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AMERICAN DEPOSITARY RECEIPTS
-A perspective for Indian corporates
Financial Advisory Lab at:
Mumbai | Mumbai-Kandivli | Thane | Vadodara | Ahmedabad | Bengaluru
www.shbathiya.com
American Depository Receipts 2
The tri-color at NASDAQ exchange commemorating India’s Independence Day.
American Depository Receipts 3
This research paper on American Depositary Receipts (ADR) – a perspective for Indian corporates is prepared and compiled by the members of Financial Advisory Lab at S.
H. Bathiya & Associates for knowledge dissemination and learning to the Firm members and its selected clients. This research paper provides general information and
guidance on ADR based on publically available information. The research paper should be read in conjunction with the Disclaimer as forming a part of this research paper.
For any further details and clarification on the research paper: Write us at [email protected].
Date of research paper: September 22, 2014
Our Locations:
Mumbai
2, Tardeo AC Market,
4th Floor, Tardeo Road,
Mumbai - 400 034.
Tel. 022-2352 3811
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Mathuradas Road, Kandivli
(W), Mumbai - 400 067.
Tel. 022-4275 8000
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Naka, Station Road,
Thane (W) - 400 601.
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Vadodara
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‘C’ Block, Sayajiganj,
Vadodara – 390005.
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Bengaluru
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Road, Off Richmond Road,
Bangalore – 560 025
Tel: 08105756750
EXECUTIVE SUMMARY
This research paper attempts to provide an overview of American Depository
Receipts (‘ADRs’) and its related aspects. ADRs are a common way for United
States of America (‘US’ or ‘USA’ or ‘America’) resident investors to buy equity in
non-US companies without the difficulties sometimes associated with cross-
border investment transactions. ADRs are priced in US dollars, pay dividends in
US dollars and can be treated like shares of US companies. ADRs are issued by a
US commercial bank and represent a fixed number or a fixed fraction of foreign
registered shares, depending on the ratio of ADRs to ordinary shares of the
issuing entity.
This paper also discusses the key benefits of trading in ADRs and the types of
ADR facilities. This paper is intended especially to act as guidepost to Indian
companies considering entering the ADR regime.
Many US investors prefer to purchase ADRs rather than shares in the issuer's
home market because ADRs trade, clear and settle according to US market
practices. Most ADRs like equity shares can be transferred and redeemed as well.
ADRs also allow easy comparison to securities of similar companies as well as
access to price and trading information. ADR holders also appreciate prompt US
dollar dividend payments and corporate action notifications. ADRs are either
unsponsored or sponsored, following the recent trend; sponsored ADRs are
favoured by foreign private issuers who enjoy several benefit and facilities as it
reaches to the broader level of potential shareholders. Sponsored ADRs are
either unlisted which includes Level 1 programs and are exempted from US
reporting requirements under Rule 12g3-2(b) compliances or listed on the three
major US exchanges - The New York Stock Exchange, The American Stock
Exchange and the National Association of Securities Dealers Automated
Quotation System which includes Level II and Level III programs.
The paper then goes on to discuss in detail, the Indian regulatory framework in
place with regard to ADRs. In India, earlier the ADR holders were not entitled to
voting rights but after many deliberations SEBI recently included, the acquisitions
through ADRs provided they are converted into shares carrying voting rights and
thereby shall attract the manner and procedure for the acquisition of shares or
voting rights, under SEBI (Substantial Acquisition of shares and takeovers)
Regulations, 2011.
ADRs generally also have two-way fungibility. Two-way fungibility meaning that
investors, either foreign institutional or domestic, in any company, which has
issued ADRs can freely convert ADRs into underlying domestic shares.
Furthermore, they can also reconvert the domestic shares into ADRs, depending
upon the market movements for the stock. The authorised dealers have been
delegated with the authority to remit the funds received for purchase of shares
or on account of cancellation of trade, under two-way fungibility of ADRs.
Retention of proceeds of the Indian companies issuing shares to overseas
depository for issuing ADRs are allowed to invest funds abroad for a temporary
period pending repatriation to India. In furtherance, the companies may also
retain abroad funds raised through ADRs, for any period to meet their future
forex (foreign exchange market) requirements.
The paper also discussed the trading of ADRs in the U.S. and the U.S. Regulations
in place for ADRs. It discusses the listing standards for securities particular to
different stock exchanges, namely the NASDAQ and the New York Stock
Exchange. The paper concludes keeping in mind various aspects of the legal
requirements and applicability of the jurisdictional barrier provided and mandate
by the statute, laws, authorities, etc. for ADRs/GDRs which are an essential part
in raising the funds of any company outside their purview in the foreign capital
markets.
American Depository Receipts 5
INTRODUCTION
An American Depository Receipt, or ADR, is a security issued by a U.S. depository
bank to domestic buyers as a substitute for direct ownership of stock in foreign
companies. An ADR can represent one or more shares, or a fraction of a share, of
a non-U.S. company. Individual shares of a foreign corporation represented by an
ADR are called American Depositary Shares (‘ADS’).
An ADR is a convenient way for companies whose stock is listed on a foreign
exchange to cross-list their stock in the United States and make their stock
available for purchase by U.S. investors, as these receipts can be traded on U.S.
exchanges.
Some ADRs are traded on major stock exchanges such as the NASDAQ Stock
Market and the New York Stock Exchange, which require these foreign
companies to conform with many of the same reporting and accounting
standards as U.S. companies. Other ADRs are traded on over-the-counter
exchanges that impose fewer listing requirements.
ADR programs frequently make a non-US company's common shares a more
appealing investment for US investors. Such programs create a new security (the
ADR) that trades and settles in US dollars in the United States, in accordance with
US market practice. In addition, the ADR program's depositary will typically
convert all dividend payments into dollars before disbursing them to investors.
As a consequence, for certain institutional investors, ADRs are deemed to be US
domestic securities and therefore are subject to fewer restrictions under internal
investment guidelines. For similar reasons, ADRs may also attract US retail
investor interest.
Key Benefits of ADR
Companies often find that the establishment of a depositary receipt program
brings additional benefits. The increased visibility and investor base they gain by
stepping outside their home market can enhance their international reputation,
increase their share value, and heighten the profile of their company among the
international investment community.
Creates, broadens or diversifies investor base to include investors in
other capital markets.
Enhances visibility and global presence among investors, consumers and
customers.
Increases liquidity by tapping new investors.
Develops and increases research coverage of your company.
Improves communication with shareholders globally.
Enables price parity with global peers.
Offers a new venue for raising equity capital.
Facilitates merger and acquisition activity by creating a desirable stock-
swap “acquisition currency”.
American Depository Receipts 6
TYPES AND LEVELS OF ADRs
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.
ADRs
Sponsored
Level I
Level II
Level III
Rule 144A
Unsponsored
American Depository Receipts 7
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
American Depository Receipts 8
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.
Program type Listed on NYSE,
Amex or Nasdaq
Unlisted Retail investors
Institutional Investors
(QIB)
Develop shareholder
base
Raise capital
Level I Unlisted (OTC)
Level II Listed
Level III - Listed Public Offering
Rule 144A DR Unlisted/Private Placement with QIBs
American Depository Receipts 9
INDIAN REGULATORY FRAMEWORK FOR ADRs
1. ELIGIBILITY CRITERIA
A. For Listed Companies
a) Eligibility of issuer: An Indian Company, which is not eligible to raise
funds from the Indian Capital Market including a company which has
been restrained from accessing the securities market by the Securities
and Exchange Board of India (SEBI) will not be eligible to issue (i) Foreign
Currency Convertible Bonds and (ii) Ordinary Shares through Global
Depositary Receipts under the Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depositary Receipt Mechanism) Scheme,
1993 (‘Scheme’).
b) Eligibility of subscriber: Erstwhile Overseas Corporate Bodies (OCBs)
who are not eligible to invest in India through the portfolio route and
entities prohibited to buy, sell or deal in securities by SEBI will not be
eligible to subscribe to (i) Foreign Currency Convertible Bonds and (ii)
Ordinary Shares through Global Depositary Receipts under the Foreign
Currency Convertible Bonds and Ordinary Shares (Through Depositary
Receipt Mechanism) Scheme, 1993.
