Adr Issue Study Icra PDF

A Study of International Listing
by Firms of Indian Origin

SUDIPA MAJUMDAR*
I C R A B U L L E T I N
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Abstract
A growing number of companies from emerging economies are crosslisting their shares on international exchanges in their effort to access the
developed stock markets. This paper tries to look into the inter-sectoral and
inter-temporal characteristics in prices of such stocks of Indian origin that are
being dually traded on the American and Indian stock exchanges. The trend
up to August 2006 shows the existence of positive premia levels of the
American Depository Receipts (ADRs) over the underlying domestic securities.
In an effort to realign ADR prices and bring down premia levels, the Reserve
Bank of India introduced two-way fungibility in February 2002. However,
ADR premia levels continued to increase during the period 2002 to 2004,
with a decline only from 2005this downward trend seems to be unrelated to
the fungibility criterion since the two-way conversion did not open up
arbitrage opportunities. We find that legislative changes in India had an
impact on decisions of Indian companies to go in for international listings.
However, once listed, the trading in ADRs by foreign investors was guided by
movements in the US stock market rather than capital market activities in
India. We do not find any increases in domestic stock prices across firms after
their foreign listings, but the domestic stocks show an increase in trading
volumes (liquidity gains) after their international listings.
I. Introduction
Companies around the world, especially those in the developing nations, are increasingly tapping international equity markets, in
an effort to enhance their global presence and to raise capital beyond
the borders of their home market. At the same time, investors around
the world are also looking beyond their national borders to take
advantage of new opportunities for raising the risk-adjusted return on
funds through geographic diversification of their portfolios. This has
been a key factor for the success of Depository Receipts.
JPMorgan introduced the first American Depository Receipt
(ADR) in 1927 to allow Americans invest in the British retailer
Selfridges. Since then, the ADR market has evolved in sophistication
* Sudipa Majumdar is with the Monetary Research Project, ICRA

Limited.
This paper tries to

look into the intersectoral and intertemporal
characteristics in
prices of stocks of
Indian origin that
are being dually
traded on the
American and Indian
stock exchanges.
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Structural reforms
received a major
impetus in 1991,
when the Indian
corporate sector
was allowed to go
global with
depository receipts
issues to foreign
investors.
and in importance to become an instrument used widely by companies

to trade their shares in equity markets of more developed countries.
Managers of the larger, growing companies in emerging nations
perceive tremendous strategic, financial, political, marketing and
operational benefits to listing shares overseas (Karolyi, 1998).
The Indian stock market remained largely outside the global
integration process until the early 1990s. 1 In line with the global trend,
reform of the Indian stock market began with the establishment of the
Securities and Exchange Board of India (SEBI) in 1988 and the process
gained momentum after the widespread economic reforms in 1991.
Among the other significant measures of global financial integration,
the structural reforms received a major impetus in 1991, when the
Indian corporate sector was allowed to go global with depository
receipts issues to foreign investors. 2 While Indian companies have
issued ADRs since the early 1990s, most of these earlier issues were
privately placed. Exchange-traded ADRs of Indian origin have been a
relatively recent phenomenon, being issued since 1999. 3 Currently there
are several active Depository Receipts of Indian origin that are listed
either on American exchanges like the New York Stock Exchange
(NYSE) and the National Association of Securities Dealers Automatic
Quotation (NASDAQ)4 or on European/Asian stock exchanges (like
Luxembourg, London, Dubai, Singapore).
The purpose of this paper is to look into the trends in prices of
each dually listed stock that is being traded on the American and
Indian stock exchanges and identify distinguishing features, if any, in
the inter-sectoral and inter-temporal trading patterns.5 The associated
premia levels of each stock on the American Stock Exchange along
with the movements of the underlying stock in the Indian stock market
have been studied. The Indian ADRs were enjoying high premia levels
since their foreign listing, and the introduction of two-way fungibility
by the Reserve Bank of India in February 2002 was expected to bring
down the premia levels by allowing arbitrage opportunities through reconversion of Indian stocks into ADRs. We have, therefore, analysed
Although it is one of the oldest in Asia, being in operation since 1875.

Foreign investors included both institutional investors as well as individuals (including non-resident Indians) residing abroad.
3 There were a few exchange-traded GDRs, listed on the London Stock
Exchange before 1999.
4 Reliance Industries was the first Indian company to be listed on NYSE in
1992 and Infosys Technologies was the first Indian company to be listed on
NASDAQ in 1999.
5 Hansda and Ray (2003) focused on the transmission mechanism of a
price shock from the US stock market to the Indian stock market, for each dually
listed company. They analysed each of the 10 ADR listed companies from their
listing date up to February 2002. Chakrabarti (2003) studied the returns and trading
volumes of US listed Indian companies, and seeks to explore if ADR issuance is
associated with any abnormal returns in the domestic stock market.
2
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the trend in ADR premia levels during the 2001 to 2006 time period to
study the effects, if any, of the introduction of re-conversion of ADRs in
early 2002. Moreover, we have also tried to explore the possible gains
in stock prices and in trading volumes, after the international listings of
domestic stocks.
The structure of this paper is as follows. Section II gives the
overall background of the Depository Receipts market and the reasons
behind the success of Depository Receipts around the globe, in terms of
the benefits that accrue to the listing companies as well as the foreign
investors. Section III provides a detailed background of the Indian
experience in the international stock markets. Section IV analyses the
movements of stock prices and premia levels in the American and the
Indian markets, and seeks to explain the trends in premia levels of
Indian ADRs. This section also examines if the Indian companies
experienced any significant increase in their domestic stock prices or
their domestic trading volumes following their foreign listings. Section
V gives the summary of conclusions along with some directions of
future research.
II. The Background

(A) What are Depository Receipts?
Depository receipts are negotiable certificates that represent
ownership of shares in companies of other countries. ADRs are typically traded on US stock exchanges such as NYSE or NASDAQ.
Depository receipts that are traded on stock exchanges at other parts of
the globe are called Global Depository Receipts (GDRs); these are
commonly listed on European stock exchanges such as the Luxembourg/London Stock Exchanges or on Asian stock exchanges such as the
Dubai/Singapore Stock Exchanges. Both ADRs and GDRs are usually
denominated in US dollars.6 A depository receipt is created when a
company wishes to list its shares on a foreign stock exchange, after
fulfilling the requirements put forth by the foreign stock exchange as
well as the national Government and the domestic Central Bank.7 The
regulatory procedure for issuing Depository Receipts has been explained in Box 1.
Once the Depository Receipt has been created, the trading
takes place through the usual buying and selling transactions on the
American stock exchange. The procedures of intra-market and crossborder transactions have been depicted in Appendix 2. An exposition of
the background of depository receipts leads us to the question why a
company would opt for listing itself in a foreign market when it can
raise capital in its own domestic market.
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A depository receipt
is created when a
company wishes to
list its shares on a
foreign stock
exchange, after
fulfilling the
requirements put
forth by the foreign
stock exchange as
well as the national
Government and the
domestic Central
Bank.
GDRs can also be denominated in Euros.

The various types of Depository Receipts have been explained in
Appendix 1.
7
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BOX 1: Regulatory Procedure for Issuing Depository Receipts
Step 1: Appointment of a financial adviser to manage the process, along with a

depository bank* in the host market and a custodian bank in the country of the issuer.
The adviser sets the number of shares to be represented by one depository receipt,
known as the depository receipt ratiothe ratio is set so that the price of a depository
receipt is comparable to that of similar securities in international markets.
Step 2: An American broker** purchases domestic shares from the Indian market
and delivers them to the local custodian bank of the depository banksay Bank of
New York.
Firms in emerging
nations seek to take
advantage of the
depth of the markets
in developed
countries and enter
the foreign capital
markets for raising
new capital. In
Step 3: The local Indian custodian bank verifies the delivery of the shares by informing the Bank of New York that the shares can now be issued in the United States and
the Bank of New York delivers the ADRs to the broker who initially purchased them.
Based on the determined ADR ratio, each ADR is issued as representing one or more
of the Indian local shares and the company determines the number of shares to be
sold in the international market and delivers the shares to the custodian bank.
Step 4: The custodian registers these shares in the name of the depository bank,
which issues the appropriate number of depository receipts. These ADRs represent
the local Indian shares held by the depository, and can be traded on the NYSE, like
other US securities. The holder of the depository receipt holds privileges like those
granted to shareholders of ordinary shares, such as voting rights and cash dividends.#
* For an explanation of the role of the Depository Bank in the ADR
market, see Appendix 3.
** Through an international office or a local brokerage house in India.
#
The rights of the ADR holder are stated on the ADR certificate.
nations that have

high investment
barriers, the higher
price for market risk
would translate into
a higher cost of
capital.
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(B) Why Depository Receipts?

