Prof.

Amber Tiwari

Click to edit Master subtitle style American Depository Receipt(ADR)

Types of ADRs Benefits of ADRs The ramification of Indian ADRs Global Depository Receipts Benefits and uses of a GDR

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Foreign Equity

If the equity issue is made in a particular domestic market (in the domestic currency of that market), it is known as a Foreign Equity Issue. For example, an Indian company accessing exclusively the US market through an equity issue would be called a foreign equity issue. The instrument available for the above case is called American Depository

Receipts(ADR). If a non-European country raises funds exclusively from European countries

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Euro Equity
If a company raises funds using equity through instruments like Global Depository Receipts (GDRs) or superstock equity in more than one foreign market except the domestic market of the issuing company and denominated in a currency other than that of the issuers home country, it is known as Euro Equity Issue or Global Equity Issue.

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Depository Receipt (DR)

A Depository Receipt (DR) is a negotiable certificate that usually represents a companys publicly traded equity or debt. Depository receipts are created when a broker purchases the company s shares on the home stock market and delivers those to the Depositorys local custodian bank, which then instructs the depository bank, to issue Depository Receipts. Depository receipts are quoted and traded in the currency of the country in which they trade, and-are governed by the trading and settlement procedures of the market. The ease of trading and settling DRs makes them an
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Americ an Glob al

DRs
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The most Depository Depository Depository Depository DRs. From there is no DRs.

common DRs are the American Receipts (ADRs) and the Global Receipts (GDRs). International Receipts (IDRs) and the European Receipts (EDRs) are rarer forms of a legal and settlement standpoint, difference between various types of

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A company may issue DRs for a number of reasons:

To To

raise capital in foreign markets.

increase consumer interest in their products by strengthening name recognition in foreign markets. potentially increase the liquidity of their shares by broadening shareholder base (DRs facilitate cross border trading). gain visibility through financial market presence which can generate support for and interest in potential mergers and acquisitions.
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To

To

American Depository Receipt (ADR)

An ADR is a dollar denominated negotiable certificate that represents a non-US companys publicly traded equity. It falls within the regulatory framework of the USA and requires registration of the ADRs and the underlying shares with the Securities Exchange Commission (SEC). In 1990, changes in Rule 144A allowed companies to raise capital without having to register with SEC.) Non-US companies have a choice of five types of AD R facilities:
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The main hurdle in raising money in the US market is that most of the Indian companies find it difficult to meet the US GAAP. An ADR will require complete recasting of the accounts and corporates will have to disclose far more information than they are used to. Also, an ADR would mean parting with the voting rights to individual investors whereas in the case of GDRs, the voting rights rest with the depository. Another point that has to be taken into account is that under the US law, the directors of the company are personally liable to the shareholders. In comparison to G D Rs,
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Types of American Depository Receipts

There

are 5 principal types of ADR rogrammes. The type of ADR programme employed depends on the requirements of the issuer. It can be broadly classified as under:

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Issuer Existing Shares Only Non-Capital Raising Transactions Selling New Shares Capital Raising Transactions

Level I ADR
Level I GDR Unlisted

Over-the-Counter (OTC) Traded

Level III ADR

U.S. Listed Level III GDR Internationally Listed

Level II ADR
U.S. Listed Level II GDR Internationally Listed

Existing shares or new shares can be used

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 Unsponsored

ADR Programme:

initiated by a third party, not the issuing firm.

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 Sponsored

categorized referents:

ADR Programmes: by different levels

are further of disclosure

a. ADR Programme Level is exempt from full compliance with the SECs reporting requirements and cannot be listed on the national exchanges. b. ADR Programme Level II - should be in full compliance with the SECs registration disclosure and reporting requirements which allow ADRs to be listed
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Rule 144(A) ADRs: restricted ADRs are not required to comply with the full SECs registration and reporting requirements and are used for private placement to qualified institutional buyers. The trading of these securities is restricted to NASDs PORTAL (Private Offerings, Resale and Trading through Automated Linkages) System.

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Unsponsored and Sponsored Adr Facilities

ADR facilities may be established as either unsponsored or sponsored. While ADRs issued under these two types of facilities are in some respects similar (for Example, each ADR represents a fixed number of securities on deposit with a depository), there are distinctions between them relating to the rights and obligations of ADR holders and the practices of market participants.

