Final Report (B&W) 2

8/2/2019 Final Report (B&W) 2

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Comparative Study of American Depository Receipts & Global

Depository Receipts on Indian perspective.

DEPOSITORY RECEIPTS

INTRODUCTION:

In an era of rapid globalisation, investors are looking beyond the boundaries of theircountries for investment opportunities. This has given rise to opportunities for companies

looking to expand into new markets, tap new customers, get hold of a new investor base

and raise more capital

There was a great demand for foreign capital in some of the lesser developed countries. At

the same time, supply of capital was in excess in the countries like U.S.A. and England.

There was a need to bridge this gap and make a channel to enable the flow of funds from

these countries to the ones that required the funds. Investing without such a channel was a

challenge not just financially but also administratively. The transactions were complicated

and settlement of the transactions in was very difficult owing to currency values. In an

effort to bridge this gap, JP Morgan introduced a system of depositary receipts in 1927. JP

Morgan intended to provide a channel that allows for easier flow of funds from U.S.A. to

other countries by offering them investment options abroad.

Hence, the depositary receipts program was intended as both an investment vehicle as

well as an investment option. Currently, there are two major depositary receipt programs

the American Depositary Receipts and the Global Depositary Receipts. American

Depositary Receipts (ADRs) enable companies to tap into the worlds largest and most

active capital market the American market. Global Depositary Receipts (GDRs) give the

companies access to European markets besides the American market.

A depositary receipt (DR) is a type of negotiable (transferable) financial security that istraded on a local stock exchange but represents a security, usually in the form of equity

that is issued by a foreign publicly listed company. The DR, which is a physical

certificate, allows investors to hold shares in equity of other countries.


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WORKING OF DRs

The DR is created when a foreign company wishes to list its already publicly traded shares

or debt securities on a foreign stock exchange. Before it can be listed to a particular stock

exchange, the company in question will first have to meet certain requirements put forth

by the exchange. Initial public offerings, however, can also issue a DR. DRs can be traded

publicly or over-the-counter. Let us look at an example of how an ADR is created and

traded.

ORIGIN OF DRs

The origin of depository receipt is USA. It started in 1920s. In this period, it was difficult

and risky to invest on the originals of foreign securities by American investors and

brokers. The risks in this condition have been causing delays and some kind of extra

expenses. In order to avoid the practical problems, they should have looked for solutions.

In the solution produced, it was aimed at constituting a system that will be able to

eliminate those handicaps. In those times, financial and economical system was national.

For the system started to function badly, the investors and brokers were not able to transit

to international market in the investment and financial activities they have been carried

out. They were as if trapped inside a no end box and it was impossible for them to open

global market. Something was clearer than anything else. The key was as if climbing up a

hill in the desert under the sun in 70 C in vein, and it was time consuming.

The distance between American and European stock exchange markets was high, for this

reason, what is to be was to reach the international arena in world of stock exchange

market. For there as one of investors demand of diversifying their financial resources

internationally, American Depository Receipts revealed.

TYPES OF DRs

There are a variety of DR program types. These can be divided into capital raising and

non capital raising structures. The type of program used will depend on the requirements

of the issuer, the features of the issuer's domestic market and on investor attitudes.


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A third type of DR program is known as "unsponsored". This differs from other types in

that the company whose shares are represented by unsponsored DRs is not involved in

setting up the program.

*Source: ADR Reference Guide JP Morgan, February 2005


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BENEFITS OF DEPOSITORY RECEIPTS:

No matter which type of program is utilized, issuing companies and investors like benefit

from the unique features of the depositary receipt structure. The advantages are

substantial.

BUYING AND SELLING DRs:

If an investor wishes to purchase shares in a foreign company, he can either buy the

foreign shares in the local market through a broker in that country or, providing the

foreign company in question has a DR program, the investor can request his broker to buy

DRs. The broker may either purchase existing DRs or, if none are available, he may

arrange for a depositary bank (e.g. Deutsche Bank) to issue new ones.


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The process for issuing new DRs is very simple. The investor's broker contacts a broker in

the issuing company's home market and acquires shares in that company. These shares are

then deposited with the depositary bank's local custodian. Upon confirmation that the

custodian has received the shares, the depositary issues the requisite number of DRs to the

investor via the broker.

In some exceptional cases there may be restrictions on the issuance of new DRs under

existing programs (e.g. Indian GDR programs) because of local regulations. DRs can be

sold in DR form, in which case they trade and settle like other US or Euro securities.

They can also, however, be cancelled. In this case the broker acting on behalf of the owner

of the DRs will request the depositary bank to cancel the DRs and release the underlying

shares to a domestic broker in the issuing company's home market. The domestic broker

will then sell the shares locally and the proceeds will be remitted to the investor who

cancelled those DRs.

DRs certify that a stated number of underlying shares have been deposited with the

depositary's custodian in the foreign country.

DR holders are entitled to all the dividends payable on the underlying foreign shares

and, furthermore, to have these paid in the currency in which the DRs are

denominated usually US dollars.

The DRs may be bought or sold through investors' own brokers, and they clear and

settle through the Depository Trust Company (DTC) for ADRs, through Euro clear

and Clear stream for EDRs and through all three (and possibly other clearing

systems) in the case of GDRs, depending on which markets they access.

Shareholder information such as annual reports, notices of general meetings and

corporate actions, and official news releases are provided by the issuer to the

depositary and to the receipt holders, either direct or through the local custodian.


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The investor is thus spared the costs and difficulties often encountered when direct

investment is made in local markets, where currency, settlement, and linguistic

problems may be compounded by an excessive number of intermediaries.

WHY DO INVESTORS BUY DRs?

US investors have become increasingly interested in overseas markets as a result oftheir higher yields compared to the US equity market over recent years.

International investors are also eager to diversify their portfolios, both geographicallyand by industry sector, in order to increase their returns while spreading their risk.

They have long been active in the debt markets, as evidenced by the vast size of theEuromarkets, and sophisticated international clearing systems have been developed to

handle Euro instruments.

Until recently, however, cross-border equity investments have involved all the currency,

settlement and linguistic problems which occur when dealing with overseas equity

markets.

Liquidity and investor demandLiquidity is enhanced when there are a significant number of depositary receipts eligiblefor trading in the United States. In a US public offering, retail and institutional investors

are more likely to buy depositary receipts that are perceived to be liquid and fairly priced.

A useful structuring toolWhile DRs are generally used to make equity more widely available or to raise capital

outside the issuer's domestic market, they can also be used as part of many other financing

structures. The concept of a receipt trading in one market, which represents an instrument

held in custody in a different market, can be adapted to a wide variety of transactions.


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*Source ADR AND GDR OVERCOMING OBSTACLES OF INTERNATIONAL

INVESTING


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Capital MarketINTRODUCTION

The deregulation and liberalization of the industry in India has been accompanied

by change in financial sector. It is widely acknowledged that economic development of a

country is directly related to the level of its industrial growth. The process of industrial

growth essentially requires the development of capital market which provides long term

finance to entrepreneurs. The capital market aims at mobilization & efficient allocation of

resources to the desired investment outlets & thus, plays a vital role in the development of

the national economy. The Indian capital market has been experiencing a process of

structural transformation since the early eighties signifying the widening & deeping of the

market by showing notable increases both in the number of participants as well as

instruments.

