ADR_GDR

ADR & GDRADR & GDRPresented to Prof. Paradkar

Group membersGroup members

Amrita Rangani 129

Ami Shah 141

Khyati Shah 146

Kavita Turkar 180

Deepal Upadhyay 181

Monica Uttarkar 182

Hema Vaswani 187

Shweta Venugopal 189

Flow of Presentation Flow of Presentation

Means of raising foreign funds

Introduction to Depository Receipts

Current market size for DR

Concept of ADR

Market watch for ADR

Concept of GDR

Market watch for GDR

Basic concepts associated with ADR/GDR

Parties involved in issuing of ADR/GDR

ContinuedContinued Process of ADR/ GDR issuance

Benefits/ Disadvantage of ADR/GDR

Types and levels of ADR

Legal issues in issue of DR

Indian regulations for ADR/GDR issue

Concept of Fungibility and Headroom

Arbitrage in ADR and Arbitrage strategy

Indian ADR/GDR

Case study on Infosys ADR issue

Future trend in DRs

Sources Of Sources Of ForeignForeign Funds Funds

FOREIGN INVESTMENT

DIRECT INVESTMENT

PORTFOLIO INVESTMENT

AutomaticRoute

FIPB NRI FII ADR/GDROff shore

funds

IntroductionIntroduction

Concept of DR

Various kinds of DR

Benefits of DR to :

Depositors

Investors

Cross-border transactions

Mergers and Acquisitions

Privatization

Current market Current market sizesize

The total value of investment in American and global depositary

receipts (DRs) increased more than 25% year on-year and

exceeded $1.1 trillion at the end of the first quarter 2006, an all-

time high.

New Sponsored DRs: During the first half of 2006, companies

from 21 countries established 74 new DR programs, a 25%

increase from 2005’s mid-year statistics.

A record 1,943 sponsored DR programs from 75 countries were

available to investors at midyear 2006, a 4% increase from mid-

year 2005 figures

Total Sponsered DR (country wise)

220

150

119

111

107

101

95

1040

INDIA

UK

AUSTRALIA

TAIWAN

HONGKONG

RUSSIA

BRAZIL

OTHERS

Continued Continued

DR Stock Exchange Listings ( as on Sep 2006)

23

9

3

6

4

LUXEMBOURG

LONDON

NASDAQ

NYSE

OTHER

Continued Continued

American Depository Receipts- ADRAmerican Depository Receipts- ADR

ADR History

Meaning

ADR Ratio

Type of companies issuing ADR

Is there any difference between ADR and ADS?

Market size: ADRMarket size: ADR

As of 05:44:00 Oct 01, 2006

Today Total

Share Volume (000's): 176656

Value of Trading (Million of $US) 4740

Issues Up: 153

Issues Down: 250

Issues Unchanged: 55

Source : www.adr.com

Bank of New York Asia ADR IndexBank of New York Asia ADR Index

Global Depository ReceiptsGlobal Depository Receipts

GDR Basics

Features of GDR

Where do GDRs trade or are listed

Market Watch - Global Depository Market Watch - Global Depository

Receipts - GDR Over a FortnightReceipts - GDR Over a Fortnight

Basic concepts associated with Basic concepts associated with

ADR/GDR ADR/GDR

OTC

Pink sheet

DTC

Euroclear/CEDEL bridge

CUSIP ID

SEDOL no

Ticker

ISSUER

BROKERS

DEPOSITORY

CUSTODIANACCOUNTANT

LAWYERS

INVESMENT BANKERS

PartiesParties involved involved

Role of IssuerRole of Issuer

Determine financial objectives

Appoint depositary, lawyers, investment bank, investor

relations firm

Determine program type

Obtain approval from Board of Directors, shareholders and

regulators as needed

Provide financial information to accountants

Develop investor relations plan

Role of DepositaryRole of Depositary

Advise on structure

Appoint custodian

Assist with compliance with ADR registration requirements

Coordinate with lawyers, accountants and investment bankers to

ensure all program implementation steps are completed

Prepare and issue certificates

Enlist market makers

Fax announcement of program establishment to brokers and traders

Role Of BrokersRole Of Brokers

Submit required forms to become a market maker in a

security, as needed (Level-One ADRs)

Make securities available to investor

Execute and settle trades

Role of Lawyers Role of Lawyers

Advise on type of DR structure

Draft and negotiate Deposit Agreement

File appropriate registration statements or establish

exemptions with SEC

As applicable:

File registration statements to list on US exchanges (Levels

II and III)

