RESEARCH PROJECT REPORT

(MBA 043)

PRICE INTERDEPENDENCE OF INDIAN STOCKS

AND THEIR ADRs

Submitted by:

SWATI JAIN
Roll No.-0806770069
MBA IV Semester
2008-2010

In partial fulfillment of the requirement for

MBA Degree Programme
of Uttar Pradesh Technical University, Lucknow

Hindustan Institute of
Management & Computer Studies
Farah, Mathura (U.P.)

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 DECLARATION

I, Swati Jain Student of MBA IV Semester, Hindustan Institute of

Management & Computer Studies Farah Mathura, hereby solemnly declare
that the Research Project Report titled “Price Interdependence of Indian
Stocks and their ADRs” is the outcome of my own research and prepared by
me and the same has not been submitted to any other University or institute
for the award of any degree or diploma.

PLACE----------------
DATE:
Name of Student:
Roll NO. 0806770069

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 Acknowledgement

The satiation and euphoria that accompany the successful completion of task would be

incomplete without the mention of the people who made it possible.

After all, success is the epitome of hard work, severance, un-deferred missionary, zeal,

steadfast determination and most of all encouraging guidance.

So, with immense gratitude, I acknowledge all those whose guidance and encouragement

served as a ―beacon light and crowned my efforts with success.

I would like to express my profound sense of gratitude to Ms. Puja kaura, Hindustan

institute of management and computer studies, Farah, Mathura for guiding me as well as

providing me the support to conduct this project.

With a deep sense of gratitude and indebtedness, I sincerely and whole-heartedly thank

my College Director Dr. K K Malviya & all my Lecturers at HIMCS who were always

open to help & guide me in my work.

Last but not the least; I take this opportunity to thank my parents and friends without their

concern and cooperation this project would not have been possible.

Swati Jain

ABSTRACT

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This study looks into the interdependence of underlying stocks on their ADR’S and how

they react to each others movement. Research would help us find whether

pricing/movement of ADR is dependent on movement in home country or vice-versa.

This would represent the integration of global markets with each other & how their co

movement affects other. NSE stock exchange listed stocks are compared with ADR’S

listed at NYSE/NASDAQ. In this study stocks taken represents different sectors of the

economy. Stocks taken for study are-

• HDFC Bank

• Tata Motors

• Wipro

• Infosys

• HDFC Bank

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 TABLE OF CONTENTS

S.No. TOPIC PAGE No.

1. Introduction 1-48

2. Objective Of The Study 49

3. Research Methodology 50

4. Data & Analysis 51-61

5. Conclusion 62

6. Bibliography 62-63

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 INTRODUCTION

The financial markets in general and the equity market in particular have now become

more closely interlinked the world over than ever before despite the differences in risk

perceptions of the markets or the country profiles. The dynamics of cross-country trade

and payments have evolved to such an extent that the economic slowdown of a country is

bound to affect its trading partners as clearly discernable from the leading movement in

the global stock prices. The close integration between the emerging and the developed

markets has even led to sentiment spillover from one market to another.1 A possible

contributor to the similar volatility profile across the markets is the listing of stocks at

dual or multiple stock exchanges all over the globe (Bennett and Keller, 1988). Their

movement in tandem powered by the instinct of arbitrage could have contributed to the

emergent cross-country co-movement of stock prices.

With the financial sector reforms initiated in 1991, Indian stock market has since joined

the integration process. The inflow of foreign funds with entry of foreign institutional

investors (FII) has transformed the style of functioning of the Indian stock market.

Moreover, it has forged an important linkage between the capital and the forex markets.

During this phase, investment norms for non-resident Indians (NRIs), persons of Indian

origin (PIOs) and overseas corporate bodies (OCBs) have been largely liberalized, inter

alia, with permission to purchase of shares without any prior approval from the RBI.

Further, the Indian corporates have been allowed to tap the global market with global

depository receipt (GDR), American depository receipt (ADR) and foreign currency

convertible bond (FCCB) since 1993.

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On the other hand, the world-class facilities provided by the newly constituted National

Stock Exchange (NSE) have unleashed competitive forces, prompting other exchanges to

go for automation and screen based trading. All these have ushered in an era of

integration and globalization of the hitherto insulated and segmented Indian stock market.

The globalization of the Indian stock market is reflected in catching up with the best

international practices, inter alia, dematerialization of shares, replacement of the Indian

carry forward trading system called badla by the index-based and scrip-based futures and

options; rolling settlement in place of the account period settlement; internet trading and

so on and so forth. More significantly, the domestic market movement has come to be

largely determined by the undercurrent of the global markets in general and the Nasdaq in

particular. This was reflected in an increase in correlation coefficient of the indices of

Indian stock market with those in the developed countries. Year wise during 1994-97,

correlation coefficient between the BSE Sensex and the Nasdaq Composite Index has

even been negative. It has since started turning positive from 1997-98 and remained

significantly positive during the latest three year period 1999-2002.

The co-movement of the Indian stock market with the Nasdaq has evinced considerable

interest and evoked contesting hypotheses behind the market phenomenon (e.g., Shah,

1999; Hansda & Ray, 2002). Besides, the likely outcome of co-movement of markets

remains contentious in regard to its impact on the cost of capital or the feedback on the

integration process itself. Indeed, there has been explicit concern that the movement of

markets in rhythm and chorus could nullify much of the gain out of diversification across

borders, besides being vulnerable to the caprices of global capital. On the other hand,

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there seems to be a general consensus on the satellite position of the Indian stock market

vis-à-vis the global market. Such a proposition possibly emanates from an analysis of the

market movement in a framework of overall or sectoral indices. And not surprisingly,

given the limited magnitude and dimension of the Indian stock market, the Nasdaq stands

out the dominant leader with an overbearing influence. Such macro approach to stock

market analysis however camouflages the micro behavior of individual stocks, keeping

the micro-foundation of macro pronouncements all the more tenuous. The present study

aims at filling up such gaps, unraveling the nuances and dynamics of the individual stock

behavior at the domestic as well as the international exchange as also their inter-

relationship. Keeping in view the importance of the US stock market in terms of its

ramifications for the Indian economy in general and the domestic stock prices in

particular, the focus of the present study has been the price behavior of the Indian ADRs

listed in NASDAQ/NYSE (i.e., New York Stock Exchange) rather than the Indian GDRs.

Indeed, the US has recently emerged as the marketplace for trading of even the Indian

GDRs through the PORTAL system.

Specifically, the present study is built around the following quests.

• Does the domestic price behavior of a dually listed Indian stock impact its ADR

price and vice versa?

• Does the dominant-satellite relationship between the NASDAQ and the Indian

stock market hold good even at the level of individual stock?

• Does the transmission of pricing information of individual stocks across the US

and the Indian markets reflect the efficiency of the markets?

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 • How does a price shock in one market get transmitted to the other market?

• How long does the shock persist?

The merits of international diversification in containing the systematic risk is long

recognized in the literature with one of the earliest attempts by Grubel (1968). Initial

studies in this direction focused upon the inter-dependence of the national equity markets.

The reported low or statistically insignificant correlations of stock returns across the

countries pointed to the determining role of the domestic factors as also the scope for

international diversification (e.g., Lessard, 1973). The global crash of October 1987

stimulated worldwide interest in this line of study. For example, Bennet and Keller

(1988) brought out evidence of strong international equity market linkages. The US

market was found to have the greatest influence on all other markets (e.g., Becker et al,

1990). Such inter-linkages however put a limit on the gains out of international

diversification.

OVERVIEW OF ADRs

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American Depositary Receipts (ADRs) are not actual shares of stock, but certificates

representing shares. They’re handled just like stocks, though. An ADR may represent one

share, several shares or a fraction of a share, so its price may differ from that of the stock

it represents.

ADRs gained widespread attention in the 1990s. They’re nothing new, however the first

ADRs were set up in 1927 by the U.S. bank now known as J.P. Morgan Chase & Co. to

facilitate US trading in the British department store chain, Selfridges Retail Ltd. With

continuing globalization, investors around the world are looking across their national

borders to take advantage of new opportunities for capital growth and to add an element

of geographic diversification to their portfolios by investing in international securities. At

the same time, companies around the world are increasingly tapping international markets

to enhance their global presence and raise capital abroad.

