DEPOSITRAY RECEIPTS: THE INDIAN PERSPECTIVE

Depositary Receipts: The Indian Perspective

Name of the Students
Mr. Neshwin Noel Almeida Ms. Mishna Fernandes Ms. Mrunalini Havaldar Mr. Sushant Madhukar Mallya

Course
Bachelor of Commerce (B.Com.)

Year
2007 – 2008

Name of the Guide
Mr. Sanjay Sawant Desai

Name of the College
Vidya Vikas Mandal’s Shree Damodar College of Commerce & Economics

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DECLARATION

We declare that this project report has been prepared by us, and has not previously formed the basis for the award of any diploma or degree. Class: T.Y. B.Com.

Name Neshwin Noel Almeida Mishna Fernandes Mrunalini Havaldar Sushant Madhukar Mallya

Roll No. 5002 5017 5025 5036

Signature

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CERTIFICATE

Certified that the project report is a record of work done by the candidates themselves during the period of study, under my guidance and that to the best of my knowledge it has not previously formed the basis of the award of any degree or diploma in Goa University or elsewhere.

Mr. Sanjay Sawant Desai Project Guide

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ACKNOWLEDGEMENT
A lot of effort has gone into the completion of this project. We wish to place on record our gratitude to the persons who made a contribution to the completion of this project. We express our sincere thanks to: Mr. Sanjay S. Desai, for his never-ending support. We thank him for all his valuable inputs which have contributed greatly to the project. Dr. I Bhanu Murthy, Principal of Shree Damodar College of Commerce and Economics, for all his love. Our family and friends who supported and encouraged us all the way.

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TABLE OF CONTENTS

1 Introduction
1.1 Introduction 1.2 Objectives of the Project 1.3 Methodology 1.4 Limitations

1–3
1 2 3 3

2 Depositary Receipts
2.1 Introduction 2.2 American Depositary Receipts (ADR) 2.3 Global Depositary Receipts (GDR)

4 – 21
4 5 18

3 ADR / GDR: Indian Perspective
3.1 Introduction 3.2 Scope for ADR / GDR in India 3.3. ADRs and India 3.4 GDRs and India 3.5 ADR vs. GDR

22 – 41
22 22 23 28 37

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4 ADR / GDR vs. The Rest
4.1 Foreign Currency Convertible Bonds (FCCB) 4.2 Foreign Institutional Investors (FII) 4.3 The ADR / GDR Advantage

42 - 48
42 45 46

5 Conclusion

49

Press Clippings Bibliography

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LIST OF TABLES, GRAPHS AND PIE CHARTS

List of Tables No.
1 2 3 4 5 6 7 8 9

Table Details
List of companies that have issued ADRs List of companies with funds raised through ADR Issue wise break up of funds raised through ADR Detailed break up of ADR: Shares ratio List of companies that have issued GDRs Detailed break up of GDR: Shares ratio ADR / GDR issuing companies Funds raised through issue of ADRs / GDRs Funds raised through issue of FCCBs

Pg. No.
24 24 25 27 29-30 35 38 40 43

List of Graphs No.
1 2

Graph Details
Funds raised through ADR by companies Issue wise break up of funds raised through ADR

Pg. No.
25 26

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3a 3b 3c 5 6

Companies that have raised more than $100 million Companies that have raised between $50 - $100 million Companies that have raised less than $50 million Average issue size of ADR / GDR program Funds raised through issue of FCCBs

32 33 34 41 44

List of Pie Charts No.
1 2 3 4

Pie Chart Details
Percentage wise break up of ADR: Shares ratio Percentage wise break up of GDR: Shares ratio ADR / GDR issuing companies as a percentage of the total Funds raised through ADR / GDR as a percentage of the total

Pg. No.
28 36 39 40

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CHAPTER 1 INTRODUCTION

1.1 INTRODUCTION

The world has become flat. In today’s global economy, trade is not restricted to the boundaries of the country. The world is believed to be one global village. It is in this very global village that a whole new world of opportunities has arisen for growth, expansion and diversification.

The Indian economy has assumed the personality of a young zealous, vibrant person. India opened its gates to the world 17 long years ago. What transpired ever since can be best described as the most amazing journey. We have been growing constantly at 8 – 9% ever since. We have become the outsourcing capital of the world. Just like our population, we are contributing more names than ever before to Forbes’ Rich List.

On the global scene, India has just arrived. India is an “emerging market”. India is the future. Our industrialists are buying out big companies – something we thought would never happen. This liberal and global India has become a destination for investors from all around the world. India has become a hotbed for foreign investment.

And it is this foreign investment that has been driving our capital market upwards into unprecedented territory. The indices of the two largest stock exchanges in India – the Nifty 50 of the National Stock Exchange (NSE) and the BSE Sensex of the Bombay Stock Exchange (BSE) – have touched levels of 20,000 and 6,000 points respectively; something solely attributed to the huge inflow of foreign funds into our capital markets.

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The project attempts to study the depositary receipts program with special reference to India. We wish to highlight the significance of this program in channeling funds into India. We hope that this study leaves you with a better understanding of the concept of depositary receipts and its significance in the Indian economy.

1.2 OBJECTIVES OF THE PROJECT To study the American Depository Receipts (ADR) and Global Depository Receipts (GDR) markets

To understand the legalities involved in the issue of ADRs / GDRs.

To find out the amount of funds collected by Indian companies through the issue of ADR / GDR.

To identify the reasons why companies raise funds through the issue of ADR / GDR.

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1.3 METHODOLOGY In our quest for a better understanding of the concept of depositary receipts program, we considered it imperative that our study shouldn’t be restricted to a theoretical overview. Hence, we have provided a statistical analysis to establish the importance of this program to India. We have compiled some statistics which demonstrates this significance. We collected most of our data from the internet since this is a dynamic concept that keeps changing itself to adjust to the changing times. We have also studied in brief alternate means of raising foreign finance with a view to establishing the superiority of the depositary receipts program over such means.

1.4 LIMITATIONS Despite our best efforts, this project suffers from certain limitations which were beyond our control. We have enlisted them as under: As a result of the topic being a dynamic one, we had to restrict ourselves to the largely, not wholly, to the internet as a source.

With the ADR / GDR issuing companies being compelled to disclose detailed statistics only to their depositary banks, we were unable to collect as much statistical data as we would have liked

Although we have obtained the statistics from highly credible sources, we cannot vouch for its accuracy.

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CHAPTER 2 DEPOSITARY RECEIPTS

2.1 INTRODUCTION In an era of rapid globalisation, investors are looking beyond the boundaries of their countries for investment opportunities. This has given rise to opportunities for companies looking to expand into new markets, tap new customers, get hold of a new investor base and raise more capital.

