Depositary receipts:

A depositary receipt (DR) is a type of negotiable (transferable) financial security that is traded on
a local stock exchange but represents a security, usually in the form of equity that is issued by a
foreign publicly listed company. The DR, which is a physical certificate, allows investors to hold
shares in equity of other countries.

Depositary receipts (DRs) are certificates that represent an ownership interest in the
ordinary shares of stock of a company, but that are marketed outside of the company’s
home country to increase its visibility in the world market and to access a greater amount
of investment capital in other countries. Depositary receipts are structured to resemble
typical stocks on the exchanges that they trade so that foreigners can buy an interest in the
company without worrying about differences in currency, accounting practices, or
language barriers, or be concerned about the other risks in investing in foreign stock
directly.

Types Of Dr:

There are a variety of DR program types. These can be divided into capital raising and non
capital raising structures. The type of program used will depend on the requirements of the
issuer, the features of the issuer's domestic market and on investor attitudes.
A third type of DR program is known as "unsponsored". This differs from other types in that the
company whose shares are represented by unsponsored DRs is not involved in setting up the
program.

Indian Depository Receipts:

Recently SEBI has issued guidelines for foreign companies who wish to raise capital in India by
issuing Indian Depository Receipts. Thus, IDRs will be transferable securities to be listed on
Indian stock exchanges in the form of depository receipts. Such IDRs will be created by a
Domestic Depositories in India against the underlying equity shares of the issuing company
which is incorporated outside India.
Though IDRs will be freely priced yet in the prospectus the issue price has to be justified. Each
IDR will represent a certain number of shares of the foreign company. The shares will not be
listed in India, but have to be listed in the home country.
The IDRs will allow the Indian investors to tap the opportunities in stocks of foreign companies
and that too without the risk of investing directly which may not be too friendly. Thus, now
Indian investors will have easy access to international capital market.
Normally, the DR are allowed to be exchanged for the underlying shares held by the custodian
and sold in the home country and vice-versa. However, in the case of IDRs, automatic fungibility
is not permitted.
SEBI has issued guidelines for issuance of IDRs in April, 2006; some of the major norms for
issuance of IDRs are as follows. SEBI has set Rs 50 crore as the lower limit for the IDRs to be
issued by the Indian companies. Moreover, the minimum investment required in the IDR issue by
the investors has been fixed at Rs two lakh. Non-Resident Indians and Foreign Institutional
Investors (FIIs) have not been allowed to purchase or possess IDRs without special permission
from the Reserve Bank of India (RBI). Also, the IDR issuing company should have good track
record with respect to securities market regulations and companies not meeting the criteria will
not be allowed to raise funds from the domestic market If the IDR issuer fails to receive
minimum 90 per cent subscription on the date of closure of the issue, or the subscription level
later falls below 90 per cent due to cheques not being honoured or withdrawal of applications, the
company has to refund the entire subscription amount received, SEBI said. Also, in case of delay
beyond eight days after the company becomes liable to pay the amount, the company shall pay
interest at the rate of 15 per cent per annum for the period of delay.
American Depository receipts:

An American Depositary Receipt (abbreviated ADR) represents ownership in the shares of a non-
U.S. company that trades in U.S. financial markets. The stock of many non-US companies trade
on US stock exchanges through the use of ADRs. ADRs enable U.S. investors to buy shares in
foreign companies without the hazards or inconveniences of cross-border & cross-currency
transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like
the shares of US-based companies.

Each ADR is issued by a U.S. depository bank and can represent a fraction of a share, a single
share, or multiple shares of the foreign stock. An owner of an ADR has the right to obtain the
foreign stock it represents, but US investors usually find it more convenient simply to own the
ADR. The price of an ADR often tracks the price of the foreign stock in its home market,
adjusted for the ratio of ADRs to foreign company shares. In the case of companies incorporated
in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge
by the UK government.

Depositary banks have various responsibilities to an ADR shareholder and to the non-US
company the ADR represents. The first ADR was introduced by JPMorgan in 1927, for the
British retailer Selfridges. There are currently four major commercial banks that provide
depositary bank services - JPMorgan, Citibank, Deutsche Bank and the Bank of New York
Mellon.

Individual shares of a foreign corporation represented by an ADR are called American Depositary
Shares (ADS).

