Depositary Receipts - The Indian Perspective

DEPOSITRAY RECEIPTS:

THE INDIAN PERSPECTIVE

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Depositary Receipts:Depositary Receipts:Depositary Receipts:Depositary Receipts:

The Indian PerspectiveThe Indian PerspectiveThe Indian PerspectiveThe Indian Perspective

Name of the Students

Mr. Neshwin Noel Almeida

Ms. Mishna Fernandes

Ms. Mrunalini Havaldar

Mr. Sushant Madhukar Mallya

Course

Bachelor of Commerce (B.Com.)

Year

2007 – 2008

Name of the Guide

Mr. Sanjay Sawant Desai

Name of the College

Vidya Vikas Mandal’s Shree Damodar College of Commerce & Economics

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DECLARATION

We declare that this project report has been prepared by us, and has

not previously formed the basis for the award of any diploma or

degree.

Class: T.Y. B.Com.

Name Roll No. Signature

Neshwin Noel Almeida 5002

Mishna Fernandes 5017

Mrunalini Havaldar 5025

Sushant Madhukar Mallya 5036

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CERTIFICATE

Certified that the project report is a record of work done by

the candidates themselves during the period of study,

under my guidance and that to the best of my knowledge it

has not previously formed the basis of the award of any

degree or diploma in Goa University or elsewhere.

Mr. Sanjay Sawant Desai

Project Guide

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ACKNOWLEDGEMENT

A lot of effort has gone into the completion of this project. We wish to place on

record our gratitude to the persons who made a contribution to the completion

of this project.

We express our sincere thanks to:

� Mr. Sanjay S. Desai, for his never-ending support. We thank him for all his

valuable inputs which have contributed greatly to the project.

� Dr. I Bhanu Murthy, Principal of Shree Damodar College of Commerce and

Economics, for all his love.

� Our family and friends who supported and encouraged us all the way.

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TABLE OF CONTENTS

1 Introduction 1 – 3

1.1 Introduction 1

1.2 Objectives of the Project 2

1.3 Methodology 3

1.4 Limitations 3

2 Depositary Receipts 4 – 21

2.1 Introduction 4

2.2 American Depositary Receipts (ADR) 5

2.3 Global Depositary Receipts (GDR) 18

3 ADR / GDR: Indian Perspective 22 – 41

3.1 Introduction 22

3.2 Scope for ADR / GDR in India 22

3.3. ADRs and India 23

3.4 GDRs and India 28

3.5 ADR vs. GDR 37

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4 ADR / GDR vs. The Rest 42 - 48

4.1 Foreign Currency Convertible Bonds (FCCB) 42

4.2 Foreign Institutional Investors (FII) 45

4.3 The ADR / GDR Advantage 46

5 Conclusion 49

� Press Clippings

� Bibliography

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LIST OF TABLES, GRAPHS AND PIE CHARTS

List of Tables

No. Table Details Pg. No.

1 List of companies that have issued ADRs 24

2 List of companies with funds raised through ADR 24

3 Issue wise break up of funds raised through ADR 25

4 Detailed break up of ADR: Shares ratio 27

5 List of companies that have issued GDRs 29-30

6 Detailed break up of GDR: Shares ratio 35

7 ADR / GDR issuing companies 38

8 Funds raised through issue of ADRs / GDRs 40

9 Funds raised through issue of FCCBs 43

List of Graphs

No. Graph Details Pg. No.

1 Funds raised through ADR by companies 25

2 Issue wise break up of funds raised through ADR 26

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3a Companies that have raised more than $100 million 32

3b Companies that have raised between $50 - $100 million 33

3c Companies that have raised less than $50 million 34

5 Average issue size of ADR / GDR program 41

6 Funds raised through issue of FCCBs 44

List of Pie Charts

No. Pie Chart Details Pg. No.

1 Percentage wise break up of ADR: Shares ratio 28

2 Percentage wise break up of GDR: Shares ratio 36

3 ADR / GDR issuing companies as a percentage of the total 39

4 Funds raised through ADR / GDR as a percentage of the total 40

CHAPTER 1

INTRODUCTION

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 1

The world has become flat. In today’s global economy, trade is not restricted to

the boundaries of the country. The world is believed to be one global village. It

is in this very global village that a whole new world of opportunities has arisen

for growth, expansion and diversification.

