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or certificate (by whatever name it is called) created by the Overseas Depositary Bank outside India and issued to non-resident investors against the issue of ordinary shares or Foreign Currency Convertible Bonds of issuing company.” A GDR issued in America is an American Depositary Receipt (ADR). Issue of equity in the form of GDR/ADR is possible only for the few top notch corporates of the country. Among the Indian companies, Reliance Industries Limited was the first company to raise funds through a GDR issue. Salient Features of a GDR • • • • These are special instruments which are created from ordinary shares to generate funds abroad The shares of a company are deposited with a bank which will issue GDRs and ADRs of equivalent value in a foreign currency (normally dollars) The holder of a GDR does not have voting rights The proceeds are collected in foreign currency thus enabling the issuer to utilize the same for meeting the foreign exchange component of project cost, repayment of foreign currency loans, meeting overseas commitments and for similar other purposes. Dividends are paid in Indian rupees due to which the foreign exchange risk or currency risk is placed totally on the investor It has less exchange risk as compared to foreign currency borrowings or foreign currency bonds. The GDRs are usually listed at the Luxembourg Stock Exchange as also traded at two other places besides the place of listing e.g. on the OTC market in London and on the private placement market in USA. An investor who wants to cancel his GDR may do so by advising the depositary to request the custodian to release his underlying shares and relinquishing his GDRs in lieu of shares held by the Custodian. The GDR can be canceled only after a cooling-period of 45 days. The depositary will instruct the custodian about cancellation of the GDR and to release the corresponding shares, collect the sales proceeds and remit the same abroad. Marketing of the GDR issue is done by the investment banks that manage the road shows, which are presentations made to potential investors. During the road shows, an indication of the investor response is obtained. The issuer fixes the range of the issue price and finally decides on the issue price after assessing the investor response at the road shows. Cost of floating an ADR or GDR issue is quite high and is only justifiable if the amount of finance to be raised is quite large
• • • •
Sponsored ADR Sponsored ADR is an ADR created by a non-US company working directly with a depositary bank. An unsponsored ADR is usually the one created by a bank without the participation or consent of the non-US company. Unsponsored ADR can trade only in the over-the-counter market.
00 70.# Bombay Dye BSES Ltd Century Textiles CESC Core Parent Crompton Greaves DCW Dr.’ • • Indian GDR THE COMPREHENSIVE GDR LISTING # euro convertible bond **adjusted for bonus GDR Companies Industry Segregation Date Of GDR Issue 03-Feb-94 20-Mar-95 27-Oct-94 27-May-94 16-Nov-93 04-Mar-96 21-Sep-94 14-Apr-94 21-Jun-94 02-Jul-96 19-May-94 18-Jul-94 07-Oct-94 07-Jul-94 19-Jul-94 30-Nov-95 Size Shares GDR Of GDR per Issue Issue GDR Price **(US$) US $ Mill 125. but the underlying shares are held in the depositary bank are not registered with the SEC.0 1. Level II ADRs are those in which both the ADRs and the underlying shares (that already trade in the foreign company’s domestic market) are registered with the SEC. Hotels EID Parry Finolex Cab Flex Industries Textiles Autos Autos Paper Textiles Power Diversified Power Pharma Electrical Diversified Pharma Hotels Fertiliser Cables Packaging .0 1.0 9.Levels of ADRs There are three levels of ADRs depending on their adherence to Generally Accepted Accounting Principes • For a Level I ADR program the receipts issued in the US are registered with the SEC.89 8.60 8. Reddy's E.00 30. I.00 40.00 25.00 137.00 1.00 125.00 100.77 110.0 1.0 2. They must partially adhere to Generally Accepted Accounting Principles (GAAP) used in the USA.0 1.20 14.56 13.77 9.00 55.0 1.00 50.55 11.40 254.00 10.0 1.0 3.16m 9.0 5.0 1.0 2.00 50. Level III ADRs must adhere fully to the GAAP and the underlying shares held at the Depositary Bank are typically new shares not those already trading in the foreign company’s domestic currency.0 1.79 16.05 Arvind Mills Ashok Leyland Bajaj Auto Ballarpur Ind.00 125. They must also partially adhere to the Generally Accepted Accounting Principles.0 1.30 8.0 3.00 48.00 40.39 16.67 12.78 12.0 1.60 7.00 35.
