What are 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.

How does DR work? The DR is created when a foreign company wishes to list its already publicly traded shares or debt securities on a foreign stock exchange. Before it can be listed to a particular stock exchange, the company in question will first have to meet certain requirements put forth by the exchange. Initial public offerings, however, can also issue a DR. DRs can be traded publicly or over-thecounter. Let us look at an example of how an ADR is created and traded.

Origin of Depository Receipts The origin of depository receipt is USA. It started in 1920’s. In this period, it was difficult and risky to invest on the originals of foreign securities by American investors and brokers. The risks in this condition have been causing delays and some kind of extra expenses. In order to avoid the practical problems, they should have looked for solutions. In the solution produced, it was aimed at constituting a system that will be able to eliminate those handicaps. In those times, financial and economical system was national. For the system started to function badly, the investors and brokers were not able to transit to international market in the investment and financial activities they have been carried out. They were as if trapped inside a no end box and it was impossible for them to open global market. Something was clearer than anything else. The key was as if climbing up a hill in the desert under the sun in 70 C in vein, and it was time consuming. The distance between American and European stock exchange markets was high, for this reason, what is to be was to reach the international arena in world of stock exchange market. For the

reason of investor’s demand of diversifying their financial resources internationally, American Depository Receipts revealed.

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.

*Source: ADR Reference Guide – JP Morgan, February 2005


SPONSORED ADR PROGRAM - LEVEL 1 A Level I sponsored ADR program is the easiest and least expensive means for a company to provide for issuance of its shares in ADR form in the US. A Level I program is initiated by the issuer and involves the filing of an F-6 registration statement, but allows for exemption under Rule12g 3-2(b) from full SEC reporting requirements. The issuer has a certain amount of control over the ADRs issued under a sponsored Level I program, since a depositary agreement is executed between the issuer and one selected depositary bank. Level I ADRs can however only be traded over-the-counter and cannot be listed on a national exchange in the US.

Advantages of a Level I ADR program: It avoids full compliance with the SEC's reporting requirements. By working with a single depositary bank, the issuer has greater control over its ADR program than would be the case with an unsponsored program. The depositary acts as a channel of communication between the issuer and its US shareholder base. Dividend payments, financial statements and details of corporate actions will be passed on to US investors via the depositary. The depositary bank maintains accurate shareholder records for the issuer and can, if requested, monitor large stock transactions and report them to the issuer. Set-up costs are minimal and all transaction costs are absorbed by the ADR holder. It is easy and relatively inexpensive to upgrade the program to Level II or III as the issuer and depositary bank do not have to negotiate cancellation of unsponsored ADRs with several depositaries, as would be the case if upgrading an unsponsored program. Disadvantages of a Level I ADR program It cannot be listed on any of the national exchanges in the US. As a result, investor interest might be somewhat restricted which may limit the issuer's ability to enhance its name recognition in the US. Capital raising is not permitted under a Level I program.

SPONSORED ADR PROGRAM - LEVEL II A sponsored Level II ADR must comply with the SEC's full registration and reporting requirements. In addition to filing an F-6 registration statement, the issuer is also required to file SEC Form 20-F and to comply with the SEC's other disclosure rules, including submission of its annual report which must be prepared in accordance with US Generally Accepted Accounting Principles (GAAP). Registration allows the issuer to list its ADRs on one of the three major national stock exchanges, namely the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), or the National Association of Securities Dealers Automated Quotation (NASDAQ) Stock Market, each of which has reporting and disclosure requirements. Level II sponsored programs are initiated by non-US companies to give US investors access to their stocks in the US. As with a Level I program, a depositary agreement is signed between the issuer and a depositary bank. The agreement defines the responsibilities of the depositary, which usually include responding to investor enquiries, mailing annual reports and other important material to shareholders and maintaining shareholder records.

Advantages of a Level II ADR program: It is more attractive to US investors than a Level I program because the ADRs may be listed on one of the major US exchanges. This raises the profile of the ADR program to investors, thus increasing the liquidity and marketability of the securities. Listing and registration also enhance the issuer's name recognition in the US. US disclosure regulations for large investors enable the issuer to monitor the ownership of its shares in the US.

Disadvantages of a Level II ADR program More detailed SEC disclosure is required than for a Level I program. For example, the issuer's financial statements must conform to US Generally Accepted Accounting Principles (GAAP), or else a detailed summary of the differences in financial reporting between the home country and the US must be submitted. SEC regulations do not permit a public offering of ADRs under a Level II program. It is more expensive and time-consuming to set up and maintain a Level II program than a Level I program because of the more stringent reporting requirements and higher legal, accounting and listing costs.


SPONSORED ADR PROGRAM - LEVEL III Level III sponsored ADRs are similar to Level II ADRs in that the issuer initiates the program, deals with one depositary bank, lists on one of the major US exchanges, and files Form F-6 and 20-F registration statements with the SEC. The major difference is that a Level III program allows the issuer to raise capital through a public offering of ADRs in the US and this requires the issuer to submit a Form F-1 Advantages of a Level III ADR program It permits public offerings of ADRs in the US which can be used for a variety of purposes, for example the raising of capital to finance acquisitions or the establishment of an Employee Stock Ownership Plan (ESOP) for the issuer's US subsidiary. Disadvantages of a Level III ADR program SEC reporting is more onerous than for Level I or II programs. The costs of setting up and maintaining a Level III program can be high. Set-upcosts, which would include listing, legal, accounting, investor relations and "road show" costs, might amount to approximately US$ 300,000 to US$ 500,000.

RULE 144(a) ADRs (RADRs) Rule 144(a) ADRs, or restricted ADRs (RADRs) are simply privately placed depositary receipts which are issued and traded in accordance with Rule 144(a). This rule was introduced by the SEC in April 1990 in part to stimulate capital raising in the US by non- US issuers. Some of the former restrictions (under Rule 144) governing resale of privately placed securities (or "restricted securities") have been lifted under Rule 144(a), providing the sale is made to "qualified institutional buyers" (QIBs), with the aim of adding liquidity to the private placement market. A QIB is currently defined as an institution, which owns and invests on a discretionary basis at least US$ 100 million (or, in the case of registered broker-dealers, US$ 10 million) in securities of an unaffiliated entity. At present there are believed to be in excess of 4000 QIBs but the SEC may decide to broaden the definition of a QIB to allow a larger number to participate in the Rule 144(a) market. NonUS companies now have easy access to the US equity private placement market and may thus raise capital through the issue of restricted ADRs without conforming to the full SEC registration and reporting requirements. Additionally the cost of issuing Rule 144(a) ADRs is considerably less than the cost of initiating a Sponsored Level III ADR program. In June 1990, the National Association of Securities Dealers (NASD) established a closed electronic trading system for RADRs called "PORTAL" (Private Offerings, Resale and Trading through Automated Linkages) this system is designed to provide a market for privately traded securities such as RADRs and access to it is available to both investors and market makers.

