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ADR-and-GDR Report
ADR-and-GDR Report
ADR-and-GDR Report
DEPOSITORY
RECEIPT and
GLOBAL
DEPOSITORY
RECEIPT
REPORT
SUBMITTED BY
SURABHI KHANNA
DEPOSITORY RECEIPTS
TYPES OF DR
There are a variety of DR program types. These can be divided into capital raising and non
capital raising structures. The type of program used will depend on the 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". This differs from other types in that the
company whose shares are represented by unsponsored DRs is not involved in setting up the
program.
Advantages of RADRs
ADRs offered under Rule 144(a) do not have to conform to full SEC reporting and
registration requirements. QIBs may demand certain financial disclosure, however, unless
the reporting exemption under Rule 12g 3-2(b) has been granted.
RADRs provide a cheaper means of raising equity capital than through 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 through 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 exchange.
RADRs can only be sold in the US to QIBs. Although there are in excess of 4000
potential QIBs, the RADR market is not as liquid as the public US equity market.
In some exceptional cases there may be restrictions on the issuance of new DRs under
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 cancel the DRs and release the underlying shares to a
domestic broker in the issuing company's home market. The domestic broker will then sell the
shares locally and the proceeds will be remitted to the investor who cancelled those DRs.
DRs certify that a stated number of underlying shares have been deposited with the
depositary's custodian in the foreign country.
DR holders are entitled to all the dividends payable on the underlying foreign shares and,
furthermore, to have these 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 settle
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 information 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
investment is made in local markets, where currency, settlement, and linguistic problems
may be compounded by an excessive number of intermediaries.
Building on the concept of the ADR, investment banks developed the EDR/GDR
to solve these problems for international investors.
foreign issuers. Clearly, foreign firms must find listing in the US (or more generally, 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 the 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 placement.
The listing can also be accompanied by an IPO, or a seasoned equity offering.
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 be traded on any of the US stock
exchange (NYSE, NASDAQ, or AMEX) and over-the-counter. 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 global depositary receipts (GDRs), international depositary receipts
(IDRs), and European depositary receipts (EDRs), which are generally traded or listed in one or
more international markets. As of February 2005, this instrument is used by around 2,100 nonUS issuers from approximately 80 countries. About 500 of those ADRs are listed in the US
exchanges.
ADR
PROGRAMS
LEVEL I
LEVEL II
LEVEL III
144a
Issuers can choose from four different types of sponsored ADR programs, each with its own set
of benefits as well as its own set of legal and regulatory requirements: Level I, Level II, Level
III, and Rule 144A/GDR. In general, American Depositary Receipts are used for two objectives:
raising new capital, or increasing US ownership of shares already issued and trading in the
market. There are three basic ADR types, or levels as they are usually referred to, designed to
achieve a companys objectives.
LEVEL I ADRS-SPONSORED
Level I ADRs are the simplest method 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 distributed by the National Daily Quotation Bureau in the pink sheets. The issuing company
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 traded
security without altering their current reporting process.
Level I DRs account 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 Board,
or if the company desires to raise capital directly in the United States.
Level 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 copies of any public reporting documents
required in its home market (including documents 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 establish 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. market, more active trading, and greater liquidity.
Level II ADRs require full registration 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 exchange. Upon F-6
effectiveness and approval of the listing application, the ADRs begin trading.
Level II ADR programs must comply with the full registration and reporting 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 registration statement, which contains detailed financial disclosure about the issuer,
including financial statements and a reconciliation of those statements to U.S. GAAP, to register
the listing of the ADRs
Annual reports and any interim financial statements submitted on a regular, timely basis to the
SEC
Level III ADRs-SPONSORED
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 sponsored ADR program, Level III, an issuer floats a public
offering of ADRs in the 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 capital
and leads to much greater visibility in the U.S. market.
