1 INTRODUCTION A Global Depositary Receipt (GDR) is a negotiable instrument issued by a depositary bank in international markets — typically in Europe and generally made available to institutional investors both outside and within the U.S. — that evidences ownership of shares in a non-U.S. company, enabling the company (issuer) to access investors in capital markets outside its home country. Each GDR represents a specific number of underlying ordinary shares (1 GDRs = 10 Equity shares) in the international company, on deposit with a custodian in the applicable home market. GDRs are quoted and traded in U.S. dollars, pay dividends in U.S. dollars and are subject to the trading and settlement procedures of the market in which they are transacted. GDRs are usually offered to institutional investors through a private offering, in reliance on exemptions from registration under the Securities Act of 1933. These exemptions are Regulation S (Reg. S) for non-U.S. investors, and Rule 144A for U.S. investors that are Qualified Institutional Buyers (QIBs). The availability of these exemptions for GDR deals makes them an efficient and cost-effective means of implementing a cross-border capital-raising transaction. The predominant listing venues for Reg. S GDRs are the London and Luxembourg Stock Exchanges, with GDRs having also been listed on the Singapore Exchange, Frankfurt Stock Exchange and Nasdaq Dubai. Rule 144A GDRs trade in the U.S. over-the-counter market. When GDRs are offered simultaneously in Reg. S and Rule 144A form, but in separate and distinct tranches, they exist inside what is known as a bifurcated GDR program. When the GDRs are offered simultaneously in Reg. S and Rule 144A form, but not in separate and distinct tranches, they exist inside what is known as a unitary GDR program. GDRs can also be offered in Reg. S form only. Due to the general flexibility afforded by GDRs, issuers from a variety of regions, including Europe, the Middle East and Africa; Asia Pacific; and Latin America, have been utilizing GDR programs to help meet their capital-raising needs on an increasing basis.
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INTRODUCTION
A Global Depositary Receipt (GDR) is a negotiable instrument issued by a depositary bank in
international markets — typically in Europe and generally made available to institutional
investors both outside and within the U.S. — that evidences ownership of shares in a non-U.S.
company, enabling the company (issuer) to access investors in capital markets outside its home
country.
Each GDR represents a specific number of underlying ordinary shares (1 GDRs = 10 Equity
shares) in the international company, on deposit with a custodian in the applicable home market.
GDRs are quoted and traded in U.S. dollars, pay dividends in U.S. dollars and are subject to the
trading and settlement procedures of the market in which they are transacted.
GDRs are usually offered to institutional investors through a private offering, in reliance on
exemptions from registration under the Securities Act of 1933. These exemptions are Regulation
S (Reg. S) for non-U.S. investors, and Rule 144A for U.S. investors that are Qualified
Institutional Buyers (QIBs). The availability of these exemptions for GDR deals makes them an
efficient and cost-effective means of implementing a cross-border capital-raising transaction.
The predominant listing venues for Reg. S GDRs are the London and Luxembourg Stock
Exchanges, with GDRs having also been listed on the Singapore Exchange, Frankfurt Stock
Exchange and Nasdaq Dubai. Rule 144A GDRs trade in the U.S. over-the-counter market.
When GDRs are offered simultaneously in Reg. S and Rule 144A form, but in separate and
distinct tranches, they exist inside what is known as a bifurcated GDR program. When the GDRs
are offered simultaneously in Reg. S and Rule 144A form, but not in separate and distinct
tranches, they exist inside what is known as a unitary GDR program. GDRs can also be offered
in Reg. S form only.
Due to the general flexibility afforded by GDRs, issuers from a variety of regions, including
Europe, the Middle East and Africa; Asia Pacific; and Latin America, have been utilizing GDR
programs to help meet their capital-raising needs on an increasing basis.
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(a)CONCEPTS DEPOSITORY RECEIPTS:
A Depository Receipt (DR) is a negotiable instrument in the form of securities that is issued by a
foreign public listed company and is generally traded on a domestic stock exchange. For this, the
issuing company has to fulfill the listing criteria for DRs in the other country. Before creating
DRs, the shares of the foreign company—which the DRs Represent—are delivered and
deposited with the custodian bank of the depository creating the DR‘s. Once the custodian bank
receives the shares, the depository creates and issues the DR‘s to the investors in the country
where the DRs are listed. These DRs are then listed and traded in the local stock exchanges of
the other country. The working of a standard DR programmed is illustrated in Figure 1.
