CHAPTER NO: 1

INTRODUCTION

CHAPTER NO: 1
INTRODUCTION

MEANING OF DEPOSITORY RECEIPT:Depository Receipts are a type of negotiable (transferable) financial security, representing a security, usually in
the form of equity, issued by a foreign publicly-listed company. However, DRs are traded on a local stock
exchange though the foreign public listed company is not traded on the local exchange.
CONCEPT OF DEPOSITORY RECEIPT
As the country grows and expands with the globalization of the economy, one important aspect with regard to the
investment opportunities available to investors is the introduction of depository receipts(DRs) as an investment
alternative.
A DR is a tradable instrument that represents an ownership interest in securities of a foreign issuer typically
trading outside its home market.
Most common types of depository receipts are the American depository receipts(ADRs) and global depository
receipts (GDRs). ADRs are issued by the united states (US) in lieu of a non-US companys shares which are
traded on the US exchange although the companies itself are not listed on the US exchange.
The DRs which are not listed on US exchange but in other countrys exchanges most commonly in London or
Luxemburg are termed as Global depository receipts (GDRs).
A depository receipt where the issuing bank is European will sometimes be called a European depository receipt
(EDR). While by creating a depository receipts program, the companies are able to gain the flexibility and access
they need to achieve the companys strategic goals it also hold special appeal for investors because they make
investing in a company beyond the investor home borders easy and convenient.

According to the placement planned, depository receipts are classified into three categories, as follows
Global Depository Receipt (GDR):Which can be simultaneously issued to investors in two or more countries
American Depository Receipt (ADR):Which are issued only to investors in America
Indian Depository Receipt (IDR):Which are issued only to investors in India
Depository Receipts listed and traded in US markets are known as American Depository Receipts (ADRs) and
those listed and traded elsewhere are known as Global Depository Receipts (GDRs).
In Indian context, DRs are treated as FDI.

CHAPTER NO: 2
CONCEPTUAL DATA

CHAPTER NO: 2
CONCEPTUAL DATA
How do Depository Receipts Created?
When a foreign company wants to list its securities on another countrys stock exchange, it can do so through
Depository Receipts (DR) mode.
To allow creation of DRs, the shares of the foreign company, which the DRs represent, are first of all delivered
and deposited with the custodian bank of the depository through which they intend to create the DR.
On receipt of the delivery of shares, the custodial bank creates DRs and issues the same to investors in the
country where the DRs are intended to be listed. These DRs are then listed and traded in the local stock exchanges
of that country.

MEANING OF ADR
Every company is interested to get investment from developed countries investors. Simply, I can say that if my
company name is Accounting Education Corporation and I have registered this company in Indian Company
registrar by making small association of my friends. After this I can sell my companys shares in Indian share
market. But If I want to make large scale company, for fulfill my other business aims like spreading quality
accounting education at international level, I need to buy high infrastructure. For this I need money. Money can be
received from selling large number of shares in developed countries. USA is also developed country.
Every dollar will become in India Rs. 45, suppose if I sell 100 shares of $ 1 each, then it means I have received
Rs. 4500. But USA does not allow every company to trade in USA. For trading in USA, I need ADR.

Definition of ADRs
American depository receipt is the receipt for trading of non US Company in the stock market of USA. If any non
USA company is interested to trade in USA stock market, then it can receive ADR level one, ADR level two and
ADR level three. ADR for level one can easily get after accepting the conditions of SEC of USA but major
problem is that this ADR can only use for getting investment from USA and it cannot be used for getting
investment money from any other country. It is the reason that Indian company prefers to get GDR instead of
ADR. No one can sell shares with GDRs as the substitute of ADRs. Any company can start trading in USA stock
exchange after buying ADRs from New York Stock exchange or NASDAQ.

