FINANCIAL REORGANIZATION:

Reorganization is the process to revive a financially troubled or bankrupt firm. A reorganization involves
the restatement of assets and liabilities, as well as holding talks with creditors to make arrangements for
maintaining repayments. Reorganization is an attempt to extend the life of a company facing bankruptcy
through special arrangements and restructuring to minimize the possibility of past situations
reoccurring. Generally, a reorganization marks the change in a company's tax structure.

Reorganization can also mean a change in the structure or ownership of a company through a merger or
consolidation, spinoff acquisition, transfer, recapitalization, or change in identity or management
structure. Such an endeavor is also known as "restructuring.

What is a Buyout?

A buyout refers to an investment transaction where one party acquires control of a company, either
through an outright purchase or by obtaining a controlling equity interest (at least 51% of the company’s
voting shares). Usually, a buyout also includes the purchase of the target’s outstanding debt, which is
also known as assumed debt by the acquirer.

The Buyout Process

The buyout process typically commences when an interested acquirer formally makes a buyout offer to
the board of directors of the target company, who represent the shareholders of the company.
Negotiations will then ensue, after which the board of directors will provide insight to shareholders on
whether to sell their shares or not. The money to be used in buyout transactions is usually supplied by
private individuals, companies, private equity firms, lenders, pension funds and other institutions.
Buyout firms focus on facilitating and funding buyouts and may do so with others in a deal or alone.
Such firms normally acquire their money from wealthy individuals, loans, or institutional investors.

LEVERAGED BUYOUT:

Introduction:

The term leveraged buyout (LBO) describes an acquisition or purchase of a business, typically a mature
company, financed through substantial use of borrowed funds or debt by a financial investor whose
objective is to exit the investment after 3-7 years. In fact, in a typical LBO, up to 90 percent of the
purchase price may be funded with debt.

The term ‘leveraged’ signifies a significant use of debt for financing the transaction. The purpose of a
LBO is to allow an acquirer to make large acquisitions without having to commit a significant amount of
capital.

A typically transaction involves the setup of an acquisition vehicle that is jointly funded by a financial
investor and the management of the target company. Often the assets of the target Company are used
as collateral for the debt. Typically, the debt capital comprises of a combination of highly structured
debt instruments including pre-payable bank facilities and / or publicly or private placed bonds
commonly referred to as high-yield debt. The new debt is not intended to be permanent LBO business
plans call for generating extra cash by selling assets, shaving costs and improving profit margins. Ht extra
cash is used to pay down the LBO debt. Managers are given greater stake in the business via stock
options or direct ownership of shares).

The term ‘buyout’ suggests the gain of control of a majority of the target company’s equity. (The target
company goes private after a LBO. It is owned by a partnership of private investors who monitor
performance and can set right away if something goes awry. Again, the private ownership is not
intended to be permanent. The most successful LBOs go public again as soon as debt has been paid
down sufficiently and improvements in operating performance have been demonstrated by the target
company).

A leveraged buyout is essentially a strategy involving the acquisition of another company using a
significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the
assets of the company being acquired are used as collateral for the loans in addition to the assets of the
acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions
without having to commit a lot of capital. In an LBO, there is usually a ratio of 70% debt to 30% equity.
LBOs today focus more on growth and complicated financial engineering to achieve their returns.

Brief History:

What is believed to be the first leveraged buyout in business history is through the acquisition of Orkin
Exterminating Company in 1964. However, the first LBO may have been the purchase by McLean
Industries, Inc. of Waterman Steamship Corporation in May 1955.

The Theory of the Leveraged Buyout:

While every leveraged buyout is unique with respect to its specific capital structure, the one common
element of a leveraged buyout is the use of financial leverage to complete the acquisition of a target
company. In an LBO, the private equity firm acquiring the target company will finance the acquisition
with a combination of debt and equity, much like an individual buying a rental house with a mortgage
.Just as a mortgage is secured by the value of the house being purchased, some portion of the debt
incurred in an LBO is secured by the assets of the acquired business. The bought-out business generates
cash flows that are used to service the debt incurred in its buyout, just as the rental income from the
house is used to pay down the mortgage. In essence, an asset acquired using leverage helps pay for
itself.