Figure 1: Working of a DR Programme
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DRs have often been used by domestic companies as investment vehicles in the form of
American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs) for accessing
foreign markets and investors. American Depositary Receipts are typically traded on US stock
exchanges while the DRs that are traded on exchanges in other parts of the world are known as
Global Depositary Receipts .Currently, DRs represent about 4% of the total world listing in the
equity market.The following section discusses the DR regulatory framework in the capital
markets of the four countries that are the focus of this paper.
(b)UNDERSTANDING OF GDRs
As derivatives, depositary receipts can be created or canceled depending on supply and
demand. When shares are created, more corporate stock of the issuer is purchased and placed
in the custodian bank in the account of the depositary bank, which then issues new GDRs
based on the newly acquired shares. When shares are canceled, the investor turns in the shares
to the depositary bank, which then cancels the GDRs and instructs the custodian bank to
transfer the shares to the GDR investor. The ability to create or cancel depositary shares keeps
the depositary share price in line with the corporate stock price, since any differences will be
eliminated through arbitrage.
The price of a GDR primarily depends on its depositary ratio (aka DR ratio), which is the
number of GDRs to the underlying shares, which can range widely depending on how the
GDR is priced in relation to the underlying shares; 1 GDR may represent an ownership
interest in many shares of corporate stock or fractional shares, depending on whether the GDR
is priced higher or lower than corporate shares.
Most GDRs are priced so that they are competitive with shares of like companies trading on
the same exchanges as the GDRs. Typically; GDR prices range from $7 - $20. If the GDR
price moves too far from the optimum range, more GDRs will either be created or canceled to
bring the GDR price back within the optimum range determined by the depositary bank.
Hence, more GDRs will be created to meet increasing demand or more will be canceled if
demand is lacking or the price of the underlying company shares rises significantly.
Most of the factors governing GDR prices are the same that affects stocks: company
fundamentals and track record, relative valuations and analysts‘ recommendations, and market
conditions. The international status of the company is also a major factor.
On most exchanges, GDRs trade just like stocks, and also have a T+3 settlement time in most
jurisdictions, where a trade must be settled within 3 business days of the trading exchange.
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The exchanges on which the GDR trades are chosen by the company. Currently, the stock
exchanges trading GDRs are the:
1. London Stock Exchange
2. Luxembourg Stock Exchange
3. NASDAQ Dubai
4. Singapore Stock Exchange
5. Hong Kong Stock Exchange
Companies choose a particular exchange because it feels the investors of the exchange‘s country
know the company better, because the country has a larger investor base for international issues,
or because the company‘s peers are represented on the exchange. Most GDRs trade on the
London or Luxembourg exchanges because they were the 1st to list GDRs and because it is
cheaper and faster to issue a GDR for those exchanges.
Many GDR issuers also issue privately placed ADRs to tap institutional investors in the United
States. The market for a GDR program is broadened by including a 144A private placement
offering to Qualified Institutional Investors in the United States. An offering based on SEC Rule
144A eliminates the need to register the offering under United States security laws, thus saving
both time and expense. However, a 144A offering must, under Rule 12g3-2(b), provide a home
country disclosure in English to the SEC or the information must be posted on the company‘s
website.
Domestic custodian bank
A banking company which acts as a custodian for the ordinary shares or FCCBS of an Indian
company which are issued by it against GDRs or certificates.
WHY DO THEY EXIST?
Mutually beneficial to issuers and investors issuers.
Capital rising.
Cost of capital.
Valuation profit issues.
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Diversification of shareholder base.
INVERSTORS
Trade locally.
Liquidity aspects currency.
Low cost of custody.
Disclosure priced in investors.
Income processing.
How are they created?
Broker
1. Buys ordinary shares.
2. Deposits them into depositary‘s custodian account.
Depositary
Issues new DRS to purchasing broker
How they cancelled?