DEFINITION & MEANING OF CAPITAL MARKET

The dictionary of commerce defines capital market as a market for medium and

long-term finance. Capital market is one of the sources for raising long-term finance by

the corporate. Capital market is the medium through which the companies and investors

interact. The companies will enter the capital market with shares and/or debenture issues,

which are subscribed by the investors. The investors will evaluate the companys offerings

and based on the credentials of the offer take decisions regarding investment. The

primary purpose of capital market is to direct the flow of savings into long term

investments.

FEATURES OF CAPITAL MARKET

The following are the main features of the capital market:

1 It is a market for long term funds exceeding a period of one year.2 Capital market supplies funds for financing the fixed capital requirements

of trade, commerce as well as Govt.

3 The transaction in capital market involves various types of instruments likeshares, debentures etc.

4 It is open for both institutions and individuals.5 Capital market instruments generally have Secondary market.


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TYPES OF CAPITAL MARKET

On the basis of the status of the market, the capital markets in India is classified as

a) Organised capital market andb)

Unorganised capital market

a) ORGANISED CAPITAL MARKET

The constituents of the organised capital market are the Reserve Bank of India

financial institutions like IFCI, LIC, IDBI, UTI commercial banks, stock markets etc.

In the organised capital market the demand for capital comes from corporate

enterprises and government and semi-government institutions and supply comes from

household savings, institutions investors like banks investments trusts, insurance

companies, finance corporations, governments and international financing agencies.

b) UNORGANISED CAPITAL MARKET

Unorganised capital market consists of indigenous bankers, money lenders, chit

funds, traders etc.

A large part of the demand for funds in the unorganised capital market is for

consumption purposes. In fact many purposes, for which funds are very difficult to get

from the organised market, are financed by the unorganised sector. Unorganised capital

market in India is characterised by the existence of multiplicity of interest rates, exorbitant

rates of interest and lack of uniformity in their business dealings.

On the basis of stage of development, capital market is classified into two types, viz.

i) Primary capital marketii) Secondary capital market

i) PRIMARY CAPITAL MARKET OR NEW ISSUE MARKET

Primary capital market is market for new issues, where long term funds are raised

by industrial, commercial enterprises, state government & central government from

investors through the issue of shares, debentures & bonds.


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ii) SECONDARY CAPITAL MARKET OR STOCK EXCHANGE MARKET

Secondary market is markets for secondary sale of securities which have already

passed through the new issue market are traded in this market. An active secondary

market actually promotes the growth of the primary market & capital formation because

investors in the primary market are assured of a continuous market & they can liquidate

their investments.

ORIGIN OF STOCK EXCHANGE OR CAPITAL MARKET

The stock exchanges are of recent origin. They did not exist in the ancient times.

The growth of stock exchange has been linked with the growth of the joint stock

companies. The stock exchanges were, in fact born after the industrial revolution. The

stock exchanges were born with the birth of joint stock companies. So, the stock

exchanges were the products of joint stock companies.

The first stock exchange originated in London, widely popular as London Stock

Exchange in the year 1773. The first organised stock exchange in India was started in

Bombay in 1875 with the formation of the Native Share and Stock Brokers Association.

In 1894 Ahmedabad Share and Stock Brokers Association was set up mainly to handle

large blocks of textile shares. In 1908, the Calcutta Stock Exchange was formed primarily

to deal in shares of plantations and jute mills. There are twenty-four stock exchanges in

country. At present, only eight stock exchanges have got permanent recognition. Others

have to renew it every year until permanent recognition is granted.

IMPORTANCE OF CAPITAL MARKET

The importance of capital market can be briefly summarised as follows:

1) It mobilises the savings of the people for further investment & enhances thecapital formation by offering suitable rates of interest as the price of capital.

2) It helps industries in securing foreign capital to promote industrial & economicdevelopment in the country.


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3) It provides an avenue for investors to invest in financial assets which are moreproductive than physical assets.

4) Moreover, it serves as an important source for technological up gradation in theindustrial sector by utilising founds invested by the public.

Thus, capital market serves link between savers & users of fund.

CAPITAL MARKET PARTICIPANTS

There are several major players in the primary market. These include the merchant

bankers, mutual funds, financial institutions, foreign institutional investors (FIIs) and

individual investors.

In the secondary market, there are the stock brokers (who are members of the

stock exchanges), the mutual funds, financial institutions, foreign institutional investors

(FIIs), and individual investors. Registrars and Transfer Agents, Custodians and

Depositories are capital market intermediaries that provide important infrastructure

services for both primary and secondary markets.

CAPITAL MARKET PROCESSES

There are various processes that Issuers of securities follow or utilise in order to

tap the savers for raising resources. Some of the commonly used processes and methods

are described below.

INITIAL PUBLIC OFFERING (IPO)

Several changes have also been introduced in recent years in the manner in

which the IPOs can be marketed. For example they can now take the book building route

or they can even be marketed through the secondary market by brokers or DPs. All these

changes have been made with the objective of making the process more investor friendly

by reducing risk, controlling cost, greater transparency in the pricing mechanism and

protecting liquidity in the hands of the investor. Some of the IPOs have been available for

subscription online - where the bids are made in real time and the information is made

available on an instantaneous basis on the screen.


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D-MAT ISSUES

As per SEBI mandate, all new IPOs are compulsorily traded in D-materialised

form. The admission to a depository for D-materialisation of securities is a prerequisite for

making a public or rights issue or an offer for sale. The investors would however, have

option of either subscribing to securities in physical form or D-materialised form, the

companies Act,1956 requires that every public listed company making IPO of any security

for Rs.10 crore or more shall issue the same only in D-materialised form.

BOOK BUILDING METHOD

The essence of the book building method is that the pricing of the issues is left to

the investors. The issuing company incorporates all the details of the issue proposal in the

offer document on the lines of the public issue method including the reserve/minimum

price. The investors are required to quote the number of securities and the price which

they wish to acquire.

PRIVATE PLACEMENT

Many companies choose to raise capital for their operations through various

intermediaries by taking what in marketing terms would be known as the wholesale route.

The retail route of approaching the public is expensive as well as time consuming. This is

called in financial markets as private placement. SEBI has prescribed the eligibility

criteria for companies and instruments as well as procedures for private placement.

However, liquidity for the initial investors in privately placed securities is ensured as they

can be traded in the secondary market. But such securities have different rules for listing

as well as for trading.

PREFERENTIAL OFFER/RIGHTS ISSUE

Companies can expand their capital by offering the new shares to their existing

shareholders. Such offers for sale can be made to the existing shareholders by giving them

a preferential treatment in allocation or the offer can be on a rights basis, i.e., the existing

holders can get by way of their right, allotment of new shares in certain proportion to their


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earlier holding. All such offers have also to be approved by SEBI which has laid out

certain criteria for these routes of tapping the public. These have to be complied with.

INTERNET BROKING

With the Internet becoming ubiquitous, many institutions have set up securities

trading agencies that provide online trading facilities to their clients from their homes.

This has been possible since all the players in the securities market, viz., stockbrokers,

stock exchanges, clearing corporations, depositories, DPs, clearing banks, etc., are linked

electronically.

