bank will withhold the tax so you don t have to wo
rry about it Therefore, if exchange rates were to move against you, it would hur
t the value of your ADR. If you are considering investing in foreign stocks, ADR
s should be part of your investment decision; however, you should become familia
r with all the risks associated with foreign investing before making an investme
nt decision.
•
Advantages to Issuers o Provides a simple means of diversifying a company’s shareh
older base and accessing important U.S. market o May increase the liquidity of t
he underlying shares of the issuer
o ADRs can be used as an equity financing tool in both M&A transactions and ESOP
s for U.S. subsidiaries o Helps increase a non-U.S. company’s visibility and name
recognition in the U.S. investor community o May raise capital in the U.S. marke
t through some types of programs Advantages to Investors o Offers a convenient m
eans of holding foreign shares o Simplifies the trading & settlement of foreign
securities; ADRs trade and settle just like U.S. securities o Offers lower tradi
ng & custody costs when compared with shares bought directly in the foreign mark
et
DISADVANTAGES OF USING ADRs Despite all the described advantages, the ADRs do re
present the same asset as local shares but may not be “fully fungible” in several co
untries (meaning they cannot be seamless exchanged with its home market security
). For example, until 2001 there was no two-way fungibility for Indian ADRs; in
that environment, investors could convert ADRs into local shares but they could
not reconvert them back to ADRs. This and other capital control regulations prev
ent risk less arbitrage opportunities to exist between ADRs and the underlying s
tock and are one of the reasons that premiums/discounts exist in the ADR market.
PROCEDURES AND MECHANICS OF ISSUING ADRS
ADRs are issued by a US bank, such as J. P. Morgan or The Bank of New York, whic
h functions as a depositary, or stock transfer and issuing agent for the ADR pro
gram. The foreign, or local shares, remain on deposit with the Depositary’s custod
ian issuer’s home market. Each ADR is backed by a specific number of an issuer’s loc
al shares (e.g. one ADR representing one share, one ADR representing ten shares,
etc.) This is the ADR ratio, which is designed to set the price of each ADR in
US dollars. Financial information, including annual reports and proxies are deli
vered to US holders on a consistent basis by the Depositary. The dividends are c
onverted into dollars and paid to ADR holders by the Depositary.
KEY COMPONENTS OF A SUCCESSFUL ADR PROGRAM Successful ADR programs are actively
traded and widely held. They typically share the following attributes: Attractiv
e market, industry and equity story Active communication of the story to US inve
stors Investor friendly ADR structure (ratio of shares to ADRs) Research and mar
ket-making by US investment banks and brokers
US LISTINGS – ADRs THE OVER-THE-COUNTER MARKET Over-The-Counter (OTC) market trade
s are listed in the "Pink Sheets". The Pink Sheets are published daily by the Na
tional Quotation Bureau and represent a non-automated listing of stocks, which t
rade outside the three major exchanges. Listing fees are paid by the broker deal
er who seeks the listing. The broker-dealer must file a National Quotation Form
211, which includes updated financials of the company and other relevant informa
tion. Listing on the "Pink Sheets" is available for sponsored Level I and unspon
sored ADR programs, while a listing on NASDAQ, AMEX or the NYSE is only availabl
e to Level II and III sponsored programs.
THE NATIONAL EXCHANGES Issuers of Level II or III sponsored ADRs will benefit in
several ways from a listing on any one of the three national exchanges. The inc
reased visibility to the US investment community, which a listing provides, toge
ther with access to the automated trading and efficient market pricing available
on the national exchanges, should lead to a significant expansion of the issuer
s investor base. Importantly, listing fees for ADRs are generally less expensiv
e than those for ordinary shares in the US. A description of the three exchanges
follows
NASDAQ (NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED QUOTATION) NASDAQ,
the first electronic stock market, operates a system of competing market makers
linked to investors by sophisticated telecommunications networks. There are two
options for listing; the Small Cap Market which, as its name implies caters for
smaller companies, and the National Market System, where the majority of NASDAQ
securities are listed. While criteria for listing on these two markets differ, t
he ADR listing charges are very similar. The NASD also operates PORTAL, the mark
et for securities issued under Rule 144(a).
AMEX (AMERICAN STOCK EXCHANGE) AMEX operates an auction market system, intended
to facilitate trading between buyers and sellers with minimum intervention from
professional dealers. Each listed stock is handled by a specialist unit. There a
re special listings requirements for non-US issuers, with "Alternate" requiremen
ts intended to cover companies which are financially sound but which, because of
the nature of their business, would not qualify under the "Regular" requirement
s.
NYSE (NEW YORK STOCK EXCHANGE) The NYSE, like AMEX, operates an auction market s
ystem where stock prices are determined largely by public orders competing with
each other. By value of shares listed and by volume of trading, the NYSE is the
largest exchange in the United States. Foreign companies listing on the NYSE can
choose to qualify either under the "Alternate Listing Standards" designed speci
fically for non-US corporations, or under the "Original" or "Alternate Original"
standards which apply to US domestic corporations. Each of the exchanges sets a
dditional standards concerning corporate governance. However, non-US corporation
s may be exempted from these requirements upon application. Confidential meeting
s can be arranged with the exchanges in advance of any decision-making to discus
s specific concerns or exemptions.