Draft offering circular/prospectus

Role of CustodianRole of Custodian

Receive underlying shares

Confirm deposit of underlying shares

Hold shares in custody for the account of depositary in the

home market

Communicate with depositary on corporate actions and

related issues

Transmit dividend payments

Role of Investment Bankers Role of Investment Bankers

Advise on type of DR structure

Obtain CUSIP number

Obtain DTC, Euroclear, Cedel, and PORTAL eligibility as

needed

Conduct roadshow

Line up market makers

Price and launch securities

Role of AccountantsRole of Accountants

Prepare financial statements in accordance with (or

reconciled to) U.S. Generally Accepted Accounting Principles

(GAAP) (or other acceptable accounting principles) for

Exchange Act registered securities (as applicable)

Process of ADR/GDR issueProcess of ADR/GDR issue

Investor’s decision

Purchase of underlying ordinary shares

Request for the delivery

Conversion of currency

Issuance and delivery

Tradable on receipt

Process of issueProcess of issue

Investor

Broker

Clear Stream

Depository

Local Broker

Local Stock Market

Local Custodian

Benefits of DRBenefits of DR

1. To the issuer

be able to access capital outside

Build company visibility

Broaden and diversify share holders base

Enlarge the market for the company

Continued Continued

2. To the investors

Facilitating diversification

Eliminating cross boarder custody

Easy comparison

Disadvantages of cross listing

More risks

Language barriers

Re issuance of depository receiptsRe issuance of depository receipts

Amendments by ministry Of Finance

Distinct and separate transaction

Process of re-conversion

PROCESS OF RE ISSUANCEPROCESS OF RE ISSUANCE

Investor

Broker

Depository

Local Custodian

Local Broker

Types of ADRsTypes of ADRs

Sponsored ADR Unsponsored ADR

Issued with the cooperation of the

company whose stock will underlie

the ADR.

Issued by - broker/dealer or

depositary bank without the

involvement of company whose stock

underlies the ADR.

Comply with regulatory reporting. No Regulatory Reporting.

Listing on international Stock

Exchanges allowed.

Trade on OTC market.

Levels of Sponsored ADRsLevels of Sponsored ADRs

LEVELS

Level I Level II Level III Others

Rule 144A GDR

Continued Continued Level I Level II Level III

Description Unlisted program in

the US.

Listed, more active

trading, and greater

liquidity

Issuer floats a public

offering of ADRs in

the US to raise capital

Trading Over-the-counter

(OTC) market

One of the U.S.

securities exchanges

or NASDAQ

One of the U.S.

securities exchanges

or NASDAQ

Regulations &

Disclosures

Minimal SEC

registration,

exemption from the

SEC's traditional

reporting

requirements

Registration,

reconciled US GAAP

statements, timely

submission of Annual

Reports

Registration, file

prospectus, reconciled

US GAAP statements,

timely submission of

Annual Reports

Levels (contd…)Levels (contd…)

Rule 144A ADRs

Description: Private placement to Qualified Institutional Buyers.

Trading: U.S. private placement market

SEC Registration: None, Exempt from US Reporting Requirements

Advantages

Cost comparatively much less.

The time to complete a US equity private placement is

reduced

Offering can be made with any class of shares

Levels of ADRs (contd.)Levels of ADRs (contd.) Global Depositary Receipts (GDRs)

Description : Global offering of securities outside issuer's home

market

Trading : Non U.S. exchanges

SEC Registration : Under SEC Regulation S, securities offered

outside the U.S. not subject registration requirements.

Advantages

Allow issuers to raise capital in two or more markets

simultaneously, thus broadening their shareholder base.

International RegulationsInternational Regulations

1. Listing Requirements

2. SEC Reporting

3. Securities Regulations

Two key U.S. securities laws with which DR issuers must

comply are:

The Securities Act of 1933, as amended (the “Securities

Act”)

The Securities Exchange Act of 1934, as amended (the

“Exchange Act”)

Indian Regulations for ADR/GDR Indian Regulations for ADR/GDR

IssueIssue No prior approval from RBI required.

After issue, the company has to file a return in the proforma

given in Annexure `C' and ‘D’ for RBI Notification

No end-use restrictions on issue proceeds, except for an

express ban on investment in real estate and stock markets.

Two way fungibility in ADR/GDR issues of Indian companies

has been introduced subject to sectoral caps wherever

applicable.

One Way FungibilityOne Way Fungibility

Conversion of depository receipts into local shares

The ADRs/GDRs converted into domestic shares are

redeemed by the depository.

