Adr GDR

Indian Companies access to International Capital Markets with reference to ADR/GDR
INTRODUCTION The trend towards the internationalization of financial markets has gained impetus during the last two decades, driven mainly by the sophistication in IT and capital market participants (borrowers, investors and financial intermediaries), greater co-operation between financial regulators, the lowering of capital barriers across national boundaries and the liberalization of capital markets in emerging economies. Many companies are looking beyond their domestic financial markets to develop an investor base and to raise international capital. A vast majority of foreign firms choose to cross-list their stock through the use of depositary receipts (DRs), which have become the popular mode of financing. The 1990s saw an increased flow of DR programmes, especially from the emerging markets. In April 1992, the government permitted Indian companies to raise equity capital by issuing DR programmes in the international financial markets and of all the emerging markets, India has maximum number of DR programmes. With the advances in information technology and greater cooperation among financial regulators, the international capital markets are now more closely linked. Listing of foreign companies on Wall Street, in the form of depositary receipts, is an important process of market integration. Foreign companies seek listing on Wall Street to raise capital, gain liquidity, and stress shareholder information. On the demand side, US investors are looking to take advantage of new capital growth opportunities and to add an additional element of diversification in international securities. Within the next few years, US investors are expected to double the non-US component of their equity portfolio.
SIMSR/MMS/2003-2005/SEM IV/31
Indian Companies access to International Capital Markets with reference to ADR/GDR Investment Banking firms need to seize the opportunity to facilitate the global capital raising and capital allocating process. ADRs provide US investors an additional venue to acquire and trade non-US securities in US dollars without concern for the differing settlement process, securities custody and currency exchange. Through ADRs, Americans can also achieve the benefits of systematic risk reduction not obtainable in the US domestic markets. For a foreign company, some structures of ADRs allow the company to raise US capital, while others provide a mechanism that improves such companys visibility in the United States. Purchasers and sellers of ADRs include retail customers, institutional investors, arbitrageurs and brokers. It is believed that 15% to 20% of the ADR market is made up of retail investors, with the balance consisting of institutions or brokers. Generally, approximately 90% of the activity in the ADR market involves purchases and sales of existing ADRs in U.S. trading markets, with the balance consisting of purchases of foreign securities and the deposit of those securities into new facilities to create new ADRs, or the surrender of ADRs and the withdrawal of deposited securities from an existing facility. Since the promulgation in 1990 of Rule 144A, an increasing number of non-U.S. issuers have raised capital on a private placement basis in the United States as part of a larger global public offering. The securities offered in the United States, commonly in the form of Global Depositary Receipts (GDRs), can often be traded outside the United States on the Luxembourg Stock Exchange and other exchanges. Non-U.S. issuers can consider the use of ADRs regardless of the nature of the trading market for their securities in their home countries. Long-established companies with
Indian Companies access to International Capital Markets with reference to ADR/GDR significant market capitalization may choose to list ADRs in the United States or establish an over-the-counter program as an adjunct to one or more listings elsewhere in the world. Companies formed via spin-off or business combinations may choose to list ADRs in connection with an initial dual listing of ordinary shares in another market or may choose, now that the London Stock Exchange has established a separate regime (for specialist certificates) to list the ADRs themselves in the United States and in London. Companies with or without home country listings may effect public offerings or other capital raising activities in the United States using ADRs. The ADR market is growing from both the demand side and the supply side. It is the preferred method of entering the US markets. Foreign issuers are increasingly attracted to the US markets for several reasons. The US markets are efficient and the largest in the world. The United States presents fewer barriers to entry by foreign issuers than do other nations. On the demand side, US investors have been looking for yield and diversity. And at times, certain ADRs offer greater liquidity in the United States than the underlying stocks in foreign local markets.
Indian Companies access to International Capital Markets with reference to ADR/GDR DEPOSITARY RECEIPTS: STRUCTURE, ISSUING AND TRADING PROCESS A depositary receipt (DR) is a negotiable instrument denominated in US dollars or Euro, issued to investors in foreign countries. Overseas depositary banks issue DRs to international investors against the delivery of local currency shares of the issuer company to the domestic custodian bank. DR programmes are classified as American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs) on the basis of the countries where they are issued and/or listed. While American Depositary Receipts are issued and/or listed only in the US markets, Global Depositary Receipts are simultaneously issued and/or listed in more than one market, typically in the European and US markets.
Each DR represents a certain number of underlying local currency equity shares of the issuer traded in the home market of the issuer. The depository sets the ratio of a single DR to local currency equity share of the issuer. The ratio is set in conformance to the price range at which most securities of companies in the issuers industry generally trade, to the average price range at which most shares listed on the stock exchange trade, and to give a sense of just pricing to prospective investors. While most DR programmes have been established with a 1:1 ratio (one underlying share equals one depositary share), some DR programmes have ratios ranging from 100,000:1 to 1:100
Indian Companies access to International Capital Markets with reference to ADR/GDR Typical Structure of a DR Programme Issuer Company Underlying Shares Foreign Country Money Dividend Listing Custodian (Local Bank)
Depository Bank
Foreign Stock Exchange
DRs Dividend
Money
Foreign Investors
Euroclear/Cedel/ Depository Trust Company
Clearing House
In order to establish a DR programme, the issuer selects a depository, a custodian bank and an advisory team constituted of lawyers, accountants and investment bankers. The roles of different market intermediaries involved in the issuing and listing of a DR programme is as follows. The Issuer Company is responsible for preparing the issue proposal, determining the financial objectives, obtaining the required approvals from the Board of Directors, shareholders and regulators, deciding the type of DR programme to be issued, providing financial information to accountants and developing investor relation plans. The Lead Manager (Investment Banker) is responsible for marketing the issue to the investors, conducting the road shows, advising the issuer company on the type of DR programme and pricing of the security, obtaining the required securities, rating numbers and eligibility and appointing legal advisors to ensure the accuracy of the information in
Indian Companies access to International Capital Markets with reference to ADR/GDR the prospectus. Co-managers assist the lead manager in fulfilling its obligations to the issuer company. Underwriters subscribe to the unsubscribed portion of the issue or buy that portion of DRs to further sell it to investors. The Depository is the bank authorized by the issuer company to issue DRs against its equity shares deposited with the domestic custodian. It is the overseas agent of the issuer company, issuing DRs to the investors in lieu of shares allotted to them. The physical possession of the shares rests with the domestic custodian although the ownership of the shares vests with the DR investors. The depository is the registered owner of the shares and its most important role is that of stock transfer agent and registrar. The depositary bank is responsible for providing advice on the structure of the DR programme, appointing the custodian, assisting in complying with the regulatory requirements for floating the DR programme, enlisting the market makers, ensuring programme implementation and acting as the liaison between the issuer, the securities market participants and the DR holders once a depositary receipt facility is established. The Custodian is the banking company situated in the issuers home country appointed as the custodian of the underlying shares of the issuer company. The custodian is responsible for holding the underlying shares in the account of the depository and transmitting dividend payments to the investors through the depository. Other functionaries include brokers who make securities available to investors and execute trades, investor relation firms, legal advisors, auditors appointed by the issuing company who reconcile the issuing companys accounts with International Accounting Standards (IAS) or US Generally Accepted Accounting Principles (GAAP) and aid the issuing company to comply with proper disclosures and the Listing Agent, usually the
Indian Companies access to International Capital Markets with reference to ADR/GDR Lead Manager who advises the company on all aspects of listing and provides the link between the company, depository and the listing authority. Launching a DR programme is a time consuming process. A Level II or a Level III DR programme requires a period of 14-20 weeks as against a period of 11-13 weeks for a Level I or GDR issue. Once a DR programme is established, DRs can be freely traded amongst different investors either on a stock exchange or over-the-counter (OTC) market. Clearing house facilities are essential for an active secondary market of any type of securities. In the US, the Depositor Trust Company (DTC) conducts clearing operations in respect of transaction related to purchase and sale of ADRs. Euroclear and CEDEL provide similar facilities for GDRs, EDRs and other variants of DRs traded in the European markets. Investors sell their DRs through their brokers. The broker can either sell their DRs in the market where they are initially issued or sell the shares into the issuer companys home market. Secondary market trading in DRs is constituted of two types of market transactions, the intra-market transaction and the cross-border transaction. Cross-border transactions in DRs are, typically, executed to take advantage of the price differentials, between the DR prices and the prices of equivalent underlying domestic shares. Besides, lack of liquidity in DR markets also prompts the cross-border transactions. Most transactions in Indian GDRs are executed as cross-border transactions.
Indian Companies access to International Capital Markets with reference to ADR/GDR EVOLUTION AND GROWTH OF DR MARKETS International Scenario DR programmes were originally developed to address the concerns of US investors interested in investing internationally but reluctant to do so because of the cumbersome buying and settlement procedures of offshore securities. J.P. Morgan created the first ADR in 1927 to allow Americans to invest in the British retailer Selfridge. ADRs have since evolved in sophistication and in importance. ADRs are now among the commonly used vehicles to invest internationally and have become fully integrated into the US capital markets. They are an efficient, transparent, cost-effective and liquid method for US investors to make specific foreign investments. ADRs came into existence in their present form in 1955, and after Japanese firms in 1960s, the 70s and 80s saw several firms from other countries also adopting the ADR route for raising capital and/or listing in the US capital market. During 1970s and 80s a few countries also allowed domestic companies to directly sell and list their equity stocks on the foreign markets. The 1990s saw a spurt in the number of DR programmes on account of the regulatory changes introduced by the SEC, the easing of regulations by the LSE and the massive wave of privatization of public enterprises. US investment in foreign equity increased from $279 billion in 1991 to $1943 in 2001. The number of ADR programmes listed on the three major stock exchanges of the US, viz., NYSE, NASDAQ and AMEX increased from 215 in 1992 to over 1558 in December 2001. The number of countries that have issued DR programmes has gone up from 24 in 1990 to 78 in 2001. The total annual trading volumes in listed DRs increased from $125 billion in 1992 to $1185 billion in
Indian Companies access to International Capital Markets with reference to ADR/GDR 2000 at compound annual growth rate of 32.5%. The total global market capitalization of companies with DR programmes exceeded $6 trillion at the close of 1999. There is an upward trend in the percentage of equity value traded in the form of DR programmes in the foreign markets. The success of DR programmes from emerging markets in the international investing community has been attributed to the fact of these markets representing huge market places and a fast growing part of the world economy, the superior returns and attractive valuations of the programmes, their being under weighted in the global portfolios and their greater diversification potential. ADRs provide US investors an additional venue to acquire and trade non-US securities in US dollars without concern for the differing settlement process, securities custody and currency exchange. Through ADRs, Americans can also achieve the benefits of systematic risk reduction not obtainable in the US domestic markets. For a foreign company, some structures of ADRs allow the company to raise US capital, while others provide a mechanism that improves such companys visibility in the United States. The ADR market is growing from both the demand side and the supply side. It is the preferred method of entering the US markets. Foreign issuers are increasingly attracted to the US markets for several reasons. The US markets are efficient and the largest in the world. The United States presents fewer barriers to entry by foreign issuers than do other nations. On the demand side, US investors have been looking for yield and diversity. And at times, certain ADRs offer greater liquidity in the United States than the underlying stocks in foreign local markets.
Indian Companies access to International Capital Markets with reference to ADR/GDR Percentage Distribution of Public DR programmes by Country of Issue
5% 5% 5% 5% 5% 5% 10% 5% 10% 15% 5% 5% 15% 5%
Switzerland UK Argentina Brazil China France Germany Hong Kong India Korea New Zealand Norway Portugal South Africa
Indian Scenario In July 1991, the Indian government announced the New Industrial Policy (NIP) to liberalize its economy. The Securities and Exchange Board of India (SEBI) was created with statutory authority to oversee Indias capital markets in 1992 and it introduced changes in several areas of the Indian capital market. In September 1992, the government permitted Foreign Institutional Investors (FIIs) to invest in Indian securities under specific guidelines issued by the Reserve Bank of India (RBI) and the SEBI. Other sources of foreign investment include Non-resident Indians (NRIs), Overseas Corporate Bodies (OCBs), DRs and Euro convertible bonds. In April 1992, the Indian government also permitted Indian firms to raise funds from the international markets by their DRs.
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Indian Companies access to International Capital Markets with reference to ADR/GDR Indian DRs can be denominated in any freely convertible currency and may be listed on any international stock exchange. In February 2001, the Indian government allowed twoway fungibility in Indian DRs. In effect, foreign investors owning Indian DRs and Indian companies could convert their ADRs/GDRs into shared tradable at Indian stock exchanges and vice-versa. There are no end-use restrictions on GDR/ADR issue proceeds, except restrictions on investment in stock markets and real estate. Earlier, the approval of the Ministry of Finance was necessary for issuing DRs. Now companies can raise money through DRs under an automatic route without the prior approval of the Ministry of Finance. However, they have to fulfill the mandatory approval requirements under FDI policy and the provisions of FERA/FEMA prior to the overseas issue. A foreign investor, interested in investing in Indian equities, primarily has two avenues of doing so. One is to register officially as an FII and buy and sell equities in the Indian stock market and the other is to buy GDRs of Indian firms in overseas markets. Both these investments carry their own tax and transactional implications. For individual investors, GDRs offer a more attractive alternate avenue for investing in Indian equities as they have fewer legal and institutional restrictions. There is no restriction on the number of ADRs/GDRs to be floated by a company or a group of companies in a financial year. Initially Indian firms listed their DR programmes at the LxSE due to its mild securities regulations and easy listing norms, and subsequently started listing on the LSE, NASDAQ and NYSE. Listings on the US market require stringent disclosures and recasting of firms financial statements, and in the early 90s, most of the Indian did not have the level of financial transparency desired by the US GAAP and SEC. In the course
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Indian Companies access to International Capital Markets with reference to ADR/GDR of 1990s, Indian financial market regulators introduced several reforms to improve the level of financial transparency of Indian firms, which increased the capability of Indian firms to tap US markets. The Reliance Industries Ltd in 1992 made the first issue of GDR and raised US $ 150 million and it became the first Indian Company to access the international capital market. Even after the Indian stock market opened to Foreign Institutional Investors (FIIs) in 1993, the GDR route remained popular for various reasons. Till date almost 62 GDRs have been issued by the Indian Companies covering a variety of industries with a range of valuations and premiums. Today some issues of GDRs are being quoted at a discount to the issue price ranging from 50 to 80 percent. Foreign listing activity by Indian firms regained momentum during 1999 with the successful ADR issue by Infosys Technologies. During 2000, there was a spurt in the number of Indian foreign listings because of the fresh policy initiatives by the Indian government, which simplified approval mechanisms for software, information technology, telecommunication, biotechnology and pharmaceutical firms for issuing DR programmes in foreign markets. While most GDR listings were accomplished during 1994 and 1996 when the domestic market was in a boom phase, ADR listings were accomplished during 2000 to 2001, when domestic market was in a bearish phase. Overall, the conduct of Indian DR listings does not seem to be consistent with the model of Lucas and McDonald, which predict that equity issues tend to follow the general increases in the broader equity markets. Each offshore instrument has positive as well as negative features. Smaller issues should probably take the GDR route and large issue may take the ADR route. A company with
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Indian Companies access to International Capital Markets with reference to ADR/GDR large issue may take the ADR route. A company with large equity base and reasonable debt to equity ratio may like to opt for an External Commercial Borrowings (ECB) route. These are broad guidelines and no blanket recommendations can be prescribed in this matter. A comparison between ADR listing Indian firms and GDR listing Indian firms reveals that the former tend to be young, innovative and operate in knowledge based industries like computers, telecommunications and pharmaceuticals. This seems to be in consonance with Pagano et als assertion that the industry characteristics of firms influence their choice of stock exchange(s) in their DR listings. US exchanges are perceived to provide a better listing environment for firms belonging to knowledge-based industries. Allen and Gale argued that the US equity markets are comparatively more mature in evaluating the future growth and revenue prospects of innovative firms. Indian firms listing their GDR programmes on the LSE and LxSE tend to be older, and operate mostly in the traditional sectors of the economy.
Industry Presence of Indian Foreign Listed Firms TABLE 1 Industry Presence of Indian Foreign Listed Firms SIMSR/MMS/2003-2005/SEM IV/31 13
Indian Companies access to International Capital Markets with reference to ADR/GDR Number of Firms Listed LSE LxSE NASDAQ NYSE Total Percent 2 1 3 3 9 12.50% 3 0 0 1 4 5.56% 2 1 0 2 5 6.94% 0 4 0 1 5 6.94% 1 6 0 0 7 9.72% 2 2 0 0 4 5.56% 2 2 0 0 4 5.56% 3 1 0 0 4 5.56%
Industry Computers and Portal Services Telecommunications Banks, FIs, Financial Services Pharmaceuticals Consumer goods, Textiles Hotels and Restaurants Utility Companies Natural Resource Extraction: oil, gas, minerals, steel Cement, Chemicals, Pesticides, Plastics, Metal Products, Synthetic Yarn Automobiles, Heavy Vehicles, 2 & 3 wheelers Construction Diversified Others TOTAL
0 3 0 3 0 21
15 2 2 5 1 41
0 0 0 0 0 3
0 0 0 0 0 7
14
19.44%
5 6.94% 2 2.78% 8 11.11% 1 1.39% 72 100.00%
Source: Table compiled from CMIE's Prowess database and Economic Times electronic database
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Indian Companies access to International Capital Markets with reference to ADR/GDR PRINCIPAL TYPES OF ADR PROGRAMS There are two categories of ADR programs: unsponsored and sponsored. The latter includes Level I ADR, Level II ADR, Level III ADR and Rule 144A ADR. The foreign companies do not support unsponsored ADRs. Sponsored facilities are exclusive to one depository and cannot exist simultaneously with unsponsored ADRs for the same foreign security might trade at different prices, creating confusion. The prices might be different in part, because in a sponsored program the issuer reimburses the depository for its expenses, whereas in an unsponsored facility the ADR holder bears such expenses.
Unsponsored Programs An unsponsored ADR program is not initiated by the foreign issuer but by a bank in response to investor demand. The issuer has little, if any, control over the activity of the unsponsored program because there is typically no deposit agreement between the issuer and the depositary bank. Registration of the underlying shares is not required, only the ADRs must be registered with the Securities and Exchange Commission (SEC). The depositary bank and the issuer together submit an application to the SEC under Rule 12g3-2(b) seeking exemption from the full reporting requirements. Upon receipt of SEC approval, the depositary bank files Form F-6, which is a limited disclosure registration statement. The foreign issuer is not a signatory to the document and generally has no obligation or liability in connection with the registration of the ADRs. Once approved, the unsponsored ADRs can be traded only in the over-the-counter market. The SEC requires that material public information in the issuers home country
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Indian Companies access to International Capital Markets with reference to ADR/GDR be supplied to the commission and made available to US investors. The depositary will mail the issuers annual reports and certain public information to US investors upon request. The SEC does not require this material to be translated into English or to be adjusted for differences between the accounting standards used and the United States generally accepted accounting principles (GAAP). Unsponsored programs offer several advantages to the issuers. They provide an inexpensive and simple way of expanding the investor base in the United States. The SEC compliance and the reporting requirements are minimal. Other depositary banks can duplicate an unsponsored program by filing a Form F-6 with the SEC without the consent of the issuer. Also, an unsponsored program can be converted to a sponsored facility. To do so the issuer buys out the unsponsored ADRs, by contacting the depositary bank of the unsponsored program, having it exchange its ADRs for the new sponsored ADRs, and paying the cash-out fee to the depositary.
Sponsored Programs To establish a sponsored ADR program, the issuer usually selects a team consisting of lawyers, accountants, investment bankers and investor relationship firms. The issuer also chooses a depositary bank to implement and manage the ADR program on an ongoing basis. Citibank, J.P. Morgan and Bank of New York are the three major depositary banks. The issuer works with the depositary bank to select a custodian to safe keep the underlying shares in the issuers home market. The issuer, the depositary bank and in most cases, the ADR holders enter into a deposit agreement that sets forth the terms of
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Indian Companies access to International Capital Markets with reference to ADR/GDR the program. Based on the contract, the depositary bank performs the specified services on behalf of the issuer and investor. The creation of ADRs comes about once the depositarys custodian in the issuers home market receives the deposit of the underlying shares. The depositary then issues depositary receipts to investors. For example, suppose that an investor wishes to purchase new ADRs. The investors US broker contacts a foreign broker to purchase shares in the foreign corporations local market. The foreign broker then deposits the purchased shares at a local custodian. The custodian instructs the depositary bank to issue ADRs evidencing ownership of the deposited shares. The depositary bank then delivers the ADRs to the broker who initiated the trade, and the broker delivers the ADRs to the customers account. The ADRs have been created. Upon establishment of the ADR program, the depositary acts as the liaison between the foreign issuer and US investors. The parties involved reverse the steps in order to cancel the ADR program. The broker receives ADRs from customers and delivers them to the depositary for cancellation. The depositary instructs the local custodian to release the underlying shares to the local broker who purchased the shares. An important step in establishing an ADR program, whether sponsored or unsponsored, is the determination of the ratio of underlying shares to the ADR. ADR shares are established as a multiple or a fraction of the underlying shares. There are several important considerations in setting the ratio. First, the issuer will want to conform to the price range of industry peers in the United States. Second, each exchange ahs average price ranges for listed shares. In addition, some institutional and individual investors also have preferences for shares traded in certain ranges. Upon setting the ratio, the price of
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Indian Companies access to International Capital Markets with reference to ADR/GDR the ADR should reflect the dollar-equivalent price of the shares in the home market. For example, suppose the ratio has been set at 1 to 1. Assume the price of the underlying shares in the home market is $15.25, and the ADR sells for $15.75. Arbitrageurs will buy shares and issue ADRs until the arbitrage profits disappear. In contrast, if the underlying shares trade at a higher level, arbitrageurs will buy the ADRs, cancel them, and sell the shares in the local foreign market. Although all sponsored programs follow the general form just described, a foreign company can issue several different types of sponsored ADRs Level I, Level II, Level III, or Rule 144A. The choice depends on the needs and wishes of the issuer.
Level I Program This is the earliest and least expensive way for a foreign company to gauge interest in its securities and to begin building a US presence. The company does not have to comply with US GAAP or full disclosure. The company is required to obtain an exemption by providing its financial statements and English and the other information already required by the regulatory authorities of its home country. The issuer also had to file a Form and sign a deposit agreement. The issuer has greater control over a Level I facility because a deposit agreement is executed between the issuer and one exclusive depositary bank. The agreement defines the responsibilities of the depository, including responding to investor inquiries, maintaining stockholder records and mailing annual reports and other materials to shareholders. The Level I sponsored ADRs can only be traded OTC, with bid and ask prices published daily in National Daily Quotation Bureau pink sheets. Those who wish to continue