Benefits of the Listing Company
Companies across the world are increasingly tapping international markets and depository receipts have emerged as a favoured
method of companies in developing countries to access international
stock markets. Today the ADR is an instrument used widely by non-US
companies to trade their shares conveniently and efficiently in the US
equity markets.
During the 1990s, several studies sought to understand the net
benefits of the corporate decision to list shares on overseas exchanges.
The decision to list shares abroad is expected to reduce the companys
cost of raising capital by diversifying its exposure to different market
risks and by reducing illiquidity of trading in its shares. These studies
emphasised the importance of the benefits of a lower cost of capital, an
expanded global shareholder base, greater liquidity 8 in the trading of
8 Liquidity refers to the volume of securities which can be bought/sold at
one time without significantly affecting its price and the amount of time needed to
shares, direct listing costs etc. Firms in emerging nations seek to take
advantage of the depth of the markets in developed countries and enter
the foreign capital markets for raising new capital. In nations that have
high investment barriers, the higher price for market risk would
translate into a higher cost of capital. So, companies in less developed
countries have strong incentives to access capital markets of more
developed countries by dually listing their shares on those stock exchanges to take advantage of the lower cost of capital.
In a focused study of cost-benefit trade-off, Mittoo (1992)
obtained responses from 78 CEOs of Canadian firms that were listed on
stock exchanges in the US/UK. She found that the reasons for managers
to list their equities abroad included looking for increased ability to
raise equity; growth of the shareholder base; increased visibility of the
company; and the expected increase in trading liquidity. In fact, in her
survey, the managers cited the increase in liquidity of underlying shares
to be a primary motivation for cross-listing on US exchanges.
In an early study, Choi and Stonehill (1982) found that, among
Japanese and Korean firms, enhanced international corporate prestige
and visibility was the most common reason for an interest in listing on
a foreign exchange. Sarkissan and Schill (2004) concluded that firms
tend to target overseas listing in markets that are larger, highly capitalised and have a more liberal tax environment. Miller (1999) documented significantly large abnormal returns for issuers that listed ADRs
on major US exchanges. There is also a strand of literature that looks
into the value of firms following foreign listing. Some studies looked
into the effect of liquidity on asset priceshigher liquidity results in
lower transaction costs and lower cost of capital. Errunza and Losq
(1985) showed how firms from emerging nations are able to reduce
their cost of capital and increase firm value by issuing equity on
foreign markets. Another source of value for a foreign listing is based
on models of information asymmetry whereby firms seek to convey
information about their quality to the market. High-quality firms from
markets with low disclosure standards gain by listing in markets that
have high disclosure requirementsforeign listing is a signal of higher
quality, which then improves firm valuation. Jithendranathan et al
(2000) listed out the possible reasons for cross-listing as availability of
capital in large capital markets, lower costs of capital, enhanced
liquidity and cost efficiency.
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High-quality firms
from markets with
low disclosure
standards gain by
listing in markets
that have high
disclosure
requirements
foreign listing is a
signal of higher
quality, which then
improves firm
valuation.
Investors Viewpoint
Investors around the world are increasingly looking across
their national borders in an effort to geographically diversify their
portfolios by investing in international securities. Foreign investors buy
shares of Indian companies in their effort to diversify their portfolio and
complete a desired transaction. Therefore, asset liquidity reflects two dimensions of a
desired transaction, namely speed (transaction time) and price (transaction cost).
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For a developing
country like India, it
is more rational to
allow and
encourage domestic
companies to issue
depository receipts
in foreign countries
rather than favour
foreign investors to
gain direct access to
the domestic equity
market.
hence lower the risks in the equity market. A foreign investor may do
so either through direct investment in the equity market of the emerging
nation or through access to depository receipts of the firms on their own
stock exchange. Foreign investors find it very difficult to invest directly
into equity markets of emerging nations like India. First of all, legal
and institutional restrictions make it difficult for small and medium
foreign investors to invest directly in the Indian stock market. The
investor has to be a foreign institutional investor (FII) registered with
the SEBI in order to directly participate in the Indian equity market.
Secondly, the foreign investors are also concerned about the poor
regulatory mechanism and low liquidity of the market in emerging
nations. Thirdly, direct investments in the equity market involve
brokerages and custody fees which are avoided in the case of depository receipts since the depository banks like Bank of New York arrange
for these services directly.
While the mechanics of cross-border investment flows are often
complex, ADRs offer a convenient avenue for adding global exposure
to US portfolios. Through depository receipts, the foreign investors gain
benefits of diversification while trading in their market under their own
settlement and clearance conditions. Given the legal and institutional
requirements and restrictions, it is more convenient for small/medium
size foreign investors and foreign individuals to invest in Indian depository receipts rather than in the Indian stock market.9
The Developing Countries
In reaction to the severe impacts of the financial crises in
different parts of the globe, the developing countries have several
concerns about growing international integration and have placed
stringent measures on activities of foreign investors. In particular, there
is a fear that foreign investors add volatility in asset prices in emerging
markets through herding behaviour or contagion effects.10 Therefore,
for a developing country like India, it is more rational to allow and
encourage domestic companies to issue depository receipts in foreign
countries rather than favour foreign investors to gain direct access to
the domestic equity market.
III. Foreign Listing by Indian Companies

Indian companies began their foreign listings in the early 1990s
by issuing Depository Receipts. The Indian Government issued the
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9 Hansda, S.K. and P. Ray, 2003. Stock Market Integration and Dually
Listed Stocks: Indian ADR and Domestic Stock Prices, Economic and Political
Weekly, Vol. XXXVIII, No. 8, pp. 743.
10 Herding refers to the phenomenon when investors follow each other in
investment decisions, irrespective of whether the decision is warranted by changes in
economic fundamentals. Contagion occurs when events in one emerging market
change investors behaviour in other emerging markets, regardless of whether the
economic fundamentals of the latter have been affected or not.
Foreign Currency Convertible Bonds and Ordinary Shares (Through

Depository Receipt Mechanism) Scheme (1993), facilitating foreign
listing by Indian companies. It was stipulated that a company, desirous
of raising funds through foreign listing, obtain prior permission of the
Department of Economic Affairs, Ministry of Finance, Government of
India. An issuing company seeking such permission was required to
have a consistent track record of good performance for a minimum
period of three years. The ordinary shares issued against the Global
Depository Receipts were to be treated as direct foreign investment in
the issuing company11it was stipulated that the aggregate of the
foreign investment made either directly or indirectly should not exceed
51% of the issued and subscribed capital of the issuing company.
Indian companies began to issue ADRs since 199212 with
Reliance and Grasim Industries accessing the foreign equity market. A
substantial volume of GDR/ADR issuance took place in the next couple
of years, till 1995 when large Indian companies like Bombay Dyeing,
Arvind Mills, CESC, Finolex Cables, India Hotels, L&T, Videocon
International, Crompton Greaves, Great Eastern Shipping, etc. began
foreign listings mainly through private placements. Foreign inflows
through depository receipts went up from US$240 million in 1992-93 to
reach US$2,082 in 1994-95.
With Indian firms looking for their capital needs outside the
domestic country, the Indian government began to usher in widespread
reforms by opening up opportunities within the domestic stock market.
A major improvement in the Indian stock market came in 1995 when
the new electronic National Stock Exchange began operations whereby
a new clearing corporation and a new depository were in place. This
generated renewed interest and increased trading volumes in the Indian
stock market in 1995-96, and consequently, we find a dip in the amount
raised through depository receipts.
Moving ahead from the domestic stock exchange, the Government of India took another major step to permit financial services
companies like banks, non-bank finance companies and financial
institutions, to access the foreign stock markets, which saw another
round of new foreign listings. 1996-97 witnessed the foreign listing of
State Bank of India (bank) and ICICI (finance), through private placements. The amounts raised by these two companies amounted to
US$600 million in 1996-97. As a further step, the mandatory three-year
good performance track record was relaxed for financing investments in
infrastructure sectors, such as power generation, telecom, petroleum
exploration and refining, ports, airports and roads, which encouraged
foreign listings by BSES Ltd. (power), VSNL (telecom) and MTNL
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Indian companies
began to issue
ADRs since 1992
with Reliance and
Grasim Industries
accessing the
foreign equity
market. A
substantial volume
of GDR/ADR
issuance took place
in the next couple of
years.
For a detail on classification of Depository Receipts as FDI, see
Appendix 4.
12 For a detailed exposition of the policy measures adopted by the
Government from time to time, see Appendix 6.
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The process of
global financial
integration received
a major impetus
when two-way
fungibility for Indian
GDR/ADRs was
introduced in 2002,
whereby converted
local shares could
be reconverted into
GDR/ADR subject to
sectoral caps.
(telecom) in 1996 and 1997. In 1997-98 and 1998-99, the changing

political and economic conditions in India and in Asia brought down
the number of new issues in the foreign stock markets. Thus, 1997-98
recorded the entry of only MTNL into the GDR market while 1998-99
was marked by the issue of Infosys stocks as the first exchange traded
ADR from India. Since 1999-00, the Ministry of Finance continued to
liberalise the procedures and environment for the Indian corporate
sector for acquiring capital from domestic and foreign sources, which
has been reflected in the growing market for ADRs/GDRs. 2001-02 saw
a dip in GDR issues, which was reflective of the global slowdown in
developed markets, including the US, owing to a recession setting in the
US and the war in Iraq. By 2003, the overseas market began to look up
after the efforts to revive the US economy, and ADR/GDR issues by
Indian companies also began to rise.
The process of global financial integration received a major
impetus when two-way fungibility for Indian GDR/ADRs was introduced in 2002, whereby converted local shares could be reconverted
into GDR/ADR subject to sectoral caps. Earlier, under the one-way
fungibility, once a company issued ADR/GDR, the holder could convert
the ADR/GDR into shares of the Indian Company, but it was not
possible to reconvert the equity shares into ADR/GDR. No re-issuance
of Depository receipts was permittedinvestors could only cancel the
depository receipts and avail of the underlying shares or take back the
proceeds by selling the underlying shares. Hence over a period of time,
the outstanding balance of depository receipts would decline, thereby
reducing the liquidity of depository receipts for the international
investors.
The two-way fungibility guidelines of the RBI issued in February 2002 enabled a non-resident investor to purchase local shares of an
Indian company through an Indian stock broker and convert them into
ADRs that were eligible to be traded on the American stock exchange.13
However, the equity shares in India could be converted to ADRs only to
the extent of cancellation and conversion of ADRs in that company into
shares, known as the headroom.14 The RBI guidelines stated that the
transactions will be demand-driven and would not require company
involvement or fresh permissions. All SEBI registered brokers would act
as intermediaries in the two-way fungibility of ADRs.
The sudden skyrocketing of depository receipts in 2005-06
came with the Monetary Policy of 2005-06 as there was a major
revision to the guidelines on ADRs/GDRs for unlisted companies.
13
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The concept and procedure of one-way and two-way fungibility has

been elaborated in Box 2.
14 Headroom= number of ADRs cancelled and converted into underlying
Indian equity shares.
= maximum number of ADRs that can be re-issued on
demand from foreign investors.
BOX 2: One-way and Two-way Fungibility