Level III ADR programs must comply with various SEC rules, including the full registration and
reporting requirements of the SEC's Exchange Act. This entails the following:
Form F-6 registration statement, to register the ADRs
Form 20-F registration statement, an annual filing that contains detailed financial disclosure
from the issuer, including Form F-1, to register the equity securities underlying the ADRs that
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 businesses, the offering price for the
securities, and the plan for distributing the shares Annual reports and any interim 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 Rule 144A, which do not require SEC review. Rule144A facilitates the trading
of privately 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 programs 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 is common for other
depositories to clone it, creating numerous unsponsored facilities which are considered fungible.
In contrast sponsored program are issued by an exclusive depository appointed by the foreign
company under a deposit agreement, 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
fees.
The main advantage of buying an American Depositary Receipt 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 to foreign tax, the investment bank will withhold the
tax so you don't have to worry about it
Therefore, if exchange rates were to move against you, it would hurt the value of your
ADR. If you are considering investing in foreign stocks, ADRs should be part of your
investment decision; however, you should become familiar with all the risks associated
with foreign investing before making an investment decision.
Advantages to Issuers
o Provides a simple means of diversifying a companys shareholder base and accessing
important U.S. market
o May increase the liquidity of the underlying shares of the issuer
o ADRs can be used as an equity financing tool in both M&A transactions and ESOPs for
U.S. subsidiaries
o Helps increase a non-U.S. companys visibility and name recognition in the U.S. investor
community
o May raise capital in the U.S. market through some types of programs
Advantages to Investors
o Offers a convenient means of holding foreign shares
o Simplifies the trading & settlement of foreign securities; ADRs trade and settle just like
U.S. securities
o Offers lower trading & custody costs when compared with shares bought directly in the
foreign market
ADRs are issued by a US bank, such as J. P. Morgan or The Bank of New York, which
functions as a depositary, or stock transfer and issuing agent for the ADR program.
The foreign, or local shares, remain on deposit with the Depositarys custodian issuers
home market.
Each ADR is backed by a specific number of an issuers local 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 delivered to US holders
on a consistent basis by the Depositary. The dividends are converted into dollars and paid
to ADR holders by the Depositary.
US LISTINGS ADRs
THE OVER-THE-COUNTER MARKET
Over-The-Counter (OTC) market trades are listed in the "Pink Sheets". The Pink Sheets are
published daily by the National Quotation Bureau and represent a non-automated listing of
stocks, which trade outside the three major exchanges. Listing fees are paid by the broker dealer
who seeks the listing.
The broker-dealer must file a National Quotation Form 211, which includes updated financials of
the company and other relevant information. Listing on the "Pink Sheets" is available for
sponsored Level I and unsponsored ADR programs, while a listing on NASDAQ, AMEX or the
NYSE is only available to Level II and III sponsored programs.
Let us assume that Russian Vodka Ltd, trades on a Russian stock exchange at 127
Russian roubles
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
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 it 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 discrepancies between the prices of ADRs and local shares while
questioning whether they should be subjected to the law of one price.
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 explored 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 price with U.S. dollars;
2. ADR is converted into the local security;
3. Local security is sold in the local market in local currency at the bid price;
4. Local currency amount is then converted into U.S. dollar at the ask exchange rate.
Taxes, fees, liquidity issues, bid/ask spreads and restrictions can occur at any point of the
transaction.
Operational issues
There are several operational issues that make the mechanics of the
arbitrage difficult. The first one is related to time zone, which could potentially shrink trading
sessions overlap, making it difficult for the arbitrage to occur simultaneously or even in the same
day. Additionally, public information about the companies with ADR listing will also hit the
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 listings 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
(sometimes these issues trade less than 1,000 shares/day) and differences in prices cannot be
exploited (large inefficiencies in bid and ask spreads, higher transaction costs of trading small
lots, etc.).
Transaction costs
Transactions costs are probably one of the major inhibitors of arbitrage opportunities. Not every
investor 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 amount and have to be add up to the stock
price (either the ADR or local stock) so 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
opportunities to emerge, they create what we call a no-arbitrage band.