B. For Unlisted Companies
i) Earlier Provision
Unlisted companies, which have not yet accessed the ADR/GDR route for
raising capital in the international market, would require prior or
simultaneous listing in the domestic market, while seeking to issue such
overseas instruments. Unlisted companies, which have already issued
ADRs/GDRs in the international market, have to list in the domestic market
on making profit or within three years of such issue of ADRs/GDRs,
whichever is earlier.
ii) New Provision Introduced Vide A.P. (Dir Series) Circular No. 69
Dated November 8, 2013
It has now been decided to allow unlisted companies incorporated in India
to raise capital abroad, without the requirement of prior or subsequent
listing in India, initially for a period of two years, subject to conditions
mentioned below. This scheme will be implemented from the date of the
Government Notification of the scheme, subject to review after a period of
two years. The investment shall be subject to the following conditions:
(a) Unlisted Indian companies shall list abroad only on exchanges in
IOSCO/FATF compliant jurisdictions or those jurisdictions with which SEBI
has signed bilateral agreements;
(b) The ADRs shall be issued subject to sectoral cap, entry route, minimum
capitalisation norms, pricing norms, etc. as applicable as per FDI
regulations notified by the Reserve Bank from time to time;
(c) The pricing of such ADRs to be issued to a person resident outside India
shall be determined in accordance with the captioned scheme as
prescribed under paragraph 6 of Schedule 1 of Notification No. FEMA 20
dated May 3, 2000, as amended from time to time;
(d) The number of underlying equity shares offered for issuance of ADRs to
be kept with the local custodian shall be determined upfront and ratio of
ADRs to equity shares shall be decided upfront based on applicable FDI
pricing norms of equity shares of unlisted company;
American Depository Receipts 10
(e) The unlisted Indian company shall comply with the instructions on
downstream investment as notified by the Reserve Bank from time to time;
(f) The criteria of eligibility of unlisted company raising funds through ADRs
shall be as prescribed by Government of India;
(g) The capital raised abroad may be utilised for retiring outstanding
overseas debt or for bona fide operations abroad including for acquisitions;
(h) In case the funds raised are not utilised abroad as stipulated above, the
company shall repatriate the funds to India within 15 days and such money
shall be parked only with AD Category-1 banks recognised by RBI and shall
be used for eligible purposes;
(i) The unlisted company shall report to the Reserve Bank as prescribed
under sub-paragraphs (2) and (3) of Paragraph 4 of Schedule 1 to FEMA
Notification No. 20.
(j) The Companies shall file a copy of the return which they submit to the
proposed exchange/regulators also to SEBI for the purpose of Prevention
of Money Laundering Act (PMLA). They shall comply with SEBI’s disclosure
requirements in addition to that of the primary exchange prior to the
listing abroad.
iii) New Provision Introduced Vide Press Note No. 7 (2013 Series)
Dated December 3, 2013
Present Position: Unlisted companies, which have not yet accessed the
ADR/GDR route for raising capital in the international market, would
require prior or simultaneous listing in the domestic market, while seeking
to issue such overseas instruments. Unlisted companies, which have
already issued ADRs/GDRs in the international market, have to list in the
domestic market on making profit or within three years of such issue
ADRs/GDRs, whichever is earlier. ADRs/GDRs are issued on the basis of the
ratio worked out by the Indian company in consultation with the Lead
Manager to the issue. Pending repatriation or utilization of the proceeds,
the Indian company can invest the funds in:
a) Deposits, Certificate of Deposits or other instruments offered by banks
rated by Standard and Poor, Fitch, IBCA, Moody’s etc. with rating not
below the rating stipulated by Reserve Bank from time to time for the
purpose;
b) Deposits with branch/es of Indian Authorized Dealers outside India;
and
c) Treasury bills and monetary instruments with a maturity or unexpired
maturity of one year or less.
Revised Position: The Government of India has reviewed the position in
this regard and notified the Foreign Currency Convertible Bonds and
Ordinary shares (Through Depository Receipt Mechanism) (Amendment)
Scheme, 2013 vide Notification no. G.S.R. 684 (E) dated 11th October, 2013.
Unlisted Companies shall be allowed to raise capital abroad without the
requirement of prior or subsequent listing in India initially for a period for
two years subject to the following conditions:
(a) Unlisted companies shall list abroad only on exchanges on IOSCO/FATF
complaint jurisdictions or those jurisdictions with which SEBI has
signed bilateral agreement;
(b) The Companies shall file a copy of the return which they submit to the
proposed exchange/regulators also to SEBI for the purpose of
Prevention of Money Laundering Act (PMLA). They shall comply with
American Depository Receipts 11
SEBI’s disclosure requirements in addition to that of the primary
exchange prior to the listing abroad;
(c) While raising resources abroad, the listing company shall be fully
compliant with the FDI policy in force;
(d) The Capital raised abroad may be utilised for retiring outside overseas
debt or for operations abroad including for acquisitions;
(e) In case the funds raised are not utilised abroad as stipulated at (d)
above, such companies shall remit the money back to India within 15
days and such money shall be parked only in AD category banks
recognised by RBI and may be used domestically.
2. PRICING OF ADRs:
The pricing of ADR issues including sponsored ADRs / GDRs should be
made at a price determined under the provisions of the Scheme of issue of
Foreign Currency Convertible Bonds and Ordinary Shares (Through
Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the
Government of India and directions issued by the Reserve Bank, from time
to time.
A. For Listed Companies:
Issues should be made at a price not less than the higher of the following
two averages:
(i) The average of the weekly high and low of the closing prices of the
related shares quoted on the stock exchange during the six months
preceding the relevant date;
(ii) The average of the weekly high and low of the closing prices of the
related shares quoted on a stock exchange during the two weeks
preceding the relevant date.
Relevant date - the date thirty days prior to the date on which the
meeting of the general body of shareholders is held, in terms of
provisions of the Companies Act, 2013, to consider the proposed issue.
B. For Unlisted Companies:
Pricing of ADRs to be issued to a person resident outside India shall be
determined in accordance with the scheme as prescribed under FEMA
regulations.
Utilization of Issue Proceeds:
ADRs are issued on the basis of the ratio worked out by the Indian
company in consultation with the Lead Manager to the issue. The proceeds
so raised have to be kept abroad till actually required in India. Pending
repatriation or utilisation of the proceeds, the Indian company can invest
the funds in:-
a. Deposits with or Certificate of Deposit or other instruments offered
by banks who have been rated by Standard and Poor, Fitch or
Moody's, etc. and such rating not being less than the rating
stipulated by the Reserve Bank from time to time for the purpose;
b. Deposits with branch/es of Indian Authorised Dealers outside India;
and
c. Treasury bills and other monetary instruments with a maturity or
unexpired maturity of one year or less.
American Depository Receipts 12
There are no end-use restrictions except for a ban on deployment /
investment of such funds in real estate or the stock market. There is no
monetary limit up to which an Indian company can raise ADRs / GDRs.
However issuer needs to comply with sectoral cap norms as notified under
FEMA Regulations.
The ADR / GDR proceeds can be utilised for first stage acquisition of shares
in the disinvestment process of Public Sector Undertakings / Enterprises
and also in the mandatory second stage offer to the public in view of their
strategic importance.
