ADR AMERICAN DEPOSITORY RECEIPTS GDR GLOBAL DEPOSITORY RECEIPTS

FLOW OF PRESENTATION
 Overview of Depository Receipts  ADR and History of ADR  Structure of ADR  Types of ADR  Process of issuing ADR  Benefits to the issuer company
 One-way fungibility and Two-way

fungibility

 GDR  Difference between ADR and

GDR
 Case Study: MakeMyTrip

and the investors

 Headroom

 Arbitrage opportunities
2

DEPOSITORY RECEIPTS (DR)

 A negotiable certificate that usually represents a company's publicly traded equity or debt
 Traded on the stock exchange of the country where the DR is issued but

represents a security, denominated generally in US Dollars or Euros

 Represents one or more shares of a foreign stock or a fraction of a

share For e.g. 1:1 ratio (one underlying share equals one depositary share) ; 5:1 ; 1:2
 Issued by depository bank against the delivery of local currency shares

of the issuer company in the form of ADRs, GDRs, IDRs

4

Why Companies issue DRs?

 Raise Capital  Diversification of shareholder base  Recognition in foreign market  Valuation  Cost of capital  DRs

Why investors invest in DRs?

 Higher Yields  To diversify their portfolios  Trade locally, Convenience  Disclosure  Liquidity aspects

are used in privatization,  Priced in investors currency (Minimize foreign exchange problems) mergers, foreign governments Dept, imports and employment financing  Low cost of custody
 Simplification of Trading & Settlement 5

HOW IS DR ISSUED?
Underlying Shares

Issuer Company

Custodian (Local Bank)

Money

Dividend Listing

Depository Bank
DRs Money Dividend

Foreign Stock Exchange

Clearing House

Foreign Investors

Euroclear / Cedel / Depository Trust Company

HOW ARE DRs TRADED?

US Dollars Investor in US DRs Purchase DRs (Secondary Market) Pays the local broker Broker in US Converts Foreign Currency

Create DRs

Purchases shares in the Co s local market through a local broker

Delivers to Depository s Local Custody Bank Instructs Depository Bank to issue DRs 7

 It is created when a foreign company wishes to list its already publicly

traded shares or debt securities on a foreign stock exchange

 The issuer Company then requires:  A Depository  A Custodian bank and  An Advisory team of lawyers, accountants and investment bankers  The Issuer Company is responsible for:  Preparing the issue proposal,  Determining the financial objectives,  Obtaining the required approvals from the BOD, shareholders and

regulators,
 Deciding the type of DR programme to be issued,  Providing financial information to accountants and  Developing investor relation plans
8

RESPONSIBILITIES: ISSUER
 Preparing Issue Proposals, Financial Objectives & Deciding Type of

DR Programme.  To provide depository and custodian with notices of:

Rights Offerings Corporate Actions like

Obtaining the required approvals from the BOD, shareholders and regulators Notices of Annual and Special Stockholder Meetings

Dividends

 Ongoing compliance with stock exchange and SEC regulations,

including disclosure and reporting (coordinating with legal counsel/accountants)  Execute US focused investor relations plan
9

RESPONSIBILITIES: THE DEPOSITORY BANK

 Overseas agent of the issuer company & authorized by the issuer company to

issue DRs
 Provide advice/perspective on type of program, exchange or market on which to

list or quote
 Advise on ratio of depositary shares to ordinary shares & structure of the DR

programme
 Appoint custodian  File Form F-6 if Level One, 2 or 3 program & Assist with compliance with ADR

registration requirements
 Review draft registration statement or offering memorandum, depending upon

type of program to be established

10

contd
 Coordinate with lawyers, accountants and investment bankers to

ensure all program implementation steps are completed

 Prepare and issue certificates and/or direct registration statements  Solicit market makers (Level I ADR only)  Announce DR program to market (brokers, traders, media,

retail/institutional investors via news releases and internet)

 Acts as the liaison between the issuer, the securities market

participants and the DR holders

 Enlisting the market makers

11

RESPONSIBILITIES: THE CUSTODIAN BANK

 Holds and manages a client's securities or other assets on his/her behalf  The physical possession of the shares rests with the domestic custodian

although the ownership of the shares vests with the DR investors

 Receives underlying shares from the issuer company  Confirms deposit of underlying shares  Holds shares in custody for the account of depositary in the home

market
 Communicates with depositary on corporate actions and related issues  Transmits dividend payments
12

RESPONSIBILITIES: BROKERS
X

Submit required forms to become a market maker in a security, as needed (Level-One ADRs) Make securities available to investor Execute and settle trades

X X

13

RESPONSIBILITIES: THE LEAD MANAGER (INVESTMENT BANKER)

 Advise
  

Type of DR Programme to Launch & Capital Market Issues Exchange or Market on which to list Ratio of Depository Shares to Ordinary Shares Roadshows, Investors Meetings, Investors to Target

Marketing the issue to the investors Obtaining the required securities, rating numbers and eligibility Appointing legal advisors to ensure the accuracy of the information in the prospectus

