ADR, GDR & IDR

India is hot these days all major brokerages are of the opinion that India has a great long term potential, and that investors in India would reap handsome benefits in the next 10 years. With the current correction in the Indian stock market, the valuations have become even better. And the logic of investing in Indian equity market has become even more compelling. This is great for people living in India But what about Non Resident Indians (NRIs) and foreign nationals? Considering the many restrictions on NRIs and foreign nationals investing in India, how can they benefit from the potential that India offers? There are some very good proxies to investing directly in India and ADRs and GDRs are a great option.

 ADR

stands for American Depository Receipt. Similarly, GDR stands for Global Depository Receipt. Lets understand these better. Every publicly traded company issues shares These shares are sometimes also listed and traded on foreign stock exchanges But to list on a foreign stock exchange, the company has to comply with the policies of those stock exchanges. But many good companies get listed on these stock exchanges indirectly using ADRs and GDRs.

 Depositary

Receipt

Global Depository Receipt (GDR) American Deposit Receipt (ADR)

Foreign

Currency Convertible Bond (FCCB) Euro Medium Term Notes Program

depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form at the request of the shareholder through the medium of a Depository Participant an investor wants to utilize the services offered by a Depository, the investor has to open an account with the Depository through a Depository Participant.

If

A Depositary Receipt is a negotiable security that represents an ownership interest in securities of a foreign issuer typically trading outside its home market.

Depositary Receipts are created when a broker purchases a foreign company's shares on its home stock market and delivers the shares to the depositary's local custodian bank, and then instructs the depositary bank to issue Depositary Receipts.

In addition, Depositary Receipts may also be purchased in the secondary trading market.

They may trade freely, just like any other security, either on an exchange or in the over-the-counter market and can be used to raise capital.

ADRs were the first type of depositary receipt to evolve. They were introduced in 1927 in response to a law passed in Britain, which prohibited British companies from registering shares overseas without a British-based transfer agent.

ADR- American Depositary Receipts

A

negotiable certificate issued by a U.S. bank Represents a specified number of shares of a foreign company ADRs are denominated in U.S. dollars. Give Non-U.S. companies access to the US capital markets

GDR- Global Depositary Receipts

A

bank certificate issued in more than one country for shares in a foreign company Offered for sale globally through the various bank branches Shares trade as domestic shares Provide exposure to the global markets (except U.S.) outside the issuers home market.

Let us take Patni example trades on the Indian stock at around Rs.460/This is equivalent to US$ 10 assume for simplicity Now a US bank purchases 10000 shares of Patni and issues them in US in the ratio of 10:1 This means 1 ADR purchased is worth 10 Patni shares. Quick calculation means 1 ADR = US $100 Once ADR are priced and sold, its subsequent price is determined by supply and demand factors, like any ordinary shares.

COMPANY SHARE

DEPOSITARY BANK

INVESTOR

Indian companies can raise foreign currency resources abroad through the issue of ADRs/ GDRs, in accordance with the Scheme for issue of FCCB and Ordinary Shares (Through DR Mechanism) Scheme, 1993 and guidelines issued by the GoI . A company can issue ADRs / GDRs, if it is eligible to issue shares to persons resident outside India under the FDI Scheme. However, an Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by SEBI will not be eligible to issue ADRs/GDRs. Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital in the international market, would require prior or simultaneous listing in the domestic market, while seeking to issue such overseas instruments. Unlisted companies, which have already issued ADRs/GDRs in the international market, have to list in the domestic market on making profit or within 3 years of such issue of ADRs/GDRs, whichever is earlier. After the issue of ADRs/GDRs, the company has to file a return in Form DR as indicated in the RBI Notification. There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets.

Erstwhile OCBs which are not eligible to invest in India and entities prohibited to buy, sell or deal in securities by SEBI will not be eligible to subscribe to ADRs / GDRs issued by Indian companies.
The pricing of ADR / GDR issues including sponsored ADRs / GDRs should be made at a price determined under the provisions of the Scheme of issue of FCCB and Ordinary Shares, 1993 and guidelines issued by the GoI and directions issued by RBI.

Legal Counsel
At the time of offering Prepare (issuer counsel) and/or review (depositary counsel) offering circular and interact with authorities Prepare draft deposit agreement (depositary banks counsel) Submit requisite documents to local regulatory authorities and exchanges (issuer and placement agent counsels) Ongoing Manage compliance with securities laws, rules and regulations and perfect any securities law exemptions Provide corporate action support, whenever required

I-Banks / Underwriters
At the time of offering Advise on size, pricing and marketing of offering, type of program to launch and exchange or market on which to list or quote, and ratio of depositary shares to ordinary shares Act as placement agent or underwriter in offering Conduct road shows with management/ introduce issuer to institutional and other investors Line up selected dealers and counderwriters Ongoing Cover issuer through research reports/ promote DRs to investors Advise on road shows, invest or meetings, investors to target

Custodian
At the time of offering Receive local shares in issuers home country and confirm receipt Ongoing Hold shares in custody for the account of depositary Receive and deliver shares in accordance with depositarys instructions

Investor Relation Firm

At the time of offering Develop long-term plan to raise awareness of issuers program in markets in which GDRs will trade Develop communications plan and information materials for launch activities (road show and presentations to investors, launch day promotion, meetings with financial media) Ongoing Coordinate with issuers advertising and public relations teams on specific program plans to support and develop company image Continue to work with the issuer to maintain visibility and invest or knowledge in the capital markets Arrange regular meetings for issuer with investors to keep them informed of developments/ results

Accountants
At the time of offering Prepare companys accounts for insertion into the prospectus Review prospectus and interact with authorities Ongoing Audit and prepare accounts

Each DR is backed by a specific number of an Issuers local shares (or a fraction thereof). This is called the DR ratio.

