case study on GLOBAL DEPOSITORY RECEIPTS

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INTRODUCTION

A Global Depositary Receipt (GDR) is a negotiable instrument issued by a depositary bank in

international markets — typically in Europe and generally made available to institutional

investors both outside and within the U.S. — that evidences ownership of shares in a non-U.S.

company, enabling the company (issuer) to access investors in capital markets outside its home

country.

Each GDR represents a specific number of underlying ordinary shares (1 GDRs = 10 Equity

shares) in the international company, on deposit with a custodian in the applicable home market.

GDRs are quoted and traded in U.S. dollars, pay dividends in U.S. dollars and are subject to the

trading and settlement procedures of the market in which they are transacted.

GDRs are usually offered to institutional investors through a private offering, in reliance on

exemptions from registration under the Securities Act of 1933. These exemptions are Regulation

S (Reg. S) for non-U.S. investors, and Rule 144A for U.S. investors that are Qualified

Institutional Buyers (QIBs). The availability of these exemptions for GDR deals makes them an

efficient and cost-effective means of implementing a cross-border capital-raising transaction.

The predominant listing venues for Reg. S GDRs are the London and Luxembourg Stock

Exchanges, with GDRs having also been listed on the Singapore Exchange, Frankfurt Stock

Exchange and Nasdaq Dubai. Rule 144A GDRs trade in the U.S. over-the-counter market.

When GDRs are offered simultaneously in Reg. S and Rule 144A form, but in separate and

distinct tranches, they exist inside what is known as a bifurcated GDR program. When the GDRs

are offered simultaneously in Reg. S and Rule 144A form, but not in separate and distinct

tranches, they exist inside what is known as a unitary GDR program. GDRs can also be offered

in Reg. S form only.

Due to the general flexibility afforded by GDRs, issuers from a variety of regions, including

Europe, the Middle East and Africa; Asia Pacific; and Latin America, have been utilizing GDR

programs to help meet their capital-raising needs on an increasing basis.

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(a)CONCEPTS DEPOSITORY RECEIPTS:

A Depository Receipt (DR) is a negotiable instrument in the form of securities that is issued by a

foreign public listed company and is generally traded on a domestic stock exchange. For this, the

issuing company has to fulfill the listing criteria for DRs in the other country. Before creating

DRs, the shares of the foreign company—which the DRs Represent—are delivered and

deposited with the custodian bank of the depository creating the DR‘s. Once the custodian bank

receives the shares, the depository creates and issues the DR‘s to the investors in the country

where the DRs are listed. These DRs are then listed and traded in the local stock exchanges of

the other country. The working of a standard DR programmed is illustrated in Figure 1.

Figure 1: Working of a DR Programme

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DRs have often been used by domestic companies as investment vehicles in the form of

American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs) for accessing

foreign markets and investors. American Depositary Receipts are typically traded on US stock

exchanges while the DRs that are traded on exchanges in other parts of the world are known as

Global Depositary Receipts .Currently, DRs represent about 4% of the total world listing in the

equity market.The following section discusses the DR regulatory framework in the capital

markets of the four countries that are the focus of this paper.

(b)UNDERSTANDING OF GDRs

As derivatives, depositary receipts can be created or canceled depending on supply and

demand. When shares are created, more corporate stock of the issuer is purchased and placed

in the custodian bank in the account of the depositary bank, which then issues new GDRs

based on the newly acquired shares. When shares are canceled, the investor turns in the shares

to the depositary bank, which then cancels the GDRs and instructs the custodian bank to

transfer the shares to the GDR investor. The ability to create or cancel depositary shares keeps

the depositary share price in line with the corporate stock price, since any differences will be

eliminated through arbitrage.

The price of a GDR primarily depends on its depositary ratio (aka DR ratio), which is the

number of GDRs to the underlying shares, which can range widely depending on how the

GDR is priced in relation to the underlying shares; 1 GDR may represent an ownership

interest in many shares of corporate stock or fractional shares, depending on whether the GDR

is priced higher or lower than corporate shares.

Most GDRs are priced so that they are competitive with shares of like companies trading on

the same exchanges as the GDRs. Typically; GDR prices range from $7 - $20. If the GDR

price moves too far from the optimum range, more GDRs will either be created or canceled to

bring the GDR price back within the optimum range determined by the depositary bank.

Hence, more GDRs will be created to meet increasing demand or more will be canceled if

demand is lacking or the price of the underlying company shares rises significantly.

Most of the factors governing GDR prices are the same that affects stocks: company

fundamentals and track record, relative valuations and analysts‘ recommendations, and market

conditions. The international status of the company is also a major factor.

On most exchanges, GDRs trade just like stocks, and also have a T+3 settlement time in most

jurisdictions, where a trade must be settled within 3 business days of the trading exchange.

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The exchanges on which the GDR trades are chosen by the company. Currently, the stock

exchanges trading GDRs are the:

1. London Stock Exchange

2. Luxembourg Stock Exchange

3. NASDAQ Dubai

4. Singapore Stock Exchange

5. Hong Kong Stock Exchange

Companies choose a particular exchange because it feels the investors of the exchange‘s country

know the company better, because the country has a larger investor base for international issues,

or because the company‘s peers are represented on the exchange. Most GDRs trade on the

London or Luxembourg exchanges because they were the 1st to list GDRs and because it is

cheaper and faster to issue a GDR for those exchanges.

Many GDR issuers also issue privately placed ADRs to tap institutional investors in the United

States. The market for a GDR program is broadened by including a 144A private placement

offering to Qualified Institutional Investors in the United States. An offering based on SEC Rule

144A eliminates the need to register the offering under United States security laws, thus saving

both time and expense. However, a 144A offering must, under Rule 12g3-2(b), provide a home

country disclosure in English to the SEC or the information must be posted on the company‘s

website.

Domestic custodian bank

A banking company which acts as a custodian for the ordinary shares or FCCBS of an Indian

company which are issued by it against GDRs or certificates.

WHY DO THEY EXIST?

Mutually beneficial to issuers and investors issuers.

Capital rising.

Cost of capital.

Valuation profit issues.

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Diversification of shareholder base.

INVERSTORS

Trade locally.

Liquidity aspects currency.

Low cost of custody.

Disclosure priced in investors.

Income processing.

How are they created?

Broker

1. Buys ordinary shares.

2. Deposits them into depositary‘s custodian account.

Depositary

Issues new DRS to purchasing broker

How they cancelled?

Broker

1. Purchases DR from market place .

2. Sells ordinary share in home market.

3. Presents DR to depositary for cancellation.

Depositary

1. Instructs custodian TP deliver ordinary share to broker‘s local custody market.

Rule 144-a and regs

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Rule 144-a

1grants exemption form US registration.

Private placement.

Holders limited to qualified institutional buyers QIBS qualifications.

Rationale for creation.

Regs

1. Exempt from us registration

2. Available only to non us persons

DEFINATION OF GDR’S

1. GDR can be defined as a foreign currency denominated derivative instrument in the form

of depository receipt created outside India and issued to non-resident investors Entitling

them to the benefits of specific number of ordinary equity shares or fully convertible

bonds of a domestic company.

2. A bank certificate issued in more than one country for shares in a foreign company. The

shares are held by a foreign branch of an international bank. The shares trade as domestic

shares, but are offered for sale globally through the various bank branches.

3. A financial instrument used by private markets to raise capital denominated in either U.S.

dollars or euros.

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(c) OBJECTIVE OF THE STUDY

The main objective of study is to find out the status of GDRs in Indian economy.