14

contd
f Where applicable, advise on potential merger/acquisition

candidates, and other matters such as rights offerings, stock distributions, spin-offs, proxy contests, etc. f If concurrent public offering:
f Advise on size, pricing and marketing of offering f Act as placement agent or underwriter in offering f Conduct roadshows with management / introduce issuer to

institutional and other investors

f Line up selected dealers and co-underwriters for offering

15

RESPONSIBILITIES: LEGAL COUNSEL (DEPOSITARY S AND ISSUER S)

 Prepare draft deposit agreement (depositary bank s counsel)

and file required registration statements with the SEC  Manage compliance with US securities laws, rules and regulations and perfect any securities law exemptions (if Rule 144A/Reg S program)(issuer counsel)

16

RESPONSIBILITIES: ACCOUNTANTS (LEVEL 2/3 ADR)

f Prepare issuers financial statements in accordance with, or reconcile to,

US GAAP
f Review registration statement or offering circular

RESPONSIBILITIES: INVESTOR RELATIONS ADVISOR / FIRM

f Develop long-term plan to raise awareness of issuers program in the US f Develop communications plan and information materials for launch

activities (roadshow and presentations to investors, launch day promotion, meetings with financial media)
f Coordinate with issuers advertising and public relations teams on specific

program plans to support and develop company image in the US

17

AMERICAN DEPOSITORY RECEIPTS (ADR)

 An ADR is for the stock of foreign companies to be traded in United

States stock markets like

 New York Stock Exchange (NYSE),  the American Stock Exchange (AMEX) or  NASDAQ  Represents ownership in the shares of a non-U.S. company that trades

in U.S. financial markets

 Each ADR is issued by a U.S. depositary bank  ADRs are denominated in US Dollars & pay dividends in US dollars  Individual shares of a foreign corporation represented by an ADR are

called American Depositary Shares (ADS)

18

CONTD
 Depository banks have numerous responsibilities to the holders of

ADRs and to the non-U.S. company the ADRs represent: The Bank of New York Mellon
 ADRs do not eliminate the currency and economic risks for the

underlying shares in another country

 For e.g., dividend payments in Euros would be converted to U.S.

dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement

19

HISTORY OF ADR
 Introduced on April 29, 1927, by the investment bank J. P. Morgan  For the UK s Selfridges Provincial Stores Limited (now known as

Selfridges plc.), a famous British retailer

 The British law prohibited British companies from registering shares

overseas without a British-based transfer agent and thus UK shares were not allowed physically to leave the UK
 The ADR was listed on the New York Curb Exchange (predecessor to the

American Stock Exchange)

 In 1955, SEC established the From S-12: Necessary to register all

depositary receipt programs

 The Form S-12 was replaced by Form F-6 later, but the principles

remained the same

20

CONTD
 In 1985, the SEC introduced new regulatory framework which led to

emergence of range of DR instruments

 Then the three different ADR programs were created, the Level I, II and

III ADRs. This change was one of the impulses for revival of activity on the otherwise stagnant ADR market
 In April 1990, a new instrument, referred to as Rule 144A was adopted,

which gave rise to private placement depositary receipts, which were available only to qualified institutional buyers (QIBs)
 Requirements laid down by SEC in 2003: All non-US companies require

to have an audit committee composed of independent directors. (Source: Financial Express)

21

ISSUER
 Broaden

INVESTOR
a
 Easier to purchase and to hold

and diversify company s investor base

than the issuer s underlying ordinary shares

 Trade easily and conveniently in

 Enhance a company s visibility,

status and profile internationally among institutional investors

 Establish/ increase total global

US dollars and settle through established clearing houses

 Facilitate

issuer liquidity by attracting new investors

 Develop

diversification into securities of foreign issuers

and/or increase research coverage outside the home market

 Create accessibility of price,

trading research

information

and

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ISSUER
 Get an international valuation

INVESTOR
 Represent a way to provide

as the Company is valued alongside its peer group

 Offer a new avenue for raising

equity capital
 Meet internationally accepted

international exposure for institutional investors despite restrictions against investing in certain countries or in foreign investment instruments
 Eliminate

corporate standards

governance

unfamiliar custody safekeeping arrangements

 Provide dividend payments in US  Trading of GDRs alongside their

peer group in the international markets

dollars and corporate action (meeting of shareholders, rights offerings, exchange offers, tender offers, etc. notifications in English
23

INDIAN FIRMS WHICH ISSUED ADRs

Source: Equitymaster http://www.Equitymaster.Com/stockquotes/adr.Asp?Orderby=adr.%5bclose%5d%20 desc

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COMPAN Y

ADR PRICE (US$)

CHANGE

ISSUE PRICE (US$)

LOCAL PRICE (Rs)

PREM / (DISC) TO LOCAL

TOTAL DOM MKT SHARES CAP (m) (US$ m)

NO OF ADRs (m)

ADR MKT CAP (US$ m)

DRREDD Y(RDY) HDFCBA NK(HDB) ICICIBAN K(IBN) INFOSYS TECH.(IN FY) MTNL(MT E) PATNICO MPUTER S(PTI) REDIFF.C OM(REDF )

