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Transcript of ADR_GDR
ADR & GDRADR & GDRPresented to Prof. Paradkar
Group membersGroup 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 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
ContinuedContinued 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 Sources Of ForeignForeign Funds Funds
FOREIGN INVESTMENT
DIRECT INVESTMENT
PORTFOLIO INVESTMENT
AutomaticRoute
FIPB NRI FII ADR/GDROff shore
funds
IntroductionIntroduction
Concept of DR
Various kinds of DR
Benefits of DR to :
Depositors
Investors
Cross-border transactions
Mergers and Acquisitions
Privatization
Current market Current market sizesize
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
Total Sponsered DR (country wise)
220
150
119
111
107
101
95
1040
INDIA
UK
AUSTRALIA
TAIWAN
HONGKONG
RUSSIA
BRAZIL
OTHERS
Continued Continued
DR Stock Exchange Listings ( as on Sep 2006)
23
9
3
6
4
LUXEMBOURG
LONDON
NASDAQ
NYSE
OTHER
Continued Continued
American Depository Receipts- ADRAmerican Depository Receipts- ADR
ADR History
Meaning
ADR Ratio
Type of companies issuing ADR
Is there any difference between ADR and ADS?
Market size: ADRMarket 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 IndexBank of New York Asia ADR Index
Global Depository ReceiptsGlobal Depository Receipts
GDR Basics
Features of GDR
Where do GDRs trade or are listed
Market Watch - Global Depository Market Watch - Global Depository
Receipts - GDR Over a FortnightReceipts - GDR Over a Fortnight
Basic concepts associated with Basic concepts associated with
ADR/GDR ADR/GDR
OTC
Pink sheet
DTC
Euroclear/CEDEL bridge
CUSIP ID
SEDOL no
Ticker
ISSUER
BROKERS
DEPOSITORY
CUSTODIANACCOUNTANT
LAWYERS
INVESMENT BANKERS
PartiesParties involved involved
Role of IssuerRole 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 DepositaryRole 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 BrokersRole 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 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 CustodianRole 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 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 AccountantsRole 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 issueProcess 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 issueProcess of issue
Investor
Broker
Clear Stream
Depository
Local Broker
Local Stock Market
Local Custodian
Benefits of DRBenefits 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 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 receiptsRe issuance of depository receipts
Amendments by ministry Of Finance
Distinct and separate transaction
Process of re-conversion
PROCESS OF RE ISSUANCEPROCESS OF RE ISSUANCE
Investor
Broker
Depository
Local Custodian
Local Broker
Types of ADRsTypes of ADRs
Sponsored ADR Unsponsored ADR
Issued with the cooperation of the
company whose stock will underlie
the ADR.
Issued by - broker/dealer or
depositary bank without the
involvement of company whose stock
underlies the ADR.
Comply with regulatory reporting. No Regulatory Reporting.
Listing on international Stock
Exchanges allowed.
Trade on OTC market.
Levels of Sponsored ADRsLevels of Sponsored ADRs
LEVELS
Level I Level II Level III Others
Rule 144A GDR
Continued Continued Level I Level II Level III
Description Unlisted program in
the US.
Listed, more active
trading, and greater
liquidity
Issuer floats a public
offering of ADRs in
the US to raise capital
Trading Over-the-counter
(OTC) market
One of the U.S.
securities exchanges
or NASDAQ
One of the U.S.
securities exchanges
or NASDAQ
Regulations &
Disclosures
Minimal SEC
registration,
exemption from the
SEC's traditional
reporting
requirements
Registration,
reconciled US GAAP
statements, timely
submission of Annual
Reports
Registration, file
prospectus, reconciled
US GAAP statements,
timely submission of
Annual Reports
Levels (contd…)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.)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 RegulationsInternational 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 Indian Regulations for ADR/GDR
IssueIssue 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 FungibilityOne 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 FungibilityTwo 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…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 fungibilityBenefits of Two way fungibility
Improvement in liquidity
Reduction of arbitrage
HeadroomHeadroom
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 ArbitrageConcept 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/GDRDifferential Pricing of ADR/GDR
Transaction cost
Exchange rate risk
Time lag gap
Market sentiments
Arbitrage StrategyArbitrage 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…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/GDRIndian ADR/GDR
Trading at premium
Limited two way fungibility
Low liquidity
Indian ADR at premiumIndian ADR at premium
Reasons
Currency risk
Investors perception
Absence of sufficient headroom
Trends in Indian ADRTrends in Indian ADR
CASE STUDYCASE STUDY
Details of DR issueDetails 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) 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 IssueProcess 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)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 IssueSchedule of Issue
Recent development in DRRecent 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 YouThank You