In an efficient market, two assets with identical attributes must sell for the same price.
On similar grounds, an identical asset trading in two different markets should also
trade at the same price. If the prices differ, a profitable opportunity arises to sell the
asset where it is overpriced and buy it back where it is under-priced. This gives rise
to arbitrage opportunities. Countries like Germany and the UK do not have any
barrier to international flow of capital and ADRs can flow freely back and forth
between the US market and the home market. For example, in Germany, an ADR
holder can sell his ADR either in the ADR market or cancel the ADR and sell the
underlying share in the domestic market, depending on the prices prevailing in the
two markets. When prices are higher in the German market, ADRs will be cancelled
and underlying shares sold in the German market, thus decreasing the number of
ADRs outstanding and increasing the number of shares traded in the German market.
When prices are higher in the ADR market, new ADRs will be issued to benefit from
the higher price thus increasing the number of ADRs outstanding and decreasing the
number of shares traded in the German market. This is the basic concept and operation of a two-way ADR programme where there is unrestricted flow between the ADR
market and underlying shares in the domestic market. Therefore, arbitrage activities
are expected to keep the prices in the two markets from diverging by more than
arbitrage transaction costs.
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There are restrictive ADR programmes where the number of ADRs from the initial
overseas offering poses a limit. So, ADRs can be cancelled and reissued, but only up
to the initial offering size. Limited two-way programmes are found in the Korean,
Taiwanese and Indian firms. Finally, the one-way programmes are the most restrictive, where ADRs that are issued may be cancelled over time but subsequent reissuance is not permitted.
India started their ADR programmes as one-way programmes and converted to
limited two-way programmes in 2002, whereby the re-issuance of ADRs once cancelled is restricted by the initial offering size. Subsequent sale of ADRs is not subject
to Indian capital gains taxes, but the dividends are taxed. Moreover, the depository
bank incurs foreign exchange transaction costs in conversions.
In India, with limited two-way fungibility, a foreign investor is now permitted to place
an order with an Indian stock broker to buy local shares, with an intention to convert
them into depository receipts. The stock broker has to apply to the domestic custodian bank for verification and approval of the order. Once the approval is granted, the
broker purchases local shares on the Indian stock market and delivers the shares to
the domestic custodian for further credit to the overseas depository. The overseas
depository issues proportional Depository Receipts to the foreign investor. This
conversion of the domestic share into ADR is subject to the extent of the original
issue of the ADRs. Consequently, the foreign investor can engage in secondary
market trading on the American stock exchange or cancel the ADR.
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The expansion spree

of the Indian
corporate sector
coupled with easing
of ADR/GDR norms
by the Ministry of
Finance resulted in a
commensurate rise
in the amounts
raised through ADR/
GDR issues.
Unlisted Indian companies were allowed to sponsor an issue of ADRs or

GDRs with an overseas depository against the shares held by its
shareholders. Further, the facility of sponsored ADR/GDR offering by
unlisted companies was to be made available to all categories of
shareholders of the company whose shares are being sold in the ADR/
GDR market overseas. The huge increase in 2005-06 was also attributable to the booming Indian stock markets that offered the corporate
sector the opportunity to issue equities abroad.15 The boom in the
Indian industry is being translated into growing domestic production
and exports, along with companies setting up new capacities. Indian
companies have raised a record level of capital in 2005-06 both from
the domestic capital markets and foreign capital markets. Some
companies went in for simultaneous offerings in domestic and foreign
markets. The expansion spree of the Indian corporate sector coupled
with easing of ADR/GDR norms by the Ministry of Finance resulted in
a commensurate rise in the amounts raised through ADR/GDR issues in
2005-06. In fact, Indian companies also began to enter new markets
like the Singapore stock exchange and the Dubai stock exchange to
enlarge their investor base even further.16
IV. Trading Characteristics of Dually Listed Companies

A. Price Trends of ADRs and Domestic Stock Prices of
Dually Listed Companies
With the opening up of the financial markets, Indian companies joined the worldwide rush to raise capital by issuing Depository
Receipts. While Indian companies have issued ADRs since the early
1990s, most of these earlier issues were privately placed. Exchangetraded ADRs of Indian origin have been a relatively recent phenomenon, being issued during or after 1999. Consequently, prices of Indian
companies listed on the American Stock Exchanges since inception of
exchange traded ADRs by Indian companies, namely 1999, have been
taken up for this study.
The daily trading closing price and daily trading volume were
obtained for the purpose of this analysis. The data is being restricted
only to those companies that were listed both on the National Stock
Exchange (NSE) as well as on stock exchanges in USA through the issue
of American Depository Receipts since our focus is on the trends in
prices for each stock both on the Indian as well as the American stock
market and the sample includes only exchange traded stocks. 17
15
Annual Report, Reserve Bank of India, 2005-06.

A chronological table of the policy changes relating to the ADR/GDRs
and the effect on the amount raised by Indian companies through foreign listings has
been presented in Appendix 5.
17 There are other Indian stocks which are listed on the American Stock
Exchanges through Private Offering, Resales and Trading through Automated
Linkages (PORTAL), which is a screen-based automated trading system. But we
have not considered these stocks for this study.
16
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The focus of this study is to observe the price trend of each

dually listed stockwe, therefore, considered the time trend of five
years for each company after their foreign listing. Therefore, only those
firms that were listed before December 2001 have been considered for
this analysis. Although this ideally refers to 10 Indian firms (refer to
Table 1), our analysis has been restricted to eight companies, as we
have excluded Silverline Technologies and Rediff.com. Silverline is
listed domestically but has not been traded on the National Stock
Exchange since April 2003 and Rediff.com is not listed on any of the
domestic stock exchanges. Therefore, these two issues were not strictly
comparable to the others and were not included in the sample.
The ADR prices in US dollar terms were converted into Indian
Rupees by adjusting for the exchange rate for each particular day of
trade. The ADR ratio of each stock was considered to estimate the
equivalent, comparable ADR price. The equivalent prices were then
compared with the price of the underlying stock on the National Stock
Exchange (NSE).18 The closing price of ADR as well as the closing
price on the NSE for each day was taken for all calculations. In order
to find out the relationship between the prices of the dually listed
1 Infosys
2
3
4
5
6
7
8
9
10
11
12
13
ICICI Bank
Silverline
Rediff.com
VSNL
Wipro
Dr Reddys
Satyam
HDFC Bank
MTNL
Tata Motors
Patni Computers
WNS Holdings
Industry
Issue
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While Indian
companies have
issued ADRs since
the early 1990s,
most of these earlier
issues were
TABLE 1
ADR issues by Indian Companies
Company
privately placed.
Stock
Exchange
ADR
Ratio
2:1
(1:1 from
July04)
1:2
1:2
2:1
1:2
1:1
1:1
1:2
1:3
1:2
1:1
1:2
1:1
Software
March 1999
Nasdaq
Finance
Software
Software
Telecom
Software
Healthcare
Software
Finance
Telecom
Engineering
Software
Support Services
March 2000
June 2000
June 2000
August 2000
October 2000
April 2001
May 2001
July 2001
September 2001
September 2004
December 2005
July 2006
NYSE
NYSE
Nasdaq
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
Exchange-traded
ADRs of Indian
origin have been a
relatively recent
phenomenon, being
issued during or
after 1999.
Note:
ADR Ratio, known as the depository receipt ratio, denotes the number
of shares to be represented by one depository receipt. The ratio is set so
that the price of a depository receipt is comparable to that of similar
securities in international markets.
Source: Company Websites, Bank of New York (www.adrbny.com).
18 ADR prices were downloaded from http://finance.yahoo.com and NSE

prices from www.nseindia.com
67
Money
&
Finance
F E B R U A R Y. 2 0 0 7
The scatter of the

ADR equivalent
prices and the NSE
closing prices of the
same stocks were
plotted for each of
the eight companies
that have been taken
stocks, the ADR equivalent prices of each stock to the closing prices of
the same underlying securities on the National Stock Exchange were
compared. The price data for each of the eight companies which were
listed dually on NASDAQ or NYSE as well as NSE were considered.
The price data are from 1st January 2001 for those companies that were
listed on American stock exchange before that date. For those companies that got their foreign listing after 1 st January 2001 (but during
2001), the prices have been taken from the first day of the foreign
trading on the American stock exchange. The cut-off date for our
analysis is 31st August 2006.
As a first step, the scatter of the ADR equivalent prices and the
NSE closing prices of the same stocks were plotted for each of the eight
companies that have been taken in this sample (see Graph 1). The
scatter clearly showed a strong positive correlation between the prices
of the dually listed Indian stocks.19
In order to find out the magnitude of the relationship, the
correlation coefficient between the ADR price and the NSE price was
calculated for each stock (See Table 2). The correlation coefficient was
found to be very high, around 0.9, for the ADR price and the corresponding domestic share price. The sectoral break-up revealed that the
synchronisation between the foreign and the domestic market was
strongest for the finance companies that were considered for analysis,
namely ICICI Bank and HDFC Bank.20 All the other companies, with
the exception of Infosys and MTNL, showed correlation coefficients of
more than 0.96.
in this sample. The