Like the capital markets themselves, he ADR has evolved in sophistication and in

importance. Today the ADR is an instrument used widely by non-U.S. companies to offer

and trade their shares conveniently and efficiently in the U.S. equity markets. While the

mechanics of cross-border investment flows are often complex, the American depositary

receipt, or ADR, offers a convenient, easy-to-use avenue for adding global exposure to

U.S. portfolios.

In 2003 more than 2,000 ADRs issued by companies in 79 countries were available to

U.S. investors. About 500 of them were listed on the New York Stock Exchange,

American Stock Exchange or Nasdaq. Others trade on the US over the counter market.

While the mechanics of cross-border investment flows are often costly and complex,

American Depositary Receipts (ADRs) offer US investors a convenient, easy-to-use

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strategy for gaining international equity exposure, and offer non-US companies access to

the US financial markets.

HISTORY AND REASONS FOR USING ADRS

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Depositary Receipts (DRs) were created in 1927, primarily to circumvent the difficulties

associated with different currencies in the foreign market. Investors attempting to enter

the emerging markets or other foreign stock exchanges have to go through expensive

commissions and currency exchange before successfully investing in a foreign market.

With ADRs, however, investors can take advantage of foreign markets while trading in

U.S stock markets. The bank choosing to issue the ADR controls the number of foreign

shares each ADR represents. Each ADR could represent multiple shares of the foreign

company, or vice versa.

Since each ADR represents a share or shares of the foreign company, the price of the

ADR changes in tandem with the price of the foreign stock. Therefore, any change in

price in the foreign company's stock applies to the change in price of the ADR. In this

way, investors can benefit from price changes without worrying about currency

conversion.

ADRs take into account currency fluctuations and foreign inflation. Should there be

rampant inflation in the nation of the foreign company, its ADR would rapidly decrease

in real value. Investors do have to worry about inflation and currency changes in the

foreign nation despite not having to convert currency to buy foreign shares.

UNDERSTANDING ADR’S

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Until 1990, companies had to issue separate receipts in the US (ADRs) and in Europe

(IDRs) to access both the markets. The weakness was that there was no cross-border

trading possible as ADRs had to be traded, settled and cleared through the Depository

Trust Company (DTC) in the Us, while the IDRs could be Rule 144A and Regulations of

the SEC of the US allowed non-US companies to raise capital in the US market without

having to register the securities with the SEC or changing the financial statements to

reflect the US accounting principles. Rule 144A is designed to facilitate certain

investment bodies called Qualified Institutional Buyers (QIBs) to invest in overseas (non-

US) companies without those companies needing to go through the SEC registration

process.

ADR/GDR’s are negotiable certificates that enable domestic investors of a country to

own shares in foreign companies. ADR/GDR’s are issued by non resident companies to

residents of another country through depositories situated in the country from which a

company intends to raise funds through depository receipts. Each unit of ADR/GDR

represents a given number of a company’s shares and can be traded freely as any other

security in the capital market. The role of depositories in an issue of ADR/GDR is very

crucial, as depositories act as custodians of the shares, against which the ADR/GDR are

issued. As the names suggest, ADR are issued in American capital markets while GDR

are issued in all other countries.

Definition

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An American Depositary Share ("ADS") is a U.S. dollar denominated form of equity

ownership in a non-U.S. company. It represents the foreign shares of the company held

on deposit by a custodian bank in the company's home country and carries the corporate

and economic rights of the foreign shares, subject to the terms specified on the ADR

certificate.

An ADR is a negotiable instrument that represents an ownership interest in securities of a

non-US company. ADRs enable investors to invest in non-US securities without concern

for often complex and expensive cross-border transactions, and offer substantially the

same economic, corporate and voting rights enjoyed by domestic shareholders of the non-

US issuer. ADRs are quoted and traded in US dollars, and are settled according to

procedures governing the US market. To the extent dividends are paid on the underlying

securities, ADRs pay dividends in US dollars.

Procedure

The procedure for issue of ADR/GDR is different from issuing shares in the domestic

capital market. The ADR/GDR is issued on the basis of the ratio worked out by the

Indian company in consultation with the lead managers of the company. The Indian

company issues its rupee denominated shares in the name of the overseas depositories

and such issued shares are kept in the custody of the domestic custodian in India. On the

basis of the ratio worked out and the rupee shares kept with the domestic custodian, the

depositories issue ADR/GDR to the investors outside India.

Statutory provisions

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Regulations under the Foreign Exchange Management Act, 1999 (FEMA) allow Indian

companies to issue shares through ADR/GDR. Issue of Foreign Currency Convertible

Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme 1993

(FCCB & ADR/GDR Scheme) and the guidelines issued by the Ministry of Finance

(MoF) from time to time set out the rules and regulations for issue of ADR/GDR by

Indian companies. The MoF has allowed Indian companies to raise ADR/GDR under the

automatic route10 under which there are simpler reporting requirements to the RBI.

Requirements for raising ADR/GDR in view of the recent changes in the FCCB &

ADR/GDR Scheme by MoF. To bring the issues of ADR/GDR in line with the

Security Exchange Board of India (SEBI) guidelines on ‘Domestic Capital Issues’ i.e.

public offers, the Finance Ministry recently amended the FCCB & ADR/GDR Scheme

whereby from August 2005 it is mandatory for all Indian companies to be a listed

company on any of the Indian stock exchanges before issuing FCCB bonds or ADR/GDR

or a simultaneous listing of shares of the applicant company is required.

The Instrument

ADR is a dollar denominated negotiable certificate, it represents non-US companies

publicly traded equity. It was devised in the late 1920s, to help Americans invest in

overseas securities and to assist non-US companies wishing to have their stock traded in

the American Markets. ADRs are divided into 3 levels based on the regulation and

privilege of each company’s issue.

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 i. ADR Level-I: It is often the first step for an issuer into the US public equity

market. Issuer can enlarge the market for existing shares and thus diversify the

investor base. In this instrument only minimum disclosure is required to the

SEC and the issuer need not comply with the US GAAP (Generally, Accepted

Accounting Principles) this type of instrument is traded in the US OTC

market. The issuer is not allowed to raise fresh capital or list on any one of the

national stock exchanges.

ii. ADR Level-II: Through this level of ADR the company can enlarge the investor

base for existing shares to a greater extent. However, significant disclosures

have to be made to the SEC. The company is allowed to list in the American

Stock Exchange (AMEX) or New York Stock Exchange (BYSE) which

implies that the company must meet the listing requirements of the particular

exchange.

iii. ADR Level-III: This level of ADR is used for raising fresh capital through public

offering in the US Capital Markets. The company has to be registered with the

SEC and comply with the listing requirements of AMEX/NYSE while

following the US-GAAP.

The reason for this may be attributed to the stiff disclosure requirements and accounting

standards as per he US GAAP. The following table gives an indication on the difference

between the US and Indian GAAP. Intermediaries that are involved in an ADR issue

perform the same work as in the case of a GDR issue. Additionally, the intermediaries

involved will liaison with the QIBs for investing in ADRs. Some of the well known

intermediaries for ADRs/GDRs are, Merrill Lynch International Ltd., Goldman Sachs &

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Co. James Capel & Co., Lehman International, Robert Fleing Inc, Jardine Fleming, CS

First Boston, JP Morgan, Etc.

Regulatory Framework

At the outset, it should be clear that the regulatory framework for the ADRs is provided

by Securities and Exchange Commission which operates through two main statutes, the

Securities Act of 1933, and the Securities Exchange Act of 1934. The Securities

Exchange Act provides for the disclosure and its periodic updating. As far as Indian

regulatory procedures are concerned, the Ministry of Finance is yet to come out with

comprehensive set of guidelines. Rule 415 of the Securities Exchange Act of 1934, refers

to Shelf Registration and applies to the issue of ADRs. Under this rule, select foreign

companies are offered the facility to register the necessary documents before the actual

issuance of securities. For this, issuers are required to prepare the prospectus in two parts:

Basic and supplementary. While the basic prospectus has to be filed at the time of shelf

registration, the supplementary prospectus has to be filed at the time of the actual

issuance of the securities. Wrapping around the basic prospectus, the supplementary

prospectus records the recent developments in addition to filing a detailed financial

condition statement. Underwriting arrangements, the certifications of auditors and legal

counsel have to be procured for the actual issue of securities. New shelf filings, are

required if the issuer seeks to raise larger amounts than originally Indicated. Also, the

issuer has the option to go in for de novo registration.

