DEPOSITARY RECEIPTS

What is Depositary Receipts?

Depository Receipts (DRs) are a type of
negotiable
(transferable)
financial
security, representing a security, usually
in the form of equity, issued by a foreign
publicly-listed company.

DRs are physical certificates, which allow investors to

hold shares in equity of other countries.
This type of instruments first started in USA in late 1920s
and are commonly known as American Depository Receipt
(ADR).
Later on these have become popular in other parts of the
world also in the form of Global Depository Receipts
(GDRs).
ADRs are typically traded on a US national stock
exchange, such as the New York Stock Exchange (NYSE)
or the American Stock Exchange, while GDRs are
commonly listed on European stock exchanges such as
the London Stock Exchange.
Both ADRs and GDRs are usually denominated in US
dollars, but these can also be denominated in Euros.

How do Depository Receipts

Created?
When a foreign company wants to list its securities
on another countrys stock exchange, it can do so
through Depository Receipts (DRs) mode.
To allow creation of DRs, the shares of the foreign
company, which the DRs represent, are first of all
delivered and deposited with the custodian bank of
the depository through which they intend to create
the DR.
On receipt of the delivery of shares, the custodial
bank creates DRs and issues the same to investors
in the country where the DRs are intended to be
listed.
These DRs are then listed and traded in the local
stock exchanges of that country.

ADVANTAGES OF DRs
For the company
Adds considerable credibility to a company
Encourages better trading in its domestic
shares
Helps companies diversify their investor
base
Offers new avenues for raising capital at
competitive rates
Adds benefits of increasing the shares
liquidity

ADVANTAGES OF DRs
For the investor
Turns an investors portfolio into a global one
Benefit of diversification while trading in their own
market under familiar settlement and clearance
conditions
Offers investors a convenient way to invest in
foreign securities without having to worry about
complex details of cross-border transactions, rules
and regulations pertaining to trading in a foreign
stock exchange and currency risk
As these are listed and traded in the holders home
country and currency they can be bought and sold
like any ordinary shares
Investors look beyond their home countries to invest
in more attractive stock markets around the world

What are ADRs ?

American Depository Receipts (ADRs) were
introduced in the American market.
ADR is a security issued by a company outside the
U.S. which physically remains in the country of
issue, usually in the custody of a bank, but is
traded on U.S. stock exchanges.
In other words, ADR is a stock that trades in the
United States but represents a specified number of
shares in a foreign corporation.
ADRs are one or more units of a foreign security
traded in American market. They are traded just
like regular stocks of other corporate but are
issued / sponsored in the U.S. by a bank or broker.

ADRs were introduced with a view to simplify the

physical handling and legal technicalities governing
foreign securities as a result of the complexities
involved in buying shares in foreign countries.
Trading in foreign securities is prone to number of
difficulties like different prices and in different
currency values, which keep in changing almost on
daily basis.
In view of such problems, U.S. banks found a
simple methodology wherein they purchase a bulk
lot of shares from foreign company and then bundle
these shares into groups, and reissue them and get
these quoted on American stock markets.

For the American public ADRs simplify

investing. So when Americans purchase Infy
(the Infosys Technologies ADR) stocks listed
on Nasdaq, they do so directly in dollars,
without converting them from rupees.
Such companies are required to declare
financial results according to a standard
accounting principle, thus, making their
earnings more transparent. An American
investor holding an ADR does not have voting
rights in the company.

ADRs are issued to offer investment routes

that avoid the expensive and cumbersome
laws that apply sometimes to non-citizens
buying shares on local exchanges. ADRs
are listed on the NYSE, AMEX, or NASDAQ

JP Morgan issued the 1st ADR in 1927

What are GDRs ?

Global Depository Receipt (GDRs) are
similar to the ADR but are usually listed
on exchanges outside the U.S., such as
Luxembourg or London. Dividends are
usually paid in U.S. dollars.
The first GDR was issued in 1990.

A Global Depository Receipt or Global Depositary Receipt

(GDR) is a certificate issued by a depository bank, which
purchases shares of foreign companies and deposits it
on the account. GDRs represent ownership of an
underlying number of shares.
Global Depository Receipts facilitate trade of shares, and
are commonly used to invest in companies from
developing or emerging markets.
Prices of Global Depositary Receipt are often close to
values of related shares, but they are traded and settled
independently of the underlying share.
Several international banks issue GDRs, such as
JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New
York. GDRs are often listed in the Frankfurt Stock
Exchange, Luxembourg Stock Exchange and in the
London Stock Exchange. Normally 1 GDR = 10 Shares,
but not always.