Thus, information flows amongst them on a real time basis. The trading platform,

which was converted from the trading hall to the computer terminals at the brokers'

premises, has now shifted to the homes of investors. This has introduced a higher degree

of transparency in transactions. The investor knows exactly when and at what rate his

order was processed. It also creates an end-to-end audit trail that makes market

manipulation difficult. The availability of securities in D-mat form has given a further

fillip to this process.

However, the emergence of, what is known as, "day-traders" has resulted in the

business environment of brokers which has changed. Investors, who can now trade

directly, no longer require their intermediation. Service charges have therefore been

declining - all of which has been in favor of investors.

SPEED-E

In order to extend the benefits of technological progress to investors, NSDL has

launched SPEED-e services. SPEED-e is an internet based facility for clients of all

Depository Participants (DPs) that enables the accountholders to submit instructions to

their DPs through SPEED-e website on internet. The clients can submit instructions at a

time convenient to them from a place convenient to them using SPEED-e website of

NSDL. The accountholders can also view the status of their instructions submitted through

SPEED-e on the website itself. SPEED-e is expected to greatly reduce the time and efforts

required in processing the instructions.


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NATIONAL STOCK EXCHANGE

In order to provide a nationwide stock trading facility to investors, upgrading the

trading facilities and to bring the Indian capital market in line with international markets ,

the National Stock Exchange has been established in 1995 as a first step in reforming thesecurities market through improved technology and introduction of best practices in

management.

Before the NSE was set up, trading on the stock exchanges in India used to take

place through open outcry without use of information technology for immediate matching

or recording of trades. This was time consuming and inefficient. To overcome this, the

NSE introduced screen-based trading system (SBTS) where trading members can stay at

their offices and execute the trading, since they are linked through a communication

network. The prices at which the buyer and seller are willing to transact will appear on the

screen. When the prices match the transaction will be completed and a confirmation slip

will be printed at the office of the trading member.

NSE has several advantages over the traditional trading exchanges. They are as follows:

v NSE brings an integrated stock market trading network across the nation.v Investors can trade at the same price from anywhere in the country since inter-

market operations are streamlined coupled with the countrywide access to the

securities.

v Delays in communication, late payments and the malpractices prevailing in thetraditional trading mechanism can be done away with greater operational efficiency

and informational transparency in the stock market operations, with the support of

total computerized network.


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OVER THE COUNTER EXCHANGE OF INDIA (OTCI)

Over The Counter Exchange of India was incorporated under section 25 of the

Companies Act in October 1990 and started functioning from September 1992.

Over The Counter Exchange of India is a negotiated stock market which is fully

computerised and having special features of ringless, scripless stock exchange with

trading and settlement standards in tune with the global standards

OTC has a unique feature of trading compared to other traditional exchanges. That

is, certificates of listed securities and initiated debentures are not traded at OTC. The

original certificate will be safely with the custodian. But, a counter receipt is generated out

at the counter which substitutes the share certificate and is used for all transactions.

Compared to the traditional Exchanges, OTC Exchange network has the following

advantages:

u OTCEI has widely dispersed trading mechanism across the country whichprovides greater liquidity and lesser risk of intermediary charges.

u Greater transparency and accuracy of prices is obtained due to the screen-basedscripless trading.

u Faster settlement and transfer process compared to other exchanges.u In the case of an OTC issue (new issue), the allotment procedure is completed in a

month and trading commences after a month of the issue closure, whereas it takes

a longer period for the same with respect to other exchanges.

Thus, with the superior trading mechanism coupled with information transparency

investors are gradually becoming aware of the manifold advantages of the OTCEI.


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SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

It was established on 12th of April 1988. On January 30, 1992 an ordinance was

passed to give SEBI a legal status with the objectives of improving market efficiency,

enhancing transparency, checking unfair trade practices and bringing the Indian market up

to international standards, regulate and develop the securities market.

ORGANISATION OF SEBI

The Board of SEBI consists of six members

1 Chairman nominated b the Central Government.2 Two members from the office of central ministries who are well versed with

finance and law.

3 One member deputed by RBI4 Two members nominated by the Central Government.

POWERS

SEBI has been vested with the following powers:

1 Power to call periodical returns and explanation from recognised stockexchanges or their members.

2

Power to make or amend bye-laws of recognised stock exchanges.

3 Power to control and regulate stock exchange4 Power to grant registration to market intermediaries.5 Power to levy fees or other charges for carrying out the purpose of regulation.


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RESEARCH METHODOLOGYOBJECTIVE OF THE STUDY:

To understand the legal norms for American Depository Receipt & GlobalDepository Receipt.

To know the procedure for the issue of American Depository Receipt & GlobalDepository Receipt.

To find out the amount of funds collected by Indian companies through the issueof American Depository Receipt & Global Depository Receipt.

METHODOLOGY:

In quest for a better understanding of the concept of depositary receipts program, I

considered it imperative that the study shouldnt be restricted to a theoretical overview.

Hence, I have provided a statistical analysis to establish the importance of this program to

India. I have compiled some statistics which demonstrates this significance. I collected

most of the data from the internet since this is a dynamic concept that keeps changing

itself to adjust to the changing times. I have also studied in brief alternate means of raising

foreign finance with a view to establishing the superiority of the depositary receipts

program over such means.

LIMITATIONS:

Despite our best efforts, this project suffers from certain limitations which were beyond

our control. Some are enlisted as under:

As a result of the topic being a dynamic one, I had to restrict myself to the largely,not wholly, to the internet as a source.

With the American Depository Receipt & Global Depository Receipts issuingcompanies being compelled to disclose detailed statistics only to their depositary

banks, I was unable to collect as much statistical data as I would have liked.

Although I have obtained the statistics from highly credible sources, I cannotvouch for its accuracy.


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AMERICAN DEPOSITORY RECEIPTS

American Depository Receipt Overview:

An American Depositary Receipt is a U.S. Dollar denominated security that trades onthe American market. An ADR is offered by financial institutions in the U.S. on behalf of

the foreign company. The financial institution, usually banks, buys shares of companies

wishing to issue equity in the U.S. Then, it bundles these shares into groups of shares and

sells these groups of shares. These groups are known as American Depositary

Receipts. Therefore, one American Depositary Receipt represents a fixed number of

shares in the parent company.

The companies wishing to issue ADRs have to sign a contract with the financial

institution. The financial institution which issues the ADRs on behalf of the company is

also known as sponsor bank / brokerage or depositary bank. The contract which is signed

by both parties is a comprehensive one. The provisions of the contract include the number

of home country shares that are on offer, the ratio of the shares per ADR, the voting

rights of the U.S. investors and the tax obligations, among many others.

The voting rights, if any, lie with the depositary bank. The holders of the ADRs indicate to

the depositary bank which way they want to vote. In the absence of any concrete

arrangement, and if it doesnt violate any U.S. law, the depositary bank votes as a proxy

of the ADR holder. This contract is known as the Deposit Agreement. This agreement is

the first step towards raising finance from the United States.

History of the ADR:

John Piermont Morgan (yes, that J.P. Morgan), launched the first ADR for the U.K.'s

Selfridges Provincial Stores Limited, the famous retailer now known as Selfridges Plc.

Even the audacious J.P. Morgan probably had no idea of the trend he was touching off. As

of mid-2008, there were more than 2,250 depositary programs representing more than

1,800 companies from over 70 countries listed on global stock exchanges. According to


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the Bank of New York Mellon, in the first half of 2008, 52 billion shares of ADRs

changed hands, representing a value of $2.07 trillion.