Advantages of RADRs ADRs offered under Rule 144(a) do not have to conform to full SEC reporting and registration requirements. QIBs may demand certain financial disclosure, however, unless the reporting exemption under Rule 12g 3-2(b) has been granted. RADRs provide a cheaper means of raising equity capital than through a public offering and they can be issued more easily and quickly. RADRs can be launched on their own or as part of a global offering. They can be traded through the NASDAQ's "PORTAL" system and they clear through the DTC. Disadvantages of RADRs RADRs cannot be created for classes of share already listed on a US exchange. RADRs can only be sold in the US to QIBs. Although there are in excess of 4000 potential QIBs, the RADR market is not as liquid as the public US equity market.

CAPITAL RASING VERSUS NON CAPITAL RAISING ADR PROGRAMS If the objective of the foreign company is to use existing shares to broaden shareholder base (i.e. non capital razing) it has the option of going with level 1 program that trades on non-NASDAQ OTC market or a more stringent level II program that is listed on NYSE, AMEX or NASDAQ, however if it plans to raise capital through new shares, it has the option of going with a level III program listed on NYSE. NASDAQ, AMEX, which is even more stringent than a level II program or with a privately placed rule 144a ADR program. ADVANTAGES OF DRs Depository stocks are within processing mechanisms for foreign securities. Depository receipt agreements serve various advantages to investors like transfer and exchanging dividends paid over foreign money currencies to their currency. Also, depository receipts are used in privatization, mergers, foreign governments Dept, imports and employment financing Mostly, foreign securities are written for the bearer. For this reason, the lists of securities can not be pursued. Depository receipts try to minimize the problems of promissory notes written for the bearer. It makes having information about the foreign company easier. Foreign companies having relationships with investors are restricted with law. Depositor or its division can learn the information and declarations send by the foreign importer. Even though the securities are written for the bearer, depository Bank has the best conditions to get this information.

BUYING AND SELLING DRS If an investor wishes to purchase shares in a foreign company, he can either buy the foreign shares in the local market through a broker in that country or, providing the foreign company in question has a DR program, the investor can request his broker to buy DRs. The broker may either purchase existing DRs or, if none are available, he may arrange for a depositary bank (e.g. Deutsche Bank) to issue new ones. The process for issuing new DRs is very simple. The investor's broker contacts a broker in the issuing company's home market and acquires shares in that company. These shares are then deposited with the depositary bank's local custodian. Upon confirmation that the custodian has received the shares, the depositary issues the requisite number of DRs to the investor via the broker.

In some exceptional cases there may be restrictions on the issuance of new DRs under existing programs (e.g. Indian GDR programs) because of local regulations. DRs can be sold in DR form, in which case they trade and settle like other US or Euro securities. They can also, however, be cancelled. In this case the broker acting on behalf of the owner of the DRs will request the depositary bank to cancel the DRs and release the underlying shares to a domestic broker in the issuing company's home market. The domestic broker will then sell the shares locally and the proceeds will be remitted to the investor who cancelled those DRs. • • • DRs certify that a stated number of underlying shares have been deposited with the depositary's custodian in the foreign country. DR holders are entitled to all the dividends payable on the underlying foreign shares and, furthermore, to have these paid in the currency in which the DRs are denominated – usually US dollars. The DRs may be bought or sold through investors' own brokers, and they clear and settle through the Depository Trust Company (DTC) for ADRs, through Euro clear and Clear stream for EDRs and through all three (and possibly other clearing systems) in the case of GDRs, depending on which markets they access. Shareholder information such as annual reports, notices of general meetings and corporate actions, and official news releases are provided by the issuer to the depositary and to the receipt holders, either direct or through the local custodian. The investor is thus spared the costs and difficulties often encountered when direct investment is made in local markets, where currency, settlement, and linguistic problems may be compounded by an excessive number of intermediaries.

• •

WHY DO INVESTORS BUY DRs? US investors have become increasingly interested in overseas markets as a result of their higher yields compared to the US equity market over recent years. International investors are also eager to diversify their portfolios, both geographically and by industry sector, in order to increase their returns while spreading their risk. They have long been active in the debt markets, as evidenced by the vast size of the Euromarkets, and sophisticated international clearing systems have been developed to handle Euro instruments. Until recently, however, cross-border equity investments have involved all the currency, settlement and linguistic problems which occur when dealing with overseas equity markets.

Building on the concept of the ADR, investment banks developed the EDR/GDR to solve these problems for international investors.

Liquidity and investor demand Liquidity is enhanced when there are a significant number of depositary receipts eligible for trading in the United States. In a US public offering, retail and institutional investors are more likely to buy depositary receipts that are perceived to be liquid and fairly priced. A useful structuring tool While DRs are generally used to make equity more widely available or to raise capital outside the issuer's domestic market, they can also be used as part of many other financing structures. The concept of a receipt trading in one market, which represents an instrument held in custody in a different market, can be adapted to a wide variety of transactions.


*Source- Freidland capital guide to American depository receipt.

ADRs were primarily created to increase investment access to widely known and often multinational companies. They are typically formed by a depository bank depositing ordinary shares of a foreign company into a trust and issuing receipts of interest in the underlying shares on a domestic exchange. The bank will act as a custodian for the trust handling dividend distribution, currency exchange, proxies, tax reporting, and regulatory filings. It receives a management fee for these services, either from the shareholders or the issuing company. Trading of ADRs occurs by brokers purchasing/selling outstanding ADRs in the domestic market, or on the foreign markets if no shares are available domestically. In the case of purchases in the foreign market, the broker then deposits the foreign shares with the bank in exchange for newly created ADRs. In the case of sales in the local market, the broker will cancel the ADR causing the depository bank to sell the shares in the foreign market and deliver the proceeds in the investor’s currency. Units in the trust are listed on large exchanges primarily in countries with developed capital markets, as if they were shares of a company domiciled in the same country as the exchange. The listing company of the ADR must adhere to the same regulatory requirements and disclosures as the other listed issuers on the exchange. In effect, shares of a foreign company can be purchased on a U.S. stock exchange in the same manner as stock of a U.S. company. So why have the middlemen (trust)? Many investors do not have efficient means of diversifying into foreign companies because of the administrative and implementation issues. Often, trading in foreign markets is more expensive relative to U.S. exchange transaction costs, as well as difficult to execute due to time zone differences. Also, foreign exchanges do not usually have the same regulatory requirements that investors are familiar with here in the U.S., and custody of the assets is costly. Currency exchanges will also have to be utilized in order to purchase ordinary shares of foreign companies. ADRs trade easily and pay dividends in U.S. dollars and settle through U.S. clearinghouses. These implementation barriers coupled with the desire of investors to diversify internationally created a market for underwriters of ADR trusts. There are also Global Depository Receipts (GDRs), International Depository Receipts (IDRs), and European Depository Receipts (EDRs), which accomplish the same benefits already stated but trade in one or more international markets. By early 1998, 429 out of 3,104 companies listed in the NYSE, 437 of 6008 listed in NASDAQ, and 61 out of 690 in the AMEX were foreign companies from over 50 different countries. In addition, 412 out of about 6,200 equity securities traded in the OTC Bulletin Board were from

foreign issuers. Clearly, foreign firms must find listing in the US (or more generally, outside their home market) advantageous. Then, why do foreign firms list their shares in the US? From the firm's perspective, why is it that listing in the US is desirable, and the cost-benefit tradeoff a positive one? Listing in the US can take many forms. Foreign firms can list their stock directly or through an American Depositary Receipt (ADR) program. This listing can take place in an organized exchange (e.g. NYSE, AMEX), NASDAQ, an OTC market, or as a private placement. The listing can also be accompanied by an IPO, or a seasoned equity offering. ADRs are issued by a U.S. bank that functions as a depositary, having ADR being backed by a specific number of shares in the non-U.S. company. ADRs can be traded on any of the US stock exchange (NYSE, NASDAQ, or AMEX) and over-the-counter. In the case of Rule 144A, they are privately placed and traded. The same concept for ADR has been spread into other regions with the creation of the global depositary receipts (GDRs), international depositary receipts (IDRs), and European depositary receipts (EDRs), which are generally traded or listed in one or more international markets. As of February 2005, this instrument is used by around 2,100 nonUS issuers from approximately 80 countries. About 500 of those ADRs are listed in the US exchanges.

