Professional Documents
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DEFINITION
An equity market is a public market for the trading of company equity stock
and derivatives at an agreed price. The equity market which comprises of
primary market as well as secondary market is one of the most important
sources for companies to raise money. This allows businesses to be publicly
traded, or raise additional capital for expansion by selling shares of
ownership of the company in a public market. The liquidity that an exchange
provides affords investors the ability to quickly and easily sell securities.
This is an attractive feature of investing in stocks, compared to other less
liquid investments such as real estate.
The worldwide equity market grew rapidly in the late 20th century, rising
from $1 trillion in market capitalization in 1974 to $16 trillion in 1997. The
worldwide equity market benefited from freer markets, government
privatizations, and companies seeking an alternative to debt.
Indian Equity Market
The Indian Equity Market is more popularly known as the Indian Stock
Market. The Indian equity market has become the third biggest after
China and Hong Kong in the Asian region. According to the latest report
by ADB, it has a market capitalization of nearly $600 billion. As of March
2009, the market capitalization was around $598.3 billion (Rs 30.13 lakhs
crore) which is one-tenth of the combined valuation of the Asia region. The
market was slow since early 2007 and continued till the first quarter of 2009.
The stock market in India does business with two types of fund namely
private equity fund and venture capital fund. It also deals in transactions
which are based on the two major indices - Bombay Stock Exchange (BSE)
and National Stock Exchange of India Ltd (NSE).
The equity market is also affected through trade integration policy. The
country has advanced both in foreign institutional investment (FII) and trade
integration since 1995. This is a very attractive field for making profit for
medium and long term investors, short-term swing and position traders and
very intraday traders.
The Indian market has 22 stock exchanges. The larger companies are
enlisted with BSE and NSE. The smaller and medium companies are listed
with OTCEI (Over The counter Exchange of India). The functions of the
Equity Market in India are supervised by SEBI (Securities Exchange Board
of India).
HISTORY
The history of the Indian equity market goes back to the 18th century when
securities of the East India Company were traded. Till the end of the 19th
century, the trading of securities was unorganized and the main trading
centers were Calcutta (now Kolkata) and Bombay (now Mumbai).
The Indian Equity Market was not well organized or developed before
independence. After independence, new issues were supervised. The timing,
floatation costs, pricing, interest rates were strictly controlled by the
Controller of Capital Issue (CII). For four and half decades, companies were
demoralized and not motivated from going public due to the rigid rules of
the Government. In the 1950s, there was uncontrollable speculation and the
market was known as 'Satta Bazaar'. Speculators aimed at companies like
Tata Steel, Kohinoor Mills, Century Textiles, Bombay Dyeing and National
Rayon. The Securities Contracts (Regulation) Act, 1956 was enacted by the
Government of India. Financial institutions and state financial corporation
were developed through an established network.
In the 60s, the market was bearish due to massive wars and drought.
Forward trading transactions and 'Contracts for Clearing' or 'badla' were
banned by the Government. With financial institutions such as LIC, GIC,
some revival in the markets could be seen. Then in 1964, UTI, the first
mutual fund of India was formed.
The 80's saw a growth in the Indian Equity Market. With liberalized policies
of the government, it became lucrative for investors. The market saw an
increase of stock exchanges, there was a surge in market capitalization rate
and the paid up capital of the listed companies. The 90s was the most crucial
in the stock market's history. Indians became aware of 'liberalization' and
'globalization'. In May 1992, the Capital Issues (Control) Act, 1947 was
abolished. SEBI which was the Indian Capital Market's regulator was given
the power and overlook new trading policies, entry of private sector mutual
funds and private sector banks, free prices, new stock exchanges, foreign
institutional investors, and market boom and bust. In 1990, there was a
major capital market scam where bankers and brokers were involved. With
this, many investors left the market. Later there was a securities scam in
1991-92 which revealed the inefficiencies and inadequacies of the Indian
financial system and called for reforms in the Indian Equity Market. Two
new stock exchanges, NSE (National Stock Exchange of India) established
in 1994 and OTCEI (Over the Counter Exchange of India) established in
1992 gave BSE a nationwide competition. In 1995-96, an amendment was
made to the Securities Contracts (Regulation) Act, 1956 for introducing
options trading. In April 1995, the National Securities Clearing Corporation
(NSCC) and in November 1996, the National Securities Depository Limited
(NSDL) were set up for demutualised trading, clearing and settlement.