In a successful LBO, equity holders often receive very high returns because the debt holders are
predominantly locked into a fixed return, while the equity holders receive all the benefits from any
capital gains. Thus, financial buyers invest in highly leveraged companies seeking to generate large
equity returns. An LBO fund will typically try to realize a return on an LBO within three to five years.
Typical exit strategies include an outright sale of the company, a public offering or a recapitalization.
The evolution of leveraged buyouts came into existence in 1960’s. During the 1980’s LBO’s became very
common and increased substantially in size, LBO’s normally occurred in large companies with more than
$100 million in revenues. But many of these deals subsequently failed due to the low quality of debt
used, and thus the movement in the 1990’s was toward smaller deals (featuring small to medium sized
companies, with about $20 million in annual revenues). The most common leveraged buyout
arrangement among small businesses is for management to buy up all the outstanding shares of the
company's stock, using company assets as collateral for a loan to fund the purchase. The loan is later
repaid through the company's future cash flow or the sale of company assets.

A management-led LBO is sometimes referred to as "going private," because in contrast to "going

public"—or selling shares of stock to the public—LBOs involve gathering all the outstanding shares into
private hands. Subsequently, once the debt is paid down, the organizers of the buyout may attempt to
take the firm public again. Many management-led, small business LBOs also include employees of the
company in the purchase, which may help increase productivity and increase employee commitment to
the company's goals.

LBO Candidate Criteria

Given the proportion of debt used in financing a transaction, a financial buyer’s interest in an LBO
candidate depends on the existence of, or the opportunity to improve upon, a number of factors.
Specific criteria for a good LBO candidate include:

 Steady and predictable cash flow

 Divestible assets?

 Clean balance sheet with little debt?

 Strong management team?

 Strong, defensible market position?

 Viable exit strategy?

 Limited working capital requirements?

 Synergy opportunities?

 Minimal future capital requirements?

 Potential for expense reduction?

 Heavy asset base for loan collateral?

Leveraged Buyout Example

Let us understand LBO in an easier way. Suppose you have purchased a house worth $2 million today
with a combination of debt and equity, where weightage of debt is 80% and equity contribution is 20%.
Assuming that you have purchased the house for rent purpose and the amount you received in the form
of rent will be used to meet out the principal and interest obligations. Once you repay the debt and
interest in full you will end up with $2 million debt free house which is going to be worth more in the
future.

Another Leveraged Buyout example, Suppose XYG firm is a leveraged buyout firm and they want to buy
ABC firm. The total value of the ABC firm is $ 20 million and they have a positive and stable cash flow
however they are not well managed. So XYG firm decided to acquire ABC so that they can manage the
firm and get result out from them. To buy ABC firm they have decided not to put all of their money
rather decided to put $2 million money of their own and the rest they will borrow. For borrowing
purpose, they are going to use ABC Firm’s assets as a collateral. If the deal gets successfully executed,
they are going to expect some positive cash flows in the future. This is the way Leveraged Buyout works.

Steps required to perform Leveraged Buyout model.

1. The first step is to fetch the information and data that is required to perform the analysis, which
is related to the Target Company and the sector.

2. Constructing historical financials and projections.

3. Adding assumptions related to the Purchase Price, sources and use of finance.

4. Updating the financing structure of sources and its uses, then Linking these sources and uses in
the adjustment column of the balance sheet.

5. Constructing schedules to reduce the complexities and making necessary adjustments to

calculate the pro forma income statement, balance sheet, and cash flow statement.

6. Calculating the exit value using EV/EBITDA multiple and then subtracting the value of debt and
cash to get the exit value of company equity.

7. Last step is to calculate the Internal Rate of Return on the initial investment.

Advantages of Leveraged Buyout

1. Mandatory interest payments and principal obligation motivates the management to get more
productive so they can generate enough cash flows.