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Shelf registration has been found to be useful to issuers as it reduces the incidence of fees

considerably. More importantly, shelf registration affords the issuers opportunities for

quickly accessing the markets as "the offering process is substantially simplified.

Statutory requirements

The requirements for companies under the applicable statutory provisions for issuing

ADR/GDR are as follows:

1) FCCB & ADR/GDR Scheme

a) Eligibility Criteria

 Indian companies

(i) A company must not be barred from raising funds from the Indian capital market nor

restrained from accessing the securities market by SEBI.

(ii) The applicant company must be a listed company or be in the process of getting listed

on any Indian stock exchange.

 Subscribers

Overseas Corporate Bodies (OCBs) and other entities, which are not eligible to invest in

India through portfolio route i.e. directly on the stock exchanges in India and entities

which are prohibited to buy, sell or deal in securities by SEBI are prohibited from

subscribing to ADR/GDR issues.

a) Pricing

 For listed companies

The price of ADR/GDR should not be less than higher of the following two averages:

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(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.

 For unlisted companies

As per the recent changes, the applicant company is required to be a listed company or a

simultaneous listing of shares should be done. Therefore, the earlier requirement that

pricing should be in accordance with the regulations notified under FEMA is not

applicable any more.

2) FEMA guidelines in accordance with MoF notifications Indian companies may

issue their shares to a person resident outside India through a foreign depository

for the purpose of issuing ADR/GDR.

However, the above is subject to the following conditions:

a) The company issuing such shares has an approval from the MoF to issue such

ADR/GDR or is eligible to issue ADR/GDR in terms of the FCCB & ADR/GDR

Scheme or notifications, which MoF issues from time to time.

b) The company is not otherwise ineligible to issue shares to persons resident outside

India in terms of regulations issued under FEMA, like, where a company’s

operations fall under activities, where foreign investment is strictly prohibited;

and

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 c) The ADR/GDR are issued in accordance with the scheme provided under FCCB

& ADR/GDR Scheme. The Indian company issuing shares through ADR/GDR

route is required to submit to the RBI

(i) full details of such issue in the specified form, within 30 days from the date of

closing of the issue, and

(ii) A quarterly return in the prescribed form within fifteen days of the close of the

calendar quarter.

Benefits to foreign investors

Under ADR/GDR route Due to restrictions on direct investment by foreign individuals in

the Indian capital market, foreign individuals are not allowed to trade directly on the

Indian stock exchanges. They can invest only through Foreign Institutional Investors

(FIIs) registered with SEBI, in the stocks of Indian companies trading on Indian stock

exchanges. Further, FIIs are also subject to restrictions like 10% cap on investment on the

total paid-up capital of a company and are also required to maintain a ratio of 70:30 while

allocating their total investments between equities and debts. Thus, such restrictions do

not allow foreign individual investors to invest freely in the stocks of Indian companies.

Another benefit of ADR/GDR route is that since ADR/GDR are traded in the respective

countries, therefore, the regulations of the concerned country and not the Indian

regulations regarding transferability, trading etc. would be applicable, which are

generally more investor friendly than the Indian regulations.

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 With most sectors and industries growing at a rapid rate, it is likely that with the

passage of time, more Indian companies will follow the path of ADR/GDR. Incidentally,

the Indian government is also taking steps to promote such issues by allowing them under

the automatic route. Further, there are no restrictions on the number of these issues. The

biggest advantage linked with ADR/GDR is that it is not beneficial just for Indian

companies or the Indian government, but it also allows foreign investors to exploit the

booming Indian industry and the capital market without becoming subject to strict Indian

regulations applicable to stocks of Indian companies. Thus, the prospects in terms of

foreign investment through ADR/GDR route seem to be bright and it is likely to become

a major source of international fund raising by Indian companies.

The advantages of ADRs are twofold. For individuals, ADRs are an easy and cost-

effective way to buy shares in a foreign company. They save money by reducing

administration costs and avoiding foreign taxes on each transaction. Foreign entities like

ADRs because they get more U.S. exposure, allowing them to tap into the wealthy North

American equities markets.

• Risks -There are several factors that determine the value of the ADR beyond the

performance of the company. Analyzing these foreign companies involves further

scrutiny than merely looking at the fundamentals. Here are some other risks that

investors should consider:

• Political Risk - Ask yourself if you think the government in the home country of

the ADR is stable? For example, you might be wary of Russian Vodka Inc.

because of the characteristic instability of the Russian government.

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 • Exchange Rate Risk - Is the currency of the home country stable? Remember the

ADR shares track the shares in the home country. If a country's currency is

devalued, it will trickle down to your ADR. This can result in a big loss, even if

the company had been performing well.

• Inflationary Risk - This is an extension of the exchange rate risk. Inflation is the

rate at which the general level of prices for goods and services is rising and,

subsequently, purchasing power is falling. Inflation can be a big blow to business

because the currency of a country with high inflation becomes less and less

valuable each day.

Sourcing ADR

One can either source new ADRs by depositing the corresponding domestic shares of the

company with the depositary bank that administers the ADR program or, instead, one can

obtain existing ADRs in the secondary market. The latter can be achieved either by

purchasing the ADRs on a US stock exchange or via purchasing the underlying domestic

shares of the company on their primary exchange and then swapping them for ADRs;

these swaps are called crossbook swaps and on many occasions account for the bulk of

ADR secondary trading. This is especially true in the case of trading in ADRs of UK

companies where creation of new ADRs attracts a 1.5%stamp duty reserve tax (SDRT)

charge by the UK government; sourcing existing ADRs in the secondary market (either

via crossbook swaps or on exchange) instead is not subject to SDRT.

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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 past 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.

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ADRS PROVIDE INVESTORS WITH A CONVENIENT WAY TO INVEST

INTERNATIONALLY

ADRs provide U.S. investors with a convenient way to invest in non-U.S. securities

without having to worry about the complex details of cross-border transactions. They

provide the same economic benefits enjoyed by the domestic shareholders of the non-

U.S. company. Each ADR is backed by a specific number or fraction of shares in the non-

U.S. company. The relationship between the number of ADRs and the number of foreign

shares is typically referred to as the ADR ratio.

ADRS ARE LISTED OR TRADED IN THE US

ADRs can be listed on any of the U.S. exchanges, such as the New York Stock Exchange

(NYSE), the American Stock Exchange (AMEX), or Nasdaq. They can also be traded on

the OTC Bulletin Board or in the over-the-counter “Pink Sheets.” ADRs can also be

privately placed and traded as Rule 144A securities.

Finally, the concept of the ADR has been extended to other geographical markets,

resulting in global depositary receipts (GDRs), international depositary receipts (IDRs),

and European depositary receipts (EDRs), which are generally traded or listed in one or

more international markets.

BENEFITS FOR COMPANIES IN ISSUING ADRS

Companies issuing ADRs have found that the ADRs provide numerous advantages, in

two main categories, financial advantages and commercial advantages, including:

• Broadening and diversifying a company’s US investor base

• Enhancing a company’s visibility, status and profile in the US and internationally,

among investors, consumers and customers

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• Increasing US liquidity, and potentially total global issuer liquidity by attracting new

investors

• Developing and/or increasing institutional research coverage in the United States

• Offering a new avenue for raising equity capital, often at highly competitive rates

(depending on the ADR program selected)

• Enhancing communications with shareholders in the United States

• Facilitating the creation of incentives for US employees including stock purchase and

option plans

• By enabling a company to tap U.S. equity markets, the ADR offers a new avenue for

raising capital, often at highly competitive costs. For companies with a desire to build a

stronger presence in the United States, an ADR program can help finance U.S. initiatives

or facilitate U.S. acquisitions.

• ADRs provide an easy way for U.S. employees of non-U.S. companies to invest in their

companies' employee stock purchase plans.

• Features such as dividend reinvestment and direct purchase programs can help ensure a

continual stream of investment into an issuer's program.

• Enabling the issuing company to broaden the market for its shares through a more

diversified exposure which often can increase or stabilize the company’s share price.

• Enhancing the company’s image and that of its products, services or securities in the

United States.

