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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.



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-the-counter. Let us look at an example of how an ADR is created and traded.


 
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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.
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An ADRT is a dollar denominated negotiable certificate which represents and non U.S.A
Company¶s publicly traded equity. It falls within the regulatory framework of U.S.A therefore
the ADRSs and underlying share should be registered with security exchange commission (SEC)
in U.S.A, however in 1990 a modification was made that allows Companies to raise capital
without having register with SEC.

A negotiable certificate issued by a U.S. bank representing a specified number of shares

(or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in
U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs
help to reduce administration and duty costs that would otherwise be levied on each transaction.

This is an excellent way to buy shares in a foreign company while realizing any
dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and
economic risks for the underlying shares in another country. For example, dividend payments in
Euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in
accordance with the deposit agreement. ADRs are listed on the NYSE, AMEX or Nasdaq.

An American Depositary Receipt (abbreviated ADR) represents ownership in the shares

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

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

Depositary banks have various responsibilities to an ADR shareholder and to the non-US
company the ADR represents. The first ADR was introduced by JPMorgan in 1927, for the
British retailer Selfridges & Co. There are currently four major commercial banks that provide
depositary bank services - JPMorgan, Citibank, Deutsche Bank and the Bank of New York
Mellon.
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ADRs program can stimulate investor interest, enhance company¶s visibility broaden its
shareholders base and increase liquidity.

The Company can tap through ADR¶s the equity capital from foreign capital market at
competitive costs.

ADR¶s provide a method for U.S. employees of non-us companies to invest in their
company¶s employees stock purchase plan.

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The Depository is a large foreign Bank. The share issued by a company is held by the
Depository. The Depository issues Receipts to investors from country. The dividends are given
by the shares in its relevant home currency to the depository. The depository in turn converts this
into currency to holder. The process passes on the foreign exchange risk to depository.

When a Company in Home Country issue shares and taps equity capital simultaneously
in more than one country-market the recourse to global depository receipts can be taken Assume
that an Indian company issues capital in India , U.S.A and U.K. The Depositories will be
appointed in U.S.A and U.K. The foreign investors who subscribe to the ordinary share issued by
the Indian company will get allotment, but such share will be deposited with the depositories
abroad. The depository in turn will issue receipt called GDR to the local investor.

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1. A holder of GDR does not have a voting right
2. The proceeds of issue of GDR are collected in foreign currency. So that they can be for
meeting foreign exchange needs of issuing company to pay for m/s for project or for the
repayment of foreign currency loans etc.
3. It has less exchange risk as compared to foreign currency loan.
4. The GDRs are listed in Luxembourg stock exchange besides being traded in Luxembourg
stock exchange the GDR¶s are also traded in OTCE market in London and Pvt. placement
market in U.S.A.
5. An investor in GDR may cancel his receipt by advising the depository accordingly the
depository requests the custodian to release the share in lieu of depository Receipts.
6. The Depository will instruct the custodian about cancellation of GDR and to replace the
corresponding share, collect the sale proceeds and remit the same abroad.
7. The marketing of the GDR issue is done by undertaking by and organizing road shows.
Road shows represent presentation made to potential investor. During the road shows the
investor response is obtained through a process called ³Book Runner´. The issue fixes the
price range based on this response and finally decides on issue price.
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There are a variety of ADR 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 ADR
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.


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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  
 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.

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M It avoids full compliance with the SEC's reporting requirements. ƒnBy working with a
single depositary bank, the issuer has greater control over its ADR program than would
be the case with an unsponsored program.
M 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.
M The depositary bank maintains accurate shareholder records for the issuer and can, if
requested, monitor large stock transactions and report them to the issuer.
M Set-up costs are minimal and all transaction costs are absorbed by the ADR holder.
M 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.


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M 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.
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M Capital raising is not permitted under a Level I programÃ

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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.

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M 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.
M Listing and registration also enhance the issuer's name recognition in the US.
M US disclosure regulations for large investors enable the issuer to monitor the ownership
of its shares in the US.


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M 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.
M SEC regulations do not permit a public offering of ADRs under a Level II program.
M 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.





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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

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M 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.


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M SEC reporting is more onerous than for Level I or II programs.
M 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.

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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 ~
 