To study the impact of GDRs over the telecom industry.

To study the effect of GDRs in Indian economy.

To study the reasons for growth of GDRs in Indian economy.

To find out the GDRs working over the Global economy.

(d) NEED OF THE STUDY

To study the growth of GDRs in Indian economy

To analyze the impact of GDRs in Indian economy.

The GDRs look over the financial system of Indian economy.

To understand the value of GDRs in Indian economy.

The study the procedure and process of GDRs in Indian economy.

(e) SCOPE OF THE STUDY

The main scope of the study to understand the concept of GDRs in Indian economy.

To find out the growth of GDRs in India.

To have the overlook up on the GDRs.

To know the GDRs issue in India.

GDRs have impact on Indian Market.

(f) LIMITATION OF THE STUDY

The study only conducts on GDRs.

The rules and regulation given by SEBI and RBI is considered.

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The working of GDRs only in Indian Financial Market.

The study restricted only in Indian market.

The study is mostly on secondary data.

(g) RESEARCH METHODOLOGY

The data collected is purely descriptive and the sources are only through secondary data

like online journals and portals etc.

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(a) Overview of GDRs in India and policy changes

The Indian stock market remained largely outside the global integration process until the early

1990s. 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. 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, when

the Indian corporate sector was allowed to tap global markets through DRs since April 1992. It

was stipulated that a company, interested in raising funds through foreign listing, obtain prior

permission of the Department of Economic Affairs, Ministry of Finance, and 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. India regards issuance of DRs

as a form of foreign direct investment (FDI). Therefore, ordinary shares issued against the

Depository Receipts were to be treated as direct foreign investment in the issuing company.

Since there are company and industry limits on permitted FDI, the number of shares eligible to

be purchased for creation of DRs is limited and controlled, ultimately by Ministry of Finance

and the RBI. It 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.

With the opening up of the financial markets, Indian companies joined the worldwide

rush to raise capital by issuing Depositary Receipts. India entered the international arena in May

1992, with the first GDR issue by Reliance Industries Ltd. on Luxembourg Stock Exchange

(LuxSE) in November 1992, followed by Grasim Industries with GDR program listed on the

LuxSE.

Indian companies can raise foreign currency resources abroad through the issue of

ADRs/GDRs, in accordance with the Scheme for issue of Foreign Currency Convertible Bonds

(FCCBs) and Ordinary Shares (Through Depository Receipt Mechanism) scheme, 1993 and

guidelines issued by the Central Government there under from time to time.

The company can issue ADRs/GDRs if it is eligible to issue shares to person resident

outside India under the FDI Scheme. However, an Indian listed company, which is not eligible to

raise funds from the Indian Capital Market including a company which has been restrained from

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accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be

eligible to issue ADRs/GDRs.

Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital

in the international markets, would require prior or simultaneous listing in the domestic market,

while seeking to issue such overseas instruments. Unlisted companies, which have already issued

ADRs/GDRs in the international market have to list in the domestic market on making profit or

within three years of such issue of ADRs/GDRs, whichever is earlier.

Till the year end 1993, DR markets witnessed a lull period resulting from the securities

scam and the consequent fall in the domestic markets. Patil attributed the small size of Indian DR

issues during this period to the limited overseas demand for Indian papers and the existing costly

procedure of flotation in the domestic market (57).

There was a surge in number of Indian GDR programs during 1994 and again during

1996. A high degree of foreign listing activity by the Indian firms during 1994 and 1996 was also

attributable to the increased allocation of investible funds by the international investors to the

emerging markets like India; and desire of many Indian firms to raise the funds during the boom

phase of the domestic markets to get a better pricing for their DR programs.

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 (NSE) 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 of capital raised through depository receipts. Additionally, uncertain domestic political

environment resulted in infrequent fresh DR listing during 1995.

Moving ahead from the domestic stock exchange, the Government of India took another major

step. The Government permitted financial services companies like banks, non-bank finance

companies and financial institutions, to access the foreign stock markets. This brought about

another round of new foreign listings. 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. This

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encouraged foreign listings by related firms such as, BSES Ltd. (power), VSNL (telecom) and

MTNL (telecom) in 1996 and 1997. This period also witnessed the foreign listing of State Bank

of India (bank) and ICICI (finance), through private placements.

Foreign listings and issuance activity during 1997 and 1998 was brought down by the

changing political and economic conditions in India and Asia including; the economic crises in

the South-east Asian markets.

Since 1999-2000, the Ministry of Finance continued to liberalize 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 DRs. End-use restriction on issue

proceeds were removed. During this period, software companies were allowed to issue DR

without reference to RBI up to US$ 100 million. Foreign listing activity by Indian firms regained

momentum during 1999 with the successful ADR issue by Infosys Technologies Ltd. as the first

exchange traded of Indian origin ADR trading in NASDAQ. Indian companies have issued

ADRs since the early 1990s, however most of these earlier issues were privately placed, so

exchange traded ADR has been relatively recent phenomenon in case of Indian origin

companies.

During 2000, there were an increasing number of Indian foreign listings resulting from

the new policy of Government of India. On Jan 20, 2000, RBI gave General permission to Indian

companies for issue of DRs, in order to simplify the procedure, under the Foreign Exchange

Regulation Act (FERA)- 1973 (58). Besides, the necessary permissions under FERA-1973 for

issue and export of ADRs/GDRs and acquisition of ADRs/GDRs by foreign investors have also

been granted. The Government of India has made certain changes in the guidelines to further

liberalize the operational procedures by dispensing with the track record scrutiny process and the

two-stage approval by the Ministry of Finance, Department of Economic Affairs for ADR/GDR

issues. On May 3, 2000, for the first time the resident employees of Indian software were

allowed to purchase foreign securities under the ADR/GDR linked Employees Stock Option

(ESOP) Schemes. On July 20, 2000, FIs were permitted to raise capital through issue of Global

Depository Receipts (GDRs) or American Depository Receipts (ADRs) within the limits

prescribed for Foreign Direct Investment by the Government of India (59). More modification in

the procedures of issuing DR programs by software, information technology, telecommunication,

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biotechnology and pharmaceutical firms in the foreign markets was carried out during 2000, with

the main aim of attaining a better valuation for firms; and to meet requirements of large amount

of funds, not easily available from the Indian markets.

During 2001-02, overseas business acquisitions through the DR route were permitted

under the automatic/simplified approval mechanism for Indian companies engaged in (i)

Information technology and Entertainment software; (ii) Pharmaceuticals; (iii) Biotechnology;

(iv) 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 DR 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. During

this period there was a decline in GDR issues, which was the reflection of the global slowdown

in developed markets, including the US, owing to a recession setting in the US and the war in

Iraq.

During 2002-2003 the guidelines were issued for two-way fungibility. The DR programs

were initially started in India as one-way programs. Under the one-way fungibility, once a

company issued DR, 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. Over a period of time,

these programs resulted in decline of the outstanding balance of DRs, leading to lower liquidity

of DRs for the international investors. The process of global financial integration received a

major impetus when two-way fungibility for Indian DRs was introduced in 2002, whereby

converted local shares could be reconverted into GDR/ADR subject to sectoral caps (60).

The 2002 amendment to the issue of Foreign Currency Convertible Bonds and Ordinary

Shares (through DR mechanism) Scheme, 1993, opened the door to the limited two-way

convertibility of DRs, through which the reissuance of DRs once cancelled is permitted but

restricted by the initial offering size. This has been done with the aim of:

Facilitating market forces to trigger a realignment of prices,

Minimizing the widely divergent premium/discount levels prevailing between DR prices

and the domestic stock prices,

Providing an active DR market, particularly with considering the GDR market that has been largely inactive for the past couple of years.