1. Approvals
The issue of ADRs/GDRs requires the
approvals of Board of Directors, Shareholders,
Ministry of Finance, Ministry of Company Affairs,
Reserve Bank of India, Stock Exchange and Financial
Institutions.
2. Appointment of Intermediaries
ADR/GDR normally involve a number of
Intermediaries including lead Manager, Co-Manager,
Overseas Depository Banks, Listing Agent, Legal
Advisor, Printer, Auditors and Underwrites.
3. Principal Documentation
The principal documents required to be prepared
include subscription agreement, Depository
Agreement, Custodian Agreement, Agency
Agreement and Trust Deed.
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 the type of ADR
program issued
GDR - Filings for any US tranche will depend on which structure is chosen:
Normaly a Level III or Rule 144(a) program.
The right granted to existing shareholders of a company to receive or to subscribe to new shares
under a "rights" or "bonus" issue is also extended to registered ADR holders. However, a US
investor can only take possession of these rights in the US if the issuer undertakes to register the
offering, or if an exemption from 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 cash 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 securities 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 inception of either an unsponsored or sponsored program.
Form 20-F
A Form 20-F is filed as a registration statement/annual report by issuers of Level II or III
Tax Compliance
US Tax
Non-US companies are not responsible for complying with the 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 provides registered GDR holders with tax certification forms prior to each
payment date and returns them to the issuer so that the correct tax can be deducted according to
local regulations.
low price it can produce copperthe 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 India. But keep in mind
that its still going on. The country adds millions of new users to its network every month, and
still only 20% to 30% of people have them today.
Mahanagar Telephone Nigam Ltd. (NYSE: MTE), a provider of telecommunications services
in Delhi and Mumbai, is down 70% from its highs to a market cap of less than $1 billion. Its
holding $700 million in cash and is debt free. The company raised its dividend in September and
has a dividend yield of about 5% at the current numbers. Mahanagar may be tempting at these
levels.
A story about India seems incomplete without some mention of its outsourcing companies.
Youve probably spoken to employees from WNS Limited (NYSE: WNS) before. Its clients
include about 20 U.S. retail banks, 10 financial advisory firms, electronics giants, pharmaceutical
companies, and more. It has more than 20,000 employees.
A smaller company, WNS had been hit harder than Sterlite, but its mounted a nice gain off its
lows. With about a $300 million (and growing) market cap, the company stands at an 80%
discount to its highs. The company has less cash on hand than many will feel 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 gains.
Indias rising middle class will create even more opportunities. In 2005, its middle class was
about 5% of the population. By 2015, it is expected to rise to 20% and by 2025 to more than
40%. While much of this segments money goes to consumables and luxury items, some of it
ends up as investments with financial institutions. After all, the middle class can afford to send
their children to school, buy businesses, and retire younger. This is why some of the biggest
gains well 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 theyve been in years. And
though its current growth pales in comparison to previous years, it dwarfs the growth, or lack
thereof, that were seeing in most of the largest economies. (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 and financial services company. The
$7.5 billion company engages in retail banking, wholesale banking, and treasury operations. It
has been affected by the economic downturn, but its all overblown, and the company doesnt
deserve the 60% loss in its price. Asset growth has slowed, but it continues to grow steadily.
Management believes that loans will grow at 20% during the next year, marginally lower than
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.
Indias second-largest private sector lender beat forecasts with a 45% jump in profits in its most
recent quarterly report, but its shares have fallen. Banks in India are dealing with rising defaults
by customers, caused by high borrowing costs and a slowing economy that has hit some jobs.
The companys gross non-performing loans rose to $392 million in the most recent quarter, up
14% from July to September 2008. In the kind of environment we are going through, [nonperforming loans] 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 dividend five times in the
past six years. Its sitting on $3.5 billion in cash (a little less than half its market cap) and has a
15% ROE. Quarterly revenue growth 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 isnt cheap.