ADR PROGRAM TYPES SPONSORED AND UNSPONSORED ADR PROGRAMS Issuers seeking the benefits of ADRs generally pursue what are called sponsored ADR programs. They initiate the process and, working with a depositary bank, actively manage the program going forward. The issuer benefits by making a strategic foray into the U.S. market, controlling its image and reputation in the capital markets. In general, only sponsored ADRs can be listed on the major stock exchanges or quoted under the NASDAQ system. While most new ADR programs are sponsored, many unsponsored programs (in which the ADRs are created and offered to investors without a company's active participation) still exist. THE VARIOUS TYPES OF SPONSORED ADR PROGRAMS






Issuers can choose from four different types of sponsored ADR programs, each with its own set of benefits as well as its own set of legal and regulatory requirements: Level I, Level II, Level III, and Rule 144A/GDR. In general, American Depositary Receipts are used for two objectives: raising new capital, or increasing US ownership of shares already issued and trading in the market. There are three basic ADR types, or “levels” as they are usually referred to, designed to achieve a company’s objectives. LEVEL I ADRS-SPONSORED Level I ADRs are the simplest method for companies to access the US capital markets. Level I ADRs are traded in the over-the-counter (OTC) market, with bid and ask prices published daily and distributed by the National Daily Quotation Bureau in the pink sheets. The issuing company does not have to comply with US Generally Accepted Accounting Principles (GAAP) or provide US Securities and Exchange Commission (SEC) disclosure. Level I ADRs essentially enable a company to obtain the benefits of a US publicly traded security without altering their current reporting process. Level I DRs account for more than 60% of the US ADRs. Companies that have Level I ADR programs can “migrate” to a Level II or Level III ADR program if they desire to trade on the New York Stock Exchange, the American Stock Exchange, Nasdaq or the OTC Bulletin Board, or if the company desires to raise capital directly in the United States. Level I ADR programs currently require minimal SEC registration: The issuer seeks exemption from the SEC's traditional reporting requirements under Rule 12g3-2(b). With that exemption, the company agrees to send to the SEC summaries or copies of any public reporting documents required in its home market (including documents for regulatory agencies, stock exchanges, or

direct shareholder communications). The depositary bank, working with the issuer, also files the Form F-6 registration statement with the SEC in order to establish the program. LEVEL II ADRS- SPONSORED Level II ADRs enable companies to list their ADRs on NASDAQ, the American Stock Exchange, the New York Stock Exchange and the OTC Bulletin Board, thereby offering higher visibility in the U.S. market, more active trading, and greater liquidity. Level II ADRs require full registration with the Securities and Exchange Commission. Companies must also meet the listing requirements of the appropriate stock exchange. Level II ADRs require a Form 20-F and Form F-6 to be filed with the SEC, as well as meeting the listing requirements and filing a listing application with the designated stock exchange. Upon F-6 effectiveness and approval of the listing application, the ADRs begin trading. Level II ADR programs must comply with the full registration and reporting requirements of the SEC's Exchange Act, which entails the following: • Form F-6 registration statement, to register the ADRs to be issued • Form 20-F registration statement, which contains detailed financial disclosure about the issuer, including financial statements and a reconciliation of those statements to U.S. GAAP, to register the listing of the ADRs • Annual reports and any interim financial statements submitted on a regular, timely basis to the SEC Level III ADRs-SPONSORED Level III ADRs enable to companies to list their ADRs on NASDAQ, the Amex, the New York Stock Exchange or the OTC Bulletin Board, and make a simultaneous public offering of ADRs in the United States. In the most high-profile form of sponsored ADR program, Level III, an issuer floats a public offering of ADRs in the United States and lists the ADRs on one of the U.S. exchanges or NASDAQ. The benefits of a Level III program are substantial: It allows the issuer to raise capital and leads to much greater visibility in the U.S. market. Level III ADR programs must comply with various SEC rules, including the full registration and reporting requirements of the SEC's Exchange Act. This entails the following: • Form F-6 registration statement, to register the ADRs • Form 20-F registration statement, an annual filing that contains detailed financial disclosure from the issuer, including Form F-1, to register the equity securities underlying the ADRs that are offered publicly in the U.S. for the first time, including a prospectus to inform potential investors about the company and the risks inherent in its businesses, the offering price for the

securities, and the plan for distributing the shares Annual reports and any interim financial statements submitted on a regular, timely basis to the SEC and to all registered public shareholders. RULE 144A ADRS Many companies seek to raise capital in the U.S. markets privately by issuing restricted securities under Rule 144A, which do not require SEC review. Rule144A facilitates the trading of privately placed securities by sophisticated institutional investors (also known as Qualified Institutional Buyers, or QIBs; they must own or manage at least $100 million in securities). SPONSORED VERSUS UNSPONSORED DR PROGRAMS Unsponsored programs are issued by a depository in response to the market demand for the shares of a foreign company, but without a formal agreement between the depository and the foreign company. Once a depository creates an unsponsored ADR facility it is common for other depositories to clone it, creating numerous unsponsored facilities which are considered fungible. In contrast sponsored program are issued by an exclusive depository appointed by the foreign company under a deposit agreement, the depository bank agrees to issue ADR certificates and the issuer agrees to pay certain costs of the depository such as such as dividend disbursement fees.

ADAVANTAGES OF USING ADRs • • • The main advantage of buying an American Depositary Receipt rather than the foreign stock itself is the ease of the transaction. ADRs are a great way to invest abroad without having to convert U.S. dollars to many different currencies Another advantage offered by an ADR is that if the foreign stock does pay dividends, the investment bank will convert the dividends to U.S. dollars and remit the payment to you. In addition, if the dividend is subject to foreign tax, the investment bank will withhold the tax so you don't have to worry about it Therefore, if exchange rates were to move against you, it would hurt the value of your ADR. If you are considering investing in foreign stocks, ADRs should be part of your investment decision; however, you should become familiar with all the risks associated with foreign investing before making an investment decision.