TABLE 2
Correlation Coefficient between ADR Closing Price and NSE Closing Price
scatter clearly
showed a strong
positive correlation
between the prices
Sector
ADR Stock
IT
Wipro
Satyam Computers
Infosys
0.961
0.965
0.922
Finance
ICICI Bank
HDFC Bank
0.993
0.990
Others
MTNL
VSNL
Dr Reddys Laboratories
0.872
0.997
0.977
of the dually listed

Indian stocks.
68
Correlation Coefficient
19 Hansda and Ray (2003) found that the high correlation coefficient
between domestic stock exchange (Bombay/National Stock Exchange) and the
foreign stock exchange (Nasdaq/NYSE) remains unaltered irrespective of whether
one considers contemporaneous data or one day lagged data; also with various
combinations of closing or opening prices.
20 Hansda and Ray (2003) found a low correlation for the foreign and
domestic share prices of HDFC Bank and VSNL, considering the price data for the
period from the listing of each stock up to February 2002.
A closer look at the scatter diagram in Graph 1 showed that

the majority of the points on the scatter are to the right of the 45 degree
line. Each scatter point to the right of the 45 degree line indicates that
the equivalent ADR price for that trading day was higher than the
prevailing price of the same stock on the domestic NSE. This throws
light on the existence of premia in the ADR markets over the domestic
prices.
A detailed exposition of the premia levels has been carried out
in the next section.
GRAPH 1
Scatter of ADR Equivalent Prices and NSE Closing Prices
Money
&
Finance
F E B R U A R Y. 2 0 0 7
Each scatter point to

the right of the 45
12000
Infosys
45 Degree Line
degree line indicates
NSE Closing Price
10000
that the equivalent
8000
ADR price for that
6000
trading day was
4000
higher than the
2000
prevailing price of
0
0
2000
4000
6000
8000
ADR Equivalent price
10000
12000
the same stock on

the domestic NSE.
45 Degree Line
VSNL
900
NSE Closing Price
750
600
450
300
150
0
0
150
300
450
600
ADR Equivalent Price
750
900
. . . continued on following page
69
700
Money
Finance
F E B R U A R Y. 2 0 0 7
600
NSE Closing Price
&
45 Degree Line
ICICI Bank
500
400
300
200
100
0
0
100
200
250
300
400
500
600
700
45 Degree Line
MTNL
NSE Closing Price
200
150
100
50
0
0
50
3500
100
150
Wipro Technologies
200
250
45 Degree Line
NSE Closing Price
3000
2500
2000
1500
1000
500
0
0
70
500
1000
1500
2000
2500
3000
3500
2500
Dr Reddy's Labs
45 Degree Line
Money
&
NSE Closing Price
2000
Finance
1500
F E B R U A R Y. 2 0 0 7
1000
500
0
0
500
1000
1000
1500
Satyam Computers
2000
2500
45 Degree Line
NSE Closing Price
800
600
400
200
0
0
200
1000
400
600
HDFC Bank
800
1000
45 Degree Line
NSE Closing Price
800
600
400
200
0
0
200
400
600
800
1000
71
Money
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F E B R U A R Y. 2 0 0 7
Although ADRs are

a derivative of the
underlying equity,
there exists a
significant
difference in the
ADR prices
compared with the
price of underlying
equitythis is
known as the ADR
premium.
72
B. ADR Premia Levels over the Underlying

Domestic Stock Prices
The prices of the same stock in two markets are expected not to
differ widely when there are arbitrage possibilities, whereby investors
would simultaneously purchase and sell equivalent securities in two
different markets in order to profit from discrepancies in their price
relationship. Although ADRs are a derivative of the underlying equity,
there exists a significant difference in the ADR prices compared with
the price of underlying equitythis is known as the ADR premium.
Arbitrage opportunities help to diminish the discrepancies in prices,
reducing the premium levels.
Depository Receipts are expected to trade within transaction
cost bands of the currency-adjusted price of equivalent domestic shares.
Gagnon and Karolyi (2004), in a study of almost 600 pairs of crosslisted shares from 39 countries, found the prices of depository receipts
to be within a 15-20 per cent (+/-) band of the equivalent home-market
share prices. However, there were some glaring exceptions to this
owing to a wide range of institutional/market frictions such as regulatory restrictions, currency controls, foreign ownership limits and
restrictions on convertibility that existed in certain countries. One such
exception was India.
The Indian government had restrictions on the conversion and
re-conversion of ADRstill 2002, India followed the one-way ADR
programmes, where ADRs once issued could be cancelled and converted into the underlying Indian shares (after a delay of 45 days from
the closing date of the issue) but subsequent re-issuance of ADRs was
not permitted and this posed restrictions on arbitrage opportunities. So,
even when identical stocks in the domestic market and ADRs traded at
different prices, the prevailing trading restrictions resulted in high
premia in the ADR market21the higher ADR prices have been explained by higher liquidity in the US stock market and the associated
costs for transactions.
Jithendranathan et al (2000) explained that in India, local
investors are allowed to hold only the securities that are listed on the
Indian stock exchanges while US investors may hold Indian securities
listed on the American stock exchanges as well as purchase other
securities listed in other foreign stock markets. Therefore the valuation
for the same stock was different for a foreign investor and a domestic
investor. With such market segmentation, US investors priced the ADRs
differently from the underlying securities, leading to the price differentials for the same securities. Similar market segmentation models were
tested by Hietala (1989) for the ADRs issued in Finlandhe concluded
that since the foreign and domestic investors were choosing the same
21
As has been seen by Hansda and Ray (2003) and Chakrabarti (2003).
securities from a different choice set,22 this may lead to a different risk
estimate and the price of a security may differ from the adjusted
equivalent price of the depository receipt of the same stock.
Differences in trading hours cause a lead-lag relationship in
information transmission between the ADR and the local markets.
There is a distinct difference in the timings of trade in the two stock
marketsin India trading starts at 10am and ends at 4pm while the
trading session in US spans from IST 8pm to IST 2:30am the following
day. So, trading in the Indian market is over before trading commences
in the US market on the same day, which can give rise to differences in
ADR prices and the Indian prices for the same stock.
In 2002, the Reserve Bank of India issued detailed operating
guidelines for implementing two-way fungibility in Indian ADRs. A
restrictive form of two-way ADR programmes was introduced whereby
ADRs were allowed to be cancelled and reissued, but only up to the
initial offering size. Two-way fungibility was expected to open up
possibilities of arbitrage so that the market forces would trigger a
realignment of prices and minimise the divergent premium levels
prevailing between ADR/GDR prices and the domestic stock prices.
In an attempt to find out whether any such realignment of the
prices has occurred after the two-way-fungibility this study has traced
the ADR premia of the companies in the sample from the date of their
foreign listing. After estimating the equivalent, comparable ADR
prices, as has been already explained, these prices were then compared
with the price of the underlying stock on the National Stock Exchange
(NSE)23 in order to calculate the ADR premium for each day. The daily
premia figures were used to compute the various averages, as have
been detailed in Table 3.
ADRs of Indian companies enjoyed considerable premium over
their underlying stocks, indicating effective market segmentation
between the US and Indian markets. Chakrabarty (2003) noted this
phenomenon for his data set covering the time period March 1999 to
January 2003. Hansda and Ray (2003) also found high premia levels
for their sample spanning March 1999 to February 2002. We have
taken the same sample of companies, but the time span for the present
study has been stretched to cover the time period up to August 2006 in
an effort to explore the effect of two-way fungibility of ADRs since
February 2002 which was expected to bring down premia levelsa
phenomenon that has not been explored yet.
The inter-sectoral average premia levels indicate that the
Information Technology (IT) companies have enjoyed the highest
22 Set A has all domestic securities available to domestic investors; Set B

has all depository receipts of securities in Set A available to foreign investors; Set C
comprises all other global stocks available to foreign investors.
23 ADR prices were downloaded from http://finance.yahoo.com and NSE
prices from www.nseindia.com
Money
&
Finance
F E B R U A R Y. 2 0 0 7
Two-way fungibility
was expected to
open up
possibilities of
arbitrage so that
the market forces
would trigger a
realignment of
prices and minimise
premium levels
prevailing between
ADR/GDR prices
and the domestic
stock prices.
73
TABLE 3
ADR Premia (in %)
Money
&
Finance
F E B R U A R Y. 2 0 0 7
ADR Stock
2001 2002 2003 2004 2005
Wipro
Satyam
Infosys
2.2
15.5
57.4
3.1
9.5
61.4
11.6
23.9
49.7
42.2
44.9
48.5
31.1
21.3
36.3
18.5
10.5
13.5
18.1
20.9
44.5
IT
27.8
2.7
5.4
13.2
7.5
16.0
13.8
14.9
20.6
11.4
11.6
9.3
6.6
11.2
10.9
Finance
11.1
2.7
0.36
2.56
7.7
-0.06
2.7
Others
3.5
ICICI Bank
HDFC Bank
The inter-sectoral
average premia
levels indicate that
MTNL
VSNL
Dr Reddys Labs
Note:
5.66
-0.65
6.7
1.1
0.01
1.5
0.4 21.1 15.5

0.14 0.46 -0.67
0.7
3.2
1.5
2006
Average Sector
(up to Aug)
Average
Premia levels were calculated as the percentage excess of price of the