There was a great demand for foreign capital in some of the lesser developed countries. At the same time, supply of capital was in excess in the countries like U.S.A. and England. There was a need to bridge this gap and make a channel to enable the flow of funds from these countries to the ones that required the funds. Investing without such a channel was a challenge not just financially but also administratively. The transactions were complicated and settlement of the transactions in was very difficult owing to currency values.

In an effort to bridge this gap, JP Morgan introduced a system of depositary receipts in 1927. JP Morgan intended to provide a channel that allows for easier flow of funds from U.S.A. to other countries by offering them investment options abroad. Hence, the depositary receipts program was intended as both an investment vehicle as well as an investment option. Currently, there are two major depositary receipt programs – the American Depositary Receipts and the Global Depositary Receipts.

American Depositary Receipts (ADRs) enable companies to tap into the world’s largest and most active capital market – the American market. Global Depositary Receipts (GDRs) give the companies access to European markets besides the American market.

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2.2 AMERICAN DEPOSITARY RECEIPTS (ADR) 2.2.1 ADR Overview An American Depositary Receipt is a U.S. Dollar – denominated security that trades on the American market. An ADR is offered by financial institutions in the U.S. on behalf of the foreign company. The financial institution, usually banks, buys shares of companies wishing to issue equity in the U.S. Then, it bundles these shares into groups of shares and sells these “groups” of shares. These “groups” are known as American Depositary Receipts. Therefore, one American Depositary Receipt represents a fixed number of shares in the parent company.

The companies wishing to issue ADRs have to sign a contract with the financial institution. The financial institution which issues the ADRs on behalf of the company is also known as sponsor bank / brokerage or depositary bank. The contract which is signed by both parties is a comprehensive one. The provisions of the contract include the number of home – country shares that are on offer, the ratio of the shares – per – ADR, the voting rights of the U.S. investors and the tax obligations, among many others.

The voting rights, if any, lie with the depositary bank. The holders of the ADRs indicate to the depositary bank which way they want to vote. In the absence of any concrete arrangement, and if it doesn’t violate any U.S. law, the depositary bank votes as a proxy of the ADR – holder.

This contract is known as the Deposit Agreement. This agreement is the first step towards raising finance from the United States.

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2.2.2 Working of ADR These ADRs can be bought and sold just like any other American security. For this purpose, ADRs can even be listed on the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) or the NASDAQ. These ADRs are issued on any of these exchanges by the sponsor bank / brokerage. Hence, the company is required to disclose all financial information to the sponsor bank / brokerage.

The sponsor bank / brokerage sets a ratio of ADRs to number of shares purchased. This ratio should be either greater than or less than 1. This is done by the sponsor bank / brokerage so that the ADR is high enough to show substantial value yet be low enough to attract investors. For instance, let us assume that Reliance, an Indian company, is currently trading at Rs. 300 on the Bombay Stock Exchange. One ADR of Reliance, representing one share of Reliance, would trade at $7.50 on the American market. Investors in the U.S. would fall back from investing in such penny stocks. But if, one ADR of Reliance represented 10 shares, it would be trading at $75 per ADR, which falls in the substantial – yet – attractive category that was spoken about a little earlier. As a result, majority of the ADRs trade at prices between $10 and $100 per ADR.

So, for companies whose shares trade at relatively lesser values in the home country has an ADR that comprise of relatively greater number of shares. For instance, if a company trading at Rs.40 on the BSE may have an ADR that comprises of 40 shares, i.e. at a price of $40 per ADR.

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2.2.3 Price Determination ADRs are just like any other security. The initial price or listing price, in case the ADR is being listed, is determined by using the predetermined ratio as we have just seen. Once listed, ADRs are traded just like other stocks in the market. This means that the price of the ADR will be determined by the market mechanism of demand and supply.

Let us recollect our earlier illustration wherein Reliance is going to the U.S. market to raise capital. Let us assume that Reliance wishes to list on the NYSE through JP Morgan. JP Morgan fixes a ratio of 10:1, i.e. 1 ADR for every 10 shares of Reliance. Reliance is currently trading at Rs. 300 per share on the BSE. This equates to $75 per ADR at the fixed ratio. This means that the investor pays $45 for 10 shares in Reliance. So, after the initial listing, the Reliance ADR will be bought and sold at prices determined by the market. If the price of the ADR increases from $75 to $85 per ADR, it implies that 10 shares in Reliance are now worth $85. This translates to Rs. 340 per share as against the Rs. 300 that Reliance is trading at on the BSE.

Two important factors in the price determination of ADRs are the shares – ADR ratio and the exchange rate of the home currency. While changes in the ratio are predetermined, the exchange rate can prove to be extremely volatile. Hence, there arises an opportunity for arbitrage. With the availability of real – time news from all across the globe and modern technology that enables on line transactions, ADR prices of companies have come to follow the trend of the share prices in the home country.

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2.2.4 Structure The structure of the American Depositary Receipts is one that offers investment options to different kinds of investors. Investors can purchase ADRs through stock exchanges or even over – the – counter (OTC). The structure offers the interested companies the option of tapping retail investors as well as institutional investors.

The ADR structure offers four types of programs to the investors: • Level I Depositary Receipts • Rule 144A Depositary Receipts • Level II Depositary Receipts • Level III Depositary Receipts 2.2.4.1 Unlisted programs (Level I and Rule 144A DRs) A Level I ADR program is not listed on a stock exchange, but is available for retail investors to purchase and trade in the over-the-counter market via NASDAQ’s Pink Sheets. A Level I program does not create new capital in the US; rather, it gives the company an opportunity to develop or expand its shareholder base by establishing a foothold in the US market. The highlights of this program are given below: The issuing company has to maintain home – market accounting and disclosure standards. They needn’t conform to the regulations laid down by Securities Exchange Commission as regards accounting disclosure.

The issuing company makes use existing shares to raise funds from the American market. This implies that the company tries to meet investor’s demand and their own need for liquidity without issuing new shares for the
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American market. However, they can issue new ADRs. They can do so by first issuing the shares in the home market and then cancelling it. These shares are then made available to be bundled and issued.

The issuing company is exempt from U.S. reporting requirements. The reporting requirements include compliance with Rule 12g3-2(b).

The issuing company has to register itself with the United States Securities Exchange Commission through form F-6.

The bid prices of the ADRs are electronically updated at the end of the trading day through the Pink Sheets LLC information Service. Vendors like OTCquote.com even post real – time and intra – day quotes posted in the market. Such services, however, are available to the issuing company only through subscription.