While Id be a fool to promise that any banking company doesnt have potential time bombs,
HDFC appears healthy, and I expect a 25% capital gain by the end of the year, bringing it into
the upper $60s. And while thats attractive, its nothing compared to what HDFC will do in
coming years.
Not only will it benefit from Indias continued boom, but also its not difficult to imagine it
entering the U.S. and U.K. markets. After all, they understand how to grow, and its 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 deposit base by offering
higher interest rates. But thats not hurting their bottom line. In the fourth quarter of 2008, the
companys profits were up 25% over the same period in 2007. The $7.5 billion bank offers
commercial banking, treasury and investment 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 another 500 in the next two years.
Having fallen from the low $70s to the low teens, ICICI 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 months/the current stock price) is nearly 4%. (Although I wouldnt bet the bank that
ICIC will give that out this year.)
With a quarter of its loan book coming from international business, investors are still worried
about problems that might appear amid the current crises. ICICI has slowed credit growth and is
looking to preserve capital. This is part of the reason we wont likely see the full dividend this
year, but I dont see the growth story being interrupted. I expect the company to gain 50% and
pass the $20 mark this year.
ADVANTAGES OF GDR/EDR
o EDRs/GDRs can be launched as part of a private or public offering.
o They allow a single fungible security to be placed in one or more international markets,
thus giving access to a global investor base.
o They may allow the issuer to overcome local selling restrictions to foreign share
ownership.
o GDRs are eligible for settlement through Clearstream, Euroclear.
DISADVANTAGES
If the US tranche of a GDR is structured as a Rule 144(a) private placement, the disadvantages of
an RADR program will apply. If it is structured as a Level III program, the reporting and cost
features of such programs will apply.
INDIAN GDRs
Industry
Segregation
Date
Of
GDR
Issue
Size
Shares
GDR
Of GDR
per
Issue
Issue
GDR
Price **(US$)
US $
Mill
Arvind Mills
Textiles
03-Feb-94
125.00
1.0
9.78
Ashok Leyland
Autos
20-Mar-95
137.77
3.0
12.79
Bajaj Auto
Autos
27-Oct-94
110.00
1.0
16.89
Ballarpur Ind.#
Paper
27-May-94
35.00
1.0
8.77
Bombay Dye
Textiles
16-Nov-93
50.00
1.0
9.20
BSES Ltd
Power
04-Mar-96
125.00
3.0
14.40
Century Textiles
Diversified
21-Sep-94
100.00
2.0
254.00
CESC
Power
14-Apr-94
125.00
1.0
10.67
Core Parent
Pharma
21-Jun-94
70.00
1.0
12.60
Crompton Greaves
Electrical
02-Jul-96
50.00
1.0
7.56
DCW
Diversified
19-May-94
25.00
5.0
13.55
Dr. Reddy's
Pharma
18-Jul-94
48.00
1.0
11.16m
E. I. Hotels
Hotels
07-Oct-94
40.00
1.0
9.30
EID Parry
Fertiliser
07-Jul-94
40.00
1.0
8.39
Finolex Cab
Cables
19-Jul-94
55.00
1.0
16.60
Flex Industries
Packaging
30-Nov-95
30.00
2.0
8.05
G.E. Shipping
Shipping
17-Feb-94
100.00
5.0
15.94
G.N.F.C
Fertiliser
06-Oct-94
61.11
5.0
12.75
GAIL
04-Nov-99
22.50
6.0
9.67
Garden Silk
Textiles
04-Mar-94
45.00
5.0
26.28
Grasim (1st)
Diversified
25-Nov-92
90.00
1.0
12.98
Grasim (2nd)
Diversified
09-Jun-94
100.00
1.0
20.50
Guj Ambuja #
Cement
26-Nov-93
80.00
1.0
5.95
Himachal Futuri
Telecomm.
