ECB

ECBs include bank loans, suppliers' and

buyers' credits, fixed and floating rate bonds
(without convertibility) and borrowings from
private sector windows of multilateral
Financial Institutions such as International
Finance Corporation. Euro-issues include
Euro-convertible bonds and GDRs.

The important aspect of ECB policy is to

provide flexibility in borrowings by Indian
corporates, at the same time maintaining
prudent limits for total external borrowings.
Guiding principles for ECB Policy are to keep
maturities long, costs low, and encourage
infrastructure and export sector financing
which are crucial for overall growth of the
economy .

The ECB policy focuses on three aspects:

• Eligibility criteria for accessing external
markets.
• The total volume of borrowings to be
raised and their maturity structure.
• End use of the funds raised.
ADR/GDR
• An American Depositary Receipt (or ADR)
represents ownership in the shares of a foreign
company trading on US financial markets. The
stock of many non-US companies trades on US
exchanges through the use of ADRs. ADRs
enable US investors to buy shares in foreign
companies without undertaking cross-border
transactions. ADRs carry prices in US dollars,
pay dividends in US dollars, and can be traded
like the shares of US-based companies.
Contd…
• Each ADR is issued by a US depositary bank and
can represent a fraction of a share, a single share,
or multiple shares of foreign stock. An owner of
an ADR has the right to obtain the foreign stock it
represents, but US investors usually find it more
convenient simply to own the ADR. The price of
an ADR is often close to the price of the foreign
stock in its home market, adjusted for the ratio of
ADRs to foreign company shares
 Types of ADR
• When a company establishes an American
Depositary Receipt program, it must decide
what exactly it wants out of the program and
how much they are willing to commit. For this
reason, there are different types of programs
that a company can choose.
 Un-sponsored ADRs
– Unsponsored shares are ADRs that trade on the over-the-counter
(OTC) market. These shares have no regulatory reporting
requirements and are issued in accordance with market demand.
The foreign company has no formal agreement with a custodian
bank and shares are often issued by more than one depositary.
Each depositary handles only the shares it has issued.
– Due to the hassle of unsponsored shares and hidden fees, they
are rarely issued today. However, there are still some companies
with outstanding unsponsored programs. In addition, there are
companies that set up a sponsored program and require
unsponsored shareholders to turn in their shares for the new
sponsored. Often, unsponsored will be exchanged for Level I
depositary receipts.
Level I
– Level 1 depositary receipts are the lowest sponsored
shares that can be issued. When a company issues
sponsored shares, it has one designated depositary
acting as its transfer agent.
– A majority of American depositary receipt programs
currently trading are issued through a Level 1
program. This is the most convenient way for a
foreign company to have its shares trade in the United
States.
– Level 1 shares can only be traded on the OTC market and the company has
minimal reporting requirements with the
U.S. Securities and Exchange Commission (SEC). The company is not required to
issue quarterly or annual reports. It may still do so, but at its own discretion. If a
company chooses to issue reports, it is not required to follow US generally
accepted accounting principles (GAAP) standards and the report may show money
denominations in foreign currency.
– Companies with shares trading under a Level 1 program may decide to upgrade
their share to a Level 2 or Level 3 program for better exposure in the U.S.
markets.
 Level II (listed)
– Level 2 depositary receipt programs are more complicated for a
foreign company. When a foreign company wants to set up a Level
2 program, it must file a registration statement with the SEC and is
under SEC regulation. In addition, the company is required to file a
Form 20-F annually. Form 20-F is the basic equivalent of an
annual report (Form 10-K) for a U.S. company. In their filings, the
company is required to follow GAAP standards.
– The advantage that the company has by upgrading their program to
Level 2 is that the shares can be listed on a U.S. stock exchange.
These exchanges include the New York Stock Exchange (NYSE),
NASDAQ, and the American Stock Exchange (AMEX).
– While listed on these exchanges, the company must meet the
exchange’s listing requirements. If it fails to do so, it will be
delisted and forced to downgrade its ADR program
 Level III (offering)
– A Level 3 depositary receipt program is the highest level a foreign
company can have. Because of this distinction, the company is required
to adhere to stricter rules that are similar to those followed by U.S.
companies.
– Setting up a Level 3 program means that the foreign company is not only
taking some of its shares from its home market and depositing them to be
traded in the U.S.; it is actually issuing shares to raise capital. In
accordance with this offering, the company is required to file a Form F-1,
which is the format for an Offering Prospectus for the shares. They also
must file a Form 20-F annually and must adhere to GAAP standards. In
addition, any material information given to shareholders in the home
market, must be filed with the SEC through Form 8K.
– Foreign companies with Level 3 programs will often issue materials that
are more informative and are more accommodating to their U.S.
shareholders because they rely on them for capital. Overall, foreign
companies with a Level 3 program set up are the easiest on which to find
information.
Restricted programs