Broker
1. Purchases DR from market place .
2. Sells ordinary share in home market.
3. Presents DR to depositary for cancellation.
Depositary
1. Instructs custodian TP deliver ordinary share to broker‘s local custody market.
Rule 144-a and regs
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Rule 144-a
1grants exemption form US registration.
Private placement.
Holders limited to qualified institutional buyers QIBS qualifications.
Rationale for creation.
Regs
1. Exempt from us registration
2. Available only to non us persons
DEFINATION OF GDR’S
1. GDR can be defined as a foreign currency denominated derivative instrument in the form
of depository receipt created outside India and issued to non-resident investors Entitling
them to the benefits of specific number of ordinary equity shares or fully convertible
bonds of a domestic company.
2. 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.
3. A financial instrument used by private markets to raise capital denominated in either U.S.
dollars or euros.
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(c) OBJECTIVE OF THE STUDY
The main objective of study is to find out the status of GDRs in Indian economy.
To study the impact of GDRs over the telecom industry.
To study the effect of GDRs in Indian economy.
To study the reasons for growth of GDRs in Indian economy.
To find out the GDRs working over the Global economy.
(d) NEED OF THE STUDY
To study the growth of GDRs in Indian economy
To analyze the impact of GDRs in Indian economy.
The GDRs look over the financial system of Indian economy.
To understand the value of GDRs in Indian economy.
The study the procedure and process of GDRs in Indian economy.
(e) SCOPE OF THE STUDY
The main scope of the study to understand the concept of GDRs in Indian economy.
To find out the growth of GDRs in India.
To have the overlook up on the GDRs.
To know the GDRs issue in India.
GDRs have impact on Indian Market.
(f) LIMITATION OF THE STUDY
The study only conducts on GDRs.
The rules and regulation given by SEBI and RBI is considered.
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The working of GDRs only in Indian Financial Market.
The study restricted only in Indian market.
The study is mostly on secondary data.
(g) RESEARCH METHODOLOGY
The data collected is purely descriptive and the sources are only through secondary data
like online journals and portals etc.
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(a) Overview of GDRs in India and policy changes
The Indian stock market remained largely outside the global integration process until the early
1990s. In line with the global trend, reform of the Indian stock market began with the
establishment of the Securities and Exchange Board of India (SEBI) in 1988. The process gained
momentum after the widespread economic reforms in 1991. Among the other significant
measures of global financial integration, the structural reforms received a major impetus, when
the Indian corporate sector was allowed to tap global markets through DRs since April 1992. It
was stipulated that a company, interested in raising funds through foreign listing, obtain prior
permission of the Department of Economic Affairs, Ministry of Finance, and Government of
India. An issuing company seeking such permission was required to have a consistent track
record of good performance for a minimum period of three years. India regards issuance of DRs
as a form of foreign direct investment (FDI). Therefore, ordinary shares issued against the
Depository Receipts were to be treated as direct foreign investment in the issuing company.
Since there are company and industry limits on permitted FDI, the number of shares eligible to
be purchased for creation of DRs is limited and controlled, ultimately by Ministry of Finance
and the RBI. It was stipulated that the aggregate of the foreign investment made either directly or
indirectly should not exceed 51% of the issued and subscribed capital of the issuing company.
With the opening up of the financial markets, Indian companies joined the worldwide
rush to raise capital by issuing Depositary Receipts. India entered the international arena in May
1992, with the first GDR issue by Reliance Industries Ltd. on Luxembourg Stock Exchange
(LuxSE) in November 1992, followed by Grasim Industries with GDR program listed on the
LuxSE.
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
(FCCBs) 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 person 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
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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 markets, 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.
Till the year end 1993, DR markets witnessed a lull period resulting from the securities
scam and the consequent fall in the domestic markets. Patil attributed the small size of Indian DR
issues during this period to the limited overseas demand for Indian papers and the existing costly
procedure of flotation in the domestic market (57).
There was a surge in number of Indian GDR programs during 1994 and again during
1996. A high degree of foreign listing activity by the Indian firms during 1994 and 1996 was also
attributable to the increased allocation of investible funds by the international investors to the
emerging markets like India; and desire of many Indian firms to raise the funds during the boom
phase of the domestic markets to get a better pricing for their DR programs.