Information Technology scripts were the major players in the late 90s with
companies like Wipro, Satyam, and Infosys. In the 21st century, there was
the Ketan Parekh Scam. From 1st July 2001, 'Badla' was discontinued and
there was introduction of rolling settlement in all scripts. In February 2000,
permission was given for internet trading and from June, 2000, futures
trading started.
CURRENT MARKET SCENARIO
Primary market
Introduction
Primary market is the market for First Time Issuance of shares and they
being listed on the major stock exchange. The company raises funds for their
development and expansion activities through Debt or Equity.
Primary Market also called the new issue market. It is the market for issuing
new securities. Many companies, especially small and medium scale, enter
the primary market to raise money from the public to expand their
businesses. They sell their securities to the public through an initial public
offering.
This is the market for new long term equity capital. The primary
market is the market where the securities are sold for the first time.
Therefore it is also called the new issue market (NIM).
In a primary issue, the securities are issued by the company directly to
investors.
The company receives the money and issues new security certificates
to the investors.
Primary issues are used by companies for the purpose of setting up
new business or for expanding or modernizing the existing business.
The primary market performs the crucial function of facilitating
capital formation in the economy.
The new issue market does not include certain other sources of new
long term external finance, such as loans from financial institutions.
Borrowers in the new issue market may be raising capital for
converting private capital into public capital; this is known as "going
public."
The financial assets sold can only be redeemed by the original holder.
When private limited company was tapping the capital market for either
expansion or developmental reason then this company must be listed on any
one of the stock exchange.
Kinds of issues
a) Public Issue
i. Initial Public Offer
ii. Further Public Offer
b) Right Issue
c) Bonus Issue
d) Private Placement
a) Public Issue
when a company offers to sell its shares to the public for the very first time it
is referred to as an Initial Public Offering (IPO). The shares now available
for trading on the stock exchange where it is listed.
Approval of Board
Within ten days of filing the prospectus, the initial listing application
must be made to the concerned stock exchanges, along with the initial
listing fees.
Statutory Announcement
The statutory announcement of the issue must be made after seeking the
approval of the lead stock exchange. This must be published at least ten
days before the opening of the subscription list.
Collection of Applications
Processing of Applications
BOOK BUILDING
When already listed company makes either a fresh issue of securities to the
public or an offer for sale to the public, it is called FPO.
b) Right Issue
A rights issue is a way in which a company can sell new shares in order to
raise capital. Shares are offered to existing shareholders in proportion to
their current shareholding, respecting their pre-emption rights. The price at
which the shares are offered is usually at a discount to the current share
price, which gives investors an incentive to buy the new shares — if they do
not, the value of their holding is diluted.
The rights are normally a tradable security themselves (a type of short dated
warrant). This allows shareholders who do not wish to purchase new shares
to sell the rights to someone who does. Whoever holds a right can choose to
buy a new share (exercise the right) by a certain date at a set price.
Some shareholders may choose to buy all the rights they are offered in the
rights issue. This maintains their proportionate ownership in the expanded
company, so that an x% stake before the rights issue remains an x% stake
after it. Others may choose to sell their rights, diluting their stake and
reducing the value of their holding.
If rights are not taken up the company may (and in practice does) sell them
on behalf of the rights holder.
c) Bonus Shares
bonus share is free share in fixed ratio to the shareholders. for exp..reliance
ind. ltd. issue bonus share in 1:1 ratio and Rs.13.00 as dividend/share
Purpose: Usually bonus shares are issued with the intent of rewarding the
investor, although having said that the ex-bonus (post bonus) price of the
share is adjusted to bonus ratio. So for e.g, if the price of a share before
bonus is Rs.100 and a bonus of 1:1 is issued, then ex-bonus share price
would adjust to Rs. 50, which means that the total market value will remain
the same. There is generally a case where the price of the share increases
after bonus effect is incorporated.