ADR over the price of the underlying stock in the Indian market, after
adjusting the ADR prices for exchange rate and the ADR ratio.
IT companies have
enjoyed the highest
premia levels (an
average of 28%).
Infosys has been the
clear winner,
reaching its peak of
more than 60%
premium level in
2002.
74
premia levels (an average of 28%). Infosys has been the clear winner,
reaching its peak of more than 60% premium level in 2002.24 Satyam
and Wipro started with low premium levels, and enjoyed a positive
trend up to 2004. After the introduction of two-way fungibility in
February 2002, the premia levels of Wipro and Satyam continued to
rise for another two years, with premia levels going beyond 40% in
2004, which was in contrast to the expectations. The decline in premia
for Wipro and Satyam is evident in 2005 and 2006. The Others
category comprises telecom (MTNL and VSNL) and the healthcare (Dr
Reddys Laboratories) sectors. This category registered the lowest
average premia levels, registering a sectoral average of 3.5% over the
2001-06 period. MTNL showed some spurt in premia in 2004 and
2005; otherwise, the average annual premium of the companies has
been negligible. The finance companies enjoyed modest average
premium of ADR prices over the domestic stock prices during this
period and the ADR premia levels within the financial sector continued
to increase after the introduction of the two-way conversion of ADRs
similar to the IT sector companies. ICICI Bank experienced a decline
their ADR premia from 2004 while the ADR premia of HDFC Bank
started coming down from 2005, much after the introduction of the twoway fungibility.
Two-way fungibility was introduced with the expectation that
the resulting arbitrage opportunity would help to converge the ADR
prices and the domestic prices of the same shares trading in the two
countries. However, despite the two-way fungibility, the conversion and
re-conversion of ADRs into the underlying security involves timethe
time period involved between a US investor buying an ADR on the
24
Average premium level of Infosys had reached more than 100% in 2000.
NYSE and then selling it on the Indian National Stock Exchange would
be approximately 45 days25 from the date of his cancellation of the
ADR. More importantly, the limited form of two-way fungibility
implied that Indian equity cannot be converted into ADR unless ADRs
have been cancelled (that is, headroom is available) and the re-issuance
is limited to the extent of cancellation for that particular stock.
With the Indian ADRs trading at premium levels, foreign
investors holding ADRs do not have any incentive to cancel them and
convert into Indian equities, implying the absence of headroom for the
stocks. On the other hand, when the price of ADR is higher, foreign
investors would want to purchase shares in India and sell them in the
US marketin the absence of headroom, such re-conversion of Indian
equities into ADR is not possible. The resulting absence of arbitrage
opportunity explains the persistence of premia levels in the ADR prices
over the underlying Indian equity prices, even after the introduction of
two-way fungibility.
Money
&
Finance
F E B R U A R Y. 2 0 0 7
With the Indian

ADRs trading at
premium levels,
foreign investors
C. Relation of ADRs with Stock Markets

We then considered the relation, if any, between ADR premia
levels and the prices of the equities on the stock markets where they
were being actively traded. We took the daily premium level of each
dually listed company from the date of its foreign listing up to August
2006 and conducted a simple regression analysis with the daily closing
price of the S&P 500 index (for the US stock exchange) and the S&P
CNX Nifty (for the National Stock Exchange of India). The results
have been presented in Table 4.
TABLE 4
Relation of ADR Premia Levels with S&P 500 Index and S&P CNX Nifty
holding ADRs do
not have any
incentive to cancel
them and convert
into Indian equities,
implying the
absence of
ADR Premia Levels
S&P CNX Nifty

(Indian Stock Exchange)
S&P 500 Index

(US Stock Exchange)
Wipro
Satyam
Infosys
ICICI Bank
HDFC Bank
MTNL
VSNL
Dr Reddys Labs
0.010* (0.0008)
0.001 (0.0005)
-0.020* (0.001)
-0.001* (0.0005)
-0.0003 (0.0003)
0.003* (0.0004)
0.0001 (0.0002)
-0.00055 (0.0003)
0.031* (0.005)
0.014* (0.003)
0.050* (0.005)
0.028* (0.002)
0.010* (0.002)
0.030* (0.002)
0.001 (0.001)
0.006* (0.001)
Average
-0.0017* (0.0003)
0.04* (0.002)
Note:
headroom for the

stocks.
Regressions on daily premia level for each dually listed stock with daily
closing price of S&P 500 index (for US stock exchange) and S&P CNX
Nifty (for NSE, India). The figures represent regression coefficients.
Figures in parentheses denote standard errors. Asterisks denote that the
coefficients are statistically significant at 5% level.
25
According to Jithendranathan et al. (2000).
75
Money
&
Finance
F E B R U A R Y. 2 0 0 7
The relation
between the ADR
returns and
domestic Stock
Exchange returns is
inconclusive. The
The relationship of ADR premia levels with the S&P CNX

Nifty of the Indian stock exchange is very weak and inconclusivethe
coefficients are positive for four stocks (statistically significant for two
out of four); negative for four stocks (statistically significant for two out
of four). On the other hand, the ADR premia levels of each and every
company in our sample show a positive relation with the S&P 500
Index of the US stock exchange and are also statistically significant for
seven out of eight companies (with the exception of VSNL). At the
overall level for all the eight dually listed companies taken together,
the relationship of the ADR premia levels with the S&P 500 Index is
stronger and significant.
Next, we studied the returns on ADRs and their relation with
the returns of the US stock exchange (S&P 500 index returns); the
Indian stock market returns (S&P CNX Nifty returns) and the returns
on the underlying domestic equity shares. Returns are computed by
taking the percentage changes of the closing index levels and closing
stock prices on successive trading days.
TABLE 5
Relation of ADR Returns with Stock Markets and Domestic Stock Price
ADR Returns
S&P CNX
Nifty Returns
(Indian Stock
Exchange)
(1)
Wipro
Satyam
Infosys
ICICI Bank
HDFC Bank
MTNL
VSNL
Dr Reddys Labs
-0.28* (0.06)
0.05 (0.06)
-0.24* (0.08)
0.32* (0.06)
0.32* (0.05)
0.05 (0.06)
0.15* (0.05)
0.07 (0.05)
relation with the

returns on the US
stock exchange is
positive and
significant for all the
companies.
Note:
76
S&P 500
Index Returns
(US Stock
Exchange)
(2)
0.88*
0.99*
0.34*
0.58*
0.45*
0.46*
0.17*
0.45*
(0.06)
(0.06)
(0.10)
(0.07)
(0.06)
(0.07)
(0.06)
(0.06)
Underlying
Domestic
Equity share
Returns
(3)
0.79*
0.63*
0.19*
0.46*
0.29*
0.62*
0.44*
0.66*
(0.02)
(0.03)
(0.03)
(0.03)
(0.03)
(0.03)
(0.02)
(0.03)
Regressions on ADR returns for each dually listed stock with returns of
the Indian stock exchange, US stock exchange and returns on the
underlying domestic equity shares. Returns are computed by taking the
percentage changes of the closing index levels and closing stock prices on
successive trading days.The figures represent regression coefficients.
Figures in parentheses denote standard errors. Asterisks denote that the
coefficients are statistically significant at 5% level.
The relation between the ADR returns and domestic Stock

Exchange returns (column (1)) is, once again, inconclusivethe coefficients are significant for five stocks, of which two are negative and
three are positive. In contrast, the relation of ADRs returns with the
returns on the S&P 500 index of the US stock exchange (column (2)) is
positive and significant for all the companies. As expected, there also
exists a positive and significant relationship between the ADR returns

and the returns of the underlying domestic equity shares for the same
stocks (column (3)).
Further, a comparison between the coefficients of column (2)
and column (3) for each company reveals that the ADR returns exhibit
a stronger relation with the US stock market for the IT companies and
the finance companies, and lower for the companies under the others
category. Interestingly, ADR premium levels have been persistently
high for the IT and finance sector firms, and these stocks have moved
more in tandem with the US stock market as compared with the Indian
counterparts.
Foreign investors who traded in Indian ADRs were, therefore,
found to be concerned more with stock price movements in the USA
rather than the market activities in India. To that end, the rising premia
level up to 2004 was contributed by the booming US economy when the
stock prices continued to enjoy upward movements. The US economy
began to face economic problems with declines in stock market activities due to problems with Iraq-Iran, high energy prices, rising interest
rates and increases in US Federal spending from the war as well as
several natural disasters. All this adversely affected the activities in the
US stock markets from end 2004, which in turn, brought down premia
levels of the Indian ADRs that were being traded on the NASDAQ and
the NYSE.
D. Impact of Listing Decisions on Share Prices
Karolyi (1998) provided a survey of various empirical studies
that have analysed the share prices of domestic stocks during two-three
months around their foreign listing, but the results were inconclusive.
Alexander et al (1988) looked into 34 dual listings from 1969 to 1982
and found only a negligible reaction of the stock prices. Foerster and
Karolyi (1993) found a decline in stock prices during the months after
the listing, but the post-listing decline was accompanied by a definite
increase in trading volumes. Jayaraman (1993) studied the ADRs
market, by considering 95 first time US listings between 1983 and
1988the increase in domestic stock prices was negligible and statistically insignificant. In contrast, Miller (1996) developed a sample of
183 ADR listings and found significantly positive gains in share prices
soon after the foreign listings.
Following a similar methodology, we have tried to find if the
Indian stocks enjoyed any gains in their share prices following their
international listings. The domestic share prices (daily closing price on
NSE) of our sample of eight dually listed companies were considered,
for 100 days prior to and 100 days after the foreign listing date.
Table 6 provides the results from a t-test of difference of means of the
domestic share price pre-ADR listing and post-ADR listing for each
individual stock series.
Money
&
Finance
F E B R U A R Y. 2 0 0 7
ADR premium levels

have been
persistently high for
the IT and finance
sector firms, and
these stocks have
moved more in
tandem with the US
stock market as
compared with the
Indian counterparts.
77
Money
&
Finance
F E B R U A R Y. 2 0 0 7
Four out of the eight

dually listed
companies in our
sample showed an
increase in domestic
TABLE 6
Effect on Average Domestic Stock Prices Before and After ADR Listing
Stock
Prior Mean
Post Mean
% Change
in prices
t-Test for Two