• Facilitating acquisitions utilizing ADRs as part or all of the acquisition currency.

BENEFITS FOR INVESTORS

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With continued globalization, increasingly American investors aim to diversify their

portfolios globally. There are many obstacles that preclude many institutional and

individual investors from purchasing foreign equities. These include undependable

settlements, unreliable custody services for foreign securities, costly currency

conversions, poor information flow, confusion tax issues, and unfamiliar market

practices.

The core benefit for investors - individuals and institutions alike - is that ADRs make it

easy to purchase and hold a non-U.S. issuer's securities.

Benefits to US individual and institutional investors include:

• As US securities, ADRs are quoted in US dollars.

• ADRs trade easily and conveniently in U.S. dollars and settle through U.S earing

houses.

• Publicly traded ADRs are registered with the U.S. Securities and Exchange Commission

(SEC).

• For companies that typically pay dividends, ADRs mean those dividends are paid

promptly in U.S. dollars at competitive foreign exchange rates.

• Many institutional investors are restricted from investing in securities that do not trade

on a U.S. exchange, so listed ADRs represent a way to add international exposure to a

portfolio.

• ADRs overcome many of the obstacles that institutional investors, including mutual

funds, pension funds have in purchasing and holding securities outside the United States.

• Typical global custodian safekeeping charges for holding foreign securities are

eliminated, saving ADR investors money.

• ADRs are as liquid as the underlying securities, as the two are interchangeable.

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ADR PROGRAM TYPES : SPONSORED AND UNSPONSORED ADR

PROGRAMS

Issuers seeking the benefits of ADRs generally pursue what are called sponsored ADR

programs. They initiate the process and, working with a depositary bank, actively manage

the program going forward.

The issuer benefits by making a strategic foray into the U.S. market, controlling its image

and reputation in the capital markets. In general, only sponsored ADRs can be listed on

the major stock exchanges or quoted under the Nasdaq system.

While most new ADR programs are sponsored, many unsponsored programs (in which

the ADRs are created and offered to investors without a company's active participation)

still exist.

27
THE VARIOUS TYPES OF SPONSORED ADR PROGRAMS

Issuers can choose from four different types of sponsored ADR programs, each with its

own set of benefits as well as its own set of legal and regulatory requirements: Level I,

Level II, Level III, and Rule 144A/GDR.

In general, American Depositary Receipts are used for two objectives: raising new

capital, or increasing US ownership of shares already issued and trading in the market.

There are three basic ADR types, or “levels” as they are usually referred to, designed to

*Financial statements must be partially reconciled to U.S. GAAP

Level I ADRS

Level I ADRs are the simplest method for companies to access the US capital markets.

Level I ADRs are traded in the over-the-counter (OTC) market, with bid and ask prices

published daily and distributed by the National Daily Quotation Bureau in the pink heets.

The issuing company does not have to comply with US Generally Accepted Accounting

Principles (GAAP) or provide US Securities and Exchange Commission (SEC)

disclosure.

28
Level I ADRs essentially enable a company to obtain the benefits of a US publicly traded

security without altering their current reporting process. Level I ADRs account for more

than 60% of the US ADRs.

Companies that have Level I ADR programs, can “migrate” to a Level II or Level III

ADR program if they desire to trade on the New York Stock Exchange, the American

Stock Exchange, Nasdaq or the OTC Bulletin Board, or if the company desires to raise

capital directly in the United States.

Level I ADR programs currently require minimal SEC registration: The issuer seeks

exemption from the SEC's traditional reporting requirements under Rule 12g3-2(b). With

that exemption, the company agrees to send to the SEC summaries or copies of any

public reporting documents required in its home market (including documents for

regulatory agencies, stock exchanges, or direct shareholder communications). The

depositary bank, working with the issuer, also files the Form F-6 registration statement

with the SEC in order to establish the program.

Level II ADRS

Level II ADRs enable companies to list their ADRs on Nasdaq, the American Stock

Exchange, the New York Stock Exchange and the OTC Bulletin Board, thereby offering

higher visibility in the U.S. market, more active trading, and greater liquidity.

Level II ADRs require full registration with the Securities and Exchange Commission.

Companies must also meet the listing requirements of the appropriate stock exchange.

Level II ADRs require a Form 20-F and Form F-6 to be filed with the SEC, as well as

meeting the listing requirements and filing a listing application with the designated stock

exchange. Upon F-6 effectiveness and approval of the listing application, the ADRs begin

trading.

29
Level II ADR programs must comply with the full registration and reporting requirements

of the SEC's Exchange Act, which entails the following:

• Form F-6 registration statement, to register the ADRs to be issued

• Form 20-F registration statement, which contains detailed financial disclosure

about the issuer, including financial statements and a reconciliation of those

statements to U.S. GAAP, to register the listing of the ADRs.

• Annual reports and any interim financial statements submitted on a regular, timely

basis to the SEC.

Level III ADRs

Level III ADRs enable to companies to list their ADRs on Nasdaq, the Amex, the New

York Stock Exchange or the OTC Bulletin Board, and make a simultaneous public

offering of ADRs in the United States.

In the most high-profile form of sponsored ADR program, Level III, an issuer floats a

public offering of ADRs in the United States and lists the ADRs on one of the U.S.

exchanges or Nasdaq. The benefits of a Level III program are substantial: It allows the

issuer to raise capital and leads to much greater visibility in the U.S. market.

Level III ADR programs must comply with various SEC rules, including the full

registration and reporting requirements of the SEC's Exchange Act. This entails the

following:

• Form F-6 registration statement, to register the ADRs

• Form 20-F registration statement, an annual filing that contains detailed financial

disclosure from the issuer, including

30
  Form F-1, to register the equity securities underlying the ADRs that are offered

publicly in the U.S. for the first time, including a prospectus to inform potential

investors about the company and the risks inherent in its businesses, the offering

price for the securities, and the plan for distributing the shares

 Annual reports and any interim financial statements submitted on a regular, timely

basis to the SEC and to all registered public shareholders

RULE 144A ADRS

Many companies seek to raise capital in the U.S. markets privately by issuing restricted

securities under Rule 144A, which do not require SEC review. Rule 144A facilitates the

trading of privately placed securities by sophisticated institutional investors (also known

as Qualified Institutional Buyers, or QIBs; they must own or manage at least $100 million

in securities).

GLOBAL DEPOSITARY RECEIPTS (GDRS)

GDRs allow issuers to raise capital in two or more markets simultaneously, thus

broadening their shareholder base. They can be settled outside the U.S. (using a link

connecting the two major European clearance and settlement facilities, Euro clear and

Cedel, with the major U.S. clearance and settlement facility, the Depository Trust

Company, or DTC) and can be traded in the Rule 144A private market.

RAISING CAPITAL WITH ADRS

31
*Financial statements must be partially reconciled to U.S. GAAP

PROCEDURES AND MECHANISM OF ISSUING ADR

ADRs are issued by a US bank, such as J. P. Morgan or The Bank of New York, which

functions as a depositary, or stock transfer and issuing agent for the ADR program.

The foreign, or local shares, remain on deposit with the Depositary’s custodian issuer’s

home market.

Each ADR is backed by a specific number of an issuer’s local shares (e.g. one ADR

representing one share, one ADR representing ten shares, etc.). This is the ADR ratio,

which is designed to set the price of each ADR in US dollars.

Financial information, including annual reports and proxies are delivered to US holders

on a consistent basis by the Depositary. The dividends are converted into dollars and paid

to ADR holders by the Depositary

KEY COMPONENTS OF A SUCCESSFUL ADR PROGRAM

32
Successful ADR programs are actively traded and widely held. They typically share the

following attributes:

• Attractive market, industry and equity story

• Active communication of the story to US investors

• Investor friendly ADR structure (ratio of shares to ADRs)

• Research and market-making by US investment banks and brokers

APPROXIMATE TIMING FOR LEVEL I AND LEVEL II ADRS

33
34
35
36
 INDIAN ADR TRADING IN US

ADR ISSUE SYMBOL INDUSTRY EXCH

DR. REDDY'S LABORATORIES RDY Pharmaceutical NYSE
LTD.
HDFC BANK LTD. HDB Banks NYSE
ICICI BANK LTD. IBN Banks NYSE
INFOSYS TECHNOLOGIES INFY Technology NASDAQ
LIMITED Services
MAHANAGAR TELEPHONE MTE Fixed Line NYSE
NIGAM LIMITED Comm.
REDIFF.COM INDIA LTD REDF Technology NASDAQ
Services
SATYAM COMPUTER SAY Technology NYSE
SERVICES LIMITED Services
SIFY LTD. SIFY Technology NASDAQ
Services
VIDESH SANCHAR NIGAM VSL Fixed Line NYSE
LIMITED Comm.
WIPRO LTD. WIT Technology NYSE
Services

37
 ADRs VS GDRs

Basis of ADR GDR

comparison

The NYSE Is the largest stock The LSE Is not as large as the
Centre exchange In the world by both NYSE overall, but Is the global
value and turnover; foreign centre for International equities,
equities play a minor role. which dominate In turnover.

