ADR & GDR

Presented to Prof. Paradkar

 Group members
Amrita Rangani 129

Ami Shah 141

Khyati Shah 146

Kavita Turkar 180

Deepal Upadhyay 181

Monica Uttarkar 182

Hema Vaswani 187

Shweta Venugopal 189

 Flow of Presentation
 Means of raising foreign funds

 Introduction to Depository Receipts

 Current market size for DR

 Concept of ADR

 Market watch for ADR

 Concept of GDR

 Market watch for GDR

 Basic concepts associated with ADR/GDR

 Parties involved in issuing of ADR/GDR

 Continued
 Process of ADR/ GDR issuance
 Benefits/ Disadvantage of ADR/GDR
 Types and levels of ADR
 Legal issues in issue of DR
 Indian regulations for ADR/GDR issue
 Concept of Fungibility and Headroom
 Arbitrage in ADR and Arbitrage strategy
 Indian ADR/GDR
 Case study on Infosys ADR issue
 Future trend in DRs
 Sources Of Foreign Funds

FOREIGN
INVESTMENT

DIRECT PORTFOLIO
INVESTMENT INVESTMENT

Automatic Off shore

FIPB NRI FII ADR/GDR
Route funds
 Introduction

 Concept of DR

 Various kinds of DR

 Benefits of DR to :
 Depositors

 Investors

 Cross-border transactions

 Mergers and Acquisitions

 Privatization
 Current market size
 The total value of investment in American and global depositary
receipts (DRs) increased more than 25% year on-year and
exceeded $1.1 trillion at the end of the first quarter 2006, an all-
time high.
 New Sponsored DRs: During the first half of 2006, companies from
21 countries established 74 new DR programs, a 25% increase
from 2005’s mid-year statistics.
 A record 1,943 sponsored DR programs from 75 countries were
available to investors at midyear 2006, a 4% increase from mid-
year 2005 figures
 Continued
Total Sponsered DR (country wise)
220

150
INDIA
UK
AUSTRALIA
119
TAIWAN
HONGKONG
1040
111 RUSSIA
BRAZIL
OTHERS
107

101
95
 Continued
DR Stock Exchange Listings
( as on Sep 2006)
4

LUXEMBOURG
LONDON
3 23 NASDAQ
NYSE
OTHER

9
American Depository Receipts- ADR

 ADR History

 Meaning

 ADR Ratio

 Type of companies issuing ADR

 Is there any difference between ADR and ADS?

 Market size: ADR

As of 05:44:00 Oct 01, 2006

Today Total

Share Volume (000's): 176656

Value of Trading (Million of $US) 4740

Issues Up: 153

Issues Down: 250

Issues Unchanged: 55

Source : www.adr.com
Bank of New York Asia ADR Index
 Global Depository Receipts

 GDR Basics

 Features of GDR

 Where do GDRs trade or are listed

Market Watch - Global Depository Receipts - GDR
Over a Fortnight
 Basic concepts associated with
ADR/GDR
 OTC

 Pink sheet

 DTC

 Euroclear/CEDEL bridge

 CUSIP ID

 SEDOL no

 Ticker
 Parties involved

BROKERS INVESMENT
BANKERS

DEPOSITORY
ISSUER LAWYERS

CUSTODIAN
ACCOUNTANT
 Role of Issuer
 Determine financial objectives
 Appoint depositary, lawyers, investment bank, investor
relations firm
 Determine program type
 Obtain approval from Board of Directors, shareholders and
regulators as needed
 Provide financial information to accountants
 Develop investor relations plan
 Role of Depositary
 Advise on structure
 Appoint custodian
 Assist with compliance with ADR registration requirements
 Coordinate with lawyers, accountants and investment bankers to
ensure all program implementation steps are completed
 Prepare and issue certificates
 Enlist market makers
 Fax announcement of program establishment to brokers and traders
 Role Of Brokers

 Submit required forms to become a market maker in a

security, as needed (Level-One ADRs)
 Make securities available to investor

 Execute and settle trades

 Role of Lawyers

 Advise on type of DR structure

 Draft and negotiate Deposit Agreement

 File appropriate registration statements or establish

exemptions with SEC
 As applicable:

 File registration statements to list on US exchanges (Levels

II and III)
 Draft offering circular/prospectus
 Role of Custodian

 Receive underlying shares

 Confirm deposit of underlying shares

 Hold shares in custody for the account of depositary in the

home market
 Communicate with depositary on corporate actions and
related issues
 Transmit dividend payments
 Role of Investment Bankers

 Advise on type of DR structure

 Obtain CUSIP number

 Obtain DTC, Euroclear, Cedel, and PORTAL eligibility as

needed
 Conduct roadshow

 Line up market makers

 Price and launch securities

 Role of Accountants

 Prepare financial statements in accordance with (or

reconciled to) U.S. Generally Accepted Accounting Principles
(GAAP) (or other acceptable accounting principles) for
Exchange Act registered securities (as applicable)
 Process of ADR/GDR issue

 Investor’s decision

 Purchase of underlying ordinary shares

 Request for the delivery

 Conversion of currency

 Issuance and delivery

 Tradable on receipt
 Process of issue

Investor
Local Broker

Broker
Local Stock Market

Clear Stream
Local Custodian

Depository
 Benefits of DR

1. To the issuer
 be able to access capital outside

 Build company visibility

 Broaden and diversify share holders base

 Enlarge the market for the company

 Continued
2. To the investors
 Facilitating diversification

 Eliminating cross boarder custody

 Easy comparison

Disadvantages of cross listing

 More risks

 Language barriers
 Re issuance of depository receipts

 Amendments by ministry Of Finance

 Distinct and separate transaction

 Process of re-conversion
PROCESS OF RE ISSUANCE
Investor

Broker

Depository

Local Custodian

Local Broker
 Types of ADRs
Sponsored ADR Unsponsored ADR

Issued with the cooperation of the Issued by - broker/dealer or

company whose stock will underlie depositary bank without the
the ADR. involvement of company whose stock
underlies the ADR.

Comply with regulatory reporting. No Regulatory Reporting.

Listing on international Stock Trade on OTC market.

Exchanges allowed.
 Levels of Sponsored ADRs

LEVELS

Level I Level II Level III Others

Rule 144A GDR

 Continued
Level I Level II Level III
Description Unlisted program in Listed, more active Issuer floats a public
the US. trading, and greater offering of ADRs in
liquidity the US to raise capital

Trading Over-the-counter One of the U.S. One of the U.S.

(OTC) market securities exchanges securities exchanges
or NASDAQ or NASDAQ

Regulations & Minimal SEC Registration, Registration, file

Disclosures registration, reconciled US GAAP prospectus, reconciled
exemption from the statements, timely US GAAP statements,
SEC's traditional submission of Annual timely submission of
reporting Reports Annual Reports
requirements
 Levels (contd…)
 Rule 144A ADRs
Description: Private placement to Qualified Institutional Buyers.
Trading: U.S. private placement market
SEC Registration: None, Exempt from US Reporting Requirements
Advantages
 Cost comparatively much less.
 The time to complete a US equity private placement is
reduced
 Offering can be made with any class of shares
 Levels of ADRs (contd.)
 Global Depositary Receipts (GDRs)
Description : Global offering of securities outside issuer's home
market
Trading : Non U.S. exchanges
SEC Registration : Under SEC Regulation S, securities offered
outside the U.S. not subject registration requirements.
Advantages
 Allow issuers to raise capital in two or more markets
simultaneously, thus broadening their shareholder base.
 International Regulations
1. Listing Requirements
2. SEC Reporting
3. Securities Regulations
Two key U.S. securities laws with which DR issuers must
comply are:
 The Securities Act of 1933, as amended (the “Securities
Act”)
 The Securities Exchange Act of 1934, as amended (the
“Exchange Act”)
 Indian Regulations for ADR/GDR Issue
 No prior approval from RBI required.
 After issue, the company has to file a return in the proforma
given in Annexure `C' and ‘D’ for RBI Notification
 No end-use restrictions on issue proceeds, except for an
express ban on investment in real estate and stock markets.
 Two way fungibility in ADR/GDR issues of Indian
companies has been introduced subject to sectoral caps
wherever applicable.
 One Way Fungibility

 Conversion of depository receipts into local shares

 The ADRs/GDRs converted into domestic shares are

redeemed by the depository.
 A fresh issue of ADRs/GDRs could reinstate that loss of
liquidity.
 Price volatility

