AMERICAN DEPOSITARY RECEIPTS

-A perspective for Indian corporates

Financial Advisory Lab at:

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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 fal@shbathiya.com.

Date of research paper: September 22, 2014

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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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