FOLLOWING ARE A FEW INDIAN ADRs TRADING IN US HDFC BANK LTD ICICI BANK LTD INFOS
YS TECHNOLOGIES LTD VIDESH SANCHAR NIGAM LTD WIPRO LTD REDIFF.COM INDIA LTD
HOW ARE ADRs PRICED? • • Let us assume that Russian Vodka Ltd, trades on a Russian s
tock exchange at 127 Russian roubles This is equivalent to US$4.58 – assume this f
or simplicity
• • • •
Now, a US bank purchases 30 million shares of Russian Vodka Ltd. and re-issues t
hem in the US at a ratio of 10:1 This means that each ADR you purchase is worth
10 shares on the Russian stock exchange A quick calculation tells us that each A
DR should have an issue price of US$45.80 (US$4.58 per share X 10 shares) – since
10 shares equal 1 ADR Once an ADR is priced and sold, its subsequent price is de
termined by supply and demand factors, like any ordinary share
ADR ARBITRAGE OPPORTUNITIES Several Indian companies actively trade on the and N
ew York Stock Exchanges and due to the time differences, market news, sentiments
etc. sometimes the prices of the DR(Depository receipt) trade at discounts or p
remiums to the underlying stock. This presents a knowledgeable fund manager an a
rbitrage opportunity, where he buys the DR abroad and sells the same stock in In
dia at a higher price (the difference being the profit). Same DRs trade during I
ndia market hours offering a live arbitrage opportunity. As there is very little
risk in such trades the gap between the DR and underlying stock is minimal. DRs
which trade in the US markets offer better gaps, but there is the overnight ris
k to be factored in. Hence the fund manager must take into consideration the loc
al market conditions before buying the stock in the US, as he must be confident
of the selling off the stock the next morning in India at the profitable gap. On
ce the stock is bought, arrangements are made to deliver the stock in India, whi
ch involves several procedures (stock is borrowed at times for this). Once the s
tock is delivered in India the proceeds are allowed to be repatriated and the pr
ocess repeated. There are some stocks which are also allowed to be bought in Ind
ia and converted into the DR forms, which is attractive if the DR is trading at
a premium to the Indian stock price.
Main Reasons for Discrepancies between the Prices of ADR and Local Shares There
are significant limitations for an investor to buy an ADR on the NYSE and sell i
t on a local exchange in the same day. Fees and other transaction costs are also
incurred in this transaction. Finally, depending on the ADR level and the local
government regulations, different rights and protections are accompanied by the
certificate. This section in the paper will discuss the main reasons for discre
pancies between the prices of ADRs and local shares while questioning whether th
ey should be subjected to the law of one price.
Are ADRs and local shares the same assets? Despite ADRs being certificates that
represent the underling foreign shares that are being held custody outside the U
.S., ADRs and local shares are different certificates and may not be “fully fungib
le” in several countries. For example, until 2001 there was no two-way fungibility
for Indian ADRs; in that environment, investors could convert ADRs into local s
hares but they could not reconvert them back to ADRs. In 2001, the Indian Reserv
e Bank created the regulation that allowed two-way fungibility between ADRs and
local shares with restrictions, however, to what shares could be converted to AD
Rs. Under this regulation, only local shares that were created through conversio
n of ADRs can be reconverted. The high demand for Indian shares in the U.S. duri
ng the past few years and the relatively low volume of ADRs available for invest
ors resulted in most Indian ADRs trading at a premium over their local shares. B
ecause of the fungibility problem, however, this premium cannot be arbitraged aw
ay by investors so companies such as Infosys and Wipro are making secondary ADR
offerings with the goal of increasing liquidity and arbitrage the price differen
tial themselves. Correlation to stock index between ADRs and local shares Anothe
r important source of disparity between ADR prices and its local traded securiti
es are the co-movements between the stocks and the markets they are traded rathe
r than where the company is established. A good example of this correlation with
the US market is the Infosys ADR, which has been following the technology compa
nies in the NASDAQ much more closely than the Indian stock market. Even more int
eresting, is the ADR premium of Wipro, which has been presenting a much more mod
est premium compared to Infosys. Considering both companies are in the same sect
or and in the same market, the differences between the ADR premium of Wipro and
Infosys can only be explained by differences in investor’s perception rather than
true valuation fundamentals.
Limits to Arbitrage Opportunities
Despite all of the advantages of the ADR, they are not seamless interchangeable
with the local underlying stock. While the previous section of this paper explor
ed the potential reasons for discrepancies between the ADR and the local stock,
this section will describe the difficulties of acting on those discrepancies in
order to generate profitable arbitrage.
The basic mechanics of the execution of the arbitrage from the perspective of an
US investor would be the following: 1. U.S. investor acquires ADR by the ask pr
ice with U.S. dollars; 2. ADR is converted into the local security; 3. Local sec
urity is sold in the local market in local currency at the bid price; 4. Local c
urrency amount is then converted into U.S. dollar at the ask exchange rate. Taxe
s, fees, liquidity issues, bid/ask spreads and restrictions can occur at any poi
nt of the transaction. Operational issues There are several operational issues t
hat make the mechanics of the arbitrage difficult. The first one is related to t
ime zone, which could potentially shrink trading sessions overlap, making it dif
ficult for the arbitrage to occur simultaneously or even in the same day. Additi
onally, public information about the companies with ADR listing will also hit th
e market in local business hours, delaying reflections is the price of the ADR.
Low liquidity for certain ADRs There are many instances of firms with multiple l
istings in different markets and countries having very low liquidity and trading
in some of their listed securities. In this case, prices and premiums/discounts
do not mean anything since these prices are not applicable for large trades (so
metimes these issues trade less than 1,000 shares/day) and differences in prices
cannot be exploited (large inefficiencies in bid and ask spreads, higher transa
ction costs of trading small lots, etc.). Transaction costs Transactions costs a
re probably one of the major inhibitors of arbitrage opportunities. Not every in
vestor can maintain trading accounts in different countries and sustain minimal
levels of investment and costs to be able to profitably exploit ADR-local shares
arbitrage opportunities. Transaction costs oftentimes add up to a significant a
mount and have to be add up to the stock price (either the ADR or local stock) s
o as to calculate the “full price” for the stock and compare it to the price of the
ADR (or vice versa). Although these costs may not disallow arbitrage opportuniti
es to emerge, they create what we call a no-arbitrage band.