The ratio is designed to set the price of each DR in a price range that is competitive with the Issuers international peer group or the peer group on the exchange on which the DR trades.
DRs are most commonly priced between $7 and $20. The ratio of DRs to ordinary shares is usually changed if the GDR price goes well over $20 (e.g., $50) or if it falls substantially below $7.

Changing the ratio allows the Company to keep its DR price in line with its peers and maintain investor interest.

Note: In case the DR ratio is unity, then the depository receipts are also referred to as depository shares

The issuer must meet each of the following criteria, determined on a worldwide basis: Pre-tax income of $100 million cumulative for the last 3 years Minimum pre-tax income of $25 million in each of the 2 most recent years In addition, the issuer must meet either of the following two criteria:

Global market capitalization of $500 million together with revenues of $100 million for the most recent 12month period and aggregate cash flow of $100 million for the last 3 years with a minimum of $25 million in each of the 2 preceding years; or Global market capitalization of $750 million together with revenues of $75 million for the most recent fiscal year.

 2.5

million publicly held shares worldwide with a market value of $100 million 5,000 round lot shareholders worldwide (holding units of 100 or more shares)

Size and earnings The issuer must meet one of the following criteria: Aggregate pre-tax earnings of $10 million cumulative for the last 3 years with a minimum of $2 million in each of the 2 most recent years; or

 Not

less than $500 million of global market capitalization together with revenues of $100 million for the most recent 12-month period and aggregate operating cash flow of $25 million for the last 3 years with a positive amount in each year; or Global market capitalization of $750 million together with revenues of $75 million for the most recent fiscal year. In addition, the market value of publicly traded shares must equal or exceed $100 million ($60 million for IPOs, spin-offs, carveouts).

 1.1

million publicly held shares (A) 2,000 round lot shareholders,in the US, or (B) 2,200 total shareholders together with average monthly trading volume of 100,000 shares for the most recent 6 months, or (C) 500 total shareholders together with average monthly trading volume of 1 million shares for the most recent 12 months.

 Original

listing fees: Minimum of $150,000 to maximum of $250,000, based on the number of ADRs outstanding. Annual continuing fees: Based on the number of ADRs outstanding, subject to a minimum of $38,000. The total fees that can be billed to an issuer in any calendar year are capped at $500,000. These fees apply to both US and foreign listed companies.

NASDAQ National Market Size & Earnings The issuer must meet one of the following 3 alternative criteria: 1. Stockholders equity of at least $15 million together with pre-tax income from continuing operations of at least $1 million in latest fiscal year or in two of the last three years and public float having a market value of $8 million; or

2. Stockholders equity of at least $30 million together with public float having a market value of $18 million; or 3. Public float having a market value of $20 million together with either (i) listed securities having a market value of $75 million or (ii) $75 million in total assets and $75 million in total revenues.

 Public

float of 1.1 million shares with a minimum bid price of $5. Minimum of 400 round lot shareholders (each owning 100 shares or more). Minimum of three market makers, except thta four are required if alternative 3 under Size and earnings is utlizied.

 Original

listing fees for ADR issuers range from $100,000 to $150,000 based on the number of ADRs issued and outstanding. Annual continuing fees for ADR issuers range from $21,225 to $30,000 depending on the number of ADRs issued and outstanding.

Size and earnings The issuer must meet one of the following 3 alternative criteria: 1. Stockholders equity of at least $5 million; or 2. $50 million in market value of listed securities; or 3. $750,000 in net income from continuing operations in latest fiscal year or in two of the last three fiscal years.

 Public

float of at least 1 million shares having a market value of $5 million and a minimum bid price of $4; in addition, for ADR listings, at least 100,000 ADRs must be issued. Minimum of 300 round lot shareholders (each owning 100 or more shares). Minimum of three market makers.

 Original

listing fees for ADR issuers range from $25,000 to $50,000 depending on the total number of ADRs issued and outstanding. Annual continuing fees for ADR issuers range from $17,500 to $21,000 depending on the total number of ADRs issued and outstanding.

One way Fungibility Conversion of ADR/GDR into shares of Indian Company After conversion, it was not possible for reconversion of shares into ADR/GDR

Two way Fungibility Two-way Fungibility of ADRs/GDRs issued by Indian Companies was permitted by the Government of India and the RBI. The present rules of the RBI make such reconversion possible, to the extent of ADR / GDR which have been converted into equity shares and sold in the local market. Two-way fungibility implies that an investor who holds ADRs/GDRs can cancel them with the depository and sell the underlying shares in the market. The company can then issue fresh ADRs to the extent of shares cancelled.

