Investment Banking.ppt

Investment Banking

Role of Merchant Bankers

Merchant Banker and its Activities

Definition of Merchant Banker

There is no universal definition of a merchant banker as their roles differs from one country to another.

A merchant banker in UK is allowed to do the business of leasing which is prohibited in India.

In USA a merchant banker can mobilize savings of the people and is commonly known as investment banker.

Well known international investment bankers/merchant bankers are Merrill Lynch, Salomon Smith, J P Morgan, etc.

Merchant banker is defined as an organisation or institution that acts as an intermediary between the issuers and the ultimate purchasers of securities in the primary capital market.

SEBI through its Merchant Banker rules, 1992, has defined merchant banker as any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. (In view of this merchant banker may be a bank, corporate body, partnership firm or proprietary concern).

Developments in India Merchant banking, as a commercial activity,

took shape in India through the management of public issues of capital and loan syndication.

Merchant banking services were offered first time in 1969 by ANZ Grindlays Bank through its merchant banking division.

In 1973 term lending institutions like IDBI, IFCI, ICICI started offering merchant banking services to their corporate clients.

In 1978 many banks both in public and private sector had set up their own subsidiaries to take up the merchant banking activities. Along with this, Non-Banking Finance Companies also entered into the merchant banking business.

Subsequent to the passing of SEBI Act of 1992, by the parliament, SEBI was allowed to regulate the activities of merchant bankers.

In view of this, merchant bankers are required to get registered with the SEBI and undertake merchant banking business as per the guidelines issued by the SEBI.

Structure of Merchant Banking Firms :

Unless a certificate of registration is obtained from the SEBI, no person can act as a merchant banker.

At present merchant banking activities are being carried out by the following organizations :

Banks having merchant banking division.

Subsidiaries of banks which are set up to take up the activities of merchant bankers.

Financial institutions

Specialized merchant banking institutions.

Activities Relating to Issue Management and Underwriting

Issue management (public and right issue)

Debt issue management

Private placement of debt and equity

Buy back arrangement for securities

Underwriting of public issue.

Corporate Advisory Services

Advising on merger, acquisition and demerger (including privatization, business and financial restructuring and business and financial valuations).

Project appraisal (for investors, borrowers and creditors) and Loan Syndication (assignments for arranging of funds from Indian and international financial markets for infrastructure sectors including power, transportation, telecommunication, energy and urban infrastructure.)

Brokering services

Sale and distribution of securities

Sale of units of mutual fund schemes

Securities research

Portfolio management services

Debenture trusteeship

Structuring of debt instruments

SEBI Guidelines on Merchant Bankers and its Activities

Other than bank and non-banking financial company only a body corporate shall be eligible to get registration as merchant banker. Such organization is required to pay registration fee of Rs. 5 lakh to the SEBI within 15 days of receipt of intimation regarding grant of certificate.

The SEBI has categorized merchant bankers into four categories and accordingly the registration may be granted :

Category I : to carry on the activity of issue management and to act as adviser, consultant, manager, underwriter and portfolio manager.

Category II : to act as adviser, consultant, co-manager, underwriter, portfolio manager.

Category III : to act as underwriter, adviser or consultant to an issue.

Category IV : to act only as adviser or consultant to an issue.

The minimum capital in terms of networth is fixed for different merchant bankers. These are as under :

Category I : Rs. 5 crore Category I : Rs. 50 lakhs Category III : Rs. 20 lakhs Category IV : NIL

Once a registration certificate is issued by the SEBI, it remains valid for three years from the date of issue. The same certificate will have to be renewed. For this, application should be submitted to the SEBI (preferably three months) before the expiry of three years period. An organization whose registration is not renewed cannot carry on the activity as a merchant banker from the date of expiry of validity period.