An Indian Company can raise foreign currency resources abroad through the
issue of ADRs: - Such company however, has to comply with the requisites under
the following policies and enactments:
Eligibility under the FDI policy;
The ADRs are issued in accordance with the scheme for issue of Foreign Currency
Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism)
Scheme, 1993 (hereinafter the 1993 Scheme) and guidelines issued by the
Central Government from time to time. The 1993 Scheme entails the following
requisites for an Indian company opting to issue ADRs:
A prior permission from the Department of Economic Affairs, Ministry of Finance,
and Government of India Subject to the condition that:
(a) Such company has a consistent track record of good performance, financial or
otherwise, for a minimum period of three years.
(b) Final approval of the issue structure from the Department of Economic
Affairs.
(c) Limit: The ADRs shall be treated as a Foreign Direct Investment. The aggregate
of the foreign investment made either directly or indirectly i.e. through ADRs
shall not exceed 51% of the issued and subscribed capital of the issuing company.
As far as the eligibility to subscribe to ADRs is concerned, erstwhile OCBs which
are not eligible to invest in India and entities prohibited to buy, sell or deal in
securities by SEBI shall not be eligible to subscribe to ADRs.
Companies Act, 2013:
The Companies Act, 2013 defines ‘global depository receipt’ to mean any
instrument in the form of a depository receipt, by whatever name called, created
by a foreign depository outside India and authorised by a company making an
issue of such depository receipts. It gives the Central Government the power to
make rules regarding the manner and condition of issue of such DRs in any
foreign country. This provision is an additional source of legal authority
governing the issue of DRs. As per the draft SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2014, GDRs or ADRs have the same
meaning as assigned to global depository receipts in the Companies Act, 2013.
Income Tax Act, 1961:
The Income Tax Act provides for tax on income of a non-resident assessee from
1. interest on bonds of an Indian company;
2. dividends on Depository Receipts (DRs)
It specifically mentions that such DR issue must be in compliance with any
scheme notified by the Central Government. This creates an additional power for
the Central Government to make regulations on DRs.
American Depository Receipts 13
3. TAXATION ASPECT OF ADRs
Taxation of income from any overseas securities including Depositories Receipts
(DR) like Bonds, ADR, GDR etc. issued by Indian companies is dealt specifically
under section 115AC (for other than employees of issuing company) and 115ACA
(for employees of issuing company).
Section 115AC of Indian Income Tax Act, 1961
(1) Where the total income of an assessee, being a non-resident, includes –
(a) income by way of interest or [Dividends other than dividends referred to in
section 115-O], on bonds or shares of an Indian company issued in accordance
with such scheme as the Central Government may, by notification in the Official
Gazette, specify in this behalf, or on bonds or shares of a public sector company,
sold by the Government and purchased by him in foreign currency; or
(b) Income by way of dividends [other than dividends referred to in section 115-
O] on Global Depository Receipts –
(i) issued in accordance with such scheme as the Central Government
may, by notification in Official Gazette, specify in this behalf, against the
initial issue of shares of Indian company and purchased by him in
foreign currency through an approved intermediary; or
(ii) issued against the shares of a public sector company sold by the
Government and purchased by him in the foreign currency through an
approved intermediary; or,
(iii) [issued or] re-issued in accordance with such scheme as the Central
Government may, by notification in Official Gazette, specify in this
behalf, against the existing shares of an Indian company purchased by
him in foreign currency through an approved intermediary ;
(c) Income by way of long-term capital gains arising from the transfer of bonds
or, as the case may be, shares referred to in clause (a), the income-tax payable
shall be the aggregate of -
(i) The amount of income-tax calculated on the income by way of
interest or [Dividends other than dividends referred to in section 115-
O], as the case may be, in respect of bonds or shares referred to in
clause (a), if any, included in the total income, at the rate of ten per
cent;
(ii) The amount of income-tax calculated on the income by way of long-
term capital gains referred to in clause (b), if any, at the rate of ten per
cent; and
(iii) The amount of income-tax with which the non-resident would have
been chargeable had his total income been reduced by the amount of
income referred to in clause (a) and clause (b).
(2) Where the gross total income of the non-resident -
(a) consists only of income by way of interest or [Dividends other than
dividends referred to in section 115-O] in respect of bonds or, as the
case may be, shares referred to in clause (a) of sub-section (1), no
deduction shall be allowed to him under sections 28 to 44C or clause (i)
or clause (iii) of section 57 or under Chapter VI-A;
(b) Includes any income referred to in clause (a) or clause (b) of sub-
section (1) the gross total income shall be reduced by the amount of
such income and the deduction under Chapter VI-A shall be allowed as if
the gross total income as so reduced, were the gross total income of the
assessee.
(3) Nothing contained in the first and second provisos to section 48 shall apply
for the computation of long-term capital gains arising out of the transfer of long-
American Depository Receipts 14
term capital asset, being bonds or shares referred to in clause (b) of sub-section
(1).
(4) It shall not be necessary for a non-resident to furnish under sub-section (1) of
section 139 a return of his income if -
(a) His total income in respect of which he is assessable under this Act
during the previous year consisted only of income referred to in clause
(a) of sub-section (1); and
(b) The tax deductible at source under the provisions of Chapter XVII-B
has been deducted from such income.
(5) Where the assessee acquired shares or bonds in an amalgamated or resulting
company by virtue of his holding shares or bonds in the amalgamating or
demerged company, as the case may be, in accordance with the provisions of
sub-section (1), the provisions of the said sub-section shall apply to such shares
or bonds.
Section 115AC is amply clear that income (interest including dividend but not
covered in Section 115-O) from DR’s to a non-resident is taxable at a
concessional rate of 10%, similarly concessional rate is also applicable to resident
employees as per Section 115ACA. Further, income by way of long-term capital
gains on transfer of those DRs, are taxed at a concessional rate of 10% for non-
resident as well as resident employees. The non-Resident further need not file
his return of income if he has only income covered under this section taxable in
India and appropriate TDS has been deducted on the said income. Further, since
the DR is just a change in nomenclature of shares any transfer/ surrender of DR
during a course of amalgamation/demerger under section 47 should not attract
the term ‘Transfer’.
Situs of DRs:
DR is issued by the overseas DP and is also redeemed through them only, hence,
one can argue that the situs of DR is outside India. New explanation applying a
look-at approach as ruled by the apex court and also viewing it from the eyes of
‘Substance over form’, Non-resident is ultimately holding share capital in Indian
company and holding of shares instead of DR is just a change in nomenclature
and only for convenience of liquidity and hassle free investment process.
Moreover the value of DR though traded on overseas stock exchanges is
ultimately derived from the share value of that company in India. Concurrently,
recent amendment in the Act wherein any capital asset whose substantial value
is derived from assets situated in India is to be deemed as situated in India, in
spite of the fact that DR is situated overseas the amendment extends the reach
of section 9 of Act and deems DR to be situated in India. Though a stand can be
taken that value of DR overseas on stock exchanges depends on demand and
supply relationship on that exchange, the value of those DR substantially
depends on what is the price of the underlying asset i.e. of shares in India or at
Indian stock exchanges. Hence from the above it is impermissible to argue that
situs of DR is not in India. This is also seconded by intention of the Government
by taxing the transfer of DR as capital gains under 115AC and 115ACA
respectively.