02-Aug-95
50.00
4.0
9.30
Hindalco (1st)
Aluminium
22-Jul-93
72.00
1.0
10.73
Hindalco (2nd)
Aluminium
08-Jul-94
100.00
1.0
16.00
Hindustan Dev.
Diversified
21-Sep-94
76.00
1.0
2.05
India Cements
Cement
11-Oct-94
90.00
1.0
4.23
Indian Alum.
Aluminium
22-Feb-94
60.00
1.0
6.77
Indian Hotels
Hotels
28-Apr-95
86.25
1.0
16.60
Indian Rayon
Diversified
25-Jan-94
125.00
1.0
15.01
Indo Gulf
Fertiliser
18-Jan-94
100.00
1.0
4.51
Indo Rama
Textiles
21-Mar-96
50.00
10.0
11.37
ICICI
Finance
02-Aug-96
230.00
5.0
11.50
ICICI (ADR)
Finance
22-Sep-99
315
5.0
9.80
Infosys
IT
11-Mar-99
70.38
0.5
34
IPCL
Petrochemicals
08-Dec-94
85.00
3.0
13.87
ITC
Cigarettes
13-Oct-93
68.85
1.0
7.65
J.K. Corp
Diversified
17-Oct-94
55.00
1.0
8.00
Jain Irrig
Plastics
25-Feb-94
30.00
1.0
11.13
JCT Ltd.
Textiles
29-Jul-94
45.00
10.0
16.96
Kesoram Ind
Diversified
31-Jul-96V
30.00
1.0
1.60
L & T (1st)
Diversified
18-Nov-94
150.00
2.0
16.70
L & T (2nd)
Diversified
01-Mar-96
135.00
2.0
15.35
Autos
30-Nov-93
74.75
1.0
4.46
MTNL
Telecom
04-Dec-97
418.53
2.0
11.958
NEPC Micon
Diversified
07-Nov-94
47.70
1.0
3.18
Nippon Denro#
Steel
03-Mar-94
125.00
10.0
21.36
Oriental Hotels
Hotels
14-Dec-94
30.00
1.5
12.75
Ranbaxy Labs
Pharma
29-Jun-94
100.00
1.0
19.38
Raymond Woolen
Textile
09-Nov-94
60.00
2.0
10.61
Reliance
Diversified
27-May-92
150.00
2.0
16.35
Reliance (2nd)
Diversified
15-Feb-94
300.00
2.0
23.50
Reliance Petroleum
Diversified
18-Oct-99
100
15.0
23.0
S.A.I.L.
Steel
07-Mar-96
125.00
15.0
12.97
Satyam Infoway
IT
19-Oct-99
75.00
1.0
18.0
S.I.E.L.
Diversified
14-Oct-94
40.00
3.0
14.64
Sanghi Poly
Textiles
28-Jul-94
50.00
5.0
9.56
SIV Ind
Textiles
01-Aug-94
45.00
1.0
6.37
SPIC
Fertiliser
28-Sep-93
65.00
5.0
11.15
SBI
Banking
03-Oct-96
369.95
2.0
14.15
Sterlite India#
Diversified
22-Dec-93
100.00
1.0
17.86
Tata Electric
Power
22-Feb-94
65.00
100.0
710.00
Telco (1st)
Autos
15-Jul-94
115.00
1.0
8.75
Telco (2nd)
Autos
06-Aug-96
200.00
1.0
14.25
Tube Invest
20-May-94
45.60
1.0
6.58
United Phos.
Pesticides
25-Feb-94
55.00
1.0
20.50
Usha Beltron
Cables
06-Oct-94
35.00
1.0
10.70
Videocon Int.
Electronics
26-Jan-94
90.00
1.0
8.10
VSNL
Telecomm.