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Unsponsored Facilities
Unsponsored ADR facilities generally are created in response to a combination of investor, broker-dealer and depository interest. Most often, a depository is the principal initiator of a facility because it perceives US investor interest in a particular foreign security and recognizes the potential income that may be derived from a facility. In other cases, one or more brokers familiar with US investor interest and US trading activity in a foreign issuers securities may request that a depository create a facility in order to facilitate trading.
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Features
A depository may establish an unsponsored facility without participation by (or even necessarily the acquiescence of) the issuer of the deposited securities, although typically the depository requests a letter of no objection from such issuer prior to the establishment of the facility. If the issuer is neither a reporting issuer4/17/12 the Exchange under

Once the registration statement becomes effective, the depository begins to accept deposits of securities of the foreign issuer and to issue ADRs against such deposits. Deposited securities are usually held by a custodian appointed by the depository (often a bank) in the country of incorporation of the foreign issuer.

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Holders of unsponsored ADRs generally bear all the costs of such facilities. The depository usually charges fees upon The deposit and withdrawal of deposited securities, the conversion of dividends into US dollars, the disposition of non-cash distributions, and the performance of other services.
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Sponsored Facilities
A sponsored ADR facility is established jointly by an issuer and a depository. Sponsored ADR facilities are createdin generally the same manner as unsponsored facilities, except that the issuer of the deposited securities enters into a deposit agreement with the depository and signs the registration statement. The deposit agreement sets out the rights and responsibilities of the issuer, the depository and the ADR holders. Like unsponsored ADR facilities, sponsored ADR facilities usually involve the use of a foreign custodian to hold the deposited Securities.
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Features
With sponsored facilities, the issuer of the deposited securities generally will bear some of the costs relating to. The facility (such as dividend payment, fees of the depository), although ADR holders continue to bear certain other costs (such as deposit and withdrawal fees). Under the terms of most sponsored arrangements, depositaries agree to distribute notices of shareholder meetings and voting instructions, thereby ensuring that ADR holders
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American Depository Receipts Unsponsored Programmes

An unsponsored ADR programme is not initiated or controlled by the issuer but by a bank in response to US investor demand. A broker acts as market maker for the issue and works in conjunction with a US bank which, acting as the depository, will issue the ADRs. The depository and the issuer together submit an application to the Securities and Exchange Commission (SEC) seeking exemption from the full reporting requirements of the Securities Exchange Act of 1934. Upon receipt of SEC
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As unsponsored ADR programmes are exempt from full compliance with the requirements,. they can SECs reporting

only he traded on the over-the-counter (OTC) market. The SECs only requirement is that material public information published by the issuer in its home country be supplied to the SE~ and made available to4/17/12 US investors.

American Depository Receipts Sponsored Programmes

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Programme Level I
A Level I sponsored AD R programme is the easiest and least expensive means for a company to provide for issuance of its shares in ADR form in the us. A Level I programme is initiated by the issuer and involves the filing of registration statement. It allows for exemption from full SEC reporting requirements.
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Programme Level II
A sponsored Level II ADR must comply with the SECs full registration and reporting requirements. In addition to filing Form F-6 registration statement, the issuer is also required to comply with the SECs other disclosure rules, including submission of its annual report which must be prepared in accordance with US GMP. Registration allows the issuer to list its ADRs on one of the three major national stock exchanges. Level II sponsored programmes are initiated by
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Programme Level III

Level III sponsored ADRs are similar to Level II ADRs in that the issuer initiates the programme, deals with one depository bank, lists on on~ of the major US exchanges, and files Form F-6 and 20-F registration statements with the SEC. The major difference is that a Level III programme allows the issuer to raise capital through a public 4/17/12

Rule 144a American Depository Receipts

Rule 144A, or Restricted AD Rs are depository receipts which are placed and traded in accordance with Rule 144A, which was introduced by the SEC in April 1990 in part to stimulate capital raising in the US by non-US issuers. Some of the former Rule 144 restrictions governing resale of privately placed securities (or restricted securities) have been lifted under Rule 144A, provided the sale is made to Qualified Institutional Buyers (QIBs).

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A QIB is currently defined as an institution, which owns and invests on a discretionary basis at least US$ 100 million (or, in the case of registered broker-dealers, US$ 10 million) in securities of an unaffiliated entity. At present, there are in excess of 4000 QIBs but the SEC may decide to broaden the definition of a QIB to allow a larger number to participate in the Rule 144A market. Non-US companies now have easy access to the US equity private placement market and may thus raise capital through the issue of restricted ADRs without conforming to the full SEC registration and
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Example

Say a gas company in Russia has fulfilled the requirements for DR listing and now wants to list its publicly-traded shares on the NYSE in the form of an ADR. the gas company's shares are traded freely on the exchange, a U.S. broker, through an international office or a local brokerage house in Russia, would purchase the domestic shares from the Russian market and then have them delivered to the local (Russian) custodian bank of the depository bank. depository bank is the American institution that issues the ADRs in America. In this example, the depository bank is the Bank of New York. the Bank of New York's local custodian bank in Russia receives the shares, this 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.
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Before

