SMO

UNIT- IV
ADR, FDI, GDR, FII, EURO ISSUE
American depositary receipt (ADR)
An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a
specified number of shares (or one share) in a foreign stock traded on a U.S. exchange. ADRs were
introduced as a result of the complexities involved in buying shares in foreign countries and the
difficulties associated with trading at different prices and currency values. For this reason, U.S. banks
simply purchase a bulk lot of shares from the company, bundle the shares into groups, and reissues
them on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) or
the Nasdaq. In return, the foreign company must provide detailed financial information to the sponsor
bank. The depositary bank sets the ratio of U.S. ADRs per home-country share.
There are three different types of ADR issues:
 Level 1 - This is the most basic type of ADR where foreign companies either don't qualify or
don't wish to have their ADR listed on an exchange. Level 1 ADRs are found on the over-the-
counter market and are an easy and inexpensive way to gauge interest for its securities in
North America. Level 1 ADRs also have the loosest requirements from the Securities and
Exchange Commission (SEC).
 Level 2 - This type of ADR is listed on an exchange or quoted on Nasdaq. Level 2 ADRs
have slightly more requirements from the SEC, but they also get higher visibility trading
volume.
 Level 3 - The most prestigious of the three, this is when an issuer floats a public offering of
ADRs on a U.S. exchange. Level 3 ADRs are able to raise capital and gain substantial
visibility in the U.S. financial markets.
The advantages of ADRs are twofold. For individuals, ADRs are an easy and cost-effective way to
buy shares in a foreign company. They save money by reducing administration costs and avoiding
foreign taxes on each transaction. Foreign entities like ADRs because they get more U.S. exposure,
allowing them to tap into the wealthy North American equities markets.
GLOBAL DEPOSITARY RECEIPT
A global depositary receipt (GDR) is a bank certificate issued in more than one country for shares in
a foreign company. The shares are held by a foreign branch of an international bank. The shares trade
as domestic shares but are offered for sale globally through the various bank branches. Negotiable
certificate issued by one country's bank against a certain number of shares held in its custody but
traded on the stock exchange of another country. GDRs entitle the shareholders to all associated
dividends and capital gains, and can be bought and sold like other securities. Thus they allow
investors in any country to buy shares of any other country without losing the income or trading
flexibility. Also called European depository receipt (EDR) or international depository receipt (IDR).
Advantages of GDR to issuing company

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 Accessibility to foreign capital markets
 Increase in visibility of the issuing company
 Rise in the capital because of foreign investors
Advantages of GDR to investor
 Helps in diversification, hence reducing risk
 More transparency since competitor’s securities can be compared
 Prompt dividend and capital gain payments
DIFFERENCE BETWEEN ADR AND GDR
ADR and GDR are commonly used by the Indian companies to raise funds from the foreign capital
market. The principal difference between ADR and GDR is in the market; they are issued and in the
exchange, they are listed. While ADR is traded on US stock exchanges, GDR is traded on European
stock exchanges.
Depository Receipt is a mechanism through which a domestic company can raise finance from the
international equity market. In this system, the shares of the company domiciled in one country are
held by the depository i.e. Overseas Depository Bank, and issues claim against these shares. Such
claims are known as Depository Receipts that are denominated in the convertible currency, mostly
US$, but these can also be denominated in Euros. Now, these receipts are listed on the stock
exchanges.
ADR and GDR are two depository receipts that are traded in local stock exchange but represent a
security issued by a foreign public listed company.
Key Differences Between ADR and GDR
The important difference between ADR and GDR are indicated in the following points:
1. ADR is an abbreviation for American Depository Receipt whereas GDR is an acronym for Global
Depository Receipt.
2. ADR is a depository receipt issued by a US depository bank, against a certain number of shares of
non-US company stock, trading in the US stock exchange. GDR is a negotiable instrument issued by
the international depository bank, representing foreign company’s stock that is offered for sale in the
international market.
3. With the help of ADR, foreign companies can trade in US stock market, through various bank
branches. On the other hand, GDR helps foreign companies to trade in any country’s stock market
other than the US stock market, through ODB’s branches.
4. ADR is issued in America while GDR is issued in Europe.
5. ADR is listed in American Stock Exchange i.e. New York Stock Exchange (NYSE) or National
Association of Securities Dealers Automated Quotations (NASDAQ). Conversely, GDR is listed in
non-US stock exchanges like London Stock Exchange or Luxembourg Stock Exchange.
6. ADR can be negotiated in America only while GDR can be negotiated in all around the world.
7. When it comes to disclosure requirements for ADR’s, stipulated by the Securities Exchange
Commission (SEC) are onerous. Unlike GDR’s whose disclosure requirements are less onerous.