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.

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.
ADR
Dr. Reddys
HDFC Bank
ICICI Bank
Infosys Technologies
MTNL
Patni Computers
Tata Motors
VSNL
WIPRO

GDR
Bajaj Auto
Dr. Reddys
HDFC Bank
Hindalco
ICICI Bank
Infosys Technologies
ITC
L&T
MTNL
Ranbaxy Laboratories
State Bank of India
VSNL
WIPRO

Instanex Skindia DR Index

Index of depository receipts issued by Indian
companies, just as SENSEX is an index of
ordinary shares
Index derives its name from the fact that it is
owned and calculated by Instanex Capital Inc
Index comprises of 15 DRs (7 ADRs and 8
GRDs)
The base of the index is 1000 as on January 3,
1995
The index is calculated using market
capitalization weighted method

Constituents of Instanex
Skindia DR Index
7 ADRs

8 GRDs

Dr. Reddy
ICICI Bank
Infosys Tech
Satyam Comp
Sterlite Industries

GAIL
Grasim Industries
ITC
L&T
Mahindra & Mah.
Ranbaxy Lab
Reliance
SBI

Tata Communications
Tata Motors

What are IDRs ?

As per the definition given in the Companies
(Issue of Indian Depository Receipts) Rules, 2004,
IDR is an instrument in the form of a Depository
Receipt created by the Indian depository in India
against the underlying equity shares of the
issuing company. In an IDR, foreign companies
would issue shares, to an Indian Depository (say
National Security Depository Limited NSDL),
which would in turn issue depository receipts to
investors in India. The actual shares underlying
the IDRs would be held by an Overseas
Custodian, which shall authorise the Indian
Depository to issue the IDRs.

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.

Standard Chartered Plc, which is listed on

London Stock Exchange and Hong Kong Stock
Exchange, became the first global company to
file for an issue of Indian depository receipts in
India.
It came out with its IDR issue in May 2010 and
was listed on the BSE and the NSE in June
2010.
The ratio of conversion : 10 IDRs = 1 share.
If one wish to convert it and take it back to the
parent exchange, one could do it after a period
of one year.

Which intermediaries are involved in issuance of IDRs?

Overseas Custodian Bank is a banking company which
is established in a country outside India and has a place
of business in India and acts as custodian for the equity
shares of issuing company against which IDRs are
proposed to be issued in the underlying equity shares
of the issuer is deposited.
Domestic Depository who is a custodian of securities
registered with SEBI and authorized by the issuing
company to issue Indian Depository Receipts;
Merchant Banker registered with SEBI who is
responsible for due diligence and through whom the
draft prospectus for issuance of IDR is filed with SEBI
by the issuer company.

Guidelines for issuance of

IDRs
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.
the minimum investment required in the IDR issue by the
investors has been fixed at Rs two lakh.
NRI and FIIs have not been allowed to purchase or
possess IDRs without special permission from the RBI
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. 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.

Eligibility conditions for

overseas companies to issue
IDRs:

Capital : The overseas company intending to issue

IDRs should have paid up capital and free reserve
of atleast US $ 100 million.
Sales turnover : It should have an average turnover
of $ 500 million during the last three years.
Profits/dividend : Such company should also have
earned profits in the last 5 years and should have
declared dividend of at least 10% each year during
this period.

Debt equity ratio : The pre-issue debt equity

ratio of such company should not be more
than 2:1.
Extent of issue : The issue during a
particular year should not exceed 15% of the
paid up capital plus free reserves.
Redemption : IDRs would not be redeemable
into underlying equity shares before one year
from date of issue.
Denomination : IDRs would be denominated
in Indian rupees, irrespective of the
denomination of underlying shares.

An issuing company making an issue of IDR

shall also satisfy the following:
the issuing company is listed in its home
country;
the issuing company is not prohibited to
issue securities by any regulatory body;
the issuing company has track record of
compliance with securities market regulations
in its home country.

THANK YOU