The Indian economy has assumed the personality of a young zealous, vibrant

person. India opened its gates to the world 17 long years ago. What transpired

ever since can be best described as the most amazing journey. We have been

growing constantly at 8 – 9% ever since. We have become the outsourcing

capital of the world. Just like our population, we are contributing more names

than ever before to Forbes’ Rich List.

On the global scene, India has just arrived. India is an “emerging market”. India

is the future. Our industrialists are buying out big companies – something we

thought would never happen. This liberal and global India has become a

destination for investors from all around the world. India has become a hotbed

for foreign investment.

And it is this foreign investment that has been driving our capital market

upwards into unprecedented territory. The indices of the two largest stock

exchanges in India – the Nifty 50 of the National Stock Exchange (NSE) and

the BSE Sensex of the Bombay Stock Exchange (BSE) – have touched levels of

20,000 and 6,000 points respectively; something solely attributed to the huge

inflow of foreign funds into our capital markets.

1.1 INTRODUCTION


The project attempts to study the depositary receipts program with special

reference to India. We wish to highlight the significance of this program in

channeling funds into India. We hope that this study leaves you with a better

understanding of the concept of depositary receipts and its significance in the

Indian economy.

� To study the American Depository Receipts (ADR) and Global Depository

Receipts (GDR) markets

� To understand the legalities involved in the issue of ADRs / GDRs.

� To find out the amount of funds collected by Indian companies through the

issue of ADR / GDR.

� To identify the reasons why companies raise funds through the issue of ADR

/ GDR.

1.2 OBJECTIVES OF THE PROJECT


In our quest for a better understanding of the concept of depositary receipts

program, we considered it imperative that our study shouldn’t be restricted to a

theoretical overview. Hence, we have provided a statistical analysis to establish

the importance of this program to India. We have compiled some statistics

which demonstrates this significance. We collected most of our data from the

internet since this is a dynamic concept that keeps changing itself to adjust to

the changing times. We 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.

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

beyond our control. We have enlisted them as under:

� As a result of the topic being a dynamic one, we had to restrict ourselves to

the largely, not wholly, to the internet as a source.

� With the ADR / GDR issuing companies being compelled to disclose

detailed statistics only to their depositary banks, we were unable to collect as

much statistical data as we would have liked

� Although we have obtained the statistics from highly credible sources, we

cannot vouch for its accuracy.

1.3 METHODOLOGY

1.4 LIMITATIONS

CHAPTER 2

DEPOSITARY RECEIPTS


In an era of rapid globalisation, investors are looking beyond the boundaries of

their countries 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 world’s

largest and most active capital market – the American market. Global

Depositary Receipts (GDRs) give the companies access to European markets

besides the American market.

2.1 INTRODUCTION


2.2.1 ADR Overview

An American Depositary Receipt is a U.S. Dollar – denominated security that

trades on the 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 doesn’t 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.

2.2 AMERICAN DEPOSITARY RECEIPTS (ADR)


2.2.2 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.


2.2.3 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 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.


2.2.4 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

2.2.4.1 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 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

disclosure standards. They needn’t 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

American market. This implies that the company tries to meet investor’s

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 cancelling it. These

shares are then made available to be bundled and issued.

� The issuing company is exempt from U.S. reporting requirements. The

reporting requirements include compliance with Rule 12g3-2(b).

� The issuing company has to register itself with the United States Securities

Exchange Commission through form F-6.

� The bid prices of the ADRs are electronically updated at the end of the

trading day through 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.

2.2.4.2 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 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 aren’t even registered with the U.S. Securities and

Exchange Commission.

� These DRs may not be advertised for or actively promoted by the issuer.

This is because the sale of such DRs takes place through private placement.

� Under Rule 144A of the Securities Act, 1933, such trades are to take place

electronically 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). This

underlies 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.

2.2.4.3 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 company’s securities, you must meet the listing

requirements of your chosen exchange or market. Your company 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) 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 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 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 issuer’s 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 issuer’s US employees, and may be used to

facilitate US mergers and acquisitions.

2.2.5 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.


2.2.5.1 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.

2.2.5.2 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.

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 to

enable the investors to analyse all the documents filed by the company before

making any investment.