Instrument No legal or technical difference Unlike the NYSE, the LSE

between an ADR and a GDR. makes no demands requiring
The US has three levels of ADR companies to give holders the
programme: Level III is suited to right to vote. The NYSE Insists
fund raising. on this point

Disclosure Comprehensive disclosure

required for F-1, the US Detailed information required on
prospective which must the company, but less onerous
accompany a public offering. for GDR Listing than full equity.

GAAP
Foreign companies listing in the LSE satisfied with a statement of
US must reconcile their accounts the difference between the UK
to US GAAP. and Indian Accounting standards
Cost
US listing could be expensive. GDR listing on the LSE is
Total initial costs likely to be in comparatively Inexpensive.
the range of US $10,00,000 to Initial costs likely to be in the
US $20,00000 range US $2,00,000 to US
Retail $4,00,000.
A public offering in the US
allows an issuer to access the US Over 5,000 US QIBs accessed,
retail market. This provides extra but
Liability source of demand. ordinary investors cannot
participate. US demand therefore
Legal liability of both a company not maximized.
and its individual directors
increased by a full US listing. Legal liability of a company and
its
directors is less than in the case
of an ADA

38
 NATIONAL STOCK EXCHANGE OF INDIA

The National Stock Exchange of India is a Mumbai-based stock exchange. It is the largest

stock exchange in India in terms of daily turnover and number of trades, for both equities

and derivative trading. And it is expected to become the biggest stock exchange in India

in terms of market capitalization by 2009 end. Though a number of other exchanges exist,

NSE and the Bombay Stock Exchange are the two most significant stock exchanges in

India, and between them are responsible for the vast majority of share transactions. The

NSE's key index is the S&P CNX Nifty, known as the Nifty, an index of fifty major

stocks weighted by market capitalization.

NSE is mutually-owned by a set of leading financial institutions, banks, insurance

companies and other financial intermediaries in India but its ownership and management

operate as separate entities. There are at least 2 foreign investors NYSE Euronext and

Goldman Sachs who have taken a stake in the NSE. As of 2006, the NSE VSAT

terminals, 2799 in total, cover more than 1500 cities across India. In October 2007, the

equity market capitalization of the companies listed on the NSE was US$ 1.46 trillion,

making it the second largest stock exchange in South Asia. NSE is the third largest Stock

Exchange in the world in terms of the number of trades in equities. It is the second fastest

growing stock exchange in the world with a recorded growth of 16.6%.

The National Stock Exchange of India was promoted by leading financial institutions at

the behest of the Government of India, and was incorporated in November 1992 as a tax-

paying company. In April 1993, it was recognized as a stock exchange under the

Securities Contracts (Regulation) Act, 1956. NSE commenced operations in the

39
Wholesale Debt Market (WDM) segment in June 1994. The Capital market (Equities)

segment of the NSE commenced operations in November 1994, while operations in the

Derivatives segment commenced in June 2000.

INNOVATIONS

NSE has remained in the forefront of modernization of India's capital and financial

markets, and its pioneering efforts include:

Being the first national, anonymous, electronic limit order book (LOB) exchange to trade

securities in India. Since the success of the NSE, existent market and new market

structures have followed the "NSE" model.

Setting up the first clearing corporation "National Securities Clearing Corporation Ltd."

in India. NSCCL was a landmark in providing innovation on all spot equity market (and

later, derivatives market) trades in India.

Co-promoting and setting up of National Securities Depository Limited, first depository

in India.

SETTING UP OF S&P CNX NIFTY

NSE pioneered commencement of Internet Trading in February 2000, which led to the

wide popularization of the NSE in the broker community.

Being the first exchange that, in 1996, proposed exchange traded derivatives, particularly

on an equity index, in India. After four years of policy and regulatory debate and

formulation, the NSE was permitted to start trading equity derivatives

Being the first and the only exchange to trade GOLD ETFs (exchange traded funds) in

India.

40
NSE has also launched the NSE-CNBC-TV18 media centre in association with CNBC-

TV18.

NSE.IT Limited, setup in 1999, is a 100% subsidiary of the National Stock Exchange of

India. A Vertical Specialist Enterprise, NSE.IT offers end-to-end Information Technology

(IT) products, solutions and services.

MARKETS

Currently, NSE has the following major segments of the capital market:

• Equity

• Futures and Options

• Retail Debt Market

• Wholesale Debt Market

• Currency futures

NSE became the first stock exchange to get approval for Interest rate futures as

recommended by SEBI-RBI committee, on 31 August,2009, a futures contract based on

7% 10 Year GOI bond (NOTIONAL) was launched with quarterly maturities.

HOURS

NSE's normal trading sessions are conducted from 9:00 am India Time to 3:30 pm India

Time on all days of the week except Saturdays, Sundays and Official Holidays declared

by the Exchange (or by the Government of India) in advance.[8] The exchange, in

association with BSE (Bombay Stock Exchange Ltd.), is thinking of revising its timings

from 9.00 am India Time to 5.00 pm India Time.

41
There were System Testing going on and opinions, suggestions or feedback on the New

Proposed Timings are being invited from the brokers across India. And finally on Nov 18,

2009 regulator decided to drop their ambitious goal of longest Asia Trading Hours due to

strong opposition from its members.

On Dec 16, 2009, NSE announced that it would pre-pone the market opening at 9am from

Dec 18, 2009. So NSE trading hours will be from 9:00 am till 3:30 pm India Time.

However, on Dec 17, 2009, after strong protests from brokers, the Exchange decided to

postpone the change in trading hours till Jan 04, 2010.

NSE new market timing from Jan 04, 2010 is 9:00 am till 3:30 pm India Time.

INDICES

NSE also set up as index services firm known as India Index Services & Products

Limited (IISL) and has launched several stock indices, including :

• S&P CNX Nifty (Standard & Poor's CRISIL NSE Index)

• CNX Nifty Junior

• CNX 100 (= S&P CNX Nifty + CNX Nifty Junior)

• S&P CNX 500 (= CNX 100 + 400 major players across 72 industries)

• CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200)

NEW YORK STOCK EXCHANGE

42
The New York Stock Exchange (NYSE) is a stock exchange located at 11 Wall Street in

lower Manhattan, New York City, USA. It is the world's largest stock exchange by

market capitalization of its listed companies at US$28.5 trillion as of May 2008.

The NYSE is operated by NYSE Euronext, which was formed by the NYSE's 2007

merger with the fully electronic stock exchange Euronext. The NYSE trading floor is

located at 11 Wall Street and is composed of four rooms used for the facilitation of

trading. A fifth trading room, located at 30 Broad Street, was closed in February 2007.

The main building, located at 18 Broad Street, between the corners of Wall Street and

Exchange Place, was designated a National Historic Landmark in 1978, as was the 11

Wall Street building.

The origin of the NYSE can be traced to May 17, 1792, when the Buttonwood Agreement

was signed by 24 stock brokers outside of 68 Wall Street in New York under a

buttonwood tree on Wall Street. On March 8, 1817, the organization drafted a

constitution and renamed itself the "New York Stock & Exchange Board". Anthony

Stockholm was elected the Exchange's first president (for other presidents, see List of

presidents of the New York Stock Exchange).

The first central location of the Exchange was a room, rented in 1792 for $200 a month,

located at 40 Wall Street. After that location was destroyed in the Great Fire of New York

in 1835, the Exchange moved to a temporary headquarters. In 1863, the New York Stock

& Exchange Board changed to its current name, the New York Stock Exchange. In 1865,

the Exchange moved to 10-12 Broad Street.