PROCEDURE FOR ISSUE OF ADRs/GDRs
1. Approvals The issue of ADRs/GDRs requires the approvals of Board of Directors
, Shareholders, Ministry of Finance, Ministry of Company Affairs, Reserve Bank o
f India, Stock Exchange and Financial Institutions.
2. Appointment of Intermediaries ADR/GDR normally involve a number of Intermedia
ries including lead Manager, Co-Manager, Overseas Depository Banks, Listing Agen
t, Legal Advisor, Printer, Auditors and Underwrites.
3. Principal Documentation The principal documents required to be prepared inclu
de subscription agreement, Depository Agreement, Custodian Agreement, Agency Agr
eement and Trust Deed.
4. Pre and Post Launch Additional Key Actions Apart from obtaining necessary app
rovals, Documentation, additional key actions necessary for Making the issue of
ADR/GDR a success, include (i) Co appointment of various agencies and proper ins
titution of a Board Sub-Committee (ii) Selection of Syndicate Members (iii) Cons
titution of a task force for due diligence (iv) Listing (v) Offering Circular (v
i) Research Papers (vii) Pre-marketing (viii) Timing, pricing and size of the is
sue (ix) Road shows (x) Book Building and pricing of the issue (xi) Closing of t
he issue (xii) Allotment
US SECURITIES AND ECXHANGE COMPLIANCE
The following table outlines the different filings required by the SEC in the US
, the way ADRs are traded and whether new capital can be raised, according to th
e type of ADR program issued
GDR - Filings for any US tranche will depend on which structure is chosen: Normal
y a Level III or Rule 144(a) program.
The right granted to existing shareholders of a company to receive or to subscri
be to new shares under a "rights" or "bonus" issue is also extended to registere
d ADR holders. However, a US investor can only take possession of these rights i
n the US if the issuer undertakes to register the offering, or if an exemption f
rom registering it is available. In all other cases, the depositary must arrange
to sell the entitlement to the rights in the home country and distribute the ca
sh proceeds to the ADR holders.
Form F-6 Form F-6 is used for the registration of depositary shares as evidenced
by ADRs (or GDRs) that are issued by a depositary bank against the deposit of s
ecurities of a foreign issuer under the Securities Act of 1933. The information
is prepared by the company under the guidance of the depositary bank at the ince
ption of either an unsponsored or sponsored program. Form 20-F A Form 20-F is fi
led as a registration statement/annual report by issuers of Level II or III
sponsored ADRs/GDRs. It is a comprehensive report of all material business activ
ities and financial results and must comply with US GAAP. The Form 20-F consists
of four distinct parts. Part I requires a full description of the issuer s busi
ness, details of its property, any outstanding legal proceedings, taxation and a
ny exchange controls that might affect security holders. Part II requires a desc
ription of any securities to be registered, the name of the depositary bank for
the DRs and all fees to be charged to the holders of DRs. Part III requires info
rmation on any defaults upon senior securities. Part IV requires various financi
al statements to be submitted. Form F-1 Foreign issuers planning a public offeri
ng in the US via a Level III DR program must register the proposed new securitie
s by filing Form F-1. This form requires the following information to be include
d in the prospectus: use of proceeds, summary information, risk factors and rati
o of earnings to fixed charges, determination of offering price, dilution, plan
of distribution, description of securities to be registered, name of legal couns
el and disclosure of commissions.
GAAP Conversion (Level II and Level III ADR Programs) The process of converting
financial statements to the US standard of Generally Accepted Accounting Princip
les (GAAP) can be complex but depends on the compatibility of accounting procedu
res in the issuer s home country with those of the US. Regulated industries such
as banking may find the costs of conversion more onerous than those companies i
n less regulated sectors.
Tax Compliance US Tax Non-US companies are not responsible for complying with th
e US tax requirements regarding dividend payments made in the US under their DR
program. The depositary bank handles any such issues. Local Tax The depositary p
rovides registered GDR holders with tax certification forms prior to each paymen
t date and returns them to the issuer so that the correct tax can be deducted ac
cording to local regulations.