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.


2.2.6 Legal Framework: India

In India, there wasn’t 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 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 raise funds through the issue of ADRs

• The permission, however, shall stand to be cancelled if the company raising

funds violates 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

of India, to make such an issue.

• The company is permitted to enter into any agreement / sign any contract

with foreign 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

the sponsor bank / brokerage towards their fees.


• The companies are permitted to make any payments to U.S. government

towards any tax liability incurred as a result of issue of ADRs

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

the money collected.

• The companies are also permitted to maintain a register of foreign members

if the company 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.


2.3.1 GDR Overview

A Global Depositary Receipt is a security that is traded in the European

markets. A GDR and 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.

2.3.2 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

2.3 GLOBAL DEPOSITARY RECEIPTS (GDR)


these depositary receipts being christened Global Depositary Receipts and not

British Depositary Receipts.

The GDRs are traded in Europe on one the Euromarket clearing systems –

Euroclear and Clearstream. 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.

2.3.3 Structure

The most significant difference between the ADR and GDR lies in their

structures. There are two types of GDRs – The Reg S Depositary Receipts and

the pairing type.

2.3.3.1 Reg S Type Depositary Receipts

The Reg S Type Depositary Receipt is the equivalent of the ADR. It is issued to

the public through a sponsor bank / brokerage. Once issued, this GDR is listed

on either the Luxembourg Stock Exchange or the London Stock Exchange.

This type of a GDR is open for every kind of investor. Unlike ADRs, where

each type of ADR determines the investors that can trade it, the Reg S type

GDR can be traded from any kind of investor to any kind of investor.

2.3.3.2 Pairing Type

This GDR is a combination of the Reg S type GDR and a Rule 144A ADR. So

when one such GDR is sold, it essentially implies the sale of a Reg S type GDR

along with a Rule 144A ADR.


The Reg S type GDR may be listed either in London or Luxembourg. The

holders of these GDRs will be regular investors. However, the Rule 144A

ADRs are privately placed through Qualified Institutional Buyers in the U.S.

The biggest reason for such a program being subscribed to is the fact that such a

program enables the issuing company to raise funds not just from the U.S. and

not just from Europe, but from both markets simultaneously.

2.2.4 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 raise funds through the issue of GDRs

• The permission, however, shall stand to be cancelled if the company raising

funds violates 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

of India, to make such an issue.


• The company is permitted to enter into any agreement / sign any contract

with foreign 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

the sponsor bank / brokerage towards their fees.

• The companies are permitted to make any payments to concerned

government towards any tax liability incurred as a result of issue of GDRs

• The companies are allowed to maintain bank accounts abroad to deposit the

money collected through such an issue.

• The companies are also permitted to maintain a register of foreign members

if the company 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.

CHAPTER 3

ADR / GDR: INDIAN

PERSPECTIVE


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.

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 and GDRs in India:

• Rapid Growth: India’s economy has been growing at a rapid pace. To

maintain the pace 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

funds required 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

the recent past. Indexes of the two major stock exchanges in India – Nifty 50

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

3.1 INTRODUCTION

3.2 SCOPE FOR ADRs / GDRs


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 and Indian companies growing as fast as they are, global investors

have greater confidence in Indian stocks than ever before. This sort of

confidence is displayed by institutional investors as well as individual

investors

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.

The first 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.

3.3 ADRs AND INDIA


Company Ticker Industry Exchange

DR. Reddy's Laboratories Ltd. RDY Pharmaceutical NYSE

HDFC Bank Limited HDB Banks NYSE

ICICI Bank Limited IBN Banks NYSE Infosys Technologies Limited INFY Technology services NASDAQ Mahanagar Telephone Nigam Limited MTE Fixed line communication NYSE Rediff.com India Limited REDF Technology services NASDAQ Satyam Computer Services Limited SAY Technology services NYSE SIFY Limited SIFY Technology services NASDAQ Videsh Sanchar Nigam Limited VSL Fixed line communication NYSE Wipro Ltd. WIT Technology services NYSE Tata Motors TTM Automobile NYSE

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

Companies Total Capital Raised Through ADR ($Million)

Dr. Reddy's 362

HDFC Bank 1,080

ICICI Bank 3,359

Infosys 2,489

Rediff 103

Satyam 484

SIFY 44 Table 2: List of companies with funds raised through ADR



Graph 1: Funds raised 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.