2.2.4.2 Rule 144A Depositary Receipts A Rule 144A DR is the quickest, easiest, and most cost-effective way to raise capital in the United States. Under this program, new restricted shares are created and then privately placed with institutional investors. Rule 144A facilitates the resale of privately placed securities to Qualified Institutional Buyers in the US.

These institutions manage at least $100 million in securities, or are registered broker-dealers that own or invest, on a discretionary basis, $10 million in securities of non-affiliates.

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Let us study the highlights of this program: Companies issuing Rule 144A DRs are not subject to U.S. reporting requirements. In fact they aren’t even registered with the U.S. Securities and Exchange Commission. These DRs may not be advertised for or actively promoted by the issuer. This is because the sale of such DRs takes place through private placement. Under Rule 144A of the Securities Act, 1933, such trades are to take place electronically on a system developed and managed by the National Association of Securities Dealers. The system is called PORTAL. These DRs can be traded only to Qualified Institutional Buyers (QIBs). This underlies the essence of such DRs – that they are privately placed DRs. This type of an ADR may be converted into the unrestricted ADR type. However, for such a conversion to take place, at least two years from the last deposit of shares under this program have got to lapse. It is only after these two years that the Rule 144A type ADR is eligible to be converted.

2.2.4.3 Level II and Level III Depositary Receipts Listing your ADR means it will be traded on one of the three major US exchanges – the New York Stock Exchange (NYSE), The American Stock Exchange (Amex), or the (NASDAQ). ADRs that are listed on the NYSE or Amex, or quoted on NASDAQ, have higher visibility in the US market, are more actively traded, and have increased potential liquidity.

In order to list your company’s securities, you must meet the listing requirements of your chosen exchange or market. Your company must also comply with the registration provisions and continued reporting requirements of the Securities Exchange Act of 1934, as amended (“The Exchange Act”), as

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well as certain registration provisions of the Securities Act, which generally entail the following: Form F-6 registration statement, to register the ADRs to be issued. Form 20-F registration statement, to register the ADRs under the Exchange Act. This requires detailed financial disclosure from the issuer, including financial statements and a reconciliation of those statements to US GAAP (Generally Accepted Accounting Principles).

Annual reports (on Form 20-F) have to be filed on a regular, timely basis with the US Securities and Exchange Commission (SEC). Interim financial

statements and current developments, furnished on a timely basis to the SEC on Form 6-K, to the extent such information is made public or filed with an exchange in the home country or distributed to shareholders.

A Level II ADR uses existing shares to satisfy investor demand and liquidity. New ADRs are created from deposits of ordinary shares in the issuer’s home market. Because these securities are listed or quoted on a major US exchange, Level II ADRs reach a broader universe of potential shareholders and gain increased visibility through reporting in the financial media. Listed securities can be promoted and advertised, and may be covered by analysts and the media. In addition, listed securities can be used to structure incentives for an issuer’s US employees, or could be used to facilitate US mergers and acquisitions.

Level III ADRs are a public offering of new shares into the US markets. These capital raisings have a high profile: They are followed closely by the financial press and other media, often generating significant visibility for the issuer. In addition to the requirements noted above, an issuing company establishing a
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Level III ADR program is required to file Form F-1. This registers the securities underlying the ADRs that will be offered publicly in the US, including a prospectus informing potential investors about the issuer and any risks inherent in its business, the offering price of the securities, and the issuer’s plan for distributing the ADRs. In certain circumstances, an abbreviated registration statement (Form F-3) may be acceptable.

The company may substitute Form 8-A for Form 20-F registration to register under the Exchange Act. However, Form 20-F annual reports must be filed thereafter. This annual filing contains detailed financial disclosure from the issuer, financial statements and a full reconciliation of those statements to US Generally Accepted Accounting Principles (GAAP).

Level III ADRs can be actively promoted and advertised to increase investor awareness and market liquidity. As with Level II ADRs, the securities can be used to structure incentives for an issuer’s US employees, and may be used to facilitate US mergers and acquisitions.

2.2.5 Legal Framework: United States The Securities and Exchange Commission (SEC) was set up in 1929, just before the Great Depression. It was formed to regulate the American capital market. It is the SEC that regulates the ADRs in the U.S. In order to have its securities listed and traded in the U.S. through an ADR, the non – U.S. company must comply with these laws and regulations.

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2.2.5.1 Federal Securities Acts There are two federal securities laws that govern the creation of ADRs: The Securities Act, 1933, and The Securities Exchange Act, 1934 (amended as The Exchange Act). The Securities Act, 1933 The Securities Act, 1933, governs the offer and sale of securities. The Act requires full and fair disclosure of all information that the investors should be aware of in order to make a well informed decision as regards the securities on offer. It also contains requirements for the registration of these securities to be offered.

The Securities Exchange Act, 1934 The Securities Exchange Act, 1934, regulates the secondary markets for listed or unquoted securities. The Act requires on – going reporting from the issuers of these securities.

In short, the Securities Act governs the offer, sale and registration of securities while the Securities Exchange Act regulates the secondary markets through mandatory on – going reporting and disclosure by the issuers.

2.2.5.2 Key SEC Rulings The regulatory and disclosure requirements imposed upon the sponsor bank / brokerage depends on the kind of program that it has opted for.

Rule 12g3-2(b) Under this rule, the ADR – issuer is exempt from periodic disclosure and reporting norms if it plans to make its Level I ADRs available to the investors
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over – the – counter (OTC). This enables the ADR – issuer to make available to the SEC those details that it has already made public. Hence, it is freed from the burden of extensive reporting and other related requirements. Form F-6: Registration of Level I, II and III ADRs with SEC Under the Securities Act, any sponsor bank / brokerage establishing an ADR program must register the ADRs with the SEC. They do so by filing form F-6 along with a copy of the Depositary Agreement.

Besides the Depositary Agreement, sponsor banks / brokerages must also file the legal opinion of their counsel. This legal opinion states the rights that the holders of these ADRs will have access to.

Once the SEC receives the Form F-6 along with the other documents and has no further comments, the sponsor bank / brokerage will file an Acceleration Request with effectiveness on a particular date, on which the ADRs can be issued. To put it simply, the Acceleration Request filed by the sponsor bank / brokerage is more like an information slip notifying the SEC about when it plans to issue the proposed ADRs. This date on which they will issue the ADRs, is the effectiveness date.

Form 20-F: Annual Disclosure & Registration Document for Level II and III This form is used as both – a form for registration as well as for annual report filing. This form can be used for registration only by Level II and Level III ADR issuers. For sponsor banks / brokerages that have already registered, they have to use this form to file the annual reports. Depending on the use of this form, certain exemptions are made available.