Buy Back and its Rationale

Buy –back of Shares-Objectives

Buy Back of Shares: Repurchase of outstanding shares by a firm in the market to discourage unfriendly takeover

Objectives:• To increase promoters holding• Rationalize the capital structure• To thwart takeover• Unused cash• Show better financed ratios• Tax gain• Market perception• Avoid legal controls

Resources of Buyback of Shares

Free reserves Security premium account Proceeds of any shares

Methods of Buyback of Shares

Tender method Book-building process Open market

Regulation of Buyback of Shares [Company's Act]

Should be authorized by AOA (articles of association) A special resolution in general meeting, when Buyback exceeds

10% It should not exceed 25% of paid up capital plus free reserves No default in debt service; redemption debt; payment of dividend No default in complying with the provisions of filing annual

return, dividend, and former contents of annual accounts Full paid-up share can only allowed to buyback After buying them should be extinguished and physically

destroyed Company should not make further issue within 6 months

Regulation of Buyback [SEBI Guidelines]

Promoters are barred from offering shares Buyback cannot be done through negotiations Buyback need to be done through Merchant banker Company should file Form ‘C’ with registrar within 30

days of such buyback completion

Procedure for Buyback of Shares

Public announcement atleast one English national daily one Hindi national daily and one regional language

Give specified date in public announcement Public announcement shall contain disclosures as per

Schedule I of SEBI guidelines A draft letter shall be filed with SEBI through a Merchant

banker

Procedure for Buyback [contd.]

Copy of Board resolution shall be filed with SEBI and Stock Exchange

Buyback date shall not be less than 7 days or later than 30 days after the specified date

A company opting for buyback through public offer a tender offer shall open an escrow account

Buyback of share had to be implemented within 12 months from the date of passing the special resolution

Important SEBI Regulations

Securities Exchange Board of India SEBI is a regulatory authority. It is established under section 3 of SEBI

Act 1992. Objective is to maintain stable and

efficient markets. To protect investors in the New Issue

Market and Stock Exchange. To regulate develop and improve quality

of securities market in India.

Guidelines for Investor Protection

SEBI has issued guidelines in four areas: Guidelines to companies issuing public offer. Guidelines to intermediaries functioning

between investor and companies in the New Issue Market.

Guidelines to intermediaries in the Stock Market.

Guidelines for investor’s rights and liabilities.

Objectives of SEBISEBI has the following objectives: Investor protection. Investor grievance cell for problems. Investor education. Prohibition of unfair trade practices. Model code of conduct for listed

companies. Arbitration facility for investors.

Role of SEBI

1. Investor protection through guidelines rules and regulations of offer document, prospectus, listing and capital adequacy.

2. Credit rating for all debt issues.3. Restrictions of issuing shares. A company

should have a track record of paying dividends in previous 3 out of 5 years.

4. Inspection of books of account.5. Advertising public issue.

(i) Model Code of Conduct

1. SEBI regulations 1992 provides model code of conduct.

2. Code of conduct to the observed by employees, officers, directors of company.

3. Every listed company must employ compliance officer.

4. Confidential file should be kept secure.

(ii) Model Code of Conduct

5. Every company should have closed trading window period.

6. Listed companies should provide sensitive information on a continuous basis to Stock Exchange.

7. Trading windows should open after 24 hours of giving sensitive prices to public.

8. SEBI also deals with problems with the listed companies.

(I) Investor Grievances

SEBI deals with following complaints: Listed or traded securities Trade by members of Stock

Exchange or listed companies. Complaints regarding delays in

dispatch of allotment letters, refund orders, misleading statements in advertisements or prospectus. Delay in transfer of securities, non-payment of dividend or interest.

(II) Investor Grievances

Department of Company Affairs and Registrar of companies deal with following complaints:

Complaint against unlisted companies. Complaint against non-receipt of annual

report or notice of annual general meeting.

Complaints regarding fixed deposits in manufacturer companies.

Complaints regarding forfeiture of shares.

Departments of SEBI

1. Market Intermediaries Registration and Supervision Department (MIRSD)

2. Market Regulation Department (MRD)

3. Derivatives and New Products Department (DNPD)

OMBUDSMAN 2003

It provides fair and transparent systems of redressal of following grievances:

Delays in receiving refund orders, allotment letters, dividend or interest.

Non-receipt of dividends, certificates, bonus shares, annual reports, refunds in allotments or redemption of mutual fund unit.

Non-receipt of letters of offer in respect of buy back of shares or in the case of delisting.

Complaints regarding grievances against intermediaries or listed companies.

National Stock Exchange Arbitration Facilities

Arbitration is done through persons selected by SEBI.

Investors get the facility if they have a valid contract note.

NSC provides facilities for investors dealing through registered brokers.

Arbitration is also for disputes and claims of trading members.

Investor Education

SEBI makes the investor aware of following rights:

To participate and vote in annual general meetings and the right to receive a notice for them or their proxy to attend the meeting.