With Indian firms looking for their capital needs outside the domestic country, the Indian
government began to usher in widespread reforms by opening up opportunities within the
domestic stock market. A major improvement in the Indian stock market came in 1995 when the
new electronic National Stock Exchange (NSE) began operations whereby a new clearing
corporation and a new depository were in place. This generated renewed interest and increased
trading volumes in the Indian stock market in 1995-96, and consequently, we find a dip in the
amount of capital raised through depository receipts. Additionally, uncertain domestic political
environment resulted in infrequent fresh DR listing during 1995.
Moving ahead from the domestic stock exchange, the Government of India took another major
step. The Government permitted financial services companies like banks, non-bank finance
companies and financial institutions, to access the foreign stock markets. This brought about
another round of new foreign listings. As a further step, the mandatory three-year good
performance track record was relaxed for financing investments in infrastructure sectors, such as
power generation, telecom, petroleum exploration and refining, ports, airports and roads. This
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encouraged foreign listings by related firms such as, BSES Ltd. (power), VSNL (telecom) and
MTNL (telecom) in 1996 and 1997. This period also witnessed the foreign listing of State Bank
of India (bank) and ICICI (finance), through private placements.
Foreign listings and issuance activity during 1997 and 1998 was brought down by the
changing political and economic conditions in India and Asia including; the economic crises in
the South-east Asian markets.
Since 1999-2000, the Ministry of Finance continued to liberalize the procedures and
environment for the Indian corporate sector for acquiring capital from domestic and foreign
sources, which has been reflected in the growing market for DRs. End-use restriction on issue
proceeds were removed. During this period, software companies were allowed to issue DR
without reference to RBI up to US$ 100 million. Foreign listing activity by Indian firms regained
momentum during 1999 with the successful ADR issue by Infosys Technologies Ltd. as the first
exchange traded of Indian origin ADR trading in NASDAQ. Indian companies have issued
ADRs since the early 1990s, however most of these earlier issues were privately placed, so
exchange traded ADR has been relatively recent phenomenon in case of Indian origin
companies.
During 2000, there were an increasing number of Indian foreign listings resulting from
the new policy of Government of India. On Jan 20, 2000, RBI gave General permission to Indian
companies for issue of DRs, in order to simplify the procedure, under the Foreign Exchange
Regulation Act (FERA)- 1973 (58). Besides, the necessary permissions under FERA-1973 for
issue and export of ADRs/GDRs and acquisition of ADRs/GDRs by foreign investors have also
been granted. The Government of India has made certain changes in the guidelines to further
liberalize the operational procedures by dispensing with the track record scrutiny process and the
two-stage approval by the Ministry of Finance, Department of Economic Affairs for ADR/GDR
issues. On May 3, 2000, for the first time the resident employees of Indian software were
allowed to purchase foreign securities under the ADR/GDR linked Employees Stock Option
(ESOP) Schemes. On July 20, 2000, FIs were permitted to raise capital through issue of Global
Depository Receipts (GDRs) or American Depository Receipts (ADRs) within the limits
prescribed for Foreign Direct Investment by the Government of India (59). More modification in
the procedures of issuing DR programs by software, information technology, telecommunication,
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biotechnology and pharmaceutical firms in the foreign markets was carried out during 2000, with
the main aim of attaining a better valuation for firms; and to meet requirements of large amount
of funds, not easily available from the Indian markets.
During 2001-02, overseas business acquisitions through the DR route were permitted
under the automatic/simplified approval mechanism for Indian companies engaged in (i)
Information technology and Entertainment software; (ii) Pharmaceuticals; (iii) Biotechnology;
(iv) Any other sector as notified by the Government from time to time. Indian companies,
engaged in IT software and IT services, were permitted to issue DR linked stock options to
permanent employees (including Indian and overseas working directors) of its subsidiary
companies incorporated in India or outside and engaged in IT software and IT services. During
this period there was a decline in GDR issues, which was the reflection of the global slowdown
in developed markets, including the US, owing to a recession setting in the US and the war in
Iraq.