Foreign companies that want their stock to be limited to being traded by only certain
individuals may set up a restricted program. There are two SEC rules that allow this type of
issuance of shares in the U.S.: Rule 144-A and Regulation S. ADR programs operating
under one of these 2 rules make up approximately 30% of all issued ADRs.
144-A
Some foreign companies will set up an ADR program under SEC Rule 144(a). This
provision makes the issuance of shares a private placement. Shares of companies registered
under Rule 144-A are restricted stock and may only be issued to or traded by Qualified
Institutional Buyers (QIBs). No regular shareholders will have anything to do with these
shares and most are held exclusively through the Depository Trust & Clearing Corporation,
so the public often has very little information on these companies. 144-A shares may be
issued along side of a Level 1 program
Regulation S
The other way to restrict the trading of depositary shares is to issue them under the terms of
SEC Regulation S. This regulation means that the shares are not and will not be registered
with any United States securities regulation authority.
Regulation S shares cannot be held or traded by any “U.S. Person” as defined by SEC
Regulation S rules. The shares are registered and issued to offshore, non-US residents.
Regulation S shares can be merged into a Level 1 program after the restriction period has
expired
 Advantages
The advantages of ADRs are twofold.

• For individuals, ADRs are an easy and cost-effective way

to buy shares in a foreign company. They save money by
reducing administration costs and avoiding foreign taxes
on each transaction.
• Foreign entities like ADRs because they get more U.S.
exposure, allowing them to tap into the wealthy North
American equities markets.
 Pricing OF ADR

Suppose a recent boom in the popularity of Bloody Mary drinks has increased the
prospects for the vodka industry. Russian Vodka Inc. wants to list shares on the
NYSE to gain exposure to the U.S. market and to tap into the growing demand for
vodka.

Russian Vodka already trades on the Russian Stock Exchange at 127 Russian roubles,
which, at this time, is equivalent to US$4.58. Let's say that a U.S. bank purchases 30
million shares from Russian Vodka Inc. and issues them in the U.S. at a ratio of 10:1.
This means each ADR share you purchase is worth 10 shares on the Russian Stock
Exchange. A quick calculation tells us that the new ADR should have an issue price of
around US$45.80 each (10 times $4.58). 

Once an ADR is priced and sold on the market, its price is determined by supply and
demand, just like an ordinary stock. However, if the U.S. price varies too far from the
Russian price after taking the currency exchange rate and the ratio of ADRs to home
country shares into account, an arbitrage opportunity may arise. ADRs tend to follow
the general trend of the home country shares, but this is not always the case.
ADRs present many other unique risks to investors; we'll examine these in the
following section.
 Risk Involved in ADR

• Political Risk - Ask yourself if you think the government in the home
country of the ADR is stable? For example, you might be wary of
Russian Vodka Inc. because of the characteristic instability of the
Russian government.

• Exchange Rate Risk - Is the currency of the home country stable?

Remember the ADR shares track the shares in the home country. If a
country's currency is devalued, it will trickle down to your ADR. This
can result in a big loss, even if the company had been performing well.

• Inflationary Risk - This is an extension of the exchange rate risk.

Inflation is the rate at which the general level of prices for goods and
services is rising and, subsequently, purchasing power is falling.
Inflation can be a big blow to business because the currency of a
country with high inflation becomes less and less valuable each day.
 Conclusion
• ADR is an acronym for American depositary receipt.
• ADRs trade just like stocks but represent shares of a foreign company
trading on a foreign stock exchange.
• ADR shares float on supply and demand, just like a regular stock.
• There are three types of ADRs - Level 1, Level 2 and Level 3. Levels 1
and 2 are listings in the U.S., while Level 3 ADRs are public offerings to
investors.
• Remember that there are other risks associated with buying ADRs,
including inflationary risk, political risk and exchange rate risk.
Thank you