FEATURES OF ADR
American Depository Receipts popularly known as ADRs were introduced in the American market in
1927.
ADR is a security issued by a company outside the U.S. which physically remains in the country of issue,
usually in the custody of a bank, but is traded on U.S. stock exchanges.
An ADR can be described as a negotiable derivative instrument, traded on a US exchange, issued by a US
bank, representing specified number of shares of foreign company
ADRs are always denominated in US dollars and are normally issued only to US residents.
The underlying shares of the foreign company represented by an ADR are called American Depository
Shares (ADS)
The relationship between the ADR and underlying shares is referred to as ADR ratio.
ADRs are listed on the NYSE, AMEX, or NASDAQ

ADVANTAGES OF ADRs

ADRs can be bought and sold just like shares

You don't need a foreign brokerage account or a new broker; you can use the same broker that you
normally deal with.

Prices for ADRs are quoted in U.S. dollars, and dividends are paid in dollars.

ADRs trade during U.S. market hours and are subject to similar clearing and settlement procedures as
American stocks.

You can customize your portfolio however you like, depending on which countries or sectors you are
interested in.

DISADVANTAGES OF ADRs

ADRs have some important limitations and drawbacks.

Limited selection:
Not all foreign companies are available as ADRs. For example, Japan's Toyota Motor has an ADR, but
Germany's BMW does not.

Liquidity:
Plenty of companies have ADR programs available, but some may be very thinly traded.

Exchange rate risk:

While ADRs are priced in dollars, for sake of convenience, your investment is still exposed to fluctuations
in the value of foreign currencies.

Because ADRs are like stocks, you need to buy enough of them to ensure adequate diversification.

So if you don't have enough investment capital to spread around, say 25 to 30 ADRs (or more), you won't
be able to create a truly diversified portfolio on your own.

TYPES OF ADR:-

Types of
ADR

Unsponso
red

level 1

Sponsore
d

level 2

level 3

Restricted

Section
144A

"S"

A) Unsponsored ADR:With an unsponsored

ADR, the custodian bank
buys shares of the

foreign company, brings the shares into the United States and then issues ADR shares to U.S. investors.
The foreign company does not support or authorize an unsponsored ADR. While a sponsored ADR can only have
one custodian bank, multiple banks can choose to issue unsponsored ADRs of a single foreign company.
Multiple ADRs for a foreign stock can result in differing ADR share prices and dividend payment amounts.
Unsponsored ADR shares only trade over the counter.

B) Sponsored ADR:With a sponsored ADR, the foreign company initiates and supports the ADR program in the United States.
The company must meet certain Securities and Exchange Commission reporting requirements.
With a sponsored ADR the foreign company knows how many of its shares are in the ADR program and has
access to investors owning the shares.
Only sponsored ADRs can be listed on the stock exchanges, the New York Stock Exchange and NASDAQ.
However, some sponsored ADRs list on the over-the-counter -- OTC -- markets.
1. Sponsored Level 1 ADR Program:
This is the first step for an issuer. In this instrument only minimum disclosure is required by the SEC. The issuer
is not allowed to raise fresh capital or list itself on any of the National Stock Exchanges.
2. Sponsored Level 2 ADR Program:
The Company is allowed to enlarge the investor base for existing shares to greater extent. But significant
disclosure has to be arranged. The Company now can test itself on American or New York Stock Exchange.
3. Sponsored Level 3 ADR Program:
This level is to raise fresh capital through public offering in the US capital market.
4. Restricted ADR
In addition to the sponsored ADR issues a company can also access the US and other capital markets
through ADR program falling under rule 144 or regulation S of the SEC.
These issues have certain limitations in terms of target investors etc.
a) Rule 144:
This rule provides for raising capital through private placement of ADRs with large institutional investors
called qualified institutional bodies

(QIBs).

Such issues operate at Level 1 status and do not require fulfillment of GAAP standards.
b) Regulation S:
Regulation S provides for raising capital through the placement of ADRs to offshore non-US investors.
Section S of the SEC regulation permits ADRs to be issued to individuals and corporate entities without any
restrictions outside the US.
For example:Let's assume the ADRs of XYZ Company, a French company, pay an annual cash dividend of 3 euros per share.
Let's also assume that the exchange rate between the two currencies is even-meaning one Euro has an equivalent
value to one dollar.
XYZ Company's dividend payment would therefore equal $3 from the perspective of a U.S. investor. However, if
the euro were to suddenly decline in value to an exchange rate of one euro per $0.75, then the dividend payment
for ADR investors would effectively fall to $2.25. The reverse is also true.
If the euro were to strengthen to $1.50, then XYZ Company's annual dividend payment would be worth $4.50.