~
 

 
~~~. 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. Non- US companies now have easy access to the US equity private
placement market and may thus raise capital through the issue of ~ 
 
~ 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.
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M 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.
M RADRs provide a cheaper means of raising equity capital than through a public offering
and they can be issued more easily and quickly.
M RADRs can be launched on their own or as part of a global offering.
M They can be traded through the NASDAQ's "PORTAL" system and they clear through
the DTC.




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M RADRs cannot be created for classes of share already listed on a US exchange.

M 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.

 
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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
Apart from obtaining necessary approvals, Documentation, additional key actions necessary for
Making the issue of ADR/GDR a success, include,

M Co-appointment of various agencies and proper institution of a Board Sub-Committee

M Selection of Syndicate Members
M Constitution of a task force for due diligence
M Listing
M Offering Circular
M Research Papers
M Pre-marketing
M Timing, pricing and size of the issue
M Road shows
M Book Building and pricing of the issue
M Closing of the issue
M Allotment
 
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Indian companies can raise foreign currency resources abroad through the issue of
ADRs/GDRs, 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 company can issue ADRs/GDRs if it is eligible to issue shares to persons resident
outside India under the FDI Scheme. However, 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.

Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital
in the international market would require prior or simultaneous listing in the domestic market,
while seeking to issue such overseas instruments. Unlisted companies, which have already issued
ADRs/GDRs in the international market, have to list in the domestic market on making profit or
within three years of such issue of ADRs/GDRs, whichever is earlier.

There are no end use restrictions except for a ban on deployment / investment of such
funds in Real Estate or the Stock Market. There is no monetary limit upto which an Indian
company can raise ADRs / GDRs.

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.

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.

The pricing of ADR / GDR issues should be made at a price not less than the higher of
the following two averages:

M 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;
M 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.

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.
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A limited Two-way Fungibility scheme has been put in place by the Government of
India for ADRs / GDRs.

Under this scheme, a stock broker in India, registered with SEBI, can purchase shares of
an Indian company from the market for conversion into ADRs/GDRs based on instructions
received from overseas investors.

Re-issuance of ADRs /GDRs would be permitted to the extent of ADRs / GDRs which
have been redeemed into underlying shares and sold in the Indian market.


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An Indian company can also sponsor an issue of ADR / GDR. Under this mechanism, the
company offers its resident shareholders a choice to submit their shares back to the company so
that on the basis of such shares, ADRs / GDRs can be issued abroad.

The proceeds of the ADR / GDR issue is remitted back to India and distributed among
the resident investors who had offered their rupee denominated shares for conversion. These
proceeds can be kept in Resident Foreign Currency (Domestic) accounts in India by the resident
shareholders who have tendered such shares for conversion into ADR / GDR.

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The Indian company issuing ADRs / GDRs has to furnish to the Reserve Bank, full
details of such issue in the form enclosed in Annex-8, within 30 days from the date of closing of
the issue. The company should also furnish a quarterly return in the form enclosed in Annex-9, to
Reserve Bank within 15 days of the close of the calendar quarter.





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The depository receipt (DR) market which had lost its sheen in 2008, appears to be back in
favour with Indian companies having raised a record $3.15 billion through 11 issues via this
route, year to date. However, merchant bankers say much of it could be due to pent-up demand,
as market conditions were not so conducive for capital raising last year. Also, following the
credit crisis in 2008, Indian companies were forced to look for equity capital as banks were wary
about lending.

Total funds raised by Indian firms through American depository receipts (ADRs) and global
depository receipt (GDRs) issuances had fallen to $0.10 billion in 2008 from $2.64 billion in
2007. The number of ADRs and GDRs had also dropped to 4 in 2008 from 15 in 2007. ³This is
the right time for investors and companies to raise money and realign the debt-equity ratios in
their balance sheets.

ADRs and GDRs are fund-raising instruments with Indian shares as the underlying. ADRs are
listed on the New York Stock Exchange (NYSE) or the technology-focused Nasdaq, the two
main US exchanges. An ADR follows the norms laid down by the Securities Exchange
Commission of America (SEC) and generally accepted accounting practices (GAAP). GDRs are
traded on the London Stock Exchange and Luxembourg Stock Exchange. Yet sceptics feel the
DR market is a thinly-traded one and is exposed to random fluctuations.

³The ADR, as an exchange-traded instrument is exposed to price-discovery risk, while the GDR
is traded by market makers and as such is not the most efficient way of taking exposure to
India,´ said the head of equities at a foreign brokerage.

Jagannadham Thunuguntla, equity head, SMC Capital, is of the view that fund raising by
corporate by way of qualified institutional placements (QIP) is way ahead of ADR/GDR route.
³Companies have year to date raised over $ 6 billion via the QIP route,´ he told ET. Investment
bankers in general prefer to remain cautious about the spurt in capital raised via an ADR or
GDR.

 
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ADR ISSUE SYMBOL INDUSTRY EXCH

DR. REDDY'S LABORATORIES LTD. RDY Pharmaceutical NYSE
HDFC BANK LTD. HDB Banks NYSE
ICICI BANK LTD. IBN Banks NYSE
INFOSYS TECHNOLOGIES LIMITED INFY Technology Services NASDAQ
MAHANAGAR TELEPHONE NIGAM MTE Fixed Line Comm. NYSE
LIMITED
REDIFF.COM INDIA LTD REDF Technology Services NASDAQ
SATYAM COMPUTER SERVICES SAY Technology Services NYSE
LIMITED
SIFY LTD. SIFY Technology Services NASDAQ
VIDESH SANCHAR NIGAM LIMITED VSL Fixed Line Comm. NYSE
WIPRO LTD. WIT Technology Services NYSE