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8. Talking about the market, ADR market is a retail investor market, where the investor’s participation is
large and provides a proper valuation of a company’s stock. As opposed to the GDR, where the
market is an institutional one, with less liquidity.
INDIAN DEPOSITORY RECEIPT
Indian depository receipt is financial instruments that allow different companies to mobilize funds
from Indian markets by offering entitlement to foreign equity and getting instead on Indian stock
exchanges. This device is similar to the GDR and the ADR the Indian depository receipts need to be
registered with the SEBI (stock exchange board of India ) the government opened this avenue for the
foreign companies to raise funds from the country as step towards globalizing the Indian capital
market and to provide local investors exposure in global companies. The company issuing IDR’s
should have a pre-issue paid-up capital and free reserves of at least 100 million US dollars, and an
average turnover of us dollar is 500 million during the three financial years.
ADVANTAGES OF THE IDR’S
 Provides access to more liquid markets.
 Provides funds for lower costs and better terms
 It expands the investor base for the issuing company.
 Establishes name recognition for the company in new capital markets.
 Provides marketing advantages due to improved brand image.
 Reduces the possibility if hostile takeovers.
 There is no exchange risk since the issuer pays dividends in their home currency.
 Helps to exploit international demand for shares of the company.
 Contributes to use global demand for shares of the enterprise.
FOREIGN DIRECT INVESTMENT
Foreign direct investment (FDI) is an investment in a business by an investor from another country
for which the foreign investor has control over the company purchased. The Organization of
Economic Cooperation and Development (OECD) defines control as owning 10% or more of the
business. Businesses that make foreign direct investments are often called multinational
corporations (MNCs) or multinational enterprises (MNEs). An MNE may make a direct
investment by creating a new foreign enterprise, which is called a Greenfield investment, or by the
acquisition of a foreign firm, either called an acquisition or brown field investment.
ADVANTAGES OF FDI
In the context of foreign direct investment, advantages and disadvantages are often a matter of
perspective. An FDI may provide some great advantages for the MNE but not for the foreign country
where the investment is made. On the other hand, sometimes the deal can work out better for the
foreign country depending upon how the investment pans out. Ideally, there should be numerous
advantages for both the MNE and the foreign country, which is often a developing country. We'll
examine the advantages and disadvantages from both perspectives, starting with the advantages for
multinational enterprises (MNEs).

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  Access to markets: FDI can be an effective way for you to enter into a foreign market. Some
countries may extremely limit foreign company access to their domestic markets. Acquiring
or starting a business in the market is a means for you to gain access.
 Access to resources: FDI is also an effective way for you to acquire important natural
resources, such as precious metals and fossil fuels. Oil companies, for example, often make
tremendous FDIs to develop oil fields.
 Reduces cost of production: FDI is a means for you to reduce your cost of production if the
labor market is cheaper and the regulations are less restrictive in the target foreign market.
For example, it's a well-known fact that the shoe and clothing industries have been able to
drastically reduce their costs of production by moving operations to developing countries.
FOREIGN INSTITUTIONAL INVESTOR
A foreign institutional investor (FII) is an investor or investment fund registered in a country outside
of the one in which it is investing. Institutional investors most notably include hedge funds, insurance
companies, pension funds and mutual funds. Foreign institutional investors (FIIs) are those
institutional investors which invest in the assets belonging to a different country other than that where
these organizations are based. Foreign institutional investors play a very important role in any
economy. These are the big companies such as investment banks, mutual funds etc, who invest
considerable amount of money in the Indian markets. With the buying of securities by these big
players, markets trend to move upward and vice-versa. They exert strong influence on the total
inflows coming into the economy. Market regulator SEBI has over 1450 foreign institutional investors
registered with it. The FIIs are considered as both a trigger and a catalyst for the market performance
by encouraging investment from all classes of investors which further leads to growth in financial
market trends under a self-organized system.
Difference between FDI and FII
FDI or foreign direct investment is frequently confused with the term FII or Foreign Institutional
Investment in light of the fact that both are the types of investment made in abroad. FDI is made to
secure controlling proprietorship in any enterprise however FII has a tendency to invest into the stock
market. Much of the time, the FDI is given more preference over the FII in light of the fact that it
advantages the entire economy. There are prominent contrasts in FDI and FII which has been
exhibited in this article.
FDI
FDI commonly known as foreign direct investment is defined as an investment made by any
organization or any entity based in one nation, into an organization or entity based in another nation.
It is the investment which contrasts considerably from indirect investments, for example, portfolio
streams, where institutions present in abroad put resources into equities recorded on a country’s stock
exchange. Those entities which make direct ventures commonly have a noteworthy level of impact
and control over the organization into which the venture is made.
FII