Advantages to Issuers o Provides a simple means of diversifying a company’s shareholder base and accessing important U.S. market o May increase the liquidity of the underlying shares of the issuer

o ADRs can be used as an equity financing tool in both M&A transactions and ESOPs for U.S. subsidiaries o Helps increase a non-U.S. company’s visibility and name recognition in the U.S. investor community o May raise capital in the U.S. market through some types of programs Advantages to Investors o Offers a convenient means of holding foreign shares o Simplifies the trading & settlement of foreign securities; ADRs trade and settle just like U.S. securities o Offers lower trading & custody costs when compared with shares bought directly in the foreign market

DISADVANTAGES OF USING ADRs Despite all the described advantages, the ADRs do represent the same asset as local shares but may not be “fully fungible” in several countries (meaning they cannot be seamless exchanged with its home market security). For example, until 2001 there was no two-way fungibility for Indian ADRs; in that environment, investors could convert ADRs into local shares but they could not reconvert them back to ADRs. This and other capital control regulations prevent risk less arbitrage opportunities to exist between ADRs and the underlying stock and are one of the reasons that premiums/discounts exist in the ADR market.


ADRs are issued by a US bank, such as J. P. Morgan or The Bank of New York, which functions as a depositary, or stock transfer and issuing agent for the ADR program. The foreign, or local shares, remain on deposit with the Depositary’s custodian issuer’s home market. Each ADR is backed by a specific number of an issuer’s local shares (e.g. one ADR representing one share, one ADR representing ten shares, etc.) This is the ADR ratio, which is designed to set the price of each ADR in US dollars. Financial information, including annual reports and proxies are delivered to US holders on a consistent basis by the Depositary. The dividends are converted into dollars and paid to ADR holders by the Depositary.

KEY COMPONENTS OF A SUCCESSFUL ADR PROGRAM Successful ADR programs are actively traded and widely held. They typically share the following attributes: Attractive market, industry and equity story Active communication of the story to US investors Investor friendly ADR structure (ratio of shares to ADRs) Research and market-making by US investment banks and brokers

US LISTINGS – ADRs THE OVER-THE-COUNTER MARKET Over-The-Counter (OTC) market trades are listed in the "Pink Sheets". The Pink Sheets are published daily by the National Quotation Bureau and represent a non-automated listing of stocks, which trade outside the three major exchanges. Listing fees are paid by the broker dealer who seeks the listing. The broker-dealer must file a National Quotation Form 211, which includes updated financials of the company and other relevant information. Listing on the "Pink Sheets" is available for sponsored Level I and unsponsored ADR programs, while a listing on NASDAQ, AMEX or the NYSE is only available to Level II and III sponsored programs.

THE NATIONAL EXCHANGES Issuers of Level II or III sponsored ADRs will benefit in several ways from a listing on any one of the three national exchanges. The increased visibility to the US investment community, which a listing provides, together with access to the automated trading and efficient market pricing available on the national exchanges, should lead to a significant expansion of the issuer's investor base. Importantly, listing fees for ADRs are generally less expensive than those for ordinary shares in the US. A description of the three exchanges follows

NASDAQ (NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED QUOTATION) NASDAQ, the first electronic stock market, operates a system of competing market makers linked to investors by sophisticated telecommunications networks. There are two options for listing; the Small Cap Market which, as its name implies caters for smaller companies, and the National Market System, where the majority of NASDAQ securities are listed. While criteria for listing on these two markets differ, the ADR listing charges are very similar. The NASD also operates PORTAL, the market for securities issued under Rule 144(a).

AMEX (AMERICAN STOCK EXCHANGE) AMEX operates an auction market system, intended to facilitate trading between buyers and sellers with minimum intervention from professional dealers. Each listed stock is handled by a specialist unit. There are special listings requirements for non-US issuers, with "Alternate" requirements intended to cover companies which are financially sound but which, because of the nature of their business, would not qualify under the "Regular" requirements.

NYSE (NEW YORK STOCK EXCHANGE) The NYSE, like AMEX, operates an auction market system where stock prices are determined largely by public orders competing with each other. By value of shares listed and by volume of trading, the NYSE is the largest exchange in the United States. Foreign companies listing on the NYSE can choose to qualify either under the "Alternate Listing Standards" designed specifically for non-US corporations, or under the "Original" or "Alternate Original" standards which apply to US domestic corporations. Each of the exchanges sets additional standards concerning corporate governance. However, non-US corporations may be exempted from these requirements upon application. Confidential meetings can be arranged with the exchanges in advance of any decision-making to discuss specific concerns or exemptions.


HOW ARE ADRs PRICED? • • Let us assume that Russian Vodka Ltd, trades on a Russian stock exchange at 127 Russian roubles This is equivalent to US$4.58 – assume this for simplicity

• • • •

Now, a US bank purchases 30 million shares of Russian Vodka Ltd. and re-issues them in the US at a ratio of 10:1 This means that each ADR you purchase is worth 10 shares on the Russian stock exchange A quick calculation tells us that each ADR should have an issue price of US$45.80 (US$4.58 per share X 10 shares) – since 10 shares equal 1 ADR Once an ADR is priced and sold, its subsequent price is determined by supply and demand factors, like any ordinary share

ADR ARBITRAGE OPPORTUNITIES Several Indian companies actively trade on the and New York Stock Exchanges and due to the time differences, market news, sentiments etc. 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, where he buys the DR abroad and sells the same stock in India at a higher price (the difference being the profit). Same DRs trade during India market hours offering a live arbitrage opportunity. As there is very little risk in such trades the gap between the DR and underlying stock is minimal. DRs which trade in the US markets offer better gaps, but there is the overnight risk to be factored in. Hence the fund manager must take into consideration the local market conditions before buying the stock in the US, as he must be confident of the selling off the stock the next morning in India at the profitable gap. Once the stock is bought, arrangements are made to deliver the stock in India, which involves several procedures (stock is borrowed at times for this). Once the stock is delivered in India the proceeds are allowed to be repatriated and the process repeated. There are some stocks which are also allowed to be bought in India and converted into the DR forms, which is attractive if the DR is trading at a premium to the Indian stock price.

Main Reasons for Discrepancies between the Prices of ADR and Local Shares There are significant limitations for an investor to buy an ADR on the NYSE and sell it on a local exchange in the same day. Fees and other transaction costs are also incurred in this transaction. Finally, depending on the ADR level and the local government regulations, different rights and protections are accompanied by the certificate. This section in the paper will discuss the main reasons for discrepancies between the prices of ADRs and local shares while questioning whether they should be subjected to the law of one price.

Are ADRs and local shares the same assets? Despite ADRs being certificates that represent the underling foreign shares that are being held custody outside the U.S., ADRs and local shares are different certificates and may not be “fully fungible” in several countries. For example, until 2001 there was no two-way fungibility for Indian ADRs; in that environment, investors could convert ADRs into local shares but they could not reconvert them back to ADRs. In 2001, the Indian Reserve Bank created the regulation that allowed two-way fungibility between ADRs and local shares with restrictions, however, to what shares could be converted to ADRs. Under this regulation, only local shares that were created through conversion of ADRs can be reconverted. The high demand for Indian shares in the U.S. during the past few years and the relatively low volume of ADRs available for investors resulted in most Indian ADRs trading at a premium over their local shares. Because of the fungibility problem, however, this premium cannot be arbitraged away by investors so companies such as Infosys and Wipro are making secondary ADR offerings with the goal of increasing liquidity and arbitrage the price differential themselves. Correlation to stock index between ADRs and local shares Another important source of disparity between ADR prices and its local traded securities are the co-movements between the stocks and the markets they are traded rather than where the company is established. A good example of this correlation with the US market is the Infosys ADR, which has been following the technology companies in the NASDAQ much more closely than the Indian stock market. Even more interesting, is the ADR premium of Wipro, which has been presenting a much more modest premium compared to Infosys. Considering both companies are in the same sector and in the same market, the differences between the ADR premium of Wipro and Infosys can only be explained by differences in investor’s perception rather than true valuation fundamentals.