 Liquidity problem
 Two Way Fungibility

 Conversion of depository receipts into local shares and vice

versa.
 It implies that an investor holding ADRs/GDRs can cancel
them with the depository and sell the underlying shares in
the market.
 India follows ‘Limited Two Way Fungibility’

 Re-issue is permitted to the extent of ADRs/GDRs that

have been redeemed.
 Continued…

 Forward fungibility

 Reverse fungibility

 No specific permission of RBI is required for re-conversion

 SEBI registered brokers will be able to act as

intermediaries in the two-way fungibility of ADRs/GDRs.
 Custodians monitor the re-issuance of ADR/GDRs
 Benefits of Two way fungibility

 Improvement in liquidity

 Reduction of arbitrage
 Headroom
 Availability of shares for re-conversion
 It is required in an ADR issue to allow arbitrage to
happen.
 Headroom = No. of ADR/GDRs originally issued – No. of
GDRs outstanding and further adjusted for ADRs/GDRs
redeemed into underlying shares and registered in the
name of the non-resident investors.
 Number of domestic shares of an issuer, which are
available for re-conversion into ADRs/GDRs.
 Concept of Arbitrage
 “Simultaneous purchase and sale of equivalent securities in
two different markets in order to profit from discrepancies
in their price relationship”
 Differential Pricing of ADR/GDR

 Transaction cost

 Exchange rate risk

 Time lag gap

 Market sentiments
 Arbitrage Strategy

1. Buy DR

2. Sell local stock in India in cash market or futures market

3. Convert shares from DR to local

4. Deliver shares to stock exchange in India

5. Deposit proceeds in Indian bank account

6. Repatriate funds

7. Repeat process
 Arbitrage contd…
 If abroad, ADR/GDR is trading at a discount, one can go long in
ADR/GDR and simultaneously short future in domestic market, at
higher prices. It will then require to convert the ADR/GDR into
local shares and square off the future position in the local market.

 In the case of underlying share trading at premium in the

international market, one can borrow and go short in the
international market, while simultaneously going long in the local
market. It will than require to convert local share into GDR/ADR
and canceling the borrowed position.
 Indian ADR/GDR

 Trading at premium

 Limited two way fungibility

 Low liquidity
 Indian ADR at premium

Reasons
 Currency risk

 Investors perception

 Absence of sufficient headroom

Trends in Indian ADR
CASE STUDY
 Details of DR issue
 Offer Price of DR: USD 49/DR (USD 98/domestic share)
 Offer Date of DR: July 30, 2003
 Number of DRs sold: 6 million (equal to 3 million domestic shares)
 Issue Size: USD 294 million
 Issue cost: USD 11.7 million (about 4% of Issue Size)
 Net Proceeds to tendering domestic shareholder: USD
94.1/domestic share (Rs. 4347)
 Prevailing price in the domestic market: Rs. 3570/domestic share
 Premium obtained by selling domestic shareholders: 22%
 ADR ratio : 1:1
 Details (contd)
Global Book Runners
Citigroup
Deutsche Bank Securities
Goldman Sachs (Asia) L.L.C.
UBS Investment Bank
Co-managers
ABN AMRO
Bank of America Securities LLC
Nomura International
 Process of Issue

 File offer documents with SEC

 Get comments from the SEC, if any and complete the

Registration Statement filing and process
 Create an escrow mechanism for shareholders to deposit their
shares in India
 Send the letter of invitation to all the shareholders in India

 Fix a specified date to identify eligibility of shareholders who

can participate in this secondary offering
 Process (contd)

 Road show to market the ADRs

 Price the ADRs

 Eligibility is pro-rata to the holdings of the shareholders

 Excess shares offered in the escrow account will be returned

to the shareholders
 The proceeds are repatriated to India and will be distributed
to the shareholders, net of issue expenses
Schedule of Issue
 Recent development in DR

 American Depositary Debentures (ADDs)

 American Depositary Notes (ADNs)

 Exchangeable Bonds or Notes

 American Depositary Warrants (ADWs)

 Embedded Restricted Securities (ERS)

 N Shares

 Global Registered Shares (GRSs)

Thank You