To receive dividends, rights shares, bonus offers from the company after approval of the board.

To receive and inspect minutes of the general meeting.

To receive balance sheet, profit and loss account, auditors report and directors reports.

To receive allotment letters and share certificates.

To requisition an extra ordinary general meeting.

To apply for winding up of the company.

To proceed in civil or criminal proceedings against the company.

Fraudulent and Unfair Trade practices regulation

This Act had its main focus on the following issues:

Prohibition of misleading statements. Prohibition of manipulation of price of

securities by traders and intermediaries Prohibition of entering into a transaction

without the intention of ownership of a security.

Prohibition of intermediaries promising clients falsely not wanting to actually completing the contract.

Prohibition of Insider Trading 1992

Any company in the same management or group of companies.

Any intermediary, asset management company, clearing corporation, an official of a stock exchange, a director or an employee who has access to information

A merchant banker, registrars to an issue, underwriters, portfolio managers, bankers to an issue, members of board of directors or their relatives.

Is prohibited to do trading as he has insider information.

MAPIN 2003

MAPIN is market participants and investors integrated database.

Registered intermediaries listed companies and investors obtain unique identification number (UIN).

Investor protection fund consists of contribution from following sources:

Members of stock exchange provide Rs 0.15 per Rs.1 lakh of their gross turnover. This is debited to their general charges account.

On a quarterly basis stock exchange contributes 2.5% on a quarterly basis out of the listing fees collected by it

Interest earned by stock exchange on security deposits of companies making public issues.

SEBI added another directive. According to this directive auctions proceeds of cases where price manipulations and rigging had taken place were also to be transferred to this fund.

Any Investor who is defrauded can be compensated upto Rs. 10 Lakhs.

Investor Protection Fund

SEBI and Investor Protection Legislations. Discipline. Insider trading. Badla trade.

Primary Market Secondary

Market Investor

Protection Mutual Fund Foreign

Institutional Investors

Summary

SEBI is a regulatory department. It has brought about transparency in market

dealings. It has provided guidelines rules and

regulations for investor protection. It has held several workshops for investor

education and awareness of rights. It has provided investor protection fund. It has setup many departments for Investor

protection through supervision and market regulation.

IPO/Rights Issue Process

How are start-up firms usually financed? Founder’s resources Angels Venture capital funds

Most capital in fund is provided by institutional investors

Managers of fund are called venture capitalists

Venture capitalists (VCs) sit on boards of companies they fund

Differentiate between a private placement and a public offering.

In a private placement, such as to angels or VCs, securities are sold to a few investors rather than to the public at large.

In a public offering, securities are offered to the public and must be registered.

Privately placed stock is not registered, so sales must be to “accredited” (high net worth) investors. Send out “offering memorandum” with 20-

30 pages of data and information, prepared by securities lawyers.

Buyers certify that they meet net worth/income requirements and they will not sell to unqualified investors.

Why would a company consider going public?

Advantages of going public Current stockholders can diversify. Liquidity is increased. Easier to raise capital in the future. Going public establishes firm value. Makes it more feasible to use stock as

employee incentives. Increases customer recognition

Disadvantages of Going Public Must file numerous reports. Officers must disclose holdings. Operating data must be disclosed. Special “deals” to insiders will be more difficult

to undertake. A small new issue may not be actively traded, so

market-determined price may not reflect true value.

Managing investor relations is time-consuming.

What are the steps of an IPO? Select investment banker File registration document with the

stock exchange Choose price range for preliminary (or

“red herring”) prospectus Go on roadshow Set final offer price in final prospectus

Book Running Lead Managers

Services Offered Composition of capital structure

Drafting of prospectus and application form,

Compliance with procedural formalities

Appointment of registrar

Listing of securities

Arrangement of underwriters

Placing of issues

Selection of Bankers

Publicity and Advertising agents, printers

Max. No of Lead Managers

Issue size less than 50 crores - 2Issue size Rs. 50 –100 crores - 3Issue size Rs. 100-200 crores - 4Issue size Rs. 200-400 crores - 5 More than Rs 400 crores -

more than 5

Responsibilities of Lead Manager

Enter into an agreement with issuing co.

Has to accept min. underwriting obligation of 5% of total UW Commitment or

Rs. 25lakhs,whichever less. Due diligence certificate Capital adequacy- min. Rs.50 Lakhs

Submission of documents to SEBI

Acquisition of shares prohibited.