29.2 28.1 31.9 50.7 1.2

0.1% 0.3% -1.5% 0.7% -0.0%

10.0 59.4 11.0 17.0 7.5

1,484.7 438.4 779.0

-3.1% 4.0% 0.8%

169.3

5,109.6

76.5 94.5

2,237.4 2,655.8

2,349.4 20,940.6 1,151.8 18,243.1

368.4 11,766.7

INDIAN COMPANIES 2,454.3 1.6% 574.2 28,654.5 270.6 13,723.4 LISTED ON NYSE
29.4 -2.0% 630.0 376.0 315.0 368.6 287.8 -0.2% 137.8 806.3 68.9 804.8

11.7

0.7%

20.3

5.6

0.1%

12.0

NM

NM

NM

NM

51.3

284.8

25

COMPAN Y

ADR PRICE (US$)

CHANGE

ISSUE PRICE (US$)

LOCAL PRICE (Rs)

PREM / (DISC) TO LOCAL

TOTAL DOM MKT SHARES CAP (m) (US$ m)

NO OF ADRs (m)

ADR MKT CAP (US$ m)

SATYAMC OMP(SAY ) SATYAMI NFOWAY( SIFY) STERLITE IND. (SLT) TATA COMM.(T CL) TATAMOT ORS(TTM ) WIPRO(W IT)

34.7

-0.0%

9.7

64.2

1,228.6 % NM 5.3% -0.6%

684.7

893.1

157.3

5,452.0

2.8 9.0 7.2

-0.3% 0.1% 0.1%

0.4 13.4 0.0

NM 104.5 179.1

NM 3,361.2 285.0

NM 7,142.1 1,037.5

141.5 177.1 142.5

401.9 1,585.3 1,031.7

15.1 9.0

0.1% 0.1%

0.0 41.2

147.4 327.9

404.8% -18.9%

3,338.6 10,006.4 2,454.4 16,364.4

353.0 422.1

5,340.9 3,803.5

26

Types of ADR

Sponsored ADRs

Unsponsored ADRs

Rule 144A

Reg S

Level 1

Level 2

Level 3

27

SPONSORED ADR
 An ADR issued with the knowledge and co-operation of the company

whose stock backs it

 Sponsored ADRs are treated just like common stock, complete with

voting rights, only denominated in the U.S. dollar.

 There is a direct involvement of foreign company  The company chooses a single depository bank and registers DRs with

SEC
 The ADR holder receives all share holder benefits complete with

voting rights
 Sponsored ADRs are usually traded through major exchanges like

NYSE and AMEX

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SPONSORED ADR LEVEL I

 Simplest and the fastest-growing segment to access the U.S. and non-

U.S. capital markets

 Not listed on the U.S. Stock Exchange  Traded in the U.S. over-the-counter (OTC) market with prices published

in the Pink Sheets

 It cannot be used to raise capital  The company does not have to report its accounts under U.S. GAAP or

provide full SEC disclosure

 The Company can continue its current reporting process  Issuers qualifies for an exemption under Rule 12g3-2(b) from

the reporting requirements of the Securities Exchange Act of 1934

 Can migrate to a Level II (listing) or Level III (offering) program
29

To establish a Level 1 sponsored ADR program, the following three principal steps are required:
 Qualify for a Rule 12g3-2(b) exemption;  Sign a deposit agreement among the company, the depositary bank

and the ADR holders that detail the rights and responsibilities of each party; and
 File Form F-6 with the SEC to register the ADSs under the 1933 Act.

The Form F-6 is signed by the depositary bank, the issuing company and its directors and officers. Financial statements and a description of the business are not required to be included in a Form F-6 registration statement

30

ADVANTAGES OF LEVEL I ADR

 No SEC financial disclosure  Same financial information & disclosure as home market  Lowest cost to enter market  Simple and Quick to execute and establish

DISADVANTAGES OF LEVEL I ADR

 Limited visibility in US as it trades in OTC market  Not listed in NYSE, AMEX, NASDAQ  Cannot be used to offer public equity capital in the US

Goal of the Company is to Diversify its Shareholder Base.

31

SPONSORED DEPOSITARY RECEIPT LEVEL II

 Enables companies to list their ADRs on Nasdaq, AMEX, NYSE and

the OTC Bulletin Board

 Does not involve raising new capital  Offers higher visibility in the U.S. market  More active trading; greater liquidity  Requires full registration with SEC  Adherence to applicable requirements for U.S. GAAP  Listing requirements of the appropriate stock exchange to be met

32

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; 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 Upon F-6 effectiveness and approval of the listing application, the ADRs begin trading
33

ADVANTAGES OF LEVEL II ADR

 Provides higher visibility  Greater opportunity to diversify issuer s US investor base  Enhances company s status & profile  Provide Currency for US Mergers & Acquisitions

DISADVANTAGES OF LEVEL II ADR

 Substantial disclosures to SEC in accordance to US laws & US GAAP  Many legal, accounting & corporate obligations to fulfill

Goal of the Company is to Diversify its Shareholder Base

34

SPONSORED DEPOSITARY RECEIPT LEVEL III

 Enables companies to list their ADRs on Nasdaq, the Amex, NYSE or

the OTC Bulletin Board, and make a simultaneous public offering of ADRs in the United States
 It allows the issuer to raise capital  Leads to much greater visibility in the U.S. market

35

Level III ADR programs must comply with various SEC rules, including the full registration and reporting requirements of the SEC's Exchange Act.
 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, including a prospectus,  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