A fresh issue of ADRs/GDRs could reinstate that loss of

liquidity.

Price volatility

Liquidity problem

Two Way FungibilityTwo Way Fungibility

Conversion of depository receipts into local shares and vice

versa.

It implies that an investor holding ADRs/GDRs can cancel

them with the depository and sell the underlying shares in

the market.

India follows ‘Limited Two Way Fungibility’

Re-issue is permitted to the extent of ADRs/GDRs that

have been redeemed.

Continued…Continued…

Forward fungibility

Reverse fungibility

No specific permission of RBI is required for re-conversion

SEBI registered brokers will be able to act as

intermediaries in the two-way fungibility of ADRs/GDRs.

Custodians monitor the re-issuance of ADR/GDRs

Benefits of Two way fungibilityBenefits of Two way fungibility

Improvement in liquidity

Reduction of arbitrage

HeadroomHeadroom

Availability of shares for re-conversion

It is required in an ADR issue to allow arbitrage to

happen.

Headroom = No. of ADR/GDRs originally issued – No. of

GDRs outstanding and further adjusted for ADRs/GDRs

redeemed into underlying shares and registered in the

name of the non-resident investors.

Number of domestic shares of an issuer, which are

available for re-conversion into ADRs/GDRs.

Concept of ArbitrageConcept of Arbitrage

“Simultaneous purchase and sale of equivalent securities in

two different markets in order to profit from discrepancies

in their price relationship”

Differential Pricing of ADR/GDRDifferential Pricing of ADR/GDR

Transaction cost

Exchange rate risk

Time lag gap

Market sentiments

Arbitrage StrategyArbitrage Strategy

1. Buy DR

2. Sell local stock in India in cash market or futures market

3. Convert shares from DR to local

4. Deliver shares to stock exchange in India

5. Deposit proceeds in Indian bank account

6. Repatriate funds

7. Repeat process

Arbitrage contd…Arbitrage contd…

If abroad, ADR/GDR is trading at a discount, one can go long in

ADR/GDR and simultaneously short future in domestic market,

at higher prices. It will then require to convert the ADR/GDR into

local shares and square off the future position in the local market.

In the case of underlying share trading at premium in the

international market, one can borrow and go short in the

international market, while simultaneously going long in the local

market. It will than require to convert local share into GDR/ADR

and canceling the borrowed position.

Indian ADR/GDRIndian ADR/GDR

Trading at premium

Limited two way fungibility

Low liquidity

Indian ADR at premiumIndian ADR at premium

Reasons

Currency risk

Investors perception

Absence of sufficient headroom

Trends in Indian ADRTrends in Indian ADR

CASE STUDYCASE STUDY

Details of DR issueDetails of DR issue Offer Price of DR: USD 49/DR (USD 98/domestic share)

Offer Date of DR: July 30, 2003

Number of DRs sold: 6 million (equal to 3 million domestic shares)

Issue Size: USD 294 million

Issue cost: USD 11.7 million (about 4% of Issue Size)

Net Proceeds to tendering domestic shareholder: USD

94.1/domestic share (Rs. 4347)

Prevailing price in the domestic market: Rs. 3570/domestic share

Premium obtained by selling domestic shareholders: 22%

ADR ratio : 1:1

Details (contd) Details (contd)

Global Book Runners

Citigroup

Deutsche Bank Securities

Goldman Sachs (Asia) L.L.C.

UBS Investment Bank

Co-managers

ABN AMRO

Bank of America Securities LLC

Nomura International

Process of IssueProcess of Issue

File offer documents with SEC

Get comments from the SEC, if any and complete the

Registration Statement filing and process

Create an escrow mechanism for shareholders to deposit their

shares in India

Send the letter of invitation to all the shareholders in India

Fix a specified date to identify eligibility of shareholders who

can participate in this secondary offering

Process (contd)Process (contd)

Road show to market the ADRs

Price the ADRs

Eligibility is pro-rata to the holdings of the shareholders

Excess shares offered in the escrow account will be returned

to the shareholders

The proceeds are repatriated to India and will be distributed

to the shareholders, net of issue expenses

Schedule of IssueSchedule of Issue

Recent development in DRRecent development in DR

American Depositary Debentures (ADDs)

American Depositary Notes (ADNs)

Exchangeable Bonds or Notes

American Depositary Warrants (ADWs)

Embedded Restricted Securities (ERS)

N Shares

Global Registered Shares (GRSs)

Thank YouThank You