Company 1st Issue 2nd Issue 3rd Issue HDFC Bank 607 300 172 Dr. Reddy's 229 133 - SIFY 44 - - Infosys 1,605 884 - Rediff 48 55 - Satyam 323 162 - ICICI Bank 246 433 466

Table 3: Issue – wise break up of funds raised 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.

Graph 2: Issue wise break of funds raised 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.

All figures in $ million


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 home – 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

raito 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 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 investor’s confidence in Indian stocks.

The following table shows the number of programs having the corresponding

ADR: Shares Ratio.

ADR: Shares Ratio Number of Programs Percentage 1:0.5 2 12.50%

1:1 5 31.25%

1:2 6 37.50%

1:3 3 18.75%

Table 4: Detailed break up of ADR: Shares ratio



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


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 million through 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.

3.4 GDRs AND INDIA


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

the issue of GDRs along with the amount of funds raised.

Company Industry Funds Raised (In $ million) Arvind Mills Textiles 125 Ashok Leyland Automobile 138 Bajaj Auto Automobile 110 Ballarpur Industries Paper 35 Bombay Dyeing Textiles 50 BSES Ltd Power 125 Century Textiles Diversified 100 CESC Power 125 Core Parent Pharmaceutical 70 Crompton Greaves Electrical 50 DCW Diversified 25 Dr. Reddy's Labs Pharmaceutical 48 E. I. Hotels Hotels 40 EID Parry Fertiliser 40 Finolex Cab Cables 55 Flex Industries Packaging 30 G.E. Shipping Shipping 100 G.N.F.C Fertiliser 61 GAIL Oil & Refineries 23 Garden Silk Textiles 45 Grasim Diversified 190 Gujarat Ambuja Cement Cement 80 Himachal Future Telecommunication 50 Hindalco Aluminum 172 Hindustan Dev. Diversified 76 India Cements Cement 90 Indian Aluminum Aluminum 60 Indian Hotels Hotels 86 Indian Rayon Diversified 125 Indo Gulf Fertiliser 100 Indo Rama Textiles 50 ICICI Bank Finance 230 Infosys IT 70


IPCL Petrochemicals 85 ITC Cigarettes 69 J.K. Corporation Diversified 55 Jain Irrigation Plastics 30 JCT Ltd. Textiles 45 Kesoram Ind Diversified 30 Larsen & Toubro Diversified 285 Mahindra & Mahindra Automobile 75 MTNL Telecommunication 419 NEPC Micon Diversified 48 Nippon Denro Steel 125 Oriental Hotels Hotels 30 Ranbaxy Labs Pharmaceutical 100 Raymond Woolen Textile 60 Reliance Diversified 450 Reliance Petroleum Diversified 100 S.A.I.L. Steel 125 Satyam Infoway IT 75 S.I.E.L. Diversified 40 Sanghi Poly Textiles 50 SIV Ind Textiles 45 SPIC Fertiliser 65 SBI Banking 370 Sterlite India Diversified 100 Tata Electric Power 65 Tata Motors Automobile 315 Tube Invest Cycles 46 United Phos. Pesticides 55 Usha Beltron Cables 35 Videocon International Electronics 90 VSNL Telecommunication 527 Wockhardt Pharmaceutical 75

Table 5: List of companies that have issued GDRs

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 season was 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, who’ve raised

$450 million and Mahanagar Telecom Nigam Limited (MTNL) who raised

$419 million. From amongst the rest of the companies, SBI has raised $370

million while Tata Motors have raised $319 million. There are a handful of

companies that have raised between $100 - $200 million. Then there’s a big

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


527

125

138

110

125

100

125

100

190

172

230

125

100

285

419

125

100

450

100

125

370

100

315

0 200 400 600

VSNL

Arwind Mills

Ashok Leyland

Bajaj Auto

BSES Ltd

Century Textiles

CESC

G.E. Shipping

Grasim

Hindalco

ICICI

Indian Rayon

Indo Gulf

L & T

MTNL

Nippon Denro#

Ranbaxy Labs

Reliance

Reliance Petroleum

S.A.I.L.