Ratios' Impact:
The main financial effect of bonus share is that it increases the number of
shares outstanding and reduces the earnings per share (EPS). Basic EPS =
(Net Profit after tax / no. of equity shares outstanding).
d) Private placement
Many of the rules affecting private placements are covered under Section
4(2) of the federal securities law. This section provides an exemption for
companies wishing to sell up to $5million in securities to a small number of
accredited investors. Companies conducting an offering under Section 4(2)
cannot solicit investors publicly, and the majority of investors are expected
to be either insiders (company management) or sophisticated outsiders with
a preexisting relationship with the company (professionals, suppliers,
customers, etc.). At a minimum, the companies are expected to provide
potential investors with recent financial statements, a list of risk factors
associated with the investment, and an invitation to inspect their facilities. In
most respects, the preparation and disclosure requirements for offerings
under Section 4(2) are similar to Regulation D filings.
Regulation D—which was adopted in 1982 and has been revised several
times since—consists of a set of rules numbered 501 through 508. Rules
504, 505, and 506 describe three different types of exempt offerings and set
forth guidelines covering the amount of stock that can be sold and the
number and type of investors that are allowed under each one. Rule 504
covers the Small Corporate Offering Registration, or SCOR. SCOR gives an
exemption to private companies that raise no more than $1 million in any
12-month period through the sale of stock. There are no restrictions on the
number or types of investors, and the stock may be freely traded. The SCOR
process is easy enough for a small business owner to complete with the
assistance of a knowledgeable accountant and attorney. It is available in all
states except Delaware, Florida, Hawaii, and Nebraska.
Sweat equity
The equity that is created in a company or some other asset as a direct result
of hard work by the owner(s). Sweat equity is a term used to describe the
contribution made to a project by people who contribute their time and
effort. It can be contrasted with financial equity which is the money
contributed towards the project. It is used to refer to a form of compensation
by businesses to their owners or employees. The term is sometimes used in
partnership agreements where one or more of the partners contributes no
financial capital. In the case of a startup company, employees might, upon
incorporation, receive stock or stock options in return for working for
below-market salaries (or in some cases no salary at all).[1]
The term is sometimes used to describe the efforts put into a start-up
company by the founders in exchange for ownership shares of the company.
This concept, also called "stock for services" and sometimes "equity
compensation" or "sweat equity" can also be seen when startup companies
use their shares of stock to entice service providers to provide necessary
corporate services in exchange for a discount or for deferring service fees
until a later date, see e.g. "Idea Makers and Idea Brokers in High
Technology Entrepreneurship" by Todd L. Juneau et al., Greenwood Press,
2003, which describes equity for service programs involving patent lawyers
and securities lawyers who specialize in start-up companies as clients.
The term can also be used to describe the value added to real estate by
owners who make improvements by their own toil. The more labor applied
to the home, and the greater the resultant increase in value, the more sweat
equity that has been used.
Secondary market
After the securities are issued in the primary market, they are traded in the
secondary market by the investors. The securities are traded, cleared and
settled within the regulatory framework prescribed by the Exchanges and the
SEBI
Definition
Secondary market refers to a market where securities are traded after being
initially offered to the public in the primary market and/or listed on the
Stock Exchange. Majority of the trading is done in the secondary market.
Secondary market comprises of equity markets and the debt markets.
Role
For the general investor, the secondary market provides an efficient platform
for trading of his securities. For the management of the company, Secondary
equity markets serve as a monitoring and control conduit-by facilitating
value-enhancing control activities, enabling implementation of incentive-
based management contracts, and aggregating information (via price
discovery) that guides management decisions
Difference
In the primary market, securities are offered to public for subscription for the
purpose of raising capital or fund. Secondary market is an equity trading
venue in which already existing/pre-issued securities are traded among
investors. Secondary market could be either auction or dealer market. While
stock exchange is the part of an auction market, Over-the-Counter (OTC) is
a part of the dealer market.
Stock exchange
"The Bombay Stock Exchange" (BSE) was founded in the year 1875. "The
Ahmedabad Shares and Stock Association" was formed in the year 1894.
The Calcutta Stock Exchange Association was formed by about 150 brokers
on 15th June 1908. In the year 1920, one stock exchange was established in
Northern India and one in Madras called "The Madras Stock Exchange".
"The Madras Stock Exchange Association Pvt. Ltd." was established in the
year 1941. On 29th April 1959, it was reorganized as a company limited by
guarantee under the name and style of "Madras Stock Exchange" (MSE).