0 1.61 16.46 11.0 5.51 11.38 85.94 12.00 90.65 8.00 68.0 1.0 10.98 20.05 4.0 1.00 72.0 1.00 100 5.35 23.00 300.N.00 90.K.0 5.0 15.0 0.00 135.00 100.0 .0 2.23 6.00 76.75 19.0 4.00 2.01 4.0 10.18 21.0 5.0 2.35 4.96 1.00 45.11 22.13 16.70 125. India Cements Indian Alum.5 3.37 11. Aluminium Aluminium Diversified Cement Aluminium Hotels Diversified Fertiliser Textiles Finance Finance IT Petrochemicals Cigarettes Diversified Plastics Textiles Diversified Diversified Diversified Autos Telecom Diversified Steel Hotels Pharma Textile Diversified Diversified Diversified 17-Feb-94 06-Oct-94 04-Nov-99 04-Mar-94 25-Nov-92 09-Jun-94 26-Nov-93 02-Aug-95 22-Jul-93 08-Jul-94 21-Sep-94 11-Oct-94 22-Feb-94 28-Apr-95 25-Jan-94 18-Jan-94 21-Mar-96 02-Aug-96 22-Sep-99 11-Mar-99 08-Dec-94 13-Oct-93 17-Oct-94 25-Feb-94 29-Jul-94 31-Jul-96V 18-Nov-94 01-Mar-96 30-Nov-93 04-Dec-97 07-Nov-94 03-Mar-94 14-Dec-94 29-Jun-94 09-Nov-94 27-May-92 15-Feb-94 18-Oct-99 100.00 150.C GAIL Garden Silk Grasim (1st) Grasim (2nd) Guj Ambuja # Himachal Futuri Hindalco (1st) Hindalco (2nd) Hindustan Dev.80 34 13.0 1.00 30.0 15.50 9.0 1. Corp Jain Irrig JCT Ltd.00 100.00 150.0 2.50 23.F.50 5.00 30.0 1.0 1.73 16.60 15.0 1.00 61.00 60.00 50.25 125.53 47.958 3.36 12.0 1.00 80.00 100.75 9.0 1.75 418.50 45.0 2.00 86.77 16.30 10.67 26.00 30.60 16. Indian Hotels Indian Rayon Indo Gulf Indo Rama ICICI ICICI (ADR) Infosys IPCL ITC J.0 1.00 11.00 230.00 60.0 2.0 1.0 1.0 10.00 315 70.87 7.0 2.28 12. Kesoram Ind L & T (1st) L & T (2nd) Mah & Mah MTNL NEPC Micon Nippon Denro# Oriental Hotels Ranbaxy Labs Raymond Woolen Reliance Reliance (2nd) Reliance Petroleum Shipping Fertiliser Oil & Refineries Textiles Diversified Diversified Cement Telecomm.70 15.00 50.38 10.00 74.5 1.00 100.95 9.85 55.0 5.G.E. Shipping G.0 6.0 1.0 1.0 1.0 1.