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Indian Companies access to International Capital Markets with reference to ADR/GDR relying on exemption will trade exclusively on the pink sheets. As a result, investor interest might be limited. On the other hand it has several advantages: Low set-up costs Exempt from full compliance with SECs disclosure requirements Issuer has greater control than would be the case with an unsponsored program The depositary bank passes on dividends, financial statements and material public corporate information to US investors Can support a Rule 144A ADR facility and is easy and relatively inexpensive to upgrade the program to Level II or Level III
Level II Programs Companies wishing to list their shares on a US exchange can use sponsored Level II program. Level II ADRs must comply with SECs full registration and reporting requirements. The issuers must file with SEC a form for registering the ADRs and a form to meet the reporting requirements. In addition, the issuer must submit its annual reports, which must be prepared in accordance with US GAAP. The compliance allows the issuer to list its ADRs on NYSE, AMEX or Nasdaq; each has its own reporting and disclosure requirements. Full registration and listing increase liquidity and marketability, and hence enhance the issuers name recognition in the United States. The issuer is also able to monitor the ownership of its US shares. Because the foreign issuer must comply with the rigorous SEC requirements, it is well positioned to upgrade and make a public offering in the US
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Indian Companies access to International Capital Markets with reference to ADR/GDR market. The foreign company may be qualified to use a short-form registration statement if it has been filing timely periodic reports to the SEC for a specified time period. On the other hand, the program is more expensive and time-consuming to set up and maintain than for a Level I ADR. It must comply with SEC full registration and reporting requirements. Financial statements must be prepared in accordance with US GAAP or a detailed summary of the differences in financial reporting between the home country and the US must be submitted. Additional costs include legal and listing expenses. Another key disadvantage is that SEC regulations do not permit a public offering of ADRs under Level II program; that is, a foreign company cannot use Level II to raise capital in the United States.
Level III Programs Companies wanting to raise capital use sponsored Level III facility. ADRs under Level III are similar to Level II ADRs. In both programs, the issuer initiates the program, signs a deposit agreement with one depositary bank, lists on one of the US exchanges and files forms with the SEC. The major difference is that a Level III ADR allows the issuer to make a public offering. For this, the issuer is required to file a Form. The reporting is more onerous that for Level I or Level II programs. The costs can be substantial, which include costs for listing, attorneys, accountants, investor relations and road shows. In summary, among the three programs discussed, a Level I facility allows a foreign company to enjoy the benefits of a publicly traded security without changing its current reporting process. Companies wanting to list shares on a US exchange use sponsored Level II programs and companies wishing to raise capital use Level III. Each higher level
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Indian Companies access to International Capital Markets with reference to ADR/GDR of ADR program reflects additional SEC registration and increases the visibility and attractiveness of the ADR to institutional and retail investors.
Rule 144A ADRs In addition to the three levels of sponsored ADR programs that trade publicly, a non-U.S. issuer can also access U.S. capital markets through a private placement of sponsored ADRs or GDRs pursuant to Rule 144A. Such a private placement would permit the nonU.S. issuer to place ADRs or GDRs with large U.S. institutional investors without having to register the offering with the SEC. Rule 144A is an exemption from the registration requirements of the 1933 Act for resales of unregistered securities to qualified institutional buyers (QIBs). The Rule was adopted in part to attract non-U.S. issuers who traditionally had shunned U.S. capital markets because of the registration requirements of the 1933 Act (including the need to reconcile their financial statements to U.S. GAAP). Although the exemption is not available to issuers, an issuer of securities in a Rule 144A program may rely on the traditional private placement exemption (Section 4(2) or Regulation D promulgated there under) to issue the securities to an intermediary, who in turn resells the securities in the United States to QIBs. To use the Rule 144A exemption, the securities must be offered and resold only to a person reasonably believed to be a QIB, the seller and persons acting on its behalf must take reasonable steps to ensure that the purchaser is aware that the seller may be relying on Rule 144A, the securities must not, when issued, be of the same class as securities listed on a U.S. national securities exchange or quoted in a U.S. inter-dealer quotation
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Indian Companies access to International Capital Markets with reference to ADR/GDR system, such as Nasdaq, and issuers must either be subject to 1934 Act reporting obligations, be exempt there from pursuant to Rule 12g3-2(b) or undertake to provide, upon request, to any seller of securities or any prospective purchaser certain information regarding the issuer. In a Rule 144A ADR or GDR program, an intermediary in an issuers unregistered offering deposits securities with a depositary against the issuance to such intermediary of ADRs or GDRs. The intermediary then resells such ADRs or GDRs to QIBs under Rule 144A. In the alternative, the deposit can be made by the issuer or an affiliate of the issuer against the issuance of ADRs or GDRs to the intermediary, which then resells the ADRs or GDRs to QIBs under Rule 144A. Reliance on Rule 144A eliminates the need to register the ADRs or GDR on Form F-6 (though registration would add flexibility to the program) or, in the case of an offering by the issuer to raise capital, the need to register the underlying securities on the more onerous registration statement on Form F-1, F-2 or F-3, which would otherwise be required when a non-U.S. issuer is undertaking an initial public offering of securities. QIBs are able to resell their Rule 144A ADRs or GDRs to other QIBs pursuant to Rule 144A or surrender their Rule 144A ADRs or GDRs in return for underlying securities which can be resold outside the United States in compliance with Regulation S.10 In conjunction with the establishment of a Rule 144A ADR or GDR program, an issuer can establish a sponsored program to develop a secondary trading market in the United States for unrestricted securities acquired offshore. Generally, a time period after the establishment of a Rule 144A program tied to the applicable restricted period under
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Indian Companies access to International Capital Markets with reference to ADR/GDR Regulation S (i.e., at least 40 days) should elapse before the filing of a registration statement for the unrestricted program. The Rule 144A ADRs or GDRs, on the one hand, and the unrestricted securities or unrestricted ADRs or GDRs (generally referred to as Regulation S ADRs or GDRs), on the other hand, use separate CUSIP numbers (identifying numbers used to track securities in the United States), eliminating the need to restrict, for U.S. securities law purposes, the securities offered and sold outside the United States. By limiting the sale of Rule 144A ADRs or GDRs to QIBs and using unrestricted securities for investors outside the United States, liquid public markets can develop outside the United States and, following the establishment of an unrestricted program through the filing of a Form F-6, within the United States. During the 40 days following completion of the offering, QIBs can sell their Rule 144A ADRs or GDRs to other QIBs and to non-U.S. investors. Non-U.S. investors can sell their unrestricted securities or Regulation S ADRs or GDRs to other non-U.S. investors and to QIBs. After effectiveness of the Form F-6 for the unrestricted facility, holders of unrestricted securities or Regulation S ADRs or GDRs have access to the liquidity of the U.S. public markets by means of the unrestricted facility. It is common for the Rule 144A ADRs or GDRs to be designated as eligible for trading in the Private Offerings, Resales and Trading through the Automated Linkages (PORTAL) system of the National Association of Securities Dealers, Inc. and to be made eligible for settlement through the book entry settlement system of The Depository Trust Company (DTC). The Regulation S ADRs or GDRs sold offshore may be approved for listing on the London Stock Exchange and be eligible for settlement through the book-entry settlement systems of DTC, Euroclear and Cedel.
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Indian Companies access to International Capital Markets with reference to ADR/GDR The Rule 144A ADRs or GDRs and the Regulation S ADRs or GDRs generally will be issued pursuant to separate Deposit agreements. A Master Rule 144A ADR or GDR will be issued to DTC and registered in the nominee name of DTC, though it will often be held by the Depositary, as custodian for DTC. So long as Rule 144A ADRs or GDRs are traded through DTCs book-entry settlement system, ownership of beneficial interests in the Master Rule 144A ADR or GDR will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee or institutions that have accounts with DTC. A Master Regulation S ADR or GDR will be issued to DTC and registered in the name of its nominee, and also may be held by the Depositary, as custodian for DTC. Initial settlement of the Regulation S ADRs or GDRs will take place through Euroclear and Cedel. Until the expiration of the distribution compliance period, Euroclear and Cedel will hold the Regulation S ADRs or GDRs on behalf of their participants through their respective depositaries, which are participants in DTC, and transfers will generally be permitted only within Euroclear and Cedel. Thereafter, transfers can be effected within DTC, Euroclear or Cedel. Cross-market transfers between DTC participants, on the one hand, and directly or indirectly through Euroclear or Cedel participants, on the other hand, generally are effected in DTC through the respective depositaries of Euroclear and Cedel. The benefits of Rule 144A clearly accrue in the first instance to the issuer. Issuers that would have accessed U.S. capital markets but for the burdens of registration have the means of doing so without relying on the small and relatively illiquid traditional private placement market. It must be remembered, however, that the advantages of a Rule 144A
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Indian Companies access to International Capital Markets with reference to ADR/GDR ADR or GDR program are available only if the issuer is willing to forgo a listing or quotation of its ADRs on a U.S. stock exchange or Nasdaq.
Global Depositary Receipts Citibank introduced the first Global Depositary Receipt (GDR) in December of 1990. Samsung Corporation, a Korean trading company, wanted to raise equity capital in the United States through a private placement, but also had a strong European investor base that it wanted to include in the offering. Citibank's solution was to create a "global" depositary receipt structure that used an innovative clearing link between the Depository Trust Corporation (DTC) in the United States and Euroclear/Cedel in Europe. Citibank had developed the DTC/Euroclear/Cedel link for use in an earlier offering of global bonds and leveraged the technology to create the GDR structure. The link enabled Samsung to raise capital in the US and Europe through one security issued simultaneously into both markets. Since 1990, the term "GDR" has been embraced by the market and is being applied to an ever-expanding group of structures for global offerings. Today, a "GDR offering" generally signifies an offering of depositary receipts that is available in two or more markets outside the issuer's home country. Most GDR offerings consist of a US tranche that is privately placed and traded in accordance with Rule 144A and a non-US tranche that is sold to investor outside the United States in accordance with Regulation S. There are, however, many variations of this structure. For example, recent global offerings have used GDRs that are listed on the New York Stock Exchange and there have been several
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Indian Companies access to International Capital Markets with reference to ADR/GDR GDR offerings with no US component. The flexibility of the GDR structure has made it a popular and rapidly growing capital-raising tool.
Euro Depositary Receipts In the last few years, the depositary receipt concept has developed considerably. Issuers in a variety of countries have realised that there are advantages in making their stock available in a form convenient not only to US investors but also, or alternatively, to investors in the Euromarkets. This has prompted the development of European Depositary Receipts (EDRs) The EDR accesses the Euromarkets but not the US market. It settles and trades through the Euromarket clearing systems, Euroclear and Clearstream, and may be listed on a European Stock Exchange, normally London or Luxembourg. EDRs and GDRs are generally denominated in US dollars, but may be denominated in any currency. They represent the underlying shares in exactly the same way as ADRs, and make it possible for foreign investors to trade in the issuing company's stock without the problems associated with custody and settlement in foreign markets. The advantages of an EDR/GDR program are similar to those of an ADR program. An EDR program gives access to the vast pool of international capital, while a GDR combines this with access to the domestic US market. This allows capital raising on a scale, which could be difficult in some domestic markets, and in the case of an EDR avoids all the US SEC reporting and registration requirements associated with ADRs.
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Indian Companies access to International Capital Markets with reference to ADR/GDR Advantages to a non-US corporation of initiating an EDR/GDR program:
A DR program provides a simple means of diversifying the company's shareholder base and of tapping the global capital markets.
It allows capital raising on a scale, which might prove impossible in the local market.
It increases the issuer's visibility and name recognition in the international markets, which may enhance knowledge of its products and ease the path of future capital raising exercises.
Indian Depositary Receipts After a two-year gap following the introduction of Section 605-A in the Indian Companies Act, 1956 (Companies Act) which permitted foreign companies to make a public offer of Indian Depository Receipts (IDRs), the Department of Company Affairs, Government of India (DCA) has prepared a draft Companies (Issue of IDRs) Rules, 2002 (Draft IDR Rules). News reports have indicated a few salient features of the Draft IDR Rules, which are briefly discussed in this update for your information. The Draft IDR Rules propose to include certain eligibility criteria for foreign companies, which are looking at listing in India, including a five-year profitability criteria, a dividend record of more than 10% during the said five-year period, a 2:1 debt-equity ratio as well as an existing listing on an international stock exchange. Some good companies which are in the small and mid-size market segment may not be able to meet with all the criteria mentioned above, particularly the dividend criteria as foreign companies typically reinvest their profits into the business as opposed to Indian companies which are used to
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Indian Companies access to International Capital Markets with reference to ADR/GDR declaring dividends out of profits. These eligibility criteria may undergo some modifications based on the subsequent discussions that the DCA intends to have with other Indian regulatory authorities. Additionally, the Draft IDR Rules do not seem to require the foreign company to have any business in India, in order to seek an Indian listing. Prior to pursuing a listing in India, the foreign company will be required to seek the approval of the DCA. The actual process for the issue of IDRs by a foreign company would be similar to the process followed by foreign private issuers looking at listing on American and European stock exchanges. The IDR would be an instrument denominated in Indian Rupees and represented by underlying securities of the foreign company, which are required to be listed on an international stock exchange. Hence, the foreign company would issue the securities underlying the Indian Depositary Receipts to an overseas custodian bank, which will in turn authorize the domestic depositary bank in India to issue IDRs to Indian investors. As part of the IDR process, the foreign company will also be required to appoint a merchant banker and file a due diligence report with the Securities and Exchange Board of India (SEBI) and the Registrar of Companies. This portion is corresponding to the Indian IPO process where the merchant bankers are required to file a due diligence report in a prescribed format with the SEBI prior to the IPO. There are also a few restrictions that are imposed by the IDR Rules such as an IDR cannot be redeemed into the underlying securities within a period of one year from the date of the listing of the IDRs on the Indian bourses. This restriction is somewhat unusual and the rationale for imposing such a restriction is also a little unclear. The foreign company is also required to transfer the IDR proceeds into a separate account and provide
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Indian Companies access to International Capital Markets with reference to ADR/GDR details of the use of the IDR proceeds and their repatriation. This requirement is similar to the reporting requirements for an Indian company issuing ADRs/GDRs to overseas investors. The IDR route is attractive for small and mid-cap foreign companies, which are familiar with Indian markets or have promoters of Indian origin. Typically, these companies would be based in the Silicon Valley, U.S.A and South East Asia. With the cost of compliance increasing for companies that want to be listed in the U.S., a listing in India may be an attractive option for foreign companies that view India as a potential market. All the provisions of the Draft IDR Rules discussed above are in draft form and are currently being discussed by all the relevant Indian regulatory bodies including the SEBI and the Reserve Bank of India at a meeting convened by the DCA. We will keep you informed of the developments in this regard.
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Indian Companies access to International Capital Markets with reference to ADR/GDR REGULATION, PURPOSE, OBJECT WITH REFERENCE TO SEBI GUIDELINES Any company wanting to float an ADR/GDR has to comply with certain regulations. The Company has to seek the permission from the Ministry of Finance, Department of Economic Affairs and follow the regulations laid down by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). To see the guidelines given by the Securities and Exchange Board of India please refer to SEBI Guidelines mentioned in detail in the latter part of this document. The purpose of an issue can be for various reasons. A few of them are as mentioned below: 1. Financing capital goods import 2. Financing domestic purchase/installation of plant 3. Pre-payment or scheduled repayment of earlier External Commercial Borrowings 4. Making investment abroad with the prior approval of the Competent Authority 5. For Corporate restructuring purposes
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Indian Companies access to International Capital Markets with reference to ADR/GDR ADR ADVANTAGES The ADR structure provides several distinct benefits, such as trading simplification, faster dividend payment, risk and cost reduction, investor barrier elimination and investor communication facilitation. The increased efficiency in the ADR market further benefits brokers and market makers. ADRs greatly simplify the trading of foreign equities for the issuers, brokers, market makers and investors. Without ADRs, a single trade of a foreign security involves multiple parties, currency concern and settlement delays. ADRs standardize the varying securities practices. Securities in ADR forms are easily transferable and the automated book-entry systems for clearing procedures are well established. ADR holders also have the benefit of a depository collecting dividends, converting the currency and issuing prompt payment in US dollars or additional ADRs in the case of a stock dividend. Institutions whose charters preclude holding foreign securities and currencies can invest through ADRs. Similarly, institutions that only invest in the US because they have no custodian facilities or arrangements abroad can invest in ADRs. Another significant advantage ADR holders have over holders of foreign shares is that the price information is readily available. It is important to note that ADR holders enjoy all the voting rights, as well as the equivalent cash value of non-US subscription rights and warrant offerings. Securities dealers and brokers find ADRs attractive as well. The T+3 settlement cycle minimizes losses from fails. The depositaries can prerelease shares to help overcome problems from differing settlement periods in different nations. In a prerelease, the depository with the knowledge that the trade of underlying shares has been executed,
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Indian Companies access to International Capital Markets with reference to ADR/GDR issues an ADR before the underlying shares are physically deposited in an overseas custodian.
Advantages to the Investor The practice of issuing ADRs in the United States has developed to facilitate trading in the underlying securities of non-U.S. issuers and the payment of dividends (or interest) to U.S. investors. One of the main attractions of ADRs is that they are priced and quoted in dollars and trade, clear and settle within the same systems and time periods as exist for other U.S. securities that trade in U.S. markets. If investors held the non-U.S. securities directly, transactions in such securities would be subject to the clearance and settlement procedures in the issuers non-U.S. trading market. In addition, ADRs may represent one or more, or a fraction of, the underlying non-U.S. securities, thus allowing the ADR price to be consistent with customary U.S. share prices. Yet another advantage to U.S. investors is that the depositary will collect and convert into dollars dividends (or interest payments) for distribution to holders. This is particularly advantageous in the case where the non-U.S. securities are issued in bearer form, which would require an investor to monitor dividend (or interest) declarations and collect dividends (or interest payments) by presenting the securities to a paying agent. The depositary also will make available to ADR holders various reports issued by the non-U.S. issuer. In addition, in cases where for regulatory reasons it may not be desirable or possible for U.S. holders of ADRs to exercise subscription rights, the depositary may sell the rights and distribute the proceeds to ADR holders.
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Indian Companies access to International Capital Markets with reference to ADR/GDR Finally, some mutual funds, pension funds and other institutions that for regulatory reasons may be precluded from purchasing and holding securities abroad can invest in the securities of non-U.S. issuers through the purchase of ADRs.
Advantages to the Issuer ADRs and GDRs provide non-U.S. issuers with a vehicle for increasing visibility in the United States and the means to raise capital in the U.S. capital markets. In addition to broadening the market for non-U.S. issuers securities, ADRs provide non-U.S. issuers with the means to encourage U.S. employees to invest in the securities of the parent company. ADRs also enable non-U.S. issuers to develop a new following for their securities. In addition, ADRs have been used in connection with mergers and acquisitions, restructurings and tender offers. GDRs can be used by non-U.S. issuers, in conjunction with Rule 144A, to enter the U.S. capital markets without regulatory review. These uses are described in greater detail below.
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Indian Companies access to International Capital Markets with reference to ADR/GDR The comparative advantages and disadvantages of each financing alternatives is described as under: TABLE 2 ADRs Large current and future funding needs Ideal Situation Involved in to issue international industries Most incremental leverage GDRs Specialized, regional base Not frequent visitor to International Capital Markets No US SEC disclosure requirements and liability issues with ADRs Can be executed more and easily than ADRs Low issuance costs from ADRs ECRs Fast rising stock prices Tremendous growth prospects in near future Sell equity at premium Incremental investor base Minimizes dilution Shortest timing schedule Lowest issuance cost
Limits access to US capital markets if not $ denominated or US registered Reconciliation with US More limited liquidity Lowest level of GAAP liquidity after Disadvantages conversion Higher issuance cost Moderate valuation Some timing and disclosure needs increase debt equity ratio
Broad investor base and distribution Pricing premium and prestige Advantages Best Liquidity and research coverage More stable performance Maximum flexibility in accessing various equity and debt market pos. Offering Extensive timing, More limited investor disclosure & on going universe filing requirements
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Indian Companies access to International Capital Markets with reference to ADR/GDR USES OF ADRS A. Using Stock (ADRs) for Acquisitions of U.S. Targets An increasing number of non-U.S. companies are considering a listing in the United States in order to be in a position to use their stock (or ADRs) as acquisition currency in acquiring U.S. target companies by way of a business combination or tender offer. Among other advantages, a stock for stock exchange (referred to in the securities laws as an exchange offer) may be structured as tax-free (such that target shareholders avoid tax on the exchange and instead incur tax on the gain when the shares (or ADRs) received as consideration ultimately are sold). Unless the target is privately held by a small number of shareholders, a business combination or tender offer is likely to trigger the registration requirements of the 1933 Act. Thus, at the time of the transaction, the non-U.S. issuer will be confronted with the prospect of registering the exchange offer (on Form F-4), a process that could take some months if the issuer is a first time registrant in the United States. In addition to the prospect of a delay while the first time registrant prepares the disclosure and the U.S. GAAP financial statements and the SEC reviews the registration statement, such potential acquiror must consider the possibility that the U.S. targets board of directors will find its bid less appealing (from a fiduciary duty standpoint) if there is the prospect of a competing bid from an SEC registrant (which is likely to pass SEC review more quickly). Non-U.S. issuers that may wish to use their stock as acquisition currency should consider a listing or public offering in advance of the time that an acquisition opportunity is likely to present itself. A listing has the advantage of gaining SEC reporting status (and the potential ability after one year to use short-form registration and to incorporate by
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Indian Companies access to International Capital Markets with reference to ADR/GDR reference annual periodic reports in future registration statements, including a registration statement Form F-4 for an exchange offer). A public offering prior to the acquisition has the additional advantage of providing a more liquid market for the stock that the target shareholders will ultimately receive in the acquisition. Both of these options also enable the issuer to present to the U.S. market disclosure that is more focused and comprehensive, and in the case of a public offering with the benefit of a marketing perspective, that a first time registrant filing a Form F-4 as its first U.S. disclosure document would not have. This is because the Form F-4 in a negotiated acquisition transaction is a combination proxy statement for the target and a registration statement for the exchange offer, and thus the focus on the issuer is somewhat diluted by the general discussion of the two companies involved and the transaction. If the U.S. targets stock is held by a small number of holders in the United States, the non-U.S. acquiror might be able to effect the exchange offer under the private placement rules. This placement, however, will result in shares that are restricted in the hands of the targets shareholders. These restricted shares can be resold only outside the United States or following registration in the United States (perhaps as a result of the exercise of registration rights granted by the issuer as part of the acquisition transaction). In terms of the nature of the securities to be offered (underlying ordinary shares versus ADRs), target shareholder, who may be unaccustomed to holding foreign securities directly, may find ADRs more appealing than the underlying shares. They may prefer to hold securities that can be traded in the U.S. markets, pay dividends in dollars and are priced such that they hold whole numbers of securities (and not, in the case where share