36

ADVANTAGES OF LEVEL III ADR

 All advantages of level 2 & allows raising of capital  Highest measure of visibility & publicity

DISADVANTAGES OF LEVEL III ADR

 Substantial disclosures to SEC in accordance to US laws & US GAAP  Many legal, accounting & corporate obligations to fulfill

Goal of the Company is to Raise Capital

37

SPONSORED ADR SCHEDULE OF ACTIVITIES

Board Approval Shareholders to tender shares in Escrow Account

Shareholders Approval

Dispatch of documents to shareholders at least 48 hrs before Offer opens

FIPB Approval

Prepare Offer Documents - Invitation to Offer - Letter of Transmittal

Appointment of: - Collection Centers - Escrow Agent - Underwriters

38

Submit documents including Transfer Instruction for Delivery (TIFD) to Collection Centers

Registration of ADR with US SE Draft Preliminary Prospectus issued by Underwriters

Send information to Escrow Agent to Transfer back to Shareholder

Collection Centers to forward all documents to T Agent

Retain valid ones

Reject incomplete

Offer Close

T Agent to verify documents

39

Foreign Investment Promotion Board (FIPB)

 A govt. body that offers a single window clearance for proposals on FDI in the

country that are not allowed access through the automatic route
 Discusses and examines proposals for foreign investment in the country for

restricted sectors Letter of Transmittal

 A document used by a security holder to accompany certificates surrendered in an

exchange or other corporate action

 May also be a distribution list with the recipients of a memo, report or contract  A transmittal letter accompanies a document and explains what the document is,

why it should receive the reader's consideration, and what the reader should do with it.
40

UNSPONSORED DEPOSITARY RECEIPTS

 An unsponsored ADR program is one that is established by a depositary

bank without the participation or consent of the issuer

 The issuer has limited or no influence on the treatment of ADR holders  Multiple programs can exist simultaneously  Creates to investor confusion  For example, U.S. dollar disbursements may differ in some cases for the

same dividend payment, depending on the foreign exchange rate applied by each of the depositary banks
 In addition, each depositary bank has its own fee schedules relating to

the services it provides to U.S. investors

 Considered less favorable to issuers and investors
41

 Traded OTC  No additional reporting/requirements (i.e. no SOX, no 20-F, etc.)  Depositary good faith belief in satisfaction of 12g3-2(b) exemption  Creates roadblock to the issuer wishing to establish a sponsored ADR

program if its unsponsored ADR program is already in existence because:

 If an unsponsored ADR program is already in existence, it has to

ensure that the depositary bank of the unsponsored program transfers the deposited securities and the related ADR holders to the new sponsored facility and
 Terminates the unsponsored facility  The SEC may require written confirmation from the depositary bank of

the unsponsored program that it agrees with such arrangements.

42

RULE 144A
 Rule 144A programs provide for raising capital through the private

placement of Depositary Receipts with large institutional investors (QIBs) in the U.S.
 Does not require full SEC registration  Privately placed with QIBs under the rule 144A market  Will be quoted on PORTAL in the U.S.  Not accessible to the general public  It allows the issuer company to raise capital in the U.S. without

adhering to the strict regulations required by Level 3 ADRs

43

REGULATION S
 Regulation S programs provide for raising capital through the

placement of Depositary Receipts offshore to non-U.S. investors in reliance on Regulation S.

 A Level I program can be established in addition to a Rule 144A

program, and a Regulation S program may be merged into a Level I program after the restricted period has expired

44

Reg S (non US)  Raise equity International outside the US  Develop and investor base

144 (US)

Objective

in the  Raise equity in the US among Market QIB s  Develop and broaden investor broaden base

Disclosure Legal documents and Exemption

Depends on International Home Market (unless the investor market selected ask for the US GAAP)  Deposit Agreement  Deposit Agreement  Prospectus prepare as  Exempted from registration per the requirement of under security Act 1934, as International Exchange amended, pursuant to 12g3-2(b)

 Under Rule 12g3-2(b),English Reporting language versions of home  Depends on exchange requirement country disclosure must be and/ or regulator furnish to the SEC or pasted on the countries Website 45

RATIO OF ADRS

46

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:

 The average of the weekly high and low of the closing prices of the

related shares quoted on the stock exchange during the two months preceding the relevant date;
 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.

47

DETERMINATION OF PRICE OF ADR

 Let us assume that Wipro, trades on a Bombay stock exchange at 320

Rupees. & 1$ = Rs. 50

 This is equivalent to US$ 6.4  Now, a US bank purchases 10 million shares of M&M Ltd. and re-

issues them in the US at a ratio of 1:10

 Each ADR should have an issue price of US$ 64 (US$ 6.4 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

48

49

ISSUANCES
 Investor calls broker with an order

CANCELLATIONS
 Investor calls broker with an

to buy 100 DRs in a company

 Broker can fill order by either

buying DRs on the international exchange or purchasing ordinary shares in the local market and converting them to DRs
 If the broker chooses to buy in the

order to sell 100 DRs in a company. A settlement usually (T+3), the investor will deliver the DRs to the broker
 Broker completes the sell order

local market they will conduct their trade via a local broker.
 The broker will then notify JP

by either selling DRs on the international exchange on which they trade or converting the DRs to ordinary shares and selling such underlying shares in the local market
 If

Morgan to expect the delivery of shares at the local DR custodian.

the broker sells in the local market they will conduct their trade via a local via a local broker. 50

ISSUANCES
 They request JP Morgan to issue

CANCELLATIONS
 JP Morgan instructs custodian

DRs to a specific account

 The custodian notifies JP Morgan

when the shares are credited to JP Morgan s account

 JP Morgan delivers DRs to the

to deliver local shares to account provided by broker, subject to seller s payment of DR cancellation fees and any other applicable charges
 Custodian delivers shares as

broker, subject to the buyer s payment of DR issuance fees.