whose direct foreign investment after a proposed GDRs/ADRs/FCCBs is likely to exceed 50 per cent/51 per cent/74 per cent as the case may be.00 527. Foreign Currency Convertible Bonds (FCCBs) is treated as Foreign Direct Investment.0 1.0 14.35 Global Depository Receipts(GDR) / American Deposit Receipts (ADR) / Foreign Currency Convertible Bonds (FCCB) Foreign Investment through ADRs/GDRs.L. Indian companies are allowed to raise equity capital in the international market through the issue of GDR/ADRs/FCCBs.15 14.00 8.00 50.00 45.0 1.0 100.00 115.0 1.10 13.0 1.37 11. There are no end-use restrictions on GDRs/ADRs issue proceeds.86 710. There is no such restriction because a company engaged in the manufacture of items covered under Automatic Route is likely to exceed the percentage limits under Automatic Route. The FCCB issue proceeds need to conform to external commercial borrowing end use requirements. telecommunication. An applicant company seeking Government's approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of 3 years.00 15.I. except for an express ban on investment in real estate and stock markets.00 45.L.97 18. In addition.00 40.0 5. ports.95 100.60 55.S.A. petroleum exploration and refining.56 6.0 12.15 17.0 2.50 10.0 1.00 75.I.75 14.00 90.00 369. 25 per cent of the FCCB proceeds can be used for general corporate restructuring.E.64 9. Pesticides Cables Electronics Telecomm.0 1.0 0.70 8.5 1.0 1.58 20.0 5. Satyam Infoway S. Pharma 07-Mar-96 19-Oct-99 14-Oct-94 28-Jul-94 01-Aug-94 28-Sep-93 03-Oct-96 22-Dec-93 22-Feb-94 15-Jul-94 06-Aug-96 20-May-94 25-Feb-94 06-Oct-94 26-Jan-94 24-Mar-97 25-Feb-94 125.00 35.0 3.00 65. This condition can be relaxed for infrastructure projects such as power generation. There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. Sanghi Poly SIV Ind SPIC SBI Sterlite India# Tata Electric Telco (1st) Telco (2nd) Tube Invest United Phos. These are not subject to any ceilings on investment. VSNL Wockhardt Steel IT Diversified Textiles Textiles Fertiliser Banking Diversified Power Autos Autos Cycles & Acc.00 200.00 75.00 65. Usha Beltron Videocon Int.25 6. airports and roads.93 14.0 1.0 1. .
issued operative guidelines for the 2 way fungibility of ADR / GDR. whichever is higher. Earlier. while extending tax incentives to non-resident investors. then. GDR norms further relaxed • Indian bidders allowed to raise funds through ADRs. to the extent of ADR / GDR which have been converted into equity shares and sold in the local market. This limit has now been increased to 49% from the present 40%. Once such conversion took place. such ADR / GDR would be converted into shares of the Indian Company. this facility was available only to Indian companies in certain sectors.k. • Any Indian company which has issued ADRs/GDRs may acquire shares of foreign companies engaged in the same area of core activity upto $100 million or an amount equivalent to ten times of their exports in a year. The present rules of the RBI make such reconversion possible. it was not possible to reconvert the equity shares into ADR / GDR. however. removal of the existing limit of $20. • Two way fungibility in ADR/GDR issues of Indian companies has been introduced subject to sectoral caps wherever applicable. and if the holder wanted to obtain the underlying equity shares of the Indian Company. vide APDIR Circular No: 21 dated February 13th 2002. once a company issued ADR / GDR. • Conversion and reconversion (a. It can be increased to 40% with approval of general body of the shareholders by a special resolution. • Companies have been allowed to invest 100 per cent of the proceeds of ADR/GDR issues (as against the earlier ceiling of 50%) for acquisitions of foreign companies and direct investments in joint ventures and wholly-owned subsidiaries overseas. The RBI has now. allowed.ADR. be governed by the Foreign Exchange Management Act notified by the Reserve Bank of India in March 2001. two-way conversion or fungibility) of shares of Indian companies into depository receipts listed in foreign bourses.000 for remittance under the employees stock option scheme (ESOP) and permitting remittance up to $ 1 million from proceeds of sales of assets here. GDRs and external commercial borrowings (ECBs) for acquiring shares of PSEs in the first stage and buying shares from the market during the open offer in the second stage. The re-coversion of ADRs/GDRs would. On Fungibility Two-way fungibility of ADRs/GDRs issued by Indian Companies was permitted by the Government of India and the RBI.a. • Permission to retain ADR/GDR proceeds abroad for future foreign exchange requirements. This would take place in the following manner: . Earlier. • FIIs can invest in a company under the portfolio investment route upto 24 per cent of the paid-up capital of the company. Stock brokers in India can now purchase shares and deposit these with the Indian custodian for issue of ADRs/GDRs by the overseas depository to the extent of the ADRs/GDRs that have been converted into underlying shares.