Sample Means
ICICI Bank
Dr Reddys
Infosys
MTNL
108
1295
2976
124
213
1498
3359
139
98.1
15.7
12.8
11.8
15.6*
7.4*
3.7*
10.1*
HDFC Bank
Wipro
Satyam
VSNL
230
2669
301
1234
224
2522
171
531
-2.5
-5.5
-43.1
-56.9
3.5*
2.9*
15.9*
16.6*
Note:
Prior Mean: Average Stock Price on NSE for 100 trading days before
foreign listing
Post Mean: Average Stock Price on NSE for 100 trading days after
foreign listing
t-Test for Two Sample Means: t-statistic indicating whether the mean of
daily domestic stock price before and after ADR listing is significantly
different at 5% level, from the mean of daily domestic stock prices after
ADR listing. Asterisk denotes significance (5% level) of the t-statistic.
share prices
immediately after
their foreign listing.
On the other hand,
the remaining four
showed declines in
their prices
following the issue
of the ADRs
(statistically
significant at 5%
level).
78
Four out of the eight dually listed companies in our sample

showed an increase in domestic share prices immediately after their
foreign listing. The domestic share price of ICICI Bank almost doubled
during the 100days after their ADR issue while Dr Reddys, Infosys and
MTNL enjoyed moderate increases of around 12-15% from their US
listing. On the other hand, the remaining four of the eight companies
showed declines in their prices following the issue of the ADRs (statistically significant at 5% level).
Previous studies have also compared the pre-listing to the postlisting share prices in an effort to find out the possible gains in domestic
stock market prices following the foreign listing. The results have been
inconclusive and the reasons have remained largely unexplored and
unexplained. One might think that the effect on domestic share prices
could well be related to the ongoing activities in the domestic stock
market at the time of the ADR issuethat is, the movements in prices
might depend on the timing of the foreign listing rather than the event
of the listing itself. However, this remains to be seen in the case of the
Indian ADRs.
E. Changes in Trading Volumes
This section studies the liquidity changes that are expected to
accompany a new cross-border listing. Karolyi (1998) concluded that
cross-border listings were found to enhance the liquidity of trading in
stocks in the home market, especially for stocks of companies in
emerging nations which were listing in the United States. Liquidity
effects have been measured in the literature in terms of an increase in
the trading volume or by a reduction in the bid-ask spread. Hargis and

Ramanlal (1998) developed a theoretical model and found that international cross-listing resulted in an increase in volume traded in the
domestic markets. Jayakumar (2002) studied the Chilean stock market
where there was no explicit trend in domestic trading volumes by the
cross-listed firms and in the aftermath of cross-listing while Domowitz
et al (1998) found a fall in trading volumes in the domestic market
following cross-listing for his sample of Mexican foreign-listed companies. Domowitz (1998) and Jayakumar (2002) also studied the orderflow migration in order to find out if the cross-listing resulted in any
transfer of trading activity from the domestic to the foreign stock
markets.26 In line with Domowitz and Jayakumar, we now carry out
the same analysis for the trading volumes of our sample of eight Indian
companies that had undertaken listing on the US stock exchanges. The
daily domestic trading volume around the ADR introduction of each
stock was considered.
Table 7 provides the results from a t-test of difference of means
of pre-ADR listing and post-ADR listing daily domestic trading volume
for each individual stock series. In order to find out the immediate
impact of the foreign listing, 100 trading days in the sample prior to
the ADR listing date and 100 trading days after the ADR listing date
were taken for the difference of means test.
TABLE 7
Average Trading Volumes Before and After ADR Listing (100 trading days)
Stock
Infosys
Dr Reddys
VSNL
Wipro
MTNL
Satyam
ICICI Bank
HDFC Bank
Combined
Excl. Satyam
Prior
Post
Difference t-Test Statistic
58,128
108,227
33,198
448,369
397,177
110,887
141,787
151,952
700,850
809,366
7.27*
2.36*
8.65*
7.91*
4.10*
15,960,780
266,963
103,465
2,172,038
202,218
9,426,792
134,961
87,361
1,448,789
309,075
8.58*
4.87*
1.45
3.09*
5.32*
Money
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F E B R U A R Y. 2 0 0 7
In line with
Domowitz and
Jayakumar, we carry
out the analysis for
the trading volumes
of our sample of
eight Indian
companies that had
undertaken listing
on the US stock
exchanges.
Note: Prior: Average Trading Volume on NSE for 100 trading days before
foreign listing.
Post: Average Trading Volume on NSE for 100 trading days after foreign
listing.
Difference t-Test: t-statistic indicating whether the mean of daily domestic
trading volume before and after ADR listing is significantly different at
5% level, from the mean of daily domestic trading volume after ADR
listing. Asterisk denotes significance (5% level) of the t-statistic.
26 Order Flow migration seeks to study whether there is any transfer of

trading activity, after the cross-listing of a stock, from the local stock market to the
international exchange.
79
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F E B R U A R Y. 2 0 0 7
There has been an

increase in trading
volumes in the
domestic market for
the majority of
stocks, during the
100 trading days
following their
foreign listing.
For five out of the eight stock series in the sample, the average
daily trading volume on the National Stock Exchange was found to be
higher after ADR listing and the difference t-test indicates that the
trading volume increase is statistically significant (at 5% level) for
each of the five stocks. For the remaining three companies, the average
trading volume in the domestic market declined after the foreign
listingthis included the finance sector companies (ICICI Bank, HDFC
Bank) and Satyamand the difference was not significant for HDFC
Bank. When we examined the average combined (total of all the eight
companies) daily domestic trading volumes, the post-ADR volume was
lower than the pre-ADR volumes but the relationship was reversed (and
significant) when we found the combined average of seven companies
excluding Satyam. So, if we exclude the outlier (Satyam) we may
conclude that there has been an increase in trading volumes in the
domestic market for the majority of stocks, during the 100 trading days
following their foreign listing, which confirms that foreign listing of a
domestic stock does help to increase liquidity of the stocks.
We then looked into the order-flow migration, where trading
volumes on the American stock exchanges were considered (NASDAQ
and NYSE, as applicable). Using the same sample stock as in Table 6,
the proportion of total trading taking place in the ADR market was
included in the analysis along with the domestic trading volumes. The
results are provided in Table 8.
It is evident from the results that the trading volume during the
100 trading days following the foreign listing was dominated by the
ADR marketfor six out of the eight companies, the average daily
ADR trading volume exceeded 50% of the total trading that took place
in the foreign and domestic market taken together. The trading followTABLE 8
Order-Flow Migration
Stock
Post Volume
Infosys
Dr Reddys
HDFC Bank
ICICI Bank
VSNL
Wipro
MTNL
Satyam
Note:
80
ADR Volume
% ADR
110,887
141,787
87,361
134,961
151,952
700,850
448,500
450,172
241,689
367,302
303,904
698,040
80
76
74
73
67
50
809,366
9,426,792
129,848
374,956
14
4
Post Volume: Average daily Trading Volume on NSE for 100 trading
days after foreign listing.
ADR Volume: Average daily Trading Volume on US stock exchange for
100 trading days after listing. ADR daily trading volume was adjusted
using ADR ratios to make it comparable to local trading volumes.
% ADR: % of total trading in the ADR market = 100* (ADR/ (ADR +
Post).
ing foreign listing was dominated by the domestic stock market for
MTNL and Satyam.27 Therefore, there was an increase in domestic
trading volumes soon after the cross-listing by the Indian firms. Interestingly, along with the gain in trading volumes in the domestic stock
market, the amount of trading occurring in the ADR market during this
time was even larger, indicating a definite gain for the company in
terms of trading activity following their foreign listing. The summary
of our findings is given in Table 9.
TABLE 9
Summary of Trading Activities in 100 trading days following Foreign Listing
Stock
Increase in Domestic
Trading volume
Dominance of ADR
in total trading
Infosys
Dr Reddys
VSNL
Wipro
MTNL
HDFC Bank
ICICI Bank
Satyam
Money
&
Finance
F E B R U A R Y. 2 0 0 7
Interestingly, along
with the gain in
trading volumes in
the domestic stock
market, the amount
of trading occurring
in the ADR market
For the five companies where the average daily trading volume
on the National Stock Exchange was found to be significantly higher
after ADR listing, in the case of Infosys, Dr Reddys, VSNL and Wipro
the gain in trading volumes in the domestic market was overshadowed
by the enhanced trades in the ADR market during the 100 trading days
following the foreign listing. The finance sector companies (ICICI Bank
and HDFC Bank) showed a clear migration of trading activity where
there was a fall in trading volumes in the domestic market while
volumes in the ADR market comprised more than 70% of their total
trades during the initial 100 days following their foreign listings. For
MTNL, the company gained from increased trading volumes in the
domestic market but trading on the ADR market during the first 100
trading days remained modest. Satyam was the only company that did
not experience any flurry of trading activity following its foreign listing
since trading volumes on the domestic stock exchange witnessed a
significant fall and activity in the ADR market also remained low key.
during this time was

even larger,
indicating a definite
gain for the
company in terms of
trading activity
following foreign
listing.
V. Summary of Findings
Exchange-traded ADRs of Indian shares originated in 1999,
with the listing of Infosys on the US stock market. The Indian
27 Our result is in line with the Chilean experience where Jayakumar
(2002) found that trading was dominated by the ADR market for 12 out of 14
Chilean stock series.
81
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F E B R U A R Y. 2 0 0 7
The decline in
premia became
evident only in
2005, but this
convergence in
prices was not
associated with the
two-way fungibility
facility.
There was a definite