Working of ADR:

These ADRs can be bought and sold just like any other American security. For this

purpose, ADRs can even be listed on the New York Stock Exchange (NYSE), the

American Stock Exchange (AMEX) or the NASDAQ. These ADRs are issued on any of

these exchanges by the sponsor bank / brokerage. Hence, the company is required to

disclose all financial information to the sponsor bank / brokerage.

The sponsor bank / brokerage sets a ratio of ADRs to number of shares purchased. This

ratio should be either greater than or less than 1. This is done by the sponsor bank /

brokerage so that the ADR is high enough to show substantial value yet be low enough to

attract investors. For instance, let us assume that Reliance, an Indian company, is currently

trading at Rs. 300 on the Bombay Stock Exchange. One ADR of Reliance, representing

one share of Reliance, would trade at $7.50 on the American market. Investors in the U.S.

would fall back from investing in such penny stocks. But if, one ADR of Reliance

represented 10 shares, it would be trading at $75 per ADR, which falls in the substantial

yet attractive category that was spoken about a little earlier. As a result, majority of the

ADRs trade at prices between $10 and $100 per ADR.

So, for companies whose shares trade at relatively lesser values in the home country has

an ADR that comprise of relatively greater number of shares. For instance, if a company

trading at Rs.40 on the BSE may have an ADR that comprises of 40 shares, i.e. at a price

of $40 per ADR.

Price Determination:

ADRs are just like any other security. The initial price or listing price, in case the ADR is

being listed, is determined by using the predetermined ratio as we have just seen. Once

listed, ADRs are traded just like other stocks in the market. This means that the price of

the ADR will be determined by the market mechanism of demand and supply. Let us


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recollect our earlier illustration wherein Reliance is going to the U.S. market to raise

capital. Let us assume that Reliance wishes to list on the NYSE through JP Morgan. JP

Morgan fixes a ratio of 10:1, i.e. 1 ADR for every 10 shares of Reliance. Reliance is

currently trading at Rs. 300 per share on the BSE. This equates to $75 per ADR at the

fixed ratio. This means that the investor pays $45 for 10 shares in Reliance. So, after the

initial listing, the Reliance ADR will be bought and sold at prices determined by the

market. If the price of the ADR increases from $75 to $85 per ADR, it implies that 10

shares in Reliance are now worth $85. This translates to Rs. 340 per share as against the

Rs. 300 that Reliance is trading at on the BSE. Two important factors in the price

determination of ADRs are the shares ADR ratio and the exchange rate of the home

currency. While changes in the ratio are predetermined, the exchange rate can prove to be

extremely volatile. Hence, there arises an opportunity for arbitrage. With the availability

of real time news from all across the globe and modern technology that enables on line

transactions, ADR prices of companies have come to follow the trend of the share prices

in the home country.

Structure:

The structure of the American Depositary Receipts is one that offers investment options to

different kinds of investors. Investors can purchase ADRs through stock exchanges or

even over the counter (OTC). The structure offers the interested companies the option

of tapping retail investors as well as institutional investors.

The ADR structure offers four types of programs to the investors:

Level I Depositary Receipts Rule 144A Depositary Receipts Level II Depositary Receipts Level III Depositary Receipts

Unlisted programs (Level Me 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 NASDAQs Pink


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Sheets. A Level I program does not create new capital in the US; rather, it gives the

company an opportunity to develop or expand its shareholder base by establishing a

foothold in the US market.

The highlights of this program are given below:

The issuing company has to maintain home market accounting and disclosurestandards. They neednt conform to the regulations laid down by Securities

Exchange Commission as regards accounting disclosure.

The issuing company makes use existing shares to raise funds from the Americanmarket. This implies that the company tries to meet investors demand and their

own need for liquidity without issuing new shares for the American market.

However, they can issue new ADRs. They can do so by first issuing the shares in

the home market and then canceling it. These shares are then made available to be

bundled and issued.

The issuing company is exempt from U.S. reporting requirements. The reportingrequirements include compliance with Rule 12g3-2(b).

The issuing company has to register itself with the United States SecuritiesExchange Commission through form F-6.

The bid prices of the ADRs are electronically updated at the end of the trading daythrough the Pink Sheets LLC information Service. Vendors like OTCquote.com

even post real time and intra day quotes posted in the market. Such services,

however, are available to the issuing company only through subscription.

Rule 144A Depositary Receipts:

A Rule 144A DR is the quickest, easiest, and most cost-effective way to raise capital in

the United States. Under this program, new restricted shares are created and then privately

placed with institutional investors. Rule 144A facilitates the resale of privately placed


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securities to Qualified Institutional Buyers in the US. These institutions manage at least

$100 million in securities, or are registered broker-dealers that own or invest, on a

discretionary basis, $10 million in securities of non-affiliates.

Let us study the highlights of this program:

Companies issuing Rule 144A DRs are not subject to U.S. reporting requirements.In fact they arent even registered with the U.S. Securities and Exchange

Commission.

These DRs may not be advertised for or actively promoted by the issuer. This isbecause the sale of such DRs takes place through private placement.

Under Rule 144A of the Securities Act, 1933, such trades are to take placeelectronically on a system developed and managed by the National Association of

Securities Dealers. The system is called PORTAL.

These DRs can be traded only to Qualified Institutional Buyers (QIBs). Thisunderlies the essence of such DRs that they are privately placed DRs.

This type of an ADR may be converted into the unrestricted ADR type. However, for such

a conversion to take place, at least two years from the last deposit of shares under this

program have got to lapse. It is only after these two years that the Rule 144A type ADR is

eligible to be converted.

Level II and Level III Depositary Receipts:

Listing your 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

(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 your companys securities, you must meet the listing

requirements of your chosen exchange or market. Your company must also comply with


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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) have to be 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 issuers 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 issuers 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


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media, often generating significant visibility for the issuer. In addition to the requirements

noted above, an issuing company 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 issuers plan for distributing the ADRs. In certain

circumstances, an abbreviated registration statement (Form F-3) may be acceptable.

The company 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 issuers US employees, and may be used to facilitate US mergers and

acquisitions.

Tax Treatment of ADRs:

Tax treatment of ADRs by the IRS is generally the same as for domestic investments.

Investors are subject to the same capital gains and dividend taxes at the same rates. There

is a little twist, however: many countries will withhold taxes on dividends paid. While the

American investor must still pay U.S. income tax on the net dividend, the amount of the

foreign tax may be claimed by the investor as a deduction against income or claimed

against U.S. income tax. Investors are encouraged to consult a professional tax or

investment advisor to make sure they are recording (and paying taxes on) their ADR

investments properly.


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Legal Framework: United States

The Securities and Exchange Commission (SEC) was set up in 1929, just before the Great

Depression. It was formed to regulate the American capital market. It is the SEC that

regulates the ADRs in the U.S. In order to have its securities listed and traded in the U.S.

through an ADR, the non U.S. company must comply with these laws and regulations.

Federal Securities Acts

There are two federal securities laws that govern the creation of ADRs: The Securities

Act, 1933, and The Securities Exchange Act, 1934 (amended as The Exchange Act). The

Securities Act, 1933 The Securities Act, 1933, governs the offer and sale of securities.