 Broker delivers DRs to investor

instructed
 Local broker receives shares

51

Generally, a cancellation instruction should include the following:

 Name of the stock  International Securities Identification Number (ISIN)  Number of ordinary shares to be cancelled  Broker / Recipient name  Name of the client and A/c no. where underlying shares are to be

delivered
 Name and telephone number of broker s back office contact  Any other relevant information (if necessary)

52

EXCEPTIONS TO ISSUANCE & CANCELLATION OF ADRS

 Most countries allow issuance and cancellation of DR facilities at any

time, while several countries maintain restrictions on issuance of DRs

 Withdrawal and sale of ordinary shares from the DR facility, are

subject to limitations

53

ADRs Value Chain Process

54

Due Diligence

Understand the issuer s business in detail Identify potential risks that investors should be aware of Obtain information to draft the Prospectus

55

Documentation Registration Statement (Form F-1) Filed to US Securities Act of 1933 with the SEC Contains the Prospectus Prospectus A marketing and disclosure document Contains description of the issuer, its business, management and financial statements The minimum required information contained is governed by the US Securities Act

56

Book Building Objectives

 Build a book that indicates the demand for the offering at

different price levels in order to determine an optimal pricing level for the offering
 Create competition between investors both individual and

institutional in order to maximize the offering Process  Begins during the pre-marketing period and accelerates towards the end of road show  Establish price talk  Investors submit indications of interest  Analysis of demand curve at various price levels
57

Pricing / Allocation
Objectives
 Maximize proceeds  Building quality investor base  Achieve a reasonable aftermarket premium that can be

sustained over the immediate term Process  A careful analysis of the quality of the orders would be conducted  Identify investors who are critical to the transaction  The ultimate price level would be set at a level where it seeks to maximize proceeds while ensuring appropriate investor allocations and a healthy aftermarket
58

After Market Support Underwriters

Aftermarket stabilization Provide liquidity as necessary to create an orderly aftermarket Commit trading capital Manage over-allotment option by Green shoe option Support investor relations Dispatch accurate information and management assessment of the macro environment, the industry, company performance and business strategy on a regular basis

59

FUNGIBILITY
 A good or asset's interchangeability with other individual goods/assets of the

same type  Interchangeability assumes that everyone values all goods of that class as the same

FUNGIBILITY ONE-WAY FUNGIBILITY TWO-WAY FUNGIBILITY

60

ONE-WAY FUNGIBILITY
 Conversion of depository receipts into local shares  The Investor could cancel the DRs and either retain the ordinary shares

or sell them in the Local Market in India

 Advantage:
 Flexibility

 Disadvantage:

Price volatility  Liquidity problem



61

TWO-WAY FUNGIBILITY
 Two-way Fungibility includes conversion of DRs into local shares

and re-conversion of local shares into DRs up to the originally issued amount
 This also implies that the volume of shares of domestic

companies issuing ADR/GDR can fluctuate in domestic markets

 In 2001, the GOI allowed two way fungibility of ADRs (subject to

headroom or the availability of shares for re-conversion)

 The first ever two- way fungibility was concluded in the shares of

Chennai based India Cements Ltd.

62

TWO WAY FUNGIBILITY

INDIAN Company

Shares

Shares

Shares held on deposit at Custodian bank

Shares Traded on Local Stock Exchange

DRs
DR s Listed on Foreign Exchange

Two way Fungibility

Traded By Foreign Investors

63

CONTD
 India follows Limited Two Way Fungibility  Re-issue is permitted to the extent of ADRs/GDRs that have been redeemed  Benefits of two way fungibility:

Improvement in liquidity  Elimination of arbitrage



Improvement in liquidity  It can happen when there is a liquid market for a security has depth and breadth, and aids speedy price discovery
 A liquid market is said to have depth if buy and sell orders exist both above and

below the prices (at which a stock or ADR/GDR) is transacting

 Similarly, the market is said to have breadth if buy and sell

orders exist in good volume.

64

PARTICIPANTS IN TWO WAY FUNGIBILITY

Indian Regulations: Open for Non Resident Investors Overseas Regulations: ADRs - Open for Non Resident Investors GDRs - Open for Non Resident Investors; some GDRs are structured whereby only US Qualified Institutional Buyers (QIB) and non-US residents are able to purchase them For the purpose of Dual Fungibility, all SEBI registered brokers will act as an intermediary and make the application on behalf of the Non Resident Investors.