‘Indian ADRs Will Shine in 2009’
(Created by EQUITIES Magazine)
India’s cheaper than it’s been in decades and offering 5% growth. By Anthony W. Hadd
ad Like many emerging markets, the past year was a difficult one for India. Afte
r five years of 9% GDP growth and a booming stock market, a global recession, a
group of terrorists, and an Enrontype scandal at Satyam helped shed 60% from sha
res in the country’s companies and 20% of the value of the rupee against the dolla
r. Though its growth is expected to be trimmed by more than a third this year, t
his country of more than a billion people is still estimated to grow by more tha
n 5%, beating even China. And the growth rates of the past are expected to retur
n in years to come. Since the reforms of the early 1990s, India’s development has
always been more a question of “when” than “if.” After all, the country’s growth was never
based on exporting cheap, labor-intensive goods to developed countries. It was
about the development of a consumption-based domestic market on the back of tech
nology, services, and natural resources. India is the largest democracy in the w
orld. With the exception of the recent scandal, it uses conservative accounting
practices. English is its official language of business, and its students compet
e with Western students in the global marketplace. In the recent past, these qua
lities have made India a popular destination for investment capital. In the very
near future, it will return as such. The country still has robust economic grow
th, contained inflation, and a growing middle class whose current spending poten
tial dwarfs the level it will soon become. Millions of Indians have benefited fr
om its years of economic expansion, but millions more still live in abject pover
ty. Its road network is the second largest in the world yet still in need of upg
rades. Its cities can dazzle with light, but power outages are common. Over the
next five years, India intends on investing a half-trillion dollars on infrastru
cture. One company that can benefit from this is Sterlite Industries Ltd. (NYSE:
SLT), India’s largest copper producer. Valued at less than $4 billion, the stock
trades at a 75% discount to its 2007 high, has a little less than $4 billion in
cash and equivalents on the books, and is virtually debt free. Like many other c
ommodities, the price of copper is down to multiyear lows, affecting Sterlite’s bo
ttom line. The question remains exactly how long the company can survive with de
creased demand, a glut of copper, and a weak economy. But with that much cash—and
at the extremely
low price it can produce copper—the company seems to be positioned well to survive
this downturn, and perhaps even grow at robust rates in the latter half of this
year. You may have heard about the incredible expansion of mobile phones in Ind
ia. But keep in mind that it’s still going on. The country adds millions of new us
ers to its network every month, and still only 20% to 30% of people have them to
day. Mahanagar Telephone Nigam Ltd. (NYSE: MTE), a provider of telecommunication
s services in Delhi and Mumbai, is down 70% from its highs to a market cap of le
ss than $1 billion. It’s holding $700 million in cash and is debt free. The compan
y raised its dividend in September and has a dividend yield of about 5% at the c
urrent numbers. Mahanagar may be tempting at these levels. A story about India s
eems incomplete without some mention of its outsourcing companies. You’ve probably
spoken to employees from WNS Limited (NYSE: WNS) before. Its clients include ab
out 20 U.S. retail banks, 10 financial advisory firms, electronics giants, pharm
aceutical companies, and more. It has more than 20,000 employees. A smaller comp
any, WNS had been hit harder than Sterlite, but it’s mounted a nice gain off its l
ows. With about a $300 million (and growing) market cap, the company stands at a
n 80% discount to its highs. The company has less cash on hand than many will fe
el comfortable with. Although I expect them to survive, waiting for their March
2009 annual filing seems prudent, even at the cost of missing out on the early g
ains. India’s rising middle class will create even more opportunities. In 2005, it
s middle class was about 5% of the population. By 2015, it is expected to rise t
o 20% and by 2025 to more than 40%. While much of this segment’s money goes to con
sumables and luxury items, some of it ends up as investments with financial inst
itutions. After all, the middle class can afford to send their children to schoo
l, buy businesses, and retire younger. This is why some of the biggest gains we’ll
see in India will be in financials. This long-term trend in India also has many
shortterm opportunities right now. Financials are cheaper today than they’ve been
in years. And though it’s current growth pales in comparison to previous years, i
t dwarfs the growth, or lack thereof, that we’re seeing in most of the largest eco
nomies. (The U.S. economy is expected to contract by 2%, Japan by 4%, German by
2.5%, and Britain by 3%.) HDFC Bank Ltd. (NYSE: HDB) is a private sector bank an
d financial services company. The $7.5 billion company engages in retail banking
, wholesale banking, and treasury operations. It has been affected by the econom
ic downturn, but it’s all overblown, and the company doesn’t deserve the 60% loss in
its price. Asset growth has slowed, but it continues to grow steadily. Manageme
nt believes that loans will grow at 20% during the next year, marginally lower t
han the previous year. This is largely because of the lower demand for property.
The company believes that customers are waiting for property prices to drop.
India’s second-largest private sector lender beat forecasts with a 45% jump in pro
fits in its most recent quarterly report, but its shares have fallen. Banks in I
ndia are dealing with rising defaults by customers, caused by high borrowing cos
ts and a slowing economy that has hit some jobs. The company’s gross non-performin
g loans rose to $392 million in the most recent quarter, up 14% from July to Sep
tember 2008. “In the kind of environment we are going through, [nonperforming loan
s] are expected to go up,” Executive Director Paresh Sukthankar said on CNBC. “With
adequate provisioning, we are not concerned by the slight rise.” HDFC has seen 30%
or better growth in net profit for 27 consecutive quarters. It has raised its d
ividend five times in the past six years. It’s sitting on $3.5 billion in cash (a
little less than half its market cap) and has a 15% ROE. Quarterly revenue growt
h for the most recent quarter is up 58% over the 2007 quarter. The company pays
a paltry dividend (about 1%), but this kind of growth isn’t cheap. While I’d be a fo
ol to promise that any banking company doesn’t have potential time bombs, HDFC app
ears healthy, and I expect a 25% capital gain by the end of the year, bringing i
t into the upper $60s. And while that’s attractive, it’s nothing compared to what HD
FC will do in coming years. Not only will it benefit from India’s continued boom,
but also it’s not difficult to imagine it entering the U.S. and U.K. markets. Afte
r all, they understand how to grow, and it’s a more open playing field these days.
ICICI Bank (NYSE: IBN) is an Indian bank in the United States, Canada, and the
United Kingdom, where the company is gaining customers and increasing its deposi
t base by offering higher interest rates. But that’s not hurting their bottom line
. In the fourth quarter of 2008, the company’s profits were up 25% over the same p
eriod in 2007. The $7.5 billion bank offers commercial banking, treasury and inv
estment banking, and other products such as insurance and asset management. The
company has about 1,500 branches around the world, and it expects to open anothe
r 500 in the next two years. Having fallen from the low $70s to the low teens, I
CICI looks like a steal. Revenue has shot up 40% in the fourth quarter over 2007
. Its P/E is around 10, and its trailing yield (dividends over the last 12 month
s/the current stock price) is nearly 4%. (Although I wouldn’t bet the bank that IC
IC will give that out this year.) With a quarter of its loan book coming from in
ternational business, investors are still worried about problems that might appe
ar amid the current crises. ICICI has slowed credit growth and is looking to pre
serve capital. This is part of the reason we won’t likely see the full dividend th
is year, but I don’t see the growth story being interrupted. I expect the company
to gain 50% and pass the $20 mark this year.