Funjability Continue

This would take place in the following manner:

Stock Brokers in India have been authorized to purchase shares of Indian Companies for reconversion The Domestic Custodian would coordinate with the Overseas Depository and the Indian Company to verify the quantum of reconversion which is possible and also to ensure that the sectoral cap is not breached. The Domestic Custodian would then inform the Overseas Depository to issue ADR / GDR to the overseas Investor.

 Improvement

in Liquidity Elimination of arbitrage

The issuing company intimates the depository when the dividend record and payment dates for the underlying shares is established. The Depositary will:

Set a DR record date & payment date, and communicate these dates to markets. Announce preliminary (estimated) dividend payment rates based upon the exchange rate between the domestic currency and the currency of DR on the date of the announcement. On the dividend payment date in the home market, the custodian receives the dividend owed on the underlying shares. The depositary will then arrange for the dividend received to be converted from domestic currency into currency of DR. Distribute the net dividend amount, net of any required tax withholding and any fees, to the DR holders entitled thereto.

As the DR investor carries the foreign currency risk, the amount of the dividend will affected by any movement of the currency of DR against the home market currency. In case of a stock dividend, additional DRs are distributed to DR holders.

DR holders have no direct voting rights on the shares underlying the DRs. In case the issuer gives its DR holders the right to vote in shareholders meeting, it instructs the depository to initiate the DR proxy process. Depository (complying with the applicable legal provisions) establishes the record date, mailing date, and voting cut-off date. Depository informs key dates to issuer and local custodian bank (LCB). Issuer provides depository with draft of agenda items & company notice. Depository provides draft of depository notice of meeting and voting card to issuing company for review. Upon approval, depository arranges for

final voting packages to be prepared and mailed to DR holders.

DR holders review the voting materials & submit their votes to depository. Depository tabulates the DR holders votes & sends to issuer and LCB. LCB forwards the results to the companys registrar, or attends the shareholders meeting to vote accordingly.

Transferability of the Underlying Shares & GDRs: The shares underlying the GDRs as well as GDRs itself must be freely transferable, fully paid and free from any liens & restrictions on transfer. Free float requirement: 25% of the GDRs must be in public hands. This 25% should not include any investor taking more than 5%. Admission to trading on a Recognized Stock Exchange. Market capitalization: The expected aggregate market value of all GDRs to be listed must be at least 700,000. The FSA may modify this rule to admit shares of a lower value if it is satisfied there will be an adequate market for the securities concerned. Continuing obligations: Various ongoing obligations on the part of issuing company include: Publication of an annual financial report within four months of its year end. Publication of price sensitive information to enable investors to trade in a knowledgeable manner.

* These are specifically applicable to companies seeking to list its GDRs on LSE

A prospectus is the companys information and sales document which enables market participants to create opinions and decide whether to participate in the offering. A DR prospectus must include the necessary information that enables investors to make an informed assessment of

the assets and liabilities, financial position, profits and losses and prospects of the Company and, the rights attached to the DRs.

An operating and financial review, audited financial information for the last three financial years or such shorter period as the Company has been in operation. In case the prospectus is more than nine months after the end of last financial year, unaudited half year accounts will also be included.

The prospectus also requires details of any material contracts.

Prospectus should also include a summary describing the Company that includes any risks associated with investing in the Company.

Offer a new avenue for raising equity capital outside the issuers home market Broaden and diversify a companys investor base Establish/increase total global issuer liquidity by attracting new investors Enhance a companys visibility, status and profile internationally among institutional investors

Develop and/or increase research coverage outside the home market

Get an international valuation as the Company is valued alongside its peer group Adjust share price levels to those of peers through DR Ratio Facilitate M&A activity through use as acquisition currency Expand opportunity to increase local share price as a result of global demand/trading

Facilitate diversification into securities of foreign issuers Represent a way to provide international exposure for institutional investors (mutual funds, pension funds) despite restrictions against investing in certain

countries or in foreign investment instruments

Easier to purchase and to hold than the issuers underlying ordinary shares Trade easily and conveniently in US dollars and settle through established

clearinghouses
Ability to acquire the underlying securities directly upon cancellation (twoway fungibility) Create accessibility of price, trading information and research Provide dividend payments in US dollars and corporate action (meetings of shareholders, rights offerings, exchange offers, tender offers, etc.) notifications in English

COMPANY Bajaj Auto Dr. Reddys HDFC Bank Hindalco ICICI Bank Infosys Technologies ITC L&T MTNL Patni Computers Ranbaxy Laboratories Tata Motors State Bank of India VSNL WIPRO

ADR No Yes Yes No Yes Yes No No Yes Yes No Yes No Yes Yes

GDR Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes No Yes Yes Yes

 Through

an ADR, companies can only tap the American markets, while GDRs give the companies more flexibility in terms of markets. European markets are more liberal than the American markets. Companies get more flexibility in terms of currencies as well. Companies here want to capitalise on foreign investor interest as much as possible. The need of Indian corporates for funds is so huge and with debt being very expensive.