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The result of limited two-way fungibility guidelines of the RBI was that, not only

corporations and depository banks could create DR, but also investors owning DRs have the

option to break them into ordinary shares, or purchase ordinary shares to convert them back into

DRs. In fact, it enabled a non-resident investor to purchase local shares of an Indian company

through an Indian stock broker and convert them into DRs that were eligible to be traded on the

international stock exchanges. However, the reconversion of broken DR into new DRs is the

subject to FDI limitation. The equity shares in India could be converted to DRs only to the extent

of the ‗headroom‘ (i.e. the number of DRs cancelled and converted into underlying Indian equity

or maximum number of DRs that can be issued on demand from foreign investors). According to

these guidelines 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 DRs. A foreign investor is 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

them to the domestic custodian for further credit to the overseas depository. The overseas

depository issues proportional Depository Receipts to the foreign investor (45, pp.43-44).

During 2004, rules were more relaxed, and RBI permission to issue ADR/GDR linked

ESOPs was relaxed. The coverage of the facility to acquire such ESOP was expanded later to

include employees of all companies in the knowledge based sectors vide Guidelines dated

September 15, 2000 (Annex-I) issued by the Ministry of Finance, Government of India (61).

There was a sudden increase of depository receipts in 2005-06 due to the Monetary

Policy of 2005-06. There was a major revision to the guidelines on DRs for unlisted companies.

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

depositary 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.

Foreign Currency Convertible Bonds and ordinary shares (through Depository Receipt

Mechanism) scheme, 1993 was amended and more simplified during 2005-2006 (62). The huge

increase in issues of DRs during this period was also attributable to the booming Indian stock

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markets that offered the corporate sector the opportunity to issue equities abroad (63). 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 of the Indian

corporate sector coupled with relaxation in DR norms by the Ministry of Finance, resulted in

suitable rise in the amount of capital raised through DR issues in 2005-06. Indian companies

began to enter new markets like the Singapore stock exchange and the Dubai stock exchange to

enlarge their investor base even further in addition to the major markets in US and Europe (i.e.

NYSE, NASDAQ, LSE, and LuxSE). This has been increase in terms of number of new issues

and number of companies listed in international market as well as capital raisings which

continued till 2007.

During 2006-2007, India experienced the growth rate above 9% (9.6%) for second

successive year. There has been remarkable growth of 49.8% in capital raised from international

capital markets during this period. However, the number of issues (i.e. IPO and follow on)

declined in the same period with compare to the previous year. During 2006-2007, there has

been amendment in Disclosure and Investor Protection Guidelines (DIP Guidelines) by the

SEBI, to permit listed companies to raise fund from the domestic market by making private

placement of specified securities with Qualified Institutional buyers (QIBs). The process called

as Qualified Institutional Placement (QIP) and the securities so issued constitute the fully paid-

up capital of the company. The Amendment defines the specified securities as equity shares,

fully convertible debentures, partly convertible debentures or any securities other than warrants,

which are convertible into or exchangeable with equity shares at a later date. The guidelines are

intended to encourage Indian companies to use QIP rout to raise fund rather than raising fund

through the DRs (ADR/GDR) or FCCBs, and to make Indian market more competitive and

efficient (64).

Master circular No. 02/2007-08 with further modifications, has explained the latest rules and

concepts regarding issues of shares by Indian companies under DRs (65). India has continued its

trend of healthy equity exports. In terms of new issues, there has been decline with compare to

the previous year. During 2007-2008, there have been 28 new issues (IPO and follow on) against

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40 new issues for the period of 2006-2007. There has been also decline in the number of

companies listed in international markets. But, the resource raisings by Indian companies

through DRs increased sharply by 56.2%. Despite of decline in new offering, particularly in the

year 2008, India has been the second country after Russia with 16 new sponsored DRs (new

offerings), and it ranked as the leading nation for total available sponsored DRs. Figure below

presents total sponsored DRs by the countries by the end of the year 2008 (53).

Fig. Total sponsored DRs by countries by the year end 2008 (53).

During the year 2008, Indian companies and companies from three other countries including

Brazil, Russia, and China (BRIC companies), dominated new DR programs, representing 53% of

new DR issuers, and 52% of capital raisings in DR form (56). Capital raisings of Indian

companies through the issuance of DR programs for the period of 1992-2008 is presented in

figure below.

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Fig. Capital rising of Indian companies from international markets through DRs, 1992-2008.

Source of data: The RBI Annual Reports and Bank of New York.

After 2008 The Indian companies are make loss over the GDRs

Investors lost money in 85% GDRs issued in 2010An analysis by CRISIL Research, India‘s

leading independent and integrated research house, of 40 global depository receipts (GDRs)

issued by Indian companies in 2010 reveals that investors have lost money in 85% of the issues,

with four out of five issues giving a negative return of 35% or more. As on September 15, 2011,

the average return on investments (a measurement of the difference in the offer price and the

market price) by all the GDRs issued in 2010 was negative 52%. The underperformance is

significant when compared to the average return of negative 7% by S&P CNX 500 during the

same period. Information technology, media and consumer staples companies were the major

underperformers. During 2010, Indian companies raised around Rs 56.8 bn (US$ 1.2 bn)

through the GDR route. Bombay Rayon Fashions Ltd‘s Rs 3.5 bn GDR issue in October 2010

was the largest during the year. Companies generally prefer the GDR route for fund raising when

the global sentiment for emerging markets is strong. During 2010, many Indian companies

were able to attract foreign investors through the GDR route given the performance of

equity markets and the strong domestic growth rate of over 8%. Further, lower disclosure norms

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on end use of funds make fund raising through GDRs comparatively easier for the domestic

companies. As of December 2010, Indian companies accounted for ~68% of the total listed

GDRs on the Luxembourg Stock Exchange. Most of the Indian companies which have raised

capital through the GDR route during 2010 are from the small and mid-cap space.

In absolute terms, the market value of the funds mobilized through GDRs has eroded by ~47%

(difference between capital mobilized and its current market value) to Rs 30.3 bn, with most

GDRs trading 40-60% below their offer price. In percentage terms, Teledata Technology

Solutions‘ GDR is the worst performer with its price on September 15, 2011, trading 93% below

the offer price. On the other hand, Rainbow Papers Ltd‘s issue has been the best performer with

its price trading 148% higher than the offer price. Rainbow Papers Ltd. is under CRISIL‘s

independent equity research coverage and has been assigned a fundamental grade of ‗3/5‘, which

indicates the company has good fundamentals. CRISIL's fundamental grade captures overall

assessment of the company‘s business positioning, industry prospects, management capability

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and corporate governance practices. However, the number of GDRs issued in 2011 has slowed

down. Volatility and weak performance of Indian equity markets in 2011 have damped investor

sentiments. This coupled with the weak performance of the past GDRs has made them less

attractive to foreign investors. Only 12 Indian companies have raised US$ 193 mn through

GDRs till date in 2011 as compared to 34 companies that raised US$ 976 mn in the

corresponding period in 2010.