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The following are some of the disclosures required to be made: • Identity of directors and other senior management • Historical financial information • Description of the properties • Financial prospects • Major stakeholders and related party transactions • Offer and listing plans • Company documents • Quantitative and qualitative disclosure of market risks • Code of ethics EDGAR Filings The SEC has put in place a system for electronic filing of disclosure documents. This system is known as EDGAR System, short for Electronic Data Gathering and Retrieval system. The major purpose of putting such a system in place is to enable the investors to analyse all the documents filed by the company before making any investment.

Under the EDGAR System the following forms need to be filed electronically: • Form F-6 (For registrations of ADRs) • Form 6-K (For informational reports) • Form 20-F (For Annual report / registration) • Forms F-1, F-2, F-3, F-4 (For public offerings) The regulations regarding filing of these forms are relaxed a little bit for sponsor bank / brokerage issuing Level I ADRs. However, such relaxation of regulation does not extend to the filing of Form F-6.
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2.2.6 Legal Framework: India In India, there wasn’t any specific regulation regarding the issue of ADRs for a long time. It was only in 2000 that the Reserve Bank of India (RBI) issued a notification permitting the issue of ADRs through the Foreign Exchange Regulation Act (FERA).

Notification No. F.E.R.A. 214 /2000-RB The Reserve Bank of India issued this notification on 20th January, 2000. Putting it quite simply, this notification permits the issue of ADRs by Indian companies. The following points highlight the essence of this notification: • All companies governed by the Indian Companies Act, 1956, are permitted to raise funds through the issue of ADRs

• The permission, however, shall stand to be cancelled if the company raising funds violates any norms or exceeds any limits laid down by the Foreign Investment Promotion Board (FIPB) or the Secretariat for Industrial Assistance (SIA).

• The company has to get approval from the Ministry of Finance, Government of India, to make such an issue.

• The company is permitted to enter into any agreement / sign any contract with foreign agencies provided that such a contract is essential for the issue of ADRs.

• The companies are allowed to make payments to the relevant authorities and the sponsor bank / brokerage towards their fees.
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• The companies are permitted to make any payments to U.S. government towards any tax liability incurred as a result of issue of ADRs

• The companies are allowed to maintain bank accounts in the U.S. to deposit the money collected.

• The companies are also permitted to maintain a register of foreign members if the company feels it necessary.

This notification cleared a lot of ambiguities that existed in the Foreign Exchange Regulation Act in the absence of any concrete provision regards ADRs.

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2.3 GLOBAL DEPOSITARY RECEIPTS (GDR)

2.3.1 GDR Overview A Global Depositary Receipt is a security that is traded in the European markets. A GDR and an ADR are essentially the same. The only difference is that the GDR is traded either on the Luxembourg Stock Exchange or the London Stock Exchange.

Just as in the case of ADRs, companies wishing to issue GDRs have to sign a Deposit Agreement with a sponsor bank / brokerage in Europe. GDR holders do not enjoy any voting rights.

2.3.2 Working of GDR GDRs can be bought and sold just like any other security. They are listed usually on the London Stock Exchange or the Luxembourg Stock Exchange.

Similar to ADR program, the sponsor bank / brokerage sets a ratio of number of shares in every GDR. One more significant difference between ADRs and GDRs is that in case of GDRs, a lot of companies have a ratio of one share per GDR. This is something that is not found in ADRs. Once the GDRs are listed, they are traded just like shares on the exchange.

An important point in this regard is that the investors who pick the shares from London or Luxembourg could be investors from other countries. For example, an investor from Japan can buy GDRs of an Indian company listed on the London Stock Exchange. Later on he can sell these GDRs to another investor from Brazil. This makes the program truly global in the sense that funds can be raised from different countries at one single point. This is the primary reason for
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these depositary receipts being christened Global Depositary Receipts and not British Depositary Receipts.

The GDRs are traded in Europe on one the Euromarket clearing systems – Euroclear and Clearstream. These clearing systems are similar to the American National Association of Securities Dealers’ Automated Quotation System (NASDAQ). These systems offer investors the benefits of real – time prices and online instant transactions among many other benefits.

2.3.3 Structure The most significant difference between the ADR and GDR lies in their structures. There are two types of GDRs – The Reg S Depositary Receipts and the pairing type.

2.3.3.1 Reg S Type Depositary Receipts The Reg S Type Depositary Receipt is the equivalent of the ADR. It is issued to the public through a sponsor bank / brokerage. Once issued, this GDR is listed on either the Luxembourg Stock Exchange or the London Stock Exchange.

This type of a GDR is open for every kind of investor. Unlike ADRs, where each type of ADR determines the investors that can trade it, the Reg S type GDR can be traded from any kind of investor to any kind of investor.

2.3.3.2 Pairing Type This GDR is a combination of the Reg S type GDR and a Rule 144A ADR. So when one such GDR is sold, it essentially implies the sale of a Reg S type GDR along with a Rule 144A ADR.

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The Reg S type GDR may be listed either in London or Luxembourg. The holders of these GDRs will be regular investors. However, the Rule 144A ADRs are privately placed through Qualified Institutional Buyers in the U.S. The biggest reason for such a program being subscribed to is the fact that such a program enables the issuing company to raise funds not just from the U.S. and not just from Europe, but from both markets simultaneously.

2.2.4 Legal Framework: India In India, GDRs are governed by the same notification issued for ADRs.

Notification No. F.E.R.A. 214 /2000-RB The Reserve Bank of India issued this notification on 20th January, 2000. It allows the issue of GDRs. The following points highlight the essence of this notification: • All companies governed by the Indian Companies Act, 1956, are permitted to raise funds through the issue of GDRs

• The permission, however, shall stand to be cancelled if the company raising funds violates any norms or exceeds any limits laid down by the Foreign Investment Promotion Board (FIPB) or the Secretariat for Industrial Assistance (SIA).

• The company has to get approval from the Ministry of Finance, Government of India, to make such an issue.

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• The company is permitted to enter into any agreement / sign any contract with foreign agencies provided that such a contract is essential for the issue of GDRs.

• The companies are allowed to make payments to the relevant authorities and the sponsor bank / brokerage towards their fees.

• The companies are permitted to make any payments to concerned government towards any tax liability incurred as a result of issue of GDRs

• The companies are allowed to maintain bank accounts abroad to deposit the money collected through such an issue.

• The companies are also permitted to maintain a register of foreign members if the company feels it necessary.