2. Acquirers will get a tax shield on the deal because the deal includes a large amount of debt
financing.

3. As deal includes a large of debt then in that case company is not bound to declare dividends.

4. It will give the opportunity to the acquirer to better restructure the acquired assets and reduce
the cost.

Disadvantages of Leveraged Buyout

 1. High leverage will reduce the flexibility of the management.
2. If company is not able to generated expected cash flow then they can’t meet out their principal
obligations.
3. High debt payments may lead to poor credit rating.

Risk associated with the Execution of LBO

Following are the risk associated with LBOs:

i) Equity holders – Significant risk arises due to financial leverage. Interest costs for the debt are “fixed
costs” which can lead to default of a company if not paid within the stipulated time. Changes in
enterprise value (EV) of a company can have immense impact on the equity value. (Provided the debt
remains fixed)

ii) Debt holders – Risk of default always lies with the debt holder which lies with high leverage. Owing to
the fact that debt holders retain the most senior claims on the assets of the company, they are likely to
suffer less risk compared to others. They are likely to realize a partial, if not full, return on their
investments, even in bankruptcy.

Criticism of LBOs

Critics of leveraged buyouts argue that these transactions harm the long-term competitiveness of firms
involved. First, these firms are unlikely to have replaced operating assets since their cash flow must be
devoted to servicing the LBO-related debt. Thus, the property, plant and equipment of LBO firms are
likely to have aged considerably during the time when the firm is privately held. In addition,
expenditures for repair and maintenance may have been curtailed as well. Finally, it is possible that
research and development expenditures have also been controlled. As a result, the future growth
prospects of these firms may be significantly reduced.

Others argue that LBO transactions have a negative impact on the stakeholders of the firm. In many
cases, LBOs lead to downsizing of operations, and employees may lose their jobs. In addition, some of
the transactions have negative effects on the communities in which the firms are located.

Much of the controversy regarding LBOs has resulted from the concern that senior executives
negotiating the sale of the company to themselves are engaged in self-dealing. On one hand, the
managers have a fiduciary duty to their shareholders to sell the company at the highest possible price.
On the other hand, they have an incentive to minimize what they pay for the shares. Accordingly, it has
been suggested that management takes advantage of superior information about a firm’s intrinsic value.
The evidence, however, indicates that the premiums paid in leveraged buyouts compare favorably with
those in inter-firm mergers that are characterized by arm’s-length negotiations between the buyer and
seller.
Exit Strategy

Financial buyers can use many exit strategies to realize the profits made on their investments. A
financial buyer typically expects to realize a return on its LBO investment within 3 to 7 years via one of
these strategies.

 Outright sale of the company to a strategic buyer or another financial sponsor

 IPO: Initial Public offering, that is, issuing new equity to the public

 Recapitalization: By paying off the debt over the time thereby converting debt into Equity and
optimizing capital structure of the company.

Real Life Case Studies of Leveraged Buyout:

Energy Future Holdings

In an era of so-called mega-buyouts between 2005 and 2007, the biggest of them all was the $48 billion
acquisition of the largest electricity utility in Texas, then known as TXU, by a consortium led by Kohlberg
Kravis Roberts & Co., Texas Pacific Group (TPG Capital), and Goldman Sachs.

The deal was based on the belief that rising demand for energy would stretch supply and push up
electricity prices. Shortly after the deal was completed, increased horizontal drilling, or fracking, led to
the U.S. shale gas revolution and energy prices tumbled.

The newly-founded company, Energy Future Holdings, filed for bankruptcy in 2014, qualifying as one of
the 10 biggest nonfinancial bankruptcies in history. America’s most famous investor, Warren Buffett,
was even convinced the deal could not miss and ended up losing nearly $900 million.

Hilton Hotel

At the height of the real estate bubble in 2007, the Blackstone Group bought Hilton in a $26 billion
leveraged buyout. When the economy slumped into crisis soon after the deal was struck, it appeared it
could not have picked a worse time, especially when some of its partners—Bear Stearns and Lehman
Brothers—fell apart.

