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OVERSEAS SOURCES OF CAPITAL (ECB / ADR / GDR)
WHAT ARE ADR’s?An American Depositary Receipt
represents ownership in the shares of a non-U.S.
company that trades in U.S. financial markets.
Stock of many non-US companies trade on US stock exchanges through the use of ADRs
WHAT ARE ADR’s?ADRs
carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-
based companies. is issued by a U.S. depository bank. May represent one share, several shares or a
fraction of a share
History of ADR’s First ADR was introduced by JPMorgan in 1927, for
the British retailer Selfridges&Co.
In 2003 more than 2,000 ADRs issued by companies in 79 countries were available to U.S. investors.
About 500 of them were listed on the New York Stock
Exchange, American Stock Exchange or Nasdaq. Others trade on the US OTC market.
TYPES OF ADR’s
1. Unsponsored ADR
2. Sponsored ADR Level I (OTC) Level II (Listed) Level III (Offering)
Unsponsored ADR created by a U.S. investment bank or brokerage that
buys the shares in the country where the shares trade, deposits them in custodian bank.
Issued in accordance with market demand & only traded on OTC markets
foreign company has no formal agreement with a depositary bank;
often issued by more than one depositary bank; costs including those associated with disbursement
of dividends are borne by the investor. Due to a recent SEC rule change in October
2008, approx. half of all ADR programs in existence are unsponsored.
Sponsored ADR Most often, the company will sponsor the creation of its own ADR
Level 1 ADR Traded in the OTC market, with bid and ask prices published daily distributed by the National Daily Quotation Bureau in the pink
sheets issuing company does not have to comply with US GAAP or
provide US Securities and Exchange Commission (SEC) disclosure.
enable a company to obtain the benefits of a US publicly traded security without altering their reporting process.
can “migrate” to a Level II or Level III ADR program if they desire to trade on NYSE,ASE, Nasdaq or the OTC Bulletin Board.
Sponsored ADR Level II ADR (Listed)
Companies have to register with the SEC; The company is required to file a Form 20-F annually that
complies with GAAP standards lowest level of ADRs that can be listed on a US stock
exchange
Level III (offering): allows foreign companies to issue shares directly into the
US The company is required to file a Form F-1, which is the
format for an Offering Prospectus for the shares. The company is also required to file a Form 20-F annually
and must adhere to U.S. GAAP standards In addition, any material information given to shareholders
in the home market, must be filed with the SEC through Form 8K.
Restricted ADRs Allowed to be placed only among selected investors &face restriction on
their re-sale Two SEC rules that allow this type of issuance of shares in the U.S.-
Rule 144-A provision makes the issuance of shares a private placement may only be issued to or traded by QIBs most ADRs held exclusively through the DTC
Regulation S shares are not, and will not be registered with any United States
securities regulation authority. cannot be held or traded by any “U.S. Person” as defined by SEC
Regulation S rules shares are registered and issued to offshore, non-US residents. can be merged into a Level 1 program after the restriction period
has expired.
ADR programs operating under one of these 2 rules make up approximately 30% of all issued ADRs.
Benefits For Companies In Issuing ADRs
Broadening and diversifying a company’s US investor base
Enhancing a company’s visibility, status and profile in the US and internationally, among investors, consumers and customers
Increasing US liquidity
Developing and/or increasing institutional research coverage in the United States
Offering a new avenue for raising equity capital, often at highly competitive rates (depending on the ADR program selected)
Enhancing communications with shareholders in US
Provides an easy way for U.S. employees of non-U.S. companies to invest in their companies' employee stock purchase plans
Benefits For InvestorsAs US securities, ADRs are quoted in US dollars.
ADRs trade easily and conveniently in U.S. dollars and settle through U.S. clearinghouses.
Publicly traded ADRs are registered with SEC.
Dividends are paid promptly in U.S. dollars at competitive foreign exchange rates.
Many institutional investors are restricted from investing in securities that do not trade on a U.S. exchange, so listed ADRs represent a way to add international exposure to a portfolio.
ADRs are as liquid as the underlying securities, as the two are interchangeable.
Liquidity Issues of ADRs of Indian Corporates
• Arbitrage opportunities arise due to time zone differences, market news, sentiments, etc.
• Two-way fungibility approved by RBI– Implies that an investor who holds ADRs/GDRs can
cancel them with the depository and sell the underlying shares in the market.
• To increase liquidity and depth of ADR/GDR market and reduce arbitrage between the underlying securities and ADRs
• Provides investors with greater flexibility• Step towards achieving Capital Account
Convertibility
Investor
Broker
Depositary
Custodian
Home Market
Local Broker
Creation Of ADRs
Investor
Broker
Depositary
Custodian
Home Market
Local Broker
Cancellation Of ADRs
Indian ADRs
• First Indian ADR – Infosys 1999
• Indian ADRs – 19– HDFC Bank, ICICI Bank– Infosys, Wipro, Cognizant, Genpact, Mahindra Satyam,
Patni Computer, iGate Corp– Sify Ltd, Rediff.com– The India Fund Ltd.– MTNL, Tata Communication– Sterlite Ind– Tata Motors– WNS, Syntel Inc.– Dr. Reddy’s
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.