This notification cleared a lot of ambiguities that existed in the Foreign Exchange Regulation Act in the absence of any concrete provision regards GDRs.

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CHAPTER 3 ADR / GDR: INDIAN PERSPECTIVE

3.1 INTRODUCTION India was totally out of the picture as far as the ADR and GDR markets are concerned. This is primarily attributed to the protectionist policy followed by the government. The Indian economy opened up only in 1991 with the government deciding to adopt the policy of Liberalisation, Privatisation and Globalisation.

3.2 SCOPE FOR ADRs / GDRs With the opening up of the economy in 1991, Indian companies have been growing at a rapid pace. With this the economy has also been growing rapidly. All this has resulted in the opening up of huge opportunities for investment in India.

The following points highlight the need for / scope of ADRs and GDRs in India: • Rapid Growth: India’s economy has been growing at a rapid pace. To maintain the pace of such growth, huge amounts of investments are required. ADRs and GDRs enable such huge investments to be made in India.

• Non – availability of funds: The funds available in India fall far short of the funds required to maintain and increase the growth rate of the economy. ADRs and GDRs channel funds from foreign sources to India, thereby enabling such investments to be made.

• Bullish Market: The Indian market has been showing bullish tendencies in the recent past. Indexes of the two major stock exchanges in India – Nifty 50 of the National Stock Exchange (NSE) and BSE Sensex of the Bombay
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Stock Exchange (BSE) – have been rising upwards consistently in the last two to three years. This upward trend is both the cause and effect of foreign funds flowing in.

• Growing Investor confidence: As a result of India sustaining the bullish trend and Indian companies growing as fast as they are, global investors have greater confidence in Indian stocks than ever before. This sort of confidence is displayed by institutional investors as well as individual investors

3.3 ADRs AND INDIA The Indian ADR market came to life only in 2000 when the Reserve Bank of India (RBI) announced properly laid out rules and regulations for the issue of depositary receipts. The first company to raise funds through the issue of ADR is Rediff.com India Limited. The company raised $55.3 million or Rs. 2.3 billion ($1= Rs. 43) from their first issue in 2000. There are 11 companies that have raised $7.9 billion through 14 programs. Of the 11 companies, 8 are listed on the NYSE and the other 3 on NASDAQ.

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Company DR. Reddy's Laboratories Ltd. HDFC Bank Limited ICICI Bank Limited Infosys Technologies Limited Mahanagar Telephone Nigam Limited Rediff.com India Limited Satyam Computer Services Limited SIFY Limited Videsh Sanchar Nigam Limited Wipro Ltd. Tata Motors

Ticker RDY HDB IBN INFY MTE REDF SAY SIFY VSL WIT TTM

Industry Pharmaceutical Banks Banks Technology services Fixed line communication Technology services Technology services Technology services Fixed line communication Technology services Automobile

Exchange NYSE NYSE NYSE NASDAQ NYSE NASDAQ NYSE NASDAQ NYSE NYSE NYSE

Table 1: List of companies that have issued ADRs Source: Bank of New York

Let has have a look at the total funds raised by each of the companies mentioned above. The following table lists the companies that have raised funds through the issue of ADRs
Companies Dr. Reddy's HDFC Bank ICICI Bank Infosys Rediff Satyam SIFY Total Capital Raised Through ADR ($Million) 362 1,080 3,359 2,489 103 484 44
Table 2: List of companies with funds raised through ADR Source: Bank of New York

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Graph 1: Funds raised through ADR by companies Source: Bank of New York

As can be seen in the graph, ICICI Bank is the largest funds – raiser. It has raised a total of $3,359 million. It raised $466 million from their first issue in March 2005, $433 million from their second issue in December 2005 and $2,460 million from their last issue in June 2007.
Company HDFC Bank Dr. Reddy's SIFY Infosys Rediff Satyam ICICI Bank 1st Issue 607 229 44 1,605 48 323 246 2nd Issue 300 133 884 55 162 433 3rd Issue 172 466

Table 3: Issue – wise break up of funds raised through ADR Source: Bank of New York

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The table above gives a break – up of the funds raised from each issue. From the following graph, which is a graphical representation of the table given above, we can see that Infosys has raised the highest amount of funds through a single issue.

All figures in $ million

Graph 2: Issue wise break of funds raised through ADR Source: Bank of New York

ICICI Bank and HDFC Bank are the only companies that have issued ADRs three times. HDFC Bank made their issues in 2001, 2005 and 2007. Amongst the others, all have made two issues except for SIFY.

Note: Data for Tata Motors, Mahanagar Telephone Nagar Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL) for use in Graph 1 and Graph 2 was not available.

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The ADRs issued have different ratios. It is not necessary that the ADRs listed on the same exchange have the same ratio. From amongst the Indian companies, most of the ADRs are in the ratio 1:2. This implies that for every ADR there are two home – country shares. In other words, two shares make up one ADR. Earlier, we said that the sponsor bank / brokerage in the U.S. prefers to keep the raito of shares per ADR high enough to instill confidence in the investors and at the same time low enough for it to look like an attractive investment. Usually the ratio is 1:10. But in case of the Indian companies, the range of of the ratio lies between 1:0.5 to 1:3. This shows not only the financial strength of the Indian companies, but also the investor’s confidence in Indian stocks.

The following table shows the number of programs having the corresponding ADR: Shares Ratio.
ADR: Shares Ratio 1:0.5 1:1 1:2 1:3 Number of Programs
2 5 6 3

Percentage
12.50% 31.25% 37.50% 18.75%

Table 4: Detailed break up of ADR: Shares ratio Source: Bank of New York

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Pie Chart 1: Percentage wise break up of ADR: Shares ratio Source: Bank of New York

3.4 GDRs AND INDIA India entered the GDR market soon after the opening up of the economy in 1991. It entered the market with the Reliance issue in May 1992. Reliance raised $150 million through this issue. This was followed by the Grasim issue through which the company raised $90 million. Thereafter, there was a lull in the GDR market until the end of 1993. This was because of the securities scam that haunted the Indian stock markets during 1992 – 93.

The number of companies that have raised funds through the issue of GDRs is far greater than the number of companies that have raised funds through ADRs. Despite this, the total amount raised through GDRs is $7.2 billion.

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The following table lists out all the companies that have raised funds through the issue of GDRs along with the amount of funds raised.