The Lahore Stock Exchange was formed in the year 1934. However in the
year 1936 after the Punjab Stock Exchange Ltd. came into existence, the
Lahore Stock Exchange merged with it. In Calcutta, a second Stock
Exchange by name "The Bengal Share & Stock Exchange Ltd." was
established in the year 1937 and likewise once again in the year 1938,
Bombay also witnessed a rival Stock Exchange formed in the name of
"Indian Stock Exchange Ltd." The U.P. Stock Exchange was formed in
Kanpur and the Nagpur Stock Exchange Ltd. in Nagpur in the year 1940.
The Hyderabad Stock Exchange Ltd. was incorporated in the year 1944.
Two stock exchanges which came into being in Delhi by the name "The
Delhi Stock & Share Brokers Association Ltd." and "The Delhi Stocks &
Shares Exchange Association Ltd." were amalgamated into "The Delhi
Stock Exchange Association Ltd." in the year 1947. Subsequently the
Bangalore Stock Exchange was registered in the year 1957 and recognized
in the year 1963. The third stock exchange in the state of Gujarat the
"Vadodara Stock Exchange Ltd." was incorporated in 1990. The Over the
Counter Exchange of India (OTCEI) broadly based on the lines of NASDAQ
(National Association of Securities Dealers Automated Quotation) of the
USA was promoted and approved on August 1989. The National Stock
Exchange of India Ltd. was incorporated in November 1992.
Introduction
Stock Exchanges in India also assist the issue and release of securities and
other monetary tools incorporating the fortification of revenues and
dividends. The book keeping of the trade is centralized but the buying and
selling is associated to a particular place as advanced marketplaces are
mechanized. The buying and selling on an exchange is only open to its
affiliates and brokers
Bombay Stock Exchange
Bombay Stock Exchange is the oldest stock exchange in Asia What is now
popularly known as the BSE was established as "The Native Share & Stock
Brokers' Association" in 1875. Over the past 135 years, BSE has facilitated
the growth of the Indian corporate sector by providing it with an efficient
capital raising platform.Today, BSE is the world's number 1 exchange in the
world in terms of the number of listed companies (over 4900). It is the
world's 5th most active in terms of number of transactions handled through
its electronic trading system. And it is in the top ten of global exchanges in
terms of the market capitalization of its listed companies (as of December
31, 2009). The companies listed on BSE command a total market
capitalization of USD Trillion 1.28 as of Feb, 2010. BSE is the first
exchange in India and the second in the world to obtain an ISO 9001:2000
certification. It is also the first Exchange in the country and second in the
world to receive Information Security Management System Standard BS
7799-2-2002 certification for its BSE On-Line trading System (BOLT).
Presently, we are ISO 27001:2005 certified, which is a ISO version of BS
7799 for Information Security. The BSE Index, SENSEX, is India's first and
most popular Stock Market benchmark index. Exchange traded funds (ETF)
on SENSEX, are listed on BSE and in Hong Kong. Futures and options on
the index are also traded at BSE.
The National Stock Exchange of India Limited has genesis in the report of
the High Powered Study Group on Establishment of New Stock Exchanges.
It recommended promotion of a National Stock Exchange by financial
institutions (FIs) to provide access to investors from all across the country
on an equal footing. Based on the recommendations, NSE 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 unlike other
stock exchanges in the country. On its recognition as a stock exchange under
the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE
commenced operations in the Wholesale Debt Market (WDM) segment in
June 1994. The Capital Market (Equities) segment commenced operations in
November 1994 and operations in Derivatives segment commenced in June
2000.
The following years witnessed rapid development of Indian capital market
with introduction of internet trading, Exchange traded funds (ETF), stock
derivatives and the first volatility index - IndiaVIX in April 2008, by NSE.
August 2008 saw introduction of Currency derivatives in India with the
launch of Currency Futures in USD INR by NSE. Interest Rate Futures was
introduced for the first time in India by NSE on 31st August 2009, exactly
after one year of the launch of Currency Futures.With this, now both the
retail and institutional investors can participate in equities, equity
derivatives, currency and interest rate derivatives, giving them wide range of
products to take care of their evolving needs.
Trading at NSE
Merchant Banking
Introduction
The merchant bankers are those financial intermediaries involved with the
activity of transferring capital funds to those borrowers who are interested in
borrowing.
They guarantee the success of issues by underwriting them.
Merchant Banks are popularly known as “issuing and accepting
houses”.
Unlike in the past, their activities are now primarily non-fund based
(Fee based).
They offer a package of financial services.