Things turned around drastically when the company went public in 2013, famously transforming the
Hilton deal into the most profitable private equity deal ever. The investors who weathered the storm
became legendary, making $12 billion on what many analysts believe to be the best-leveraged buyout of
all time.

In 2018, Blackstone sold its stake in the hotel chain. The private equity firm unloaded 15.8 million
shares. Hilton estimated the sale would generate $1.32 billion.

First Data Corporation

In 2007, buyout firm Kohlberg Kravis Roberts & Co. acquired the credit card processing giant First Data
for $30 billion. The deal looked to be a disaster soon after it was completed due to the financial crisis,
but First Data hung on and is one of KKR’s only surviving precrisis acquisitions.

In 2015, First Data began a comeback by selling apps and big data services to small businesses leading up
to its official IPO. First Data’s story is one of the few success stories from the boom of leveraged
buyouts.

Conclusion

Leveraged Buyout is one of the most fascinating way for those investors who are short of equity capital.
They borrow money and then invest. The probability of win-win situation depends on how you made the
selection of a Leveraged Buyout candidate. If you have made a right choice and everything works out
well then there is a high probability of earning huge returns.

International Financing:

International Financing is also known as International Macroeconomics as it deals with finance on a

global level. There are various sources for organizations to raise funds. To raise funds internationally is
one of them. With economies and the operations of the business organizations going global, Indian
companies have an access to funds in the global capital market.

International finance helps organizations engage in cross-border transactions with foreign business
partners, such as customers, investors, suppliers and lenders.

Importance of International Finance

International finance plays a critical role in international trade and inter-economy exchange of goods
and services. It is important for a number of reasons:

 International finance is an important tool to find the exchange rates, compare inflation rates,
get an idea about investing in international debt securities, ascertain the economic status of
other countries and judge the foreign markets.

 Exchange rates are very important in international finance, as they let us determine the relative
values of currencies. International finance helps in calculating these rates.

 Various economic factors help in making international investment decisions. Economic factors of
economies help in determining whether or not investors’ money is safe with foreign debt
securities.
  Utilizing IFRS is an important factor for many stages of international finance. Financial
statements made by the countries that have adopted IFRS are similar. It helps many countries to
follow similar reporting systems.

 IFRS system, which is a part of international finance, also helps in saving money by following the
rules of reporting on a single accounting standard.

 International finance has grown in stature due to globalization. It helps understand the basics of
all international organizations and keeps the balance intact among them.

 An international finance system maintains peace among the nations. Without a solid finance
measure, all nations would work for their self-interest. International finance helps in keeping
that issue at bay.

 International finance organizations, such as IMF, the World Bank, etc., provide a mediators’ role
in managing international finance disputes.

Sources of International Financing:

International finance helps organizations engage in cross-border transactions with foreign business
partners, such as customers, investors, suppliers and lenders. Various international sources from where
funds may be generated include the following:

American Depository:

American Depository Receipt (ADR) is a certified negotiable instrument issued by an American bank
suggesting the number of shares of a foreign company that can be traded in U.S. financial markets.

American Depository Receipts provide US investors with an opportunity to trade in shares of a foreign

company. When the ADRs did not exist, it was very difficult for an American investor to trade in shares
of foreign companies as they had to go through many rules and regulation. To ease such hardship faced
by American investors, the regulatory body Securities Exchange Commission (SEC) introduced the
concept of ADR which made it easier for an American investor to trade in shares of foreign
companies. American depository receipt fee varies from one cent to three cents per share depending
upon the ADR amount and its timing.

AMERICAN DEPOSITORY RECEIPT (ADR) PROCESS

 The domestic company, already listed in its local stock exchange, sells its shares in bulk to a U.S.
bank to get itself listed on U.S. exchange.
 The U.S. bank accepts the shares of the issuing company. The bank keeps the shares in its
security and issues certificates (ADRs) to the interested investors through the exchange.
 Investors set the price of the ADRs through bidding process in U.S. dollars. The buying and
selling in ADR shares by the investors is possible only after the major U.S. stock exchange lists
the bank certificates for trading.
 The U.S. stock exchange is regulated by Securities Exchange Commission, which keeps a check
on necessary compliances that need to be complied by the foreign company.
Pricing of ADR:

The number of shares underlying the receipt is depicted using a ratio ORD (ordinary share value): ADRS.