Disclosure to SEBI-

Action in case of default Suspension of Registration Cancellation of Registration

UNDER WRITERWho is He? Who agrees is to take up securities which are

not fully subscribed.,committed to get issue subscribed either by others or by himself.

Certificate of Registration

Fees: Rs 5 Lakhs for 1st and 2nd year Rs 2 lakh for 3rd year,Thereafter Rs 2.5 lakh every third year to keep the certificate in force. Capital Adequacy not less than Rs.20 lakhs

General Obligations and responsibility

• Agreement with Client

Operational Guidelines/Instructions

UW has to satisfy himself with the terms of the issue, information, and disclosures in the prospectus before filing it with the ROC. Total underwriting obligation shall not exceed 20 time the net worth of the underwriter.

Issuer has to supply all the related material 21 days prior to the date of issue.

Applications of UW will be treated at par with other application forms.

In case of under subscription, UW has to fulfill his obligation within 30 days.

UW is entitled to underwriting commission negotiated mutually.

UW has the right to terminate the agreement.

Bankers to an issue

Activities- acceptance of application form along with application money in respect of the issue and refund of application money

Registration- SEBI grants registration. Annual fees Rs. 5lakhs as a initial registration

and Rs. 2.5 lakhs renewal from the fourth year.

Records –No. of applications recd.names of investors,time within which the applications were forwarded to the issuer/ registrar, dates and amounts of refund money.

Agreement with the issuing co.-

Disciplinary action by RBI-

Code of conduct –

Inspection –

Action in case of default-

Registrar to an Issue

Activities – Collecting applications from investors,

Keeping a proper record of Applications and money recd,

Assisting in deciding the basis of allotment Finalizing allotment and dispatching the letter of

allotment, certificates , refund order and other related documents.

Share transfer Agentshare transfer agent" means-

Any person, who on behalf of any body corporate maintains the record of holders of securities issued by such body corporate and deals with all matters connected with the transfer and redemption of its securities.

A department or division (by whatever name called) of a body corporate performing the activities referred in sub-clause (i) if, at any time the total number of the holders of securities issued exceed one lakh.

Contd…. Share Transfer agent- Category 1- Can act as a Registrar and

Share transfer agent,Net worth Rs. 6 lakhs, Fees Rs.50,000/- and renewal fees of Rs. 40,000 every year

Category 2- Can act as a Registrar or share transfer agent, net worth Rs. 3 Lakhs, fees Rs. 30,000/-and renewal fees of Rs. 25,000 every year

Maintenance of Records- Applications received from investors Rejected applications with reasons Basis of allotment List of allotees and non allotees Refund order

Inspection Action in default

(Source- www.sebi.com)

What is a prospectus?

A prospectus is the document that contains all the information you need about the company. It will tell you why the company is coming is out with a public issue, its financials and how the issue will be priced.

There are two types of prospectus.

Draft Offer Document

This is first filed with SEBI. SEBI may specify changes, if any, to be

made. After the changes are made, it is filed with the Registrar of Companies or the Stock Exchange.

The Draft Offer Document must be filed with SEBI at least 21 days before the company files it with the RoC/ Stock Exchange.

During this period, you can check it out on the sebi website

Red Herring Prospectus This one does not have details of

either the price or the number of shares being offered or the amount the IPO plans to raise.

That's because this kind of prospectus is used in book building issues, where the details of the final price are known only after the bidding is concluded.

What to look for in a prospectus? Risk Factors Capital structure Objective of the issue Business Regulations and policies Issue structure and issue procedures Basis for issue price Financials

What criteria are important in choosing an investment banker?

Reputation and experience in this industry

Existing mix of institutional and retail (i.e., individual) clients

Support in the post-IPO secondary market Reputation of analyst covering the stock

Would companies going public use a negotiated deal or a competitive bid?

A negotiated deal.

The competitive bid process is only feasible for large issues by major firms.

It would cost investment bankers too much to learn enough about the company to make an intelligent bid.

Would the sale be on anunderwritten or best efforts basis?

Most offerings are underwritten.

In very small, risky deals, the investment banker may insist on a best efforts basis.

On an underwritten deal, the price is not set until

Investor interest is assessed.

Oral commitments are obtained.

How an IPO would be priced?

Since the firm is going public, there is no established price.