Company Arvind Mills Ashok Leyland Bajaj Auto Ballarpur Industries Bombay Dyeing BSES Ltd Century Textiles CESC Core Parent Crompton Greaves DCW Dr. Reddy's Labs E. I. Hotels EID Parry Finolex Cab Flex Industries G.E. Shipping G.N.F.C GAIL Garden Silk Grasim Gujarat Ambuja Cement Himachal Future Hindalco Hindustan Dev. India Cements Indian Aluminum Indian Hotels Indian Rayon Indo Gulf Indo Rama ICICI Bank Infosys

Industry Textiles Automobile Automobile Paper Textiles Power Diversified Power Pharmaceutical Electrical Diversified Pharmaceutical Hotels Fertiliser Cables Packaging Shipping Fertiliser Oil & Refineries Textiles Diversified Cement Telecommunication Aluminum Diversified Cement Aluminum Hotels Diversified Fertiliser Textiles Finance IT

Funds Raised (In $ million) 125 138 110 35 50 125 100 125 70 50 25 48 40 40 55 30 100 61 23 45 190 80 50 172 76 90 60 86 125 100 50 230 70
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DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE

IPCL ITC J.K. Corporation Jain Irrigation JCT Ltd. Kesoram Ind Larsen & Toubro Mahindra & Mahindra MTNL NEPC Micon Nippon Denro Oriental Hotels Ranbaxy Labs Raymond Woolen Reliance Reliance Petroleum S.A.I.L. Satyam Infoway S.I.E.L. Sanghi Poly SIV Ind SPIC SBI Sterlite India Tata Electric Tata Motors Tube Invest United Phos. Usha Beltron Videocon International VSNL Wockhardt

Petrochemicals Cigarettes Diversified Plastics Textiles Diversified Diversified Automobile Telecommunication Diversified Steel Hotels Pharmaceutical Textile Diversified Diversified Steel IT Diversified Textiles Textiles Fertiliser Banking Diversified Power Automobile Cycles Pesticides Cables Electronics Telecommunication Pharmaceutical
Source: www.gdr.in

85 69 55 30 45 30 285 75 419 48 125 30 100 60 450 100 125 75 40 50 45 65 370 100 65 315 46 55 35 90 527 75

Table 5: List of companies that have issued GDRs

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Majority of the funds raised by these companies was post 1993. The securities scam not only shattered investor confidence in India, but also the confidence of the global investors who had invested or were considering an investment in Indian stocks. The 1994-95 season was the peak. Most of these companies got themselves listed during this time.

Videsh Sanchar Nigam Limited (VSNL) raised the largest amount of funds through the issue of GDRs. It has raised $527 million in this market. The companies closest to VSNL in terms of funds raised are Reliance, who’ve raised $450 million and Mahanagar Telecom Nigam Limited (MTNL) who raised $419 million. From amongst the rest of the companies, SBI has raised $370 million while Tata Motors have raised $319 million. There are a handful of companies that have raised between $100 - $200 million. Then there’s a big group of companies who have raised a capital of less than $100 million.

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Companies That Have Raised More Than $100 million
Tata Motors Sterlite India SBI S.A.I.L. Reliance Petroleum Reliance Ranbaxy Labs Nippon Denro# MTNL L&T Indo Gulf Indian Rayon ICICI Hindalco Grasim G.E. Shipping CESC Century Textiles BSES Ltd Bajaj Auto Ashok Leyland Arwind Mills VSNL 0 200 400 100 125 100 125 110 138 125 527 600 172 190 100 125 230 Total Capital Raised Through GDR ($Million) 285 100 125 419 125 100 450 100 370 315

Graph 3a: Companies that have raised more than $100 million through GDRs Source: www.gdr.in

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Companies that have raised between $50 $100 million
Wockhardt Videocon Int. United Phos. Tata Electric SPIC Satyam Infoway Sanghi Poly Raymond Woolen Mahindra & Mahindra J.K. Corp ITC IPCL Infosys Indo Rama Indian Hotels Indian Alum. Hindustan Dev. Himachal Futuri Guj Ambuja G.N.F.C Finolex Cab Crompton Greaves Core Parent Bombay Dye India Cements 0 50 50 90 100 55 50 70 61 50 80 60 76 50 86 70 55 69 85 Total Capital Raised Through GDR ($Million) 50 60 75 55 65 65 75 75 90

Graph 3b: Companies that have raised between $50 - $100 million through GDRs Source: www.gdr.in

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Companies that have raised less than $50 million
Usha Beltron Tube Invest SIV Ind S.I.E.L. Oriental Hotels NEPC Micon Kesoram Ind JCT Ltd. Jain Irrig Garden Silk GAIL Flex Industries EID Parry E. I. Hotels DCW Ballarpur Ind. Dr. Reddy's 0 10 20 30 40 25 35 48 50 23 30 40 40 30 45 30 45 Total Capital Raised Through GDR ($Million) 30 48 40 35 46 45

Graph 3c: Companies that have raised less than $50 million through GDRs Source: www.gdr.in

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The pattern of the ratio of shares per GDR is quite different from the pattern of the ratio of shares per ADR. In fact, nearly 55% of the GDRs are in the ratio 1:1. This means that one GDR represents only one share in India. One factor that plays an important role in this is the difference in the mindset of the European investors from their American counterparts as regards Indian stocks. European investors seem to have greater confidence in Indian stocks than the Americans.

The following table shows the number of programs having the corresponding GDR: Shares Ratio.

GDR: Shares Ratio 1:0.5 1:1 1:1.5 1:2 1:3 1:4 1:5 1:6 1:10 1:15 1:100

Number Of Companies 2 39 1 9 4 1 8 1 3 2 1
Source: www.gdr.in

Percentage 2.82% 54.93% 1.41% 12.68% 5.63% 1.41% 11.27% 1.41% 4.23% 2.82% 1.41%

Table 6: Detailed break up of GDR: Shares ratio

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Pie Chart 2: Percentage wise break up of GDR: Shares ratio Source: www.gdr.in

The chart shows that the GDR: shares ratio ranges from 1:0.5 to 1:100. This indicates the presence of different kinds of companies. It indicates the presence of a large number of big Indian companies and quite a few number of small companies.

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3.5 ADRs vs. GDRs India’s entry into the GDR market dates back to 1992 with Reliance’s $150 million issue. Indian companies were hesitant to enter the ADR market until 2000, when the Reserve Bank of India issued clearly defined guidelines. Apart from this, there are several other reasons for most Indian companies’ preference towards the GDR market. They are listed as under: • Disclosure norms: Companies listed on any of the American stock exchanges are required to adhere to comprehensive disclosure norms. They have to disclose information relating not just to the ADR, but also detailed financial and non – financial information regarding the company. In contrast, the London Stock Exchange (where all of the Indian companies are listed) requires disclosure of only that information which relates to GDRs being issued.