increase in trading
volumes in the
domestic market
following foreign
listing, confirming
gains in liquidity.
82
government continued with widespread reforms of the financial

sector by liberalising the procedures and environment for issue
of depository receipts, which has been reflected in the growing
market for ADRs/GDRs.
The Indian ADRs have been trading at high premia over the
underlying domestic stocks, with Information Technology
companies at the highest premia levels. The premia levels of
VSNL and Dr Reddys Labs have been negligible.
Two-way fungibility was introduced in India in February 2002,
to allow re-conversion of ADRsa foreign investor who held
ADRs could sell the underlying shares in the market and the
company was then allowed to issue fresh ADRs to the extent of
the shares cancelled (known as headroom). The re-conversion
was aimed at minimising the divergent ADR premium levels
over their domestic stocks. However, premia levels continued
to soar in 2002, 2003 and for most companies even in 2004.
This was because the stocks continued to trade at premia levels
in the US market, indicating absence of headroomtherefore,
re-conversion was not possible and arbitrage opportunities
remained restricted even after introduction of two-way
fungibility.
The decline in premia became evident only in 2005, but this
convergence in prices was not associated with the two-way
fungibility facility. Firstly, the ADR premia level showed
positive relation with the S&P 500 Index of the US stock
exchange. Secondly, the returns on ADRs were related positively to returns on the US stock market index while the
relation with the Indian stock exchange remained inconclusive.
We found that premia levels have been persistently high for IT
and Finance sector companies, which had strong positive
relationship between ADR returns and returns on the US stock
exchange. Therefore, the ADR premia moved in line with the
US stock marketforeign investors who traded in ADRs were
concerned with activities in the US rather than the legislative
changes or the stock price movements in India.
There was no conclusive effect of foreign listing on domestic
share prices of the dually listed stocks. But there was a definite
increase in trading volumes in the domestic market during the
100 trading days following their foreign listing, confirming
that foreign listing helped to increase liquidity. Moreover, for
the companies where average daily trading volume on the
National Stock Exchange was found to be significantly higher
after ADR listing, there were further gains in trading volumes
in the ADR market during the 100 trading days following the
foreign listing.
Appendix 1: Types of Depository Receipts

Unsponsored Depository Receipts are issued in response to
market demand, but without a formal agreement with the company.
Unsponsored ADR programmes can be created by multiple depositories
for the same firm and the investors bear a large portion of the depositorys administrative expenses. Today, unsponsored Depository Receipts
are considered obsolete and are rarely established due to lack of control
over the facility and potential hidden costs.
Sponsored Depository Receipts are issued at different levels
available in various trading markets. A sponsored programme is
issued by an exclusive depository selected by the company through a
deposit agreement or a service contract. Sponsored Depository
Receipts offer control over the facility, the flexibility to list on US
or European stock exchange and the ability to raise capital. The
firm, and not the investors, bears the administrative costs of the
depositories.
Sponsored Level I Depository Receipts programme is the
simplest method for companies to access the US and non-US capital
markets, to use existing shares to broaden the shareholder base, without
raising new funds. A Level I programme does not require full Securities
and Exchange Commission (SEC) registration and the company does
not have to report its accounts under US Generally Accepted Accounting Principles (GAAP) or provide full SEC disclosure. A Sponsored
Level I Depository Receipt programme allows companies to enjoy the
benefits of a publicly traded security without changing its current
reporting process.
Sponsored Level II and Sponsored Level III Depository
Receipts are used by companies that wish to list their Depository
Receipts on a US stock exchange (NASDAQ, American or New York),
raise capital or make an acquisition using securities. Level II and Level
III Depository Receipt programmes require SEC registration and
adherence to requirements for US GAAP. Level II Depository Receipts
are exchange-listed securities but do not involve raising new capital.
Level III programmes typically generate the most investor interest
where new capital is raised.
Privately Placed and Offshore (SEC Rule 144A / Regulation S) Depository Receipts are ADRs that are privately placed with
Qualified Institutional Buyers (QIBs) in the Rule 144A market, without
any SEC registration. The Regulation S programme allows raising
capital through placement of Depository Receipts offshore to non-US
investors.
Money
&
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F E B R U A R Y. 2 0 0 7
Appendix 2: Intra-Market vs. Cross-Border Transactions

Suppose an investor who is holding Depository Receipts wishes
to sell them. The investor has to first notify his broker.
The broker can either sell the Depository Receipts in the US
83
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F E B R U A R Y. 2 0 0 7
market through an intra-market transaction where the Depository

Receipts are sold to subsequent US investors by transferring them from
the existing holder (who is now the seller) to the new holder (who is the
buyer). Intra-market trading accounts for approximately 95% of all
Depository Receipt trading.
The investor can also sell the shares back into the home market
through a cross-border transaction. In this case, the US broker surrenders the Depository Receipts to the depository bank, so as to deliver the
shares to a buyer in the home market. The depository bank cancels the
Depository Receipt and instructs the custodian to release the underlying
shares and delivers them to the local broker. The Indian broker pays for
them in equivalent Rupees that are converted into dollars by the US
broker.
Appendix 3: Role of the Depository Bank

The Depository Bank is the American institution that issues the
ADRs in USA.
Domestic shares are first delivered to the local custodian bank
of the depository bank for the initial verification and delivery of the
depository receipts to be issued in the US equity market.
The depository bank holds the securities in custody in the
country of origin and converts all dividends and other payments into
US dollars to certificate holders in the USA. In turn, the US investors
bear all currency risks and pay fees to the depository bank.
The depository bank has responsibilities relating to shareholder
rights (such as payment of dividends and voting at shareholder meetings), which are stated in the depository receipt certificate, and must
also maintain a share register of depository receipt owners. Intramarket trading accounts for almost all the trading in depository
receipts; the most important role of a depository bank is to maintain
sophisticated stock transfer systems and operating capabilities.
Appendix 4: Report of the Committee on Compilation of

Foreign Direct Investment in India, October 2002
84
According to the International Monetary Fund (IMF) definition

contained in the Balance of Payments Manual, Fifth Edition (BPM-5),
Foreign Direct Investment has three components, viz., equity capital,
reinvested earnings and other direct capital.
In an effort to align the Indian FDI reporting system with the
international norms, the Government of India, in May 2002, constituted
a Committee comprising officials from the Department of Industrial
Policy and Promotion (DIPP) and the Government of India (GoI).
The Committee noted that FDI inflow should get reflected in
increase in foreign equity holding in an existing firm. Moreover,
according to the Organisation for Economic Cooperation and Development (OECD) norms, any foreign investment beyond the threshold limit
of 10 per cent should be treated as part of foreign direct investment

inflows, even if it comes through the portfolio route. Since ADRs/GDRs
do not attract 10 per cent ceiling and also permit automatic acquisition
of shares on retirement of GDRs/ ADRs, it was recommended that
depository receipts be treated as Foreign Direct Investment.
Based on the recommendation of the Committee, the Government of India classifies ADRs/GDRs as Foreign Direct Investment and
all laws and procedures relating to FDIs are applicable to ADRs/GDRs
as well.
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Appendix 5: Policy Changes and Amount Raised

by Indian Companies through Depository Receipts
Year
Policy Changes
GDR Listings which raised

more than US$20 million
1992-93
Indian companies allowed

to raise capital abroad.
Grasim, Reliance
GDRs/ADRs
(US$ million)
240
1993-94
ArvindMills, BombayDyeing, GEShippg,

Hindalco, Indal, IndianRayon, IndoGulf,
ITC, Mahindra, Nippon, Reliance(2nd),
SPIC, Sterling, TataElec, TISCO, United
Phos, Videocon, Wockhardt.
1520
1994-95
AshokLeyland, BajajAuto, BallarpurInds,

CenturyText, CESC, Reddys, EIH, EID
Parry, Finolex, GNFC, GV Films, Grasim
(2nd), Hindalco (2nd), Hind Dev, India
Cements, IPCL, JKCorp, JCT, L&T,
NEPC, Oriental, Ranbaxy, Raymond,
SIEL, SIV, Sterlite, Telco, Usha
2082
1995-96
Flex Inds, GujaratAmbuja, Himachal

Futuristic, Indian Hotels, Indo Rama,
Ispat, L&T(2nd), Reliance Energy, SAIL
1996-97
Financial sector companies could issue

GDRs. Track record requirement was
relaxed for financing investments in
infrastructure sectors.
BharatHotels, BSESLtd, Crompton

Greaves, ICICI, Jagatjit, KesoramInd,
Pentamedia, Telco(2nd), VSNL, State
Bank of India
683
1366
1997-98
MTNL
645
1998-99
Infosys (ADR)
270
1999-00
Software companies could issue ADR/

GDRs without reference to RBI up to
US$100 million. End-use restrictions on
issue proceeds were removed.
GAIL, ICICI Bank (ADR), ReliancePetro,

Satyam, Dishnet, Sify, SSI
768
2000-01
Permission of ADR/GDRs under automatic mechanism for specified sectors.