SBI

Sterlite India

Tata Motors

Companies That Have Raised More Than $100

million

Total Capital RaisedThrough GDR ($Million)

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

Source: www.gdr.in


90

50

70

50

55

61

80

50

76

60

86

50

70

85

69

55

75

60

50

75

65

65

55

90

75

0 50 100

India Cements

Bombay Dye

Core Parent

Crompton Greaves

Finolex Cab

G.N.F.C

Guj Ambuja

Himachal Futuri

Hindustan Dev.

Indian Alum.

Indian Hotels

Indo Rama

Infosys

IPCL

ITC

J.K. Corp

Mahindra & Mahindra

Raymond Woolen

Sanghi Poly

Satyam Infoway

SPIC

Tata Electric

United Phos.

Videocon Int.

Wockhardt

Companies that have raised between $50 -

$100 million

Total Capital RaisedThrough GDR ($Million)

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

Source: www.gdr.in


48

35

25

40

40

30

23

45

30

45

30

48

30

40

45

46

35

0 10 20 30 40 50

Dr. Reddy's

Ballarpur Ind.

DCW

E. I. Hotels

EID Parry

Flex Industries

GAIL

Garden Silk

Jain Irrig

JCT Ltd.

Kesoram Ind

NEPC Micon

Oriental Hotels

S.I.E.L.

SIV Ind

Tube Invest

Usha Beltron

Companies that have raised less than $50 million

Total Capital Raised ThroughGDR ($Million)

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 one GDR 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 greater confidence in Indian stocks than the

Americans.

The following table shows the number of programs having the corresponding

GDR: Shares Ratio.

GDR: Shares Ratio Number Of Companies Percentage 1:0.5 2 2.82% 1:1 39 54.93% 1:1.5 1 1.41% 1:2 9 12.68% 1:3 4 5.63% 1:4 1 1.41% 1:5 8 11.27% 1:6 1 1.41% 1:10 3 4.23% 1:15 2 2.82% 1:100 1 1.41%

Table 6: Detailed break up of GDR: Shares ratio

Source: www.gdr.in


Pie Chart 2: Percentage wise break up of GDR: Shares ratio

Source: www.gdr.in

The chart shows that the GDR: shares ratio ranges from 1:0.5 to 1:100. This

indicates the presence of different kinds of companies. It indicates the presence

of a large number of big Indian companies and quite a few number of small

companies.


India’s entry into the GDR market dates back to 1992 with Reliance’s $150

million issue. Indian companies were hesitant to enter the ADR market until

2000, when the Reserve Bank of India issued clearly defined guidelines. Apart

from this, there are several other reasons for most Indian companies’ preference

towards the GDR market. They are listed as under:

• Disclosure norms: Companies listed on any of the American stock

exchanges are required to adhere to comprehensive disclosure norms. They

have to disclose information relating not just to the ADR, but also detailed

financial and non – financial information regarding the company. In contrast,

the London Stock Exchange (where all of the Indian companies are listed)

requires disclosure of only that information which relates to GDRs being

issued.

• Voting Rights: American rules make it a necessity for ADR holders to be

given voting rights. The London Stock Exchange (LSE) makes no such

demand. Although companies wishing to give such voting rights are

permitted to do so, they are not compelled to give these rights

• Accounting System Differences: Both U.S. and England follow accounting

systems that differ from the Indian system. The Securities and Exchange

Commission (SEC) makes it compulsory for companies issuing ADRs either

to prepare their accounts under US GAAP or reconcile the accounts to US

GAAP. The LSE, on the other hand, is satisfied with a Statement of

Difference between the English accounting system and the Indian system.

3.5 ADRs vs. GDRs


• Initial Listing Costs: There is a significant difference in the initial listing

costs of listing in the U.S. and listing on the LSE. A U.S. listing could cost

the issuing company anywhere between $1 - $2 million or Rs.400 – Rs. 800

crores ($1 = Rs. 40). These costs are down to about $200,000 - $400,000 or

Rs. 0.8 – Rs. 1.6 crores for listing on the LSE.

The following table shows the number of companies that have issued ADRs as

against the number of companies that have issued GDRs.