COMPANIES THAT HAVE ISSUED ADRS ARE:

1.

Dr. Reddys

2.

HDFC Bank

3.

ICICI Bank

4.

Infosys Technologies

5.

MTNL

6.

Patni Computers

7.

Tata Motors

8.

VSNL

9.

WIPRO

GDRs
MEANING OF GDR
GDR is a depository receipt sold outside of the United States and outside of the home country of the issuing
company.

Definition of GDRs
GDRs mean global depository receipts. It is negotiable and transferable from one body to another. It is also
evidence of ownership of a company's shares. When a bank purchases shares of foreign company, at that time it
issues a certificate, that certificate is called global depository receipt.
Suppose A USA based company wants to buy the shares of Indian company, then it only possible by getting
GDRs. USA Company can buy Indian company shares by the help of his bank. Bank takes some charges and
issues GDR.
Importance of GDRs
If any company gets GDRs for his purchased shares, then these can be sold in any stock market of world through
global network of banks and financial institutions.
Global Depositary Receipts (GDRs) give power to investors and companies access to two or more markets, most
frequently the US market and the Euromarkets, with one security. GDRs are most commonly used when the
company is raising capital in the local market as well as in the international and US markets, either through
private placement or public offerings.
Securities and Exchange Commission of USA has allowed USA companies and also foreign companies to buy and
sell shares through GDRs. Among the Indian Companies, Reliance Industries Ltd. was the first company to get
funds through a GDR issue, after this many other Indian Companies like Infosys, WIPRO AND ICICI have
started to raise funds via GDRs.
It is the good way for getting foreign investment for developing economy.
FEATURES OF GDR
First GDR was issued in 1990.
GDR can be issued in any freely convertible currency
Holders of GDRs do not acquire any voting rights.
Proceeds of GDR issue are permitted to be used for any normal business activity but cannot be used for

trading in securities or in real estate.

Investments in GDRs entitle the holders to all corporate benefits such as dividend, bonus shares, right
shares etc.
GDRs can be sold in multiple markets simultaneously.
GDR do not require approval of local regulatory authority.
GDR issues are normally listed on international stock exchange in London and Luxemburg.
GDR issue of Indian companies is classified as Foreign Direct investment (FDI).
Among the Indian companies Reliance Industries Ltd. was the first company to raise funds though a GDR
issue.
ADVANTAGES OF GDRs

GDRs, like ADRs, allow investors to invest in foreign companies without worrying about foreign trading
practices, different laws, or cross-border transactions.

GDRs offer most of the same corporate rights, especially voting rights, to the holders of GDRs that
investors of the underlying securities enjoy.

Other benefits include Easier trading, the payment of dividends in the GDR currency, which is usually
the United States dollar (USD).

Corporate notifications, such as shareholders meetings and rights offerings, are in English.

Another major benefit to GDRs is that institutional investors can buy them, even when they may be
restricted by law or investment objective from buying shares of foreign companies.

GDRs also overcome limits on restrictions on foreign ownership or the movement of capital that may be
imposed by the country of the corporate issuer, avoids risky settlement procedures, and eliminates local
or transfer taxes that would otherwise be due if the companys shares were bought or sold directly.

There are also no foreign custody fees, which can range from 10 to 35 basis points per year for foreign
stock bought directly.

GDRs are liquid because the supply and demand can be regulated by creating or cancelling GDR shares.