and aid speedy price discovery. A liquid market is said to have depth if buy and sell orders exist . The Central bank has said that since the demand for re-conversion of shares into ADRs/GDRs would be from overseas investors and not the company. the acquisition of shares on behalf of the overseas investors through the intermediary would fall within the regulatory purview of Securities and Exchange Board of India (SEBI). the re-conversion of shares into ADRs/GDRs will be distinct from portfolio investments by foreign institutional investors (FIIs). As secondary market operations. all SEBI registered brokers will be able to act as intermediaries in the two-way fungibility of ADRs/GDRs. Besides. Benefits of fungibility The key benefits that could accrue to investors (ADR/GDR holders and domestic investors) and companies from two-way fungibility are: improvement in liquidity and elimination of arbitrage. RBI has conveyed general permission through a Notification No.FEMA. For this purpose. The company can then issue fresh ADRs to the extent of shares cancelled. The custodian would monitor the re-issuance of ADRs/GDRs within the sectoral cap fixed by the Government. 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. Each purchase transaction will be only against delivery and payment received in foreign exchange through banking channels. The RBI guidelines state that the transactions will be demand-driven and would not require company involvement or fresh permissions. but SEBI registered stockbrokers. The conventional definition of liquidity is the ease with which an asset (in this case. No specific permission of the RBI will be required for the re-conversion. for these brokers to buy shares on behalf of the overseas investor) to buy shares on behalf of overseas investors (this include both foreign investors as well as domestic shareholders). The RBI has already given general permission to brokers (not banks. investments under foreign currency convertible bonds and ordinary shares will be treated as direct foreign investment. The transactions will be governed by the Income-Tax Act. 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. This essentially means that a liquid market for a security must have depth and breadth. Re-issue of ADRs/GDRs would be permitted to the extent of ADRs/GDRs that have been redeemed and the underlying shares sold in the domestic market. The Domestic Custodian would then inform the Overseas Depository to issue ADR / GDR to the overseas Investor.41/2001-RB dated 2nd March 2001. the expenses would be borne by the investor. Accordingly. ADRs/GDRs) can be bought or sold quickly with relatively small price changes.
low trading volumes in the security. Accordingly: Indian Companies seeking to raise FCCBs are permitted to raise them under the Automatic Route upto US 50 Million Dollars per financial year without any approval. basically for two reasons. has vide FEMA Notification No : 55 dated March 7th 2002. Second. minimising the widely divergent premium/discount levels prevailing between ADR/GDR prices and the domestic stock prices. The RBI. Some restrictions had been imposed previously on the number of issues that could be floated by an individual company or a group of companies during a financial year. thereby. market forces may trigger a realignment of prices. breadth and pricediscovery process of GDRs in these markets. the market is said to have breadth if buy and sell orders exist in good volume. though identical assets (namely stocks in the domestic market and ADRs/GDRs in the overseas markets) traded at different prices (at a discount/premium). Maturity period for the FCCBs shall be at least 5 years and the "all in cost" at least 100 basis points less than that prescribed for External Commercial Borrowings. The FCCBs raised shall be subject to the sectoral limits* prescribed by the Government of India.both above and below the prices (at which a stock or ADR/GDR) is transacting. ADRs/GDRs suffered from price volatility and liquidity problems. liberalised these rules. Euro Issues by Indian Companies Earlier. In the one-way fungible regime. Under the one-way fungibility regime. Obviously. the GDR market had been largely dormant (with the exception of a few highprofile stocks) for the past couple of years. and so should an identical asset trading in two different markets. There will henceforth be no restrictions on the number of Euro-Issues to be floated by a company or a group of companies in a financial year. Two-way fungibility may at least revive some market interest in these stocks. The first reason was the low ADR issue size that accounted for low free-float in the US market and. Reduction/elimination of arbitrage In an efficient market. Indian Companies required approval of the Government of India before issue of Foreign Currency Convertible Bonds (FCCBs). a profitable opportunity arises to sell the asset where it is overpriced and buy it back where it is under priced. If the prices of such an asset differ. Similarly. . two assets with identical attributes must sell for the same price. This affected the depth. the arbitrage opportunities went a begging because of restrictions on the capital account. By introducing two-way fungibility. arbitrageurs (speculators aiming to exploit these riskless opportunities) can step in and exploit this profit opportunity.