Banker and company project the company’s future earnings and free cash flows

The banker would examine market data on similar companies.

Price set to place the firm’s P/E ratio in line with publicly traded firms in the same industry having similar risk and growth prospects.

On the basis of all relevant factors, the investment banker would determine a ballpark price, and specify a range (such as $10 to $12) in the preliminary prospectus.

What is a road show? What is a road show? Senior management team, investment banker,

and lawyer visit potential institutional investors

Usually travel to ten to twenty cities in a two-week period, making three to five presentations each day.

Management can’t say anything that is not in prospectus, because company is in “quiet period.”

What is “book building?”

Investment banker asks investors to indicate how many shares they plan to buy, and records this in a “book”.

Investment banker hopes for oversubscribed issue.

Based on demand, investment banker sets final offer price on evening before IPO.

There is an inherent conflict of interest, because the banker has an incentive to set a low price: to make brokerage customers happy. to make it easy to sell the issue.

Firm would like price to be high. Note that original owners generally sell

only a small part of their stock, so if price increases, they benefit.

Later offerings easier if first goes well.

What are the direct costs of an IPO?

Underwriter usually charges a 3-3.5% spread between offer price and proceeds to issuer.

Direct costs to lawyers, printers, accountants, etc. .

What are the indirect costs of an IPO?

Indirect cost= (End of price on first day - Offer price) x Number of shares

Preparing for IPO consumes most of management’s attention during the pre-IPO months.

Book Building Guidelines

1. Allotment

2. Bidding

50% allocation/allotment to QIB on a proportionate basis with 5% reservation for Mfs.

50% offer to non-QIB on a proportionate basis

15% to wholesale investors applying for an amount >Rs.1,00,000

35% to retail investors applying for an amount of Rs.1,00,000 or less.

Bidding mandatory on electronically linked platform of the stock exchanges

Bidding terminals at all centres where there is a stock exchange

3. On Line Display4. Price Discovery

5. Underwrit- ing

6. Bidding Period

Graphical display of demand and price at the bidding terminals is mandatory.

Bidding permitted by using a floor price or a price band having 20% range

Price band during the bidding period can be revised within a 20% band provided bid open for 3 days after revision

Underwriting is mandatory

Mandatory period of 3 days and upto 10 days

Green shoe option When there is an over allotment in a new share

issue it is referred to as the “green shoe option.” This allows the underwriters the right to sell more

shares than originally planned by the issuers if the demand is higher than expected.

In the case where there is very high demand, this option puts more supply in the market and helps to prevent excessive volatility in the aftermarket once the stock starts trading.

The green shoe company was the first company to have such an option; Hence the name.

What is a rights offering?

A rights offering occurs when current shareholders get the first right to buy new shares.

Shareholders can either exercise the right and buy new shares, or sell the right to someone else.

Book Building Issues Process Flow Chart

Issuer Co. SE

SEBIBRLMDRAFT

In Prin

ciple

Approva

l

RHP ROC

Issue Opens

Printing RHP &Appln(Bid Form)

Despatch of RHP & Form toSE’s & othrs.

Advt

Sign Escrow Agmt.

Syn.Agmt filed with SEBI

DRAFT

RHP

1

Book Building Issues Process Flow Chart (contd)

2

Investor Submits Forms

SM and SUBSM

Bankers to an Issue

BSE/NSE

BRLM

REGISTRAR

IssueCloses

Price determination By BRLM/Issuer

Update Prospectus

BRLM submitsCANs

to QIBs and offer document to

SEBI/ROC

Allocation toQIBs on

Proportinate basis

Strike Order for CANs and Refund warrants given to the printer

Book Building Issues Process Flow Chart (contd)

3

Basis of AllocationFinalised by Issuer,

Registrar,BRLM,Designated SE and PR

Issuer approvesAllotment

(Board Resolution)

BRLM

TRANSFER OF FUNDS

REGISTRAR

DEPOSITORIESCrediting of shares into Individual BO accounts

ISSUERCO./

BRLM

STOCK EX.Issuer seeks listing approval

If approved, trading commences

Fixed Price Issue Process Flow Chart (contd)

2

Investor Submits Forms

Bankers to an Issue/Authorised Collection Agents

REGISTRARData Entry

Recon.of data recd.from BankersReconciles physical forms

ISSUE CLOSES

REGISTRAR/ISSUERReceipt of Provisional Certificate from Banks

Strike Order for Refund Orders/Warrants given to the Printer

Final Collection Certificates Received from Bankers

Submission of Basis To the Designated SE

Fixed Price Issues Process Flow Chart (contd)