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FII is the abbreviation of Foreign Institutional Investor. It can be defined as the investors that put their
cash to invest in the resources of the nation located in abroad. It is an instrument for profiting for the
speculators. Institutional speculators are organizations that put cash in the budgetary markets in the
nation based outside the financial specialist nation. To make any investment, it is necessary to get
registered with securities exchange board of respective nation. It incorporates mutual funds, banks,
hedge funds, insurance companies etc. FII assumes an exceptionally significant part in any nation’s
economy.
FDI VS FII
 Meaning:
When any organization in one nation makes an investment in any organization in abroad, it is mostly
called as foreign direct investment or FDI.
When any organization in abroad make investment in the market related to stock of a nation then this
investor is called foreign institutional investor or FII.
 Brings:
Foreign direct investment brings long term capital in the company where investment is made by other
company.
Foreign institutional investor brings short or long term capital in the nation.
 Access or leave:
Foreign direct investment does not give an easy access or exit to the stock market.
FII gives an easier access to stock market and also allow an investor to leave the stock market.
 Transfer:
In foreign direct investment, transfer of technologies, funds, strategies or resources is done.
In FII, only funds are transferred through this institution.
 Economic growth:
Foreign direct investment helps to increase the job opportunities in the country which leads to
increase in living standard of people, also develops the infrastructure of the investee country and all of
this helps in the economic growth so FDI plays its role in economic growth of the country.
Foreign institutional investor does not play any part in the economic growth of country.
 Making money:
Foreign direct investment does not give an easy way in making money quickly as it includes complex
procedures.
FII allows the investor to make money quickly from the stock market.
 Results:
By having foreign direct investment, there is the increase in productivity, job opportunities and
eventually it helps to increase the economic growth of the country.
The main consequence of FII is that there is an increase in capital of country.
 Target:
Foreign direct investment targets any specific company for investment.
FII never targets any specific company.

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  Control:
Through FDI, there is the administration control in company.
FII does not help to get such kind of control in company.

EURO

The euro is the official currency of the eurozone, which consists of 19 of the 28 member states of the
European Union: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland,
Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and
Spain. The currency is also officially used by the institutions of the European Union and four other
European countries, as well as unilaterally by two others, and is consequently used daily by some 337
million Europeans as of 2015. Outside of Europe, a number of overseas territories of EU members
also use the euro as their currency. The euro is managed and administered by the Frankfurt-based
European Central Bank (ECB) and the Eurosystem (composed of the central banks of the eurozone
countries). As an independent central bank, the ECB has sole authority to set monetary policy. The
Eurosystem participates in the printing, minting and distribution of notes and coins in all member
states, and the operation of the eurozone payment systems.
Governing the euro area
By adopting the euro, the economies of the euro-area members become more integrated. This
economic integration must be managed properly to realise the full benefits of the single currency.
Therefore, the euro area is also distinguished from other parts of the EU by its economic management
– in particular, monetary and economic policy-making.
 Monetary policy in the euro area is in the hands of the independent Eurosystem, comprising
the European Central Bank (ECB), which is based in Frankfurt, Germany, and the national
central banks of the euro-area Member States. Through its Governing Council, the ECB
defines the monetary policy for the whole euro area – a single monetary authority with a
single monetary policy and the primary objective to maintain price stability.
 Within the euro area, economic policy remains largely the responsibility of the Member
States, but national governments must coordinate their respective economic policies in order
to attain the common objectives of stability, growth and employment. Coordination is
achieved through a number of structures and instruments, the Stability and Growth Pact
(SGP) being a central one. The SGP contains agreed rules for fiscal discipline, such as limits
on government deficits and on national debt, which must be respected by all EU Member
States, although only euro-area countries are subject to sanction – financial or otherwise – in
the event of non-compliance.
 Implementation of the EU’s economic governance is organised annually in a cycle, known as
the European Semester.

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