Instrument Issued No. of Companies Percentage ADR 11 14.86% GDR 63 85.14%

Table 7: ADR / GDR issuing companies

Source: Bank of New York and www.gdr.in

Of the 74 companies that have raised funds through the issue of ADRs and

GDRs, 11 have issued ADRs while the other 63 have issued GDRs. The

following pie chart shows this in terms of percentage of total number of

companies who have raised funds through depositary receipts.


Pie Chart 3: ADR / GDR issuing companies as a percentage of the total

Source: Bank Of New York and www.gdr.in

As shown above, an astounding 85.14% of the companies issue GDR for the

various reasons that we listed above. One interesting point worth noting is that

the measures which deter Indian companies from listing in the U.S. affect the

smaller companies in a far greater manner. The companies listed in the U.S. are

the “big boys” of “India Inc.”

The fact that the bigger companies are listed in the U.S. is evident from the

amount of funds raised through these issues. It would be logical to assume that

since 85.14% of the companies have issued GDRs, a near equal percent of funds

would be raised. However, GDRs account for only 47.52% of the funds raised.


Instrument Funds Raised Percentage

ADR 7,92,13,84,003 52.48%

GDR 7,17,13,90,000 47.52% Table 8: Total funds raised through issue of ADRs / GDRs


The following pie chart shows the amount of funds raised through ADRs and

GDRs as a percentage of the total funds raised.

Pie Chart 4: Funds raised through ADR / GDR as a percentage of the total


Although ADRs account for only 14.86% of the total issue of depositary

receipts, they account for 52.48% of the funds raised. This goes to prove, as we

stated earlier, that the Indian companies issuing ADRs are bigger than the ones

issuing GDRs.


As a result of the more funds being raised from lesser companies through the

issue of ADRs, the average issue size of a company issuing ADR is much

higher than than a company issuing a GDR. The average issue size in case of

an ADR is about $720 million while this average drops to around $114 million

in case of GDRs. The following graph shows the average issue size in case of

ADR as against in case of a GDR.

Graph 5: Average issue size of a ADR / GDR program


Although the general preference amongst Indian companies is to issue GDRs,

India have managed to raise more funds in lesser time through the ADR market.

It took us 16 years 63 companies to raise $7.2 billion through GDRs but only 7

years and 11 companies to raise $7.9 billion.

CHAPTER 4

ADR / GDR VS. THE REST


Foreign Currency Convertible Bonds (FCCBs) are a means of debt financing.

FCCBs are bonds issued by companies in a foreign currency. The holders of

these bonds have the option of converting the bonds into shares. Hence, a

convertible bond can be said to be a mix between an equity instrument and a

debt instrument.

The company that issues FCCBs offers the investor an option to convert his

bonds into equity in the same company. Generally, the company permits such

conversions at predetermined exchange rates and at predetermined prices. Most

of the Indian companies set the conversion rate of these bonds at 10 – 50

percent. The investors can exercise this option only after having stayed invested

in the FCCB for about 1 – 2 years after the issue.

FCCBs are attractive as both – an investment opportunity and as a channel to

raise finance. These convertible bonds have proved to be an attractive prospect

to both the investors as well as the companies issuing the bonds. The investors

enjoy the safety of a guarantee of payments on the bond. The investors stand to

gain a lot with a substantial increase in the companies stocks. They stand to gain

from the improved stock position of the company by way of the warrants

attached to the bonds. These warrants are activated when the price of the

company’s stock reaches a certain point.

Companies issuing such bonds have a preference towards FCCBs owing to the

equity aspect. This allows the company to reduce its debts by converting these

debts into equity. Further, such a conversion adds value to the company.

4.1 FOREIGN CURRENCY CONVERTIBLE BONDS


In the recent past, there has been an increasing preference for raising funds

through the issue of FCCBs in India. Leading from the front in this respect are

the IT majors, who seem to be making good use of the available opportunities.

The table below shows the amount of funds raised by a few companies through

the issue of FCCBs

Companies Funds Raised Through FCCB ($ Million)

Videocon Indisutries 75

CESC 40

India Cements 100

Jindal 65

Indiabulls 130

Apollo Hospitals 65

EMCO Ltd. 10

Bharat Forge 100

Centurian Bank 10

Nagarjuna Constructions 100

HDFC 500

Tata Power 200

Tata Motors 400

Ashok Leyland 100

Bharti Group 115

Zee Telefilms 100 Table 9: Funds raised through issue of FCCBs

Source: www.rediff.com


Graph 6: Funds raised through issue of FCCBs

Source: www.rediff.com


Foreign Institutional Investor (FII) refers to a non – Indian institution that

invests directly in India. A FII is an investor or and investment fund that invests

in India, but is not registered in India. The FIIs in India include hedge funds,

incsurance companies, penison funds and mutual funds.