During 2002-2003 the guidelines were issued for two-way fungibility. The DR programs
were initially started in India as one-way programs. Under the one-way fungibility, once a
company issued DR, the holder could convert the ADR/GDR into shares of the Indian company,
but it was not possible to reconvert the equity shares into ADR/GDR. Over a period of time,
these programs resulted in decline of the outstanding balance of DRs, leading to lower liquidity
of DRs for the international investors. The process of global financial integration received a
major impetus when two-way fungibility for Indian DRs was introduced in 2002, whereby
converted local shares could be reconverted into GDR/ADR subject to sectoral caps (60).
The 2002 amendment to the issue of Foreign Currency Convertible Bonds and Ordinary
Shares (through DR mechanism) Scheme, 1993, opened the door to the limited two-way
convertibility of DRs, through which the reissuance of DRs once cancelled is permitted but
restricted by the initial offering size. This has been done with the aim of:
Facilitating market forces to trigger a realignment of prices,
Minimizing the widely divergent premium/discount levels prevailing between DR prices
and the domestic stock prices,
Providing an active DR market, particularly with considering the GDR market that has been largely inactive for the past couple of years.
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The result of limited two-way fungibility guidelines of the RBI was that, not only
corporations and depository banks could create DR, but also investors owning DRs have the
option to break them into ordinary shares, or purchase ordinary shares to convert them back into
DRs. In fact, it enabled a non-resident investor to purchase local shares of an Indian company
through an Indian stock broker and convert them into DRs that were eligible to be traded on the
international stock exchanges. However, the reconversion of broken DR into new DRs is the
subject to FDI limitation. The equity shares in India could be converted to DRs only to the extent
of the ‗headroom‘ (i.e. the number of DRs cancelled and converted into underlying Indian equity
or maximum number of DRs that can be issued on demand from foreign investors). According to
these guidelines transactions will be demand-driven and would not require company involvement
or fresh permissions. All SEBI registered brokers would act as intermediaries in the two-way
fungibility of DRs. A foreign investor is permitted to place an order with an Indian stock broker
to buy local shares, with an intention to convert them into depository receipts. The stock broker
has to apply to the domestic custodian bank for verification and approval of the order. Once
the approval is granted, the broker purchases local shares on the Indian stock market and delivers
them to the domestic custodian for further credit to the overseas depository. The overseas
depository issues proportional Depository Receipts to the foreign investor (45, pp.43-44).
During 2004, rules were more relaxed, and RBI permission to issue ADR/GDR linked
ESOPs was relaxed. The coverage of the facility to acquire such ESOP was expanded later to
include employees of all companies in the knowledge based sectors vide Guidelines dated
September 15, 2000 (Annex-I) issued by the Ministry of Finance, Government of India (61).
There was a sudden increase of depository receipts in 2005-06 due to the Monetary
Policy of 2005-06. There was a major revision to the guidelines on DRs for unlisted companies.
Unlisted Indian companies were allowed to sponsor an issue of ADRs or GDRs with an overseas
depositary against the shares held by its shareholders. Further, the facility of sponsored
ADR/GDR offering by unlisted companies was to be made available to all categories of
shareholders of the company whose shares are being sold in the ADR/GDR market overseas.
Foreign Currency Convertible Bonds and ordinary shares (through Depository Receipt
Mechanism) scheme, 1993 was amended and more simplified during 2005-2006 (62). The huge
increase in issues of DRs during this period was also attributable to the booming Indian stock
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markets that offered the corporate sector the opportunity to issue equities abroad (63). The boom
in the Indian industry is being translated into growing domestic production and exports, along
with companies setting up new capacities. Indian companies have raised a record level of capital
in 2005-06 both from the domestic capital markets and foreign capital markets. Some companies
went in for simultaneous offerings in domestic and foreign markets. The expansion of the Indian
corporate sector coupled with relaxation in DR norms by the Ministry of Finance, resulted in
suitable rise in the amount of capital raised through DR issues in 2005-06. Indian companies
began to enter new markets like the Singapore stock exchange and the Dubai stock exchange to
enlarge their investor base even further in addition to the major markets in US and Europe (i.e.
NYSE, NASDAQ, LSE, and LuxSE). This has been increase in terms of number of new issues
and number of companies listed in international market as well as capital raisings which
continued till 2007.