Merchant banks offer consultancy services for mergers & acquisitions and
financial restructuring, and the associated financing (raising the necessary
funds). Merchant banks are banks that specialize in activities that facilitate
trade and commerce. This typically involves international finance, long term
loans to companies and underwriting. Merchant banks do not offer usual
banking services to the general public
Merchant banking activity was formally initiated into the Indian capital
Markets when Grindlays bank received the license from reserve bank in
1967. Grindlays started with management of capital issues, recognized the
needs of emerging class of Entrepreneurs for diverse financial services
ranging from production planning and system design to market research.
Even it provides management consulting services to meet the Requirements
of small and medium sector rather than large sector. Citibank Setup its
merchant banking division in 1970. The various tasks performed by this
divisions namely assisting new entrepreneur, evaluating new projects,
raising funds through borrowing and issuing equity. Indian banks Started
banking Services as a part of multiple services they offer to their clients
from 1972. State bank of India started the merchant banking division in
1972. In the Initial years the SBI's objective was to render corporate advice
And Assistance to small and medium entrepreneurs. Merchant banking
activities is of course organized and undertaken in several forms.
Commercial banks and foreign development finance institutions have
organized them through formation divisions, nationalized banks have formed
subsidiaries companies and share brokers and consultancies constituted
themselves into public limited companies or registered themselves as private
limited Companies. Some merchant banking outfits have entered into
collaboration with merchant bankers abroad with several branches
The capital requirement depends upon the category. The minimum net worth
requirement
for acting as merchant banker is given below:
Category I – Rs. 5 crores
Category II – Rs. 50 lakh
Category III – Rs. 20 lakh
Category IV – Rs. Nil
Costs of Public Issue: The cost of public issue is normally between 8 and
12 per cent depending on the size of the issue and the level of marketing
effort. The important expenses incurred for a public issue are Underwriting
Expenses, Brokerage, Fees to the Managers of the Issue, Fees for Registrars
to the Issue, Printing Expenses, Postage Expenses, Advertising and Publicity
Expenses, Listing fees, Stamp duty. In addition to the above procedural
matter, the most important issue relates to the pricing of the issue. The
merchant banker has to see that the issue is priced properly.
INTRODUCTION:
1. Merchant Banking
2. Commercial Banking
3. Investments
4. Bankers to Issue - Escrow Bankers
5. Underwriting
6. Loan Syndication
SPECTRUM OF SERVICES:
Equity Issue (Public/Rights) Management
Debt Issue Management
Private Placements
Project Appraisals
Monitoring Agency Assignments
IPO Funding
Security Trustee Services
Agriculture Consultancy Services
Corporate Advisory Services
Mergers and Acquisitions
Buy Back Assignments
Share Valuations
Syndication
ESOS Certification
Project Appraisal
Capital structuring
Preparation of offer document
Tie Ups (placement)
Formalities with SEBI / Stock Exchange / ROC, etc.
Underwriting
Promotion /Marketing of Issues
Collecting Banker / Banker to an issue
Post Issue Management
Refund Bankers
Debenture Trusteeship
Registrar & Transfer Agency (our Subsidiary)
CONCLUSION
The merchant banker plays a vital role in channelising the financial
surplus of the society into productive investment avenues. Hence before
selecting a merchant banker, one must decide, the services for which he is
being approached. Selecting the right intermediary who has the necessary
skills to meet the requirements of the client will ensure success.
It can be said that this project helped me to understand every details
about Merchant Banking and in future how it’s going to get emerged in the
Indian economy. Hence, Merchant Banking can be considered as essential
financial body in Indian financial system.
Market development is predicted on a sound, fair and transparent regulatory
framework. To sustain the growth of the market and crystallize the growing
awareness and interest into a committed, discerning and growing awareness
and interest into an essential to remove the trading malpractice and structural
inadequacies prevailing in the market, and provide the investors an
organized, well regulated.
Since then, DRs have spread to other parts of the globe in the form of global
depositary receipts (GDRs) (the other most common type of DR), European
DRs and international DRs. ADRs are typically traded on a U.S. national
stock exchange, such as the New York Stock Exchange (NYSE) or the
American Stock Exchange, while GDRs are commonly listed on European
stock exchanges such as the London Stock Exchange. Both ADRs and
GDRs are usually denominated in U.S. dollars, but can also be denominated
in Euros.