24-Mar-97
527.00
0.5
13.93
Wockhardt
Pharma
25-Feb-94
75.00
1.0
14.35
(3) Without prejudice to the generality of the provisions of sub-section (2), the 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
the ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency
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 Ministry of Finance,
Government of India to issue such ADRs and/or GDRs or is eligible 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 borrowing 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 is no limit up to which an Indian company can raise ADRs/GDRs. However, the
Indian 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, whose direct
foreign investment after a proposed GDRs/ADRs issue is likely to exceed the percentage limits
under the automatic route, or which is implementing a project falling under Government
approval route, would need to obtain prior Government clearance through FIPB before seeking
final approval from the Ministry of Finance.
VOTING RIGHTS
Voting rights on shares issued under the Scheme shall be as per the provisions of Companies
Act, 1956 and in a manner in which restrictions on voting rights imposed on ADR/GDR issues
shall be consistent with the Company Law provisions.
RBI regulations regarding voting rights in the case of banking companies 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 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 weeks preceding the relevant date.
Depositary receipts (mostly denoted as ADR or GDR), an equity instrument representing shares
of a company listed on a foreign exchange, are still very little known in the Czech Republic (and
not only there), although their history reaches back to 1927. DRs have gained much popularity in
the 1990s. After a slowdown in 2001/2002, the years 2003 and especially 2004 brought a
renewed progress of the DR markets, which seems to be sustained in 2005. Also the Central
European companies are gradually becoming aware of the advantages of DR offering. There is,
however, still enough unused potential.
In case the domestic and DR markets are integrated, there is a possibility of cross-border trading.
The prices of underlying shares in the local market and the DRs should be therefore virtually
equal, not allowing for arbitrage opportunities. The first hypothesis we tested is that the price of
ordinary share in the local market and underlying local currency equivalent 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 diversified shareholders base, increased
demand or lower cost of capital. These are only some of the factors that may drive the shares
price up. Several studies have dealt with response of the underlying shares price to the DR
offering. The obtained results are, however, ambiguous. We focused on the impact of DR
program establishment on the price of Czech, Polish and Hungarian shares. We wanted to prove
that a price increase would follow the DR offering.
It is usually expected a DR listing also improves liquidity of the companys stock, as the
potential investors base is extended, the visibility of the company both in DR and local markets
is enhanced and cross-border trading is enabled. On the other hand, some argue, that trading in
the stock shifts to the DR market and they worry about the impact on the 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 observed on a sample of Central European shares.
The first chapter brings an insight into the DR world. In the second chapter we focus on prices of
depositary receipts and the underlying shares. The two fields of interest are the correlation
between the underlying shares price and the local currencys equivalent of the DR Price, and the
response of the ordinary shares price in the local market to the DR program introduction. The
third chapter deals with liquidity effects subsequent 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 instrument in the Czech Republic.
MinistryofFinanceDepartmentofEconomicAffairs
31st July, 2008
(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 date.
The relevant date means the date thirty days prior to the date on which the meeting of the
general body of shareholders is held, in terms of section 81 (IA) of the Companies Act, 1956, to
consider the proposed issue.
(iii)
In the normal circumstances 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).
Recently SEBI has issued guidelines for foreign companies who wish to raise capital in India by
issuing Indian Depository Receipts. Thus, IDRs will be transferable 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 outside 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 in the home country.
The IDRs will allow the Indian investors to tap the opportunities 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 easy access to international capital market.
Normally, the DR are allowed to be exchanged for the underlying shares held by the custodian
and sold in the home country and vice-versa. However, in the case of IDRs, automatic
fungibility is not permitted.
SEBI has issued guidelines for issuance of IDRs in April, 2006; some of 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 special permission
from the Reserve Bank of India (RBI). Also, the IDR issuing company should have good track
record with respect to securities market regulations and 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 subscription 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 applications,
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 pay the amount, the company shall
pay interest at the rate of 15 per cent per annum for the period of delay.
REFERENCES
www.google.com
www.investopedia.com
www.nasdaq.com
www.businessfinance.com
Depository 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