Advantages of ADR:

 A jury is not involved. Juries are unpredictable and often amplify or decrease damage
awards purely according to whether they like the parties. Juries have awarded claimants
damages that are well above what they would have received through alternative dispute
resolution; and they have also done the opposite. Basically, avoiding juries means that
both parties are more likely to get reasonable damages if damages are due.
 Expenses are kept down. Attorneys and expert witnesses are expensive, meaning
litigating a case can easily run up obscene bills. Alternative dispute resolution offers the
benefit of getting the issue resolved quicker than would occur at trial – and that means
less money spent for both sides.
 ADR is speedy. Trials are lengthy, without exception. In many jurisdictions it could take
years before you even get to begin arguing your case before a judge, much less get a
verdict. There are better things you could be doing with your time.
 The results can be confidential. The parties can agree that information disclosed during
negotiations cannot be used later in later proceedings. The final outcome can also be
made private if the parties wish. Courts do not offer this -- trial are open to the public,
which means everyone will know your business. That is why so many high-profile cases
have “out of court settlements”.
Disadvantages of ADR:

 There is no guaranteed resolution. With the exception of arbitration, alternative dispute

resolution processes do not always lead to a resolution. That means it is possible that you
could invest the time and money in trying to resolve the dispute out-of-court and still end
up having to go to court.
 Arbitration decisions are final. With few exceptions, the decision of a neutral arbitrator
cannot be appealed. Decisions of a court, on the other hand, usually can be appealed to a
higher court.
 Participation could be perceived as weakness. While the option of making the proceeding
confidential addresses some of this concern, some parties still want to go to court “just on
principle.”

Is it to one’s advantage to use alternate dispute resolution? In many cases, the answer is a
resounding “Yes.” However, there is no absolute answer. Instead, the circumstances of each case
need to be weighed separately. Knowing one’s options is an important first step.

Characteristics of ADR:

ADRs are negotiable certificates or financial instruments that provide American investors
ownership rights to stocks or bonds in a foreign country. This instrument is created when a
depository bank, that holds the underlying securities in the country of their origin, issues the
negotiable certificate, called an ADR. An individual ADR may represent either a number of
ordinary shares or a fraction of a share of the underlying stock. The ADR was first introduced as
an investment vehicle in 1927 (by a predecessor of the Morgan Guaranty Trust Company) to
address many of the difficulties of trading and owning foreign stocks. Morgan Guaranty, along
with several other money centers--Bankers Trust, The Bank of New York, Chase Manhattan and
Chemical Bank -- are the dominant intermediaries in this market.

It is worthwhile to note that banks issue two kinds of ADRs -- sponsored and unsponsored. For
sponsored ADRs, a foreign bank requests the depository bank to create ADRs and the company
pays for the bank's services. These ADRs are registered with the Securities and Exchange
Commission (SEC) which subjects the foreign company to financial disclosure requirements
similar to those applicable to U.S. companies. Holders of sponsored ADRs have the same voting
rights as do the ordinary shareholders in the home market and receive English language
translations of company information made public in the home country.

Unsponsored ADRs, on the other hand, are independently set up by one or more depository bank,
usually with the consent of the relevant foreign company. A key characteristic of the unsponsored
ADRs is that they are not registered with the SEC, and thus provide U.S. investors with reduced
disclosure. For ADRs to trade on New York or American Stock Exchange, they must be
sponsored. Unsponsored ADRs can trade on NASDAQ or in the 'pink sheet' market. If an ADR is
sponsored, it implies that the stock issuing company has selected a single U.S. bank to serve as
the depositary and transfer agent for its shares.
The majority of foreign stocks traded in the U.S. today are ADRs. While these represent
companies in all major industries domiciled in over 45 countries; British, Japanese, and
Australian issues dominate the depository market. Of the more than 1,000 ADRs that currently
trade in the U.S. financial markets, roughly 25% are traded on exchanges or with NASDAQ, and
approximately 75 % are traded in the non-NASDAQ over-the-counter market, which is composed
of the OTC Bulletin Board and the "pink sheets." Sponsored ADRs, however, are more popular
with both investors and issuers.

It should be kept in mind that while ADRs trade in dollars in the U.S. market, investors are
exposed to the same currency risk as an ordinary stock traded directly in the foreign market.
Thus, if the dollar appreciates relative to the home country currency, investors will experience a
foreign currency exchange loss. Consequently, currency risk has the effect of making the returns
on ADRs more volatile.

The purpose of the ADRs, in general, is to make investing abroad both simpler and less costly for
the average individual, who has neither the expertise of large institutional investors nor trades in
the volumes necessary to reduce per share costs. Investors could also diversify their portfolios
with foreign securities by purchasing open-end and closed-end international mutual funds.
However, investors should be aware of differences between ADRs and mutual funds. First,
international funds provide exposure to a much broader range of foreign companies because a
substantial number of countries have only one or a few ADRs, which typically consist of a
country's most widely-held and actively traded issues. Second, whereas international fund
managers can hedge against currency risk, it may be impractical or difficult for an individual to
do so.