43
The volume of stocks traded increased sixfold in the years between 1896 and 1901, and a

larger space was required to conduct business in the expanding marketplace. Eight New

York City architects were invited to participate in a design competition for a new

building; ultimately, the Exchange selected the neoclassic design submitted by architect

George B. Post. Demolition of the Exchange building at 10 Broad Street, and adjacent

buildings, started on May 10, 1901.

The new building, located at 18 Broad Street, cost $4 million and opened on April 22,

1903. The trading floor, at 109 x 140 feet (33 x 42.5 m), was one of the largest volumes

of space in the city at the time, and had a skylight set into a 72-foot (22 m)-high ceiling.

The main façade of the building features six tall Corinthian capitals, topped by a marble

sculpture by John Quincy Adams Ward, called “Integrity Protecting the Works of Man”.

The building was listed as a National Historic Landmark and added to the National

Register of Historic Places on June 2, 1978.

In 1922, a building for offices, designed by Trowbridge & Livingston, was added at 11

Broad Street, as well as a new trading floor called the Garage. Additional trading floor

space was added in 1969 the Blue Room, and in 1988 the EBR or Extended Blue Room,

with the latest technology for information display and communication. Yet another

trading floor was opened at 30 Broad Street called the Bond Room in 2000. As the NYSE

introduced its hybrid market, a greater proportion of trading came to be executed

electronically, and due to the resulting reduction in demand for trading floor space, the

NYSE decided to close the 30 Broad Street trading room in early 2006. As the adoption

44
of electronic trading continued to reduce the number of traders and employees on the

floor, in late 2007, the NYSE closed the rooms created by the 1969 and 1988 expansions.

The Stock Exchange Luncheon Club was situated on the seventh floor from 1898 until its

closure in 2006.

The NYSE announced its plans to acquire Archipelago on April 21, 2005, in a deal

intended to reorganize the NYSE as a publicly traded company. NYSE's governing board

voted to acquire rival Archipelago on December 6, 2005, and become a for-profit, public

company. It began trading under the name NYSE Group on March 8, 2006. A little over

one year later, on April 4, 2007, the NYSE Group completed its merger with Euronext,

the European combined stock market, thus forming the NYSE Euronext, the first

transatlantic stock exchange.

EVENTS

The exchange was closed shortly after the beginning of World War I (July 31, 1914), but

it partially re-opened on November 28 of that year in order to help the war effort by

trading bonds, and completely reopened for stock trading in mid-December.

On September 16, 1920, a bomb exploded on Wall Street outside the NYSE building,

killing 33 people and injuring more than 400. The perpetrators were never found. The

NYSE building and some buildings nearby, such as the JP Morgan building, still have

marks on their facades caused by the bombing.

45
The Black Thursday crash of the Exchange on October 24, 1929, and the sell-off panic

which started on Black Tuesday, October 29, are often blamed for precipitating the Great

Depression of 1929. In an effort to try to restore investor confidence, the Exchange

unveiled a fifteen-point program aimed to upgrade protection for the investing public on

October 31, 1938.

On October 1, 1934, the exchange was registered as a national securities exchange with

the U.S. Securities and Exchange Commission, with a president and a thirty-three

member board. On February 18, 1971 the non-profit corporation was formed, and the

number of board members was reduced to twenty-five.

One of Abbie Hoffman's well-known protests took place on August 24, 1967, when he

led members of the Yippie movement to the gallery of the New York Stock Exchange

(NYSE). The protesters threw fistfuls of dollars (most of the bills were fake) down to the

traders below, some of whom booed, while others began to scramble frantically to grab

the money as fast as they could Hoffman claimed to be pointing out that, metaphorically,

that's what NYSE traders "were already doing." "We didn't call the press," wrote

Hoffman, "at that time we really had no notion of anything called a media event." The

press was quick to respond and by evening the event was reported around the world.

Since that incident, the stock exchange has spent $20,000 to enclose the gallery with

bulletproof glass.

On October 19, 1987, the Dow Jones Industrial Average (DJIA) dropped 508 points, a

22.6% loss in a single day, the second-biggest one-day drop the exchange had

experienced, prompting officials at the exchange to invoke for the first time the "circuit

46
breaker" rule to halt all trading. This was a very controversial move and led to a quick

change in the rule; trading now halts for an hour, two hours, or the rest of the day when

the DJIA drops 10, 20, or 30 percent, respectively. In the afternoon, the 10% and 20%

drops will halt trading for a shorter period of time, but a 30% drop will always close the

exchange for the day. The rationale behind the trading halt was to give investors a chance

to cool off and reevaluate their positions. Black Monday was followed by Terrible

Tuesday, a day in which the Exchange's systems did not perform well and some people

had difficulty completing their trades.

Consequently, there would be another major drop for the Dow on October 13, 1989; the

Mini-Crash of 1989. The crash was apparently caused by a reaction to a news story of a

$6.75 billion leveraged buyout deal for UAL Corporation, the parent company of United

Airlines, which broke down. When the UAL deal fell through, it helped trigger the

collapse of the junk bond market causing the Dow to fall 190.58 points, or 6.91 percent.

Similarly, there was a panic in the financial world during the year of 1997; the Asian

Financial Crisis. Like the fall of many foreign markets, the Dow suffered a 7.18% drop in

value (554.26 points) on October 27, 1997, in what later became known as the 1997

Mini-Crash but from which the DJIA recovered quickly.

On January 26, 2000, an altercation during filming of the music video for Sleep Now in

the Fire, which was directed by Michael Moore, caused the doors of the exchange to be

closed and the band, Rage Against the Machine, to be escorted from the site by security,

after band members attempted to gain entry into the exchange. Trading on the exchange

floor, however, continued uninterrupted.

47
On May 6, 2010, the Dow Jones Industrial Average posted its biggest intraday loss since

the market crash of 1987, with a 998 point loss later being called the 2010 Market Crash.

Preliminary reports appeared to indicate that the massive selloff was caused by an

erroneous computerized glitch which initially started in Proctor & Gamble's stock price.

TRADING

U.S. Secretary of Commerce Donald L. Evans rings the opening bell at the NYSE on

April 23, 2003. Former chairman Jack Womack is also in this picture.

The New York Stock Exchange provides a means for buyers and sellers to trade shares of

stock in companies registered for public trading. The NYSE is open for trading Monday

through Friday between 9:30am – 4:00pm ET, with the exception of holidays declared by

the Exchange in advance.

On the trading floor, the NYSE trades in a continuous auction format, where traders can

execute stock transactions on behalf of investors. They will gather around the appropriate

post where a specialist broker, who is employed by an NYSE member firm (that is,

he/she is not an employee of the New York Stock Exchange), acts as an auctioneer in an

open outcry auction market environment to bring buyers and sellers together and to

manage the actual auction. They do on occasion (approximately 10% of the time)

facilitate the trades by committing their own capital and as a matter of course disseminate

information to the crowd that helps to bring buyers and sellers together.

As of January 24, 2007, all NYSE stocks can be traded via its electronic Hybrid Market

(except for a small group of very high-priced stocks). Customers can now send orders for

immediate electronic execution, or route orders to the floor for trade in the auction

48
market. In the first three months of 2007, in excess of 82% of all order volume was

delivered to the floor electronically.

The right to directly trade shares on the exchange is conferred upon owners of the 1366

"seats". The term comes from the fact that up until the 1870s NYSE members sat in

chairs to trade. In 1868, the number of seats was fixed at 533, and this number was

increased several times over the years. In 1953, the exchange stopped at 1366 seats.

These seats are a sought-after commodity as they confer the ability to directly trade stock

on the NYSE. Seat prices have varied widely over the years, generally falling during

recessions and rising during economic expansions. The most expensive inflation-adjusted

seat was sold in 1929 for $625,000, which, today, would be over six million dollars. In

recent times, seats have sold for as high as $4 million in the late 1990s and $1 million in

2001. In 2005, seat prices shot up to $3.25 million as the exchange was set to merge with

Archipelago and become a for-profit, publicly traded company. Seat owners received

$500,000 cash per seat and 77,000 shares of the newly formed corporation. The NYSE

now sells one-year licenses to trade directly on the exchange.