• Voting Rights: American rules make it a necessity for ADR holders to be given voting rights. The London Stock Exchange (LSE) makes no such demand. Although companies wishing to give such voting rights are permitted to do so, they are not compelled to give these rights

• Accounting System Differences: Both U.S. and England follow accounting systems that differ from the Indian system. The Securities and Exchange Commission (SEC) makes it compulsory for companies issuing ADRs either to prepare their accounts under US GAAP or reconcile the accounts to US GAAP. The LSE, on the other hand, is satisfied with a Statement of Difference between the English accounting system and the Indian system.

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• Initial Listing Costs: There is a significant difference in the initial listing costs of listing in the U.S. and listing on the LSE. A U.S. listing could cost the issuing company anywhere between $1 - $2 million or Rs.400 – Rs. 800 crores ($1 = Rs. 40). These costs are down to about $200,000 - $400,000 or Rs. 0.8 – Rs. 1.6 crores for listing on the LSE.

The following table shows the number of companies that have issued ADRs as against the number of companies that have issued GDRs.

Instrument Issued ADR GDR

No. of Companies 11 63

Percentage 14.86% 85.14%

Table 7: ADR / GDR issuing companies Source: Bank of New York and www.gdr.in

Of the 74 companies that have raised funds through the issue of ADRs and GDRs, 11 have issued ADRs while the other 63 have issued GDRs. The following pie chart shows this in terms of percentage of total number of companies who have raised funds through depositary receipts.

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Pie Chart 3: ADR / GDR issuing companies as a percentage of the total Source: Bank Of New York and www.gdr.in

As shown above, an astounding 85.14% of the companies issue GDR for the various reasons that we listed above. One interesting point worth noting is that the measures which deter Indian companies from listing in the U.S. affect the smaller companies in a far greater manner. The companies listed in the U.S. are the “big boys” of “India Inc.”

The fact that the bigger companies are listed in the U.S. is evident from the amount of funds raised through these issues. It would be logical to assume that since 85.14% of the companies have issued GDRs, a near equal percent of funds would be raised. However, GDRs account for only 47.52% of the funds raised.

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Instrument ADR GDR

Funds Raised 7,92,13,84,003 7,17,13,90,000

Percentage 52.48% 47.52%

Table 8: Total funds raised through issue of ADRs / GDRs Source: Bank of New York and www.gdr.in

The following pie chart shows the amount of funds raised through ADRs and GDRs as a percentage of the total funds raised.

Pie Chart 4: Funds raised through ADR / GDR as a percentage of the total Source: Bank of New York and www.gdr.in

Although ADRs account for only 14.86% of the total issue of depositary receipts, they account for 52.48% of the funds raised. This goes to prove, as we stated earlier, that the Indian companies issuing ADRs are bigger than the ones issuing GDRs.

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As a result of the more funds being raised from lesser companies through the issue of ADRs, the average issue size of a company issuing ADR is much higher than than a company issuing a GDR. The average issue size in case of an ADR is about $720 million while this average drops to around $114 million in case of GDRs. The following graph shows the average issue size in case of ADR as against in case of a GDR.

Graph 5: Average issue size of a ADR / GDR program Source: Bank of New York and www.gdr.in

Although the general preference amongst Indian companies is to issue GDRs, India have managed to raise more funds in lesser time through the ADR market. It took us 16 years 63 companies to raise $7.2 billion through GDRs but only 7 years and 11 companies to raise $7.9 billion.

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CHAPTER 4 ADR / GDR VS. THE REST

4.1 FOREIGN CURRENCY CONVERTIBLE BONDS Foreign Currency Convertible Bonds (FCCBs) are a means of debt financing. FCCBs are bonds issued by companies in a foreign currency. The holders of these bonds have the option of converting the bonds into shares. Hence, a convertible bond can be said to be a mix between an equity instrument and a debt instrument.

The company that issues FCCBs offers the investor an option to convert his bonds into equity in the same company. Generally, the company permits such conversions at predetermined exchange rates and at predetermined prices. Most of the Indian companies set the conversion rate of these bonds at 10 – 50 percent. The investors can exercise this option only after having stayed invested in the FCCB for about 1 – 2 years after the issue.

FCCBs are attractive as both – an investment opportunity and as a channel to raise finance. These convertible bonds have proved to be an attractive prospect to both the investors as well as the companies issuing the bonds. The investors enjoy the safety of a guarantee of payments on the bond. The investors stand to gain a lot with a substantial increase in the companies stocks. They stand to gain from the improved stock position of the company by way of the warrants attached to the bonds. These warrants are activated when the price of the company’s stock reaches a certain point.

Companies issuing such bonds have a preference towards FCCBs owing to the equity aspect. This allows the company to reduce its debts by converting these debts into equity. Further, such a conversion adds value to the company.

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In the recent past, there has been an increasing preference for raising funds through the issue of FCCBs in India. Leading from the front in this respect are the IT majors, who seem to be making good use of the available opportunities.

The table below shows the amount of funds raised by a few companies through the issue of FCCBs Companies Videocon Indisutries CESC India Cements Jindal Indiabulls Apollo Hospitals EMCO Ltd. Bharat Forge Centurian Bank Nagarjuna Constructions HDFC Tata Power Tata Motors Ashok Leyland Bharti Group Zee Telefilms Funds Raised Through FCCB ($ Million) 75 40 100 65 130 65 10 100 10 100 500 200 400 100 115 100
Source: www.rediff.com

Table 9: Funds raised through issue of FCCBs

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Graph 6: Funds raised through issue of FCCBs Source: www.rediff.com

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4.2 FOREIGN INSTITUTIONAL INVESTORS (FII) Foreign Institutional Investor (FII) refers to a non – Indian institution that invests directly in India. A FII is an investor or and investment fund that invests in India, but is not registered in India. The FIIs in India include hedge funds, incsurance companies, penison funds and mutual funds.

FIIs enter the Indian market through the back door. They buy and sell shares from the exchange and do not directly invest their funds in the operations of Indian companies. The FIIs have to get themselves registered witht the Securities and Exchange Board of India (SEBI). SEBI has laid down guidelines with regards not solely to the quantum of investment, but also the procedures to be followed prior to such investment.

Recently, FIIs have been permitted to short sell equity in the Indian market through the notification no. A. P. (DIR Series) Circular No. 23, issued by the RBI. However, the custodian banks of these FIIs have to report on all transactions seperately to the RBI for the purpose of monitoring.

FIIs have been pouring in a lot of funds into the Indian markets in the recent past. In fact, FIIs have been playing a major role in the Indices of the country’s two major stock exchanges – Nifty 50 of the NSE and BSE Sensex of the BSE. The recent bullsihness of the Indian markets is attributed to the huge inflow of funds from the FIIs.