For example, HDFC Bank's ratio is 3:1 implies that 3 shares of HDFC equal to a single ADR. This ratio is
important to understand if the receipt has been priced at fair market value. For example, if Robert
decides to purchase ADRs of HDFC Bank Ltd. whose current price is $151.73, he should verify if the ADRs
are priced fairly. Assuming the current exchange rate is Rs.46.30: $1.00, the price of 3 shares of HDFC
Bank on the Indian stock exchange should be around Rs 7,025 ($151.73 * 46.30).

So, a single share should be trading around Rs 2,342. However, the demand for the ADR also puts a
premium / discount on the prices. Robert should be willing to pay a premium on the ADR since the ADR
of the bank is priced at a premium.

TYPES OF ADRs

There are two basic types of ADR facilities, sponsored and unsponsored.

a) Unsponsored ADRs: An unsponsored ADR facility is one that is created without active participation
from the foreign private issuer of the deposited securities. In case of an unsponsored ADR facility, the
depositary must file a registration statement under the Securities Act, 1933 (‘Securities Act’) on Form F-
6. Once this statement becomes effective, the depositary can accept deposits of securities of a foreign
private issuer and issue ADRs with respect to such deposit. The ADR certificate acts as a contract
between the ADR holder and the depositary. As a general rule, holders of unsponsored ADRs bear the
costs of such facilities, which are passed on to the holders by way of fees for such deposit and
withdrawal of deposited securities, and for other services. However, in recent years the trend in the
creation of ADR facilities is towards sponsored, rather than unsponsored arrangements.

b) Sponsored ADRs: A sponsored ADR facility is created jointly by a foreign private issuer and a
depositary. The Foreign private issuer signs the Form F-6 registration statement and enters into a
depositary agreement with the depositary. This agreement governs the rights and responsibility of the
parties, and sets forth the allocation of fees. In a typical sponsored ADR arrangement, a depositary
agrees to provide notice of shareholders meeting and other information about the foreign private issuer
so that ADR holders may exercise their voting rights through the depositary. The foreign private issuer
pays administration fees, which are often waived, to the depositary for servicing and maintaining the
program. A contractual relationship is established between the shareholder, the depositary, and the
foreign private issuer by virtue of the depositary agreement. Additionally, the foreign private issuer in a
sponsored ADR facility must establish an exemption from registration under Rule 12g3-2(b) of the
Exchange Act, or else effect registration of its securities under this statute. A foreign private issuer
enjoys several benefits by selecting a sponsored, rather than an unsponsored, ADR facility.

Among them are the following:

i. The foreign private issuer is able to maintain a greater degree of control over the ADR facility.
ii. With a sponsored ADR, the depositary generally does not deduct fees from dividends before paying
them out of ADR holders. With an unsponsored ADR, this fee usually is deducted. Consequently, since
holders of ADRs receive higher yield on their dividends, the sponsored facility is much attractive and
marketable.

iii. Certain stock exchanges, including the American and NYSE, require sponsored ADRs as a prerequisite
to listing.
These benefits have resulted in an increasing number of sponsored facilities and a corresponding
decrease in the use of unsponsored ADR arrangements. Sponsored ADRs are those in which the non-U.S.
company enters into an arrangement directly with the U.S. depositary bank to arrange for record
keeping, forwarding of shareholder communications, payment of dividends, and other services.

There are three levels of sponsored ADRs that are available to be listed on U.S. securities market. Each
of these programs has different registration, regulatory, reporting and financial disclosure requirements.
Since the financial disclosure and accounting practices and desires of the issuing company often
determine its Listing options, we’ll start by Looking at unlisted programs vs. listed programs.

