his article explains what ADRs and GDRs are, and how they can be used by Non Resident

Indians (NRIs) and non-Indians for making investments in India.

India is hot these days – all major brokerages are of the opinion that India has a great long term
potential, and that investors in India would reap handsome benefits in the next 10 years.
With the current correction in the Indian stock market, the valuations have become even
better. And the logic of investing in Indian equity market has become even more
compelling.
This is great for people living in India – they can invest in variousmutual funds (MFs),
or can choose some great companies and invest in those. (Confused if you should
invest in stocks directly or through mutual funds? Please read “Direct investment in
Stocks versus Mutual Funds (MFs)?”)

But what about Non Resident Indians (NRIs) and foreign nationals? Considering the
many restrictions on NRIs and foreign nationals investing in India, how can they benefit
from the potential that India offers?

There are some very good proxies to investing directly in India – and ADRs and GDRs
are a great option.

What is an ADR / GDR?

ADR stands for American Depository Receipt. Similarly, GDR stands for Global
Depository Receipt. Let’s understand these better.

Every publicly traded company issues shares – and these shares are listed and traded
on various stock exchanges. Thus, companies in India issue shares which are traded on
Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE (National Stock
Exchange), etc.

These shares are sometimes also listed and traded on foreign stock exchanges like
NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities
Dealers Automated Quotation).

But to list on a foreign stock exchange, the company has to comply with the policies of
those stock exchanges. Many times, the policies of these exchanges in US or Europe
are much more stringent than the policies of the exchanges in India. This deters these
companies from listing on foreign stock exchanges directly.
But many good companies get listed on these stock exchangesindirectly – using ADRs
and GDRs.
This is what happens: The company deposits a large number of its shares with a bank
located in the country where it wants to list indirectly. The bank issues receipts against
these shares, each receipt having a fixed number of shares as an underlying (Usually 2
or 4).

These receipts are then sold to the people of this foreign country (and anyone who is
allowed to buy shares in that country). These receipts are listed on the stock
exchanges. They behave exactly like regular stocks – their prices fluctuate depending
 on their demand and supply, and depending on the fundamentals of the underlying
company.

These receipts, which are traded like ordinary stocks, are calledDepository Receipts.
Each receipt amounts to a claim on the predefined number of shares of that company.
The issuing bank acts as a depository for these shares – that is, it stores the shares on
behalf of the receipt holders.
What is the difference between ADR and GDR?

Both ADR and GDR are depository receipts, and represent a claim on the underlying
shares. The only difference is the location where they are traded.

If the depository receipt is traded in the United States of America (USA), it is called
an American Depository Receipt, or an ADR.
If the depository receipt is traded in a country other than USA, it is called a Global
Depository Receipt, or a GDR.
How can you use an ADR / GDR?

ADRs and GDRs are not for investors in India – they can invest directly in the shares of
various Indian companies.

But the ADRs and GDRs are an excellent means of investment for NRIs and foreign
nationals wanting to invest in India. By buying these, they can invest directly in Indian
companies without going through the hassle of understanding the rules and working of
the Indian financial market – since ADRs and GDRs are traded like any other stock,
NRIs and foreigners can buy these using their regular equity trading accounts!

Which Indian companies have ADRs and / or GDRs?

Some of the best Indian companies have issued ADRs and / or GDRs. Below is a partial
list.

Company ADR GDR

Bajaj Auto No Yes
Dr. Reddys Yes Yes
HDFC Bank Yes Yes
Hindalco No Yes
ICICI Bank Yes Yes
Infosys Technologies Yes Yes
ITC No Yes
L&T No Yes
MTNL Yes Yes
Patni Computers Yes No
Ranbaxy Laboratories No Yes
Tata Motors Yes No
State Bank of India No Yes
VSNL Yes Yes
WIPRO Yes Yes

Types of ADR program

When a company establishes an American Depositary Receipt program, it must decide what exactly it
wants out of the program, and how much time, effort and resources they are willing to commit. For this
reason, there are different types of programs that a company can choose.

[edit]Unsponsored shares
Unsponsored shares are a form of Level I ADRs that trade on the over-the-counter (OTC) market. These
shares are issued in accordance with market demand, and the foreign company has no formal agreement
with a depositary bank. Unsponsored ADRs are often issued by more than one depositary bank. Each
depositary services only the ADRs it has issued.

Due to a recent SEC rule change making it easier to issue Level I depositary receipts, both sponsored
and unsponsored, hundreds of new ADRs have been issued since the rule came into effect in October
2008. The majority of these were unsponsored Level I ADRs, and now approximately half of all ADR
programs in existence are unsponsored.

[edit]Level I (OTC)
Level 1 depositary receipts are the lowest level of sponsored ADRs that can be issued. When a company
issues sponsored ADRs, it has one designated depositary who also acts as its transfer agent.

A majority of American depositary receipt programs currently trading are issued through a Level 1
program. This is the most convenient way for a foreign company to have its equity traded in the United
States.

Level 1 shares can only be traded on the OTC market and the company has minimal reporting
requirements with the U.S. Securities and Exchange Commission (SEC). The company is not required to
issue quarterly or annual reports in compliance with U.S. GAAP. However, the company must have a
security listed on one or more stock exchange in a foreign jurisdiction and must publish in English on its
website its annual report in the form required by the laws of the country of incorporation, organization or
domicile.

Companies with shares trading under a Level 1 program may decide to upgrade their program to a Level
2 or Level 3 program for better exposure in the United States markets.

[edit]Level II (listed)
Level 2 depositary receipt programs are more complicated for a foreign company. When a foreign
company wants to set up a Level 2 program, it must file a registration statement with the U.S. SEC and is
under SEC regulation. In addition, the company is required to file a Form 20-F annually. Form 20-F is the
basic equivalent of an annual report (Form 10-K) for a U.S. company. In their filings, the company is
required to follow U.S. GAAP standards or IFRS as published by the IASB.

The advantage that the company has by upgrading their program to Level 2 is that the shares can be
listed on a U.S. stock exchange. These exchanges include the New York Stock
Exchange (NYSE), NASDAQ, and the American Stock Exchange (AMEX).

While listed on these exchanges, the company must meet the exchange’s listing requirements. If it fails to
do so, it may be delisted and forced to downgrade its ADR program.

[edit]Level III (offering)

A Level 3 American Depositary Receipt program is the highest level a foreign company can sponsor.
Because of this distinction, the company is required to adhere to stricter rules that are similar to those
followed by U.S. companies.

Setting up a Level 3 program means that the foreign company is not only taking steps to permit shares
from its home market to be deposited into an ADR program and traded in the U.S.; it is actually issuing
shares to raise capital. In accordance with this offering, the company is required to file a Form F-1, which
is the format for an Offering Prospectus for the shares. They also must file a Form 20-F annually and
must adhere to U.S. GAAP standards or IFRS as published by the IASB. In addition, any material
information given to shareholders in the home market, must be filed with the SEC through Form 6K.

Foreign companies with Level 3 programs will often issue materials that are more informative and are
more accommodating to their U.S. shareholders because they rely on them for capital. Overall, foreign
companies with a Level 3 program set up are the easiest on which to find information. Examples include
the British telephone company Vodafone (VOD), the Brazilian oil company Petrobras (PBR), and the
Chinese technology company China Information Technology, Inc. (CNIT).