Limits to Arbitrage Opportunities

Despite all of the advantages of the ADR, they are not seamless interchangeable with the local underlying stock. While the previous section of this paper explored the potential reasons for discrepancies between the ADR and the local stock, this section will describe the difficulties of acting on those discrepancies in order to generate profitable arbitrage.

The basic mechanics of the execution of the arbitrage from the perspective of an US investor would be the following: 1. U.S. investor acquires ADR by the ask price with U.S. dollars; 2. ADR is converted into the local security; 3. Local security is sold in the local market in local currency at the bid price; 4. Local currency amount is then converted into U.S. dollar at the ask exchange rate. Taxes, fees, liquidity issues, bid/ask spreads and restrictions can occur at any point of the transaction. Operational issues There are several operational issues that make the mechanics of the arbitrage difficult. The first one is related to time zone, which could potentially shrink trading sessions overlap, making it difficult for the arbitrage to occur simultaneously or even in the same day. Additionally, public information about the companies with ADR listing will also hit the market in local business hours, delaying reflections is the price of the ADR. Low liquidity for certain ADRs There are many instances of firms with multiple listings in different markets and countries having very low liquidity and trading in some of their listed securities. In this case, prices and premiums/discounts do not mean anything since these prices are not applicable for large trades (sometimes these issues trade less than 1,000 shares/day) and differences in prices cannot be exploited (large inefficiencies in bid and ask spreads, higher transaction costs of trading small lots, etc.). Transaction costs Transactions costs are probably one of the major inhibitors of arbitrage opportunities. Not every investor can maintain trading accounts in different countries and sustain minimal levels of investment and costs to be able to profitably exploit ADR-local shares arbitrage opportunities. Transaction costs oftentimes add up to a significant amount and have to be add up to the stock price (either the ADR or local stock) so as to calculate the “full price” for the stock and compare it to the price of the ADR (or vice versa). Although these costs may not disallow arbitrage opportunities to emerge, they create what we call a no-arbitrage band.


1. Approvals The issue of ADRs/GDRs requires the approvals of Board of Directors, Shareholders, Ministry of Finance, Ministry of Company Affairs, Reserve Bank of India, Stock Exchange and Financial Institutions.

2. Appointment of Intermediaries ADR/GDR normally involve a number of Intermediaries including lead Manager, Co-Manager, Overseas Depository Banks, Listing Agent, Legal Advisor, Printer, Auditors and Underwrites.

3. Principal Documentation The principal documents required to be prepared include subscription agreement, Depository Agreement, Custodian Agreement, Agency Agreement and Trust Deed.

4. Pre and Post Launch Additional Key Actions Apart from obtaining necessary approvals, Documentation, additional key actions necessary for Making the issue of ADR/GDR a success, include (i) Co appointment of various agencies and proper institution of a Board Sub-Committee (ii) Selection of Syndicate Members (iii) Constitution of a task force for due diligence (iv) Listing (v) Offering Circular (vi) Research Papers (vii) Pre-marketing (viii) Timing, pricing and size of the issue (ix) Road shows (x) Book Building and pricing of the issue (xi) Closing of the issue (xii) Allotment


The following table outlines the different filings required by the SEC in the US, the way ADRs are traded and whether new capital can be raised, according to the type of ADR program issued

GDR - Filings for any US tranche will depend on which structure is chosen: Normaly a Level III or Rule 144(a) program.

The right granted to existing shareholders of a company to receive or to subscribe to new shares under a "rights" or "bonus" issue is also extended to registered ADR holders. However, a US investor can only take possession of these rights in the US if the issuer undertakes to register the offering, or if an exemption from registering it is available. In all other cases, the depositary must arrange to sell the entitlement to the rights in the home country and distribute the cash proceeds to the ADR holders.

Form F-6 Form F-6 is used for the registration of depositary shares as evidenced by ADRs (or GDRs) that are issued by a depositary bank against the deposit of securities of a foreign issuer under the Securities Act of 1933. The information is prepared by the company under the guidance of the depositary bank at the inception of either an unsponsored or sponsored program. Form 20-F A Form 20-F is filed as a registration statement/annual report by issuers of Level II or III

sponsored ADRs/GDRs. It is a comprehensive report of all material business activities and financial results and must comply with US GAAP. The Form 20-F consists of four distinct parts. Part I requires a full description of the issuer's business, details of its property, any outstanding legal proceedings, taxation and any exchange controls that might affect security holders. Part II requires a description of any securities to be registered, the name of the depositary bank for the DRs and all fees to be charged to the holders of DRs. Part III requires information on any defaults upon senior securities. Part IV requires various financial statements to be submitted. Form F-1 Foreign issuers planning a public offering in the US via a Level III DR program must register the proposed new securities by filing Form F-1. This form requires the following information to be included in the prospectus: use of proceeds, summary information, risk factors and ratio of earnings to fixed charges, determination of offering price, dilution, plan of distribution, description of securities to be registered, name of legal counsel and disclosure of commissions.

GAAP Conversion (Level II and Level III ADR Programs) The process of converting financial statements to the US standard of Generally Accepted Accounting Principles (GAAP) can be complex but depends on the compatibility of accounting procedures in the issuer's home country with those of the US. Regulated industries such as banking may find the costs of conversion more onerous than those companies in less regulated sectors.

Tax Compliance US Tax Non-US companies are not responsible for complying with the US tax requirements regarding dividend payments made in the US under their DR program. The depositary bank handles any such issues. Local Tax The depositary provides registered GDR holders with tax certification forms prior to each payment date and returns them to the issuer so that the correct tax can be deducted according to local regulations.

‘Indian ADRs Will Shine in 2009’
(Created by EQUITIES Magazine)

India’s cheaper than it’s been in decades and offering 5% growth. By Anthony W. Haddad Like many emerging markets, the past year was a difficult one for India. After five years of 9% GDP growth and a booming stock market, a global recession, a group of terrorists, and an Enrontype scandal at Satyam helped shed 60% from shares in the country’s companies and 20% of the value of the rupee against the dollar. Though its growth is expected to be trimmed by more than a third this year, this country of more than a billion people is still estimated to grow by more than 5%, beating even China. And the growth rates of the past are expected to return in years to come. Since the reforms of the early 1990s, India’s development has always been more a question of “when” than “if.” After all, the country’s growth was never based on exporting cheap, labor-intensive goods to developed countries. It was about the development of a consumption-based domestic market on the back of technology, services, and natural resources. India is the largest democracy in the world. With the exception of the recent scandal, it uses conservative accounting practices. English is its official language of business, and its students compete with Western students in the global marketplace. In the recent past, these qualities have made India a popular destination for investment capital. In the very near future, it will return as such. The country still has robust economic growth, contained inflation, and a growing middle class whose current spending potential dwarfs the level it will soon become. Millions of Indians have benefited from its years of economic expansion, but millions more still live in abject poverty. Its road network is the second largest in the world yet still in need of upgrades. Its cities can dazzle with light, but power outages are common. Over the next five years, India intends on investing a half-trillion dollars on infrastructure. One company that can benefit from this is Sterlite Industries Ltd. (NYSE: SLT), India’s largest copper producer. Valued at less than $4 billion, the stock trades at a 75% discount to its 2007 high, has a little less than $4 billion in cash and equivalents on the books, and is virtually debt free. Like many other commodities, the price of copper is down to multiyear lows, affecting Sterlite’s bottom line. The question remains exactly how long the company can survive with decreased demand, a glut of copper, and a weak economy. But with that much cash—and at the extremely