The

Once

Example (contd.)
The

Bank of New York then delivers the ADRs to the broker who initially purchased them. on a determined ADR ratio, each ADR may be issued as representing one or more of the Russian local shares, and the price of each ADR would be issued in U.S. dollars converted from the equivalent Russian price of the shares being held by the depository bank. ADRs now represent the local Russian shares held by the depository, and can now be freely traded equity on the NYSE. the process whereby the new ADR of the Russian gas company is issued, the ADR can be traded freely among investors and transferred from the buyer to the seller on the NYSE, through a procedure known as intramarket trading. ADR transactions of the Russian gas company will now take place in U.S. dollars and are settled like any other U.S. transaction on the NYSE. ADR investor holds privileges like those granted to shareholders of ordinary shares, such as voting rights 4/17/12 and cash dividends. The rights of the ADR holder are

Based

The

After

All

The

Pricing and Cross-Trading

When any DR is traded, the broker will aim to find the best price of the share in question. He or she will therefore compare the U.S. dollar price of the ADR with the U.S. dollar equivalent price of the local share on the domestic market. If the ADR of the Russian gas company is trading at US$12 per share and the share trading on the Russian market is trading at $11 per share (converted from roubles to dollars), a broker would aim to buy more local shares from Russia and issue ADRs on the U.S. market.

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The Benefits of Depositary Receipts

The

DR functions as a means to increase global trade, which in turn can help increase not only volumes on local and foreign markets but also the exchange of information, technology, regulatory procedures as well as market transparency. Thus, instead of being faced with impediments to foreign investment, as is often the case in many emerging markets, the DR investor and company can both benefit from investment abroad.

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For the Company

A

company may opt to issue a DR to obtain greater exposure and raise capital in the world market. Issuing DRs has the added benefit of increasing the share's liquidity while boosting the company's prestige on its local market ("the company is traded internationally"). Depositary receipts encourage an international shareholder base, and provide expatriates living abroad with an easier opportunity to invest in their home countries. Moreover, in many countries, especially 4/17/12

Benefits for the Investor

Buying

into a DR immediately turns an investors' portfolio into a global one. gain the benefits of diversification, while trading in their own market under familiar settlement and clearance conditions. investors will be able to reap the benefits of these usually higher-risk, higher-return equities, without having to endure the added risks of going directly into foreign markets, which may pose lack
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Investors

DR

Definition of Important Terms

Domestic Custodian Bank

means a banking company which acts as a custodian for the ordinary shares or foreign currency convertible bonds of an Indian Company which are issued by it against global depositary receipts or certificates;

Foreign Currency Convertible Bonds

means bonds issued in accordance with this scheme and subscribed by a non- resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments;

Global Depositary Receipts

means any instrument in the form of a depositary receipt or certificate (by whatever name it is called) created by the Overseas Depositary Bank outside India and issued to non- resident investors against the issue of ordinary shares or Foreign Currency Convertible Bonds of issuing company;

Issuing Company

means an Indian company permitted to issue Foreign Currency Convertible Bonds or ordinary shares of that company against Global Depositary Receipts;

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ADR Risks
There

are several factors that determine the value of the ADR beyond the performance of the company. Analyzing these foreign companies involves further scrutiny than merely looking at the fundamentals. Here are some other risks that investors should consider: 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.
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Political

The Process
The

process of issuing an ADR usually starts by seeking a financial advisor, an international investment bank, or may be initiated by a foreign investment bank that recognizes the attraction to a company for its money management clients (and of course the fees generated for its own bottomline). The advisor would then contact commercial banks that can act as a depository in the foreign market and as a custodian in the domestic market and form the depository trust against shares held in the domestic market.
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The Process (contd.)

To set the price of the ADR, the advisor goes through a price discovery process as dictated by the markets, participants, and the supply-demand considerations. The advisor might invite other investment banks to join it to form a syndicate. The syndicate should have more financial muscle and bigger client base to place the issue in the market. A foreign investor may find it beneficial to invest in an ADR as opposed to a domestic share, for a variety of reasons

lack of custody or safekeeping agent in the foreign market, difficult settlement procedures for share purchase and transaction costs associated with foreign currencies. The ADRs, from the perspective of a foreign buyer, may be more liquid as they trade among large institutional investors and can be sold in bulk. The liquidity makes for quicker execution and less transaction costs.

The issuing process usually goes smoothly, but at times hits snags or is cancelled or postponed. Unfavorable market conditions like the global

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