65

Advantages of Two-way Fungibility for the Investor

 Investors can take advantage of the arbitrage opportunities

through continuous Cancellations and Re- Issuances

 Before this, the investors could only cancel the DRs and sell the

shares in the Local Market

 There are no tax implications in India at the time of purchase of

shares for conversion into DRs

66

Advantages of Two-way Fungibility for the Company

 Provides tremendous liquidity to Company s local stock as fresh

purchases have to be made in the Open Market for the purpose of Re Issuances
 The DR program of the Company stays

alive as otherwise cancellations continuously reduces the outstanding DRs

 Induces Active Trading of DRs in the Overseas Markets  Better Research Coverage by analysts on liquid DRs

67

HEADROOM
 Head Room is the extent to which Depository Receipts can be issued under

Two Way Fungibility with respect to the specific company

HEAD ROOM = Number of ADRs/GDRs originally issued at time of initial offering + Subsequent Offering + Any other offering resulting in distribution of DR to DR Investors - No of DRs O/S - No of shares formerly represented by DRs cancelled but have not been sold in the local Market

68

CONTD
Illustration Original Issuance Cancellations Outstanding Cancelled but shares not sold Head Room = 20-12-1 20 mn DRs 3mn DRs 12mn DRs 1mn DRs = 7 mn DRs

 Where no Head Room is available on the date of application, the said application will

be valid for a period of 5 working days and will be first in queue made which will be considered on a FIFO basis

 In case of non renewal on the 5th working day, a fresh application will have to be  The Depository bank provides a daily update on the availability

of Head Room on its website

69

CONTD
 Head room available for re-issuance is monitored by the

custodian of the underlying shares in coordination with the depository bank, company secretary and NSDL
 If Headroom is not available and ADR is trading at a premium

then no possibility of Arbitrage opportunity

 Difficult to obtain accurate information about headroom

availability in terms of current and historical data

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Forward Fungibility

Reverse Fungibility

 If, the investor converts the

 After

ADRs/ GDRs into the local shares by arbitrage opportunities it is called Forward fungibility

the conversion of ADRs/ GDRs into the local shares and if that local shares are re-converted to the ADRs/GDRs by arbitrage opportunities again, then it is called reverse fungibility

71

ARBITRAGE OPPORTUNITIES
 ADR s can sometimes trade at a big difference to the stock in its home

market
 Violation of the Law of One Price  ADR s of Infosys & Wipro have consistently traded at 30 - 130%

premium over the domestic stock

 Indian ADR s can be traded at a premium to the stock due to:  Excess demand for Indian high growth companies  Limited supply of ADR: 3%-6% of the market capitalization of stock  Hard for US companies to enter the Indian market

72

CONTD


ADRs could be under priced due to:  Cost of investing in the ADRs > Risk of entering the market directly  FII equity holdings in a single company are capped at a level below the overall sector-specific foreign investment limits  FIIs investing in India's capital markets must register with SEBI

 Disparities between the ADR and local share prices can be due to:
    

The level of ADR Government regulations and investor restrictions Increase in capital controls Deep fluctuations of currency exchange rates Contagious effects of neighboring countries

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CONTD
 Another important source of disparity is the co-movements between

the stocks and the markets they are traded

 An example of this correlation with the US market is the Infosys ADR,

which has been following the technology companies in the NASDAQ much more closely than the Indian stock market. modest premium compared to Infosys

 The ADR premium of Wipro, which has been presenting a much more  Considering both companies are in the same sector and in the same

market, the differences between the ADR premium of Wipro and Infosys can only be explained by differences in investor s perception rather than true valuation fundamentals.

74

BASIC MECHANICS
The basic mechanics of the execution of the arbitrage from the perspective of an US investor would be the following:
 U.S. investor acquires ADR by the ask price with U.S. dollars;  ADR is converted into the local security;  Local security is sold in the local market in local currency at the bid

price;
 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.

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ARBITRAGE STRATEGY

 The arbitrageur will buy the ORDs shares and short-sell the ADRs or

vice versa, depending on their relative valuations

 ADR (Theoretical share price) =

Ordinary share price x conversion ratio of ordinary share price to ADRs x foreign currency exchange rate

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RESTRICTIONS IN ARBITRAGE TRADE

Non-synchronous data
 There is an impossibility of real time arbitrage between Indian stocks

and their ADRs due to 10+ hours difference between U.S. and Indian time zones

77

CONTD

Indian market regulation

 The lack of full fungibility for ADRs  Restrictions on short sales of securities in the Indian market, and  Stock investment restrictions for both local and foreign investors  Different from other countries were hedgers and arbitrageurs have

benefits regarding taxes, fees, and position limits, in India they face the same costs and limits as speculators, which make arbitrage costs higher
78

CONTD

Stock investment restrictions

 Indian residents are typically not allowed to invest in ADRs/GDRs,

therefore limiting the pool of investors that could exploit arbitrage opportunities in these markets
 There are minimum requirements for foreign investors (such as

size of money pool) that restrict foreign investors ability to invest in local shares in India, limiting demand for these assets and weakening the relationship of ADRs and local share prices

79

CONTD

Bid and ask spreads

 The investor faces the spreads between bid and ask prices of the

local stock, the ADR, and the currency exchange rate

 The wider the spread, the higher the transaction cost of exercising

the arbitrage

80

CONTD

Transaction costs
 Every investor cannot 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 often adds up to a significant amount and have to

be added 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)

81

CONTD

 These costs create no-arbitrage band  This band is the sum of the stock price plus all the transaction costs

and bid-ask spreads incurred by the investor in the process of arbitrage

 As long as the stock (or ADR) is trading within that band, the

arbitrage will not be profitable because any difference between the two stock prices will be lost to transaction costs.