Background of ADR
Unsponsored shares
Unsponsored shares are a form of Level I ADRs that trade on the over-the-
counter (OTC) market. These shares are issued in accordance with market
demand, and the foreign company has no formal agreement with a
depositary bank. Unsponsored ADRs are often issued by more than one
depositary bank. Each depositary services only the ADRs it has issued.
Due to a recent SEC rule change making it easier to issue Level I depositary
receipts, both sponsored and unsponsored, hundreds of new ADRs have
been issued since the rule came into effect in October 2008. The majority of
these were unsponsored Level I ADRs, and now approximately half of all
ADR programs in existence are unsponsored.
Level I (OTC)
Level 1 depositary receipts are the lowest level of sponsored ADRs that can
be issued. When a company issues sponsored ADRs, it has one designated
depositary who also acts as its transfer agent.
Level 1 shares can only be traded on the OTC market and the company has
minimal reporting requirements with the U.S. Securities and Exchange
Commission (SEC). The company is not required to issue quarterly or
annual reports in compliance with U.S. GAAP. However, the company must
have a security listed on one or more stock exchange in a foreign jurisdiction
and must publish in English on its website its annual report in the form
required by the laws of the country of incorporation, organization or
domicile.
Level II (listed)
Level 2 depositary receipt programs are more complicated for a foreign
company. When a foreign company wants to set up a Level 2 program, it
must file a registration statement with the US SEC and is under SEC
regulation. In addition, the company is required to file a Form 20-F
annually. Form 20-F is the basic equivalent of an annual report (Form 10-K)
for a U.S. company. In their filings, the company is required to follow U.S.
GAAP standards or IFRS as published by the IASB.
The advantage that the company has by upgrading their program to Level 2
is that the shares can be listed on a U.S. stock exchange. These exchanges
include the New York Stock Exchange (NYSE), NASDAQ, and the
American Stock Exchange (AMEX).
While listed on these exchanges, the company must meet the exchange’s
listing requirements. If it fails to do so, it may be delisted and forced to
downgrade its ADR program.
Setting up a Level 3 program means that the foreign company is not only
taking steps to permit shares from its home market to be deposited into an
ADR program and traded in the U.S.; it is actually issuing shares to raise
capital. In accordance with this offering, the company is required to file a
Form F-1, which is the format for an Offering Prospectus for the shares.
They also must file a Form 20-F annually and must adhere to U.S. GAAP
standards or IFRS as published by the IASB. In addition, any material
information given to shareholders in the home market, must be filed with the
SEC through Form 6K.
Foreign companies with Level 3 programs will often issue materials that are
more informative and are more accommodating to their U.S. shareholders
because they rely on them for capital. Overall, foreign companies with a
Level 3 program set up are the easiest on which to find information.
Of course, even though they trade in US dollars and can, at least on the
surface, closely mimic the look and feel of American stocks, ADRs come
with their own set of special considerations to keep in mind.
Currency risk: If the value of the US dollar rises against the value of the
company's home currency, a good deal of the company's intrinsic profits
might be wiped out in translation. Conversely, if the US dollar weakens
against the company's home currency, any profits it makes will be enhanced
for a US owner. For more information on how this could damage or inflate
your results, read The Danger of Investing in International Bonds.
Political risk: ADR status does not insulate a company's stock from the
inherent risk of its home country's political stability. Revolution,
nationalization, currency collapse or other potential disasters may be greater
risk factors in other parts of the world than in the US, and those risks will be
clearly translated through any ADR that originates in an affected nation.
Inflation risk: Countries around the globe may be more, or less, prone to
inflation than the US economy is at any given time. Those with higher
inflation rates may find it more difficult to post profits to an US owner,
regardless of the company's underlying health.
In other words, ADRs are just what they seem: a representation of a foreign
stock, rather than an actual holding in the company. Because of all of the
considerations listed above, an ADR of a foreign company in the US. may
trade a little ahead or a little behind the price the company commands in its
own currency in its own home base. But it's safe to say that buying an ADR
is the closest an American investor can come to participating directly in the
rest of the world's
The custodian bank is located in the home country of the issuer and holds
the underlying corporate shares of the GDR for safekeeping. The custodian
bank is generally selected by the depositary bank rather than the issuer, and
collects and remits dividends and forwards notices received from the issuer
to the depositary bank, which then sends them to the GDR holders. The
custodian bank also increases or decreases the number of company shares
held per instructions from the depositary bank.