low price it can produce copper—the company seems to be positioned well to survive this downturn, and perhaps even grow at robust rates in the latter half of this year. You may have heard about the incredible expansion of mobile phones in India. But keep in mind that it’s still going on. The country adds millions of new users to its network every month, and still only 20% to 30% of people have them today. Mahanagar Telephone Nigam Ltd. (NYSE: MTE), a provider of telecommunications services in Delhi and Mumbai, is down 70% from its highs to a market cap of less than $1 billion. It’s holding $700 million in cash and is debt free. The company raised its dividend in September and has a dividend yield of about 5% at the current numbers. Mahanagar may be tempting at these levels. A story about India seems incomplete without some mention of its outsourcing companies. You’ve probably spoken to employees from WNS Limited (NYSE: WNS) before. Its clients include about 20 U.S. retail banks, 10 financial advisory firms, electronics giants, pharmaceutical companies, and more. It has more than 20,000 employees. A smaller company, WNS had been hit harder than Sterlite, but it’s mounted a nice gain off its lows. With about a $300 million (and growing) market cap, the company stands at an 80% discount to its highs. The company has less cash on hand than many will feel comfortable with. Although I expect them to survive, waiting for their March 2009 annual filing seems prudent, even at the cost of missing out on the early gains. India’s rising middle class will create even more opportunities. In 2005, its middle class was about 5% of the population. By 2015, it is expected to rise to 20% and by 2025 to more than 40%. While much of this segment’s money goes to consumables and luxury items, some of it ends up as investments with financial institutions. After all, the middle class can afford to send their children to school, buy businesses, and retire younger. This is why some of the biggest gains we’ll see in India will be in financials. This long-term trend in India also has many shortterm opportunities right now. Financials are cheaper today than they’ve been in years. And though it’s current growth pales in comparison to previous years, it dwarfs the growth, or lack thereof, that we’re seeing in most of the largest economies. (The U.S. economy is expected to contract by 2%, Japan by 4%, German by 2.5%, and Britain by 3%.) HDFC Bank Ltd. (NYSE: HDB) is a private sector bank and financial services company. The $7.5 billion company engages in retail banking, wholesale banking, and treasury operations. It has been affected by the economic downturn, but it’s all overblown, and the company doesn’t deserve the 60% loss in its price. Asset growth has slowed, but it continues to grow steadily. Management believes that loans will grow at 20% during the next year, marginally lower than the previous year. This is largely because of the lower demand for property. The company believes that customers are waiting for property prices to drop.

India’s second-largest private sector lender beat forecasts with a 45% jump in profits in its most recent quarterly report, but its shares have fallen. Banks in India are dealing with rising defaults by customers, caused by high borrowing costs and a slowing economy that has hit some jobs. The company’s gross non-performing loans rose to $392 million in the most recent quarter, up 14% from July to September 2008. “In the kind of environment we are going through, [nonperforming loans] are expected to go up,” Executive Director Paresh Sukthankar said on CNBC. “With adequate provisioning, we are not concerned by the slight rise.” HDFC has seen 30% or better growth in net profit for 27 consecutive quarters. It has raised its dividend five times in the past six years. It’s sitting on $3.5 billion in cash (a little less than half its market cap) and has a 15% ROE. Quarterly revenue growth for the most recent quarter is up 58% over the 2007 quarter. The company pays a paltry dividend (about 1%), but this kind of growth isn’t cheap. While I’d be a fool to promise that any banking company doesn’t have potential time bombs, HDFC appears healthy, and I expect a 25% capital gain by the end of the year, bringing it into the upper $60s. And while that’s attractive, it’s nothing compared to what HDFC will do in coming years. Not only will it benefit from India’s continued boom, but also it’s not difficult to imagine it entering the U.S. and U.K. markets. After all, they understand how to grow, and it’s a more open playing field these days. ICICI Bank (NYSE: IBN) is an Indian bank in the United States, Canada, and the United Kingdom, where the company is gaining customers and increasing its deposit base by offering higher interest rates. But that’s not hurting their bottom line. In the fourth quarter of 2008, the company’s profits were up 25% over the same period in 2007. The $7.5 billion bank offers commercial banking, treasury and investment banking, and other products such as insurance and asset management. The company has about 1,500 branches around the world, and it expects to open another 500 in the next two years. Having fallen from the low $70s to the low teens, ICICI looks like a steal. Revenue has shot up 40% in the fourth quarter over 2007. Its P/E is around 10, and its trailing yield (dividends over the last 12 months/the current stock price) is nearly 4%. (Although I wouldn’t bet the bank that ICIC will give that out this year.) With a quarter of its loan book coming from international business, investors are still worried about problems that might appear amid the current crises. ICICI has slowed credit growth and is looking to preserve capital. This is part of the reason we won’t likely see the full dividend this year, but I don’t see the growth story being interrupted. I expect the company to gain 50% and pass the $20 mark this year.

A negotiable certificate held in the bank of one country representing a specific number of shares of a stock traded on an exchange of another country To raise money in more than one market, some corporations use global depositary receipts (GDRs) to sell their stock on markets in countries other than the one where they have their headquarters. The GDRs are issued in the currency of the country where the stock is trading. For example, a Mexican company might offer GDRs priced in pounds in London and in yen in Tokyo. Individual investors in the countries where the GDRs are issued buy them to diversify into international markets. GDRs let you do this without having to deal with currency conversion and other complications of overseas investing. The objective of a GDR is to enable investors in developed markets, who would not necessarily feel happy buying emerging market securities directly in the securities’ home market, to gain economic exposure to the intended company and, indeed, the overall emerging economy using the procedures with which they are familiar. Global Depository Receipt (GDR) - certificate issued by international bank, which can be subject of worldwide circulation on capital markets. GDR's are emitted by banks, which purchase shares of foreign companies and deposit it on the accounts. Global Depository Receipt facilitates trade of shares, especially those from emerging markets. Prices of GDR's are often close to values of related shares. GDRs are securities available in one or more markets outside the company’s home country. The basic advantage of the GDRs, compared to the ADRs, is that they allow the issuer to raise capital on two or more markets simultaneously, which increases his shareholder base. They gained popularity also due to the flexibility of their structure. GDRs are typically denominated in USD, but can also be denominated in Euros. GDRs are commonly listed on European stock exchanges, such as the London Stock Exchange (LSE) or Luxembourg Stock Exchange, or quoted on SEAQ (Stock Exchange Automated Quotations) International, and 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 the US. Large part of the GDR programs consists of a US tranche, which is privately placed and a non-US tranche that is sold to investors outside the United States, typically in the Euro markets. An overwhelming majority of DR programs by companies from Central and Eastern European countries are established as GDRs, typically listed in London and traded by qualified institutional investors in Euromarkets under regime of so called Regulation S and some of them also in the American OTC markets in accordance with Rule 144A.