NYSE COMPOSITE INDEX

In the mid-1960s, the NYSE Composite Index (NYSE: NYA) was created, with a base

value of 50 points equal to the 1965 yearly close. This was done to reflect the value of all

stocks trading at the exchange instead of just the 30 stocks included in the Dow Jones

Industrial Average. To raise the profile of the composite index, in 2003 the NYSE set its

new base value of 5,000 points equal to the 2002 yearly close.

49
 NASDAQ

The NASDAQ Stock Market, known as NASDAQ, is an American stock exchange.

"NASDAQ" originally stood for "National Association of Securities Dealers Automated

Quotations," but the exchange's official stance is that the acronym is obsolete. It is the

largest electronic screen-based equity securities trading market in the United States. With

approximately 3,700 companies and corporations, it has more trading volume than any

other stock exchange in the world.

HISTORY

It was founded in 1971 by the National Association of Securities Dealers (NASD),. who

divested themselves of it in a series of sales in 2000 and 2001. It is owned and operated

by the NASDAQ OMX Group, the stock of which was listed on its own stock exchange

beginning July 2, 2002, under the ticker symbol NASDAQ: NDAQ. It is regulated by the

Securities and Exchange Commission.

With the completed purchase of the Nordic-based operated exchange OMX, following its

agreement with Borse Dubai, NASDAQ is poised to capture 67% of the controlling stake

in the aforementioned exchange, thereby inching ever closer to taking over the company

and creating a trans-atlantic powerhouse. The group, now known as Nasdaq-OMX,

controls and operates the NASDAQ stock exchange in New York City – the second

largest exchange in the United States. It also operates eight stock exchanges in Europe

and holds one-third of the Dubai Stock Exchange. It has a double-listing agreement with

OMX, and will compete with NYSE Euronext group in attracting new listings.

50
When the NASDAQ stock exchange began trading on February 8, 1971, the NASDAQ

was the world's first electronic stock market. At first, it was merely a computer bulletin

board system and did not actually connect buyers and sellers. The NASDAQ helped

lower the spread (the difference between the bid price and the ask price of the stock) but

somewhat paradoxically was unpopular among brokerages because they made much of

their money on the spread.

NASDAQ was the successor to the over-the-counter (OTC) and the "Curb Exchange"

systems of trading. As late as 1987, the NASDAQ exchange was still commonly referred

to as the OTC in media and also in the monthly Stock Guides issued by Standard &

Poor's Corporation.

Over the years, NASDAQ became more of a stock market by adding trade and volume

reporting and automated trading systems. NASDAQ was also the first stock market in the

United States to advertise to the general public, highlighting NASDAQ-traded companies

(usually in technology) and closing with the declaration that NASDAQ is "the stock

market for the next hundred years." Its main index is the NASDAQ Composite, which

has been published since its inception. However, its exchange-traded fund tracks the

large-cap NASDAQ-100 index, which was introduced in 1985 alongside the NASDAQ

100 Financial Index.

Until 1987, most trading occurred via the telephone, but during the October 1987 stock

market crash, market makers often didn't answer their phones. To counteract this, the

Small Order Execution System (SOES) was established, which provides an electronic

51
method for dealers to enter their trades. NASDAQ requires market makers to honor trades

over SOES.

In 1992, it joined with the London Stock Exchange to form the first intercontinental

linkage of securities markets. NASDAQ's 1998 merger with the American Stock

Exchange formed the NASDAQ-Amex Market Group, and by the beginning of the 21st

century it had become the largest electronic stock market (in terms of both dollar value

and share volume) in the United States. NASD spun off NASDAQ in 2000 to form a

publicly traded company, the NASDAQ Stock Market, Inc.

On November 8, 2007, NASDAQ bought the Philadelphia Stock Exchange (PHLX) for

US$652 million. PHLX is the oldest stock exchange in America—having been in

operation since 1790.

On May 7, 2010, the NASDAQ officially entered a correction, after falling to 2,265, a

10.45% drop from its recent high of 2,530 which occurred on April 23.

To qualify for listing on the exchange, a company must be registered with the SEC, have

at least three market makers (financial firms that act as brokers or dealers for specific

securities), and meet minimum requirements for assets, capital, public shares, and

shareholders.

QUOTE AVAILABILITY

NASDAQ quotes are available at three levels:

• Level 1 shows the highest bid and lowest offer — the inside quote.

52
 • Level 2 shows all public quotes of market makers together with information of

market makers wishing to sell or buy stock and recently executed orders.[3]

• Level 3 is used by the market makers and allows them to enter their quotes and

execute orders.

TRADING SCHEDULE

NASDAQ has a pre-market session from 7:00am to 9:30am, a normal trading session

from 9:30am to 4:00pm and a post-market session from 4:00pm to 8:00pm

INDICES

• NASDAQ-100

• NASDAQ Biotechnology Index

• NASDAQ Composite

• NASDAQ Bank

MARKETS

• NASDAQ Capital Market

• NASDAQ Global Market

• NASDAQ Global Select Market

• NASDAQ PORTAL Market

53
 OBJECTIVE OF THE STUDY

1. To know stock prices and ADR prices of five Indian companies.

2. To know the price interdependence between the Indian stocks of five companies

and their ADRs. The parameters taken for the analysis are :

• NSE open & NSE close

• NSE open & ADR open

• NSE open & ADR close

• ADR open & ADR close

• NSE close & ADR close

• NSE close & ADR open

54
 RESEARCH OBJECTIVE

RESEARCH METHODOLOGY

The project is based on the empirical study. The research is not trying to test any

hypothesis.

DATA COLLECTION

Data has been collected through Secondary source of information.

For data collection, price data of these five stocks were taken of Indian NSE in relation

with ADR listed in NYSE/NASDAQ & check their co movements & dependency.

DATA ANALYSIS

Software SPSS version 16 has been used for data analysis. The type of analysis is

descriptive analysis (mean, standard deviation) and associative analysis (correlation).

This is basically a data driven analysis where co movements would be checked.

LIMITATION

• Time constraint

• Material constraint

55
 ANALYSIS & INTERPRETATION

TATA MOTORS LTD

Descriptive Statistics
STD.
MEAN DEVIATION N
NSE OPEN 7.7096 21.4865 15
NSE CLOSE 7.7076 21.5445 15
ADR OPEN 18.7633 0.7696 15
ADR CLOSE 18.7993 0.7134 15

Associative statistics
NSE
NSE OPEN CLOSE ADR OPEN ADR CLOSE
NSE OPEN Pearson Correlation 1 .707** .795** .747**
Sig. (2-tailed) .003 .000 .001
N 15 15 15 15
NSE CLOSE Pearson Correlation .707** 1 .838** .852**
Sig. (2-tailed) .003 .000 .000
N 15 15 15 15
ADR OPEN Pearson Correlation .795** .838** 1 .927**
Sig. (2-tailed) .000 .000 .000
N 15 15 15 15
ADR CLOSE Pearson Correlation .747** .852** .927** 1
Sig. (2-tailed) .001 .000 .000
N 15 15 15 15
**. Correlation is significant at the 0.01 level (2-tailed).

56
 PERCENTAGE OF REMARK

CORRELATION

1. NSE open & NSE close 70% MODERATE CORRELATED

2. NSE open & ADR open 79% MODERATE CORRELATED

3. NSE open & ADR close 74% MODERATE CORRELATED

4. ADR open &ADR close 92% PERFECT CORRELATION

5. NSE close & ADR close 85% HIGHLY CORRELATED

6. NSE close & ADR open 83% HIGHLY CORRELATED

Observing the above data we can see that there is a high correlation between NSE close &

ADR open. This shows that 83% of the times after the NSE close at 3:30 pm in the

afternoon, & NYSE opens at 7:00 in the evening as per IST, it follows the closing price

that could have been seen at NSE. But we can also see, relationship follows one-third of

times, of what the closing prices are there at both the exchanges.

Also we can see that at what price the ADR had opened up at has 79% correlation with

that of NSE opening.