Once the Situs of DR is concluded to be in India let us evaluate the tax liability on
various options under Income Tax Act:
Clause (viia) of Section 47 - Transactions not regarded as transfer
Any transfer of capital asset, being bonds, or [Global Depository Receipts]
referred to in sub section (1) of section 115AC, made outside India by non-
resident to another non-resident;]
i) Transfer of DRs to another Non-Resident:
Under this option as discussed above non-resident transfers the DR to another
non-resident overseas in foreign exchange, this prima facie gets taxed under
American Depository Receipts 15
section 115AC of the Act. However, due to specific exemption given under
section 47 of the Act the same is not treated as transfer and not liable to capital
gain tax in India.
ii) Transfer of DRs to a Resident of India:
Though the ultimate purpose of going under this route is not clear from a
resident’s prospective, since the exemption available under section 47 as taken
under option 1 is not available here, since this is not a transfer made to non-
resident, this transfer will squarely fall under section 115AC and will be taxed
accordingly depending on whether it is short term capital gains or long term
capital gains.
However, if the transfer is in the form of gift, this could have implications on the
part of resident as receiver of gift under section 56 and accordingly will be taxed
to resident as ‘Income from other sources’.
iii) Get DRs converted to shares and then sell them on Indian stock
exchange:
This being the most complicated option, since there are two stages of transfers
being done, one when the DRs are converted into equity shares and other when
the equity shares are actually sold. Let us deal this stage wise:
Stage I: At this stage DR are converted into equity shares either to still hold them
or to sell them off immediately. Irrespective of above since DRs and equity shares
are two separate financial instruments with separate voting rights under the
Companies Act, separate set of risks involved, separate returns expected from
them, issuing authority also being different, and most importantly transfer of DRs
is kept open for taxation under section 115AC of the Act. From the foregoing it
would not be wrong to say that surrendering of DR in order to get shares in lieu
of it is taxable in India.
Further, the scheme of ‘Issue of Foreign currency convertible bonds and ordinary
shares (Through Depository Receipt Mechanism), 1993 states that value of
shares acquired or say cost of acquisition of shares obtained by surrendering the
DRs will be the market value of those shares as on the date of such shares getting
credited to his D-mat account or getting the purchase note from the respective
stock broker whichever is earlier, moreover the period of holding of those shares
is also to be reckoned from the date of those shares getting credited to one’s
account and not from the date from which DRs were held, from which is amply
clear that stage I and II are separate taxable events.
Further, one more view is also possible that exchange of DR for equity is just
moving from one class of deemed equity to another class of equity with
new/separate rights which is similar to exchanging A class of equity for B class of
equity which may still fall under the term ‘Transfer’ and capital gains may attract
accordingly.
It is also pertinent to note that one of the clauses of section 47 mentions “any
transfer by way of conversion of (bonds) or debentures, debenture stock, or
deposit certificates in any form, of a company in to shares or debentures of that
company” will not attract the provisions of section 45 i.e. charging section of
capital gains under the Income Tax Act, 1961.
Few questions that arise from the above clause are, does the deposit certificate
as mentioned above include DR, prima facie it does not look like because the
relationship between lender and borrower which exists generally in a transaction
of deposit is missing here, and an extremely aggressive stand would also not fall
within the four walls of ‘Deposit certificates’. Another question that arise is,
specific exemption for transfer of DR between Non-resident to Non-Resident is
provided in the Act and, also specific provision to exclude conversion of bonds
mentioned under section 115AC, (the same section where taxation of DR is
mentioned), in to equity shares is been provided but there is no specific provision
to exempt exchange of DR with equity from capital gains. Hence it can be safely
be concluded that exchange of DR with equity is a taxable event.
American Depository Receipts 16
The cost of acquisition taken for the above shares as discussed in the preceding
paragraphs can also be treated as sale value for the DRs surrendered/
transferred/exchanged. Further one can also argue that getting equity by
surrendering DR is not a transfer, but the definition of transfer is wide enough to
include exchange of assets which in this case is of DR for equity shares, which via
intermediaries ultimately happens between the company and share holder/DP
holder.
To conclude stage I, the exchange being taxable and the computation of gain is
done by taking sale value as mentioned in the above paragraph and cost of
acquisition as actual cost incurred to acquire DR.
Stage 2: At this stage since the DRs are converted in to equity shares and are
listed on Indian stock exchanges, there is no ambiguity as to the situs of the
shares and depending on which type of capital gain is earned i.e. Long term
which will be exempt under section 10(38) or Short term which will be taxed at a
special concessional rate of 15%.
Further the mode of computation is also not complex since the cost of
acquisition is derived as mentioned in the scheme as discussed above and sale
value will be the net sale consideration received by selling the shares.
They (the companies) just need to report the details of such funds raised and
retained abroad within 30 days from the date of closure of the issue to the
Reserve Bank of India (RBI).
American Depository Receipts 17
PROCESS AND INTERMEDIARIES
Issue Process
The Scheme operates in a framework comprising of laws on companies,
securities, foreign exchange, taxation, money laundering and market abuse. Over
time, this framework has resulted in the creation of a market micro-structure
around the issue of DRs. This section explains the steps involved in the issue of
capital raising ADRs or GDRs by an Indian issuer company against its shares,
under the present Scheme in conjunction with the existing market micro-
structure:
1. The Indian issuer company must: (a) convene a board meeting to approve the
proposed DR issue not exceeding ascertain value in foreign currency; (b) convene
an Extraordinary General Meeting (EGM) for the approval of the shareholders for
the proposed DR issue under the provisions of the Companies Act, 2013; (c)
identify the agencies whose participation or permission it would require for the
DR issuance; (d) convene a board meeting to approve the agencies; (e) appoint
the agencies and sign the engagement letters.
2. The Indian legal counsel must undertake the due diligence.
3. The Indian issuer company must draft the information memorandum in
consultation with the Indian legal counsel and submit the same to various
agencies for their comments and then finalise it.
4. The listing agent must submit the information memorandum to the overseas
stock exchange for their comments and in principle listing approval.
5. The Indian issuer company must simultaneously submit the draft information
memorandum to the Indian stock exchanges where the issuing company’s shares
are listed for in principle approval for listing of the underlying shares.
6. The Indian issuer company must hold a board meeting to approve the issue.
7. Pursuant to steps 4 and 5, on receipt of the comments on the information
memorandum from the overseas and Indian stock exchanges, the Indian issuer
company must incorporate the same and file the final information memorandum
with the overseas and Indian stock exchange and obtain final listing approval.
8. The Indian issuer company can open the issue for the DRs on receipt of the in
principle listing approval from the overseas and the Indian stock exchanges.
9. The Indian issuer company must open the escrow account with the escrow
agent and execute the escrow agreement.
10. The Indian issuer company, in consultation with the lead manager (merchant
banker), must finalise: (a) Whether the DRs will be through public or private
placement. (b) The number of DRs to be issued. (c) The issue price. (d) Number of
underlying shares to be issued against each DR.
11. On the day of the opening of the issue, the Indian issuer company must
execute the deposit and subscription agreements.
12. The issue should be kept open for a minimum of three working days.
13. Immediately on closing of the issue, the Indian issuer company must convene
a board or committee meeting for allotment of the underlying shares against the
issue of the DRs.
14. The Indian issuer company must deliver the share certificates to the domestic
custodian bank who will in terms of the deposit agreement instruct the overseas
depository bank to issue the DRs to non-resident investors against the shares
held by the domestic custodian bank.
15. On receipt of listing approval from the overseas stock exchange, the Indian
issuer company must submit the required documents for final in principle listing
approval from the Indian stock exchange.
American Depository Receipts 18
16. After DRs are listed, the lead manager must instruct the escrow agent to
transfer the funds to the Indian issuer company’s account.
17. The Indian issuer company can either remit all or part of the funds, as per its
discretion.
18. On obtaining the final approval from the Indian stock exchange, the Indian
issuer company can admit the underlying shares to the depository, that is,
National Securities Depository Limited (NSDL) or Central Depository Services
(India) Limited (CDSL).
19. The Indian issuer company must obtain trading approval from the stock
exchange.