FIIs enter the Indian market through the back door. They buy and sell shares

from the exchange and do not directly invest their funds in the operations of

Indian companies. The FIIs have to get themselves registered witht the

Securities and Exchange Board of India (SEBI). SEBI has laid down guidelines

with regards not solely to the quantum of investment, but also the procedures to

be followed prior to such investment.

Recently, FIIs have been permitted to short sell equity in the Indian market

through the notification no. A. P. (DIR Series) Circular No. 23, issued by the

RBI. However, the custodian banks of these FIIs have to report on all

transactions seperately to the RBI for the purpose of monitoring.

FIIs have been pouring in a lot of funds into the Indian markets in the recent

past. In fact, FIIs have been playing a major role in the Indices of the country’s

two major stock exchanges – Nifty 50 of the NSE and BSE Sensex of the BSE.

The recent bullsihness of the Indian markets is attributed to the huge inflow of

funds from the FIIs.

4.2 FOREIGN INSTITUTIONAL INVESTORS (FII)


ADRs / GDRs have several benefits to offer to both issuers as well as the

investors. Listed below are the various ways in which the issuers of ADRs /

GDRs stand to gain

� Widened Investor Base: With the issue of ADRs / GDRs, Indian companies

can expand their investor base to beyond the borders of the country. Further,

this facilitates the company to divesify their investors.

� Increased Liquidity: As in the case of any issue, the issue of ADRs / GDRs

will increase the liquid position of the company. The compay can use these

funds to fuel their expansion plans.

� Global Visibilty: Entering the depositary receipts market would result in the

issuing company becoming globally visible. This enables Indian companies

to enhance their reputation not just amongst foreign investors, but also

amongst domestic investors.

� Price Parity: Indian companies can compete to be at par with MNCs with

regards to their stock prices. With the issue of ADRs / GDRs, Indian

companies with the MNCs in their own turf.

� Facilitates Market Entry: Once a company has got itself recognised and

acepted by the investors, Indian companies can set up shop abroad with far

lesser difficulty. In fact, some of the India companies have issued ADRs /

GDRs not just to raise funds, but also to establish their brand in the country.

In this manner, they can enter foregin market with a lesser risk of failure.

4.3 THE ADR / GDR ADVANTAGE


ADR / GDR is a very good option for investors to consider. The following

points highlight the advantages that accrue to investors investing in ADRs /

GDRs:

� Ease of Investment: ADRs / GDRs are very easy to invest in and hold.

They are treated like just other securities. Hence, there is no complicated

procedure involved in the pruchase of a ADR / GDR.

� Simple to Trade: Since ADR / GDR is given the same treatment as local

securities, it becomes that much easier and simpler for the investor to trade

in ADRs / GDRs.

� Global Access: ADRs / GDRs provide the investors opportunities to invest

globally. This permits them to invest in foreign companies without having to

transfer funds out of the country. Further, investors can divesify the

industries into which they wish to invest.

� Enables Comparison: Owing to the fact that all transactions take place in

their home country, investors can easily compare their investments in ADRs

/ GDRs as against their investments in other local securities. This is also

made possible with the trasactions taking place electronically.

� Access to Institutional Investors: ADRs / GDRs offer the institutional

investors an opportunity to hold securities which they are not permitted to

hold in the home country of the ADR / GDR issuing company.


ADRs / GDRs have proved to be very vital to India’s recovery from the

financial crisis in 1991. Although, alternate means look more attractive, the

ADR / GDR is fundamentally and structurally sound.

CHAPTER 5

CONCLUSION


As we conclude this project, we are filled with a sense of satisfaction of having

achieved what we set out to. This project is the result of all the efforts that we

have been putting in over the last year. The experience has left us better

equipped in more than one way.

We are now better positioned to conduct a similar research on other topics. The

project has enlightened us with what it takes to actually achieve the goals that

you set. Further, we are better prepared to work in a team.