investments in stock markets and real estate will not be permitted. equity investment in JVs/WOSs in India. Companies will not be permitted to issue warrants along with their Euro-issue. investments abroad where these have been approved by competent authorities. GDR end . prepayment or scheduled repayment of earlier external borrowings. and the expectation of the Government is that FCCBs should have a substantially finer spread than ECBs. Sectoral Caps As per the Foreign Investment guidelines issued by the Government of India. The policy and guidelines for Euro-issues will be subject to review periodically. not more than 25 per cent of FCCB issue proceeds may be used for general corporate restructuring including working capital requirements.14 (1997 series) dated 8th October 1997** and (ii) a trading company primarily engaged in export activity. and for end-use of funds which conform to the norms prescribed for the Government for External Commercial Borrowings (ECB) from time to time. capital expenditure including domestic purchase/installation of plant. Foreign investment (equity/preference) upto 51% in (i) industries/items included in part 'B' of Annexure III to Ministry of Industry's Press Note No.GDR end-uses will include: financing capital goods imports. Currently. equipment and buildings and investments in software development. companies are permitted to access foreign capital market through Foreign Currency Convertible Bonds for restructuring of external debt that helps to lengthen maturity and soften terms. the all-in costs for FCCBs should be significantly better than the corresponding debt instruments (ECBs). in software development Foreign investment (equity/preference) upto 74% in industries/items included in part 'C' of Annexure III to Ministry of Industry's Press Note No. FCCBs are available and accessible more freely as compared to external debt. to Ministry of Industry's Press Note No. Up to a maximum of 25 per cent of the total proceeds may be used for general corporate restructuring.14 (1997 series) dated 8th October 1997** Foreign Investment upto 100% in industries/items included in Part 'D' of Annexure III.14 (1997 Series)** as amended from time to time provided the foreign investment in a project does not exceed Rs. However. In addition to these. including working capital requirements of the company raising the GDR.uses will include : Foreign investment (equity/preference) upto 50% in respect of Mining activities.1500 crores. Accordingly. foreign investment (equity/preference shares) upto certain specified limits would be permitted by Reserve Bank under Automatic Route as under: In relaxation of earlier guidelines. . Ministry of Industry.
07% Change % Change Prem/Disc EPS to Local ($) P/E 2.NOTE & DISCLAMER: The above report is compiled from newspaper reports appearing from time to time. .87 2.41 7.29 36.38million GDR issue fully subscribed Our Corporate Bureau Calcutta.38% -0.16 16.84 42.88% -1.41 52. If any mistake or lapse is dedected.75% -0. please do lwt us know by writing to us at firstname.lastname@example.org -1. No obligation is undertaken for updating this information on an ongoing basis.59 25.05 62.60 -0.192.15% 0.com.22 -0.65% 17.62% -1.35% 83.33 0. has completed the placement of 35. It is not guaranteed for accuracy or completeness. Thank you for your time and for using our services.57% 1.69% -3.34 18.88% 15.11% -1.84 -1.09 0.60% -1.44 -3.05 -1.38% -6.72% 12.14% 3.18 63.64 0.36 0.67% -5.88 -0.77 21. GDR Prices Index INSTANEX SKINDIA DR INDEX AND CONSTITUENTS Company Instanex Skindia DR Index Bajaj Auto (G) Dr.54 53.84% 4.96% 19.38% -8.04% 7.37% 4.01% -3.37 -0.73% 2.57% 9.79% -10.53% -6.10 20.74% 8.38% 1.04 -5.59 0.10 -0.15 25.8 60.35% -1.45% -3.26% -1.57% 1.76 22.83% -6.00.05% -4.56 3.35% -7.32% 1.47% -2.31 1. We shall make the necessary corrections and changes.88 21.03 62.75 35.98 1.51 3.59 3.00% 2.000 global depository receipts (GDRs) at a price of $3.46% -7.86% 10.27 0.08 -0.33 26.29% 5.07 8.19 41.4 6.1 -1.14 29.25 each.2 3.19 -124.22 43.31 27.00% 24.08% 3. Aug 25: Usha Beltron Ltd. the flagship of the Usha Martin group owned by the Jhawars.20 -0.74% 1.88% -4.63% 2.07 0.72 -4. Reddy's (A) HDFC Bank (A) Hindalco (G) ICICI Bank (A) Infosys Tech (A) ITC (G) L & T (G) MTNL (A) Ranbaxy Labs (G) Reliance (G) Satyam Computers (A) State Bank of India (G) VSNL (A) Wipro (A) Weight Price ($) 27-Feb-2007 100.4 16. according to a release of the Calcutta-based company.5 15.78 Usha Beltron $11.00 0.39 41.06 -4.70 -0.26 23.70 0.94% 2.83 1.