The Act requires full and fair disclosure of all information that the investors should be

aware of in order to make a well informed decision as regards the securities on offer. It

also contains requirements for the registration of these securities to be offered.

The Securities Exchange Act, 1934

The Securities Exchange Act, 1934, regulates the secondary markets for listed or

unquoted securities. The Act requires on going reporting from the issuers of these

securities. In short, the Securities Act governs the offer, sale and registration of securities

while the Securities Exchange Act regulates the secondary markets through mandatory on

going reporting and disclosure by the issuers.

Key SEC Rulings

The regulatory and disclosure requirements imposed upon the sponsor bank / brokerage

depends on the kind of program that it has opted for. Rule 12g3-2(b) Under this rule, the

ADR issuer is exempt from periodic disclosure and reporting norms if it plans to make

its Level I ADRs available to the investors over the counter (OTC). This enables the

ADR issuer to make available to the SEC those details that it has already made public.

Hence, it is freed from the burden of extensive reporting and other related requirements.

Form F-6: Registration of Level I, II and III ADRs with SEC Under the Securities Act,

any sponsor bank / brokerage establishing an ADR program must register the ADRs with

the SEC. They do so by filing form F-6 along with a copy of the Depositary Agreement.


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Besides the Depositary Agreement, sponsor banks / brokerages must also file the legal

opinion of their counsel. This legal opinion states the rights that the holders of these

ADRs will have access to. Once the SEC receives the Form F-6 along with the other

documents and has no further comments, the sponsor bank / brokerage will file an

Acceleration Request with effectiveness on a particular date, on which the ADRs can be

issued. To put it simply, the Acceleration Request filed by the sponsor bank / brokerage is

more like an information slip notifying the SEC about when it plans to issue the proposed

ADRs. This date on which they will issue the ADRs, is the effectiveness date.

Form 20-F: Annual Disclosure & Registration Document for Level II and III This form is

used as both a form for registration as well as for annual report filing. This form can be

used for registration only by Level II and Level III ADR issuers. For sponsor banks /

brokerages that have already registered, they have to use this form to file the annual

reports. Depending on the use of this form, certain exemptions are made available.

The following are some of the disclosures required to be made:

Identity of directors and other senior management Historical financial information

Description of the properties Financial prospects Major stakeholders and related party transactions Offer and listing plans Company documents Quantitative and qualitative disclosure of market risks Code of ethics

EDGAR Filings

The SEC has put in place a system for electronic filing of disclosure documents. This

system is known as EDGAR System, short for Electronic Data Gathering and Retrieval

system. The major purpose of putting such a system in place is toenable the investors to

analyse all the documents filed by the company beforemaking any investment.


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Under the EDGAR System the following forms need to be filed electronically:

Form F-6 (For registrations of ADRs) Form 6-K (For informational reports) Form 20-F (For Annual report / registration) Forms F-1, F-2, F-3, F-4 (For public offerings)

The regulations regarding filing of these forms are relaxed a little bit for sponsor bank /

brokerage issuing Level I ADRs. However, such relaxation of regulation does not extend

to the filing of Form F-6.

ADAVANTAGES OF USING ADRs

The main advantage of buying an American Depositary Receipt rather than theforeign stock itself is the ease of the transaction.

ADRs are a great way to invest abroad without having to convert U.S. dollars tomany different currencies

Another advantage offered by an ADR is that if the foreign stock does paydividends, the investment bank will convert the dividends to U.S. dollars and remit

the payment to you. In addition, if the dividend is subject to foreign tax, the

investment bank will withhold the tax so you dont have to worry about it

Therefore, if exchange rates were to move against you, it would hurt the value ofyour ADR. If you are considering investing in foreign stocks, ADRs should be part

of your investment decision; however, you should become familiar with all the

risks associated with foreign investing before making an investment decision.

Advantages to Issuers

Provides a simple means of diversifying a companys shareholder base andaccessing important U.S. market

May increase the liquidity of the underlying shares of the issuer ADRs can be used as an equity financing tool in both M&A transactions and

ESOPs for


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U.S. subsidiaries Helps increase a non-U.S. companys visibility and name recognition in the U.S.

investor community

May raise capital in the U.S. market through some types of programs

Advantages to Investors

Offers a convenient means of holding foreign shares Simplifies the trading & settlement of foreign securities; ADRs trade and settle

just like

Offers lower trading & custody costs when compared with shares bought directlyin the foreign market

DISADVANTAGES OF USING ADRs

Despite all the described advantages, the ADRs do represent the same asset as local shares

but may not be fully fungible in several countries (meaning they cannot be seamless

exchanged with its home market security). For example, until 2001 there was no two-way

fungibility for Indian ADRs; in that environment, investors could convert ADRs into local

shares but they could not reconvert them back to ADRs. This and other capital control

regulations prevent risk less arbitrage opportunities to exist between ADRs and the

underlying stock and are one of the reasons that premiums/discounts exist in the ADR

market.

MECHANICS OF ISSUING ADRS

ADRs are issued by a US bank, such as J. P. Morgan or The Bank of New York,which functions as a depositary, or stock transfer and issuing agent for the ADR

program.

The foreign, or local shares, remain on deposit with the Depositarys custodianissuers home market. Each ADR is backed by a specific number of an issuers

local shares (e.g. one ADR representing one share, one ADR representing ten


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shares, etc.) This is the ADR ratio, which is designed to set the price of each ADR

in US dollars.

Financial information, including annual reports and proxies are delivered to USholders on a consistent basis by the Depositary. The dividends are converted into

dollars and paid to ADR holders by the Depositary

The text of the ADR certificate (see specimen below) is attached as an exhibit tothe Deposit Agreement. A typical ADR certificate resembles an ordinary share

certificate, and contains the general terms and conditions of the ADR applicable to

ADR holders.

KEY COMPONENTS OF A SUCCESSFUL ADR PROGRAM

Successful ADR programs are actively traded and widely held. They typically share the

following attributes:

Attractive market, industry and equity story Active communication of the story to US investors Investor friendly ADR structure (ratio of shares to ADRs) Research and market-making by US investment banks and brokers

Legal Framework: India

In India, there wasnt any specific regulation regarding the issue of ADRs for a long time.

It was only in 2000 that the Reserve Bank of India (RBI) issued a notification permitting

the issue of ADRs through the Foreign Exchange Regulation Act (FERA). Notification


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No. F.E.R.A. 214 /2000-RB.The Reserve Bank of India issued this notification on 20th

January, 2000.Putting it quite simply, this notification permits the issue of ADRs by

Indian companies.

The following points highlight the essence of this notification:

All companies governed by the Indian Companies Act, 1956, are permitted to raisefunds through the issue of ADRs

The permission, however, shall stand to be cancelled if the company raising fundsviolates any norms or exceeds any limits laid down by the Foreign Investment

Promotion Board (FIPB) or the Secretariat for Industrial Assistance (SIA).

The company has to get approval from the Ministry of Finance, Government ofIndia, to make such an issue.

The company is permitted to enter into any agreement / sign any contract withforeign agencies provided that such a contract is essential for the issue of ADRs.

The companies are allowed to make payments to the relevant authorities and thesponsor bank / brokerage towards their fees.