Global Depository Receipts
“Issuing Company“"Domestic Custodian Bank“"Overseas Depositary Bank““Lead Manager(s)”“Other Manager(s)”“Clearing Systems”
Parties Involved
Indian GDRs• India has the distinction of having
the largest number of GDR issues (Rule 144A/Reg S) by any country
• First GDR – RIL ($ 150 mn) in May 1992
• July 2009 – Tata Power Company launched
a GDR issuance of US $ 250 mn – Tata Steel sold GDRs worth
$400 mn – Suzlon offered $175 mn in
GDRs.
Facilitates trade of shares, especially those from emerging markets.
To raise money in more than one market.
Objective of a GDR
Unitary Structure
Bifurcated Structure
GDR structures
Can be launched as part of a private or public offering.
Allow the issuer to raise capital on two or more markets simultaneously.
Allow the issuer to overcome local selling restrictions to foreign share ownership.
GDR holders do not enjoy voting rights.
Raised through public issues
More expensive in terms of administrative expenses.
AdvantagesDisadvantages
Indian stock market to some extent is shifting from Bombay to Luxemborg.
Indian stock market is no longer independence from the rest of the world.
Indian retail investors can no longer expect to make easy money on heavily discounted rights/public issues.
IMPACT OF GDR ON INDIAN CAPITAL MARKET
i. GDR’S are sold primarily to institutional investors.
ii. Demand is likely to be dominated by emerging market funds.
iii. Switching by foreign institutional investors from ordinary share in to GDRs is likely.
iv. Major demand in UK, USA, South East Asia and to some extent continental Europe.
Among the Indian Companies, Reliance Industries Ltd. was the first company to raise funds through a GDR issue.
Markets of GDR’s
What is ECB?
Source of funds for corporates from abroad with advantage of lower rates of interest prevailing in the international financial markets, longer maturity period and for financing expansion of existing capacity as well as for fresh investment
Defined as to include commercial loans [in the form of bank loans, buyers’ credit, suppliers’ credit, securitised instruments (e.g. floating rate notes and fixed rate bonds, CP)] availed from non-resident lenders with minimum average maturity of 3 years
Modes of raising ECBs Commercial Bank Loans : in the form of term loans from banks outside
India Buyer's Credit Supplier's Credit Securitised instruments such as Floating Rate Notes (FRNs), Fixed Rate
Bonds (FRBs), Syndicated Loans etc. Syndicated Loan, CP Credit from official export credit agencies Commercial borrowings from the private sector window of multilateral
financial institutions such as International Finance Corporation (Washington), ADB, AFIC,CDC
Loan from foreign collaborator/equity holder, etc and corporate/institutions with a good credit rating from internationally recognised credit rating agency
Lines of Credit from foreign banks and financial institutions Financial Leases Import Loans Foreign currency loan raised by residents from recognised lenders
Modes of raising ECBs
Two Routes for ECB and Bases of Comparison
ECBs can be accessed under two routes
(i) Automatic Route and
(ii) Approval Route.
Bases of Comparison Eligibility criteria for accessing international financial markets. Total quantum limit of funds that can be raised through ECBs. Maturity period and the cost involved. End uses of the funds raised.
Criteria Automatic Route Approval Route
Procedure Agreement with lender Application submission though dealer to RBI
Borrowers • Companies• NGOs – Micro Finance• Special Economic Zone
• FIs with infrastructure or export finance• NBFCs – import financial equipments•> US $ 500 million ECB in a year
Lenders • International Banks, Capital Markets • Qualified Overseas Organizations and Individuals
Except QOI
End Use • Real Sector – SME and infrastructure• Investment in JV, Subsidiaries• Lending for Micro Finance
SME and InfrastructureJV, Wholly owned subsidiary
Why ECB is attractive?Investor ECB is for specific period, which can be as short as three years Fixed Return, usually the rates of interest are fixed The interest and the borrowed amount are repatriable No owners risk as in case of Equity Investment
Borrower No dilution in ownership Considerably large funds can be raised as per requirements of
borrower Usually only a fixed rate of interest is to be paid Easy Availability of funds because ECB is more appealing to
Investors
Recent Developments - ECB Minimum Average Maturity: ECB up to USD 500 million per borrower
per financial year is permitted for rupee expenditure and/ or foreign currency expenditure for permissible end-uses under the automatic route
Parking of ECB proceeds: The borrowers have been provided with a flexibility to either keep their ECB proceeds offshore or keep it with the overseas branches/ subsidiaries of Indian banks abroad or to remit these funds to India to credit to their Rupee accounts with banks in India, pending utilization for permissible end-uses.
All-in-Cost Ceilings: ECB beyond the permissible all-in-cost ceiling can be availed of under the Approval Route.
Definition of Infrastructure expanded to include, power,
telecommunication, mining exploration and refining
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