Unlisted programs (Level I and Rule 144A DRs)

A Level I ADR program is not listed on a stock exchange, but is available for retail investors to purchase
and trade in the over-the-counter market via NASDAQ’s Pink Sheets. A Level I 1n of Securities Dealers
pursuant to Rule 144a of the Securities Act of 1933.

• Are restricted to Qualified Institutional Buyers (QIBs) for purchase or trading.

• Are not registered with the US Securities and Exchange Commission.

At Least two years from the Last deposit of shares in the Rule 144A ADR facility, the ADRs issued under
the Rule 144 program may be eligible to be merged into an unrestricted ADR facility.

Listed programs (Level II and Level III)

Listing an entity’s ADR means it will be traded on one of the three major US exchanges – the New York
Stock Exchange (NYSE), The American Stock Exchange (Amex), or the National Association of Securities
Dealers Automated Quotation System (NASDAQ). ADRs that are Listed on the NYSE or Amex, or quoted
on NASDAQ, have higher visibility in the US market, are more actively traded, and have increased
potential Liquidity.

In order to list an entity’s securities, the entity must meet the Listing requirements of the respective
chosen exchange or market. The entity must also comply with the registration provisions and continued
reporting requirements of the Securities Exchange Act of 1934, as amended (‘The Exchange Act’), as well
as certain registration provisions of the Securities Act, which generally entail the following:

• Form F-6 registration statement, to register the ADRs to be issued.

• Form 20-F registration statement, to register the ADRs under the Exchange Act. This requires detailed
financial disclosure from the issuer, including financial statements and a reconciliation of those
statements to US GAAP (Generally Accepted Accounting Principles).
• Annual reports (on Form 20-F), filed on a regular, timely basis with the US Securities and Exchange
Commission (SEC).
• Interim financial statements and current developments, furnished on a timely basis to the SEC on Form
6-K, to the extent such information is made public or filed with an exchange in the home country or
distributed to shareholders.

A Level II ADR uses existing shares to satisfy investor demand and Liquidity. New ADRs are created from
deposits of ordinary shares in the issuer’s home market. Because these securities are Listed or quoted
on a major US exchange, Level II ADRs reach a broader universe of potential shareholders and gain
increased visibility through reporting in the financial media. Listed securities can be promoted and
advertised, and may be covered by analysts and the media. In addition, listed securities can be used to
structure incentives for an issuer’s US employees, or could be used to facilitate US mergers and
acquisitions.

Level III ADRs are a public offering of new shares into the US markets. These capital raisings have a high
profile: They are followed closely by the financial press and other media, often generating significant
visibility for the issuer. In addition to the requirements noted above, an issuer establishing a Level III
ADR program:

• Is required to file form F-1. This registers the securities underlying the ADRs that will be offered
publicly in the US, including a prospectus informing potential investors about the issuer and any risks
inherent in its business, the offering price of the securities, and the issuer’s plan for distributing the
ADRs. In certain circumstances, an abbreviated registration statement (form F-3) may be acceptable.

• May substitute Form 8-A for Form 20-F registration to register under the Exchange Act. However,
Form 20-F annual reports must be filed thereafter. This annual filing contains detailed financial
disclosure from the issuer, financial statements and a full reconciliation of those statements to US
Generally Accepted Accounting Principles (GAAP).

Level III ADRs can be actively promoted and advertised to increase investor awareness and market
Liquidity. As with Level II ADRs, the securities can be used to structure incentives for an issuer’s US
employees, and may be used to facilitate US mergers and acquisitions.

ADVANTAGES OF AMERICAN DEPOSITORY RECEIPT (ADR)

 The American investor can invest in foreign companies which can fetch him higher returns.
 The companies located in foreign countries can get registered on American Stock Exchange and
have its shares trades in two different countries.
 The benefit of currency fluctuation can be availed.
 It is an easier way to invest in foreign companies as there are no restrictions to invest in ADR.
 ADR simplifies tax calculations. Trading in shares of foreign company in ADR would lead to tax
under US jurisdiction and not in the home country of company.
 The pricing of shares of foreign companies in ADR is generally cheaper. Hence it provides
additional benefit to investors.