IN 2011

An analysis by CRISIL Research, India‘s largest independent and integrated research house, of

40 global depository receipts (GDRs) issued by Indian companies in 2010 reveals that investors

have lost money in 85% of the issues, with four out of five issues giving a negative return of

35% or more. As on September 15, 2011, the average return on investments (a measurement of

the difference in the offer price and the market price) by all the GDRs issued in 2010 was

negative 52%. The underperformance is significant when compared to the average return of

negative 7% by S&P CNX 500 during the same period. Information technology, media and

consumer staples companies were the major underperformers. Indian companies have been the

most active GDR issuers accounting for ~68% of the total listed GDRs on the Luxembourg

Stock Exchange as of December 2010. During 2010, Indian companies, predominantly small and

mid-cap companies, raised around Rs 56.8 bn (USD 1.2 bn) through the GDR route. According

to Mr. Tarun Bhatia, Director, Capital Markets, CRISIL Research, ―Companies generally prefer

the GDR route for fund raising when the global sentiment for emerging markets is strong. During

2010, many Indian companies were able to attract foreign investors through the GDR route given

the performance of equity markets and the strong domestic growth rate of over 8%. Further,

lower disclosure norms on end use of funds make fund raising through GDRs comparatively

easier for the domestic companies.‖

CRISIL Research analysis further reflects that, in absolute terms, the market value of the funds

mobilized through GDRs has eroded by ~47% (difference between capital mobilized and its

current market value) to Rs 30.3 bn (USD 0.6 bn), with most GDRs trading 40-60% below their

offer price. In percentage terms, Teledata Technology Solutions‘ GDR is the worst performer

with its price on September 15, 2011, trading93% below the offer price. On the other hand,

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Rainbow Papers Ltd‘s issue has been the best performer with its price trading 148% higher than

the offer price. However, the number of GDRs issued in 2011 has slowed down. Only 12 Indian

companies have raised Rs9.4 bn (USD 0.2 bn) through GDRs during 2011, as compared to 34

companies that raised Rs 45.1 bn (USD1.0 bn) during the corresponding period in 2010. Mr.

Chetan Majithia, Head, CRISIL Research says ―Volatility and weak performance of Indian

equity markets in 2011 have damped investor sentiments. This, coupled with the weak

performance of the past GDRs, has made them less attractive to foreign.

IN 2012

Slowing economic growth resulting in a fall in corporate investments, newer instruments to raise

equity domestically and tougher regulations for issuing depository receipts aboard has led to a

sharp decline in the number of Indian companies going abroad to raise equity, which declined to

record lows this fiscal.

According to Prime Database, only two companies went for overseas equity issuances this fiscal,

which helped raise a paltry $40 million — the lowest since Prime began compiling data. The

money raised so far this fiscal is one-fourth of that raised by four companies last fiscal ($161.88

million) and one-tenth of the capital raised by a total of 19 companies in FY12.

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Data show most overseas issues recently done were by way of depository receipts — either

American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). Some companies

that raised foreign equity during the last 1-2 years included Zee Learn ($20 million), Zylog

Systems ($20 million), Industrial Investment Trust ($59.89 million) and Videocon Industries

($51.02 million).

One reason for the decline in overseas listing is the weakness in the domestic primary markets.

Under the current regulations, firms cannot raise funds through an overseas equity listing without

being listed on Indian exchanges.

―Since Indian primary markets have been in a bad shape for the last 3-4 years, many Indian

companies could not list here and that explains why there has been a decline in overseas equity

issues,‖ said Prithvi Haldea, CMD, and Prime Database.

A Mumbai-based investment banker explained that qualified institutional placements (QIPs) had

also led to a reduction in GDR listings in centers like Luxembourg.

―The current norms or listing agreement allow an Indian company to raise equity through QIP or

GDR. The introduction of QIPs and additional restrictions for issuing GDRs have eliminated the

need for Indian companies to go overseas and raise equity,‖ said V Jayasankar, senior ED and

head, equity capital markets, Kotak Investment Banking.

Meanwhile, listings in London and Singapore have declined as they are not seen as favorable

from valuation perspective. However, a section of the industry feels that the trend could change

with the proposal to make overseas listings more flexible. Last month, the government

introduced draft guidelines stating unlisted Indian entities could list on international exchanges

without the need to compulsorily list on Indian exchanges. The scheme will be implemented on a

pilot basis for a period of two years.

21

TAXATION OF GDRS IN INDIA

Taxation on shares issued under global depository receipt mechanism

Any income by way of dividends distributed, declared or paid (whether interim or otherwise) by

any Indian company is exempt from tax and is not taxable in the hands of the investor. However,

the Indian Company declaring dividends will have to pay Indian dividend distribution tax at a

current rate of 16.995% (taking into account 10% educational cess and 3% surcharge).

On receipt of these payments of dividend after taxation, the Overseas Depositary Bank

distributes them to the non-resident investors proportionate to their holdings of GDRs evidencing

the relevant shares. The holders of the Depositary Receipts may take credit of the tax deducted at

source on the basis of the certification by the Overseas Depositary Bank, if permitted by the

country of their residence.

All transaction of trading of the Global Depository Receipts outside India, among non -resident

investors, will be free from any liability to income tax in India on capital gains therefrom.

If any capital gains arise on the transfer of the aforesaid shares in India to the non-resident

investor, he is liable to income tax under the provisions of the Income Tax Act, 1961. If the

aforesaid shares are held by the non-resident investor for a period of more than twelve (12)

months from the date of advice of their redemption by the Overseas Depositary Bank, the capital

gains arising on the sale thereof are treated as long-term capital gains and are currently not

subject to any income tax under the provisions of Section 115AC of the Income Tax Act, 1961.

If such shares are held for a period of less than twelve (12) months from the date of redemption

advice, the capital gains arising on the sale thereof are treated as short-term capital gains. Gains

on sale of shares held for less than one year are taxed at 11.33% (10% plus surcharge and

educational cess).

After redemption of the Depository Receipts into underlying shares, during the period, if any,

which these shares are held by the redeeming non-resident foreign investor who has paid for

these shares in foreign exchange at the time of purchase of the Global Depository Receipts, the

22

rate of taxation of income by way of dividends on these shares would continue to be @ 11.33%

(10% plus surcharge and 3% educational cess) in accordance with section 115 AC (1) of the Act.

When the redeemed shares are sold on the Indian Stock Exchanges against payment in Rupees,

these shares shall go out of the purview of section 115 AC of the Act and income therefrom shall

not be eligible for the concessional tax treatment provided thereunder. After the transfer of

shares where consideration is in terms of rupee payment, the normal tax rate would apply to the

income arising or accruing on these shares.

Deduction of tax at source on the amount of capital gains accruing on transfer of the shares

would be made in accordance with sections 195 and 196C of the Act.

The provisions of Double Taxation Avoidance Agreement will be applicable, on the basis of the

country of the Overseas Depository Bank, in the matter of taxation of income from dividends

from underlying shares.

Application of avoidance of double taxation agreement in case of GDRs and underlying

shares after redemption

During the period, if any, when the redeemed underlying shares are held by the non- resident

investor on transfer from fiduciary ownership of the Depository, before they are sold to the

resident purchasers, India's treaty with the country of residence of the non- resident investor will

be applicable in the matter of taxation of income by way of capital gains arising out of the

transfer of the underlying shares to a resident of India or in India.

23

(b) RULES AND REGULATION ACCORDING TO RBI AND SEBI

RBI GIVEN THE RULES IN (Sep 05 2005)

FCCBs and Ordinary Shares [Through Depository Receipt Mechanism] Scheme, 1993 Amended.