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Indian Companies access to International Capital Markets with reference to ADR/GDR prices are in the foreign equivalent of hundreds or thousands of dollars, increments of one share). Using ADRs can be advantageous for an acquisition in several ways. First, an active ADR program provides a liquidity option and transparent pricing for investors. Second, these ADR exchanges are in the form of tax-free stock swaps. Thus, a stock swap merger or acquisition results in a pool of new ADR investors. Third, by using ADRs, the acquirers can avoid taking on additional debt, thereby preserving capital and enhancing financial flexibility. The eventual success of the merger may in part depend on an employee stock purchase plan that the ADR programs make available conveniently. A listed program could also offer the advantage of enabling employee plans that hold company shares to continue without cashing out the existing employees. Another significant contribution of the Depositary Receipt market is the raising of funds for privatization programs. The number of privatizations using depositary receipts in their global offerings has steadily increased in recent years. Examples include:
Compania Anonima Nacional Telefonos de Venezuela raised $904 million Deutsche Telekom raised $1.1 billion Eni (an Italian oil and gas company) raised $678 million Russias Gazprom raised $429 million Telefonica del Peru raised $918 million Egypts Commercial International Bank raised $ 117 million
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Indian Companies access to International Capital Markets with reference to ADR/GDR Foreign Acquisitions using ADRs as Acquisition Currency TABLE 3 Year 1998 1998 1998 1996 1997 1996 1996 1996 1997 1997 US Target Amoco Chrysler DSC Communications Providian (Insurance) Equitable of Iowa Fresenius New World Communication Varity Corporation Heritage Media Dauphin Deposit Foreign Acquirer British Petroleum Daimler Benz Alcatel Alsthom Aegon NV ING Group Fresenius AG News Corporation Lucas plc News Corporation Allied Irish Bank Country United Kingdom Germany France Netherlands Netherlands Germany Australia United Kingdom Australia Ireland Size ($ billions) 54.3 40.5 5.1 3.5 2.6 2.2 2.2 2.0 1.4 1.3
Source: Bank of New York, Citigroup and Wall Street Journal
B. Providing U.S.-Based Employees with a Means of Investing in the Employer Non-U.S. companies with operations in the United States have the ability to use ADR either to fund stock option and other stock-based incentive plans or as part of employee stock purchase programs. ADRs have the attraction of being user-friendly for employees, who may be acquiring only nominal amounts of stock and may be unaccustomed to holding foreign securities directly. Like the target shareholders described above, they may prefer to hold securities that can be traded in the U.S. markets, pay dividends in dollars and are priced such that they hold whole numbers of securities (and not, in the case where share prices are in the foreign equivalent of hundreds or thousands of dollars, increments of one share). These sorts of programs work best for companies that have reporting obligations in the United States and, therefore, can make use of short-form registration designed for employee benefit plans.
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Indian Companies access to International Capital Markets with reference to ADR/GDR In addition, ADRs can be used to fund stock option and other stock plans for employees of U.S. companies acquired through exchange offers involving ADRs as described above.
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Indian Companies access to International Capital Markets with reference to ADR/GDR REGULATION BY SECURITIES AND EXCHANGE COMMISSION IN RESPECT OF ADR Generally, a non-U.S. issuer wishing to offer and sell securities in the United States, like its U.S. counterpart, must consider the applicability of both the Securities Act of 1933 (the 1933 Act), which requires the registration of securities publicly offered by an issuer or affiliate thereof and the use of a prospectus in connection with such offering, and the Securities Exchange Act of 1934 (the 1934 Act), which requires the registration of securities prior to listing and trading on a securities exchange, as well as the registration of widely held securities traded in the over-the-counter market.
A. 1933 Act For 1933 Act purposes, ADRs and the deposited securities are considered separate securities, the offer and sale of each of which is subject to registration unless an exemption is available. Except where the issuer or an affiliate thereof is engaged in a public offering of the deposited securities, registration of the deposited securities under the 1933 Act is not required; instead, only the ADRs must be registered, which can be accomplished through the filing of a Form F-6 with the SEC, which is a relatively straightforward and simple procedure. In an unsponsored program, the depositary will prepare and file with the SEC a registration statement on Form F-6 to register the unsponsored ADRs. The issuer is not a signatory to, and generally has no obligations or liability in connection with, such registration statement. The Form F-6 requires information principally about the terms of
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Indian Companies access to International Capital Markets with reference to ADR/GDR the ADRs and little more about the issuer or underlying securities other than the identity thereof (see Annex I). In a sponsored Level-I program, the same registration statement on Form F-6 must be filed with the SEC, but in this case it is filed by the issuer.4 Although signing the Form F6 raises potential liability under Section 11 of the 1933 Act, the risk is minimal given the limited disclosure in the Form F-6. Similarly, in a Level-II program, the issuer must file a registration statement on Form F-6 with the SEC. In the case of a Level-III program, the issuer or an affiliate thereof is making a distribution of its underlying securities and, accordingly, both the underlying securities and the ADRs must be registered. Registration of the ADRs again is accomplished by the filing of a registration statement on Form F-6. The underlying securities, however, must be registered on Form F-1, F-2 or F-3.
B. 1934 Act 1. Who Must Register; Rule 12g3-2(b) Exemption: In addition to the registration requirements applicable to the offer and sale of securities, if an issuers equity securities are held of record by 500 or more persons and the issuer has assets exceeding $5 million, the 1934 Act generally requires the issuer to register the class of securities with the SEC and thereafter to comply with certain reporting requirements. Eligible non-U.S. issuers may obtain an exemption from registration and reporting under the 1934 Act under the so-called information-supplying exemption of Rule 12g3-2(b) under which such issuers will provide to the SEC copies of their home country reports in lieu of 1934 Act reports. In order to obtain an exemption under Rule 12g3-2(b), a non-U.S. issuer must furnish to the SEC whatever information, since the
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Indian Companies access to International Capital Markets with reference to ADR/GDR beginning of its last fiscal year, the issuer (i) has made or is required to make public pursuant to the law of the country of its domicile or in which it is incorporated or organized, (ii) has filed or is required to file with the stock exchange on which its securities are traded and which was made public by such exchange or (iii) has distributed or is required to distribute to its security holders. Such information would include: the financial condition or results of operations; changes in business; acquisitions or dispositions of assets; issuance, redemption or acquisitions of the issuers securities; changes in management or control; the granting of options or the payment of other compensation to directors or officers and transactions with directors, officers or principal security holders. Press releases and all other communications or materials distributed directly to security holders of each class of securities to which the exemption relates must be in English; in lieu of original English translations, English versions or adequate summaries in English may be furnished. Other documents need not be furnished unless the issuer has prepared or caused to be prepared English translations, versions or summaries thereof; if no English translations, versions or summaries thereof have been prepared, a brief description in English of any such document must be furnished. None of the information so furnished to the SEC is considered to be filed so as to subject the issuer to liability under Section 18 of the 1934 Act, which imposes liability for false and misleading statements made in any application, report or document filed under the 1934 Act. In addition, information in the specified categories made public during each subsequent fiscal year must be furnished promptly after it is made public.
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Indian Companies access to International Capital Markets with reference to ADR/GDR The Rule 12g3-2(b) exemption is not available if the issuer has securities registered under Section 12 of the 1934 Act ( e.g., because it has securities listed on a U.S. national securities exchange) or has securities quoted in an automated inter-dealer quotation system, such as Nasdaq, or has otherwise made a public offering of securities in the United States (other than under a registration statement solely on Form F-6). The exemption is also not available if at the time the exemption is applied for, the issuer would otherwise be required to register under the 1934 Act. Thus, any issuer contemplating applying for an exemption should do so, for example, before it has more than 300 shareholders resident in the United States. The Rule 12g3-2(b) exemption is not self-executing. The issuer must provide to the Office of International Corporate Finance in the Division of Corporation Finance the material information that the issuer has made public or distributed (as described above), a list identifying such information that it is required to provide (including when and to whom such information is required to be furnished) and information regarding the number of holders of each class of equity securities resident in the United States, the amount and percentage of each class of outstanding equity securities held by residents in the United States, the circumstances in which such securities were acquired and the date and circumstances of the most recent public distribution of securities by the issuer or any affiliate thereof. If the submission is satisfactory, the issuer will then be notified that it has been included in the list of non-U.S. issuers eligible to claim the exemption, and assigned a file number. The notification will remind the exempted issuer that the exemption will lapse if it fails to submit its annual report. Non-U.S. issuers may establish an exemption under Rule 12g3-2(b) for a variety of reasons. First, a non-U.S. issuer that
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Indian Companies access to International Capital Markets with reference to ADR/GDR is not a reporting company under the 1934 Act may apply for the exemption so as to satisfy the information requirement of Rule 144A (see below). Second, a non-U.S. issuer that is likely to have or that may have 300 or more security holders in the United States would be well advised to obtain the exemption, since the reaching of such threshold could trigger an obligation on the part of the non-U.S. issuer to register under Section 12 of the 1934 Act, whether or not it has assets in the United States, whether or not it actively sought to build up its shareholder base in the United States or to otherwise access the U.S. capital markets, and whether or not it has any other connection with the United States. Finally, many non-U.S. issuers have established the exemption so that they can establish an ADR program.
2. Registration; Consequences of Registration: If the issuer decides to list its ADRs on a U.S. stock exchange or to have the ADRs quoted on Nasdaq, it also would have to register the underlying securities under Section 12 of the 1934 Act on Form 20-F (which involves in-depth disclosure about the issuer, including financial statements reconciled to U.S. GAAP) and thereafter comply with the reporting requirements applicable to non-U.S. issuers. A description of the disclosure items that must be included in a Form 20-F report or registration. Following registration under the 1934 Act, the issuer would be subject to periodic reporting pursuant to which it would file on an annual basis an Annual Report on Form 20-F and reports on Form 6-K Similarly, if the issuer makes a public offering of its ADRs, the issuer will be required to file Annual Reports on Form 20-F and reports on Form 6-K.9 Non-U.S. issuers whose securities are registered under the 1934 Act, in
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Indian Companies access to International Capital Markets with reference to ADR/GDR general, would not be subject to the proxy solicitation provisions of Section 14 or the provisions of the short-swing profit rules of Section 16. However, these issuers, as well as their officers, directors, employees and shareholders acting on their behalf, would be subject to the provisions of the U.S. Foreign Corrupt Practices Act. In addition, any nonU.S. or U.S. person who makes a tender offer for ADRs or deposited equity securities of a non-U.S. issuer that are registered under Section 12 of the 1934 Act is subject to the SECs tender offer regulations. Tender offers for equity securities of non-U.S. issuers with an exemption under Rule 12g3-2(b) will be exempt from the tender offer disclosure rules though they may be subject to the antifraud provisions of the tender offer rules. Non-U.S. issuers seeking to list their ADRs on a national securities exchange must also meet the eligibility standards of the exchange and would be required to file a listing application. The listing application will not require significant information over and above that required in the Form 20-F registration statement.
Regulation S Regulation S, which applies to GDRs, provides two types of safe harbor exemptions for securities offered overseas without registration. One is the issuer safe harbor, which addresses offers and sales by issuers, their affiliates, and securities professionals involved in the initial offerings of securities. The second is the resale safe harbor, which addresses resales by securities professionals such as brokers. Two general conditions must be satisfied to take advantage of these safe harbors: 1) Any offer or sale must be made in an offshore transaction, and 2) No direct selling efforts may be made in the United States
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Indian Companies access to International Capital Markets with reference to ADR/GDR Regulation S and Rule 144A are closely related (they are related, but not similar). The SEC has maintained the position that foreign issuers may undertake private placements in the United States (Rule 144A) at the same time they make an Offshore Regulation S offering without violating that regulations prohibition against U.S. direct selling efforts. Substantial care must nevertheless be taken to avoid spillover of such securities into the U.S. public markets. In the 1990s, the SEC has identified abusive practices in Offshore Regulation S securities transactions. Therefore, in 1998 the SEC adopted amendments to Regulation S to prevent further abuses of the rule, but also to allow continued reliance on Regulation S in legitimate offshore offerings. The amendments adopted included the following:
The classification of equity securities placed offshore by US issuers under Regulation S is that of restricted securities within the meaning of Rule 144, so resales are under restriction
The distribution compliance period (restricted period under Regulation S) for these securities is one year (lengthened from forty-one days)
Issuers must change from Form 8-K reporting to quarterly reporting on Form 10Q
The SEC indicated that to avoid undue interference with offshore offering practices of foreign issuers, these amendments apply to equity securities of US issuers, but not to the equity securities of foreign issuers.
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Indian Companies access to International Capital Markets with reference to ADR/GDR MAJOR ADR INVESTORS The following is the list of the major ADR investors across the globe. Though the list is not exhaustive, but it includes most of them. Barclays Global Investors Brandes Investment Partners Capital Guardian Trust Company Capital International Inc. Capital Research & Management Fidelity Management & Research Invesco Capital Management J.P. Morgan Investment Management Janus Capital Corporation Lazard Asset Management Merrill Lynch Asset Management Putnam Investment Management Smith Barney Investment Advisors Scudder Kemper Investments Templeton Investment Counsel Wellington Management Company
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Indian Companies access to International Capital Markets with reference to ADR/GDR Top 10 ADR Institutional Investors TABLE 4 Institutional Investor Value of ADR ADR as a % of total Investment (US $ billion) Fidelity Management and Research Brandes Investment Management Capital Research & Management Wellington Management Morgan Stanley Investment Management Dodge & Cox Lazard Asset Management American Century Investment Management Alliance Capital Management L.P. Smith Barney Asset Management Top 10 ADR holders value Total ADR reported market cap 17.7 13.3 10.1 10.0 6.7 6.5 5.9 5.7 121.8 365.9 5.00 5.60 9.31 14.14 30.06 10.00 2.70 4.20 (33.29% of total value) 25.9 20.0 4.80 49.89 equity portfolio
AMOUNT RAISED THROUGH ADRS/GDRS The amount raised by the Indian Companies by issuing ADRs/GDRs is as shown in the table below. From the table we can see that since the time India had opened up her economy in 1991-92, the maximum amount was raised in the period 1994-95
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TABLE 5 Year 1992-1993 1993-1994 1994-1995 1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Source: Reserve Bank of India ADR / GDR (US $ million) 240 1597 2050 683 1366 645 270 768 831 477 600 459
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Indian Companies access to International Capital Markets with reference to ADR/GDR RECENT NORMS FOR ISSUING ADRs/GDRs/FCCBs Foreign Investment through ADRs/GDRs, Foreign Currency Convertible Bonds (FCCBs) is treated as Foreign Direct Investment. Indian companies are allowed to raise equity capital in the international market through the issue of GDR/ADRs/FCCBs. These are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition can be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.
There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. There is no such restriction because a company engaged in the manufacture of items covered under Automatic Route is likely to exceed the percentage limits under Automatic Route, whose direct foreign investment after a proposed GDRs/ADRs/FCCBs is likely to exceed 50 per cent/51 per cent/74 per cent as the case may be.
There are no end-use restrictions on GDRs/ADRs issue proceeds, except for an express ban on investment in real estate and stock markets. The FCCB issue proceeds need to conform to external commercial borrowing end use requirements. In addition, 25 per cent of the FCCB proceeds can be used for general corporate restructuring.
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Indian Companies access to International Capital Markets with reference to ADR/GDR ADR, GDR norms further relaxed Indian bidders allowed to raise funds through ADRs, GDRs and external commercial borrowings (ECBs) for acquiring shares of PSEs in the first stage and buying shares from the market during the open offer in the second stage.
Conversion and reconversion (a.k.a. two-way conversion or fungibility) of shares of Indian companies into depository receipts listed in foreign bourses, while extending tax incentives to non-resident investors, allowed. The re-coversion of ADRs/GDRs would, however, be governed by the Foreign Exchange Management Act notified by the Reserve Bank of India in March 2001.
Permission to retain ADR/GDR proceeds abroad for future foreign exchange requirements, removal of the existing limit of $20,000 for remittance under the employees stock option scheme (ESOP) and permitting remittance up to $ 1 million from proceeds of sales of assets here.
Companies have been allowed to invest 100 per cent of the proceeds of ADR/GDR issues (as against the earlier ceiling of 50%) for acquisitions of foreign companies and direct investments in joint ventures and wholly owned subsidiaries overseas.
Any Indian company which has issued ADRs/GDRs may acquire shares of foreign companies engaged in the same area of core activity upto $100 million or an amount equivalent to ten times of their exports in a year, whichever is higher. Earlier, this facility was available only to Indian companies in certain sectors.
FIIs can invest in a company under the portfolio investment route upto 24 per cent of the paid-up capital of the company. It can be increased to 40% with approval of
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Indian Companies access to International Capital Markets with reference to ADR/GDR general body of the shareholders by a special resolution. This limit has now been increased to 49% from the present 40%.
Two way fungibility in ADR/GDR issues of Indian companies has been introduced subject to sectoral caps wherever applicable. Stock brokers in India can now purchase shares and deposit these with the Indian custodian for issue of ADRs/GDRs by the overseas depository to the extent of the ADRs/GDRs that have been converted into underlying shares.
On Fungibility The Government of India and the RBI permitted two-way fungibility of ADRs/GDRs issued by Indian Companies. The RBI has now, vide APDIR Circular No: 21 dated February 13th 2002, issued operative guidelines for the 2 way fungibility of ADR / GDR.
Earlier, once a company issued ADR / GDR, and if the holder wanted to obtain the underlying equity shares of the Indian Company, then, such ADR / GDR would be converted into shares of the Indian Company. Once such conversion took place, it was not possible to reconvert the equity shares into ADR / GDR. The present rules of the RBI make such reconversion possible, to the extent of ADR / GDR which have been converted into equity shares and sold in the local market. This would take place in the following manner:
Stock Brokers in India have been authorized to purchase shares of Indian Companies for reconversion
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The Domestic Custodian would coordinate with the Overseas Depository and the Indian Company to verify the quantum of reconversion, which is possible, and also to ensure that the sectoral cap is not breached.
The Domestic Custodian would then inform the Overseas Depository to issue ADR / GDR to the overseas Investor.
Re-issue of ADRs/GDRs would be permitted to the extent of ADRs/GDRs that have been redeemed and the underlying shares sold in the domestic market. Two-way fungibility implies that an investor who holds ADRs/GDRs can cancel them with the depository and sell the underlying shares in the market. The company can then issue fresh ADRs to the extent of shares cancelled. No specific permission of the RBI will be required for the re-conversion. Besides, investments under foreign currency convertible bonds and ordinary shares will be treated as direct foreign investment. Accordingly, the re-conversion of shares into ADRs/GDRs will be distinct from portfolio investments by foreign institutional investors (FIIs). The RBI guidelines state that the transactions will be demand-driven and would not require company involvement or fresh permissions. The custodian would monitor the re-issuance of ADRs/GDRs within the sectoral cap fixed by the Government. Each purchase transaction will be only against delivery and payment received in foreign exchange through banking channels. For this purpose, all SEBI registered brokers will be able to act as intermediaries in the two-way fungibility of ADRs/GDRs. The RBI has already given general permission to brokers (not banks, but SEBI registered stockbrokers. RBI has conveyed general permission through a Notification No.FEMA.41/2001-RB dated 2nd March 2001, for these brokers to buy shares on behalf SIMSR/MMS/2003-2005/SEM IV/31 53
Indian Companies access to International Capital Markets with reference to ADR/GDR of the overseas investor) to buy shares on behalf of overseas investors (this include both foreign investors as well as domestic shareholders). As secondary market operations, the acquisition of shares on behalf of the overseas investors through the intermediary would fall within the regulatory purview of Securities and Exchange Board of India (SEBI). The Central bank has said that since the demand for re-conversion of shares into ADRs/GDRs would be from overseas investors and not the company, the expenses would be borne by the investor. The Income-Tax Act will govern the transactions. Benefits of fungibility The key benefits that could accrue to investors (ADR/GDR holders and domestic investors) and companies from two-way fungibility are: improvement in liquidity and elimination of arbitrage. The conventional definition of liquidity is the ease with which an asset (in this case, ADRs/GDRs) can be bought or sold quickly with relatively small price changes. This essentially means that a liquid market for a security must have depth and breadth, and aid speedy price discovery. A liquid market is said to have depth if buy and sell orders exist both above and below the prices (at which a stock or ADR/GDR) is transacting. Similarly, the market is said to have breadth if buy and sell orders exist in good volume. In the one-way fungible regime, ADRs/GDRs suffered from price volatility and liquidity problems, basically for two reasons. The first reason was the low ADR issue size that accounted for low free-float in the US market and, thereby, low trading volumes in the security.
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Indian Companies access to International Capital Markets with reference to ADR/GDR Second, the GDR market had been largely dormant (with the exception of a few highprofile stocks) for the past couple of years. This affected the depth, breadth and pricediscovery process of GDRs in these markets. Two-way fungibility may at least revive some market interest in these stocks. Reduction/elimination of arbitrage In an efficient market, two assets with identical attributes must sell for the same price, and so should an identical asset trading in two different markets. If the prices of such an asset differ, a profitable opportunity arises to sell the asset where it is overpriced and buy it back where it is under priced. Obviously, arbitrageurs (speculators aiming to exploit these riskless opportunities) can step in and exploit this profit opportunity. Under the one-way fungibility regime, though identical assets (namely stocks in the domestic market and ADRs/GDRs in the overseas markets) traded at different prices (at a discount/premium), the arbitrage opportunities went a begging because of restrictions on the capital account. By introducing two-way fungibility, market forces may trigger a realignment of prices, minimizing the widely divergent premium/discount levels prevailing between ADR/GDR prices and the domestic stock prices. Euro Issues by Indian Companies Earlier, Indian Companies required approval of the Government of India before issue of Foreign Currency Convertible Bonds (FCCBs). The RBI, has vide FEMA Notification No : 55 dated March 7th 2002, liberalized these rules. Accordingly:
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Indian Companies seeking to raise FCCBs are permitted to raise them under the Automatic Route upto US 50 Million Dollars per financial year without any approval.
The FCCBs raised shall be subject to the sectoral limits prescribed by the Government of India.
Maturity period for the FCCBs shall be at least 5 years and the "all in cost" at least 100 basis points less than that prescribed for External Commercial Borrowings.
An individual company or a group of companies had imposed some restrictions previously on the number of issues that could be floated during a financial year. There will henceforth be no restrictions on the number of Euro-Issues to be floated by a company or a group of companies in a financial year. GDR end-uses will include:

Financing capital goods imports Capital expenditure including domestic purchase/installation of plant, equipment and buildings and investments in software development
Prepayment or scheduled repayment of earlier external borrowings Investments abroad where these have been approved by competent authorities Equity investment in JVs/WOSs in India. However, investments in stock markets and real estate will not be permitted. Up to a maximum of 25 per cent of the total proceeds may be used for general corporate restructuring, including working capital requirements of the company raising the GDR.
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Indian Companies access to International Capital Markets with reference to ADR/GDR Currently, companies are permitted to access foreign capital market through Foreign Currency Convertible Bonds for restructuring of external debt that helps to lengthen maturity and soften terms, and for end-use of funds, which conform to the norms, prescribed for the Government for External Commercial Borrowings (ECB) from time to time. In addition to these, not more than 25 per cent of FCCB issue proceeds may be used for general corporate restructuring including working capital requirements.
FCCBs are available and accessible more freely as compared to external debt, and the expectation of the Government is that FCCBs should have a substantially finer spread than ECBs. Accordingly, the all-in costs for FCCBs should be significantly better than the corresponding debt instruments (ECBs). Companies will not be permitted to issue warrants along with their Euro-issue. The policy and guidelines for Euro-issues will be subject to review periodically. Sectoral Caps As per the Foreign Investment guidelines issued by the Government of India, Ministry of Industry, foreign investment (equity/preference shares) upto certain specified limits would be permitted by Reserve Bank under Automatic Route as under: In relaxation of earlier guidelines, GDR end - uses will include: Foreign investment (equity/preference) upto 50% in respect of mining activities; Foreign investment (equity/preference) upto 51% in (i) industries/items included in part 'B' of Annexure III to Ministry of Industry's Press Note No.14 (1997 series) dated 8th October 1997 and (ii) a trading company primarily engaged in export activity; in software development
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Indian Companies access to International Capital Markets with reference to ADR/GDR Foreign investment (equity/preference) upto 74% in industries/items included in part 'C' of Annexure III to Ministry of Industry's Press Note No.14 (1997 series) dated 8th October 1997 Foreign Investment upto 100% in industries/items included in Part 'D' of Annexure III, to Ministry of Industry's Press Note No.14 (1997 Series) as amended from time to time provided the foreign investment in a project does not exceed Rs.1500 crores. The scheme for issue of ADR/GDR Linked Stock Option for employees of software companies in India is briefly explained as in Annexure II
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SEBI GUIDELINES Government of India has been permitting Indian company to issue Equity and Equity related instruments to international investors in the form of Global Depository Receipts and Convertible bonds. A detailed notification was also issued on November 12, 1993 outlining the scheme for the issue of Foreign Currency Convertible Bonds (FCCBs) and ordinary shares (through Depository Receipt Mechanism). Government have since reviewed the working of the scheme and the following further guidelines have been formulated in this regard. (a) For the present it is proposed to follow a restrictive policy towards FCCBs since such bonds form part of the countrys external debt till their conversion into equity. However, companies will be allowed on merits to issue FCCBs as part of a programme of restructuring external debt, which helps to lengthen maturity and soften terms. (b) Euro Issues will be treated as direct foreign investments. Accordingly, a company contained in Annexure III of the New Industrial Policy of 1991 whose direct foreign investment after a proposed Euro Issue is likely to exceed 51%, or which is implementing projects not predominantly not contained in Annexure III, would need to obtain a prior FIPB clearance before final approval for the Euro Issue is given by the Finance Ministry. (c) For the purpose of ensuring that as many companies as possible avail of this scheme, only one issue per company in a financial year will be permitted with a minimum gap of twelve months between two issues by the same company and not
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Indian Companies access to International Capital Markets with reference to ADR/GDR more than two issues will be permitted for any group of companies in a financial year. (d) Both the in-principle and final approvals will be valid only for three months from the dates of their respective issue. (e) Requests for retention of the Issue proceeds abroad will be considered on specific application, for import of capital goods, retiring foreign debts, capitalizing Indian joint ventures, etc., and projects abroad. (f) GDR issues would be permitted only for the following end-use to be incurred within one year from the date of issue: a) Financing capital goods imports b) Financing domestic purchase/installation of plant, equipment and buildings c) Pre-payment or scheduled repayment of earlier external borrowing d) Making investments abroad where these have been approved by competent authorities e) A margin of 15% of the total proceeds of an issue for other general corporate restructuring uses (g) Companies would be required to submit quarterly statement of utilization of funds duly certified by their auditors (h) The policy and guidelines for Euro Issues will be subject to review every three months.
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Indian Companies access to International Capital Markets with reference to ADR/GDR CLARIFICATION 1 Fresh guidelines for Euro Issues: 1994-95 The guidelines for Euro Issues 1994-95 were announced by the GoI on 11 th May 1994. At the time it was indicated that the guidelines would be reviewed periodically. During the first half of the Fiscal Year Indian companies have mobilized in excess of US $ a billion through issue of GDRs and Euro Convertible Bonds. This indicates a healthy and sustained interest by overseas investors. The guidelines have been reviewed on the basis of experience in this period and various representations received. The following modifications are being made: (a) The guidelines had stipulated that Euro issues would be permitted only for certain specific end-uses to be incurred within one year from the date of issue. Several representations have been received by the Government requesting review of the stipulation that the Euro Issue proceeds should be utilized for the approved enduses within a period of one year from the date of issue on the plea that capital expenditure projects have a long gestation period and that it would be difficult for companies to comply with the one year restriction. These representations have been considered and the guidelines are being modified to remove the stipulation that Euro Issue proceeds should be utilized for the approved end-uses within a period of one year from the date of issue. Instead, issuing companies would be required mandatorily to retain the Euro Issue proceeds abroad to be repatriated as and when expenditure for the approved end-uses are incurred. This will enable companies to tap abroad for approved purposes while also avoiding monetary expansion as a consequence of Euro Issue inflows in advance for the need of
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Indian Companies access to International Capital Markets with reference to ADR/GDR funds. This requirement will be added to all final approvals given henceforth. Information regarding periodic repatriation of Euro Issue proceeds into the country and the manner of their deployment for the approved end-uses should be furnished in detail in the quarterly statements that the issuing companies are required to submit to the government at the end of every calendar quarter duly vetted by the auditors. (b) A relaxation of the approved end-use criteria will be allowed to enable select All India Financial Institutions to access the Euro market considering the multiplier effect and generally beneficial impact for small and medium industries who are unable themselves to access the Euro market. (c) Companies will not be permitted to issue warrants along with their Euro Issues. CLARIFICATION 2 Modification of Euro Issue Guidelines regarding retention of funds abroad In terms of the guidelines dated 28th October 1994, issuing companies were required to retain the Euro issue proceeds abroad to be repatriated as and when expenditure for the approved end-uses were incurred. It has now been decided to permit the issuing companies to also retain the Euro Issue proceeds as foreign currency deposits with Banks and Public Financial Institutions in India, which can be converted into Indian Rupees only as and when expenditure for the approved end-uses are incurred. The interim deployment of funds retained abroad or as foreign currency deposits with Banks and Public Financial Institutions in India, should conform to the manner of deployment that will be indicated by RBI in their approval letter.
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Indian Companies access to International Capital Markets with reference to ADR/GDR CLARIFICATION 3 Modification of Euro Issue Guidelines GoI had notified a scheme in November 1993, for issue of FCCB and ordinary shares through DR mechanism. Revision/modifications in the operative guidelines are being announced from time to time. On the basis of the periodic review and assessment of current situation, the following modifications are announced to the existing Euro issue guidelines. (a) The guidelines of 28th October 2004, provided that the Euro issue proceeds were to be mandatorily retained abroad by the issuer companies to be repatriated as and when expenditure and approval project/end-uses were incurred. This requirement was partially modified through a press release dated 24th May 1995 providing option to the issuing companies to also keep funds in the foreign currency deposits with banks and Public Financial Institutions in India to be converted into Indian Rupees as and when expenditure on approved end-uses were incurred. In relaxation of the above requirement, companies will now be permitted to remit funds into India in anticipation of the use of funds for approved end-uses. (b) The existing ceiling for use of issue proceeds for general corporate restructuring including working capital requirement is revised from 15 percent to 25 percent of the GDR issue. (c) At present only companies having a consistent track record of good performance for a minimum period of three years are allowed to issue GDRs/FCCBs. In view of the importance of the infrastructure projects, and the need to encourage equity financing of such projects, the three year track record will be relaxed in case of
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Indian Companies access to International Capital Markets with reference to ADR/GDR companies seeking GDR/FCCB issues to finance investments in infrastructure industries such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads. (d) Currently corporates are permitted to access foreign capital market for ECB through instruments like FRN and fixed rate bonds. In order to enable corporates to tap a wider spectrum of the market, they would also be permitted to structure their borrowings as a FCCB. The end-use of funds through a FCCB should conform to the norms prescribed by government for ECB from time to time. While the same time frame for conversion of FCCB is flexible, the non-converted portion should have a minimum average tenor of five years. CLARIFICATION 4 Conditions subject to which authorized dealers / public financial institutions are to accept foreign deposits from Indian companies out of Euro Issue proceeds 1. At present Indian companies going in for Euro issues, GDRs and FCCBs are required mandatorily to retain the proceeds of such issues abroad to be repatriated to India as and when the expenditure for the approved end uses is incurred. Such funds could be kept abroad either with foreign banks, which are rated for shortterm obligations as A1+ by S&P or P1 by Moodys, or branches of Indian banks as deposits or invested in treasury bills and other monetary instruments with maturities not exceeding one year. 2. In terms of the revised guidelines, the companies going for Euro issues will now have the option of retaining the proceeds of Euro issues abroad as indicated in paragraph 1 above or keeping the issue proceeds in foreign currency deposits with
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Indian Companies access to International Capital Markets with reference to ADR/GDR authorized dealers and/or public financial institutions in India holding authorization from Reserve Bank to deal in foreign exchange. 3. Accordingly, it would be in order for authorized dealers/public financial institutions to accept foreign currency deposits from Indian companies out of Euro issue proceeds subject to the following conditions: (a) The foreign currency deposits would carry interest at a rate not exceeding LIBOR for the respective period for which the deposit is accepted. (b) The authorized dealers/public financial institutions with whom the foreign currency deposits are kept should not swap the foreign currency for rupees but use the amounts for lending in foreign currency to eligible clients. (c) The authorized dealers may also invest surplus foreign currency out of such Euro issue proceeds as permitted (d) The authorized dealers/public financial institutions accepting the foreign currency deposits would be eligible to charge interest at the rate not exceeding 2.5% over six months LIBOR for lending out of such funds. (e) The authorized dealers will be required to maintain a CRR of 7.5% on such deposits (f) The deposits can be converted into Indian rupees only as and when expenditure are incurred by the issuer company (g) The authorized dealers/public financial institutions accepting such deposits as also the issuer company, as the case may be, should also comply with the conditions stipulated by GoI in their approval letters for such issues.
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Indian Companies access to International Capital Markets with reference to ADR/GDR CLARIFICATION 5 Fresh guidelines for Euro Issues 1. A Scheme for issue of FCCBs and Ordinary shares was notified by the GoI in November 1993. Revisions/modifications in the operative guidelines for Euro issues are announced from time to time. 2. On the basis of periodic review and assessment of the current situation, the following Euro issue guidelines, in continuation of the notification of the November 1993, shall come into effect for approvals granted on, or after the date of issue of these guidelines, in super cession of all the previous guidelines on the subject. 3. An issuing company seeking permission for rising foreign funds by Euro Issues having a consistent track record of good performance for a period of three years shall be allowed to issue GDRs/FCCBs 4. In view of the importance of the infrastructure project, and the need to encourage equity financing of such projects, the three year track record requirement would be relaxed in the case of companies seeking GDR/FCCB issues to finance investments in infrastructure industries. 5. Euro Issues will be treated as direct foreign investments. Accordingly, a company contained in Annexure III of the New Industrial Policy of 1991 whose direct foreign investment after a proposed Euro Issue is likely to exceed 51%, or which is implementing projects not predominantly not contained in Annexure III, would need to obtain a prior FIPB clearance before final approval for the Euro Issue is given by the Finance Ministry.
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Indian Companies access to International Capital Markets with reference to ADR/GDR 6. Some restrictions had been imposed previously on the number of issues that could be floated by an individual company or a group of companies during a financial year. There will henceforth be no restrictions on the number of Euro issues to be floated by a company or a group of companies in a financial year. 7. In relaxation of earlier guidelines, GDR end uses will include: a) Financing capital goods imports b) Financing domestic purchase/installation of plant, equipment and buildings c) Pre-payment or scheduled repayment of earlier external borrowing d) Making investments abroad where these have been approved by competent authorities e) Equity investments in JVs/WOSs in India 8. However, investments in stock markets and real estate will not be permitted. 9. Within this framework, GDR raising companies will be allowed full flexibility in deploying the proceeds 10. Upto a maximum of 25 percent of the total proceeds may be used for general corporate restructuring, including working capital requirements of the company raising the GDR. 11. However, banks, FIs and NBFCs registered with RBI will be eligible for GDR issues without reference to the end-use criteria mentioned in paras 7 to 10 above with the restriction that investments in stock markets and real estate will not be permitted.
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Indian Companies access to International Capital Markets with reference to ADR/GDR 12. A company shall be required to specify the proposed end-uses of the issue proceeds at the time of making their application, and will be required to submit quarterly statement of utilization of funds for the approved end-uses, duly certified by their auditors. 13. Currently, 25 percent of FCCB issue proceeds may be used for general corporate restructuring, including working capital requirements. 14. FCCBs are available and accessible more freely as compared to external debt, and the expectation of the Government is that FCCBs should have a substantially finer spread than ECBs. Accordingly, the all in cost for FCCBs should be significantly better than the corresponding debt instruments (ECBs). 15. Companies will not be permitted to issue warrants along with their Euro-Issue 16. Companies may retain the proceeds abroad or may remit funds into India in anticipation of the use of funds for approved end-uses. 17. Both the in-principle and final approvals will be valid for three months from the date of their respective issue. 18. The policy and guidelines for Euro-Issues will be subject to review periodically. CLARIFICATION 6 The Government has made certain modifications in respect of Euro/ADR issues by companies. This has been done on the basis of the periodic review of comprehensive guidelines for Euro issues, which is done from time to time, and assessment of the current situation. 1. Track record requirement: Considering the funding requirements of unlisted companies, it has been decided to permit all unlisted companies to float
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Indian Companies access to International Capital Markets with reference to ADR/GDR Euro/ADR issues provided they fulfill 3 years track record eligibility requirement. However, the current provisions for relaxing the 3-year track record requirement in the case of companies seeking GDR/ADR/FCCB issues to finance investments in infrastructure industries will continue. The following modifications are also made specifically for ADR/GDR issues: 2. Validity: The guidelines issued on 19th June 1996 had provided that both the in principle and final approval will be valid for 90 days from the date of their respective issue. In partial modification, the 90 days validity period for final approval for GDRs and ADRs is being withdrawn End uses: GDRs/ADRs are equity instruments and there is no repayment liability on the issuing company. Unlike a commercial borrowing or a foreign currency convertible bond, which carries a repayment liability on the company, GDRs/ADRs are full risk equity. It has, therefore, been decided that all end-use restrictions on GDR/ADR issue proceeds be removed The existing ban on investment of GDR/ADR issue proceeds in real estate and stock markets will, however, continue. These modifications shall come into effect for approvals granted on or after the date of issue of these guidelines. The policy and guidelines for Euro issue will be subject to review periodically. CLARIFICATION 7 In his Budget speech 1998-99, the Finance Minister, Shri Yashwant Sinha announced a special stock option scheme for Indian software companies linked with ADR/GDR offerings by these companies as an instrument to enable these companies to provide
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Indian Companies access to International Capital Markets with reference to ADR/GDR initiatives to retain their highly skilled professionals. The scheme would enable Indian software companies to offer terms comparable to the packages offered by international companies in the field. The scheme will be governed by the following guidelines: 1. A software company which has already floated ADR/GDR or a company which is proposing to float ADR/GDR would be entitled to issue ADR/GDR linked stock option to employees. A software company which proposes to issue ADR/GDR linked stock option to its employees should clearly include such proposal as part of its application for GDRs/ADRs, while DEA approval will be for total issue inclusive of stock option, the GDRs/ADRs earmarked for the employees upto the specified limit will be issued by the company as and when an employee exercises his stock option. Accordingly, the company shall never exceed the approval level of GDRs/ADRs to be issued. In the case of software companies, which have already issued GDRs/ADRs, such companies may seek permission for issue of stock options related to the existing GDRs/ADRs issue observing the general parameters of the guidelines. 2. The scheme would be available to listed and unlisted software Indian companies which fulfill the performance track record eligibility and other requirements under ADR/GDR guidelines. 3. A software company would be defined as a company engaged in manufacture or production of software where not less than 80 percent of the companys turnover is from software activities.
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Indian Companies access to International Capital Markets with reference to ADR/GDR The software company applying for issue of ADR/GDR linked stock options shall be required to submit relevant documents certified by a Chartered Accountant, establishing that they are a software company conforming to the stipulation indicated above. The relevant documents shall also be submitted to RBI while applying for permission of foreign currency for acquisition of ADRs/GDRs in exercise of the stock option. 4. The stock options shall be available to non-resident and resident permanent employees of the company. The stock options shall not be available to the promoters and their relatives. 5. The general FERA permission for resident employees of software companies under the ADR/GDR linked stock option scheme shall be granted by RBI. Requisite notification shall be issued by RBI. This would entitle resident employees to acquire and/or hold ADR/GDR linked stock option, acquire ADR/GDR on exercise of the option, remit funds upto a limit of $ 50,000 in a block of five years for acquisition of ADRs/GDRs and to retain or continue holding ADRs/GDRs so acquired. The resident employee upon liquidation of ADR/GDR holding would need to repatriate the proceeds to India unless general/specific permission from RBI is obtained for its retention or use abroad. 6. Issue of stock options shall require a special resolution as applicable for preferential allotment of shares. The allotment of stock options shall be done by a committee of the Board of Directors of the company. The Committee of Directors shall have a minimum of two non-executive members of the Board as its members.
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Indian Companies access to International Capital Markets with reference to ADR/GDR 7. The issuing company would be entitled to issue options not exceeding 10 percent of its issued and paid up equity capital 8. The stock options may be issued at a discount of not more than 10 percent to the market price at the time of the issue of the stock option. 9. While ADRs/GDRs acquired in exercise of the stock option shall be freely transferable, the stock options themselves shall not be transferable. 10. Full disclosure shall be made in the Directors report or in an annexure to the Directors report of the details of the stock option scheme by the company. 11. ADRs/GDRs acquired on exercise of stock option would be eligible for concessional tax treatment under section 115AC of the Income-Tax Act, 1961. Necessary amendment under section 115AC of the Income-Tax Act, 1961 shall be notified by the Department of Revenue separately. CLARIFICATION 8 1. Indian companies are permitted to access the international capital markets through issue of GDRs/ADRs under the provisions of the Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme, 1993 and subsequent guidelines on Euro issues publicized through Press Notes by the Government of India, Ministry of Finance, Department of Economic Affairs. Under the scheme, GDRs/ADRs are issued by overseas depositories against ordinary shares issued and placed with the domestic custodian by Indian Companies. 2. Representations have been received from issuer companies seeking clarification on the eligibility/entitlements of GDR/ADR holders to the rights and bonus issues
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Indian Companies access to International Capital Markets with reference to ADR/GDR made by the company and on entitlement of GDR/ADR holders in cases of business reorganization/mergers/demergers. 3. It is clarified that under the scheme, a GDR/ADR holder is entitled to hold or transfer GDRs/ADRs, or redeem them into underlying shares with the option to continue holding underlying shares, and thus has a right to the ordinary shares underlying the GDRs/ADRs. Therefore, if an ordinary shareholder of the issuing company acquires a right or entitlement by virtue of ownership of ordinary shares, the GDR/ADR holder also matures the same rights or entitlements owing to his rights over underlying ordinary shares. GDR/ADR holders, therefore, are entitled to same bonus and rights issue of shares as any ordinary shareholder of company. Similarly, if ordinary shareholder of Company A become entitled to shares of another company B as a consequence of a genuine business reorganization, and which is duly approved by the High Court under section 391/395 of the Indian Companies Act, then the GDR/ADR holders of company A also mature the same entitlement to shares of company B. 4. Furthermore, when GDR/ADR holders mature and entitlement to shares in a company, the company would need to issue and place ordinary shares with the domestic custodian against which the overseas depository would issue corresponding GDRs/ADRs to the GDR/ADR holders. 5. It has, therefore, been decided to allow Indian companies to issue GDRs/ADRs in cases of bonus or right issue of shares or genuine business reorganizations duly approved by the High Court, in accordance with the provisions of the Scheme and the guidelines issued there under. Indian companies would be required to apply to
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Indian Companies access to International Capital Markets with reference to ADR/GDR the Department of Economic Affairs for obtaining approval for issue of GDRs/ADRs in all these cases. The Department of Economic Affairs would consider such requests on the basis of necessary supporting documents to assess that the proposed GDRs/ADRs issued is on account of the entitlements of GDR/ADR holders as stated above. CLARIFICATION 9 1. It has now been decided to grant general permission for sale/transfer of underlying shares obtained after conversion of GDRs/ADRs by persons not resident in India if the sale is proposed to be made through a stock exchange or when the underlying shares are being sold in terms of an offer made under the SEBI regulations, 1997. All other cases of sale of shares underlying the GDRs/ADRs will have to be referred to the RBI for necessary permission. 2. The scheme for issue of ordinary shares through DR mechanism provides that the holders of the GDRs/ADRs may ask the overseas depository to redeem the GDRs/ADRs. The overseas depository then requests the domestic custodian bank to get the corresponding underlying shares released in favour of the non-resident investor for being sold in India. The non-resident holder, so far, had to approach the RBI for necessary permission under FERA 1973, for sale of the shares. It was pointed out by several investors that there was a risk that markets may move against the sellers during the time needed for obtaining necessary RBI approval for sale.
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Indian Companies access to International Capital Markets with reference to ADR/GDR CLARIFICATION 10 1. Guidelines were issued through a Press Note dated 23 rd June 1998, facilitating issue of GDR/ADR linked stock option to its employees by companies engaged in manufacture or production of software where not less than 80 percent of the companys turnover is from software activities. 2. A Notification was issued on 25th July 1998 by the Planning Commission announcing the recommendations made in the Information technology Action Plan of the Prime Ministers National Task Force on Information technology and Software Development. Among others, the Task Force had recommended that the GDR/ADR linked stock option scheme for software companies be modified to include all companies engaged in Information Technology Software and Information Technology Services. 3. Taking in view the recommendation, it has been decided by the government to extend the facility for issue of GDR/ADR linked stock options to all companies engaged in the IT Software and IT Services as defined in the Notification referred to in para 2 above. All other parameters/requirements indicated in the Euro issue guidelines dated 23rd June 1998 continue to be applicable. 4. These guidelines come into force with immediate effect. CLARIFICATION 11 1. A Scheme for issue of FCCB and ordinary shares was notified by the GoI in November 1993. Revisions/modifications in the operative guidelines for Euro issues are announced from time to time.
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Indian Companies access to International Capital Markets with reference to ADR/GDR 2. With a view to further liberalising the operational guidelines and in particular track record scrutiny of the ADR/GDR proposals and approval mechanism of various options were considered by the Government. Given the facts that investments through ADR/GDR being risk capital, it has been decided that the track record scrutiny process for ADR/GDR issues and the two stage approval by the Ministry of Finance, Department of Economic Affairs could be dispensed with. 3. The following guidelines for ADR/GDR issues, in continuation of the Notification of November 1993, shall come into effect from the date of issue of these guidelines. These guidelines will also extend to proposals which have already been filed with the Ministry of Finance as also in cases where an in principle approval has been issued by the Ministry of Finance, Department of Economic Affairs. These modified guidelines will, however not extend to FCCB issues which will continue to be governed by existing guidelines. Further the issue of ADRs/GDRs under the liberalized guidelines would be only against expansion of the existing capital base through issuance of fresh equity shares as underlying shares for ADRs/GDRs 4. ADR/GDR are reckoned as part of FDI. Accordingly, such issues would need to conform to the existing FDI policy and only in areas where FDI is possible.
5. Approvals 5.1 Indian Companies raising money through ADRs/GDRs through registered exchanges would henceforth be free to access the ADR/GDR markets through
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Indian Companies access to International Capital Markets with reference to ADR/GDR an automatic route without the prior approval of Ministry of Finance, Department of Economic Affairs. Private Placement of ADRs/GDRs would also be eligible for the automatic approval provided the issue is lead managed be an investment banker. The track record condition will not be operative for ADR/GDR issues. 5.2 Automatic route for ADR/GDR issue would also cover issue of Employee Stock Options by Indian Software Companies/Companies in the IT Sector in conformity with the guidelines dated 23rd June 1998 and 16th Sept 1998 issued for ADR/GDR linked employees stock options by Indian Software Companies/Companies in the IT Sector, subject to other approval requirements, as indicated in para 6 below. 5.3 Issue of ADRs/GDRs arising out of business reorganization/merger/demerger would also be governed by automatic route subject to the guidelines issued by this Department on 17th August 1998.
6. Mandatory Approval Requirements 6.1 In all cases of automatic approval mentioned above, the mandatory approval requirement under FDI policy, approvals such as under the Companies Act, approvals for overseas investments/business acquisition, etc., would need to be obtained by the company prior to the ADR/GDR issues. 6.2 The issuer company would need to obtain RBI approval under the provisions of FERA/FEMA prior to the issue. 6.3 RBI will be issuing necessary guidelines.