The companies are permitted to make any payments to U.S. government towardsany tax liability incurred as a result of issue of ADRs

The companies are allowed to maintain bank accounts in the U.S. to deposit themoney collected.

The companies are also permitted to maintain a register of foreign members if thecompany feels it necessary.

This notification cleared a lot of ambiguities that existed in the Foreign Exchange

Regulation Act in the absence of any concrete provision regards ADRs.


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GLOBAL DEPOSITORY RECEIPTS

Global Depository Receipt Overview

A Global Depositary Receipt is a security that is traded in the European markets. A GDRand an ADR are essentially the same. The only difference is that the GDR is traded either

on the Luxembourg Stock Exchange or the London Stock Exchange. Just as in the case of

ADRs, companies wishing to issue GDRs have to sign a Deposit Agreement with a

sponsor bank / brokerage in Europe. GDR holders do not enjoy any voting rights.

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 to raise money in more than

one market, some corporations use global depositary receipts (GDRs) to sell their stock on

markets in countries other than the one where they have their headquarters.

The GDRs are issued in the currency of the country where the stock is trading. For

example, a Mexican company might offer GDRs priced in pounds in London and in yen in

Tokyo. Individual investors in the countries where the GDRs are issued buy them to

diversify into international markets. GDRs let you do this without having to deal with

currency conversion and other complications of overseas investing. The objective of a

GDR is to enable investors in developed markets, who would not necessarily feel happy

buying emerging market securities directly in the securities home market, to gain

economic exposure to the intended company and, indeed, the overall emerging economy

using the procedures with which they are familiar.

Global Depository Receipt (GDR) - certificate issued by international bank, which can be

subject of worldwide circulation on capital markets. Global Depository Receipts are

emitted by banks, which purchase shares of foreign companies and deposit it on the

accounts. Global Depository Receipt facilitates trade of shares, especially those from

emerging markets. Prices of Global Depository Receipts are often close to values of

related shares. GDRs are securities available in one or more markets outside the

companys home country. The basic advantage of the GDRs, compared to the ADRs, is


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that they allow the issuer to raise capital on two or more markets simultaneously, which

increases his shareholder base. They gained popularity also due to the flexibility of their

structure. GDRs are typically denominated in USD, but can also be denominated in Euros.

GDRs are commonly listed on European stock exchanges, such as the London Stock

Exchange (LSE) or Luxembourg Stock Exchange, or quoted on SEAQ (Stock Exchange

Automated Quotations) International, and traded at two other places besides the place of

listing, e.g. on the OTC market in London and on the private placement market in the US.

Large part of the GDR programs consists of a US tranche, which is privately placed and a

non-US tranche that is sold to investors outside the United States, typically in the Euro

markets. An overwhelming majority of DR programs by companies from Central and

Eastern European countries are established as GDRs, typically listed in London and traded

by qualified institutional investors in Euromarkets under regime of so called Regulation S

and some of them also in the American OTC markets in accordance with Rule 144A.

Working of GDR

GDRs can be bought and sold just like any other security. They are listed usually on the

London Stock Exchange or the Luxembourg Stock Exchange.

Similar to ADR program, the sponsor bank / brokerage sets a ratio of number of shares in

every GDR. One more significant difference between ADRs and GDRs is that in case of

GDRs, a lot of companies have a ratio of one share per GDR. This is something that is not

found in ADRs. Once the GDRs are listed, they are traded just like shares on the

exchange.

An important point in this regard is that the investors who pick the shares from London or

Luxembourg could be investors from other countries. For example, an investor from Japan

can buy GDRs of an Indian company listed on the London Stock Exchange. Later on he

can sell these GDRs to another investor from Brazil. This makes the program truly global

in the sense that funds can be raised from different countries at one single point. This is

the primary reason for these depositary receipts being christened Global Depositary

Receipts and not British Depositary Receipts.


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The GDRs are traded in Europe on one the Euro market clearing systems Euro clear and

Clear stream. These clearing systems are similar to the American National Association of

Securities Dealers Automated Quotation System (NASDAQ). These systems offer

investors the benefits of real time prices and online instant transactions among many

other benefits.

STRUCTURE:

When GDRs are structured with a Rule 144(a) offering for the US and a "Regulation S"

offering for non-US investors, there are two possible options for the structure.

Unitary Structures

Under a unitary structure, a single class of DRs is offered both to QIBs in the US and to

offshore purchasers outside the issuers domestic market, in accordance with Regulation S

All DRs are governed by one Deposit Agreement and all are subject to deposit,

Withdrawal and resale restrictions.

Bifurcated Structure

Under a bifurcated structure, Rule 144(a) ADRs are offered to QIBs in the US and

Regulation S DRs are offered to offshore investors outside the issuers domestic market.

The two classes of DRs are offered using two separate DR facilities and two separate

Deposit Agreements. The Regulation S DRs are 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. However, they may be subject to

temporary resale restrictions in the US.


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ADVANTAGES OF GDR:

EDRs/GDRs can be launched as part of a private or public offering. They allow a single fungible security to be placed in one or more international

markets, thus giving access to a global investor base.

They may allow the issuer to overcome local selling restrictions to foreign shareownership.

GDRs are eligible for settlement through Clear stream, Euro clear.

DISADVANTAGES OF GDR:

If the US tranche of a GDR is structured as a Rule 144(a) private placement, the

disadvantages of an RADR program will apply. If it is structured as a Level III program,

the reporting and cost features of such programs will apply.

PRICING OF GDR

The pricing of GDR 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 relatedshares 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 relatedshares quoted on a stock exchange during the two weeks preceding the relevant

date.


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Legal Framework: India

In India, GDRs are governed by the same notification issued for ADRs. Notification No.

F.E.R.A. 214 /2000-RB.The Reserve Bank of India issued this notification on 20th

January, 2000. It allows the issue of GDRs. The following points highlight the essence of

this notification:

All companies governed by the Indian Companies Act, 1956, are permitted to raisefunds through the issue of GDRs.

The permission, however, shall stand to be cancelled if the company raising fundsviolates any norms or exceeds any limits laid down by the Foreign Investment

Promotion Board (FIPB) or the Secretariat for Industrial Assistance (SIA).

The company has to get approval from the Ministry of Finance, Government ofIndia, to make such an issue.

The company is permitted to enter into any agreement / sign any contract withforeign agencies provided that such a contract is essential for the issue of GDRs.

The companies are allowed to make payments to the relevant authorities and thesponsor bank / brokerage towards their fees.

The companies are permitted to make any payments to concerned governmenttowards any tax liability incurred as a result of issue of GDRs

The companies are allowed to maintain bank accounts abroad to deposit the moneycollected through such an issue.

The companies are also permitted to maintain a register of foreign members if thecompany feels it necessary.

This notification cleared a lot of ambiguities that existed in the Foreign Exchange

Regulation Act in the absence of any concrete provision regards GDRs.


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AMERICAN DEPOSITORY RECEIPTS /GLOBAL DEPOSITORY RECEIPTS: INDIAN

PERSPECTIVE

INTRODUCTION:

India was totally out of the picture as far as the ADR and GDR markets are concerned.

This is primarily attributed to the protectionist policy followed by the government. The

Indian economy opened up only in 1991 with the government deciding to adopt the policy

of Liberalisation, Privatisation and Globalisation.