DISADVANTAGES OF AMERICAN DEPOSITORY RECEIPT (ADR)

  Even though the transactions in ADR take place in US dollars, still they are exposed to the risk
associated with foreign exchange fluctuation.
 The number of options to invest in foreign companies is limited. Only a few companies feel the
necessity to register themselves through ADR. This limits the choice available to US investor to
invest.
 The investment in companies opting for ADR often becomes illiquid as an investor needs to hold
the shares for the long term to generate good returns.
 The charges for the entire process of ADR are mostly transferred on investors by foreign
companies.
 Any violation of compliance can lead to strict action by the Securities Exchange Commission

GLOBAL DEPOSITORY RECEIPTS:

Global Depository Receipt (GDR) is an instrument in which a company located in domestic country issues
one or more of its shares or convertibles bonds outside the domestic country. In GDR, an overseas
depository bank i.e. banks outside the domestic territory of a company, issues share of the company to
residents outside the domestic territory. Such shares are in the form of depository receipt or certificate
created by overseas the depository bank.

Issue of Global Depository Receipt is one of the most popular ways to tap the global equity markets. A
company can raise foreign currency funds by issuing equity shares in a foreign country.

GLOBAL DEPOSITORY RECEIPT MECHANISM

 The domestic company enters into an agreement with the overseas depository bank for the
purpose of issue of GDR.
 The overseas depository bank then enters into a custodian agreement with the domestic
custodian of such company.
 The domestic custodian holds the equity shares of the company.
 On the instruction of domestic custodian, the overseas depository bank issues share to foreign
investors.
 The whole process is carried out under strict guidelines.
 GDRs are usually denominated in U.S. dollars

ADVANTAGES OF GDR

 GDR provides access to foreign capital markets.

 A company can get itself registered on an overseas stock exchange or over the counter and its
shares can be traded in more than one currency.
 GDR expands the global presence of the company which helps in getting international attention
and coverage.
 GDR are liquid in nature as they are based on demand and supply which can be regulated.
  The valuation of shares in the domestic market increase, on listing in the international market.
 With GDR, the non-residents can invest in shares of the foreign company.
 GDR can be freely transferred.
 Foreign Institutional investors can buy the shares of company issuing GDR in their country even
if they are restricted to buy shares of foreign company.
 GDR increases the shareholders base of the company.
 GDR saves the taxes of an investor. An investor would need to pay tax if he purchases shares in
the foreign company, whereas in GDR same is not the case.

DISADVANTAGES

 Violating any regulation can lead to serious consequences against the company.
 Dividends are paid in domestic country’s currency which is subject to volatility in the forex
market.
 It is mostly beneficial to High Net-Worth Individual (HNI) investors due to their capacity to invest
high amount in GDR.
 GDR is one of the expensive sources of finance

American Depository Shares:

An American Depositary Share, also called an ADS, is the share of a foreign-based company
denominated in US dollars which can be bought on a US stock exchange. The shares are issued by
American depositary banks (custodian banks) under agreement with the overseas issuing company.

The whole issue is called an ADR (American Depositary Receipt). Each individual share is known as an
ADS. The two terms are used today interchangeably, i.e. with the same meaning. The US custodian bank
has the corporate and economic rights of the foreign shares, subject to the terms included in the ADR
certificate. The foreign company may either list its shares over-the-counter (OTCC) or on a major
exchange such as the New York Stock Exchange or Nasdaq, this will depend on its level of compliance
with US securities regulations. OTC sales require a lower level of reporting.

Benefits for the company and investors

1. These type of shares provide American investors with a convenient and reliable way to invest in
foreign securities without having the hassle of dealing with cross-border transaction procedures.
2. Buying an ADS offers the same economic benefits enjoyed by the residents of the foreign
company’s home country.
3. The foreign company, through ADRs, has direct access to the world’s largest investor market –
the United States.