20. The Indian issuer company must intimate the custodian for converting the
physical shares into dematerialised form.
21. Within 30 days of the closing of the DRs issue, details of the DRs issue along
with the information memorandum should be submitted to various authorities.
22. Return of allotment is to be filed with Registrar of Companies within 30 days
of allotment.
23. Indian issuing company is to file a specified format annexed to Schedule I,
FEMA 20 with RBI Central Office within 30 days of closure of the DRs issue.
24. The Indian issuer company is to file a quarterly return in a specified format
annexed to Schedule I, FEMA 20 within 15 days of the close of the calendar
quarter.
American Depository Receipts 19
VOTING RIGHTS ASPECT OF ADRs & INDIAN EXPERIENCE WITH ADRs
The Voting Rights of American Depository Receipts holders are determined
primarily by the terms of the Deposit Agreement and are guided by the rules of
the stock exchange where the ADRs are listed (if any) and also, by the laws of the
Issuer’s home market.
The Deposit Agreement may give ADR holders a contractual right to instruct the
Depositary to vote on matters that have been submitted for shareholder
approval, provided it is legal and reasonably practicable to do so. If these
preconditions are met, then pursuant to the terms of the Deposit Agreement,
the rules of the relevant stock exchange and home market law, and an
instruction from the Issuer to do so, the Depositary will extend the voting rights
to the ADR holders. The Depositary then vote, or cause to be voted, such shares
for which instructions are received from ADR holders in accordance with such
instructions.
The Depositary does not itself exercise any voting discretion and will cause
underlying shares to be voted only to the extent it has received proper and
timely instructions from ADR holders, and only in accordance with such
instructions. Any shares for which instructions have not been received from the
underlying ADR holders would generally remain un-voted. However, if the issuer
so requests, in situations where the depositary is provided a legal opinion by the
issuer’s counsel to the effect that voting on behalf of non- instructing DR holders
does not violate home market law, a discretionary proxy can be granted to the
issuer permitting it to vote the shares represented by un-voted DRs on certain
matters.
Issuers should be made aware, however, that the larger market participants
generally do not hold a favourable view of discretionary proxies.
Initially, the ADR holders were not entitled to voting rights. Although, the
situation improved when, in 2009, they were made entitled to vote on the
underlying shares. However, this was subject to the clauses in the terms of issue
or agreements between the holders of these instruments and the issuers. This
practically negated the possibility of exercising the voting rights.
This is why SEBI recently recommended for a change in current rules to allow
ADR holders to exercise their voting rights, raising the possibility of increased
shareholder activism in future.
INDIA EXPERIENCES WITH ADRs
In the year 2005, the Ministry of Finance, India disallowed issuance of GDRs
without listing in India. Before such restriction was imposed, companies such as
Sify, Satyam Infoway and Rediff raised substantial amount of funds through
listing their GDRs/Foreign Currency Convertible Bonds (“FCCBs”) in foreign stock
exchanges and continue to remain to be unlisted in India.
The Securities Exchange Board of India (“SEBI”) supported this move since it
believed that it would help the development of domestic capital markets and
shall also give it regulatory control over companies issuing GDRs/FCCBs.
However, the poor performance of the domestic capital markets in recent years
and the consequent impact on the market sentiment has made it difficult for
companies to raise money from domestic capital market. In such a situation,
Indian groups or their founders have started setting up offshore companies (that
through their Indian subsidiary owned the Indian asset) and are solely dedicated
towards raising funds abroad.
These offshore companies were then listed on the back of their Indian subsidiary
holding the Indian asset. In this background, it seems the government has now
decided to permit Indian unlisted companies to issue ADRs/ GDRs without the
requirement to list in the domestic stock exchange. Under the chairmanship of
Mr. M. S. Sahoo, Secretary, Institute of Company Secretaries of India, a
committee was constituted on January 10, 2014 to review the entire framework
of access to domestic and overseas capital markets and related aspects. The
Committee in its report suggested reforms in the framework of domestic
depository.
American Depository Receipts 20
U.S. REGULATIONS FOR ADRs
In order for a non-U.S. company to place their ADRs on U.S. securities market,
they have to comply with Securities and Exchange regulations and reporting
requirements, so there is more assurance for the U.S. investor that the shares
they are purchasing meet the standards applicable for U.S. companies, and that
there will be the same level of transparency in reporting.
ADRs are traded in the same way as U.S. stocks, and are listed on the New York
Stock Exchange, the American Stock Exchange, or are traded on the NASDAQ or
on the over-the-counter market. ADRs are traded according to U.S. market
practices, are quoted in U.S. dollars, and dividends are paid in U.S. dollars.
U.S. investors generally prefer to purchase ADRs rather than ordinary shares in
the issuer’s home market because ADRs trade, clear and settle according to U.S.
market conventions.
1. TRADING OF ADRs
ADRs are traded in the United States using the same facilities as equity securities,
including the New York Stock Exchange and NASDAQ. Purchasers and sellers of
ADRs range from retail customers and institutional investors to arbitragers and
brokers. The prices at which ADRs are traded are influenced by several factors,
including the price of the depositary security in its home market and foreign
currency rates.
The actual certificates for ADRs are typically held by securities depositaries,
which hold the ADRs in their vaults and keep computerized book keeping entries
of the transfer of ADRs, payment of dividends and related matters. Thus, ADRs
may be purchased through brokerage firms like any other securities.
2. FEDERAL REGULATIONS OF ADRs
Two principal bodies of law provide the primary federal regulation of ADR
issuance and trading. The first of these statues, the Securities Act of 1933,
governs public distributions by a foreign private issuer of ADRs and its affiliates in
the United States. The second, the Securities Exchange Act of 1934, governs
secondary trading in ADRs in U.S. capital market.
a) SECURITIES ACT OF 1933
Under the Securities Act of 1933 (‘the Securities Act’), the depositary shares
represented by the ADRs are securities, separate and apart from the deposited
foreign securities they represent. Unless an exemption is available, the ADRs
must be registered under the Securities Act before they may be publicly
distributed within the United States.
When a foreign private issuer wants to raise capital in the U.S. market through a
public offering, such issuer generally proceeds in a manner similar to that of a
U.S. issuer conducting a domestic offering. In most of ADR offerings, the foreign
private issuer files two registration statements:
i. Form F-6, to register the depositary shares; and
ii. Form F-1 (used for initial public offerings of ADRs), Form F-2 and
F-3 (are used by foreign private issuer that have previously
registered securities under Securities Act or the Exchange Act) or
Form F-4 (used for securities issued in business combinations
including certain reclassifications, mergers, consolidations,
transfers of assets and exchange offers.
b) SECURITIES EXCHANGE ACT OF 1934
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 U.S. GAAP.
Form 2-F may be used by foreign private issuers to register depositary
shares under the Exchange Act if either the depositary or the legal entity
American Depository Receipts 21
created by the agreement for ADRs signs the registration statement
describing the ADRs and the depositary shares.
Annual reports (on Form 20-F), filed on a regular basis with the U.S.
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.
3. SEC REQUIREMENTS
ADRs are always registered with the SEC on a Form F-6 registration statement.
Disclosure under Form F-6 relates only to the contractual terms of deposit under
the depositary agreement and includes copies of the agreement, a form of ADR
certificate, and legal opinions. A Form F-6 contains no information about the
non-U.S. company. If a foreign company with ADRs wishes to raise capital in the
U.S., it would separately file a registration statement on Form F-1, F-3 or F-4. If a
foreign private issuer seeks to list ADRs on a U.S. Stock Exchange, it would
separately file with the SEC a registration statement on Form 20-F. Registration
statements used to raise capital or list ADRs on an exchange are required to
contain extensive financial and non-financial information about the issuer.