Mumbai on August 14.281 equity shares of a nominal value of Rs 10 each.63. Chennai-based Usha Martin Academy of Communication Technology and USOFT. steel. 2004 at 0000 hours IST MUMBAI: MphasiS BFL Ltd will hold an extra-ordinary general meeting on May 12.is awaiting the approval of the Calcutta high court. the company will also seek approval for acquiring of shares by FIIs and non resident Indians. in one or more tranches . advisors and managers to the issue. It is also planning to come up with American Depository Receipts (ADRs) and/or Global Depository Receipts (GDRs) with a view to raise additional funds to meet its capital expenditure and working capital requirements. This could be done directly by it or its direct or indirect wholly-owned subsidiary. According to the company’s notice to the Bombay Stock Exchange (BSE). lead-managed by Robert Flemings. The issue is priced at a premium of approximately four per cent over the closing price of Rs 143. April 23. this is subject to a condition that the equity shareholding of a single FII or a subaccount of an FII in the company shall not at any time exceed 10 per cent of the paid-up equity share capital of the company or such other limit as may be permitted by law and approved by the board of directors of the company. to seek members approval for increasing its authorised share capital to Rs 100 crore from Rs 40 crore. investment bank-ers. 2000.20 million being paid by the company in cash to the selling share holders of Msource USA. wire and wire ropes. 2004. aggregates to $11. The exact proportion and size will be decided based on the advice of consultants. the proposed issue of GDRs/ADRs would be a combination of a sponsored issue of securities by the existing shareholders and a fresh issue of securities. the company said.55 of the company's scrip on the stock exchange. United Kingdom. Its knowledge-based business consists of United States-based Usha Communication Technology Ltd. Usha Beltron is a diversified engineering and technology corporation that makes jellyfilled telephone cables. MphasiS BFL Plans ADR/GDR Issue OUR EFE BUREAU Posted online: Friday.38 million which is equivalent to Rs 522 million approximately.Usha Martin Infotech Ltd . It is also likely to offer issue and allot from time to time in one or more tranches on a preferential allotment basis up to 17. They will also discuss offering issue and allot from time to time. Each global depository receipt is represented by one equity share of Rs 10 of the company. The company's proposed hiving off of its knowledge-based business into a separate company . With the balance consideration of $13. However.The issue.
they were horrified at the equity markets that they saw. In recent years. offshore listing has been an important vehicle through which firms in India have raised capital. which trade in many European countries and particularly in London. it was highly illiquid). Indian equity risk is uncorrelated with global portfolios. The first problem faced is poor market design on the Indian equity market. and conceptual arguments.66. there are two strategies: either foreign investors can buy Indian shares in India. This was an obvious motivation for GDRs and ADRs: Indian firms saw these as a way to . Why list offshore? From 1992 onwards. By the same coin. Bangalore. Initially. 2004 as may be considered necessary by the board for the purpose of issuance bonus shares of Rs 10 per cent each credited as fully paid to the holders of the existing equity shares of the company. it makes great sense for Indian investors to buy shares of foreign companies: doing so would yield improved diversification and hence low risk for Indian investors.e. Thus. The notice added that for capitalisation of such of the free reserves of the company as on March 31.389 equity shares of a nominal value of Rs 10 each with the balance consideration of Rs 28. How can foreign investment into Indian equities be implemented? Broadly. so foreign investors require a lower rate of return from Indian equities. in the early 1990s. When foreign investors first appeared in India. we think through the rationale for offshore listing and ask questions about the appropriate role for ADRs/GDRs in India's financial system. For example. the focus was on "global depository receipts" (GDRs). which trade in the US. In this article.600 being paid by the company in cash to the remaining selling shareholders of Kshema Technologies Ltd. We have preponderant evidence.on a preferential allotment basis up to 11. Let us start with the question about foreign ownership of Indian equity. there has been sharp interest in "American depository receipts" (ADRs).69. or Indian firms can list their shares abroad in order to make these shares available to foreigners. foreign ownership of Indian equity reduces the cost of capital in India. The Indian equity market imposed extremely large transactions costs upon investors (i. and makes more investment projects viable.. in favour of large-scale ownership of local firms by foreign shareholders.83. Foreign investors buying shares in India has traditionally been limited by two problems: 1.