During 2006-2007, India experienced the growth rate above 9% (9.6%) for second
successive year. There has been remarkable growth of 49.8% in capital raised from international
capital markets during this period. However, the number of issues (i.e. IPO and follow on)
declined in the same period with compare to the previous year. During 2006-2007, there has
been amendment in Disclosure and Investor Protection Guidelines (DIP Guidelines) by the
SEBI, to permit listed companies to raise fund from the domestic market by making private
placement of specified securities with Qualified Institutional buyers (QIBs). The process called
as Qualified Institutional Placement (QIP) and the securities so issued constitute the fully paid-
up capital of the company. The Amendment defines the specified securities as equity shares,
fully convertible debentures, partly convertible debentures or any securities other than warrants,
which are convertible into or exchangeable with equity shares at a later date. The guidelines are
intended to encourage Indian companies to use QIP rout to raise fund rather than raising fund
through the DRs (ADR/GDR) or FCCBs, and to make Indian market more competitive and
efficient (64).
Master circular No. 02/2007-08 with further modifications, has explained the latest rules and
concepts regarding issues of shares by Indian companies under DRs (65). India has continued its
trend of healthy equity exports. In terms of new issues, there has been decline with compare to
the previous year. During 2007-2008, there have been 28 new issues (IPO and follow on) against
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40 new issues for the period of 2006-2007. There has been also decline in the number of
companies listed in international markets. But, the resource raisings by Indian companies
through DRs increased sharply by 56.2%. Despite of decline in new offering, particularly in the
year 2008, India has been the second country after Russia with 16 new sponsored DRs (new
offerings), and it ranked as the leading nation for total available sponsored DRs. Figure below
presents total sponsored DRs by the countries by the end of the year 2008 (53).
Fig. Total sponsored DRs by countries by the year end 2008 (53).
During the year 2008, Indian companies and companies from three other countries including
Brazil, Russia, and China (BRIC companies), dominated new DR programs, representing 53% of
new DR issuers, and 52% of capital raisings in DR form (56). Capital raisings of Indian
companies through the issuance of DR programs for the period of 1992-2008 is presented in
figure below.
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Fig. Capital rising of Indian companies from international markets through DRs, 1992-2008.
Source of data: The RBI Annual Reports and Bank of New York.
After 2008 The Indian companies are make loss over the GDRs
Investors lost money in 85% GDRs issued in 2010An analysis by CRISIL Research, India‘s
leading independent and integrated research house, of 40 global depository receipts (GDRs)
issued by Indian companies in 2010 reveals that investors have lost money in 85% of the issues,
with four out of five issues giving a negative return of 35% or more. As on September 15, 2011,
the average return on investments (a measurement of the difference in the offer price and the
market price) by all the GDRs issued in 2010 was negative 52%. The underperformance is
significant when compared to the average return of negative 7% by S&P CNX 500 during the
same period. Information technology, media and consumer staples companies were the major
underperformers. During 2010, Indian companies raised around Rs 56.8 bn (US$ 1.2 bn)
through the GDR route. Bombay Rayon Fashions Ltd‘s Rs 3.5 bn GDR issue in October 2010
was the largest during the year. Companies generally prefer the GDR route for fund raising when
the global sentiment for emerging markets is strong. During 2010, many Indian companies
were able to attract foreign investors through the GDR route given the performance of
equity markets and the strong domestic growth rate of over 8%. Further, lower disclosure norms
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on end use of funds make fund raising through GDRs comparatively easier for the domestic
companies. As of December 2010, Indian companies accounted for ~68% of the total listed
GDRs on the Luxembourg Stock Exchange. Most of the Indian companies which have raised
capital through the GDR route during 2010 are from the small and mid-cap space.