4. STOCK EXCHANGE REQUIREMENTS
To be listed initially, a company must meet minimum financial and non-financial
standards. Among other things, the standards cover total market value, stock
price, and the number of publicly traded shares and shareholders a firm has.
After a company's stock starts trading on an exchange, it usually is subject to
other, less stringent requirements; if it fails to meet those, the stock can be
delisted. The listing requirements particular to the NASDAQ and the New York
Stock Exchange are provided in detail:
NASDAQ STOCK EXCHANGE
a) NASDAQ Market Tiers: The NASDAQ Stock Market has 3 distinctive tiers:
The NASDAQ Global Select Market®, The NASDAQ Global Market® and
The NASDAQ Capital Market®. Applicants must satisfy certain financial,
liquidity and corporate governance requirements to be approved for
listing on any of these market tiers. As illustrated in the following tables,
the initial financial and liquidity requirements for the NASDAQ Global
Select Market are more stringent than those for the NASDAQ Global
Market and likewise, the initial listing requirements for the NASDAQ
Global Market are more stringent than those for the NASDAQ Capital
Market. Corporate governance requirements are the same across all
NASDAQ market tiers. It is important to note that even though a
company’s securities meet all enumerated criteria for initial inclusion,
NASDAQ may deny initial listing, or apply additional conditions, if
necessary to protect investors and the public interest.
b) Overview of Initial Listing Requirements: The following charts provide an
overview of the criteria companies must satisfy:
NASDAQ Global Select Market: Financial Requirements
Companies must meet all of the criteria under at least one of the four financial
standards below and the applicable liquidity requirements on the next page.
These requirements apply to listing the primary class of securities for an
operating company. Refer to the Listing Rules for specific requirements as they
pertain to closed end funds, structured products and secondary classes.
Financial
Requirements
Standard 1:
Earnings
Standard 2:
Capitalization
with Cash
Standard 3:
Capitalization
with Revenue
Standard 4:
Assets with
American Depository Receipts 22
Flow Equity
Listing Rules 5315(e) and 5315(f)(3)(A)
5315(e) and 5315(f)(3)(B)
5315(e) and 5315(f)(3)(C)
5315(e) and 5315(f)(3)(D)
Pre-Tax
Earnings
(income from
continuing
operations
before income
taxes)
Aggregate in prior three
fiscal years > $11 million and Each of the prior three
fiscal years > $0 and
Each of the two
most recent
fiscal years >
$2.2 million
--- --- ---
Cash Flows --- Aggregate in prior three
fiscal years >
$27.5 million And Each of
the prior three fiscal years > $0
--- ---
Market
Capitalization
--- Average > $550
million over prior
12 months
Average > $850
million over prior
12 months
$160 million
Revenue --- Previous fiscal
year > $110
Previous fiscal year >
---
million $90 million
Total Assets --- --- --- $80 million
Stockholders’
Equity
--- --- --- $55 million
Bid Price $4 $4 $4 $4
NASDAQ Global Select Market: Liquidity Requirements
Liquidity Requirements
Initial Public Offerings and Spin-Off Companies
Seasoned Companies: Currently Trading Common Stock or Equivalents
Affiliated Companies
Listing Rule
Round Lot Shareholders
or Total
Shareholders or
Total Shareholders
and Average Monthly Trading Volume
over Past Twelve
Months
450 or
2,200
450 or
2,200 or
550 and
1.1 million
450 or
2,200 or
550 and
1.1 million
5315(f)(1)
American Depository Receipts 23
Publicly Held Shares
1.25 million 1.25 million 1.25 million 5315(e)(2)
Market Value of Publicly Held
Shares or
Market Value of Publicly Held
Shares and
Stockholders’ Equity
$45 million $110 million or
$100 million and
$110 million
$45 million 5315(f)(2)
*The Company must also have four registered and active Market Makers unless it satisfies the requirements of the NASDAQ Global Market Income Standard or Equity Standard as set forth on the next page, in which case it must have three registered and active Market Makers.
NASDAQ Capital Market: Financial and Liquidity Requirements
Companies must meet all of the criteria under at least one of the three standards
below:
Requirements Equity Standard Market Value of
Listed Security
Standard
Net Standard
Income
Listing Rules 5505(a) and 5505(b)(1)
5505(a) and 5505(b)(2)
5505(a) and 5505(b)(3)
Stockholders’
Equity
$5 million $4 million $4 million
Market Value of $15 million $15 million $5million
Publicly Held
Shares
Operating History 2 years --- ---
Market Value of
Listed Securities
--- $50 million ---
Net Income from Continuing
Operations (in the latest fiscal year or in two of the last three fiscal years)
--- --- $0.75 million
Publicly Held
Shares
1 million 1 million 1 million
Shareholders (round lot holders)
300 300 300
Market Makers 3 3 3
Bid Price OR
Closing Price**
$4
$3
$4
$2
$4
$3
* Currently traded companies qualifying solely under the Market Value Standard
must meet the $50 million Market Value of Listed Securities and the applicable
bid price requirement for 90 consecutive trading days before applying.
** To qualify under the closing price alternative, a company must have: (i)
average annual revenues of $6 million for three years, or (ii) net tangible assets
of $5 million, or (iii) net tangible assets of $2 million and a 3 year operating
history, in addition to satisfying the other financial and liquidity requirements
listed above.
Corporate Governance Requirements
Companies listed on the NASDAQ Stock Market are required to meet high
standards of corporate governance provided in the Listing Rules 5600 Series.
American Depository Receipts 24
Certain exemptions and phase-ins from these requirements apply to limited
partnerships, foreign private issuers, initial public offerings and controlled
companies.
c) Overview of continued listing standards:
Continued Listing Standards for NASDAQ Global Select Market and NASDAQ
Global Market Companies
The financial and liquidity standards for continued listing are the same for
companies trading on either the NASDAQ Global Select Market o the NASDAQ
Global Market. Once listed, companies must meet all of the criteria under at least
one of the three standards below:
Financial
Requirements
Equity Standard Market value
Standard
Total Assets/Total
Revenue Standard
Listing Rules 5450(a) and
5450(b)(1)
5450(a) and
5450(b)(2)
5450(a) and
5430(b)(3)
Stockholders’ Equity
$10 million --- ---
Market Value of Listed Securities
--- $50 million ---
Total Assets and Total Revenue (in
latest fiscal year or in two of last three
fiscal years)
--- --- ---
Publicly Held
Shares
0.75 million 1.1 million 1.1 million
Market Value of
Publicly Held
Shares
$5 million $15 million $15 million
Bid Price $1 $1 $1
Total Shareholders 400 400 400
Market Makers 2 4 4
Continued Listing Standards for NASDAQ Capital Market Companies
Companies must meet all of the criteria under at least one of the three standards
below:
Requirements Equity Standard Market Value of
Listed Securities
Standard
Net Income
Standard
Listing Rules 5550(a) and
5550(b)(1)
5550(a) and
5550(b)(2)
5550(a) and
5550(b)(3)
Stockholders’
Equity
$2.5 million --- ---
Market Value of Listed Securities
--- $35 million ---
Net Income from Continuing
Operations (in the latest fiscal year or in two of the last three fiscal years)
--- --- $0.50 million
Publicly Held
Shares
0.50 million 0.50 million 0.50 million
Market Value of
Publicly Held
Securities
$1 million $1 million $1 million
Bid Price $1 $1 $1
Public Holders 300 300 300
Market Makers 2 2 2
American Depository Receipts 25
NEW YORK STOCK EXCHANGE (NYSE)
a) Overview of Initial Listing Standard
The NYSE Market has established certain qualitative and quantitative standards
for initial listing of U.S. and foreign companies.