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Indian Companies access to International Capital Markets with reference to ADR/GDR 7. Option for retention of funds abroad/repatriation 7.1 Existing guidelines on Euro issues providing for the option of retention of issue proceeds abroad or repatriation of funds into the country in anticipation of deployment towards the purposes for which the funds have been raised would continue to be applicable. 7.2 Retention and deployment of funds abroad would be as prescribed by the RBI
End Uses 8. While no detailed end uses are specified, the existing bar on investments in stock markets and real estate would continue to be operative. Issue related programs 9. The issue related expenses shall be subject to a ceiling of 4% in the case of GDRs and 7% in the case of listing on US Exchange. Issue expenses beyond the ceiling would need the approval of RBI
Reporting 10. After completing the transactions, the companies would be required to furnish full particulars thereof including amount of ADRs/GDRs issued, number of underlying fresh equity shares issued, percentage of foreign equity level in the Indian company on account of issue of ADRs/GDRs, detailed issue parameters to the Ministry of Finance, Department of Economic Affairs and the Exchange Control Department of the RBI, Central Office, Mumbai, within 30 days of completion of such transactions.
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Indian Companies access to International Capital Markets with reference to ADR/GDR DELIVERY OF UNDERLYING SHARES OF GDRs/ADRs IN DEMATERIALISED FORM At the meeting of the working group held on 17th July 1998, it was decided that delivery of undertaking shares of GDRs/ADRs shall compulsorily be in dematerialized form. The matter was referred to RBI. The RBI has issue two notifications on the subject permitting: a) a non-resident holder of GDRs/ADRs issued by a company registered in India, to acquire, upon surrendering GDRs/ADRs, the underlying shares when such shares are released by the Indian custodian of the GDR/ADR issue, and b) the company whose shares are so released, or a depository defined in clause (2) of sub-section (1) of section 2 of the Depositories Act, 1996 to enter into its register or books, in which securities are registered or inscribed, an address outside India of the non-resident holder of shares. RBI has further clarified that there would not be any obstacle from FERA angle in the process of dematerialization as the above mentioned modifications have issued to take care of the same. It has therefore been decided that henceforth delivery of underlying shares of GDRs/ADRs shall compulsorily be in dematerialized form. Stock Exchanges shall not accept delivery of underlying shares of GDRs/ADRs in physical form. PERMISSION FOR ACQUISITION/PURCHASE OF SHARES ACQUIRED ON SURRENDER OF ADRs/GDRs In exercise of the powers conferred by clause (b) of sub-section (1) of section 29 and clause (b) of sub-section (4) of section 19 of the FERA, 1973, the RBI hereby permits:
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Indian Companies access to International Capital Markets with reference to ADR/GDR a) a non-resident holder of GDRs/ADRs issued by a company registered in India, to acquire, upon surrendering GDRs/ADRs, the underlying shares when such shares are released by the Indian custodian of the GDR/ADR issue, and b) the company whose shares are so released, or a depository defined in clause (2) of sub-section (1) of section 2 of the Depositories Act, 1996 to enter into its register or books, in which securities are registered or inscribed, an address outside India of the non-resident holder of shares.
GUIDELINES FOR OVERSEAS BUSINESS ACQUISITION BY INDIAN SOFTWARE COMPANIES THROUGH ADR/GDR REALISATIONS / STOCK SWAP 1) Under the existing guidelines for overseas investments by the Indian companies, one of the automatic approval route available without reference to RBI/Government is where: a) such overseas investments are funded upto a maximum of 50% out of the proceeds of ADRs/GDRs raised; and b) floating o f ADR/GDR issue has been approved by the government. Proposals not conforming to the criteria stipulated above are required to be referred to RBI of the special committee constituted under RBI as the case may be for consideration and approval. 2) Considering the increasing opportunities presenting before the Indian Software Companies for expanding globally and making an International presence and to transform into Multi-National Companies through acquisitions abroad, it has been
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Indian Companies access to International Capital Markets with reference to ADR/GDR decided to liberalize the operational norms governing overseas investments and mode of financing acquisitions of overseas software companies.
Coverage 3) The liberalized norms will cover acquisition of overseas software companies only by Indian Software companies which have been defined as those registered in India and engaged in manufacturing or production of software where 80% of the turnover is from software activities in the three previous financial years. 4) The eligibility for automatic approval will be operative only in respect of those Indian software companies which have already floated an ADR/GDR issue and are currently listed in the overseas exchange. In addition, companies who obtain one time Blanket Approval from the Special Composite Committee, would also be eligible for automatic approval.
Limit for acquisition 5) Financial limits specified in paras 6(a) and (b) below:
Approval Mechanism 6) Overseas acquisition of software companies by Indian software companies would be governed by the following guidelines: a) Business acquisition abroad by Indian software companies upto the value limit of US $ 100 million
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Indian Companies access to International Capital Markets with reference to ADR/GDR 1. Indian software companies, which have already floated an ADR/GDR issue and are currently listed in the overseas exchange, would be eligible to acquire overseas software companies and issue ADRs/GDRs of the value of the cost of acquisition, on a back to back basis, on an automatic basis without reference either to the government or the RBI 2. In addition, Indian software companies not covered by (1) above, may obtain a one time Blanket Approval from the Special Composite Committee, by an application made to RBI, and would thereafter be eligible for automatic approval as in the case of Indian software companies which have already floated an ADR/GDR issue and are currently listed in the overseas exchange. 3. Such transaction would be exempt from the prior approval requirement either from the government or from the RBI subject to the condition that the cost of acquisition is met with ADRs/GDRs realization / stock swaps on a back to back basis. 4. At present ADR/GDR offerings require a two stage approval by the Department of Economic Affairs an in principle approval based on track record requirement and the final approval for issue parameters. The two stage approval requirement will not be required for ADR/GDR offerings/ stock swaps which are being raised / issued specifically for the purpose of overseas business acquisition by the Indian software companies as defined above.
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Indian Companies access to International Capital Markets with reference to ADR/GDR 5. The existing limit of use of upto 50% of the ADR/GDR proceeds for overseas investment is also removed. Under the revised norms, limited to such acquisition, upto 100% of the ADR/GDR proceeds may be utilized for such business acquisition. 6. The value limit of US $ 100 million under the above ADR/GDR stock swap would be an annual limit for each company for one or more acquisitions. b) Overseas Business acquisition beyond $100 million In the case of proposals which do not meet the conditions at (a) above and where the cost in the transaction / overseas business acquisition exceeds $100 million, the Indian software company would need to send the proposal to RBI for consideration by a Special Composite Committee on overseas investment and ADR/GDR approvals. The Committee would consider according a composite approval, prescribing a ceiling for overseas acquisition under the above scheme. The company would, thereafter, report to the committee after finalizing the acquisition, of the details of the transactions.
Criteria for automatic approval 7) The liberalized approval mechanism is subject to the following norms: a) The existing foreign equity including on account of any existing ADR/GDR offering and the proposed ADR/GDR issue/stock swap in the expanded capital base is within the limit operative for RBI automatic approval for FDI in the software sector. No FIPB approval would be required in such cases even if the ADRs/GDRs are issued otherwise than is cash.
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Indian Companies access to International Capital Markets with reference to ADR/GDR b) The proposed ADR/GDR stock swap for purposes of acquisition of business abroad is by way of expansion in the capital base or to be precise by way of issue of fresh underlying shares. c) The present ADR/GDR guidelines provides for redemption of the ADRs/GDRs into the underlying rupee denominated shares of the Indian company, sale in the domestic market, and full repatriation of sale proceeds subject to payment of prescribed tax. d) The proposal would have to conform to the following valuation norms: 1. The valuation of the transaction and of the overseas company shall be as per the recommendation of an Investment Banker. 2. In the case of a listed overseas company, the valuation will be based on the current market capitalization of the overseas company and premium, if any, as per the recommendations of the Investment Banker in the Duediligence reports 3. In the case of an unlisted overseas company, the valuation will be based on the recommendations of the Investment Banker. e) The proposal being in conformity with all provisions of the Companies Act, 1956 f) The companies are required to report full details of the transaction including value of the transaction / acquisition cost, foreign equity level in the Indian software company on account of issue of ADRs/GDRs, as detailed in para 8 below. g) Compliance with RBI regulations
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Indian Companies access to International Capital Markets with reference to ADR/GDR h) Other clearances as applicable being obtained by the company.
Reporting 8) After completing the transactions/acquisitions, Indian Companies should furnish full particulars thereof including amount of ADRs/GDRs issues, percentage of foreign equity level in Indian company on account of such issue, name/s of the overseas company/ies acquired, cost of acquisition, percentage of holding of Indian company in the foreign company, details of its line of activity, country of location, etc., together with relevant documents like valuation report by the investment banker to the Ministry of Finance, Department of Economic Affairs and RBI, Exchange Control Department, Overseas Investment Division, Mumbai within 30 days of completion of such transactions. On receipt of these particulars, Reserve Bank will issue specific identification number in respect of each overseas company acquired and Indian companies will have to comply with the existing requirement regarding submission of Annual Performance Reports, repatriation of entitlements from the overseas concerns, etc.
Format of the application 9) The application will have to be submitted to the RBI in the existing forms of overseas investment and for ADR/GDR together by an applicant, for the time being, who will have the option to supplement the information. 10) This scheme is in addition to the existing routes available for overseas investment including the automatic approval route.
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Indian Companies access to International Capital Markets with reference to ADR/GDR GUIDELINES FOR OVERSEAS BUSINESS ACQUISITION BY INDIAN COMPANIES THROUGH ADR/GDR STOCK SWAP 1) Guidelines were issued on 27th Feb 1999 to liberalize the operational norms including approval mechanism for overseas business acquisition by the Indian Software Companies. In his Budget Speech 2000-2001, the Finance Minister had announced the intent to further liberalize the policy for acquisition of companies abroad and to extend the policy to wider spectrum of companies in the knowledge based sectors to expand globally and transform into Multinational Companies in areas where India has comparative advantage. 2) In partial modification of the guidelines issued on 27th Dec 1999, following parameters are set out for overseas business acquisition through ADR/GDR stock swap:
Coverage 3) The liberalized norms will extend to Indian companies engaged in areas/activities for acquisition of overseas companies in their respective areas of business. The Indian companies in the specified sectors/areas are defined as those registered in India and 80% of the turnover is from these respective areas of the operation/business of the company in the three previous financial years. In the case of multi-product diversified company, not conforming to the 80% criteria, the liberalized norms would be applicable if they have average annual export earnings of at least Rs. 100 crores in the three previous financial years in these sectors/areas.
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Indian Companies access to International Capital Markets with reference to ADR/GDR Limit for acquisition 4) Overseas business acquisition by specified Indian companies would be governed by the following guidelines: a) Overseas business acquisition abroad by specified Indian companies under the automatic route The financial limit to overseas business acquisition on an automatic basis without reference either to the Government or the RBI on a back to back basis i.e./ through stock swap will be as follows 1) US $ 100 million; or 2) Upto 10 times the export earning of the investing company during the preceding year as reflected in the audited balance sheet of the company For (2) above if any other facility has been availed by the investing company for overseas investment through any other window including item (1) above during the financial year, the same would be adjusted and the entitlement would be for the balance amount. The value limits indicated above would be an annual limit for each company for one or more acquisitions. Other criteria for qualifying for automatic route would continue to apply. b) Overseas business acquisition not governed by the automatic route Cases not covered by (a) above, the specified Indian company would send the proposal to RBI for consideration by the Special Composite Committee for Overseas Investment through ADR/GDR Stock swap.
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Indian Companies access to International Capital Markets with reference to ADR/GDR 5) The criteria for automatic approval and other norms contained in the guidelines of 27th Dec 1999 including the mandatory requirement of the conforming to the FDI policy, an existing ADR/GDR listing abroad and reporting requirement, etc. would continue to be operative. 6) After issue of ADRs/GDRs for acquisitions, the particulars thereof, along with the copy of the documents submitted to the regulatory authorities in the host country should be transmitted to DEA and RBI within a month as post facto reports along with certification about compliance with the eligibility with reference to the definition of the company in the specified permitted category/sector and entitlement based on export earnings. 7) In respect of each overseas company acquired under the scheme, an Annual Performance Report, as per the existing procedure, citing the Identification Number allotted by RBI in respect of such overseas companies should be sent to RBI for the purpose of compilation of data and monitoring. 8) The above policy will be subject to review as considered necessary by the Government.
PERMISSION TO ISSUE GLOBAL/AMERICAN DEPOSITORY RECEIPTS TO FOREIGN INVESTORS UNDER AUTOMATIC ROUTE OF RBI 1. In pursuance of clause (a) and clause (d) of sub-section (1) of section 19 and clause (b) of sub-section (1) of section 29 of FERA 1973, and all other powers enabling it in this regard, the Reserve Bank is pleased to permit
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Indian Companies access to International Capital Markets with reference to ADR/GDR (a) a company incorporated in India which fulfills the eligibility criteria laid down in para 2, 1) to make an international offering of rupee denominated equity shares of the company by way of issue of GDRs/ADRs to persons resident outside India; 2) to export the said securities to investors outside India; and (b) the investors to acquire the securities so purchased 2 (1) The issuing company has necessary approval from the MoF, GoI to issue such GDRs/ADRs in terms of the relevant scheme or notification issued by the MoF. (2) The issuing company is eligible to issue shares to foreign investors under the automatic route of RBI or has necessary approval from Secretariat for Industrial Assistance (SIA) / FIPB and the percentage of foreign equity does not exceed the limits specified under the automatic route or the limits specified by the SIA/FIPB 3. The company issuing GDRs/ADRs is also permitted a) to issue shares in the name of the depository or its nominees to place the share certificates in respect of the said shares in the physical custody of a custodian in India against which the depository will issue GDRs/ADRs outside India b) to remit dividends through an authorized dealer as and when due subject to payment of Indian taxes as applicable c) to issue rights or bonus shares that may accrue in respect of the GDRs/ADRs d) to incur issue related expenses as approved by the MoF, GoI or upto the limits laid down in the relevant guidelines issued by the GoI
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Indian Companies access to International Capital Markets with reference to ADR/GDR e) to pay the issue related expenses by way of deductions from the issue proceeds as approved by the MoF, GoI or upto the limits laid down in the relevant guidelines issued by the GoI f) to remit and pay for filing, listing, agency or other fees on ongoing basis in respect of international stock exchange where the GDRs/ADRs are listed g) to maintain a foreign register of members, if so required h) to open an account abroad to receive the subscription monies in foreign currency i) to pay any foreign tax in the nature of sales or VAT in respect of services provided to the issuing company and reimburse any out of pocket expenses j) to repatriate the proceeds of the issue to India for deployment for purposes permitted by the GoI; pending repatriation of issue proceeds to India 1) to invest funds as an interim arrangement on short term basis as deposits in foreign banks which are rated for short term obligations A1+ by S&P or P1 by Moodys, or branches of Indian banks abroad 2) to invest in treasury bills and other monetary instruments with maturities exceeding one year 3) to keep the funds as foreign currency deposits with authorized dealers and or public financial institutions in India 4) to invest in CDs or other paper issued outside India by banks incorporated in India 4. The issuing company shall 1. Furnish a statement to Exchange Control Department of RBI, Central Office, Mumbai, within thirty days from the date of closing of the Issue providing full
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Indian Companies access to International Capital Markets with reference to ADR/GDR particulars of the issue such as amount of GDRs/ADRs issued, a number of underlying fresh equity shares issued, listing arrangements, total amount raised, amount retained abroad and other relevant details regarding launching and initial trading of the GDRs 2. Furnish capital structure of the company before and after the issue within 30 days from the closure of the issue 3. Inform Reserve bank of any repatriation of issue proceeds held abroad immediately on such repatriation
EMPLOYEES OF INDIAN SUBSIDIARY COMPANIES ENGAGED IN I.T. SOFTWARE AND I.T. SERVICES ENTITLED TO GET ADR/GDR LINKED STOCK OPTIONS 1) Guidelines by way of a press note were issued on June 23, 1998, containing operational parameters and modalities for issue of ADR/GDR linked stock options to its employees by the Indian software companies. Enabling amendment notification operating the facility for ADR/GDR linked employee stock options had been issued by the government on November 10, 1999, under the Scheme for issue of FCCB and Ordinary Shares (through Depository receipt mechanism) 2) The Government has been considering expansion in the coverage of employees who would be entitled to the ESOPs in line with the SEBI guidelines on ESOPs, which covers employees of a subsidiary company for the purposes of ESOPs. 3) Keeping in view the essential features of the relationship between the parent company and its subsidiaries, viz., interchangeability of the employees between
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Indian Companies access to International Capital Markets with reference to ADR/GDR the parent and subsidiary companies, inter-linkage of the parent and subsidiary companies and complimentality of the functions between the two, it has since been decided to expand the facility for issue of ADR/GDR linked to stock options to include employees of eligible subsidiary companies of the parent company, under the scheme. Accordingly, Indian companies engaged in the IT software and IT services, would be entitled to issue ADR/GDR linked stock options to the permanent employees of its subsidiary companies incorporated in India or out of India and engaged in information technology software and information technology services subject to the eligibility criteria and other parameters prescribed in the press note dated 23rd June 1998 and 16th September 1998. 4) These guidelines will come into force with immediate effect.
LIBERALISATION IN THE GUIDELINES FOR ISSUE OF ADR/ GDR LINKED EMPLOYEES STOCK OPTIONS BY THE INDIAN COMPANIES 1) Guidelines issued in the press note dated 23rd June 1998 were further modified on 16th September 1998. These guidelines were further modified by the government on 16th June 2000, expanding the coverage of employees who would be entitled to the ESOPs in line with the SEBI guidelines on ESOPs, which include employees of a subsidiary company for the purposes of ESOPs. Enabling amendment Notification operating the facility for ADR/GDR linked employee stock options. 2) Guidelines were issued on the 23 rd March 2000, liberalizing the norms for overseas business acquisition by Indian companies in terms of which:
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Indian Companies access to International Capital Markets with reference to ADR/GDR a) The norms for acquisition of overseas companies were extended to IT and entertainment software, pharmaceuticals, bio-technology and any other activity within the knowledge based sector as notified by the government from time to time and b) In the case of multi-product diversified company, not conforming to the eligibility criteria of 80% of the turnover from the sectors/areas mentioned above, the liberalized norms would be applicable if they have an average annual export earnings of Rs. 100 crores in the 3 previous financial years. 3) It has been decided to extend the liberalized norms as mentioned in para 2 above in respect of the issue of ADR/GDR linked employee stock option as well. This could imply that: a) The companies in the following knowledge based sectors would be eligible to issue ADR/GDR linked ESOPs with a view to enable retaining their high skilled professional. b) The liberalized norms would also be available to multi-product diversified company, not conforming to the eligibility criteria of 80% of the turnover from the sectors/areas mentioned above, the liberalized norms would be applicable if they have an average annual export earnings of Rs. 100 crores in the 3 previous financial years. 4) These guidelines will come into force with immediate effect
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Indian Companies access to International Capital Markets with reference to ADR/GDR LISTING OF INDIAN COMPANIES IN FOREIGN STOCK EXCHANGES 1) A scheme for issue of FCCBs and Ordinary Shares was notified by the GoI on 12th November 1993. Revisions/modifications in the operative guidelines of the scheme have been made from time to time. 2) Pursuant to 1. Finance Ministers Budget Speech of 2001-2002 to permit Indian companies to list in Foreign stock exchanges by sponsoring ADR/GDR issues against block shareholding and that this facility would have to be offered to all categories of shareholders. 2. The FEMA notification dated 2nd March 2001 issued by the RBI in this regard, the issue of FCCBs and Ordinary shares Scheme 1993, notified by the MoF, DEA, as amended from time to time, is amended as under: 1) A listed Indian company may sponsor and issue of ADRs/GDRs with an overseas depository against shares held by its shareholders. 2) Such a facility would be available pari passu to all categories of shareholders of the company whose shares are being sold in the ADR/GDR market overseas. 3) Such issues would need to conform to the FDI policy and other mandatory statutory requirements
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Indian Companies access to International Capital Markets with reference to ADR/GDR DETAILS OF GDR/ADR LAUNCHED 1) Indian companies issuing ADRs/GDRs shall furnish to RBI full details of such issue in the form specified in Annexure C within 30 days from the date of closing of the issue and a quarterly return in the form specified in Annexure D within 15 days from the close of the calendar quarter, respectively. However, it is observed that some of the companies are not submitting Annexures C and D from time to time. 2) Authorized dealers may advice their constituents who have issued ADRs/GDRs or who are going for ADR/GDR issues to submit Annexures C and D within the stipulated time. 3) The directions contained in this circular have been issued under section 10(4) and section 11(1) of the FEMA 1999 and any contravention or non-observance is subject to the penalties prescribed under the Act.
GDRs/ADRs ISSUED BY FIs 1) As you are aware, FIs are permitted to raise capital through issue of ADRs/GDRs within the prescribed for FDI by the GoI. As per the guidelines issued by the GoI for ADR/GDR issues, FIs are eligible for ADR/GDR issues without reference to the end-use criteria with the restriction that investments in stock market and real estate is not permitted 2) The issue of repatriation of the proceeds of ADRs/GDRs issued by FIs has been reviewed by SEBI. Considering the fact that FIs, which are raising capital abroad for improving their capital base, have largely rupee-denominated assets and that
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Indian Companies access to International Capital Markets with reference to ADR/GDR most of the risk limits are linked to the capital, FIs are advised to repatriate the entire proceeds of ADRs/GDRs soon after the issue is completed. The provision would also be applicable to direct investments in FIs made by NRIs/OCBs, foreign banking companies of finance companies including multilateral institutions.
OPERATIVE GUIDELINES FOR THE LIMITED TWO-WAY FUNGIBILITY UNDER THE ISSUE OF FCCB AND ORDINARY SHARES (THROUGH DEPOSITORY RECEIPT MECHANISM) SCHEME, 1993 a) Reissuance of ADR/GDR would be permitted to the extent of ADRs/GDRs, which have been redeemed into underlying shares and sold in the domestic market. The arrangement is demand driven with the process of reconversion emanating with the request for acquisition of domestic shares by non-resident investor for issue of ADRs/GDR. b) Investments under the FCCB and ordinary shares will be treated as FDI. Accordingly, the transaction under the reconversion arrangement will be distinct and separate from FII portfolio. c) The transaction will be effected through SEBI registered stockbrokers as intermediaries between foreign investors and domestic shareholders. A general permission has been conveyed by the RBI authorizing such stockbrokers to acquire domestic shares on behalf of the overseas investors for being placed with the domestic custodian.
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Indian Companies access to International Capital Markets with reference to ADR/GDR d) For this purpose all SEBI registered stockbrokers will be able to act as intermediary in the two-way fungibility of ADRs/GDRs. The RBI has conveyed general permission for these brokers to buy shares on behalf of the overseas investor. e) As a secondary market transaction, the acquisition of such shares through the intermediary on behalf of the overseas investors will fall within the purview of SEBI. The custodian would monitor the reissuance and furnish a certificate to both the RBI and SEBI to ensure that the sectoral caps are not breached. The RBI would monitor the receipt of certificates from the custodian to this effect. f) The domestic custodian who is the intermediary between overseas depository on the one hand and Indian company on the other will have the record of ADRs/GDRs issued and redeemed and sold in the domestic market. g) The domestic custodian will also be required to ascertain the extent of registration in favor of ADR/GDR holders/non-resident investor based on the advice of overseas depository to the domestic Custodian for the underlying shares being t transferred in the books of account of the issuing company in the name of the non-resident on redemption of the ADRs/GDRs. h) The custodian is also required to verify with the Company Secretary/NSDL if the total cap is being breached if there is a percentage cap on foreign investment. i) On request by the overseas investor for acquisition of shares for reissuance of ADRs/GDRs, the SEBI registered broker will purchase a given number of shares after verifying with the Custodian whether there is any Head Room available.
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Indian Companies access to International Capital Markets with reference to ADR/GDR j) Head Room = Number of ADRs/GDRs originally issued minus number of GDRs outstanding further adjusted for ADRs/GDRs; redeemed into underlying shares and registered in the name of the non-resident investors. The domestic custodian would notify the extent upto which reissuance would be permissible the redemption effected minus the underlying shares registered in the name of the non-resident investor with reference to original GDR issue and adjustment on account of sectoral caps/approval limits. k) The Indian broker would receive funds through normal banking channels for purchase of shares from the market. The shares would be purchased in the name of the overseas depository and the shares would need to be purchased on a recognized stock exchange. l) Upon acquisition the Indian broker would place the domestic shares with the Custodian; the arrangement would require a revised custodial agreement under the Custodian would be authorized by the company to accept shares from entities other than the company. m) The Custodian would advice overseas depository on the custody of domestic shares and that corresponding ADRs/GDRs may be issued to the non-resident investor. n) Overseas depository would issue corresponding ADRs/GDRs to the investor. o) The domestic Custodian in addition would have to ensure that the advices to the overseas depository are issued on the first come first serve basis i.e., the first deposit of domestic/underlying shares with a custodian shall be eligible for the first reissuance of ADRs/GDRs to the overseas investors.
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Indian Companies access to International Capital Markets with reference to ADR/GDR p) The Custodian would also have to ensure that ordinary shares only to the extent of the depletion in ADRs/GDRs stock are deposited with it. This can be readily ensured by adopting a system similar to the trigger mechanisms adopted for FIIs. Once the trigger mechanism is reached, say at 90 percent of the depletion in the ADR/GDR stock, each buying transaction of domestic shares would be complete only after the Custodian has approved it. q) A monthly report about the ADR/GDR transaction under the two-way fungibility arrangement is to be made by the Indian Custodian in the prescribed format to the RBI and SEBI. r) The broker has to ensure that each purchase transaction is only against delivery and payment thereof is received in foreign exchange. s) The broker will submit the contract note to the Indian Custodian of the underlying shares on the day next to the day of the purchase so that the custodian can reduce the Head Room accordingly. Copy of the contract note would also need to be provided by the custodians to the RBI and SEBI. The broker will also ensure that a separate rupee account will be maintained for the purpose of buying shares for the purpose of effecting two-way fungibility. No forward cover will be available for the amounts lying in the said rupee account. The ADRs will be permitted to transfer the monies lying in the above account on the request of the broker. t) The Custodian of the underlying shares and the depositories would co-ordinate on a daily basis in computing the Head Room. Further, the company secretary of each individual company would provide details of non-resident investment at weekly intervals to the custodian and the depository. The custodian would