This imposes ceilings on foreign ownership. This superiority of liquidity in India is not accidental. with the rise of electronic trading. there has been no liquidity premium argument which favours offshore listing. and hence GDRs or ADRs generally enjoy a premium. clearing corporation and depository. no foreign market can ever harness the liquidity which is found in India. will help improve the liquidity of . The second problem faced is restrictions on equity ownership by foreigners.bypass the incompetent Indian equity market mechanisms and instead jump to the well-functioning equity markets found abroad. FIIs face restrictions on the fraction of a firm that can be purchased. From 1994 onwards. their shares commanded a higher price owing to a liquidity premium. issuance abroad fragments the order flow and yields no improvement to local liquidity. while anyone can buy GDRs or ADRs. in Indian standard time. the company should pass the special resolution which raises the limit upon FII shareholding from 24% to 40%. announced in the budget speech. Only "foreign institutional investors" can buy shares in India. When the company hits the limit of 40% FII shareholding. The companies with the largest fraction of foreign ownership would obtain the highest P/Es and the lowest cost of capital. and obtain good liquidity by building up market capitalisation and retail investors in India. it makes sense to use ADRs or GDRs as a way of further improving foreign shareholding. It is easy to examine the `market by price' on NSE. Instead. the presence of leveraged trading on the spot market. and the limited access to derivatives. Indeed. The two--way fungibility. a firm which issues ADRs or GDRs actually suffers an opportunity cost by listing abroad: if it had (instead) issued shares domestically. We are still inferior to international standards in a few respects. it would have improved local liquidity and obtained a liquidity premium. it is better for a firm to issue shares in India. Hence. and seeks to obtain the highest possible valuation? We can propose a few ingredients: • • • As far as possible. The liquidity of the stock market is ultimately driven by retail investors and speculators. In this conceptual framework. participation in the GDR or ADR market is unencumbered. and compare it with the bid/offer spreads seen for GDRs or ADRs: we see sharply higher liquidity on NSE. However. such as the rolling settlement. When Indian firms issued shares on the GDR or ADR markets. so it is important to woo FIIs. Towards this goal. what is the optimal policy for a firm which operates under existing Indian regulations and laws. Foreign investors would always be willing to pay higher prices for Indian shares. From 1996 onwards. 2. the first order mistakes in market design in India have been addressed. In contrast. who are found in the home country. the picture on liquidity has turned around completely. The benefits here (of greater foreign ownership giving an improved valuation) are diminished to the extent that GDRs and ADRs are extremely illiquid. The Indian equity market has obtained a quantum leap in liquidity.