57
 INFOSYS TECHNOLOGIES LIMITED

Descriptive Statistics

STD.
MEAN DEVIATION N
NSE OPEN 2.7078E3 61.78195 15
NSE CLOSE Associative statistics
2.7069E3 66.69658 15
ADR OPEN 60.8300 1.13837 15
ADR CLOSE NSE OPEN
60.9360 NSE CLOSE
1.12852 ADR 15
OPEN ADR CLOSE
NSE OPEN Pearson
1 .790** .659** .460
Correlation
Sig. (2-tailed) .000 .008 .084
N 15 15 15 15
NSE CLOSE Pearson
.790** 1 .867** .797**
Correlation
Sig. (2-tailed) .000 .000 .000
N 15 15 15 15
ADR OPEN Pearson
.659** .867** 1 .849**
Correlation
Sig. (2-tailed) .008 .000 .000
N 15 15 15 15
ADR CLOSE Pearson
.460 .797** .849** 1
Correlation
Sig. (2-tailed) .084 .000 .000
N 15 15 15 15
**. Correlation is significant at the 0.01 level (2-tailed).

PERCENTAGE OF REMARK

CORRELATION

1. NSE open & NSE close 79% MODERATE CORRELATED

58
 2. NSE open & ADR open 65% MODERATE CORRELATED

3. NSE open & ADR close 46% MODERATE CORRELATED

4. ADR open &ADR close 84% MODERATE CORRELATED

5. NSE close & ADR close 79% MODERATE CORRELATED

6. NSE close & ADR open 86% HIGHLY CORRELATED

Observing the above data we can see that there is a good correlation between NSE close

& ADR open. This shows that 86% of the times after the NSE close at 3:30 pm in the

afternoon, & NYSE opens at 7:00 in the evening as per IST, it follows the closing price

that could have been seen at NSE. But we can also see, relationship follows less than half

the times of what the closing prices are there at both the exchanges. Also we can see that

at what price the ADR had opened up at has 65% correlation with that of NSE opening.

HDFC BANK LTD

59
 Descriptive Statistics
STD.
MEAN DEVIATION N
NSE OPEN 1.9142E3 82.88555 15
NSE CLOSE 1.9410E3 18.81667 15
ADR OPEN 1.4199E2 5.05776 15
ADR CLOSE 1.4253E2 4.60730 15

Associative statistics
NSE OPEN NSE CLOSE ADR OPEN ADR CLOSE
NSE OPEN Pearson Correlation 1 -.311 .433 .338
Sig. (2-tailed) .260 .107 .218
N 15 15 15 15
NSE CLOSE Pearson Correlation -.311 1 .313 .250
Sig. (2-tailed) .260 .255 .368
N 15 15 15 15
ADR OPEN Pearson Correlation .433 .313 1 .919**
Sig. (2-tailed) .107 .255 .000
N 15 15 15 15
ADR CLOSE Pearson Correlation .338 .250 .919** 1
Sig. (2-tailed) .218 .368 .000
N 15 15 15 15
**. Correlation is significant at the 0.01 level (2-tailed).

PERCENTAGE OF REMARK

60
 CORRELATION

1. NSE open & NSE close -31% NEGATIVE CORRELATION

2. NSE open & ADR open 43% LOW CORRELATION

3. NSE open & ADR close 34% LOW CORRELATION

4. ADR open &ADR close 91% PERFECT CORRELATION

5. NSE close & ADR close 25% LOW CORRELATION

6. NSE close & ADR open 31% LOW CORRELATION

Observing the above data we can see that there is a high correlation between ADR open

&ADR close of about 91%. But we can also see, relationship follows one-third of times,

of what the closing prices are there at both the exchanges.Also we can see that there is

negative correlation between NSE open & NSE close of about -31%.

WIPRO LIMITED

61
 Descriptive Analysis
STD.
MEAN DEVIATION N
NSE OPEN 7.1626E2 7.46097 15
NSE CLOSE 7.1515E2 6.97911 15
ADR OPEN 23.6460 .48206 15
ADR CLOSE 23.6120 .45681 15

Associative Analysis

62
 **. Correlation is significant at the 0.01 level (2-tailed).

PERCENTAGE OF REMARK

CORRELATION

1. NSE open & NSE close 34% LESS CORRELATED

2. NSE open & ADR open 46% LESS CORRELATED

3. NSE open & ADR close 23% LESS CORRELATED

NSE OPEN NSE CLOSE ADR OPEN ADR CLOSE

NSE OPEN Pearson
1 .349 .467 .237
Correlation
Sig. (2-tailed) .203 .079 .395
N 15 15 15 15
NSE CLOSE Pearson
.349 1 .381 .408
Correlation
Sig. (2-tailed) .203 .161 .131
N 15 15 15 15
ADR OPEN Pearson
.467 .381 1 .714**
Correlation
Sig. (2-tailed) .079 .161 .003
N 15 15 15 15
ADR CLOSE Pearson
.237 .408 .714** 1
Correlation
Sig. (2-tailed) .395 .131 .003
N 15 15 15 15

4. ADR open &ADR close 71% MODERATE CORRELATION

5. NSE close & ADR close 40% LESS CORRELATED

63
 6. NSE close & ADR open 38% LESS CORRELATED

Observing the above data we can see that there is a correlation between ADR open &

ADR close of about 71%. But we can also see, relationship follows one-third of times, of

what the closing prices are there at both the exchanges. Also we can see that at what price

the ADR had opened up at has 46% correlation with that of NSE opening.

ICICI BANK

Descriptive Statistics
STD.
MEAN DEVIATION N
NSEOPEN 9.5903E2 24.02771 15
NSECLOSE 9.5707E2 23.21440 15
ADROPEN 43.0473 1.24552 15
ADRCLOSE 43.2307 1.53855 15

64
 Associative statistics
NSEOPEN NSECLOSE ADROPEN ADRCLOSE
NSEOPEN Pearson Correlation 1 .745** .827** .763**
Sig. (2-tailed) .001 .000 .001
N 15 15 15 15
NSECLOSE Pearson Correlation .745** 1 .905** .924**
Sig. (2-tailed) .001 .000 .000
N 15 15 15 15
ADROPEN Pearson Correlation .827** .905** 1 .949**
Sig. (2-tailed) .000 .000 .000
N 15 15 15 15
ADRCLOSE Pearson Correlation .763** .924** .949** 1
Sig. (2-tailed) .001 .000 .000
N 15 15 15 15
**. Correlation is significant at the 0.01 level (2-tailed).

PERCENTAGE OF REMARK

CORRELATION

1. NSE open & NSE close 74% MODERATE CORRELATED

2. NSE open & ADR open 82% HIGHLY CORRELATED

3. NSE open & ADR close 76% MODERATE CORRELATED

4. ADR open &ADR close 94% PERFECT CORRELATION

5. NSE close & ADR close 92% PERFECT CORRELATION

6. NSE close & ADR open 90% PERFECT CORRELATION

65
Observing the above data we can see that there is a good correlation between NSE close

& ADR open. This shows that 90% of the times after the NSE close at 3:30 pm in the

afternoon, & NYSE opens at 7:00 in the evening as per IST, it follows the closing price

that could have been seen at NSE. But we can also see, relationship follows one-third of

times, of what the closing prices are there at both the exchanges. Also we can see that at

what price the ADR had opened up at has 82% correlation with that of NSE opening.

66
 DATA INFERENCES TABLE

TATA INFOSY HDFC WIPRO ICICI

MOTOR S
S BANK LTD BANK
LTD
NSE OPEN 70% 79% -31% 34% 74%
& NSE
CLOSE
NSE OPEN 79% 65% 43% 46% 82%
& ADR
OPEN
NSE OPEN 74% 46% 34% 23% 76%
& ADR
CLOSE
ADR OPEN 92% 84% 91% 71% 94%
& ADR
CLOSE
NSE CLOSE 85% 79% 25% 40% 92%
&ADR
CLOSE
NSE CLOSE 83% 86% 31% 38% 90%
& ADR
OPEN

67
 CONCLUSION

Looking at the above data we can conclude that there is some kind of relationship

between all the stocks and the ADR’s and they almost react to the way they are all doing

in the home market to that of ADR.

We can see that there is almost 70-90% of relationship between stocks closing & their

ADR’s, but this kind of relationship does not hold true in case of exchanges. And highest

correlation exits between ADR open and ADR close of ICICI bank.

So we can conclude that there is some kind of relationship between all ADR’s & they are

dependent on each other and ADR follow home country stock more.

68
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