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Indian Companies access to International Capital Markets with reference to ADR/GDR monitor the reissuance and furnish a certificate of both the RBI and SEBI, to ensure that the sectoral caps are not breached. The RBI would monitor the receipt of certificates from the custodian to this effect. u) The reissuance would be within the already approved/issued limits and would only effectively mean transfer of ADRs/GDRs from one non-resident to another and accordingly no further approval mechanism be insisted upon. v) In the limited two-way fungibility arrangement, the company is not involved and the process is demand driven i.e., request for ADRs/GDRs emanates from overseas investors. Consequently, the expenses involved in the transaction would be borne by the investors, which would include the payments due to overseas intermediary/broker, domestic custodians, charges of the domestic and overseas brokers. w) The tax provision under section 115AC of the IT Act 1961, which is applicable to non-resident investors investing in ADRs/GDRs offered against issue of fresh underlying shares would extend to non-resident investors investing in foreign exchange in ADRs/GDRs issued against existing shares under these guidelines, in terms of the relevant provisions of the IT Act 1961.
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Indian Companies access to International Capital Markets with reference to ADR/GDR GUIDELINES FOR ADR/GDR ISSUES BY THE INDIAN COMPANIES DISINVESTMENT OF SHARES BY THE INDIAN COMPANIES IN THE OVERSEAS MARKET THROUGH ISSUE OF ADRs/GDRs 1) Divestment by shareholders of their holdings of Indian companies, in the overseas markets would be allowed through the mechanism of Sponsored ADR/GDR issue in respect of: a) Divestment by shareholders of their holdings of Indian companies listed in India b) Divestment by shareholders of their holdings of Indian companies not listed in India but which are listed overseas 2) The process of divestment would be initiated by such Indian companies whose shares are being offered for divestment in the overseas market by sponsoring ADR/GDR issues against the block of existing shares offered by the shareholders under the provisions of these guidelines. 3) Such a facility would be available pari passu to all categories of shareholders, of the company whose shares are being sold in the ADR/GDR markets overseas. This would ensure that no class of shareholder gets a special dispensation. 4) The sponsoring company, whose shareholders propose to divest existing shares in the overseas market through issue of ADRs/GDRs will be given an option to all its shareholders indicating the number of shares to be divested and the mechanism how the price will be determined under the ADR/GDR norms. If the shares offered for divestment are more than the pre-specified number to be divested, shares would be accepted for divestment in proportion to existing holdings.
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Indian Companies access to International Capital Markets with reference to ADR/GDR 5) The proposal for divestment of the existing shares in the ADR/GDR market would have to be approved by a special resolution of the company whose shares are being divested. 6) The proceeds of the ADR/GDR issue raised abroad shall be repatriated into India within a period of one month of the closure of the issue. 7) Such ADR/GDR issues against existing shares arising out of the divestment would also come within the purview of the existing SEBI Takeover Code if the ADRs/GDRs are cancelled and the underlying shares are to be registered with the company as the shareholders. 8) Divestment of existing shares of Indian companies in the overseas markets for issue of ADRs/GDRs would be reckoned as FDI. Such proposals would require FIPB approval as also other approvals, if any, under the FDI policy. 9) Such divestment inducting foreign equity would also need to confirm to the FDI sectoral policy and the prescribed sectoral cap as applicable. Accordingly the facility would not be available where the company whose shares are to be divested is engaged in an activity where FDI is not permitted. 10) Each case would require the approval of FIPB for foreign equity induction through offer of existing shares under the ADR/GDR route. 11) Other mandatory approvals such as those under the Companies Act, etc. as applicable would have to be obtained by the company prior to the ADR/GDR issue. 12) The issue related expenses for public issue shall be subject to a ceiling of 4% in the case of GDRs and 7% in the case of ADRs and 2% in case of private
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Indian Companies access to International Capital Markets with reference to ADR/GDR placements of ADRs/GDRs. Issue expenses beyond the ceiling would need the approval of RBI. The issue expenses shall be passed on to the shareholders participating in the sponsored issue on a pro rata basis. 13) The shares earmarked for the sponsored ADR/GDR issue may be kept in an escrow account created for this purpose and in any case, the retention of shares in such escrow account shall not exceed 3 months. 14) If the issues of ADR/GDR are made in more than one tranche, each tranche would have to be treated as a separate transaction. 15) After completing the transactions, the companies would need to furnish full particulars thereof including amount raised through ADRs/GDRs, number of ADRs/GDRs issues and the underlying shares offered, percentage of foreign equity level in the Indian company on account of issue of ADRs/GDRs, details of issue parameters, details of repatriation, and other details to the Exchange Control Department of the RBI, Central Office, Mumbai within 30 days of completion of such transactions. 16) The tax provision under section 115AC if the IT Act 1961, which is applicable to non-resident investors for ADR/GDR offering against issue of fresh issue of underlying shares would extend to non-resident investors investing in foreign exchange in ADRs/GDRs issued against disinvested existing shares, in terms of the relevant provisions of the IT Act 1961. 17) Resident shareholders divesting their holdings will be subject to capital gain tax provisions applicable under the IT Act 1961, i.e., section 115AC will be applicable for non-residents would not extend to them.
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Indian Companies access to International Capital Markets with reference to ADR/GDR ACQUISITION OF PSUs SHARES 1) Government has received some suggestions regarding permitting use of ADR/GDR/FCCB proceeds to acquire shares of PSUs under the disinvestment programme of the government. As per the guidelines, there are no endues restrictions for ADR/GDR/FCCB proceeds other than the existing ban on investment in real estate and stock markets. 2) The suggestion is that in view of the impending large scale disinvestment of PSU stocks in near future, Indian bidders would be required to mobilize huge sums of money for purchasing such stocks. The domestic bidders might suffer from two structural constraints. One relates to the restriction on Bank Financing to capital market and another relates to exposure limits to borrowers. Therefore, attention has been drawn to the prohibition of end-use of proceeds of
ADRs/GDRs/FCCBs/ECBs. The view is that this prohibition not only puts restrictions on Indian bidders in the first stage offer to the government, but also to fund the second stage of mandatory public offer under SEBI Regulations, 1997. 3) In view of the governments policy to promote the disinvestment programme of PSU shares, the matter has been reconsidered. 4) In view of the above, a view has been taken that ADR/GDR/FCCB proceeds could be used in the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public, in view of their strategic importance. 5) These modifications shall come into effect after the date of issue of these guidelines.
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Indian Companies access to International Capital Markets with reference to ADR/GDR ISSUE OF FOREIGN CURRENCY CONVERTIBLE BONDS AND ORDINARY SHARES (THROUGH DEPOSITORY RECEIPT MECHANISM) SCHEME, 1993 Central Government hereby notifies the following Scheme, for facilitating Issue of FCCB and Ordinary Shares through GDR mechanism by Indian Companies, namely: Short title and commencement 1. (1) This scheme may be called the issue of FCCB and Ordinary shares (through DR mechanism) scheme, 1993 (2) It shall be deemed to have come into force with effect from the first day of April, 1992 Definitions 2. In this scheme, unless the context otherwise requires: -
a) Domestic Custodian Bank means a banking company which acts as a custodian for the ordinary shares or FCCBs of an Indian company which are issued by it against GDR or certificates b) Foreign Currency Convertible Bonds means bonds issued in accordance with this scheme and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments c) Global Depository Receipts means any instrument in the form of a depository receipt or certificate created by the Overseas Depository Bank outside India and
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Indian Companies access to International Capital Markets with reference to ADR/GDR issued to non-resident investors against the issue of ordinary shares or FCCB of issuing company d) Issuing Company means an Indian company permitted to issue FCCB or ordinary shares of that company against GDRs e) Overseas Depository Bank means a bank authorized by the issuing company to issue GDR against issue of FCCBs or ordinary shares of the issuing company f) The words and expressions not defined in the Scheme, but defined in the Income Tax Act, 1961 or the Companies Act 1956, or the SEBI Act 1992 or the Rules and Regulations framed under these Acts, shall have the meaning respectively assigned to them, as the case may be, in the IT Act or the Companies Act, or the SEBI Act g) A Software Company means a company engaged in manufacture or production of software where not less than 80% of the companys turnover is from software activities h) Information technology software and information technology services means the company which deal with such activities as defined in recommendations of the Planning Commission Eligibility for issue of convertible bonds or ordinary shares of issuing company 3. (1) An issuing company desirous of raising foreign funds by issuing FCCBs or ordinary shares for equity issues through GDR is required to obtain prior permission of the DEA, MoF, GoI (2) An issuing company seeking permission under sub-para (1) shall have a consistent track record of good performance for a minimum period of 3 years, on the basis of which
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Indian Companies access to International Capital Markets with reference to ADR/GDR an approval for finalizing the issue structure would be issued to the company by the DEA, MoF. (3) On the completion of finalization of issue structure in consultation with the Lead Manager to the issue, the issuing company shall obtain the final approval for proceeding ahead with the issue from the DEA. Explanation For the purposes of sub-paras (2) and (3) issue structure means any of th requirements which are provided in paragraphs 5 and 6 of this Scheme. (4) The FCCB shall be denominated in any convertible foreign currency and the ordinary shares of an issuing company shall be denominated in Indian Rupees (5) When an issuing company issues ordinary shares or bonds under this scheme, the company shall deliver the ordinary shares or bonds to a domestic Custodian Bank who will, in terms of agreement, instruct the Overseas Depository Bank to issue GDR or Certificate to non-resident investors against the shares or bonds held by the Domestic Custodian bank. (6) A GDR may be issued in the negotiable form and may be listed on any international stock exchanges for trading outside India. (7) The provisions of any law relating to issue of capital by an Indian company shall apply in relation to the issue of FCCBs or the ordinary shares of an issuing company and the issuing company shall obtain the necessary permission or exemption from the appropriate authority under the relevant law relating to issue of capital.
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Indian Companies access to International Capital Markets with reference to ADR/GDR Issue of Global Depository Receipts 3A. Indian Companies engaged in Information Technology Software and Information Technology Services, are eligible to offer to their non-resident or resident permanent employees GDRs against the issue of ordinary shares under the scheme subject to the operational guidelines/conditions issued from time to time by the government.
3B Indian Companies engaged in Information Technology Software and Information Technology Services as defined in recommendation No. 19(a) and (b) of the Notification dated 25th July 1998 issued by the Planning Commission, are eligible to offer also to the non-resident/resident permanent employees of their subsidiary companies, incorporated in India or abroad and engaged in Information Technology Software and Information Technology Services, GDR against the issue of ordinary shares under the scheme subject to the eligibility conditions and operational guidelines/conditionalities announced from time to time by the government.
3C Indian Companies registered in India and engaged in the following sectors/areas, where 80% of turnover is from these sectors/areas of the operation/business of the company in the previous three financial years, are eligible to offer GDRs against the issue of ordinary shares under the scheme to their non-resident/resident permanent employees and also of their subsidiary companies, incorporated in India or abroad, subject to the eligibility conditions and operational guidelines/conditionalities announced from time to time by the government.
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Indian Companies access to International Capital Markets with reference to ADR/GDR Limits of foreign investment in the issuing company 4. The Ordinary shares and FCCBs issued against the GDRs shall be treated as FDI in the issuing company. The aggregate of the foreign investment made either directly or indirectly shall not exceed 51% of the issued and subscribed capital of the issuing company: Provided that the investments made through Offshore Funds or by FIIs will not form part of the limit laid down in this paragraph.
Issue structure of Global Depository Receipts 5: (1) A GDR may be issued for one or more underlying shares or bonds held with the domestic Custodian Bank (2) The FCCB and GDR may be denominated in any freely convertible foreign currency (3) The ordinary shares underlying the GDRs and the shares issued upon conversion of the FCCBs will be denominated only in Indian currency. (4) The following issues will be decided by the issuing company with the Lead Manager to the issue, namely: (a) public or private placement (b) number of GDRs to be issued (c) the issue price (d) the rate of interest payable on FCCBs; and (e) the conversion price, coupon, and the pricing of the conversion options of the FCCBs (5) There would be no lock-in-period for the GDRs issued under this scheme
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Indian Companies access to International Capital Markets with reference to ADR/GDR Listing of the GDRs 6. The GDRs issued under this scheme may be listed on any of the Overseas Stock Exchanges, or OTC or through Book Entry Transfer Systems prevalent abroad and such receipts may be purchased, possessed and freely transferable by a person who is a nonresident within the meaning of the FERA 1973, subject to the provisions of the Act.
Transfer and Redemption 7. (1) A non-resident holder of GDRs may transfer those receipts or may ask the Overseas Depository Bank to redeem those receipts. In the case of redemption, Overseas Depository Bank shall request the Domestic Custodian Bank to get the corresponding underlying shares released in favor of the non-resident investor, for being sold directly on behalf of the non-resident, or being transferred in the books of account of the issuing company in the name of the non-resident.
(2) In case of redemption of GDRs into underlying shares, a request for the same will be transmitted by the Overseas Depository bank to the Domestic Custodian Bank in India, with a copy of the same being sent to the issuing company for information and record. (3) On redemption, the cost of acquisition of the shares underlying the GDRs shall be reckoned as the cost on the date on which the Overseas Depository Bank advises the Domestic Custodian bank for redemption. The price of the ordinary shares of the issuing company prevailing in the BSE or the NSE on the date of the advice of redemption shall betaken as the cost of acquisition of the underlying ordinary shares.
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Indian Companies access to International Capital Markets with reference to ADR/GDR (4) For the purposes of conversions of FCCB, the cost of acquisition in the hands of the non-resident investors would be the conversion price determined on the basis of the price of the shares at the BSE or the NSE on the date of FCCB into Bonds
Taxation on Foreign Currency Convertible Bonds 8. (1) Interest payments on the bonds, until the conversion option is exercised, shall be subject to deduction of tax at source at the rate of ten percent. (2) Tax on dividend on the converted portion of the bond shall be subject to deduction of tax at source at the rate of ten percent (3) Conversion of FCCB into shares shall not give rise to any capital gains liable to income tax in India (4) Transfers of FCCBs made outside India by a non-resident investor to another nonresident investor shall not give rise to any capital gains liable to tax in India Taxation on shares issued under GDR Mechanism 9. (1) Under the provisions of the Income Tax Act, income by way of dividend on shares will be taxed at the rate of 10 percent. The issuing company shall transfer the dividend payments net after deduct tax at source to the Overseas Depository Bank (2) On receipt of these payments of dividend after taxation, the Overseas Depository Bank shall distribute them to the non-resident investors proportionate to their holdings of GDRs evidencing the relevant shares. The holders of the DRs may take credit of the TDS on the basis of the certification by the Overseas Depository Bank, if permitted by the country of their residence
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Indian Companies access to International Capital Markets with reference to ADR/GDR (3) All transactions of trading of the GDRs outside India, among non-resident investors, will be free from any liability to income tax in India on capital gains there from (4) If any capital gains arise on the transfer of the aforesaid shares in India to the nonresident investor, he will be liable to income tax under the provisions of the IT Act. If the aforesaid shares are held by the non-resident investor for a period of more than 12 months from the date of advice of their redemption by the Overseas Depository Bank, the capital gains arising on the sale thereof will be treated as long term capital gains and will be subject to income tax at the rate of 10 percent under the provisions of section 115AC of the IT Act. If such shares are held for a period of less than 12 months from the date of redemption advice, the capital gains arising on the sale thereof will be treated as short term capital gains and will be subject to tax at the normal rates of income tax applicable to non-residents under the provision of the IT Act. (5) After redemption of the DRs into the 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 GDR, the rate of taxation of income by way of dividends on these shares would continue to be at the rate of 10 percent, in accordance with section 115AC (1) of the IT Act. The Long term capital gains on the sale of these redeemed underlying shares held by non-resident investors in the domestic market shall also be charged to tax at the rate of 10 percent, in accordance with the provisions of section 115AC (1). (6) 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 115AC of the IT Act and income there from shall not be eligible for the concessional tax treatment provided there
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Indian Companies access to International Capital Markets with reference to ADR/GDR under. After the transfer of shares where consideration in terms of rupee payment, the normal tax rates would apply to the income arising or accruing on these shares. (7) Deduction of TDS on the amount of capital gains accruing on transfer of the shares would be made in accordance with sections 195 and 196C of the IT Act. Application of avoidance of double taxation agreement in case of GDRs 10. (1) During the period of fiduciary ownership of shares in the hands of the Overseas Depository Bank, the provisions of Avoidance of Double Taxation Agreement entered into by the GoI with the country of residence of the Overseas Depository Bank will be applicable in the matter of taxation of income from dividends from underlying shares and interest on FCCBs. (2) During the period, if any, when the redeemed underlying shares are held by the nonresident investor on transfer from fiduciary ownership of the Overseas Depository Bank, before they are sold to resident purchasers, the Avoidance of Double Taxation Agreement entered into by the GoI with the country of residence of the non-resident investor will be applicable in the matter of taxation of income from the dividends from the said underlying shares, or interest on FCCBs, or any capital gain arising out of transfer of underlying shares Gift tax and wealth tax 11. The holding of the DRs in the hands of non-resident investors and the holding of the underlying shares by the Overseas Depository Bank in a fiduciary capacity and the transfer of the GDRs between non-resident investors and the Overseas Depository Bank shall be exempt from wealth tax under the Wealth Tax Act 1957 and from gift tax under the Gift Tax Act 1958.
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Indian Companies access to International Capital Markets with reference to ADR/GDR ROLES OF VARIOUS PARTIES IN ISSUING AN ADR/GDR ABC & Co (India) Ltd Issue of Global Depository Receipts Representing Equity Shares Draft Outline Time Table Abbreviations used in the Time Table Issuer Lead Manager Co-Lead Manager L&F IILA MILA USLA Auditors Listing Agent Depository Week 5th Feb 2005 : ABC & Co (India) Ltd : Lean Thin and Stout (UK) Ltd : True Brokers Finance Ltd : Link & Finance : Issuers Indian Legal Advisers Brother & Brother : Managers Indian Legal Advisers (Big & Co) : US Legal Advisers (to be determined if required) : M/s. Hones & Co. C.A : To be determined : The good Bank of New York General Discussion to determine principal aspects implications Appointment of Lead Manager (and Co-Lead Manager) and Lawyers for the transaction. Initial approaches made to obtain necessary approvals, consents and tax clearances. In particular discussions with the Ministry of Finance for authorization, passing of necessary Board Resolution and preparation for Extraordinary meeting of Shareholders to approve the issue General Discussions to determine format of offering SIMSR/MMS/2003-2005/SEM IV/31 All Parties 114 All Parties All Parties
Commencing proposed issue including tax, legal and accounting
Indian Companies access to International Capital Markets with reference to ADR/GDR Circular, roadshows, venue, roadshow presentation material, time schedule and assignments of responsibilities for proposed issue EGM Notice and Resolutions to be proposed at EGM to be available EGM to approve offering to be covered By 12th Feb Issued to have submitted a letter seeking in principle approval for the issue from the Ministry of Finance Lead Manager to have prescribed list of initial requests to the Issuer for information for the purpose of the first draft of the business description for the Offering Circular 12th Feb Issuer to hold Board Meeting to approve structure of transaction Week 19th Feb Issuer to supply the Lead Manager with responses to description, plus minutes of the previous meeting of the Board of Directors Commence preparation of first draft of the following Key documents Offering Circular Subscription Agreement All Parties L&F Issuer Lead Manager/L&F Issuer/IILA/ L&F Issuer/IILA Issuer/IILA
Commencing requests for information for purposes of business
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Indian Companies access to International Capital Markets with reference to ADR/GDR Auditors Comfort Letters Legal Opinions L&F/Auditors L&F/MILA/ IILA Signing and Closing Agendas Deposit Agreement Undertaking to Luxembourg Stock Exchange DTC Representation Letter 5th March Lead Manager to have prepared (with the assistance of information supplied by the Issuer) a first draft of the Offering Circular to be circulated to all parties Review by the Lead Manager, L&F, MILA and IILA of formal application to Ministry of Finance Agree and reserve roadshow, venues, presentation invitations ready for mailing to prospective investors Lead Manager/ Issuer Signing and Submission of Letters of Undertaking to Luxembourg Stock Exchange 12th March 12th March EGM to pass shareholders resolution Formal approval of the Ministry of Finance to be sought Issuer/L&F/ Lead Manager Issuer/IILA Issuer/IILA L&F Depository L&F USLA Lead Manager/L&F
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Indian Companies access to International Capital Markets with reference to ADR/GDR Week 19th March Proposed date for documentation and due diligence included in the Offering Circular and to discuss all other draft documentation L&F, Lead Manager, MILA, IILA Issuer & Auditor Agree Co-Lead Managers Lead Manager / Issuer Week 26th March Draft Roadshow Presentation material planned Approval of Ministry of Finance to have been confirmed to Lead Manager, Applications to Reserve Bank of India and Department of Company Affairs to be submitted following Ministry of Finance Approval Three weeks Finalise outstanding issues on Offering Circular and Commencing documentation 4th April Finalise proposed management Group Lead Manager/ Issuer 23rd April Printing of preliminary (Red Herring) Offering Circular Issuer/Lead Manager All Parties Issuer Issuer/ IILA Draft Offering Circular delivered to Luxembourg Lead Manager
Commencing Meetings to verify and obtain all information to be
Commencing Stock Exchange
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Roadshow presentation material finalized Issuer to appoint duly authorized officers to sign Subscription Agreement, Deposit Agreement and all other necessary documents on behalf of Issuer Week 7th May (Launch) Dispatch Invitation Telex with indicative pricing to Managers. Preliminary offering Circular (if not already supplied) and subscription Agreement dispatched to Manager Press Release announcing issue Roadshow presentations and one-to-one meetings
Issuer
Issuer/Lead Manager
Commencing commence
Lead Manager / Issuer
(Apply for clearance of GDRs through DTC) Fixing of price and Forex Rate
Lead Manager Lead Manager, Issuer
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Indian Companies access to International Capital Markets with reference to ADR/GDR LIVE CASE - I LIC HOUSING FINANCE LIMITED Lets see a live case study of LIC Housing Finance Ltd. (incorporated in the Republic of India as a public company with limited liability), which has recently issued Global Depositary shares
Details of the issue are as follows: Number of GDS: 5,000,000 Representing 10,000,000 Equity Shares, par value of Rs.10 each US $5.97 per GDS
This is an offering of 5,000,000 number of Global Depositary Shares (GDSs) that are being issued by LIC Housing Finance Limited (the Company) and are being offered in the United States by the Lead Managers, through their US broker-dealer affiliates, only to qualified institutional buyers (QIBs) in reliance on Rule 144A (Rule 144A) under the US Securities Act of 1933; as amended (the Securities Act) and outside the United States in reliance on Regulation S (Regulation S) under the Securities Act. Each GDS will initially represent y equity shares, par value Rs. M each per equity share (the Shares) of the company. The GDSs are not being offered in the Republic of India.
GDSs which are offered and sold in reliance on Rule 144A will be represented by a master Rule 144A GDS (the Master Rule 144A GDS), in registered form, which will be deposited on or about the closing date (as defined below) with a custodian for, and
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Indian Companies access to International Capital Markets with reference to ADR/GDR registered in the name of Cede & Co. as a nominee of, The Depository Trust Company (DTC). GDSs which are offered and sold in reliance on Regulation S (the International GDS) will be represented by a master international GDS (the Master International GDS, together with the Master Rule 144A GDS, the Master GDSs) in registered form, which will be deposited on or about the Closing Date with a common depositary for, and registered in the name of a common nominees of Euroclear Bank S.A/N.V., as operator of the Euroclear System (Euroclear) and Clearstream Banking, societe anonyme (Clearstream, International). Beneficial Interests in the GDSs represented by the Master GDSs will be shown on, and transfers thereof will be effected only through, book-entry records maintained by DTC, Euroclear and Clearstream, International. Except as described therein, individual global depositary shares representing GDSs will be subject to certain restrictions on transfer. The Rule 144A GDSs and the International GDSs will be issued pursuant to a deposit agreement (the Deposit Agreement) between the Company and the Depository. Application has been made to list the International GDSs on the Luxembourg Stock Exchange. The European Union (EU) Transparency Obligations Directive is currently being finalized and may be implemented in Luxembourg in a manner that is unduly burdensome for the company. In such circumstances, the issuer may decide to seek and alternative listing for the International GDSs on a stock exchange outside the EU. We have also applied to have the Rule 144A GDSs designated as eligible for trading in the Portal. Market of The Nasdaq Stock Market, Inc. (PORTAL). The Companys outstanding Shares are listed on The Stock Exchange (the BSE) and The National Stock Exchange of India Limited (he NSE). The Company has undertaken to apply to
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Indian Companies access to International Capital Markets with reference to ADR/GDR have the Shares represented by the GDSs approved for listing on the BSE and the NSE. On 31st August 2004, the closing price of the shares on the BSE was Rs. 145.55 per share and NSE was Rs. 145.65 per share. Investing in GDSs involves risks. See Risk Factors for details. (The details of the risk factors will be briefly mentioned in the latter part of this document) Delivery of the GDSs in book-entry form only will be made on or about September 7, 2004 the Closing Date. The GDSs and the Shares to be represented by such GDSs have not been and will not be registered under the Securities Act and may not be offered or sold within the United States, except to QIBs in reliance on the exemption from registration provided by Rule 144A. You are hereby notified that sellers of the GDSs may be relying on the exemption from the provisions of the Securities Act provided by Rule 144A. The GDSs may not be offered or sold directly or indirectly in India or to. or for the account of, any resident of India. The GDSs offered hereby are not transferable except in accordance with the restrictions described under Transfer Restrictions. A copy of this Offering Memorandum will be delivered to the Registrar of Companies in Mumbai, India, the Reserve Bank of India (the RBI), the Securities and Exchange Board of India (the SEBI) and the BSE and NSE for record purposes. Details of the Offering Memorandum I shall here cover only the important details that are mentioned in the offering memorandum, since it is an exhaustive one. If any one is interested in the minute details of the offering memorandum can have a look at it as it is publicly available.
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Indian Companies access to International Capital Markets with reference to ADR/GDR Summary The summary of the offering memorandum contains the various details about the company. We shall look at all the details with a small briefing under each head.
Our Business In this the company here explains their business model, so the investors who are unaware of the companys operations can have a look at it. Also their current market position is mentioned in this section.
Our Strengths and Competitive Advantage Under this head, the company mentions their strengths and their competitive advantage. Like in this case where it is Housing Finance Company it explains about: 1. Extensive experience in the housing finance industry 2. Extensive marketing network 3. Strong brand name 4. Credit rating from various credit rating agencies 5. Advantage on its low cost of operations. Our Strategy In this section it explains about its current strategy and also the steps it would like to take to increase its market share and thereby shareholder wealth. The various steps it has mentioned in this case are as follows:

Widening distribution channels and diversifying assets Reorganizing operations and marketing network
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Brand promotion Reduce funding costs Reduce operating costs Reduce Non-performing liabilities Effective use of technology Human resource development
Corporate Information In this section the address of the registered office of the company is mentioned along with its website.
Risk Factors Prospective investors should carefully consider the various risks described below, in addition to the other information contained in the offering memorandum, before making any investment decision relating to the GDSs. The occurrence of any of the following events could have a material adverse effect on the companys business, results of operation, financial condition and future prospects and cause the market price of the GDSs and the shares to fall significantly.
Risk associated with the Companys business
There have been technical breaches of certain covenants in our loan agreements and debentures
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Our internal audit system needs to be strengthened to make it commensurate with our size and the nature of our business
We have experienced incidents of fraud Our business strategies, in particular, relating to the reorganization of our area offices, upgrade of our IT systems and implementation of a credit scoring system, may not be a success
A significant amount of our disbursements are made to customers introduced by third party agents
We are unable to provide certain financial information, which you may customarily expect to find in an offering document for an offering of this share.
The Indian housing finance industry is very competitive and increasing competition may result in declining margins and market share if we are unable to compete effectively
Our business is particularly vulnerable to volatility in interest rates. Our primary statutory auditors do not audit all of our area offices We may be unable to secure funding at competitive rates or at all If we are unable to control the level of NPLs in our loan portfolio, our financial position and results of operation may suffer
We have incurred significant losses with respect to some of our investments in the past
We may be subject to regulations in respect of classification and provisioning for NPLs that are less stringent than in other countries
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In the past we have not been able to foreclose on collateral when borrowers default on their obligations to us
Our business is highly regulated and we may be adversely affected by future regulatory changes
Our ability to assess, monitor and manage risks inherent in our business differs from the standards of some of our counterparts in India and some developed countries
Borrowing for the purchase or construction of property may not continue to offer borrowers the same fiscal benefits it currently offers and the housing sector may not continue to be regarded as a priority sector by the Government
The interests of our promoter and major shareholder, LIC, may not be the same as those of the holders of the GDSs and the Shares
We may be unable to retain key members of management and staff If the corporate undertakings provided by us in our mortgage-backed securitization transactions are invoked, in may require an increase in provisioning in respect of these undertakings and adversely affect our net income
We may be considered a passive foreign investment company (PFIC) for United States federal income tax payers
Specific financial information included in this offering memorandum may not be comparable with other financial information included in this offering memorandum, and an analysis based on comparisons of such financial information may not be meaningful
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Indian Companies access to International Capital Markets with reference to ADR/GDR Risks Associated with Investments in Indian Company
A slowdown in economic growth in India may adversely affect our business and results of operation
Political instability or changes in the Government could adversely affect economic conditions in India generally and our business in particular
If communal disturbances or riots erupt in India, or if regional hostilities increase, this would adversely affect the Indian economy, the health of which our business depends upon
The market value of your investment may fluctuate due to the volatility of the Indian securities market
The price of the GDSs could decline as a result of Government regulation of foreign ownership
Investors may have difficulty enforcing judgments against our management or us Significant differences exist between Indian GAAP and other accounting principles such as IFRS and US GAAP, which may be material to investors assessments of the financial conditions of the company
Risks related to the GDSs and the Shares
An active market for the GDSs may not develop, which may cause the price of the GDSs to fall
GDS holders bear the risk of fluctuations in the prices of the Shares We are subject to foreign investments restrictions under Indian law that limit our ability to attract foreign investors, which may adversely impact the market price of our GDSs and Shares
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Fluctuations in the exchange rate between the rupee and the US dollar could have a material adverse effect on the value of the GDSs and the shares to be represented by such GDSs, independent of our operating results
Holders of GDSs could be restricted in their ability to exercise pre-emptive rights under Indian law and could thereby suffer future dilution of their ownership position
Holders of GDSs will only be able to exercise their voting rights to the extent that a majority of the holders of outstanding GDSs vote for or against a particular resolution
Future issuances or sales of the Shares could significantly affect the trading price of the Shares and the GDSs
Use of Proceeds The net proceeds from this offering of GDSs, after deduction of underwriting fees, discounts and commissions, but before deduction of other expenses associated with this offering, are estimated to be approximately US $29.25 million, which we intend to use to strengthen our capital base and for general purposes, including financing new borrowers.
SUMMARY OF THE OFFERING The following is a general summary of the offering of the GDSs. This summary is derived from and should be read in conjunction with the full text of the terms and conditions of the GDSs and the Deposit Agreement. The terms and conditions of the
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Indian Companies access to International Capital Markets with reference to ADR/GDR GDSs and the Deposit Agreement shall prevail in the event of any inconsistency with the terms set out in this section
Issuer:
LIC Housing Finance Limited, a public company incorporated in the Republic of India with limited liability
The Offering:
5,000,000 GDSs are being offered (i) in the United States only to QIBs in reliance on Rule 144A, and (ii) outside the United States in reliance on Regulation S and other applicable laws. The GDSs are not being offered in India.
Price per GDS:
US $5.97
GDSs:
Each GDS represents two shares. The Rule 144A GDSs and the International GDSs will be issued pursuant to the Deposit Agreement. Holders of International GDSs represented by the Master International GDS may only transfer such International GDSs in exchange for Rule 144A GDSs upon satisfying certain procedural requirements. Holders of Rule 144A GDSs may only transfer such Rule 144A GDSs in exchange for International GDSs upon satisfying certain procedural requirements.
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Indian Companies access to International Capital Markets with reference to ADR/GDR There are limitations on redeposits of Shares that have been withdrawn from the GDS deposit facilities and on deposits of shares acquired in the open market. The GDSs and the Shares represented thereby are subject to restrictions on transfer.
Closing Date:
On or about September 7, 2004
Form and Denomination: The initial deposits of shares in connection with this offering will be made by the delivery to ICICI Bank Limited, as custodian (the Custodian), of a share certificate representing the shares. Upon receipt by the custodian of such share certificate and receipt by the Depositary of confirmation from the company that the shares to be represented by the GDSs have been issued as fully paid, the Depositary shall execute the Master Rule 144A GDSs and hold it as custodian for DTC and execute and deliver the Master International GDSs to a common Depositary in London for Euroclear and Clearstream, International. Except as described herein, beneficial interest in the Master Rule 144A GDS and the Master International GDS will be shown on, and transfers thereof will be effected only through, book-entry records maintained by DTC, Euroclear and Clearstream, and International and their direct and indirect participants and accountholders.
Issue of Additional GDSs: Under current Indian law and the Deposit Agreement, additional GDSs may be issued only in connection with (i) a bonus issue of shares, (ii) the exercise by holders of their pre-emptive rights in
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Indian Companies access to International Capital Markets with reference to ADR/GDR connection with rights offerings, (iii) transfers between the Depositary facility and the Rule 144A GDSs and the Depositary facility for the International GDSs and (iv) to the extent, previously issued GDSs have been cancelled Total Shares Outstanding prior to and after this offering: As of March 31, 2004, there were 74,932,600 shares outstanding. Immediately after this offering, there will be 84,932,600 shares outstanding, including 10,000,000 shares represented by GDSs Dividends: Holders of GDSs will be entitled to receive dividends, subject to the terms of the Deposit Agreement, to the same extent as the holders of the shares, less the fees and expenses payable under such Deposit Agreement and any Indian tax applicable to such dividends. Cash dividends on the Shares, if any, will be paid in rupees and, subject to any restrictions imposed by Indian law, regulations or applicable permits, will be converted into US dollars by the Depositary in the manner provided in the Deposit Agreement and distributed to holders of GDSs.
For fiscal 2004, our Board of Directors (the Board) recommended dividends equal to 50% of par value on our shares payable to our shareholders of record on July 28, 2004. Such dividend was approved by the annual general meeting of
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Indian Companies access to International Capital Markets with reference to ADR/GDR shareholders held on August 17, 2004. Holders of GDSs sold pursuant to this offering will not be entitled to receive such dividend.
Indian Taxation:
Allotment of the GDSs will be made free and clear of, and without deduction or withholding in respect of Indian taxation save to the extent required by law. Where tax is required to be deducted or withheld, we will gross up the taxable amount and will be required to account separately to the Indian tax authorities for any withholding taxes applicable on such amounts. The GDS will have the benefit of the tax concessions available under the provisions of Section 115AC of the Indian Income Tax Act, 1961 and The issue of Foreign Currency Convertible Bonds and Ordinary Shares Depositary Receipt Mechanism) Scheme, 1993
(through
promulgated by the Government (the Depositary Receipt Scheme). These tax concessions include withholding at a reduced rate of 10% plus an applicable surcharge of 10% on such tax, for individuals and an association of persons if taxable income exceeds 850,000 and a surcharge of 2.5% for companies, in respect of capital gains resulting from long-term investments, except where such lone-term capital gains are exempt from tax by virtue of the transfer of a short-term capital asset, being sale of equity shares in a company or a unit of an equity oriented fund or a
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Indian Companies access to International Capital Markets with reference to ADR/GDR derivative, and such transactions are entered into a recognized stock exchange in India, and are chargeable to securities transaction tax under the Finance Act of 2004. Gains realized outside India on the sale or transfer of GDSs (but not the shares represented by those GDSs) by a holder who is a non-resident of India to another non-resident of India are exempt from Indian capital gains tax.
Under current Indian laws, no tax is payable by the recipients of dividends on shares of an Indian company, including shares represented by GDSs. However, we will be liable to pay distribution tax on dividends paid on the Shares (including shares represented by GDSs) at a rate of 12.8125% (inclusive of surcharge).
Voting Rights of Holders of GDSs: Holders of GDS will only be able to exercise their voting rights with respect to the shares represented by such GDSs to the extent a majority of the holders of the outstanding GDSs vote for or against a particular resolution. If a majority of the holders of the outstanding GDSs vote for or against a particular resolution, the Depositary will vote all of the shares represented by the outstanding GDSs in accordance with the voting instructions by the majority. If less than a majority of the holders of the outstanding GDSs vote for or against such resolution, the Depositary will vote all of the shares represented by the
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Indian Companies access to International Capital Markets with reference to ADR/GDR outstanding GDSs as directed by the Board or a duly appointed committee thereof. Registered holders of the shares withdrawn from the Depositary arrangements will be entitled to vote and exercise other direct shareholder rights in accordance with applicable Indian law. Registration of transfer of GDSs may be refused in certain circumstances.
Settlement:
The Rule 144A GDSs will be represented by beneficial interests in the Master Rule 144A GDS, which will be deposited on or about the Closing Date with a Custodian for, and registered in the name of Cede & Co., as nominee for DTC.
The International GDSs will be represented by beneficial interests in the Master International GDS, which will be deposited on or about the Closing Date with a common Depositary for, and registered in the name of a common nominee of, Euroclear and Clearstream, International.
Beneficial interests in the Master GDSs will be shown on, and transfers thereof will be effected only through, book-entry records maintained by DTC, Euroclear and Clearstream, International. Except as described herein, individual GDS certificates will not be issued in exchange for beneficial interests in the Master GDSs.
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Indian Companies access to International Capital Markets with reference to ADR/GDR Restriction on Disposition of Securities: The GDSs and the shares to be represented by such GDSs, have not been, and will not be, registered under the Securities Act. Offers and sales of the GDSs will be subject to certain restrictions.
Depository for the GDS: Bank of New York
Governing Law:
The Underwriting Agreement and the Deposit Agreement will be governed by English Law
Listings:
Application has been made to list the International GDSs on the Luxembourg Stock Exchange and to have the Rule 144A GDSs designated as eligible for trading in PORTALSM. The EU Transparency Obligations Directive is currently being finalized and may be implemented in Luxembourg in a manner that is unduly burdensome for the company. In such circumstances, we may decide to seek an alternative listing for the International GDSs on a stock exchange outside the EU. We have undertaken to apply to have the shares represented by GDSs approved for listing on the BSE and the NSE
Only International GDSs will be listed on the Luxembourg Stock Exchange. Holders of Rule 144A GDSs who wish to effect a sale
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Indian Companies access to International Capital Markets with reference to ADR/GDR of such Rule 144A GDSs on the Luxembourg Stock Exchange will be required to exchange their interest in the Master Rule 144A GDSs representing such Rule 144A GDSs for an equivalent interest in the Master International GDS pursuant to the terms of the Deposit Agreement, including delivery of required
certifications and representations and payment of fees, charges and taxes as provided therein.
Trading Market for the GDSs and the Shares: The only trading market for the shares are the BSE and the NSE. The shares have been listed on the BSE and the NSE since 1994. There is no public market outside India for the shares. As if August 17, 2004, the latest date for which such information is available. Prior to this offering, there has been no trading market for the GDSs.
Use of Proceeds:
The net proceeds from the offering of GDSs, after deduction of underwriting fees, discounts and commissions but before deduction of other expenses relating to the offering, are expected to be approximately US $29.25 million, which we intend to use to strengthen our capital base and for general corporate purposes, including financing new borrowers.
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Indian Companies access to International Capital Markets with reference to ADR/GDR Lock-up Agreement: Each of the Company and LIC has agreed not to: (a) issue, offer, lend, pledge, sell, contract to sell or issue, sell any option or contract to purchase, purchase any option or contract to sell or issue, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any Shares, GDSs or any securities convertible into or exercisable or exchangeable for shares or GDSs; (b) enter into swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of shares or GDSs; or (c) publicly announce any intention to enter into any transaction described in (a) or (b) above, whether any such transaction described in (a) or (b) above is to be settled by delivery of shares, GDSs or other such securities, in cash or otherwise, for a period of 180 days after the date of this Offering Memorandum without the prior written consent of the Lead Managers, subject to certain exceptions including the issue, offer and sale by the company of the GDSs pursuant to this Offering.
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Indian Companies access to International Capital Markets with reference to ADR/GDR LIVE CASE - II ICICI BANK LIMITED Notifications issued by the Government of India and the Reserve Bank of India, i.e. the RBI, allow Indian companies such as ICICI Bank Limited, i.e. the Bank, with shares listed on a stock exchange in India and also having American Depositary Shares, i.e. ADSs/Global Depositary Receipts, i.e. GDRs, listed on a stock exchange outside India, to sponsor an additional ADR/GDR offering against equity shares to be sold by its existing shareholders subject to the conditions set forth in this invitation. The Securities and Exchange Board of India i.e. SEBI, has vide notification dated May 14, 2003, also allowed Foreign Institutional Investors that constitute equity shareholders, to participate in such Sponsored ADR/GDR Offerings. All references in this Invitation to Participate, to the Bank or we or our are to the Bank, and references to you are to the Equity Shareholders of the Bank. Accordingly, this invitation, is being made to you as a holder of record of our Equity Shares, i.e. an Equity Shareholder, whereby, as an Equity Shareholder, you may participate as a selling shareholder in a public offering on the New York Stock Exchange, i.e. NYSE, of up to 6% of the Banks paid-up equity share capital aggregating not more than 22,087,859 of our American Depositary Shares (representing 44,175,718 Equity Shares), i.e. the ADS Offering, on the terms and conditions described herein. Each ADS issued by the bank currently represents two equity shares. All of our equity shareholders including our directors and officers and certain affiliates of Merrill Lynch International, Morgan Stanley and UBS Investment Bank, i.e. collectively, the Underwriters, may participate in terms of this Invitation to Participate.
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Indian Companies access to International Capital Markets with reference to ADR/GDR The schedule of activities is as per the following table Date of Dispatch to the Equity March 4, 2005 March 7, 2005 March 11, 2005 March 28, 2005
Shareholders Invitation Opening Date Invitation Closing Date Date by which communication regarding the acceptance of the Deposited Equity
Shares would be dispatched Date by which consideration would be Not later than 30 days from the date received of Closing of the ADS Offering Last Date until which the Deposited Equity Shares may be held in the Escrow Account June 7, 2005
TERMS AND CONDITIONS OF THIS INVITATION Persons Eligible to Participate All the equity shareholders holding fully paid up Equity Share free from any charge, lien, encumbrance or any transfer restriction of any kind whatsoever, and whose names appear on our Register of Members. Minimum Lot There is no minimum lot that has to be offered by you for sale in the ADS Offering. Invitation Period To avail the facility in this Invitation, you may offer your equity shares for sale in the ADS Offering, together with the invitation documents from the Invitation Opening Date and ending on the Invitation Closing Date, being the Invitation Period. Size of the ADS Offering The maximum size for the entire ADS Offering cannot exceed 6.0% of the Banks paid up equity share capital aggregating not more than 22,087,859 of our ADSs including the Overallotment Option. There is no minimum size for the ADS Offering. SIMSR/MMS/2003-2005/SEM IV/31 138
Indian Companies access to International Capital Markets with reference to ADR/GDR Subject to the terms and conditions of the Underwriting Agreement and the maximum ADS Offering size of 44,175,718 equity shares, the Underwriters will have the option, i.e. the Overallotment Option, to buy additional ADSs representing upto 15% of the initial ADS offering, i.e. the Optional ADS. The Overallotment Option may be exercised within seven days of the date of the final prospectus being delivered with respect to the ADS offering. If any Optional ADSs are purchased, the Underwriters will pay the same price for those Optional ADSs as they paid for the initial number of ADSs sold. No assurances can be made that any Optional ADSs will be sold. Withdrawal Your offer of Equity Shares for sale in the ADS Offering in this invitation is irrevocable and cannot be withdrawn. Price The Underwriters will determine the price of the ADSs being sold under the ADS offering depending on prevailing market conditions. The proceeds of the ADS Offering, after deduction of the expenses incurred in connection with the ADS Offering and this Invitation, will be distributed to you in proportion to the number of Equity Shares accepted ADS Offering. We are not purchasing any equity shares in the transaction. The Underwriters for sale in the ADS Offering will solely purchase shares.
ANNEXURE I Disclosure Requirements for Form F-6 (1933 Act). 1. Description of the terms of the ADRs. (a) Name and address of Depositary.
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Indian Companies access to International Capital Markets with reference to ADR/GDR (b) Title of ADRs and identity of deposited securities. (c) Amount of deposited securities represented by one unit of ADRs. (d) Procedure for voting, if any, the deposited securities. (e) Method of collection and distribution of dividends. (f) Method of transmission of notices, reports and proxy soliciting material. (g) Manner of sale or exercise of rights. (h) Terms of the deposit or sale of securities resulting from dividends, splits or plans of reorganization. (i) Amendment, extension or termination of the deposit. (j) Rights of holders of receipts to inspect transfer books of the Depositary and list of ADR holders. (k) Restrictions on the right to deposit or withdraw the underlying securities. (l) Limitations on the liability of the Depositary. (m) Description of all fees and charges to which the ADR holder will be subject, including the type of service, the amount of fees or charges and to whom paid.
2. Statement as to whether the non-U.S. issuer is subject to the periodic reporting requirements of the 1934 Act or furnishes information under Rule 12g3-2(b).
3. Exhibits. (a) Deposit Agreement. (b) Other agreements entered into by Depositary relating to the issuance of the ADRs being registered or custody of the deposited securities.
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Indian Companies access to International Capital Markets with reference to ADR/GDR (c) Material contracts relating to the deposited securities between the issuer and the depositary in effect within the last three years. (d) Legality opinion. (e) If Rule 466 (relating to designating effective date of registration statement) is used, certification as required under the Rule.
4. Undertakings. (a) Depositary undertakes to make available at its principal U.S. office any reports and communications received by it as holder of the deposited securities that are generally available to holders of the underlying shares of the issuer. (b) Disclosure of fees (if not disclosed in any prospectus).
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Indian Companies access to International Capital Markets with reference to ADR/GDR ANNEXURE II Scheme for issue of ADR/GDR Linked Stock Option for employees of software companies in India (i) A software company, which has already floated ADR/GDR, or a company, which is proposing to float ADR/GDR, would be entitled to issue ADR/GDR Linked Stock Options to its employees. A software company, which proposes to issue ADR/GDR linked stock option to its employees, should clearly include such proposal as part of its application for ADRs/GDRs. While Government of India, Ministry of Finance, Department of Economic Affairs, approval will be for total issue size inclusive of stock option, the company as will issue the ADRs/GDRs earmarked for the employees up to the specified limit and when an employee exercises his stock option. Accordingly, the company shall not exceed the approved level of ADRs/GDRs to be issued by it at any point of time. In the case of software companies, which have already issued ADRs/GDRs, such companies may seek permission for issue of stock options for existing ADR/GDR issue, observing the general parameters of the guidelines. (ii) The scheme would be available to listed and unlisted software Indian companies which fulfill the performance track record eligibility and other requirements under ADR/GDR guidelines of Government of India.
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Indian Companies access to International Capital Markets with reference to ADR/GDR (iii) A software company would be defined as a company engaged in manufacture or production of software whose turnover from software activities is not less than 80 per cent. (iv) A software company applying to Government of India for issue of ADR/GDR linked stock options shall be required to submit relevant documents certified by a Chartered Accountant, establishing that they are a software company conforming to the stipulation indicated above. The relevant documents shall also be submitted to Reserve Bank while applying for permission for remittances of foreign exchange for acquisition of ADRs/GDRs in exercise of the stock option. (v) The stock option shall be available to non-resident and resident permanent employees (including Indian and overseas working directors) of the company. The stock options shall not be available to the promoters and their relatives (as defined under the Companies Act). (vi) The eligible employees can remit up to U.S.$ 50,000 in a block of five years for acquisition of ADRs/GDRs. Upon liquidation of ADR/GDR holdings the proceeds should be repatriated to India unless permission from Reserve Bank is obtained for its retention or use abroad. (vii) Issue of stock options shall require a special resolution as applicable for preferential allotment of shares. A Committee of the Board of Directors of the company shall do the allotment of stock options. The Committee of Directors shall have a minimum of two non-executive members of the Board as its members.
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Indian Companies access to International Capital Markets with reference to ADR/GDR (viii) The issuing company would be entitled to issue options not exceeding 10% of its issued and paid up equity capital. (ix) The stock options may be issued at a discount of not more than 10% to the market price prevailing at the time of the issue of the stock option. (x) While ADRs/GDRs acquired in exercise of the stock option shall be freely transferable, the stock options themselves shall be non-transferable. (xi) Full disclosure should be made in the Directors Report or in an Annexure to the Directors Report, of the details of the stock option scheme by the company. (xii) ADRs/GDRs acquired on exercise of stock option would be eligible for concessional tax treatment under 115AC of Income-tax Act, 1961. (Necessary amendments under Section 115AC of the Income-tax Act, 1961 shall be notified by the Government of India, Ministry of Finance, Department of Revenue, separately.)
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Indian Companies access to International Capital Markets with reference to ADR/GDR