Amendment to the 'Issue of Foreign Currency Convertible Bonds and Ordinary Shares

(Through Depositary Receipt Mechanism) Scheme, 1993'

Attention of Authorised Dealer (AD) banks is invited to the paragraph 2 of the Annex to the A.P.

(DIR Series) Circular No.5 dated August 1, 2005 regarding issue of Foreign Currency

Convertible Bonds (FCCB) and Regulations 4 and 5A of Schedule 1 to Notification No. FEMA

20/2000-RB dated May 3, 2000, as amended from time to time, for issue of American

Depository Receipts (ADRs) / Global Depository Receipts (GDRs).

2. In order to bring the ADR/GDR guidelines in alignment with guidelines on domestic capital

issues framed by the Securities and Exchange Board of India (SEBI), the Government of India

has brought about certain changes to the guidelines on GDR/ADR guidelines by amending the

Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt

Mechanism) Scheme, 1993.

3. A copy of the Press Note F.No.15/4/2004-NRI dated August 31, 2005 issued by the

Government of India, Ministry of Finance and the Government Notification dated August 31,

2005 is annexed (Annex 1 and 2, respectively).

4. Necessary amendments to the Foreign Exchange Management (Transfer or issue of Security

by a Person Resident outside India) are being issued separately.

5. Authorised Dealer banks may bring the contents of this circular to the notice of their

constituents and customers concerned.

24

6. The directions contained in this circular have been issued under sections 10(4) and 11(1) of

the Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice to

permissions / approvals, if any, required under any other law.

RBI (Annex-1)

CAPITAL MARKETS DIVISION

Press Note

Amendment to the "Issue of Foreign Currency Convertible Bonds and Ordinary Shares

(through Depositary Receipt Mechanism) Scheme, 1993".

A Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through

Depositary Receipt Mechanism) Scheme was notified by the Government of India on

12th

November, 1993. Revisions/modifications in the operative guidelines of the Scheme have

been made from time to time.

. In order to bring the ADR/GDR guidelines in alignment with SEBI‘s guidelines on domestic

capital issues, it has been decided by the Government to incorporate the following changes to the

GDR/ADR guidelines by amending the Foreign Currency Convertible Bonds and Ordinary

Shares (Through Depositary Receipt Mechanism) Scheme:-

A. For listed companies

a) Eligibility of issuer: An Indian Company, which is not eligible to raise funds from the Indian

Capital Market including a company which has been restrained from accessing the securities

market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue (i)

Foreign Currency Convertible Bonds and (ii) Ordinary Shares through Global Depositary

Receipts under the Foreign Currency Convertible Bonds and Ordinary Shares (Through

Depositary Receipt Mechanism) Scheme, 1993.

25

b) Eligibility of subscriber: Erstwhile Overseas Corporate Bodies (OCBs) who are not eligible

to invest in India through the portfolio route and entities prohibited to buy, sell or deal in

securities by SEBI will not be eligible to subscribe to (i) Foreign Currency Convertible Bonds

and (ii) Ordinary Shares through Global Depositary Receipts under the Foreign Currency

Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme,

1993.

c) Pricing: The pricing of Global Depositary Receipt and Foreign Currency Convertible Bond

issues should be made at a price not less than the higher of the following two averages:

(i) The average of the weekly high and low of the closing prices of the related shares

quoted on the stock exchange during the six months preceding the relevant date;

(ii) The average of the weekly high and low of the closing prices of the related shares

quoted on a stock exchange during the two weeks preceding the relevant date.

The "relevant date" means the date thirty days prior to the date on which the meeting of the

general body of shareholders is held, in terms of section 81 (IA) of the Companies Act, 1956, to

consider the proposed issue.

d) Voting rights: The voting rights shall be as per the provisions of the Companies Act, 1956

and in a manner in which restrictions on voting rights imposed on Global Depositary Receipt

issues shall be consistent with the Company Law provisions. RBI regulations regarding voting

rights in the case of banking companies will continue to be applicable to all shareholders

exercising voting rights.

B. For unlisted companies

Unlisted companies, which have not yet accessed the Global Depositary Receipt /

Foreign Currency Convertible Bond route for raising capital in the international market

would require prior or simultaneous listing in the domestic market, while seeking to issue

(i) Foreign Currency Convertible Bonds and (ii) Ordinary Shares through Global

26

Depositary Receipts under the Foreign Currency Convertible Bonds and Ordinary Shares

(Through Depositary Receipt Mechanism) Scheme, 1993.

It is clarified that unlisted companies, which have already issued Global Depositary

Receipts / Foreign Currency Convertible Bonds in the international market, would now require to

list in the domestic market on making profit beginning financial year 2005-06 or within three

years of such issue of Global Depositary Receipts / Foreign Currency Convertible Bonds,

whichever is earlier.

F.No.15/4/2004-NRI New Delhi, dated the 31st August, 2005

The Press Information Bureau is requested to give wide publicity to this Press Note.

RBI (ANNEX- 2)

NOTIFICATION


Mechanism) (Amendment) Scheme, 2005.

G.S.R.No. 553(E), Central Government hereby amend the Foreign Currency Convertible Bonds

and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993, namely :-

1. This Scheme may be called the issue of Foreign Currency Convertible Bonds and Ordinary

Shares (Through Depositary Receipt Mechanism) (Amendment) Scheme, 2005.

2. The Scheme shall be deemed to have come into force from the date of publication of

Notification; and

3. In the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt

Mechanism) Scheme, 1993;

After paragraph 3(1), the following sub-paragraph shall be inserted; namely:-

27

3(1)(A). An Indian company, which is not eligible to raise funds from the Indian capital market

including a company which has been restrained from accessing the securities market by the

Securities and Exchange Board of India (SEBI) will not be eligible to issue (i) Foreign Currency

Convertible Bonds and (ii) Ordinary Shares through Global Depositary Receipts under the


Mechanism) Scheme, 1993.

3(1)(B). Unlisted Indian Companies issuing Global Depositary Receipts/Foreign Currency

Convertible Bonds shall be required to simultaneously list in the Indian Stock Exchange(s).

3(1)(C) Erstwhile Overseas Corporate Bodies (OCBs) who are not eligible to invest in India

through the portfolio route and entities prohibited to buy, sell or deal in securities by SEBI will

not be eligible to subscribe to (i) Foreign Currency Convertible Bonds and (ii) Ordinary Shares

through Global Depositary Receipts under the Foreign Currency Convertible Bonds and

Ordinary Shares(Through Depositary Receipt Mechanism) Scheme, 1993.

In Paragraph 5 sub-paragraph (4) (c) shall read as follows :-

5(4) (ca) Listed Companies – The pricing should not be less than the higher of the following

two averages:

(i) The average of the weekly high and low of the closing prices of the related shares quoted on

the stock exchange during the six months preceding the relevant date;

(ii) The average of the weekly high and low of the closing prices of the related shares quoted on

a stock exchange during the two weeks preceding the relevant date.

The 'relevant date' means the date thirty days prior to the date on which the meeting of the

general body of shareholders is held, in terms of section 81(lA) of the Companies Act, 1956, to

consider the proposed issue.

5(4) c(b) Unlisted Companies – The pricing should be in accordance with Reserve Bank of

India Regulations notified under Foreign Exchange Management Act, 1999.

28

In Paragraph 5 (sub-paragraph (4) (e) (i) and (4) (e) (ii) shall be inserted, namely :-

5(4)(e)(i) Listed Companies - The conversion price of the Foreign Currency Convertible Bonds

should be in accordance with para 5(4)(ca) ibid.