82

RISKS INVOLVED
 Political Risk  Exchange Rate Risk  Inflationary Risk

83

GLOBAL DEPOSITORY RECEIPTS (GDR)

 A negotiable certificate held in the bank of one country representing a

specific number of shares of a stock traded on an exchange of another country

 Issued in the currency of the country where the stock is trading  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, where they are traded on the International Order Book (IOB)
 Prices close to values of related shares, but they are traded and

settled independently of the underlying share

84

GDR STRUCTURE
Unitary Structures A single class of DRs is offered both to QIBs in the US and to offshore purchasers outside the issuer's domestic market, in accordance with Regulation S. Bifurcated Structure Under Rule 144(a) ADRs are offered to QIBs in the US and Regulation S DRs are offered to offshore investors outside. The 2 classes of DRs are offered using 2 separate DR facilities and 2 separate deposit Agreements. The Regulation S DRs - not restricted securities, and can therefore be deposited into a "side-by-side" Level I DR program, and are not normally subject to restrictions on deposits, withdrawals or transfers.

Regulation S

Unitary Structure

Bifurcated Structure

85

ADVANTAGES OF GDR
 Can be launched as part of a private or public offering.  Allow a single fungible security to be placed in one or more international

markets, thus giving access to a global investor base

 Allow the issuer to overcome local selling restrictions to foreign share

ownership
 Eligible for settlement through Clearstream, Euroclear  Enhancement of the image of the issuer company and country in the

International arena
 Tapping of International capital flows  Listing and trading in International stock exchange  Concessions in tax rates on dividends, interest and capital gains

on euro issues
86

INDIAN GUIDELINES FOR ISSUING ADRS/GDRS

Section 6 (3) (b) of FEMA, 1999 reads as follows: 6. Capital account transactions.
 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 The Reserve Bank may, in consultation with the Central Government, specify Any class or classes of capital account transactions which are

permissible;
 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. 87

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

88

FCCB (FOREIGN CURRENCY CONVERTIBLE BONDS)

Debt instrument  Issued in freely convertible currency  An option to convert to Equity  An option to also demand redemption  Redemption in the currency of issue at the then current exchange ratio Why FCCB ?
 Most popular instrument with the Indian Co s  Low interest rate by Indian standards  Fixed Interest rate  Unsecured instrument  Option to convert to fixed number of Equity  Redemption in Dollars  No voting rights 89

DIFFERENCE BETWEEN FCCB AND GDR

 FCCB means the company issues bonds denominated in foreign

currency and these bonds will be convertible in nature i.e. they can be converted into equity at a future date.
 In case of GDRs, the issuing company deposits its shares to a

depository through a custodian bank and in return the company gets proportionate amount of GDRs
 These GDRs are then issued to investors in the foreign market which

can be freely traded in those stock exchanges

 Bonds are the liabilities of the Company like debenture  GDR is the Company s own fund, as it is Share Capital of the Company

90

ADR VS. GDR

Basis of comparison Centre ADR The NYSE which is the largest stock exchange in the world is where ADR is traded Foreign companies listening in the US must reconcile their accounts to US GAAP GDR The LSE is the global centre for international equities, which dominate in turnover LSE satisfied with a statement of the difference between the UK and Accounting Standards

91

GAAP

Retail

A public offering in the US allows an GDR is issued only to QIB s but ordinary issuer to access the US retail Market. investors cannot Participate This provides extra source of Demand Legal liability of both a company and Legal liability of a company and its its individual directors increased by a directors is less than in the case of an full US listing ADR US listing could be expensive Total GDR listing on the LSE is Comparatively initial costs likely to be in the range of Inexpensive. Initial costs likely to be in US $10,00,000 to US $20,00,000. the range US 2,00,000 to US $ 4,00,000

Liability

Cost

IDRs
 IDRs give the holder the opportunity to hold an interest in equityshares

in an overseas company. IDRs are denominated in IndianRupees and issued by a Domestic Depository in India.They can belisted on any Indian stock exchange. In other words, whatADRs/GDRs are for investors abroad with respect to Indiancompanies, IDRs are for Indian investors with respect to foreigncompanies.

92

ELIGIBILITY
 Capital : The overseas company intending to issue IDRs should have

paid up capital and free reserve of at least $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 suchcompany

should not be more than 2:1

 Extent of issue : The issue during a particular year shouldnot

exceed 15% of the paid up capital plus free reserves.

 Must be listed in home country.  Must comply with any additional criteria set by SEBI.  Must have a good track record with compliance withsecurities

market regulations
93

PARTICIPANTS IN IDR
 IDRs will be issued to Indian residents in the same way as

domesticshares are issued. The issuer company will make a public offer inIndia, and residents can bid the same way as they do for Indianshares
 Participants: Qualified Institutional Buyers (QIBs)  Non-Institutional Investors (NII)  Corporates and High networth Individuals (HNIs)  Non-resident Indians, retail Individual Investors and employees

canparticipate in IDR issue.