DISADVANTAGE OF GDRs
GDRs have foreign exchange risk if the currency of the issuer is different from the currency of the GDR, which is
usually USD.
PARTIES INVOLVED IN GDR ISSUE:
1. Lead manager:
A lead manager is usually an investment bank appointed by the issuing company.
This institution has the responsibility of collecting and evaluating information about the issuing company
documentation and presenting to investors a current picture of the companys strengths and future prospects. Lead
managers may involve other managers to subscribe to the issue.
2. Depository:
A depository bank is a bank organized in the United States which provides all the stock transfer and agency
services in connection with a depository receipt programme.
This function includes arranging for a custodian to accept deposits of ordinary shares, issuing the negotiable
receipts which back up the shares, maintaining the register of holders to reflect all transfers and exchanges and
distributing dividends in U.S. dollars.
3. Custodian:
An agent that safe keeps securities for its customers and performs related corporate action services.
With regard to DRs, the custodian may be the overseas branch, affiliate or correspondent of the depository and is
responsible for safekeeping of the securities underlying the DRs and performing related corporate action services.
4. Clearing system:
It is like registrars who keep record of all particulars of GDRs for investors.

In US, Depository Trust Company (DTC) does this function.

In Europe there is Euro CLEAR (Brussels)- An International clearing organization, located in Brussels,
responsible for holding, clearing and settling international securities transactions and similarly DEDEL in
(London).
STEPS IN GDR ISSUE:
GDRs are the best way of raising finance from USA and other European countries' investors. No Indian company
has right to sell their shares in foreign capital market without GDRs. So, it is very necessary to know the
procedure of issue GDRs. Only GDRs connects foreign investors with Indian Companies.
Following are the simple steps of issuing GDRs :
1st Step
To find the Depository bank
Depository bank has only right to issue the GDRs. So, it is necessary to find depository bank in USA and other
European countries.
2nd Step
Issue the Shares to Depository bank
Shares cannot issued to foreign investors. But shares are issued to depository bank and depository bank will
accept the shares of Indian companies as the custodian of foreign investors.
3rd Step
Deposit the fees
For issuing GDRs, either investors or Company has to deposit the fees for issuing the certificate named global
depository receipt.
4th Step
Issue of GDRs and Record
Depository bank has right to issue one GDR certificate for 2 to 10 shares. The issue of GDRs to those investors
who will pay the amount of shares of Indian companies. After this, it will be assumed that USA or other foreign

countries' investors have acquired the shares of Indian companies. Indian company gets money of shares through
depository banks. On the other side, foreign investors' name registered and they will get dividend through this
bank in USA Dollar. Not only Indian companies but many other developing countries' companies are using same
procedure for getting fund through GDRs. This year, a Kuwaiti investment company successfully issued shares in
the form of Global Depository Receipts (GDRs) to foreign investors. After issuing GDRs, these shares can deal in
any foreign stock exchange and GDRs will be one of the security type in stock exchange list of stocks.
Tips and Warnings

Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to issue its Rupee
denominated shares to a person resident outside India being a depository for the purpose of issuing Global
Depository Receipts (GDRs) and/ or American Depository Receipts (ADRs).

Purchasing the shares through GDRs will have the risk of currency and all currency risk will be of
Investors and not of depository bank or company will suffer currency risk. For example, if the dollar increases in
value against the Indian currency, the dollar value of Indian's stock will decline even if the share price in Indian
Rupees does not. So, this currency loss will be USA Investor.

COMPANIES THAT HAVE ISSUED GDRS:

1.

Dr. Reddys

2.

Bajaj Auto

3.

HDFC Bank

4.

Hindalco

5.

ICICI Bank

6.

Infosys Technologies

7.

ITC

8.

L&T

9.

MTNL

10. Ranbaxy Laboratories

11. State Bank of India
12. VSNL
13. WIPRO

DISTINGUISH

BETWEEN GDR & ADR:

GDR

ADR

GDRs can be sold in multiple markets

ADRs can be sold only in US market.

simultaneously.
1.

2.

GDRs can be denominated in freely

ADRs can be denominated only in US

convertibility currency.

dollars.

The depository bank issuing GDR can be

3.

located in any country outside the country

of issuing company.

No approval is required from local

4.

regulatory agency where the GDRs are

issued

The depository bank issuing ADR has to

be located only in the US.

ADRs are issued only with the approval

SEC.

5.

1.

6.

ADRs are classified in terms of

There are no sub classification in case of

approval level provided by the SEC i.e.