5(4)(e)(ii) Unlisted Companies - The conversion price of the Foreign Currency Convertible

Bonds should be in accordance with Reserve Bank of India Regulations notified under Foreign

Exchange Management Act, 1999.

Foot Note :

(1). The Principal Scheme, viz., Issue of Foreign Currency Convertible Bonds and Ordinary

Shares (Through Depositary Receipt Mechanism Scheme, 1993), was published in the Gazette of

India, Extraordinary, Part II – Section 3 – Sub-section (i) on the 12th November 1993/Kartika

21, 1915). (Notification GSR No. 700 (E) dated 12th November, 1993).

(2) Amendment in the Original Scheme carried in Foreign Currency Convertible Bonds and

Ordinary Shares (Through Depositary Receipt Mechanism) (Amendment) Scheme. 1999 was

published in the Gazette of India, Extraordinary, Part II – Section 3 – Sub-section (i) on the 11th

November 1999/Kartika 20, 1921. (Notification GSR.No.764(E), dated 10th November 1999).


Ordinary Shares (Through Depositary Receipt Mechanism) (Amendment) Scheme. 1999 was

published in the Gazette of India, Extraordinary, Part II – Section 3 – Sub-section (i) on the 19th

June 2000/Jyaistha 29, 1922. (Notification GSR.No.544(E), dated 16th June 2000).


Ordinary Shares (Through Depositary Receipt Mechanism) (Amendment) Scheme II, 2000 was

published in the Gazette of India, (Extraordinary), under Part II – Section 3 – Sub-section (i) on

the 14th November, 2000 /Kartika 23, 1922. (Notification GSR.No.865 (E), dated 10th

November 2000).

29


Ordinary Shares (Through Depositary Receipt Mechanism) (Amendment) Scheme-III, 2000 was


14th November 2000/Kartika 23, 1922. (Notification GSR.No.866 (E), dated 10th November

2000).


Ordinary Shares (Through Depositary Receipt Mechanism) (Amendment) Scheme 2001 was


21st September, 2001/Bhadra 30, 1923. (Notification GSR.No.687 (E), dated 18th September,

2001).


Ordinary Shares (Through Depositary Receipt Mechanism) (Amendment) Scheme, 2002 was


13th February 2002/Magha 24, 1923. (Notification GSR.No.100(E), dated 13th February 2002).


Ordinary Shares (Through Depositary Receipt Mechanism) (Amendment) Scheme-II, 2002 was


the 30th July 2002/Sravana 8, 1924. (Notification GSR.No.532(E), dated 29th July 2002).


Ordinary Shares (Through Depositary Receipt Mechanism) (Amendment) Scheme III, 2002 was


2nd December 2002/Agrahayana 11,1924 (Notification GSR.No.789(E), dated 2nd December

2002).

Other ECB Parameters : All other ECB parameters such as minimum average maturity, all-in-

ost ceilings, restrictions on issuance of guarantee, choice of security, parking of ECB proceeds,

prepayment and refinancing of ECB under the Automatic Route should be complied with. The

30

designated AD has to ensure at the time of draw down that the forex exposure of the borrower is

hedged.

Privately Placed and Offshore Sponsored Depositary Receipts (SEC Rule

144A / Regulations) :

In addition to the three levels of sponsored DRs programs, companies can access the markets by

SEC Rule 144A providing 93 raising capital through private placement of sponsored DRs in the

U.S. and/or Regulation S (Reg. S) program (adopted by SEC in 1990), for private placement

outside the United States, with qualified institutional investors (Qualified Institutional Buyers-

QIBs) while avoiding some registration and regulation process. The distinguishing features of

private placement DRs- SEC Rule 144A and Reg. S – is classified in Appendix B.

As per Rule 144A, a QIB is (i) any institution that owns and invests on a discretionary basis not

less than US $100 million in securities of issuers that are not affiliated to it or (ii) an entity

entirely owned by the QIBs. Rule 144A greatly increased the liquidity of privately placed

securities by allowing QIBs to resell the Privately Placed - Rule 144A Depositary Receipts

(RADRs) privately to the other QIBs without any holding period requirement. RADRs are traded

by US market makers on a private screen-based listing service system known as PORTAL

(Private Offerings, Re-sales and Trading through Automated Linkages) administered by the

National Association of Securities Dealers.

Regulation S clarifies the conditions under which an issue is considered to be made outside the

US, and hence not subjected to SEC regulations. An issue is considered to be made outside the

US when the following three conditions are met: (i) the buyer is outside US territory; (ii) the

securities are not offered or advertised in the US; and (iii) during a specific period (up to one

year depending on how much interest there is in the securities in the US) the securities are not

offered, advertised or sold to US investors directly or indirectly, with the exception of QIBs.

Private placement of ADRs is a comparatively cheaper and faster mode of raising the capital

than level-III ADR offerings. They allow foreign issuers to assess investors‘ appetite for their

securities before listing or publicly offering their DRs to full spectrum of investors. Nowadays,

different multiple Depository Receipt programs and structures are provided by depository banks,

to facilitate offering structure and trading goals (7, 8).

31

GDRs issued by a United States depositary bank are issued pursuant to Regulation S (Reg S) of

the Securities Act of 1933.

A GDR certificate is not delivered to the GDR holder, but is based on a master certificate held by

a Common Depositary for clearing purposes.

Most depositary receipts (DRs) are held in the street name of a bank or broker in a securities

depositary institution, such as the Depositary Trust Company (DTC), Euro clear, or Clear stream,

which expedites the trading and settlement of DR trades for the beneficial interest of the owners.

The beneficial DR owners are the owners who receive the actual benefits of holding a depositary

receipt, such as the capital gains from trading shares, dividends, and voting rights.

Most GDR programs require that the issuing company notify the relevant exchanges of any

information that may cause the underlying shares to greatly change in price.

SEBI RULES

Under sections 11, 11B and 11(4) of the Securities and Exchange Board of India Act, 1992

read with Regulation 11(1) of the SEBI (Prohibition of Fraudulent and Unfair Trade

Practices relating to Securities Market) Regulations, 2003, in the proceedings against M/s

Mavi Investment Fund Limited (PAN No. AAECM5148A).

1. Securities and Exchange Board of India (hereinafter referred to as ―SEBI‖) had received alerts

about large scale off-market transactions in its Integrated Market Surveillance System regarding

trading in scrips of certain companies during the year 2009.

2. Preliminary Investigations revealed that one Shri Arun Panchariya (hereinafter referred to as

―AP‖) had used certain Foreign Institutional Investors (FIIs)/Sub-Accounts along with a few

other entities to defraud Indian investors by facilitating issuance of Global Depository Receipts

(hereinafter referred to as ―GDRs‖) by certain listed Indian Companies. Later, the GDRs were

converted into equity shares and were sold in the Indian securities market. The Issuer Companies

where AP was observed to be involved in fraudulent activities were Asahi Infrastructure &

Projects Ltd(Asahi), IKF Technologies Ltd. (IKF), Avon Corporation Ltd (Avon), K Sera Sera

Ltd (K Sera), CAT Technologies Ltd (Cat), Maars Software International Ltd (Maars)

(hereinafter collectively to as "Issuer Companies").

32

3. As prima facie manipulative practices were suspected, SEBI, vide an ad–interim ex – parte

Order dated September 21, 2011 (hereinafter referred to as ―Interim Order‖), had inter alia issued

directions against AP and his company viz. Pan Asia Advisors Ltd. (hereinafter referred to as

―Pan Asia‖) barring them from rendering services in connection with instruments that are

defined as securities (as in section 2(h) of SCRA, 1956) in the Indian market or in any way

dealing with them.