GLOBAL DEPOSITORY RECEIPTS
A negotiable certificate held in the bank of one country representing a specific
number of shares of a stock traded on an exchange of another country To raise m
oney in more than one market, some corporations use global depositary receipts (
GDRs) to sell their stock on markets in countries other than the one where they
have their headquarters. The GDRs are issued in the currency of the country wher
e the stock is trading. For example, a Mexican company might offer GDRs priced i
n pounds in London and in yen in Tokyo. Individual investors in the countries wh
ere the GDRs are issued buy them to diversify into international markets. GDRs l
et you do this without having to deal with currency conversion and other complic
ations of overseas investing. The objective of a GDR is to enable investors in d
eveloped markets, who would not necessarily feel happy buying emerging market se
curities directly in the securities’ home market, to gain economic exposure to the
intended company and, indeed, the overall emerging economy using the procedures
with which they are familiar. Global Depository Receipt (GDR) - certificate iss
ued by international bank, which can be subject of worldwide circulation on capi
tal markets. GDR s are emitted by banks, which purchase shares of foreign compan
ies and deposit it on the accounts. Global Depository Receipt facilitates trade
of shares, especially those from emerging markets. Prices of GDR s are often clo
se to values of related shares. GDRs are securities available in one or more mar
kets outside the company’s home country. The basic advantage of the GDRs, compared
to the ADRs, is that they allow the issuer to raise capital on two or more mark
ets simultaneously, which increases his shareholder base. They gained popularity
also due to the flexibility of their structure. GDRs are typically denominated
in USD, but can also be denominated in Euros. GDRs are commonly listed on Europe
an stock exchanges, such as the London Stock Exchange (LSE) or Luxembourg Stock
Exchange, or quoted on SEAQ (Stock Exchange Automated Quotations) International,
and traded at two other places besides the place of listing, e.g. on the OTC ma
rket in London and on the private placement market in the US. Large part of the
GDR programs consists of a US tranche, which is privately placed and a non-US tr
anche that is sold to investors outside the United States, typically in the Euro
markets. An overwhelming majority of DR programs by companies from Central and
Eastern European countries are established as GDRs, typically listed in London a
nd traded by qualified institutional investors in Euromarkets under regime of so
called Regulation S and some of them also in the American OTC markets in accord
ance with Rule 144A.
Two different GDR structures When GDRs are structured with a Rule 144(a) offerin
g for the US and a "Regulation S" offering for non-US investors, there are two p
ossible options for the structure. Unitary Structures Under a unitary structure,
a single class of DRs is offered both to QIBs in the US and to offshore purchas
ers outside the issuer s domestic market, in accordance with Regulation S. All D
Rs are governed by one Deposit Agreement and all are subject to deposit, Withdra
wal and resale restrictions. Bifurcated Structure Under a bifurcated structure,
Rule 144(a) ADRs are offered to QIBs in the US and Regulation S DRs are offered
to offshore investors outside the issuer s domestic market. The two classes of D
Rs are offered using two separate DR facilities and two separate Deposit Agreeme
nts. The Regulation S DRs are not restricted securities, and can therefore be de
posited into a "side-by-side" Level I DR program, and are not normally subject t
o restrictions on deposits, withdrawals or transfers. However, they may be subje
ct to temporary resale restrictions in the US.
ADVANTAGES OF GDR/EDR o EDRs/GDRs can be launched as part of a private or public
offering. o They allow a single fungible security to be placed in one or more i
nternational markets, thus giving access to a global investor base. o They may a
llow the issuer to overcome local selling restrictions to foreign share ownershi
p. o GDRs are eligible for settlement through Clearstream, Euroclear.
DISADVANTAGES If the US tranche of a GDR is structured as a Rule 144(a) private
placement, the disadvantages of an RADR program will apply. If it is structured
as a Level III program, the reporting and cost features of such programs will ap
ply.
INDIAN GDRs
THE COMPREHENSIVE GDR LISTING
GDR Companies
# euro convertible bond **adjusted for bonus
Industry Segregation
Date Of GDR Issue 03-Feb-94 20-Mar-95 27-Oct-94 27-May-94 16-Nov-93 04-Mar-96 21
-Sep-94 14-Apr-94 21-Jun-94 02-Jul-96 19-May-94 18-Jul-94 07-Oct-94 07-Jul-94 19
-Jul-94 30-Nov-95 17-Feb-94 06-Oct-94 04-Nov-99 04-Mar-94 25-Nov-92 09-Jun-94 26
-Nov-93 02-Aug-95 22-Jul-93 08-Jul-94 21-Sep-94 11-Oct-94 22-Feb-94 28-Apr-95 25
-Jan-94 18-Jan-94 21-Mar-96 02-Aug-96 22-Sep-99 11-Mar-99
Size Shares GDR Of GDR per Issue Issue GDR Price **(US$) US $ Mill 125.00 137.77
110.00 35.00 50.00 125.00 100.00 125.00 70.00 50.00 25.00 48.00 40.00 40.00 55.