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4.3 THE ADR / GDR ADVANTAGE ADRs / GDRs have several benefits to offer to both issuers as well as the investors. Listed below are the various ways in which the issuers of ADRs / GDRs stand to gain Widened Investor Base: With the issue of ADRs / GDRs, Indian companies can expand their investor base to beyond the borders of the country. Further, this facilitates the company to divesify their investors.

Increased Liquidity: As in the case of any issue, the issue of ADRs / GDRs will increase the liquid position of the company. The compay can use these funds to fuel their expansion plans.

Global Visibilty: Entering the depositary receipts market would result in the issuing company becoming globally visible. This enables Indian companies to enhance their reputation not just amongst foreign investors, but also amongst domestic investors.

Price Parity: Indian companies can compete to be at par with MNCs with regards to their stock prices. With the issue of ADRs / GDRs, Indian companies with the MNCs in their own turf.

Facilitates Market Entry: Once a company has got itself recognised and acepted by the investors, Indian companies can set up shop abroad with far lesser difficulty. In fact, some of the India companies have issued ADRs / GDRs not just to raise funds, but also to establish their brand in the country. In this manner, they can enter foregin market with a lesser risk of failure.
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ADR / GDR is a very good option for investors to consider. The following points highlight the advantages that accrue to investors investing in ADRs / GDRs: Ease of Investment: ADRs / GDRs are very easy to invest in and hold. They are treated like just other securities. Hence, there is no complicated procedure involved in the pruchase of a ADR / GDR.

Simple to Trade: Since ADR / GDR is given the same treatment as local securities, it becomes that much easier and simpler for the investor to trade in ADRs / GDRs.

Global Access: ADRs / GDRs provide the investors opportunities to invest globally. This permits them to invest in foreign companies without having to transfer funds out of the country. Further, investors can divesify the industries into which they wish to invest.

Enables Comparison: Owing to the fact that all transactions take place in their home country, investors can easily compare their investments in ADRs / GDRs as against their investments in other local securities. This is also made possible with the trasactions taking place electronically.

Access to Institutional Investors: ADRs / GDRs offer the institutional investors an opportunity to hold securities which they are not permitted to hold in the home country of the ADR / GDR issuing company.

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ADRs / GDRs have proved to be very vital to India’s recovery from the financial crisis in 1991. Although, alternate means look more attractive, the ADR / GDR is fundamentally and structurally sound.

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CHAPTER 5 CONCLUSION

5.1 CONCLUSION

As we conclude this project, we are filled with a sense of satisfaction of having achieved what we set out to. This project is the result of all the efforts that we have been putting in over the last year. The experience has left us better equipped in more than one way.

We are now better positioned to conduct a similar research on other topics. The project has enlightened us with what it takes to actually achieve the goals that you set. Further, we are better prepared to work in a team.

We have fully understood the concept and the need for a depositary receipts program. We have identified its significance in India’s growth. We have also got an insight into the functioning of the American markets along with the European market.

We have observed that the sudden surge in ADR issues took place after the government put in place clearly defined rules. Similarly, GDR issues kicked off immediately after the opening up of the economy. We hope that the RBI can further relax the ADR / GDR guidelines to enable Indian companies to gain even greater access to global markets. We also believe that Indian companies raising funds globally should attempt to make this growth more inclusive.

ADRs and GDRs have proved to be quite a revolution. It wouldn’t be too daring to dream of a day when we can issue new shares in foreign markets without the company’s presence in the country.

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Press Clippings
“Government Amends Norms for ADRs / GDRs” NEW DELHI: The finance ministry has amended norms for the issuance of equity and convertible bonds by Indian companies in the international markets.

The new norms will be a breather to companies like SIFY and Rediff.com which were suppose to list their companies in the domestic market by March 31, 2006. However, with the new norms, they can go for domestic listing within three years after they start making profit.

According to new norms, unlisted companies which had issued Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) prior to August 31, 2005 and are not making profit have been permitted to sponsor ADR/GDRs, against existing shares held by shareholders in the domestic market and will have to list on the domestic stock exchanges, within three years of making profit.

However, unlisted companies which have not issued FCCBs, ADRs and GDRs prior to August 31, 2005 would require prior or simultaneous listing in the domestic stock exchanges or issues against existing shares under the scheme.

At the same time, unlisted Indian companies can sponsor an issue of ADRs and GDRs in the international market against shares held by its shareholders provided such facility would be available pari-passu to all categories of shareholders of the company whose ADRs and GDRs are being traded in the global market.
(Source: Times of India dt. 29 June 2006)

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“Government curtails voting rights of depositaries ” NEW DELHI: RBI has tightened the voting rights norms in a bank for American Depository Receipt (ADR) and Global Depository Receipt (GDR) holders through depositories.

RBI, in a communique to the scheduled commercial banks has asked them not to take cognizance to voting by depositories, which hold underlying shares of ADRs and GDRs, if they vote in contravention to its agreement with the banks.

The letter noted that banks enter into an agreement with the depositories, while issuing shares to them, that they would not exercise voting rights in respect of the shares held by them or if at all they exercise voting rights, they will do as directed by the board of directors of banks.

In the communique RBI said, "Further, to eliminate the possibility of any interference of depositories in the bank's management, they should give an undertaking to the RBI that, (i) they would not give cognizance to voting by the depository, should the depository vote in contravention of its agreement with the bank and (ii) no change would be made in terms of the Depository Agreement without prior approval of RBI."

Therefore, now, banks cannot grant voting rights to depositories. Ideally, the RBI assumed banks were following the practice of not allowing depositories to vote. But it came to the notice of the RBI that banks issuing ADR/GDR enter into a trust agreement with the depository granting them the right to vote as directed by the board of directors of the bank.
(Source: The Hindu Business Line dt. 9th February, 2007)

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Bibliography
Source: Books Security Analysis of Portfolio Management by V.K. Bhatia Foreign Direct Investment in India by Lata Chakravarthy International Finance by V.A. Avadhani Foreign Exchange Market by S. Yadav, P.K. Yadav & Max Peyrard

Source: Newspapers The Hindu Business Line (dt. 9th February, 2007) Times of India (dt. 29th June 2006)

Source: Magazines Fortune Business Today Time

Source: Internet www.adr.com www.jpmorgan.com www.gdr.in www.adr.in www.investopedia.com www.thehindubusinessline.com www.bnymellon.com www.moneycontrol.com

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Source: Other Documentation JP Morgan Depositary Receipts Guide Deutsche Bank Depositary Receipts Guide

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