Despite the advantages associated with international mutual funds, ADRs are still attractive for a
variety of reasons. First, ADRs may be a good alternative to gain access to a particular market
when the single-country closed-end funds, investing in the particular market, are trading at
substantial premiums relative to their net asset values. Moreover, individuals can hold ADRs as
long as they wish, thereby deferring the realization of capital gains, whereas with mutual funds,
the gains may be realized and distributed at times that are not particularly advantageous from the
individual's tax perspective. Finally, individuals invested in ADRs are able to avoid the
management fees associated with investment companies.
Procedures And Mechanics Of Issuing Adr:

1) 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.

2) The foreign, or local shares, remain on deposit with the Depositary’s custodian
issuer’s home market.

3) 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.

4) 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.
Global Depository receipt:

A global depositary receipt (GDR) is similar to an ADR, but is a depositary receipt sold outside
of the United States and outside of the home country of the issuing company. Most GDRs are,
regardless of the geographic market, denominated in United States dollars, although some trade in
Euros or British sterling. There are more than 900 GDR’s listed on exchanges worldwide, with
more than 2,100 issuers from 80 countries.

Although ADRs were the most prevalent form of depositary receipts, the number of GDRs has
recently surpassed ADRs because of the lower expense and time savings in issuing GDRs,
especially on the London and Luxembourg stock exchanges.

GDR Advantages and Disadvantages

GDRs, like ADRs, allow investors to invest in foreign companies without worrying about foreign
trading practices, different laws, accounting rules, or cross-border transactions. GDRs offer most
of the same corporate rights, especially voting rights, to the holders of GDRs that investors of the
underlying securities enjoy.

Other benefits include easier trading, the payment of dividends in the GDR currency, which is
usually the United States dollar (USD), 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 also overcome limits on restrictions on foreign ownership or the movement of capital that
may be imposed by the country of the corporate issuer, avoids risky settlement procedures, and
eliminates local or transfer taxes that would otherwise be due if the company’s shares were
bought or sold directly. There are also no foreign custody fees, which can range from 10 to 35
basis points per year for foreign stock bought directly.

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

The main benefit to GDR issuance to the company is increased visibility in the target markets,
which usually garners increased research coverage in the new markets; a larger and more diverse
shareholder base; and the ability to raise more capital in international markets.
 The Details of a GDR Purchase by An Investor:

1. An investor calls her broker to buy GDRs for a particular company.

2. The broker fills the order by either buying the GDRs on any of the exchanges that it
trades, or by buying ordinary company shares in the home market of the company by using a
broker in the issuer's country. The foreign broker then delivers the shares to the custodian
bank.
3. The investor’s broker notifies the depositary bank that ordinary shares have been
purchased in the issuer's market and will be delivered to the custodian bank and requests
depositary shares to be issued in the investor’s account.
4. The custodian notifies the depositary bank that the shares have been credited to the
depositary bank’s account.
5. The depositary bank notifies the investor’s broker that the GDRs have been delivered.
6. The broker then debits the account of the investor for the GDR issuance fee.

The Details of a GDR Sale by an Investor:

1. An investor instructs his broker to sell his GDRs. The investor must deliver the shares
within 3 business days if the shares are not in the street name of the broker.
2. The broker can either sell the shares on the exchanges where the GDR trades, or the
GDRs can be canceled, and converted into the ordinary shares of the issuing company.
3. If the broker sells the shares on an exchange, then the broker uses the services of a
broker in the issuer's market.
4. If, instead, the shares are canceled, then the broker will deliver the shares to the
depositary bank for cancellation and provide instructions for the delivery of the ordinary
shares of the company issuer. The investor pays the cancelation fees and any other
applicable fees.
5. The depositary bank instructs the custodian bank to deliver the ordinary shares to the
investor’s broker, who then credits the account of its customer.

Characteristics of GDR:

There are two very important characteristics of Global Depository Receipts (GDRs), which
are vital to their successful existence. First, the Global Depository Receipt shares trading on
the Frankfurt Stock Exchange can be exchanged for the shares they represent in their home
country. In fact, all Global Depository Receipts, whether American Depository Receipts or
Global Depository Receipts, share this characteristic. This means that the Frankfurt Stock
Exchange traded Global Depository Receipts can be surrendered to the issuing bank,
whereupon the shares they represent will be released to the investor in their home country.
This ‘exchange’ facility is important as it ensures a price link between the markets of the two
countries, which brings us to the second important characteristic of Global Depository
Receipts, which is that the prices of that same share trading in the
 US/Canada/China/Australian/etc. and Germany on the Frankfurt Stock Exchange, remain
linked, albeit in different currencies.
Who Can Issue Adr/Gdr?
A company can issue ADR/GDR, if it is eligible to issue shares to person resident outside India
under the FDI Scheme.

Who Cannot Issue Adr/Gdr?

1) 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 the Securities and Exchange Board of India (SEBI) will
not be eligible to issue ADRs/GDRs.

2) Erstwhile OCBs who are not eligible to invest in India through the portfolio route
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.