00 30.00 100.00 61.11 22.50 45.00 90.00 100.00 80.00 50.00 72.00 100.00 76.00 90
.00 60.00 86.25 125.00 100.00 50.00 230.00 315 70.38 1.0 3.0 1.0 1.0 1.0 3.0 2.0
1.0 1.0 1.0 5.0 1.0 1.0 1.0 1.0 2.0 5.0 5.0 6.0 5.0 1.0 1.0 1.0 4.0 1.0 1.0 1.0
1.0 1.0 1.0 1.0 1.0 10.0 5.0 5.0 0.5 9.78 12.79 16.89 8.77 9.20 14.40 254.00 10
.67 12.60 7.56 13.55 11.16m 9.30 8.39 16.60 8.05 15.94 12.75 9.67 26.28 12.98 20
.50 5.95 9.30 10.73 16.00 2.05 4.23 6.77 16.60 15.01 4.51 11.37 11.50 9.80 34
Arvind Mills Ashok Leyland Bajaj Auto Ballarpur Ind.# Bombay Dye BSES Ltd Centur
y Textiles CESC Core Parent Crompton Greaves DCW Dr. Reddy s E. I. Hotels EID Pa
rry Finolex Cab Flex Industries G.E. Shipping G.N.F.C GAIL Garden Silk Grasim (1
st) Grasim (2nd) Guj Ambuja # Himachal Futuri Hindalco (1st) Hindalco (2nd) Hind
ustan Dev. India Cements Indian Alum. Indian Hotels Indian Rayon Indo Gulf Indo
Rama ICICI ICICI (ADR) Infosys
Textiles Autos Autos Paper Textiles Power Diversified Power Pharma Electrical Di
versified Pharma Hotels Fertiliser Cables Packaging Shipping Fertiliser Oil & Re
fineries Textiles Diversified Diversified Cement Telecomm. Aluminium Aluminium D
iversified Cement Aluminium Hotels Diversified Fertiliser Textiles Finance Finan
ce IT
IPCL ITC J.K. Corp Jain Irrig JCT Ltd. Kesoram Ind L & T (1st) L & T (2nd) Mah &
Mah MTNL NEPC Micon Nippon Denro# Oriental Hotels Ranbaxy Labs Raymond Woolen R
eliance Reliance (2nd) Reliance Petroleum S.A.I.L. Satyam Infoway S.I.E.L. Sangh
i Poly SIV Ind SPIC SBI Sterlite India# Tata Electric Telco (1st) Telco (2nd) Tu
be Invest United Phos. Usha Beltron Videocon Int. VSNL Wockhardt
Petrochemicals Cigarettes Diversified Plastics Textiles Diversified Diversified
Diversified Autos Telecom Diversified Steel Hotels Pharma Textile Diversified Di
versified Diversified Steel IT Diversified Textiles Textiles Fertiliser Banking
Diversified Power Autos Autos Cycles & Acc. Pesticides Cables Electronics Teleco
mm. Pharma
08-Dec-94 13-Oct-93 17-Oct-94 25-Feb-94 29-Jul-94 31-Jul-96V 18-Nov-94 01-Mar-96
30-Nov-93 04-Dec-97 07-Nov-94 03-Mar-94 14-Dec-94 29-Jun-94 09-Nov-94 27-May-92
15-Feb-94 18-Oct-99 07-Mar-96 19-Oct-99 14-Oct-94 28-Jul-94 01-Aug-94 28-Sep-93
03-Oct-96 22-Dec-93 22-Feb-94 15-Jul-94 06-Aug-96 20-May-94 25-Feb-94 06-Oct-94
26-Jan-94 24-Mar-97 25-Feb-94
85.00 68.85 55.00 30.00 45.00 30.00 150.00 135.00 74.75 418.53 47.70 125.00 30.0
0 100.00 60.00 150.00 300.00 100 125.00 75.00 40.00 50.00 45.00 65.00 369.95 100
.00 65.00 115.00 200.00 45.60 55.00 35.00 90.00 527.00 75.00
3.0 1.0 1.0 1.0 10.0 1.0 2.0 2.0 1.0 2.0 1.0 10.0 1.5 1.0 2.0 2.0 2.0 15.0 15.0
1.0 3.0 5.0 1.0 5.0 2.0 1.0 100.0 1.0 1.0 1.0 1.0 1.0 1.0 0.5 1.0
13.87 7.65 8.00 11.13 16.96 1.60 16.70 15.35 4.46 11.958 3.18 21.36 12.75 19.38
10.61 16.35 23.50 23.0 12.97 18.0 14.64 9.56 6.37 11.15 14.15 17.86 710.00 8.75
14.25 6.58 20.50 10.70 8.10 13.93 14.35
EUROPEAN LISTINGS LONDON AND LUXEMBOURG At the time of writing, most GDRs have c
onsisted of a Rule 144a offering in the US and a Euromarkets element. With these
instruments there is no listing in the US, but many are listed in London or Lux
embourg, the traditional exchanges for listing euro market instruments. A listin
g on a recognized stock exchange adds to the visibility of the issue and provide
s a wider potential market; many institutional investors have limits on the numb
er of unlisted securities, or securities which are not listed on certain specifi
ed exchanges, in which they can invest. Both the London and Luxembourg Stock Exc
hanges list GDRs, and since both are governed by the same European Union directi
ve, their listing requirements are broadly similar. The differences lie mainly i
n the level of disclosure, the ease and speed with which listings can be obtaine
d and the level of visibility afforded by the listing. Listings on the London St
ock Exchange are generally arranged by the Lead Manager of the GDR issue acting
as Listing Agent, while for Luxembourg the Listing Agent must be a Luxembourg ba
nk with a seat on the Luxembourg Stock Exchange. This is not normally a service
the Lead Manager of the GDR issue can provide directly. A listing on the London
Stock Exchange makes it easier for a GDR to be quoted on SEAQ International, the
exchange s electronic price quotation service, although such a listing is not a
requirement for trading on SEAQ.
REGULATORY PROVISIONS FOR ADR/GDR The issue of ADR/GDR by India Inc. is governed
by following legal provisions: 1. Section 6 (3) (b) of Foreign Exchange Managem
ent Act (FEMA), 1999 reads as follows: 6. Capital account transactions. – (1) Subj
ect to the provisions of sub-section (2), any person may sell or draw foreign ex
change to or from an authorized person for a capital account transaction. (2) Th
e Reserve Bank may, in consultation with the Central Government, specify(a) Any
class or classes of capital account transactions which are permissible; (b) the
limit up to which foreign exchange shall be admissible for such transactions: Pr
ovided that the Reserve Bank shall not impose any restriction on the drawl of fo
reign exchange for payments due on account of amortization of loans or for depre
ciation of direct investments in the ordinary courts of business.