3

Basis of Allotment Approved by the

Designated SE/LM/Registrars

LM/ISSUER

Registrar

Issuer approvesAllotment

(Board Resolution)

LM

Basis of Allocation

Advertisement

REGISTRAR

DEPOSITORIESCrediting of shares into Individual BO accounts

ISSUERCO./

BRLM

STOCK EX.Issuer seeks listing approval

If approved, trading commences

Transfer of Funds

ADR/GDR Issues

Prof. D. C. Pai

Global Depository Receipts (GDRs)

A GDR is a dollar denominated instrument, tradable on a stock exchange or private placement in USA, representing one or more shares of the issuing company.

The shares are acquired by a bank in Europe, which then issues receipts or “Certificates” to the investors.

This bank is called a depository and such receipts are called Global Depository Receipts in short GDR.

The company, which has issued GDRs/shares has no commitment to pay any foreign exchange, and thus has no exposure in foreign exchange. As a result there is no foreign exchange risk.

The dividend paid by the company is in local currency.

As the GDR represents shares, there is no redemption involved.

This arrangement thus, works to the advantage of the company as also is convenient for the holder of the GDRs, as it can be traded on a foreign stock exchange where they are listed.

Alternatively, the holder can convert the GDR into its underlying shares, sell these on the local stock exchange, and then convert the proceeds into US $ at the prevailing exchange rate.

GDR has a distinct identity from the underlying shares.

GDRs do not appear in the books of the issuing company, however the underlying share appear in its books.

The issuing company collects the GDR proceeds in foreign currency. It may then use these proceeds for meeting the foreign exchange component of its project costs, repayment of foreign loans, or for its domestic expenditure.

A GDR holder has the option to convert the GDR and the hold the underlying equity shares.

GDRs are normally listed on Luxemburg exchange and traded at 2 other places besides the place of listing – i.e. OTC market London and private placement market in US.

GDR does not entitle the holder any voting rights. However, the holder gets the voting rights, when he prefers to convert GDRs into underlying shares.

GDR is an instrument governed by international law.

Pricing of GDR would generally be in line with the pricing of underlying shares. However, based on international market conditions and perceptions about domestic currency, the GDR may be at discount or at premium compared to domestic share prices.

The GDR market is a global one. It is therefore exposed to international influences, like prices of other securities in the financial market or interest rates in the US market.

The currency market also have impact on the GDR prices.

American Depository Receipts (ADRs)

ADR is an instrument similar to GDR and is issued in the capital markets of US alone.

Generally, far more stringent rules and regulations prevail for bringing out an ADR issue.

An American Depository Receipt is a receipt or a certificate issued by the US bank, representing title to specified number of shares of a non US company.

US bank is the depositary in this case.

ADR is the evidence of the ownership of underlying shares.

ADRs are freely traded in the US, without actual delivery of underlying non US shares.

ADRs can be created in two ways Unsponsored ADRs

One way to create ADR is by an arrangement which is not initiated by the company concerned, but is generally set up by one or more US brokers, when it is observed that a large number of American investors are interested in dealing in the shares of a non US company.

The brokers then ask a US depository bank to create ADRs.

The depository has to register the ADRs with the securities and exchange commission (SEC), which is the main securities regulator in the US.

Sponsored ADRs

In this case the issuing company actually promotes the companies ADRs in the US choosing a single depository bank, which assumes the sole responsibility for administration and dividend payment.

The administrative cost involved in issuing the ADRs are bourn by the issuing company.

The proceeds of the ADR issue are also received by the company.

The registration of ADR with the SEC is not compulsory. the company need to submit its annual report to SEC.

If the ADRs are to be registered with SEC, the financial statement of the company need to be prepared in accordance with US generally accepted accounting principles (US GAAP) and fulfill listing requirements of at least one of the US stock exchange.

Unregistered ADRs are not eligible for listing for any of the stock exchanges. However, trading in such ADRs may take place on the NASDAQ's bulletin board.

Generally raising FOREX funds through ADR, GDR routes is preferred to external commercial borrowing (ECB) route.

Commercial borrowing adds to the countries external debt burden which is not in the case of ADR, GDR.

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