In absolute terms, the market value of the funds mobilized through GDRs has eroded by ~47%
(difference between capital mobilized and its current market value) to Rs 30.3 bn, with most
GDRs trading 40-60% below their offer price. In percentage terms, Teledata Technology
Solutions‘ GDR is the worst performer with its price on September 15, 2011, trading 93% below
the offer price. On the other hand, Rainbow Papers Ltd‘s issue has been the best performer with
its price trading 148% higher than the offer price. Rainbow Papers Ltd. is under CRISIL‘s
independent equity research coverage and has been assigned a fundamental grade of ‗3/5‘, which
indicates the company has good fundamentals. CRISIL's fundamental grade captures overall
assessment of the company‘s business positioning, industry prospects, management capability
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and corporate governance practices. However, the number of GDRs issued in 2011 has slowed
down. Volatility and weak performance of Indian equity markets in 2011 have damped investor
sentiments. This coupled with the weak performance of the past GDRs has made them less
attractive to foreign investors. Only 12 Indian companies have raised US$ 193 mn through
GDRs till date in 2011 as compared to 34 companies that raised US$ 976 mn in the
corresponding period in 2010.
IN 2011
An analysis by CRISIL Research, India‘s largest independent and integrated research house, of
40 global depository receipts (GDRs) issued by Indian companies in 2010 reveals that investors
have lost money in 85% of the issues, with four out of five issues giving a negative return of
35% or more. As on September 15, 2011, the average return on investments (a measurement of
the difference in the offer price and the market price) by all the GDRs issued in 2010 was
negative 52%. The underperformance is significant when compared to the average return of
negative 7% by S&P CNX 500 during the same period. Information technology, media and
consumer staples companies were the major underperformers. Indian companies have been the
most active GDR issuers accounting for ~68% of the total listed GDRs on the Luxembourg
Stock Exchange as of December 2010. During 2010, Indian companies, predominantly small and
mid-cap companies, raised around Rs 56.8 bn (USD 1.2 bn) through the GDR route. According
to Mr. Tarun Bhatia, Director, Capital Markets, CRISIL Research, ―Companies generally prefer
the GDR route for fund raising when the global sentiment for emerging markets is strong. During
2010, many Indian companies were able to attract foreign investors through the GDR route given
the performance of equity markets and the strong domestic growth rate of over 8%. Further,
lower disclosure norms on end use of funds make fund raising through GDRs comparatively
easier for the domestic companies.‖
CRISIL Research analysis further reflects that, in absolute terms, the market value of the funds
mobilized through GDRs has eroded by ~47% (difference between capital mobilized and its
current market value) to Rs 30.3 bn (USD 0.6 bn), with most GDRs trading 40-60% below their
offer price. In percentage terms, Teledata Technology Solutions‘ GDR is the worst performer
with its price on September 15, 2011, trading93% below the offer price. On the other hand,
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Rainbow Papers Ltd‘s issue has been the best performer with its price trading 148% higher than
the offer price. However, the number of GDRs issued in 2011 has slowed down. Only 12 Indian
companies have raised Rs9.4 bn (USD 0.2 bn) through GDRs during 2011, as compared to 34
companies that raised Rs 45.1 bn (USD1.0 bn) during the corresponding period in 2010. Mr.
Chetan Majithia, Head, CRISIL Research says ―Volatility and weak performance of Indian
equity markets in 2011 have damped investor sentiments. This, coupled with the weak
performance of the past GDRs, has made them less attractive to foreign.
IN 2012
Slowing economic growth resulting in a fall in corporate investments, newer instruments to raise
equity domestically and tougher regulations for issuing depository receipts aboard has led to a
sharp decline in the number of Indian companies going abroad to raise equity, which declined to
record lows this fiscal.
According to Prime Database, only two companies went for overseas equity issuances this fiscal,
which helped raise a paltry $40 million — the lowest since Prime began compiling data. The
money raised so far this fiscal is one-fourth of that raised by four companies last fiscal ($161.88
million) and one-tenth of the capital raised by a total of 19 companies in FY12.
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Data show most overseas issues recently done were by way of depository receipts — either
American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). Some companies
that raised foreign equity during the last 1-2 years included Zee Learn ($20 million), Zylog
Systems ($20 million), Industrial Investment Trust ($59.89 million) and Videocon Industries
($51.02 million).
One reason for the decline in overseas listing is the weakness in the domestic primary markets.
Under the current regulations, firms cannot raise funds through an overseas equity listing without
being listed on Indian exchanges.