4. The primary observations made in the Interim Order are:

a. Issuer Companies were having unimpressive financials yet they were able to successfully issue

GDRs in much larger quantities than their existing equity capital. The lead manager in all the

cases was Pan Asia.

b. The initial investors in all the GDR issues of Issuer Companies were common set of foreign

entities. The addresses of these entities prima facie appeared to be non-existent.

c. A group of Sub-Accounts with prima facie connections with AP were observed to be

converting GDRs of Issuer Companies and selling it in India within a short period of issuance of

GDRs.

d. The sale of shares of Issuer Companies by Sub-Accounts was matching on a consistent basis

with certain Indian entities which were also connected to AP.

e. During the aforesaid preliminary examination alongwith certain other FIIs/sub-accounts, it

was prima-facie observed that M/s Mavi Investment Fund Limited (hereinafter referred to as

"Mavi"), was converting the GDRs held by it in one of the Issuer Companies viz. Maars

Software International Limited (hereinafter referred to as "Maars") into underlying shares to sell

in the Indian markets.

f. It was observed that around 96.1 % of shares of Maars sold by Mavi were purchased by three

Indian clients connected to AP, viz. Basmati Securities Private Limited, Alka India Limited and

SV Enterprises (hereinafter referred to as "CP Group"). From the preliminary examination, it

prima facie appeared that Mavi was acting in concert with AP to offload the GDRs of companies

mentioned in paragraph 2 above.

33

5. Subsequently, SEBI completed the investigation against AP. Investigation revealed that AP

had used fraudulent means through various entities to defraud the Indian investors. After

concluding the investigation in respect of the roles of AP and Pan Asia, SEBI vide Order dated

June 20, 2013 debarred AP and Pan Asia for a period of ten years.

6. As stated earlier in Para 4(f), Mavi was observed to have traded with counterparties connected

with AP in Maars. It was observed in the Interim Order that for certain trades , the buy and sell

orders were placed at exactly or nearly same price and the that the buy and sell order size was

also nearly same in four trades (Details given in paragraph 22.1(ii) of this Order).

7. As prima facie manipulative practices were suspected, SEBI vide the Interim Order, pending

investigation and passing of further orders, inter alia directed that Mavi ―shall not deal in

securities or instrument with Indian securities as underlying, in any manner whatsoever, until

further orders‖, in view of the irregularities observed in the issuance of GDRs of Maars.

8. The abovementioned Interim Order was confirmed on January 25, 2012 (hereinafter referred

to as ―Confirmatory Order‖). Vide the aforesaid Confirmatory Order, the directions against Mavi

as contained in the Interim Order dated September 21, 2011, were modified to the limited extent

of allowing it to sell the securities held by it in its demat accounts. In that regard, it was directed

that: "Mavi Investment Fund Limited shall deposit sale proceeds, in case of any sale, in a bank

fixed deposit earning interest and it shall not be allowed to withdraw monies from the said

account including interest without the prior permission of the Securities and Exchange Board of

India. In case, Mavi Investment Fund Limited intends to utilize any or whole of the sale

proceeds, it shall seek prior permission of the Securities and Exchange Board of India."

9. While the Confirmatory Order was in force, Mavi filed appeals (Appeal No. 169 and 170 of

2012) before the Hon‘ble Securities Appellate Tribunal (hereinafter referred to as "SAT") inter

alia with a prayer for setting aside the Interim Order and Confirmatory Order passed by SEBI

and also a further prayer to permit it to sell shares which were not the subject matter of the

investigation and to permit repatriation of the sale proceeds in accordance with law. The Hon'ble

34

SAT vide its Order dated August 10, 2012, directed SEBI to consider the representation made by

Mavi and to pass an order on such representation within a period of two weeks from the date of

the aforesaid Order.

10. In compliance with the abovementioned Order of the Hon'ble SAT dated August 10, 2012,

SEBI considered the representation made by Mavi. Vide letter dated August 24, 2012, granted

further relaxation to Mavi and allowed it to repatriate and utilise funds generated out of shares

held by it except for the scrips of the Issuer Companies and Cals Refineries Limited, which were

under investigation.

11. Mavi filed an appeal (Appeal No. 63 of 2013), before the Hon‘ble SAT against the Interim

Order and Confirmatory Order issued by SEBI. The aforesaid appeal was disposed of by the

Hon‘ble SAT vide its Order dated July 17, 2013, wherein it observed:

"3.Learned counsel for the respondent (SEBI) on instruction states that the respondent would

complete the investigation and issue a show cause notice within a period of six weeks and pass a

final order within a period of four weeks thereafter, provided the appellant cooperates in the

matter. He further states on instruction that the respondent would not seek any extension of time

for passing the final order.

4. Learned Counsel for the appellant (Mavi) on instruction states that the appellant would co-

operate in the matter and would not seek any adjournment.

5. The statement made by the learned counsel for the parties is accepted. It is made clear that if

the respondent fails to issue a final order within the time stipulated hereinabove the ad-interim

order and interim order passed on September 21, 2011 and January 25, 2012 respectively shall

stand vacated against the appellant."

12. In compliance with the abovementioned Order of the Hon'ble SAT dated July 17, 2013, SEBI

completed its investigation as against Mavi, in the matter of market manipulation using GDR

Issues. Consequently, a Show Cause Notice dated August 28, 2013 (hereinafter referred to as

"SCN"), was issued to Mavi under Sections 11, 11(4) and 11B of the SEBI Act, 1992

(hereinafter referred to as "SEBI Act") read with Regulation 11 of the SEBI (Prohibition of

35

Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003

(hereinafter referred to as "PFUTP Regulations, 2003") calling upon it to show cause as to why

suitable directions should not be issued, for the violations alleged in the SCN.

13. Mavi filed their reply to the abovementioned SCN dated August 28, 2013 vide letter

September 16, 2013. Further, an opportunity for personal hearing was granted to Mavi on

September 23, 2013. Pursuant to the personal hearing, Mavi submitted additional written

submissions to the SCN vide letter dated September 24, 2013.

14. As per the findings contained in the Investigation Report (against AP and other entities) and

Supplementary Investigation Report (specifically with respect to Mavi), I note that:

16.1 During the period January 01, 2009 to September 21, 2011 (hereinafter referred to as

"Investigation Period"), out of the six scrips where AP was found to have indulged in

manipulation, Mavi had purchased and cancelled GDRs and sold resultant shares of two listed

companies, viz. Cat Technologies Limited (hereinafter referred to as "CAT") and Maars.

36

Nasrum Financial Services

Accountants & Business Advisers Chartered Accountants & Business Profilers

PROFILE

About Nasrum Financials Services

A Partnership firm of Chartered Accounts, Chartered Financial Accountants, Company

Secretaries & Cost and Management Accounts along with Management Grads and qualified Law

Grads is at the verge of providing professionalized services to each and every entity. From a

normal individual to listed entity of any recognized national and international stock exchange the

firm provides various services to its clients.

Having pan India network with supportive staff working round the clock in major Indian cities

like, Mumbai, Pune, New Delhi, Kolkatta, Chennai, Bangalore, Raighar, Noida,

Jaisalmer,Vijayawada, Vizag, Anantapur, Kurnool & Hyderabad, the firm has made a passive

entry Sectors like Information Technology, Realty & Infrastructure, Online Stamp Duty

collections & etc.