Two different GDR structures When GDRs are structured with a Rule 144(a) offering for the US and a "Regulation S" offering for non-US investors, there are two possible options for the structure. Unitary Structures Under a unitary structure, a single class of DRs is offered both to QIBs in the US and to offshore purchasers outside the issuer's domestic market, in accordance with Regulation S. All DRs are governed by one Deposit Agreement and all are subject to deposit, Withdrawal and resale restrictions. Bifurcated Structure Under a bifurcated structure, Rule 144(a) ADRs are offered to QIBs in the US and Regulation S DRs are offered to offshore investors outside the issuer's domestic market. The two classes of DRs are offered using two separate DR facilities and two separate Deposit Agreements. The Regulation S DRs are not restricted securities, and can therefore be deposited into a "side-by-side" Level I DR program, and are not normally subject to restrictions on deposits, withdrawals or transfers. However, they may be subject to temporary resale restrictions in the US.

ADVANTAGES OF GDR/EDR o EDRs/GDRs can be launched as part of a private or public offering. o They allow a single fungible security to be placed in one or more international markets, thus giving access to a global investor base. o They may allow the issuer to overcome local selling restrictions to foreign share ownership. o GDRs are eligible for settlement through Clearstream, Euroclear.

DISADVANTAGES If the US tranche of a GDR is structured as a Rule 144(a) private placement, the disadvantages of an RADR program will apply. If it is structured as a Level III program, the reporting and cost features of such programs will apply.


GDR Companies
# euro convertible bond **adjusted for bonus

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 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

Size Shares GDR Of GDR per Issue Issue GDR Price **(US$) US $ Mill 125.00 137.77 110.00 35.00 50.00 125.00 100.00 125.00 70.00 50.00 25.00 48.00 40.00 40.00 55.00 30.00 100.00 61.11 22.50 45.00 90.00 100.00 80.00 50.00 72.00 100.00 76.00 90.00 60.00 86.25 125.00 100.00 50.00 230.00 315 70.38 1.0 3.0 1.0 1.0 1.0 3.0 2.0 1.0 1.0 1.0 5.0 1.0 1.0 1.0 1.0 2.0 5.0 5.0 6.0 5.0 1.0 1.0 1.0 4.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 10.0 5.0 5.0 0.5 9.78 12.79 16.89 8.77 9.20 14.40 254.00 10.67 12.60 7.56 13.55 11.16m 9.30 8.39 16.60 8.05 15.94 12.75 9.67 26.28 12.98 20.50 5.95 9.30 10.73 16.00 2.05 4.23 6.77 16.60 15.01 4.51 11.37 11.50 9.80 34

Arvind Mills Ashok Leyland Bajaj Auto Ballarpur Ind.# Bombay Dye BSES Ltd Century Textiles CESC Core Parent Crompton Greaves DCW Dr. Reddy's E. I. Hotels EID Parry Finolex Cab Flex Industries G.E. Shipping G.N.F.C GAIL Garden Silk Grasim (1st) Grasim (2nd) Guj Ambuja # Himachal Futuri Hindalco (1st) Hindalco (2nd) Hindustan Dev. India Cements Indian Alum. Indian Hotels Indian Rayon Indo Gulf Indo Rama ICICI ICICI (ADR) Infosys

Textiles Autos Autos Paper Textiles Power Diversified Power Pharma Electrical Diversified Pharma Hotels Fertiliser Cables Packaging Shipping Fertiliser Oil & Refineries Textiles Diversified Diversified Cement Telecomm. Aluminium Aluminium Diversified Cement Aluminium Hotels Diversified Fertiliser Textiles Finance Finance IT

IPCL ITC J.K. Corp Jain Irrig JCT Ltd. 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 S.A.I.L. Satyam Infoway S.I.E.L. Sanghi Poly SIV Ind SPIC SBI Sterlite India# Tata Electric Telco (1st) Telco (2nd) Tube Invest United Phos. Usha Beltron Videocon Int. VSNL Wockhardt

Petrochemicals Cigarettes Diversified Plastics Textiles Diversified Diversified Diversified Autos Telecom Diversified Steel Hotels Pharma Textile Diversified Diversified Diversified Steel IT Diversified Textiles Textiles Fertiliser Banking Diversified Power Autos Autos Cycles & Acc. Pesticides Cables Electronics Telecomm. Pharma

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 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

85.00 68.85 55.00 30.00 45.00 30.00 150.00 135.00 74.75 418.53 47.70 125.00 30.00 100.00 60.00 150.00 300.00 100 125.00 75.00 40.00 50.00 45.00 65.00 369.95 100.00 65.00 115.00 200.00 45.60 55.00 35.00 90.00 527.00 75.00

3.0 1.0 1.0 1.0 10.0 1.0 2.0 2.0 1.0 2.0 1.0 10.0 1.5 1.0 2.0 2.0 2.0 15.0 15.0 1.0 3.0 5.0 1.0 5.0 2.0 1.0 100.0 1.0 1.0 1.0 1.0 1.0 1.0 0.5 1.0

13.87 7.65 8.00 11.13 16.96 1.60 16.70 15.35 4.46 11.958 3.18 21.36 12.75 19.38 10.61 16.35 23.50 23.0 12.97 18.0 14.64 9.56 6.37 11.15 14.15 17.86 710.00 8.75 14.25 6.58 20.50 10.70 8.10 13.93 14.35

EUROPEAN LISTINGS LONDON AND LUXEMBOURG At the time of writing, most GDRs have consisted of a Rule 144a offering in the US and a Euromarkets element. With these instruments there is no listing in the US, but many are listed in London or Luxembourg, the traditional exchanges for listing euro market instruments. A listing on a recognized stock exchange adds to the visibility of the issue and provides a wider potential market; many institutional investors have limits on the number of unlisted securities, or securities which are not listed on certain specified exchanges, in which they can invest. Both the London and Luxembourg Stock Exchanges list GDRs, and since both are governed by the same European Union directive, their listing requirements are broadly similar. The differences lie mainly in the level of disclosure, the ease and speed with which listings can be obtained and the level of visibility afforded by the listing. Listings on the London Stock Exchange are generally arranged by the Lead Manager of the GDR issue acting as Listing Agent, while for Luxembourg the Listing Agent must be a Luxembourg bank with a seat on the Luxembourg Stock Exchange. This is not normally a service the Lead Manager of the GDR issue can provide directly. A listing on the London Stock Exchange makes it easier for a GDR to be quoted on SEAQ International, the exchange's electronic price quotation service, although such a listing is not a requirement for trading on SEAQ.

REGULATORY PROVISIONS FOR ADR/GDR The issue of ADR/GDR by India Inc. is governed by following legal provisions: 1. Section 6 (3) (b) of Foreign Exchange Management Act (FEMA), 1999 reads as follows: 6. Capital account transactions. – (1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. (2) The Reserve Bank may, in consultation with the Central Government, specify(a) Any class or classes of capital account transactions which are permissible; (b) the limit up to which foreign exchange shall be admissible for such transactions: Provided that the Reserve Bank shall not impose any restriction on the drawl of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary courts of business.