(3) Without prejudice to the generality of the provisions of sub-section (2), th
e Reserve Bank may, by regulations, prohibit, restrict or regulate the following
(a) Transfer or issue of any foreign security by a person resident in India; (b)
Transfer or issue of any security by a person resident outside India
FOREIGN EXCHANGE MANAGEMENT ACT (FEMA) An Indian corporate can raise foreign cur
rency resources abroad through the issue of American Depository Receipts (ADRs)
or Global Depository Receipts (GDRs). Regulation 4 of Schedule I of FEMA Notific
ation no. 20 allows an Indian company to issue its Rupee denominated shares to a
person resident outside India being a depository for the purpose of issuing Glo
bal Depository Receipts (GDRs) and/ or American Depository Receipts (ADRs), subj
ect to the conditions that:
•
•
• •
• •
the ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Curr
ency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism
) Scheme, 1993 and guidelines issued by the Central Government there under from
time to time The Indian company issuing such shares has an approval from the Min
istry of Finance, Government of India to issue such ADRs and/or GDRs or is eligi
ble to issue ADRs/ GDRs in terms of the relevant scheme in force or notification
issued by the Ministry of Finance, and There are no end-use restrictions on GDR
/ADR issue proceeds, except for an express ban on investment in real estate and
stock markets. The FCCB issue proceeds need to conform to external commercial bo
rrowing end use requirements; in addition, 25 per cent of the FCCB proceeds can
be used for general corporate restructuring Is not otherwise ineligible to issue
shares to persons resident outside India in terms of these Regulations. There i
s no limit up to which an Indian company can raise ADRs/GDRs. However, the India
n company has to be otherwise eligible to raise foreign equity under the extant
FDI policy.
A company engaged in the manufacture of items covered under Automatic route, who
se direct foreign investment after a proposed GDRs/ADRs issue is likely to excee
d the percentage limits under the automatic route, or which is implementing a pr
oject falling under Government approval route, would need to obtain prior Govern
ment clearance through FIPB before seeking final approval from the Ministry of F
inance.
WHO CAN ISSUE ADR/GDR? A company can issue ADR/GDR, if it is eligible to issue s
hares to person resident outside India under the FDI Scheme. WHO CANNOT ISSUE AD
R/GDR? An Indian listed company, which is not eligible to raise funds from the I
ndian Capital Market including a company which has been restrained from accessin
g the securities market by the Securities and Exchange Board of India (SEBI) wil
l not be eligible to issue ADRs/GDRs. o Erstwhile OCBs who are not eligible to i
nvest in India through the portfolio route and entities prohibited to buy, sell
or deal in securities by SEBI will not be eligible to subscribe to ADRs / GDRs i
ssued by Indian companies. o
END USE RESTRICTIONS No end-use restrictions except for a ban on deployment / in
vestment of such funds in Real Estate or the Stock Market. LIMIT OF OFFERINGS Th
ere is no monetary limit up to which an Indian company can raise ADRs / GDRs.
VOTING RIGHTS Voting rights on shares issued under the Scheme shall be as per th
e provisions of Companies Act, 1956 and in a manner in which restrictions on vot
ing rights imposed on ADR/GDR issues shall be consistent with the Company Law pr
ovisions. RBI regulations regarding voting rights in the case of banking compani
es will continue to be applicable to all shareholders exercising voting rights.
PRICING OF ADR/GDR The pricing of ADR / GDR issues should be made at a price not
less than the higher of the following two averages: (i) The average of the week
ly high and low of the closing prices of the related shares quoted on the stock
exchange during the six months preceding the relevant date; (ii) The average of
the weekly high and low of the closing prices of the related shares quoted on a
stock exchange during the two weeks preceding the relevant date.
TWO WAY FUNGIBILITY SCHEME Under the limited Two-way fungibility Scheme, a regis
tered broker in India can purchase shares of an Indian company on behalf of a pe
rson resident outside India for the purpose of converting the shares so purchase
d into ADRs/GDRs. The operative guidelines for the same have been issued vide A.
P. (DIR Series) Circular No.21 dated February 13, 2002. The Scheme provides for
purchase and re-conversion of only as many shares into ADRs/GDRs which are equal
to or less than the number of shares emerging on surrender of ADRs/GDRs which h
ave been actually sold in the market. Thus, it is only a limited two-way fungibi
lity wherein the headroom available for fresh purchase of shares from domestic m
arket is restricted to the number of converted shares sold in the domestic marke
t by nonresident investors. So long ADRs/GDRs are quoted at discounts to the val
ue of shares in domestic market, an investor will gain by converting the ADRs/GD
Rs into underlying shares and selling them in the domestic market. In case of AD
Rs/GDRs being quoted at premium, there will be demand for reverse fungibility, i
.e. purchase of shares in domestic market for re-conversion into ADRs/GDRs. The
scheme is operationalized through the Custodians of securities and stockbrokers
under SEBI
ADR AND GDR POTENTIAL IN CENTRAL EUROPE
Depositary receipts (mostly denoted as ADR or GDR), an equity instrument represe
nting shares of a company listed on a foreign exchange, are still very little kn
own in the Czech Republic (and not only there), although their history reaches b
ack to 1927. DRs have gained much popularity in the 1990s. After a slowdown in 2
001/2002, the years 2003 and especially 2004 brought a renewed progress of the D
R markets, which seems to be sustained in 2005. Also the Central European compan
ies are gradually becoming aware of the advantages of DR offering. There is, how
ever, still enough unused potential. In case the domestic and DR markets are int
egrated, there is a possibility of cross-border trading. The prices of underlyin
g shares in the local market and the DRs should be therefore virtually equal, no
t allowing for arbitrage opportunities. The first hypothesis we tested is that t
he price of ordinary share in the local market and underlying local currency equ
ivalent of the DR price are very closely correlated.