GDRs.

sponsored or unsponsored.

Many Indian Companies listed

2.

Some of Indian Companies are

foreign stock market through foreign

listed in USA stock exchange only

banks GDR. Names of these Indian

through ADRs :- (A) Patni Computers

Companies are following :- (A) Bajaj

(B) Tata Motors

Auto (B) Hindalco (C) ITC ( D) L&T (E)

Ranbaxy Laboratories (F) SBI

MEANING OF IDR
IDRs are financial instruments that allow foreign companies to mobilize funds from Indian markets by
offering entitlement to foreign equity and getting listed on Indian Stock Exchange.
This instrument is similar to the GDR and ADR. IDRs need to be registered with SEBI.
The Government opened this avenue for the foreign companies to raise funds from the country, as a step
towards globalizing the Indian capital market and to provide local investors exposure in global companies.

ADVANTAGES OF IDRs
1. For Indian Investors and Rights

No resident Indian individual can hold more than $200,000 worth of foreign securities purchased per year
as per Indian foreign exchange regulations.

However, this will not be applicable for IDRs which gives Indian residents the chance to invest in an
Indian listed foreign entity.

Additional key requisites for investing in foreign securities such as a securities trading account outside
India to hold foreign securities, know your customer norms (KYC) with foreign broker and foreign bank
account to hold funds are generally too cumbersome for most Indian investors. Such requirements are
avoided in holding IDRs.

Whatever benefits accrue to the shares, by way of dividend, rights, splits or bonuses would be passed on to
IDR holders also, to the extent permissible under Indian law.

2.

For International Issuers

It provides enhanced local branding and target business opportunities in India.

It gives access to the large Indian capital pool and creates opportunities for future fund raising.

It provides a currency for any acquisition in India which otherwise would be possible only through cash.

DISADVANTAGES OF IDRs
There is the possibility of IDR issues being undersubscribed if they are not well marketed or fail to catch the
imagination of investors.
In addition, the challenges mentioned below are certain challenges with respect to the issuance of IDRs.
1.

Stringent eligibility norms:

The stringent eligibility criteria, disclosure and corporate governance norms (Although in the investors interests,
they compare unfavourably with listing norms on other tier II global exchanges such as Luxembourg, Londons
Alternate Investment Market (AIM) and Dubai. This could result in higher compliance costs for companies
seeking to tap the Indian capital markets).
2.

Voting Rights:

It is not entirely clear whether IDR holders will have voting rights or not the SEBI guidelines do not
specifically mention voting rights, it leaves that to the discretion of the issuer.
3.

Market:

Indian financial markets are still considered volatile and contain emerging market risk.

COMPANIES THAT HAVE ISSUED IDRs

Standard Chartered PLC

DIFFERENCE BETWEEN ADR, GDR AND IDR

The difference between ADR, GDR and IDR is only in the places where the Depositories are listed.

If the Depository Receipt is to be traded in India, then it is called Indian Depository Receipt (IDR).
If the Depository Receipt is to be traded in US, then it is known as American Depository Receipt (ADR).
If the Depository Receipt is to be traded elsewhere in the world, then it is known as Global Depository
Receipt (GDR).

CHAPTER NO: 3
CONCLUSION

CHAPTER NO: 3
CONCLUSION

Depository receipt give the opportunity to add the benefits of foreign investment while avoiding the unnecessary
risks of investing outside your own borders, you may want to consider adding these securities to your portfolio.
ADR and GDR have emerged as an innovative instrument of investment.
It may also be concluded that for a developing country like India, these depository receipts have enabled the
investors as well as the companies to tap the global market and become an international player.

CHAPTER NO: 4
APPENDIX

CHAPTER NO: 4
APPENDIX

BIBLIOGRAPHY
International banking and finance by Himalaya publication
International banking and finance by Vipul publication
WEBLIOGRAPHY
www.investopedia.com
www.outshiners.blogspot.com
www.deepakbfm.blogspot.com
www.elearning.nokomis.in
www.allbankingsolution.com
www.svtuition.org
www.investinganswers.com