IT companies could issue ADR/GDR
linked stock options to employees.
Aptech, Gesco, Rediff (ADR), Silverline

(ADR), VSNL (ADR), Wipro (ADR)
831
2001-02
Sponsor of ADR/GDR issues against

Dr Reddys (ADR), HDFC Bank (ADR),
shares held by shareholders; overseas
MTNL (ADR), Pentasoft, Satyam (ADR),
business acquisition through ADR/GDR Teamasia
stock swap under automatic route.
477
85
Year
Policy Changes
GDR Listings which raised

more than US$20 million
Money
&
2002-03
Guidelines issues for Two-way

fungibility of GDRs and ADRs.
Finance
2003-04
F E B R U A R Y. 2 0 0 7
GDRs/ADRs
(US$ million)
Aftek, HimachalFuturistic(2nd), Mascon,

Morepen, Patni, Reliance Ports, Reliance
Utilities, Uniphos
600
ACC, BallarpurInds(2nd), CranesSoftware,

CrestComm, Maars, Mawana, Silverline,
Tata Tea, UnitedPhos(2nd)
459
613
2004-05
Rules were simplified to allow sponsoring, listing on overseas exchanges,

retention of proceeds abroad and free
conversions and repatriability.
CenturionBank, Elder, Essar Oil, Essar

Projects, Gammon, IndiaBulls, LIC Housing,
MicroInks, Tata Motors (ADR), Ultratech,
UTI Bank
2005-06
Foreign Currency Convertible Bonds

and Ordinary Shares (Through
Depository Receipt Mechanism)
Scheme, 1993 was amended and
simplified.
AlpsInds, ApolloHosp, Ballarpur Sugar,

BharatForge, Cipla, Emco, EssarShipping,
Eveready, FederalBank, HindCnst, ILFS,
IndiaCements(2 nd), IndiaBulls(2nd), Jindal,
JK Paper, Lloyd, Lyka, McDowell, MicroTech,
Patni (ADR), SREI, Usha(2nd), Videocon (2nd)
2552
Source: Data from Reserve Bank of India Bulletin; Policy Changes from Ministry of Finance website, ADR/GDR
listings from Bank of New York website.
Appendix 6: Details of Policy Changes in India relating

to Depository Receipts
1992-93
Indian companies were allowed to raise capital abroad
through the issue of ordinary shares against Global Depository
Receipts (GDRs)or certificates created outside India and issued to nonresident investors. The Indian company desirous of raising foreign
funds through GDR was required to obtain prior permission of the
Department of Economic Affairs, Ministry of Finance, Government
of India. The company was required to have a consistent track
record of good performance (financial or otherwise) for a minimum
period of three years, on the basis of which an approval would be
issued to the company by the Department of Economic Affairs,
Ministry of Finance. On completion of finalisation of issue structure
in consultation with the Lead Manager to the issue, the issuing
company had to obtain the final approval from the Department of
Economic Affairs.
86
1996-97
Banks, Financial Institutions and Non-Banking Finance Companies registered with the RBI were permitted to access GDR markets.
GDR issue proceeds were permitted to be deployed for investments in
joint ventures and wholly-owned subsidiaries in India by parent companies, in addition to end uses earlier allowed. Use of GDR proceeds for
investments in stock markets and real estate were banned. There was
no limit on the number of Euro issues a company or group may float.
The three-year track record requirement of good performance by the

issuing company was relaxed for financing investments in infrastructure
sectors, such as power generation, telecom, petroleum exploration and
refining, ports, airports and roads.
1999-2000
The Reserve Bank of India granted general permissions to
Indian companies to make an international offering of Rupee
denominated equity shares by way of issue of ADRs/GDRs. The
necessary permissions under FERA-1973 for issue and export of ADRs/
GDRs by the Indian company and acquisition of ADRs/GDRs by
foreign investors were also granted. The track record scrutiny
process and two-stage approval by the Ministry of Finance for ADR/
GDR issues were not required anymore. Issuing companies were
allowed to enter into agreements in respect of or ancillary to the
offer including but not limited to the Subscription Agreements and
Deposit Agreement and to provide the necessary warranties and
indemnities in accordance with international practices. The Ministry
of Finance permitted Indian software companies which were listed on
foreign exchanges and have already floated ADR/GDR issues, to
acquire foreign software companies and issue ADR/GDR without
reference to the Government of India or RBI up to the value limit of
US$100 million. Unlisted companies were permitted to float Euro
issues under certain conditions. All end-use restrictions on GDR/ADR
issue proceeds were removed, except restrictions on investment in
stock markets and real estate. The 90-day validity period for final
approvals of GDR/ADR issues was withdrawn, imparting greater
flexibility to issuing companies regarding the timing of issues. Indian
companies were permitted to issue GDRs/ADRs in the case of Bonus or
Rights issue of shares, or on genuine business reorganisations duly
approved by the High Court. However, the companies were required
to get approval from the Department of Economic Affairs for the issue
of GDRs/ADRs.
Money
&
Finance
F E B R U A R Y. 2 0 0 7
2000-01
Overseas business acquisitions through the ADR/GDR route
were permitted under the automatic/simplified approval mechanism for
Indian companies engaged in (1) Information technology and Entertainment software; (2) Pharmaceuticals; (3) Biotechnology; and (4) Any
other sector as notified by the Government from time to time. Indian
companies, engaged in IT software and IT services, were permitted to
issue ADR/GDR linked stock options to permanent employees (including Indian and overseas working directors) of its subsidiary companies
incorporated in India or outside and engaged in IT software and IT
services.
87
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&
Finance
F E B R U A R Y. 2 0 0 7
2001-02
Operational guidelines for facility for limited two-way fungibility for Indian ADRs/GDRs announced by the Finance Minister in the
Union Budget 2001-02 were under finalisation in consultation with the
RBI and the SEBI. Indian companies were permitted to list on foreign
stock exchanges by sponsoring ADR/GDR issues with overseas depository against shares held by its shareholders subject to prescribed
conditions. Indian companies were allowed to utilise up to 100 per cent
of proceeds of ADRs/GDRs for overseas investments instead of the
existing ceiling of 50 per cent allowed so far. Any Indian company,
irrespective of its line of activity and which has already made an ADR/
GDR issue, was allowed to acquire shares of foreign companies engaged in the same core activity, up to an amount of US$ 100 million,
or an amount equivalent to 10 times its export earnings in the preceding financial year, whichever is higher, by way of swap of fresh issues
of ADRs/ GDRs on back to back basis subject to compliance with
certain conditions. Earlier this facility was available only to Indian
companies in certain sectors.
2002-03
Guidelines for two-way fungibility were finalisedre-conversion of ADR/GDRs was made possible, to the extent of ADR/GDR
which have been converted into equity shares and sold in the local
market. No specific permission of the RBI was required for the reconversion. The RBI guidelines stated that the transactions would 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 would be against delivery and payment received in foreign
exchange through banking channels. For this purpose, all SEBI registered brokers were permitted to act as intermediaries in the two-way
fungibility of ADRs/GDRs.
88
2003-04
Resident shareholders of Indian companies who offer their
shares for conversion to ADRs/GDRs, were allowed to receive the
sale proceeds in foreign currency subject to the condition that the
conversion to such ADRs/GDRs should have the approval of Foreign
Investment Promotion Board. The sale proceeds so received by
residents were permitted to be credited to their Exchange Earners
Foreign Currency/Resident Foreign Currency (Domestic) accounts or
to their Rupee accounts in India at their option. Disinvestment
proceeds under the scheme, receivable by residents, who have since
become non-residents, would also be eligible for credit to their foreign
currency accounts abroad or any of their accounts in India at their
option.
2005-06
In order to bring the ADR/GDR guidelines in alignment with
the guidelines on domestic capital issues framed by SEBI, the Government of India amended the Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depository Receipt Mechanism) Scheme,
1993. Accordingly, both listed and unlisted companies in India were
required to comply with the amended guidelines for issue of ADRs/
GDRs.
Money
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F E B R U A R Y. 2 0 0 7
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A Study of International Listing

by Firms of Indian Origin

* Sudipa Majumdar is with the Monetary Research Project, ICRA

This paper tries to

and in importance to become an instrument used widely by companies

Although it is one of the oldest in Asia, being in operation since 1875.

II. The Background

GDRs can also be denominated in Euros.

BOX 1: Regulatory Procedure for Issuing Depository Receipts

Step 1: Appointment of a financial adviser to manage the process, along with a

nations that have

(B) Why Depository Receipts?

III. Foreign Listing by Indian Companies

Foreign Currency Convertible Bonds and Ordinary Shares (Through

For a detail on classification of Depository Receipts as FDI, see

(telecom) in 1996 and 1997. In 1997-98 and 1998-99, the changing

The concept and procedure of one-way and two-way fungibility has

BOX 2: One-way and Two-way Fungibility

The expansion spree

Unlisted Indian companies were allowed to sponsor an issue of ADRs or

IV. Trading Characteristics of Dually Listed Companies

Annual Report, Reserve Bank of India, 2005-06.

The focus of this study is to observe the price trend of each

18 ADR prices were downloaded from http://finance.yahoo.com and NSE

The scatter of the

in this sample. The

of the dually listed

A closer look at the scatter diagram in Graph 1 showed that

Each scatter point to

degree line indicates

NSE Closing Price

that the equivalent

ADR price for that

trading day was

higher than the

the same stock on

NSE Closing Price

. . . continued on following page

NSE Closing Price

NSE Closing Price

. . . continued on following page

NSE Closing Price

NSE Closing Price

NSE Closing Price

Although ADRs are

B. ADR Premia Levels over the Underlying

22 Set A has all domestic securities available to domestic investors; Set B

2001 2002 2003 2004 2005

0.4 21.1 15.5

Premia levels were calculated as the percentage excess of price of the

With the Indian

C. Relation of ADRs with Stock Markets

ADR Premia Levels

S&P CNX Nifty

S&P 500 Index

headroom for the

According to Jithendranathan et al. (2000).

The relationship of ADR premia levels with the S&P CNX

relation with the

The relation between the ADR returns and domestic Stock

exists a positive and significant relationship between the ADR returns

ADR premium levels