QUANTITATIVE STANDARDS
Listing Standards
Criteria Standard
1
Standard
2
Standard
3
Standard
4
Pre-tax income1 $0.75
million
N/A N/A N/A
Market capitalization N/A N/A $50
million
$75 million
OR
At least $75
million in
total assets
and $75
million in
revenues1
Market value of public
float2
$3 million $15
million
$15
million
$20 million
Minimum price $3 $3 $2 $3
Operating history N/A 2 years N/A N/A
Shareholders' equity $4 million $4
million
$4
million
N/A
Public
shareholders/Public
float (shares)2
Option 1: 800/500,000
Option 2: 400/1,000,000
Option 3: 400/500,0003
1Required in the latest fiscal year, or two of the three most recent fiscal years. 2Public shareholders and public float do not include shareholders or shares held
directly or indirectly by any officer, director, controlling shareholder or other
concentrated (i.e. 10 percent or greater), affiliated or family holdings. 3Option 3 requires a daily trading volume of at least 2,000 shares during the six
months prior to listing.
Foreign Applicants
Foreign issuer applicants who do not meet the distribution guidelines outlined
above may alternatively qualify with 800 round-lot public shareholders
worldwide, 1 million publicly held shares worldwide and a $3 million market
value of public float worldwide.
Initial Public Offerings
In certain circumstances, the NYSE MKT may approve an issue for listing "subject
to official notice of issuance" immediately prior to effectiveness of the issuer
applicant’s initial public offering. While the Exchange has not adopted special
criteria for IPOs, added emphasis is placed on the company’s financial strength,
including an objective evaluation of the anticipated value and offering price, and
its demonstrated earnings history and/or outlook.
Qualitative Standards
In evaluating listing eligibility, the Exchange also considers qualitative factors
such as the nature of a company's business, market for its products, reputation
of its management, historical record and pattern of growth, financial integrity,
demonstrated earnings power and future outlook.
American Depository Receipts 26
The Exchange also considers the laws, customs and practices of the applicant's
country of domicile regarding matters such as the election and composition of
the board of directors, issuance of quarterly earnings statements, shareholder
approval requirements and quorum requirements.
Corporate Governance Standards
The NYSE MKT requires listed companies to adhere to its corporate governance
standards.
Conflicts of Interest
The Exchange requires a listed company to utilize its audit committee to conduct
an appropriate review of all related party transactions on an ongoing basis.
Independent Directors and Audit Committee
The Exchange has various requirements regarding a company's independent
directors and audit committee. Any domestic issuer applying for listing on the
NYSE MKT must be prepared to demonstrate compliance with these
requirements and ongoing compliance is also required for listed companies.
Quorum
The NYSE MKT expects that an appropriate quorum of the shares issued and
outstanding and entitled to vote will be provided for by the by laws of companies
applying for the original listing of voting securities. A quorum of at least 33-1/3
percent is recommended. See SECTION 123 of the NYSE MKT Company Guide.
Shareholder Approval
The NYSE MKT requires listed companies to obtain shareholder approval for
certain corporate actions that would result in discounted stock and/or option
issuances as well as other potentially dilutive transactions.
Voting Rights
Common Stock— SECTION 122 of the NYSE MKT Company Guide.
Preferred Stock— SECTION 124 of the NYSE MKT Company Guide.
b) Continued Listing Standards
The Exchange has both quantitative and qualitative continued listing criteria.
When a company falls below any criterion, the Exchange will review the
appropriateness of continued listing. The following is a summary of the
Exchange's financial continued listing standards.
Price Criteria
Average closing price of a security is less than $1.00 over a consecutive 30
trading-day period.
Numerical Criteria for Capital and Common Stock
Average global market capitalization over a
consecutive 30 trading-day period is less than
$50 million
AND
Total stockholders' equity is less than $50 million
OR
Average global market capitalization over a
consecutive 30 trading-day period is less than
$15 million
Companies that are listed under the Affiliated Company standard will not be
subject to numerical criteria unless the parent/affiliated company no longer
controls the entity or such parent/affiliated company itself falls below the
numerical criteria.
American Depository Receipts 27
The exchange has separate criteria for REITs, Limited Partnerships, Acquisition
Companies, Closed-End Funds, Bonds, and Preferred Stock. Issuers may trade on
the Exchange while non-compliant with the quantitative continued listing criteria
subject to the procedures referred to in Section 802.02 and Section 802.03 of the
Exchange's Listed Company Manual. If an issuer is traded on the Exchange while
below its quantitative continued listing criteria, the Exchange will disseminate
over the consolidated tape a BC indicator of its status. The indicator continues to
be disseminated until NYSE Regulation staff has determined that the issuer is in
good standing. Whether this indicator appears in a stock quotation and what
symbol is used to represent it is determined by the particular vendor displaying
the quote.
5. TAXATION OF ADRs in U.S.
For U.S. federal income tax purpose, a holder of an ADR generally will be treated
as the owner of the underlying shares of the company’s stock represented by the
ADR.
U.S. Holder
a) Dividend:
Any dividend paid by the ADR is generally taxable, just like dividend on U.S.
shares. The provision applies to dividends from domestic U.S. corporations and
qualified foreign corporations (QFCs). Distributions from a foreign corporation
only qualify for these preferential tax rates if they are dividends according to U.S.
tax rules, and the corporation qualifies as a QFC.
Qualified Foreign Corporation
One of the qualifying tests for a QFC is that it pays a dividend on stock that is
"readily tradable on an established securities market in the United States".
Readily tradable stock includes an ADR if it is listed on one of the securities
markets. Since ADRs meet this criterion, they would qualify as securities of a
qualified foreign corporation.
Qualifying dividends
In order for a distribution from a foreign corporation to be considered a dividend
for U.S. income tax purposes, the underlying security must be an equity security
and not debt, and the distribution must be made from earnings and profits. The
security is considered equity if it is a common or ordinary share of stock, or if
there is a public Securities and Exchange Commission (SEC) filing, stating that the
security will be treated as equity for U.S. income tax purposes. An ADR would
meet this test.
These qualifying dividends are the ordinary dividends that are subject to the
maximum tax rates that apply on net capital gains. If the regular tax rate that
would otherwise apply to your ordinary income is 25% or higher, the maximum
tax rate on qualifying dividends is 15%. And if your regular tax rate is lower than
25%, the qualified dividends would be subject to tax at 5%.
b) Capital Gains And Losses:
A U.S. holder that sells or otherwise disposes of ADRs will recognise a capital gain
or loss for U.S. federal income tax purpose equal to the difference between the
U.S. dollar value of the amount realized and the holder’s tax basis, determined in
U.S. dollars, in the shares or ADRs.
Short – term capital gains: is one year or less. Depends on how long the capital
asset is held. Short-term capital gains are taxed at ordinary income tax rates,
which range from 10% to 39.6% for the year 2013.
American Depository Receipts 28
Long – term capital gains: more than one year. Long-term capital gains are taxed
at long-term capital gains rates, which is usually less than ordinary tax rates. The
Long-term capital gains tax rate is 0%, 15% or 20% depending on your marginal
tax bracket.
c) Withholding Tax:
Foreign Corporation may apply withholding taxes as per the domestic laws
applicable in the home country. Also, as per DTAA between India and U.S.,
withholding tax would be applicable. The withholding tax will be eligible,
subject to certain limitations, for credit against the U.S. holder’s U.S. federal
income tax.
d) ADRs Exchange For Ordinary Shares
The surrender of ADRs in exchange for ordinary shares or vice versa, will not
be a taxable event for U.S. federal income tax purpose, and U.S. holders will
not recognize any gain or loss upon such an exchange.