Other benefits include easier trading, the payment of dividends in the GDR
currency, which is usually the United States dollar (USD), and corporate
notifications, such as shareholders’ meetings and rights offerings, are in
English. Another major benefit to GDRs is that institutional investors can
buy them, even when they may be restricted by law or investment objective
from buying shares of foreign companies.
GDRs are liquid because the supply and demand can be regulated by
creating or canceling GDR shares.
GDRs do, however, have foreign exchange risk if the currency of the issuer
is different from the currency of the GDR, which is usually USD.
GRD Market
Most GDRs are priced so that they are competitive with shares of like
companies trading on the same exchanges as the GDRs. Typically, GDR
prices range from $7 - $20. If the GDR price moves too far from the
optimum range, more GDRs will either be created or canceled to bring the
GDR price back within the optimum range determined by the depositary
bank. Hence, more GDRs will be created to meet increasing demand or more
will be canceled if demand is lacking or the price of the underlying company
shares rises significantly.
Most of the factors governing GDR prices are the same that affects stocks:
company fundamentals and track record, relative valuations and analysts’
recommendations, and market conditions. The international status of the
company is also a major factor.
On most exchanges GDRs trade just like stocks, and also have a T+3
settlement time in most jurisdictions, where a trade must be settled in 3
business days of the trading exchange.
The exchanges on which the GDR trades are chosen by the company.
Currently, the stock exchanges trading GDRs are the:
Many GDR issuers also issue privately placed ADRs to tap institutional
investors in the United States. The market for a GDR program is broadened
by including a 144A private placement offering to Qualified Institutional
Investors in the United States. An offering based on SEC Rule 144A
eliminates the need to register the offering under United States security laws,
thus saving both time and expense. However, a 144A offering must, under
Rule 12g3-2(b), provide a home country disclosure in English to the SEC or
the information must be posted on the company’s website.
Indian Depository Receipt (IDR)
Definition
2)Approvals for issue of IDRs : IDR issue will require approval from SEBI
and application can be made for this purpose 90 days before the issue
opening date.
Profits/dividend : Such company should also have earned profits in the last
5 years and should have declared dividend of at least 10% each year during
this period.
Debt equity ratio : The pre-issue debt equity ratio of such company should
not be more than 2:1.
Extent of issue : The issue during a particular year should not exceed 15%
of the paid up capital plus free reserves.
Eligible companies resident outside India are allowed to issue IDRs through
a Domestic Depository pursuant to Circular No. SEBI / CFD / DIL / DIP /
20 /2006 / 3 / 4 dated April 3, 2006 and the provisions of Issue of Capital
and Disclosure Requirements (“ICDR”) Regulations 2009 (which replaced
the SEBI (Disclosure and Investor Protection) Guidelines, 2000). In
addition, the Circular and the ICDR Regulations 2009, permit persons
resident in India and outside India to purchase, possess, transfer and redeem
IDRs.
In addition, the regulations state that in the case of raising of funds through
the issuance of IDRs by financial/banking companies having a presence in
India, either through a branch or subsidiary, the approval of the sectoral
regulator(s) should be obtained before the issuance of IDRs. Therefore, the
approval of the Reserve Bank of India (RBI) will need to be obtained for the
Standard Chartered IDR.
The SEBI guidelines permit only those companies listed in their home
market for at least three years and which have been profitable for three of
the preceding five years to make IDR issues. As the issuance of the IDR by
SCP would be the first IDR ever undertaken, there will be a number of
challenges including the structure of the instrument, how one trades in it,
what kind of returns can be made on the instrument, and what are the risks
involved.
No resident Indian individual can hold more than $200,000 worth of foreign
securities purchased per year as per Indian foreign exchange regulations.
However, this will not be applicable for IDRs which gives Indian residents
the chance to invest in an Indian listed foreign entity.
There is the possibility of IDR issues being undersubscribed if they are not
well marketed or fail to catch the imagination of investors. In addition, the
challenges mentioned below are certain challenges with respect to the
issuance of IDRs.
5. Risks: What risks are involved given that the same shares would be
simultaneously trading in London and Hong Kong.
7. Voting Rights: It is not entirely clear whether IDR holders will have
voting rights or not – the SEBI guidelines do not specifically mention
voting rights, it leaves that to the discretion of the issuer.
Tax issues:
Related to IDRs