SCOPE OF ADRS/GDRs:

With the opening up of the economy in 1991, Indian companies have been growing at a

rapid pace. With this the economy has also been growing rapidly.

All this has resulted in the opening up of huge opportunities for investment in India.

The following points highlight the need for / scope of ADRs/GDRs in India:

Rapid Growth: Indias economy has been growing at a rapid pace. To maintain thepace of such growth, huge amounts of investments are required. ADRs and GDRs

enable such huge investments to be made in India.

Non availability of funds: The funds available in India fall far short of the fundsrequired to maintain and increase the growth rate of the economy. ADRs and

GDRs channel funds from foreign sources to India, thereby enabling such

investments to be made.

Bullish Market: The Indian market has been showing bullish tendencies in therecent past. Indexes of the two major stock exchanges in India Nifty 50 of the

National Stock Exchange (NSE) and BSE Sensex of the Bombay Stock Exchange

(BSE) have been rising upwards consistently in the last two to three years. This

upward trend is both the cause and effect of foreign funds flowing in.

Growing Investor confidence: As a result of India sustaining the bullish trend andIndian companies growing as fast as they are, global investors have greater


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confidence in Indian stocks than ever before. This sort of confidence is displayed

by institutional investors as well as individual investors.

PROCEDURE FOR ISSUE AND CANCELLATION OF ADRs/GDRs:


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Depository


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ISSUANCE AND CANCELLATION:

1. ApprovalsThe issue of GDRs requires the

approvals of Board of Directors, Shareholders,

Ministry of Finance, Ministry of Company Affairs,

Reserve Bank of India, Stock Exchange and Financial Institutions.

2. Appointment of IntermediariesADR/GDR normally involve a number of

Intermediaries including lead Manager, Co-Manager,

Overseas Depository Banks, Listing Agent, Legal

Advisor, Printer, Auditors and Underwrites.

3. Principal Documentation

The principal documents required to be preparedinclude subscription agreement, Depository

Agreement, Custodian Agreement, Agency

Agreement and Trust Deed.

4. Pre and Post LaunchAdditional Key Actions

Apart from obtaining necessary approvals,

Documentation, additional key actions necessary for

Making the issue of ADR/GDR a success, include

(i) Co appointment of various agencies and properinstitution of a Board Sub-Committee

(ii) Selection of Syndicate Members

(iii) Constitution of a task force for due diligence(iv) Listing

(v) Offering Circular(vi) Research Papers

(vii) Pre-marketing

(viii) Timing, pricing and size of the issue

(ix) Road shows

(x) Book Building and pricing of the issue

(xi) Closing of the issue

(xii) Allotment


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The depositary and custodian will work closely on the issuance and cancellation ofunderlying shares and depositary receipts in support of your depositary receiptprogram.

Depositary receipts are normally created when shares currently trading in a foreignmarket, or newly issued shares resulting from an offering of securities, aredeposited with the depositarys custodian bank in the issuers home market. Thedepositary then issues depositary receipts representing those shares.

Conversely, when the demand for shares in the home market is higher than thedemand for depositary receipts, the depositary receipts can be cancelled, and theshares are released back into the home market. Often, depositary receipts are oftenthe only way certain US investors can invest in non-US companies, given theinvestment criteria of many institutional funds. Investor demand is driven by anumber of factors, including:

Company fundamentals and track record, market conditions and sectorperformance Relative valuations and analyst recommendations NYSE/Amex specialist or NASDAQ market maker commitment to supply

liquidity of the stock.

Liquidity of shares in the local market and visibility of the companyinternationally.

In some cases, a broker-dealer will choose to purchase shares in the home market even ifdepositary receipts are available, based on their assessment of factors such as availability,Pricing and market conditions in the home market vs. the investors market.

WHO CAN ISSUE ADR/GDR:

A company can issue ADR/GDR, if it is eligible to issue shares to person resident outside

India under the FDI Scheme.

WHO CANNOT ISSUE ADR/GDR:

An Indian listed company, which is not eligible to raise funds from the IndianCapital 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 ADRs/GDRs.


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Erstwhile OCBs who are not eligible to invest in India through the portfolio routeand entities prohibited to buy, sell or deal in securities by SEBI will not be eligible

to subscribe to ADRs / GDRs issued by Indian companies.

END USE RESTRICTIONS:

No end-use restrictions except for a ban on deployment / investment of such funds in Real

Estate or the Stock Market.

LIMIT OF OFFERINGS:

There is no monetary limit up to which an Indian company can raise ADRs / GDRs.

VOTING RIGHTS:

Voting rights on shares issued under the Scheme shall be as per the provisions of

Companies Act, 1956 and in a manner in which restrictions on voting rights imposed on

ADR/GDR issues shall be consistent with the Company Law provisions. RBI regulations

regarding voting rights in the case of banking companies will continue to be applicable to

all shareholders exercising voting rights.

LISTING REQUIREMENT:

WHERE TO LIST

One of the more important decisions facing a prospective issuer of DRs is determining

where to list them. Listing on a recognised stock exchange is important partly because

many institutional investors are required to limit their investment in unlisted securities.

Critical factors such as share liquidity, visibility, listing costs and funding requirements

must be carefully evaluated before the exchange which best suits the issuer's needs can be

selected. In order to ensure that the correct decision is reached, the prospective issuer

should hold in-depth discussions with the major exchanges. We would be happy to

introduce issuers to representatives of the various exchanges in the US and in Europe.


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The type of DR program desired will determine what listing options are available. For

example, a listing on one of the three national US exchanges, the New York Stock

Exchange (NYSE), the American Stock Exchange (AMEX) or NASDAQ, is only possible

for Level II and Level III ADRs. We set out below a summary of the differences between

the "over-the-counter" market and the major US exchanges, and information on the

London and Luxembourg Stock Exchanges where most GDRs are currently listed.

This is followed by details of the minimum requirements for listing on each

exchange and their respective listing charges.

US LISTINGS ADRs

THE OVER-THE-COUNTER MARKET

Over-The-Counter (OTC) market trades are listed in the "Pink Sheets". The Pink Sheets

are published daily by the National Quotation Bureau and represent a non-automated

listing of stocks, which trade outside the three major exchanges. Listing fees are paid by

the broker dealer who seeks the listing. The broker-dealer must file a National Quotation

Form 211, which includes updated financials of the company and other relevant

information. Listing on the "Pink Sheets" is available for sponsored Level I and

unsponsored ADR programs, while a listing on NASDAQ, AMEX or the NYSE is only

available to Level II and III sponsored programs.

THE NATIONAL EXCHANGES

Issuers of Level II or III sponsored ADRs will benefit in several ways from a listing on

any one of the three national exchanges. The increased visibility to the US investment

community, which a listing provides, together with access to the automated trading and

efficient market pricing available on the national exchanges, should lead to a significant

expansion of the issuer's investor base. Importantly, listing fees for ADRs are generally

less expensive than those for ordinary shares in the US.


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A description of the three exchanges follows:-

NASDAQ (NATIONAL ASSOCIATION OF SECURITIES DEALERS

AUTOMATED QUOTATION)

NASDAQ, the first electronic stock market, operates a system of competing market

makers linked to investors by sophisticated telecommunications networks. There are two

options for listing; the Small Cap Market which, as its name implies caters for smaller

companies, and the National Market System, where the majority of NASDAQ securities

are listed. While criteria for listing on these two markets differ, the ADR listing charges

are very similar. The NASD also operates PORTAL, the market for securities issued

under Rule 144(a).