Non-U.S. Holders
a) Dividend:
Since the underlying issuer is a foreign corporation, income earned on ADRs
is not considered to be U.S. sourced income and thus should not be subject
to U.S tax reporting or U.S. withholding tax for non-U.S. persons.
b) Capital Gains And Losses:
When a non-resident sells investment stocks or securities at a gain, that gain
is exempt from U.S. tax unless the foreign investor is an individual present in
the U.S. at least 183 days during the year. The exemption applies equally to
long-term (assets held for more than one year) capital gains and short-term
capital gains. Losses from the sale of investment securities cannot be used
by a non-resident to offset other types of income that are subject to U.S. tax.
As an exception to this general tax exemption, gains from the disposition of
stock in companies with substantial U.S. real property holdings may be
subject to U.S. tax.
American Depository Receipts 29
ADR TERMINATION
Most ADR programs are subject to possible termination. Termination of the ADR
agreement will result in cancellation of all the depositary receipts, and a
subsequent delisting from all exchanges where they trade.
The termination can be at the discretion of the foreign issuer or the depositary
bank, but is typically at the request of the issuer. There may be a number of
reasons why ADRs terminate, but in most cases the foreign issuer is undergoing
some type of reorganization or merger.
Owners of ADRs are typically notified in writing at least thirty days prior to a
termination. Once notified, an owner can surrender their ADRs and take delivery
of the foreign securities represented by the Receipt, or do nothing.
If an ADR holder elects to take possession of the underlying foreign shares, there
is no guarantee the shares will trade on any US exchange. The holder of the
foreign shares would have to find a broker who has trading authority in the
foreign market where those shares trade. If the owner continues to hold the ADR
post the effective date of termination, the depositary bank will continue to hold
the foreign deposited securities and collect dividends, but will cease distributions
to ADR owners.
Usually up to one year after the effective date of the termination, the depositary
bank will liquidate and allocate the proceeds to those respective clients. Many
US brokerages can continue to hold foreign stock, but may lack the ability to
trade it overseas.
CONCLUSION
Everything has its own “pros and cons” but after analysing the whole structure
and mechanism of financial markets all over the world focusing mainly US and
India, the report can finally make a view point that there is a need for
amendments and further liberalisation in Indian financial rules and regulations in
accordance with the present scenario, which is more indeed apt to state that
there can be no comparison between the regulations prevalent in US and India as
the latter is yet to match up to the standards of the former in securities market.
US had introduced ADRs in 1927 and at present, the regulations governing ADRs
are close to perfect. This concluding approach mentioned above is based upon
the following findings which are prevalent in Indian financial or capital market:
Market abuse: Recent incidents have shown that the DR route may be used to
commit market abuse in India. At the same time, imposing stricter regulations on
Indian firms who wish to participate in the international capital market will
increase their cost of capital. The regulations must strike a balance between
these two.
Stringent eligibility norms: The stringent eligibility criteria, disclosure and
corporate governance norms, though in the investor's interests, compare
unfavourably with that of the Unsponsored and Sponsored Level I program of
ADRs. This has resulted in higher compliance costs for mid-sized companies
seeking to tap the Indian capital markets.
No automatic fungibility, no arbitrage opportunities for investors and issuers:
The ADR holders enjoy two-way fungibility option (conversion of GDR/ADR into
underlying shares and vice versa) while investors in GDRs/IDRs can exercise the
option only after one year (as per regulation). Two-way fungibility enables an
investor to benefit from any arbitrage opportunities arising due to exchange rate
fluctuations or quotation differences on the two stock exchanges. An IDR
investor is denied of this opportunity.
American Depository Receipts 30
Also, the issuer is required to immediately repatriate the rupee funds through
IDR proceeds back to the home country. By not allowing them to park their rupee
funds in India, they cannot take advantage of any interest arbitrage opportunity.
Also, given the fact that rupee is not a floating currency, it would entail
conversion into dollars or other hard currency and then being repatriated. This
would exert pressure on the rupee.
Lack of clarity on taxation issue: It is not very clear whether GDRs are exempt
from capital gains tax; this could be a potential roadblock. As per current Income
tax laws, Securities which are held for more than 1 year are exempt
from capital gains tax and for less than 1 year tax is 15%. Treating IDRs at par
with shares for taxation purpose till the new tax code comes into effect in 2011
will help promote IDRs. Issue of Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993
provides guidance as regards the taxation of income that would arise to foreign
investors from investing in these Securities. Similar guidance is required to clarify
the taxability of IDRs.
Indian Financial Markets still quite volatile: US being a developed country has
less political flux, which lends stability to its financial market. Instead,
Indian markets are perceived to be rumour driven which leads to heightened
volatility.
References
1) http://www.supremecourtcases.com/index2.php?option=com_content
&itemid=54&dpdf=1&id=22274
2) http://barandbench.com/content/212/viewpoint-indian-depository-
receipts
3) http://www.finmin.nic.in/reports/Sahoo_Committee_Report.pdf
4) http://finmin.nic.in/the_ministry/dept_eco_affairs/ecb/ForConBondsSc
heme1993.pdf
5) http://www.finmin.nic.in/press_room/2014/Report_committee_frame
work_Capitalmarket.pdf
6) http://www.finmin.nic.in/the_ministry/dept_revenue/idr_report_20140
609.pdf
7) https://www.pwc.in/assets/pdfs/Publications-
2010/Indian_Depository_reciept.pdf
8) http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=4abe
cfc7-4af9-4788-bb24-
9509ab6acdb4&txtsearch=Subject:%20Capital%20Market
9) https://www.pwc.in/assets/pdfs/Publications-
2010/Indian_Depository_reciept.pdf
10) http://law.incometaxindia.gov.in/dittaxmann/incometaxacts/2005itact/
section115AC.htm
American Depository Receipts 31
GLOSSARY
Abbreviations /
Terms Full Form / Description
ADR American Depository Receipts
AIM IPO Initial Public Offer on AIM exchange
AR Admission Responsibility
AS Accounting Standard
Australian IFRS Australia’s International Financial Reporting Standards
CGT Capital Gain Tax
Canadian GAAP Generally Accepted Accounting Principles of Canada
BIFR Board for Industrial and Financial Reconstruction
BPR Business Property Relief
DCF Discounted Cash Flow
DI Depository Interest
DR Depository Receipt
EEA European Economic Area
EIS Enterprise Investment Scheme
ER Engagement Responsibility
FDI Foreign Direct Investment
FEMA Foreign Exchange Management Act, 1999
FII Foreign Institutional Investors
FIPB Foreign Investment Promotion Board
FSA Financial Services Authority
FTSE Financial Times and (London) Stock Exchange
GDR Global Depository Receipts
HMRC A non-ministerial department of the U.K.
Government responsible for the collection of taxes
IAS International Accounting Standard
IHT Inheritance Tax
IPO Initial Public Offer
Abbreviations /
Terms Full Form / Description
IRDA Insurance Regulatory Authority of India
Japanese GAAP Generally Accepted Accounting Principles of Japan
LR Listing Rules (United Kingdom)
“LSE” or “Main
Market”
London Stock Exchange
NASDAQ National Association of Securities Dealers Automated
Quotation System American stock exchange
NBFC Non-Banking Finance Company
Nomad Nominated Advisor
NRI Non Resident Indian
OCB Overseas Corporate Bodies
OR On-going Responsibility
OTCEI Over The Counter Exchange of India
QIP Qualified Institutional Placement
RBI Reserve Bank of India
RIS Regulatory Information Services
SEBI Securities and Exchange Board of India
SEBI ICDR SEBI (Issue of Capital and Disclosure Requirement)
Regulations, 2009
SME Small & Medium Scaled Enterprises Exchange
SSI Small Scale Industries
American Depository Receipts 32
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Research Credits: Jatin A. Thakkar, Ankit Davda, Vijay Naik, Sahil Vora, Divya Avasthi and Shivani Harlalka
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