The sale of a share is a private action between one investor and another. In reality. Wipro was offering its shares at a premium of 10 per cent to the then prevailing market price. Even at that time. but there is no possibility of an ADR or GDR being as liquid as NSE. this limit should be raised to 100%. to suffer poor liquidity in offshore markets. any depreciation in the value of the rupee would also act as an offset to any decline in the value of the ADR while it will also add to any increase in the value of ADR. If our policies are amended in these two directions. a few mutual funds participated in the offer. there will be no case for ADRs or GDRs by Indian firms. have been belied. the Government of India should not have a say in this matter. A firm should be free to sell shares to anyone it wants. What would we undertake? • • Foreign investment brings capital into India. however. This budget has made a step in the right direction by allowing shareholders to increase the limit on FII shareholding from 30% to 40%. in order to obtain a wider foreign investor base. Conversely. and try to find the economic policy strategy which would yield the lowest possible cost of capital for the firms of India. The definition of "FII" should be steadily broadened. This would eliminate the incentive that Indian firms are given. the shareholders of a firm should be free to choose whom they sell shares to. the Wipro ADR. and obtain the lowest possible cost of capital. it prima facie did not make sense to buy them. the investments of mutual funds appeared to defy logic. there is no real argument in favour of GDR or ADR issuance for an Indian firm which has not yet hit the 40% limit. For example. The above receipe is appropriate for a firm in India which faces existing economic policies. so as to improve the investor base that all Indian companies can access. the ADRs would have paid off if the volatility in the overseas markets were low. investment in ADRs\GDRs has failed to pay for these mutual funds. investments in the GDR/ADR market appear to have significantly backfired. Since shares were available at a cheaper price in the local market. Suppose we could change these economic policies. Indian firms will consolidate all their liquidity in India. Such hopes. and reduces the cost of capital for a firm. However. However. When Wipro made its ADR offer. However. and some proceeded to do so. Indian firms will then avoid fragmentation of their liquidity.• ADRs or GDRs. The ADR . In addition. Instead. From the perspective of economic freedom. GDR/ADR fail to pay Suresh Krishnamurthy INDIAN mutual funds were allowed to invest in global depository receipts and American depository receipts in 1999.
The rupee depreciation has not helped either. In rupee terms. may also be partly due to their investments in the depository receipts of Indian companies. the Wipro stock price declined 34 per cent at the Bombay Stock Exchange. investments in ADRs\GDRs were unchartered territory for investors. During the same period. Its ADR declined by 40 per cent in the last six months. mutual funds appear to have taken a higher risk when investing in the ADRs of Indian companies.price declined 52 per cent in the last six months. the VSNL stock price declined by 37 per cent over the same period. In many ways. The risk does not appear to have paid off in terms of higher returns too. On this count alone. The same situation obtains in VSNL. There is a case for mutual funds to communicate the state of affairs to their investors and also how they are likely to deal with these issues in the future. . In contrast. the decline is around 51 per cent. the relative under-performance of such funds such as Pioneer ITI Infotech. compared to its peers. In some cases. Mutual funds did not provide any explanation when they invested in the ADRs of Indian companies.
4. There are some stocks which are also allowed to be bought in India and converted into the DR forms. The Process 1. Back charges for transfer. Once the stock is bought. which is attractive if the DR is trading at a premium to the Indian stock price. Convert shares from DR to local. 4. sometimes the prices of the DR(Depository receipt) trade at discounts or premiums to the underlying stock. This presents a knowledgeable fund manager an arbitrage opportunity. Hence the fund manager must take into consideration the local market conditions before buying the stock in the US. DRs which trades in the US markets offer better gaps. 5. 5. Repeat process. 2. where he buys the DR abroad and sells the same stock in India at a higher price (the difference being the profit). 6. arrangements are made to deliver the stock in India. The Costs 1.ADR/GDR Arbitrage ARBITRAGE Several Indian companies actively trade on the London and New York Stock Exchanges and due to the time differences. as he must be confident of the selling off the stock the next morning in India at the profitable gap. Once the stock is delivered in India the proceeds are allowed to be repatriated and the process repeated. Same DRs trade during India market hours offering a live arbitrage opportunity. which involves several procedures (stock is borrowed at times for this). Local brokerage. 2. Deposit proceeds in Indian bank account. Fund manager charge. 3. . Foreign brokerage. 3. sentiments etc. but there is the overnight risk to be factored in. Buy DR Sell local stock in India in cash market or futures market. Deliver shares to stock exchange in India. Repatriate funds. Custodian charge for conversion (local and global). market news. 7. As there is very little risk in such trades the gap between the DR and underlying stock is minimal.
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