(3) Without prejudice to the generality of the provisions of sub-section (2), the Reserve Bank may, by regulations, prohibit, restrict or regulate the following(a) Transfer or issue of any foreign security by a person resident in India; (b) Transfer or issue of any security by a person resident outside India

FOREIGN EXCHANGE MANAGEMENT ACT (FEMA) An Indian corporate can raise foreign currency resources abroad through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing Global Depository Receipts (GDRs) and/ or American Depository Receipts (ADRs), subject to the conditions that:

• •

• •

the ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government there under from time to time The Indian company issuing such shares has an approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance, and There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets. The FCCB issue proceeds need to conform to external commercial borrowing end use requirements; in addition, 25 per cent of the FCCB proceeds can be used for general corporate restructuring Is not otherwise ineligible to issue shares to persons resident outside India in terms of these Regulations. There is no limit up to which an Indian company can raise ADRs/GDRs. However, the Indian company has to be otherwise eligible to raise foreign equity under the extant FDI policy.

A company engaged in the manufacture of items covered under Automatic route, whose direct foreign investment after a proposed GDRs/ADRs issue is likely to exceed the percentage limits under the automatic route, or which is implementing a project falling under Government approval route, would need to obtain prior Government clearance through FIPB before seeking final approval from the Ministry of Finance.

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? 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. o 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. o

END USE RESTRICTIONS No end-use restrictions except for a ban on deployment / investment of such funds in Real Estate or the Stock Market. LIMIT OF OFFERINGS There is no monetary limit up to which an Indian company can raise ADRs / GDRs.

VOTING RIGHTS Voting rights on shares issued under the Scheme shall be as per the provisions of Companies Act, 1956 and in a manner in which restrictions on voting rights imposed on ADR/GDR issues shall be consistent with the Company Law provisions. RBI regulations regarding voting rights in the case of banking companies will continue to be applicable to all shareholders exercising voting rights. PRICING OF ADR/GDR The pricing of ADR / GDR issues should be made at a price not less than the higher of the following two averages: (i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; (ii) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date.

TWO WAY FUNGIBILITY SCHEME Under the limited Two-way fungibility Scheme, a registered broker in India can purchase shares of an Indian company on behalf of a person resident outside India for the purpose of converting the shares so purchased into ADRs/GDRs. The operative guidelines for the same have been issued vide A.P. (DIR Series) Circular No.21 dated February 13, 2002. The Scheme provides for purchase and re-conversion of only as many shares into ADRs/GDRs which are equal to or less than the number of shares emerging on surrender of ADRs/GDRs which have been actually sold in the market. Thus, it is only a limited two-way fungibility wherein the headroom available for fresh purchase of shares from domestic market is restricted to the number of converted shares sold in the domestic market by nonresident investors. So long ADRs/GDRs are quoted at discounts to the value of shares in domestic market, an investor will gain by converting the ADRs/GDRs into underlying shares and selling them in the domestic market. In case of ADRs/GDRs being quoted at premium, there will be demand for reverse fungibility, i.e. purchase of shares in domestic market for re-conversion into ADRs/GDRs. The scheme is operationalized through the Custodians of securities and stockbrokers under SEBI


Depositary receipts (mostly denoted as ADR or GDR), an equity instrument representing shares of a company listed on a foreign exchange, are still very little known in the Czech Republic (and not only there), although their history reaches back to 1927. DRs have gained much popularity in the 1990s. After a slowdown in 2001/2002, the years 2003 and especially 2004 brought a renewed progress of the DR markets, which seems to be sustained in 2005. Also the Central European companies are gradually becoming aware of the advantages of DR offering. There is, however, still enough unused potential. In case the domestic and DR markets are integrated, there is a possibility of cross-border trading. The prices of underlying shares in the local market and the DRs should be therefore virtually equal, not allowing for arbitrage opportunities. The first hypothesis we tested is that the price of ordinary share in the local market and underlying local currency equivalent of the DR price are very closely correlated.

The price of underlying shares in the local market rarely remains unaffected by the DR issue. A company listing its equity internationally can gain from diversified shareholders’ base, increased demand or lower cost of capital. These are only some of the factors that may drive the share’s price up. Several studies have dealt with response of the underlying share’s price to the DR offering. The obtained results are, however, ambiguous. We focused on the impact of DR program establishment on the price of Czech, Polish and Hungarian shares. We wanted to prove that a price increase would follow the DR offering. It is usually expected a DR listing also improves liquidity of the company’s stock, as the potential investors’ base is extended, the visibility of the company both in DR and local markets is enhanced and cross-border trading is enabled. On the other hand, some argue, that trading in the stock shifts to the DR market and they worry about the impact on the overall liquidity of the local market. We tested whether a positive reaction of the domestic markets to the DR offering in terms of trading activity can be observed on a sample of Central European shares. The first chapter brings an insight into the DR world. In the second chapter we focus on prices of depositary receipts and the underlying shares. The two fields of interest are the correlation between the underlying share’s price and the local currency’s equivalent of the DR Price, and the response of the ordinary share’s price in the local market to the DR program introduction. The third chapter deals with liquidity effects subsequent to the DR listing. In the last chapter, we identify a few areas, where DRs are frequently employed and we suggest there is an unused potential of the instrument in the Czech Republic.

Ministry of Finance Department of Economic Affairs  31st July, 2008

Proposed changes in the ADR/GDR’s Pricing guidelines The “Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993” was initiated in 1993 to allow the Indian Corporate sector to access global capital markets through issue of Foreign Currency Convertible Bonds (FCCBs)/Equity Shares under the Global Depository Receipt Mechanism (GDR) and American Depository Receipt Mechanism (ADR). The Scheme has been amended several times since then. In order to bring the ADR/GDR guidelines in alignment with SEBI guidelines on domestic capital issues, Government, vide Press Note dated August 31, 2005, amended the pricing guidelines for Indian listed companies issuing ADR/GDR. The present pricing clause, thus, reads as under: “Listed Companies – The pricing should not be less than the higher of the following two averages: (i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date;

(ii) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two week preceding the relevant date. The “relevant date” means the date thirty days prior to the date on which the meeting of the general body of shareholders is held, in terms of section 81 (IA) of the Companies Act, 1956, to consider the proposed issue.” (iii) In the normal circumstances the extant pricing norms provides protection from price manipulation by the Issuer in domestic market. In the recent period, Government has received a number of representations from corporate that the extant pricing norms affect them adversely in the falling market. In order to remove hardship to companies in a falling market, Government is considering modifying the pricing guidelines for ADR/GDR issues. The proposal is to amend the parameter of the pricing norms to ‘two months’ in place of ‘six months’. In addition the definition of ‘the relevant date’ for such issues is also proposed to be modified as per SEBI (DIP) guidelines on preferential allotment and qualified institutions placements (QIP).


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.

REFERENCES Depository Receipt Hand book by Deutsche Bank BOOKS - Indian Financial System by M.Y. Khan -ADR IN CORPORATE ENVIRONMENT by M. THERESE REILLY DEBORAH L. MACKENZIE

Sign up to vote on this title
UsefulNot useful