We have fully understood the concept and the need for a depositary receipts

program. We have identified its significance in India’s growth. We have also

got an insight into the functioning of the American markets along with the

European market.

We have observed that the sudden surge in ADR issues took place after the

government put in place clearly defined rules. Similarly, GDR issues kicked off

immediately after the opening up of the economy. We hope that the RBI can

further relax the ADR / GDR guidelines to enable Indian companies to gain

even greater access to global markets. We also believe that Indian companies

raising funds globally should attempt to make this growth more inclusive.

ADRs and GDRs have proved to be quite a revolution. It wouldn’t be too daring

to dream of a day when we can issue new shares in foreign markets without the

company’s presence in the country.

5.1 CONCLUSION

ix

� “Government Amends Norms for ADRs / GDRs”

NEW DELHI: The finance ministry has amended norms for the issuance of equity

and convertible bonds by Indian companies in the international markets.

The new norms will be a breather to companies like SIFY and Rediff.com which

were suppose to list their companies in the domestic market by March 31, 2006.

However, with the new norms, they can go for domestic listing within three years

after they start making profit.

According to new norms, unlisted companies which had issued Foreign Currency

Convertible Bonds (FCCBs), American Depository Receipts (ADRs) and Global

Depository Receipts (GDRs) prior to August 31, 2005 and are not making profit have

been permitted to sponsor ADR/GDRs, against existing shares held by shareholders

in the domestic market and will have to list on the domestic stock exchanges, within

three years of making profit.

However, unlisted companies which have not issued FCCBs, ADRs and GDRs prior

to August 31, 2005 would require prior or simultaneous listing in the domestic stock

exchanges or issues against existing shares under the scheme.

At the same time, unlisted Indian companies can sponsor an issue of ADRs and

GDRs in the international market against shares held by its shareholders provided

such facility would be available pari-passu to all categories of shareholders of the

company whose ADRs and GDRs are being traded in the global market.

(Source: Times of India dt. 29 June 2006)

Press Clippings

x

� “Government curtails voting rights of depositaries ”

NEW DELHI: RBI has tightened the voting rights norms in a bank for American

Depository Receipt (ADR) and Global Depository Receipt (GDR) holders through

depositories.

RBI, in a communique to the scheduled commercial banks has asked them not to take

cognizance to voting by depositories, which hold underlying shares of ADRs and

GDRs, if they vote in contravention to its agreement with the banks.

The letter noted that banks enter into an agreement with the depositories, while

issuing shares to them, that they would not exercise voting rights in respect of the

shares held by them or if at all they exercise voting rights, they will do as directed by

the board of directors of banks.

In the communique RBI said, "Further, to eliminate the possibility of any

interference of depositories in the bank's management, they should give an

undertaking to the RBI that, (i) they would not give cognizance to voting by the

depository, should the depository vote in contravention of its agreement with the

bank and (ii) no change would be made in terms of the Depository Agreement

without prior approval of RBI."

Therefore, now, banks cannot grant voting rights to depositories. Ideally, the RBI

assumed banks were following the practice of not allowing depositories to vote. But

it came to the notice of the RBI that banks issuing ADR/GDR enter into a trust

agreement with the depository granting them the right to vote as directed by the

board of directors of the bank.

(Source: The Hindu Business Line dt. 9th February, 2007)

xi

Source: Books

� Security Analysis of Portfolio Management by V.K. Bhatia

� Foreign Direct Investment in India by Lata Chakravarthy

� International Finance by V.A. Avadhani

� Foreign Exchange Market by S. Yadav, P.K. Yadav & Max Peyrard

Source: Newspapers

� The Hindu Business Line (dt. 9th February, 2007)

� Times of India (dt. 29th June 2006)

Source: Magazines

� Fortune

� Business Today

� Time

Source: Internet

� www.adr.com

� www.jpmorgan.com

� www.gdr.in

� www.adr.in

� www.investopedia.com

� www.thehindubusinessline.com

� www.bnymellon.com

� www.moneycontrol.com

Bibliography

xii

Source: Other Documentation

� JP Morgan Depositary Receipts Guide

� Deutsche Bank Depositary Receipts Guide

Documents

Depositary Receipts - The Indian Perspective