AMEX (AMERICAN STOCK EXCHANGE)

AMEX operates an auction market system, intended to facilitate trading between buyers

and sellers with minimum intervention from professional dealers. Each listed stock is

handled by a specialist unit. There are special listings requirements for non-US issuers,

with "Alternate" requirements intended to cover companies which are financially sound

but which, because of the nature of their business, would not qualify under the "Regular"

requirements.

NYSE (NEW YORK STOCK EXCHANGE)

The NYSE, like AMEX, operates an auction market system where stock prices are

determined largely by public orders competing with each other. By value of shares listed

and by volume of trading, the NYSE is the largest exchange in the United States. Foreign

companies listing on the NYSE can choose to qualify either under the "Alternate Listing

Standards" designed specifically for non-US corporations, or under the "Original" or

"Alternate Original" standards which apply to US domestic corporations. Each of the

exchanges sets additional standards concerning corporate governance. However, non-US

corporations may be exempted from these requirements upon application. Confidential

meetings can be arranged with the exchanges in advance of any decision-making to

discuss specific concerns or exemptions.


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EUROPEAN LISTINGS GDRs

LONDON AND LUXEMBOURG

At the time of writing, most GDRs have consisted of a Rule 144a offering in the US and a

Euromarkets element. With these instruments there is no listing in the US, but many are

listed in London or Luxembourg, the traditional exchanges for listing euro market

instruments.

A listing on a recognised stock exchange adds to the visibility of the issue and provides a

wider potential market; many institutional investors have limits on the number of unlisted

securities, or securities which are not listed on certain specified exchanges, in which they

can invest. Both the London and Luxembourg Stock Exchanges list GDRs, and since both

are governed by the same European Union directive, their listing requirements are broadly

similar. The differences lie mainly in the level of disclosure, the ease and speed with

which listings can be obtained and the level of visibility afforded by the listing. Listings

on the London Stock Exchange are generally arranged by the Lead Manager of the GDR

issue acting as Listing Agent, while for Luxembourg the Listing Agent must be a

Luxembourg bank with a seat on the Luxembourg Stock Exchange. This is not normally a

service the Lead Manager of the GDR issue can provide directly. A listing on the London

Stock Exchange makes it easier for a GDR to be quoted on SEAQ International, the

exchange's electronic price quotation service, although such a listing is not a requirement

for trading on SEAQ.


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American Depository Receipts and Indian

The Indian ADR market came to life only in 2000 when the Reserve Bank of India (RBI)

announced properly laid out rules and regulations for the issue of depositary receipts. Thefirst company to raise funds through the issue of ADR is Rediff.com India Limited. The

company raised $55.3 million or Rs. 2.3 billion ($1= Rs. 43) from their first issue in 2000.

There are 11 companies that have raised $7.9 billion through 14 programs. Of the 11

companies, 8 are listed on the NYSE and the other 3 on NASDAQ.

Table 1: List of companies that have issued ADRs

Source: Bank of New York

Let has have a look at the total funds raised by each of the companies mentioned above.

The following table lists the companies that have raised funds through the issue of ADRs

Table 2: List of companies with funds rose through ADR



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Graph 1: Funds rose through ADR by companies


As can be seen in the graph, ICICI Bank is the largest funds raiser. It has raised a total

of $3,359 million. It raised $466 million from their first issue in March 2005, $433 million

from their second issue in December 2005 and $2,460 million from their last issue in June

2007.

Table 3: Issue wise break up of funds rose through ADR


The table above gives a break up of the funds raised from each issue. From the

following graph, which is a graphical representation of the table given above, we can see

that Infosys has raised the highest amount of funds through a single issue.


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Graph 2: Issue wise break of funds rose through ADR


ICICI Bank and HDFC Bank are the only companies that have issued ADRs three times.

HDFC Bank made their issues in 2001, 2005 and 2007. Amongst the others, all have made

two issues except for SIFY.

Note: Data for Tata Motors, Mahanagar Telephone Nagar Limited (MTNL) and Videsh

Sanchar Nigam Limited (VSNL) for use in Graph 1 and Graph 2 was not available.

The ADRs issued have different ratios. It is not necessary that the ADRs listed on the

same exchange have the same ratio. From amongst the Indian companies, most of the

ADRs are in the ratio 1:2. This implies that for every ADR there are two homes country

shares. In other words, two shares make up one ADR. Earlier, we said that the sponsor

bank / brokerage in the U.S. prefers to keep the ratio of shares per ADR high enough to

instill confidence in the investors and at the same time low enough for it to look like an

attractive investment. Usually the ratio is 1:10. But in case of the Indian companies, the

range of the ratio lies between 1:0.5 to 1:3. This shows not only the financial strength of

the Indian companies, but also the investors confidence in Indian stocks.


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The following table shows the number of programs having the corresponding ADR:

Shares Ratio.

Table 4: Detailed break up of ADR: Shares ratio


Pie Chart 1: Percentage wise break up of ADR: Shares ratio



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Global Depository Receipts and India

India entered the GDR market soon after the opening up of the economy in 1991. It

entered the market with the Reliance issue in May 1992. Reliance raised $150 millionthrough this issue. This was followed by the Grasim issue through which the company

raised $90 million. Thereafter, there was a lull in the GDR market until the end of 1993.

This was because of the securities scam that haunted the Indian stock markets during 1992

93. The number of companies that have raised funds through the issue of GDRs is far

greater than the number of companies that have raised funds through ADRs. Despite this,

the total amount raised through GDRs is $7.2 billion.

The following table lists out all the companies that have raised funds through the issue of

GDRs along with the amount of funds raised.

Table 5: List of companies that have issued GDRs


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Source: www.gdr.in

Majority of the funds raised by these companies was post 1993. The securities scam not

only shattered investor confidence in India, but also the confidence of the global investors

who had invested or were considering an investment in Indian stocks. The 1994-95

seasons were the peak. Most of these companies got themselves listed during this time.

Videsh Sanchar Nigam Limited (VSNL) raised the largest amount of funds through the

issue of GDRs. It has raised $527 million in this market. The companies closest to VSNL

in terms of funds raised are Reliance, whove raised $450 million and Mahanagar

Telecom Nigam Limited (MTNL) who raised $419 million. From amongst the rest of the


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companies, SBI has raised $370 million while Tata Motors have raised $319 million.

There are a handful of companies that have risen between $100 - $200 million. Then

theres a big group of companies who have raised a capital of less than $100 million.

Graph 3a: Companies that have raised more than $100 million through GDRs

Source: www.gdr.in


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Graph 3b: Companies that have raised funds between $50 - $100 million through GDRs

Source: www.gdr.in


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Graph 3c: Companies that have raised less than $50 million through GDRs

Source: www.gdr.in

The pattern of the ratio of shares per GDR is quite different from the pattern of the ratio of

shares per ADR. In fact, nearly 55% of the GDRs are in the ratio 1:1. This means that oneGDR represents only one share in India. One factor that plays an important role in this is

the difference in the mindset of the European investors from their American counterparts

as regards Indian stocks. European investors seem to have

Documents

Final Report (B&W) 2