ADR , GDR

AMERICAN DEPOSITORY RECEIPTS

Type of negotiable (transferable) financial security.

Traded on a local stock exchange.

Physical certificate allowing investors to hold shares in

equity of other countries.

Depositary Receipts (DR)

For the Company1. Raise capital from foreign markets.2. Increases the share liquidity.

For the Investor1. Investors gain the benefits of diversification.2. Investors will be able to reap the benefits of foreign

(emerging) markets.

Benefits

The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges.

Shares of many non-US companies trade on US stock exchanges.

ADRs are denominated and pay dividends in US dollars and may be traded like regular shares of stock.

American Depository Receipt (ADR)

Sponsored ADR program

WORKING OF ADR MARKET

INVESTOR US EXCHANGE

BROKE/ DEALER

• Under the sponsored program there are 3 levels and they are ;

• Level 1- Level 1 depositary receipts are the lowest level of sponsored ADRs that can be issued. When a company issues sponsored ADRs, it has one designated depositary who also acts as its transfer agent.

• Level 1 shares can only be traded on the OTC market and the company has minimal reporting requirements with the U.S. Securities and Exchange Commission [SEC]

3 LEVELS OF SPONSORED PROGRAMS

• Level 2 depositary receipt programs are more complicated for a foreign company. When a foreign company wants to set up a Level 2 program, it must file a registration statement with the U.S. SEC and is under SEC regulation.

• The advantage that the company has by upgrading their program to Level 2 is that the shares can be listed on a U.S. stock exchange. These exchanges include the New York Stock Exchange (NYSE), NASDAQ, and the American Stock Exchange (AMEX).

• A Level 3 American Depositary Receipt program is the highest level a foreign company can sponsor. Because of this distinction, the company is required to follow to stricter rules that are similar to those followed by U.S. companies.

• Foreign companies with Level 3 programs will often issue materials that are more informative and are more accommodating to their U.S. shareholders because they Rely on them for capital

Unsponsored Programme:

• Unsponsored shares trade on the over-the- counter (OTC) market

• Unsponsored ADRs are often issued by more than one depositary bank

Restricted Programme

Foreign companies that want their stock to be limited to being traded by only certain individuals may set up a restricted program

ADR programs operating under one of these 2 rules make up approximately 30% of all issued ADRs

Privately placed (SEC Rule 144A) ADRs

ADR program under SEC Rule 144A

 private placement

 Restricted Stock and may only be issued to or traded by Qualified Institutional Buyers (QIBs)

GLOBAL DEPOSITORY RECEIPTS

Certificate issued by a depository bank, which purchases shares of foreign companies.

Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York.

GDRs are often listed in the Frankfurt Stock Exchange, Luxembourg Stock Exchange and in the London Stock Exchange.

Global Depository Receipt (GDR)

Process

Co/- deposits large no of

shares located in country

where it wants to list.

The bank then issues receipts underlying the shares (2-4)

Behaves exactly like

regular stocks- price

fluctuation according to demand &

supply

Is receipts are sold to people of that country

This receipt is then listed on

local stock exchanges.

London Stock Exchange

Luxembourg Stock Exchange

Dubai International Financial Exchange (DIFX)

Singapore Stock Exchange

Hong Kong Stock Exchange

GDR Market

Foreign currency convertible bonds (FCCBs) are a type of convertible bonds that are issued in currency other than the domestic currency of the issuing company.

FCCB's are issued by corporates for raising funds in foreign currency. 

FCCBs with a maturity term of 3-7 years provide an option to the bondholders to either redeem their investments or convert FCCBs into equities at or before maturity term at pre-determined price

FCCB

Anatomy of an FCCB…Issuer of FCCBs Lender of money

Capital in $

FCCBs29-Apr-2009

raises money in dollars sets conversion price at premium (say Rs 125) maturity period between 3-5 years

29-Apr-2009 receives FCCBs can trade FCCBs if in liquidity

crunch

Issuer of FCCBs Lender of money

Equity at conversion price

FCCBs returned

29-Apr-2014 no need to pay in cash issues equity at pre decided price (Rs 125) equity dilution

29-Apr-2014 makes windfall profit by selling equity at

prevailing market prices (say Rs 200)

If markets are good…

Issuer of FCCBs Lender of money

Capital in $

FCCBs returned

29-Apr-2014 redeem bonds at par value huge requirement of cash buy back from market before

maturity if traded at discount

29-Apr-2014 redeem FCCBs at par value principal investment comes back with

small returns

If markets are bad…

18

It’s different!

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