 Commercial banks may participate subject to approval from the RBI

94

LIMITS OF BIDS IN IDR

 Retail Investors : Minimum of Rs 20,000 and maximum of Rs 100,000.  NII : Non-institutional investors have to invest above Rs100,000 up to

the issue size.

 QIBs : Institutional investors above Rs100,000 up to theissue size.  No IDR holder can individually own more than 5% of thetotal IDRs

issued except for QIBs which can hold up to15% of the IDR issued.

95

BENEFITS
f Indian investors gets chance

LIMITATIONS
f Fungibility. f Tradability of IDR f Voting Rights f Taxation f Currency Risk

to invest in foreignentity.
f Easier Access to IDRs than

s.

shares.
f Benefits of shares accrue to

IDRs also.
f Diversify holdings across

regions
f Reserve a proportion

for employees

96

STANDARD CHARETERED: IDR

 The company is already listed on the London and Hong Kong stock

Exchanges.
 Every 10 IDRs represents one share of the bank  The price band for the offering was100 (1.47; $2.10) to 115 rupeesper

IDR.
 Standard Chartered fixed its issue price for Indian DepositoryReceipts

at Rs 104 per unit. At this issue price, the bank raised Rs.2,490 crore ($530 million) by selling 24 crore IDRs

97

98

CASE STUDY ON
99

BACKGROUND
 MakeMyTrip Limited is the parent company of MakeMyTrip

(India) Private Limited and MakeMyTrip.com Inc., Indias largest online travel company based on 2009 gross bookings.  Through its primary website, www.makemytrip.com, and other technology-enhanced platforms, the company provides access to all major airlines operating to and from India, over 4,000 hotels in India and a wide selection of hotels outside India, Indian Railways and several major Indian bus operators.  E-commerce site not allowed to list in India.  Company did not make profit for last three years.

100

ORGANIZATIONAL STRUCTURE
MakeMyTrip Limited (Mauritius)

MakeMyTip (I)(Pvt. )Ltd 99.99%

MakeMyTrip.com Inc(USA) 100%

LuxuryTours&Tr avel (Pte)Ltd (Sing)(76.36%)

LuxuryTours (Malay) Sdn Bhd (100%)

101

REASONS FOR GOING GLOBAL

 To get listed, and to get that, you have to raise money, because

Indian government regulations did not allow a listing

 The second was to develop brand equity in the US

 As Indian companies have been increasing their participation

in and capitalisation of the global market, they decided to explore opportunities, just as other Indian companies have listed on the Nasdaq in the past.

102

PRICING OF ADRS
 MakeMyTrip Inc made a debut in 2010 at a price of $14.  5,750,000 shares to raise an estimated $ 70 m  The MakeMyTrip (MMYT) stock surged 89% on its listing last

Thursday, and has been the best IPO to list in the US since Athena health Incs IPO in 1997 which surged 97% on listing

103

REASONS FOR HIGH PREMIUM

 Infosys ADRs trade at a premium to the domestic price  Investors can buy shares in the domestic market, transfer them into

ADRs and then sell them on the NYSE for a higher price
 As more investors engage in such deals, the price of the stock in the

domestic market will go up, because of the increase in demand.

 Likewise, the price of ADRs on the NYSE will fall, as more investors

sell their holdings

104

MMYT: 12TH AUGUST 2010

Size of issue/No. of equity shares Offer Price Actual Price Obtained Issue Amount Green shoe Option Total Amount raised 9 mn equity shares $14 per share $ 19 per share $70 million 15% of $ 70mn = $ 80.5mn $ 70 million

MMYT received net proceeds of US $ 44.30million.

105

HISTORIC DATA

106

Open Previous Close Daily Range 52-Week Range Market Cap EPS Dividend (Yield) Volume Average Daily Volume

$0.00 $22.28 $21.50 - 23.18 $16.06 - $40.80 $37.16B 0.17 N/A (N/A) 150,355 127,377

107

FOLLOW-ON
On June 2, 2011, we completed our follow-on public offering on the

Nasdaq Global Market. We sold an aggregate of 5,244,000 ordinary shares On June 29, 2011, in connection with our follow-on public offering, we completed an additional over-allotment offering of 350,000 The price per share was $24.00 $62 million intended to be raised

108

RECENT DEVELOPMENTS
For the first time company came out of the red On June 29, 2011, in connection with our follow-on public offering, we completed an additional over-allotment offering of 350,000 of our ordinary shares at $24.00 per share. As of June 30, 2011, our stated capital was $150,763,660.85, comprising 36,854,250 ordinary shares with a par value of $0.0005 each. In July 2011, incorporated Luxury Tours (Malaysia) Sdn Bhd till date invested $168,000 In August 2011, we acquired 19.9% of Le Travenues Technology Private Limited along with SAIF, our largest shareholder, acquired 56.7%

109

PRESENTED BY:
fPrakash Rajput fVaibhav Vatkar f Rameez Sayed fJimmit Dand

103 157 134 165

110

THANK YOU

111