―Since Indian primary markets have been in a bad shape for the last 3-4 years, many Indian
companies could not list here and that explains why there has been a decline in overseas equity
issues,‖ said Prithvi Haldea, CMD, and Prime Database.
A Mumbai-based investment banker explained that qualified institutional placements (QIPs) had
also led to a reduction in GDR listings in centers like Luxembourg.
―The current norms or listing agreement allow an Indian company to raise equity through QIP or
GDR. The introduction of QIPs and additional restrictions for issuing GDRs have eliminated the
need for Indian companies to go overseas and raise equity,‖ said V Jayasankar, senior ED and
head, equity capital markets, Kotak Investment Banking.
Meanwhile, listings in London and Singapore have declined as they are not seen as favorable
from valuation perspective. However, a section of the industry feels that the trend could change
with the proposal to make overseas listings more flexible. Last month, the government
introduced draft guidelines stating unlisted Indian entities could list on international exchanges
without the need to compulsorily list on Indian exchanges. The scheme will be implemented on a
pilot basis for a period of two years.
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TAXATION OF GDRS IN INDIA
Taxation on shares issued under global depository receipt mechanism
Any income by way of dividends distributed, declared or paid (whether interim or otherwise) by
any Indian company is exempt from tax and is not taxable in the hands of the investor. However,
the Indian Company declaring dividends will have to pay Indian dividend distribution tax at a
current rate of 16.995% (taking into account 10% educational cess and 3% surcharge).
On receipt of these payments of dividend after taxation, the Overseas Depositary Bank
distributes them to the non-resident investors proportionate to their holdings of GDRs evidencing
the relevant shares. The holders of the Depositary Receipts may take credit of the tax deducted at
source on the basis of the certification by the Overseas Depositary Bank, if permitted by the
country of their residence.
All transaction of trading of the Global Depository Receipts outside India, among non -resident
investors, will be free from any liability to income tax in India on capital gains therefrom.
If any capital gains arise on the transfer of the aforesaid shares in India to the non-resident
investor, he is liable to income tax under the provisions of the Income Tax Act, 1961. If the
aforesaid shares are held by the non-resident investor for a period of more than twelve (12)
months from the date of advice of their redemption by the Overseas Depositary Bank, the capital
gains arising on the sale thereof are treated as long-term capital gains and are currently not
subject to any income tax under the provisions of Section 115AC of the Income Tax Act, 1961.
If such shares are held for a period of less than twelve (12) months from the date of redemption
advice, the capital gains arising on the sale thereof are treated as short-term capital gains. Gains
on sale of shares held for less than one year are taxed at 11.33% (10% plus surcharge and
educational cess).
After redemption of the Depository Receipts into underlying shares, during the period, if any,
which these shares are held by the redeeming non-resident foreign investor who has paid for
these shares in foreign exchange at the time of purchase of the Global Depository Receipts, the
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rate of taxation of income by way of dividends on these shares would continue to be @ 11.33%
(10% plus surcharge and 3% educational cess) in accordance with section 115 AC (1) of the Act.
When the redeemed shares are sold on the Indian Stock Exchanges against payment in Rupees,
these shares shall go out of the purview of section 115 AC of the Act and income therefrom shall
not be eligible for the concessional tax treatment provided thereunder. After the transfer of
shares where consideration is in terms of rupee payment, the normal tax rate would apply to the
income arising or accruing on these shares.
Deduction of tax at source on the amount of capital gains accruing on transfer of the shares
would be made in accordance with sections 195 and 196C of the Act.
The provisions of Double Taxation Avoidance Agreement will be applicable, on the basis of the
country of the Overseas Depository Bank, in the matter of taxation of income from dividends
from underlying shares.
Application of avoidance of double taxation agreement in case of GDRs and underlying
shares after redemption
During the period, if any, when the redeemed underlying shares are held by the non- resident
investor on transfer from fiduciary ownership of the Depository, before they are sold to the
resident purchasers, India's treaty with the country of residence of the non- resident investor will
be applicable in the matter of taxation of income by way of capital gains arising out of the
transfer of the underlying shares to a resident of India or in India.
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(b) RULES AND REGULATION ACCORDING TO RBI AND SEBI