The price of underlying shares in the local market rarely remains unaffected by
the DR issue. A company listing its equity internationally can gain from diversi
fied shareholders’ base, increased demand or lower cost of capital. These are only
some of the factors that may drive the share’s price up. Several studies have dea
lt with response of the underlying share’s price to the DR offering. The obtained
results are, however, ambiguous. We focused on the impact of DR program establis
hment on the price of Czech, Polish and Hungarian shares. We wanted to prove tha
t a price increase would follow the DR offering. It is usually expected a DR lis
ting also improves liquidity of the company’s stock, as the potential investors’ bas
e is extended, the visibility of the company both in DR and local markets is enh
anced and cross-border trading is enabled. On the other hand, some argue, that t
rading in the stock shifts to the DR market and they worry about the impact on t
he overall liquidity of the local market. We tested whether a positive reaction
of the domestic markets to the DR offering in terms of trading activity can be o
bserved on a sample of Central European shares. The first chapter brings an insi
ght into the DR world. In the second chapter we focus on prices of depositary re
ceipts and the underlying shares. The two fields of interest are the correlation
between the underlying share’s price and the local currency’s equivalent of the DR
Price, and the response of the ordinary share’s price in the local market to the D
R program introduction. The third chapter deals with liquidity effects subsequen
t to the DR listing. In the last chapter, we identify a few areas, where DRs are
frequently employed and we suggest there is an unused potential of the instrume
nt in the Czech Republic.
Ministry€of€Finance€Department€of€Economic€Affairs€ 31st July, 2008
Proposed changes in the ADR/GDR’s Pricing guidelines The “Issue of Foreign Currency
Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Sch
eme, 1993” was initiated in 1993 to allow the Indian Corporate sector to access gl
obal capital markets through issue of Foreign Currency Convertible Bonds (FCCBs)
/Equity Shares under the Global Depository Receipt Mechanism (GDR) and American
Depository Receipt Mechanism (ADR). The Scheme has been amended several times si
nce then. In order to bring the ADR/GDR guidelines in alignment with SEBI guidel
ines on domestic capital issues, Government, vide Press Note dated August 31, 20
05, amended the pricing guidelines for Indian listed companies issuing ADR/GDR.
The present pricing clause, thus, reads as under: “Listed Companies – The pricing sh
ould not be less than the higher of the following two averages: (i) The average
of the weekly high and low of the closing prices of the related shares quoted on
the stock exchange during the six months preceding the relevant date;
(ii) The average of the weekly high and low of the closing prices of the related
shares quoted on a stock exchange during the two week preceding the relevant da
te. The “relevant date” means the date thirty days prior to the date on which the me
eting of the general body of shareholders is held, in terms of section 81 (IA) o
f the Companies Act, 1956, to consider the proposed issue.” (iii) In the normal ci
rcumstances the extant pricing norms provides protection from price manipulation
by the Issuer in domestic market. In the recent period, Government has received
a number of representations from corporate that the extant pricing norms affect
them adversely in the falling market. In order to remove hardship to companies
in a falling market, Government is considering modifying the pricing guidelines
for ADR/GDR issues. The proposal is to amend the parameter of the pricing norms
to ‘two months’ in place of ‘six months’. In addition the definition of ‘the relevant date’
for such issues is also proposed to be modified as per SEBI (DIP) guidelines on
preferential allotment and qualified institutions placements (QIP).
INDIAN DEPOSITORY RECEIPTS
Recently SEBI has issued guidelines for foreign companies who wish to raise capi
tal in India by issuing Indian Depository Receipts. Thus, IDRs will be transfera
ble securities to be listed on Indian stock exchanges in the form of depository
receipts. Such IDRs will be created by a Domestic Depositories in India against
the underlying equity shares of the issuing company which is incorporated outsid
e India. Though IDRs will be freely priced yet in the prospectus the issue price
has to be justified. Each IDR will represent a certain number of shares of the
foreign company. The shares will not be listed in India, but have to be listed i
n the home country. The IDRs will allow the Indian investors to tap the opportun
ities in stocks of foreign companies and that too without the risk of investing
directly which may not be too friendly. Thus, now Indian investors will have eas
y access to international capital market. Normally, the DR are allowed to be exc
hanged for the underlying shares held by the custodian and sold in the home coun
try and vice-versa. However, in the case of IDRs, automatic fungibility is not p
ermitted. SEBI has issued guidelines for issuance of IDRs in April, 2006; some o
f the major norms for issuance of IDRs are as follows. SEBI has set Rs 50 crore
as the lower limit for the IDRs to be issued by the Indian companies. Moreover,
the minimum investment required in the IDR issue by the investors has been fixed
at Rs two lakh. Non-Resident Indians and Foreign Institutional
Investors (FIIs) have not been allowed to purchase or possess IDRs without speci
al permission from the Reserve Bank of India (RBI). Also, the IDR issuing compan
y should have good track record with respect to securities market regulations an
d companies not meeting the criteria will not be allowed to raise funds from the
domestic market If the IDR issuer fails to receive minimum 90 per cent subscrip
tion on the date of closure of the issue, or the subscription level later falls
below 90 per cent due to cheques not being honoured or withdrawal of application
s, the company has to refund the entire subscription amount received, SEBI said.
Also, in case of delay beyond eight days after the company becomes liable to pa
y the amount, the company shall pay interest at the rate of 15 per cent per annu
m for the period of delay.
REFERENCES
www.google.com www.investopedia.com www.nasdaq.com www.businessfinance.com Depos
itory Receipt Hand book by Deutsche Bank BOOKS - Indian Financial System by M.Y.
Khan -ADR IN CORPORATE ENVIRONMENT by M. THERESE REILLY DEBORAH L. MACKENZIE