Foreign Stock Exchange

Euroclear/Cedel/ Depository Trust Company

5% 5% 5% 5% 5% 5% 10% 5% 10% 15% 5% 5% 15% 5%

5 6.94% 2 2.78% 8 11.11% 1 1.39% 72 100.00%

Source: Bank of New York, Citigroup and Wall Street Journal

Indian Companies access to International Capital Markets with reference to ADR/GDR

Indian Companies access to International Capital Markets with reference to ADR/GDR

Indian Companies access to International Capital Markets with reference to ADR/GDR

Indian Companies access to International Capital Markets with reference to ADR/GDR

Commencing proposed issue including tax, legal and accounting

Commencing requests for information for purposes of business

Commencing Meetings to verify and obtain all information to be

Commencing Stock Exchange

Indian Companies access to International Capital Markets with reference to ADR/GDR

Lead Manager / Issuer

Lead Manager Lead Manager, Issuer

Indian Companies access to International Capital Markets with reference to ADR/GDR

Risk associated with the Companys business

Indian Companies access to International Capital Markets with reference to ADR/GDR

Indian Companies access to International Capital Markets with reference to ADR/GDR

Risks related to the GDSs and the Shares

Indian Companies access to International Capital Markets with reference to ADR/GDR

Price per GDS:

On or about September 7, 2004

Depository for the GDS: Bank of New York

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