United States.
ADRS were introduced in the financial markets in 1927.
countries.
These complexities involved trading at different prices and
Cont
In return, the foreign company provides detailed financial information to the sponsor or depository bank. The depository bank sets the ratio of ADRs per actual share of the foreign company.
For e.g. 10 shares of the foreign company may be equal to 1 ADR. So ratio is pegged at 10:1.
The ratio, typically called ADR Ratio could be less than or greater than 1. This ratio is set in such a way that an ADRs price is high enough to show substantial value, yet low enough to make it affordable for individual investors.
Let us assume that Russian Vodka Ltd, trades on a Russian stock exchange at 127 Russian rubles. This is equivalent to US$4.58 assume this for simplicity.
Now, a US bank purchases 30 million shares of Russian Vodka Ltd. and re-issues them 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 ADR 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 determined by supply and demand factors, like any ordinary share.
An example
Most investors avoid investing in penny stocks or stocks
real valuation in the United States. It may appear like a low performing stock.
That is why, majority of ADRs range between $10 and
the share
value is considerably less, then each ADR would be accordingly structured to include more shares. This is to make the price of each ADR attractive to buyers.
USD
24.47
38.75 77.25 26.72 24.71
12.38
ADVANTAGES OF ADR
Cost-effective ADRs are an easy and cost-effective way to buy shares in a foreign company. They save money by reducing administration costs and avoiding foreign taxes on each transaction. Diversification Investor gains the potential to capitalize on emerging economies by investing in different countries More US exposure Foreign entities favor ADRs because they get more US exposure, allowing them to tap into the wealthy North American equity markets.
Political Risk Investors in ADRs need to ask themselves if the government of the home country (Russia, in previous example) is stable. Exchange Rate Risk Stability of the home countrys currency (Russian rubles) needs to be assessed as well. If the Russian rubles gets devalued, the effects will be felt on the price of the ADR held by an investor. This can result in a big loss even if the company is doing well.
Inflationary Risk Currency of a country with high inflation becomes less and less valuable each day. This can be a big blow to a companys business due to reduced purchasing power and will reflect on its share price.
TYPES OF ADR
DEPOSITARY RECEIPTS
ADR
LEVEL 1
LEVEL 2
LEVEL 3
144 A
which purchases shares of foreign companies Offered for sale globally through the various bank branches Shares trade as domestic shares Negotiable instrument denominated in freely convertible currency. Global funding vehicle for raising capital. Traded globally in Exchange or OTC market.
CONTD.
Listed on European stock exchanges,
Frankfurt Stock Exchange Luxembourg Stock Exchange London Stock Exchange (LSE)
International, and traded at two other places besides the place of listing, e.g. on the OTC market 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 tranche that is sold to investors outside the United States, typically in the Euro markets.
1. Section 6 (3) (b) of Foreign Exchange Management Act (FEMA), 1999 reads as follows: Capital account transactions. (1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. (2) Without prejudice to the generality of the provisions of sub-section (2), the Reserve Bank may, by regulations, prohibit, restrict or regulate the following Transfer or issue of any foreign security by a person resident in India; Transfer or issue of any security by a person resident outside India
CONTD
(3) The 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: Provided that the Reserve Bank shall not impose any restriction on the drawl of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary courts of business
Unitary Structures
Bifurcated Structure
ISSUANCE OF GDR
Shareholder Approval Needed
1. 1.
2.
3.
DIFFERENCES
BASIS OF COMPARISION ADR GDR
Centre
The NYSE which is the largest stock exchange In the world is where the ADR is traded.
The LSEIs not as large as the NYSE over all, but Is the global centre for International equities, which dominate In Turnover. LSE satisfied with a statement of the difference between the UK and Indian Accounting standards
GAAP
COST
Initial costs likely to be in the range of US $10,00,000to US $20,00000 A public offering in the US allows an issuer to access the US retail market. This provides extra source of demand. Legal liability of both a company and its individual directors increased by a full US listing.
Initial costs likely to be in the range US $2,00,000 to US $4,00,000. GDR is Issued only to QIBs but ordinary investors cannot participate.
Retail
Liability
Legal liability of a company and its directors is less than in the case of an ADR.
instructions from the depository bank.Collects , remits dividends and forwards notices received from the depository bank.
GDR MARKET
GDRs can be created or cancelled depending on
demand and supply. When shares are created, more corporate stock is placed in the custodian bank in the depositary bank account. The depositary bank then issues the new GDRs. Factors governing GDR prices are company track record, analysts recommendations, relative valuations, market conditions and also international status of the company
GDR Listing
London Stock Exchange
companies without worrying about foreign trading practices, laws. Easier trading, payments of dividends are in the GDR currency GDRs are liquid because they are based on demand and supply which is regulated by creating or cancelling shares. GDR issuance provides the company with visibility, more larger and diverse shareholder base and the ability to raise more capital in international markets However, they have foreign exchange risk i.e. currency of issuer is different from currency 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
Reference
www.google.com
www.investopedia.com
www.nasdaq.com www.businessfinance.com
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