Since inception in the year 2009 till date the company has envisaged its services as enumerated

in the below mentioned table.

37

Sl.No Client Profile No. of

Clients

1. Individuals 166

2. High Networth Individuals 54

3. Banks 18

4. Partnership Firms 38

5. Private Limited Corporates 86

6. Public Limited Corporates 43

7. Educational Institutions & Trusts 9 & 14

With all the partners coming together from varied experiences, the firm has become a hub of

extreme services in all facets of business operations in India. From manufacturing to services,

banking to stock markets, assessments of business viability to technical analysis of stocks,

commodity and mutual funds the firm with its arm of experienced financial analysts‘ provides

valuable services to each and every client associated with it.

As being the fore bud of technology being in force and having state of the art technology with

central location as an advantage the firm is well placed to reach its client within the diameter of

its need at any point of time.

Various Services Being Offered:

Taxation Services include, Income Tax, Wealth Tax, Service Tax to clients ranging from

individual to listed corporate entities, the firm is extensively placed with various types of

agreements in force and caters to the needs of the clients on a time specific basis.

38

Project Management consultancy services are being offered to numerous project from the

inception to end product viability by preparing cost management report and reporting to the

promoters of the project.

Analysis of stocks, commodities, mutual funds and assessments of portfolios presently at the

various mutual funds houses stand as a exceptional service at the firm. Partner of the firm have

got vibrant knowledge and are well equipped with latest technologies being available in the

financial markets to cater the needs of the individuals as well as corporate clients.

The firm is also into distribution of Mutual Funds, Govt of India Relief Bonds, Policies of

Insurance & variety of Financial Products as a corporate broker. The firm has envisaged itself

into providing numerous services to its clients in financial matters

Being principal business of Audit, Taxation and conducting various special audits for BIFR &

AIFR, the firm is engaged in provided of services to offshore clients with its Joint Venture

organization M/s. James Cowper, wherein the services are titled, negotiated and for the purpose

of back end processing, the Indian arm ie., Nasrum Financial Services proved end to end solution

for all these kind of offshore activities.

The firm having an extensive database of various categories of clients stands at a peak of variant

height, with clear focus towards expanding its present operations in the field of Accounting,

Taxation, Corporate and other laws is catapulted to provide the services. The firms; capital

market division in its exclusivist conducts Inspection of various corporate entities, to name a few

the firm since inception has conducted inspection on behalf of SEBI, client included, KARVY

Stock Broking Ltd (All India Basis), HSE Securities Ltd., Ludhiana Stock Exchange,& various

other categories of Financial Market Participants.

About James Cowper

As a leading firm of accountants and business advisers, James Cowper‘s aim is simple - to draw

on the experience and expertise to help achieve real success. Fresh thinking, diverse skills and a

sharp eye for the broader picture mean that together, the company can really make things

happen.

39

What sets James Cowper apart from the rest of the UK‘s top accountants and business advisers is

Professionalism, flexibility, but above all, passion. The Cliental as varied as our skills, each

advised according to their specific needs.

With decades of experience behind the promoters and with sound knowledge, clear vision along-

with trained professionals for the future. Whatever the requirement – be it starting out with a new

business venture, flotation or tax planning for the private client – the company has breadth of

expertise to help achieve the requisite goals.

Services:

Audit and Assurance

Our audit team punches above its weight and we are currently the 28th largest firm of

auditors in England and Wales.

We provide a flexible easy-to-use audit service that's technically strong, while keeping to

agreed timetables and costs.

At James Cowper we stay up to date with changes in standards and legislation and can

deal with the most complex reporting requirements.

In an increasingly international environment our links through our global network,

Kreston International, enable us to provide international audit support, wherever you

need it.

Our assurance services offer more than just audit - we also provide review compilation

and other limited assurance services, and carry out financial investigations.

Business Direction

From project appraisal to raising finance or planning for growth, James Cowper‘s tailored

business direction service will help get you where you want to be.

40

When you deal with business direction service, you won‘t just receive expert advice from

the partners but the client also works as a team across the entire project. The organization

offers carefully considered business guidance, sharing expertise knowhow with all levels.

JC tailors its services to the requirements of its clients, from phone support through to

regular attendance at board meetings to inject objectivity, balanced opinion and

professional advice. JC works flexibly to meet client needs, whether client want regular

input or help with a one-off project.

Strategic workshops are an effective way to clarify aims and JC devises and facilitates

these for the client and the clients team. They can help deal with various situations,

ranging from managing a rapidly expanding business to dealing with business succession

issues. These sessions are followed up with on-going support.

JC seeks out opportunities and identify any threats - then focus on the solutions. When

you need very specific strategic support, JC hone‘s in on the area in question. Above all,

the client can count on our keen eye and wealth of specialist experience to help in

achieving success.

Specialist Projects

Strategic Review

Management Assessment

Profile Enhancement

Project Viability

Improving Credit Ratings

Implementing Key Performance Indicators

Optimising the Value Chain for Retial Segment Client

Pricing Strategies

41

Business Restructuring and Insolvency (BRI)

James Cowper prides itself on working clients to achieve the best solutions to financial

problems for various entities viz., SME‘s, Partnerships and HNI Individuals & etc.

The problems facing each business or individual are unique; JC‘s experienced team will

tailor a solution to fit with particular circumstances. JC‘s primary focus is to advise and

support in the recovery of a struggling business. This can often be achieved through a

refinancing or restructuring although the company recognizes that this is not always

possible in which case, as licensed insolvency practitioners, the company is able to act in

a suitable formal insolvency procedure.

The company also helps clients realize successful business investments tax efficiently

and securely by means of a solvent liquidation on which we offer a competitive fixed

price service.

Corporate Finance

At James Cowper Corporate Finance prides itselfs on the honesty and flexibility of its

approach coupled with over 70 years of M&A experience to deliver an award winning

service to the clients.

Here are a few of the areas where we strive to differentiate ourselves:

Boutique Approach:

Partner lead and manage transactions

Prompt attention to issues

Prepared to give opinions

Added Value:

Expert Negotiations

Demonstrable experience in creating and preserving value

http://www.jamescowper.co.uk/solvent-liquidation/

42

Bring the best buyers or financiers to the table

Confidence Borne from Experience:

Partner have seen most issues before

Design an appropriate process

Very used to dealing with international acquirers

Outsourcing

Accounting requirements are becoming increasingly complicated and time-consuming,

stretching internal resources. Faced with this, many companies are discovering the major

benefits of outsourcing. James Cowper supplies flexible support, leaving the client to

concentrate on running its business.

James Cowper‘s outsourcing service allows client to draw an varied range of experts with

total flexibility. Working with most of the client for as little as half a day a month,

through to a full-time secondment, JC‘ experts will field challenges on behalf of its

clients, cutting through complexities that might otherwise bring a halt.

At JC they understand that outsourcing is not only about cost saving, but also improving

efficiency, flexibility, speed and control. So, they work closely with the client to

understand their business and help you meet objectives.

As professional accountants, the expert team also consists of many experts who have

broader experience in the ‗real world‘. They therefore understand the business arena

inside out, and appreciate the pressures facing companies today.

They don't just prepare management accounts - they offer accounts training to cliental

staff and help implement new systems.

Outsourcing at JC enables its clients to:

Focus on core activities/ free ip management time

43

Have confidence in your accounting records

Have better controls and risk management

Access a flexible service that suits the client needs

Have constant access to specialist services

Reduce the hidden costs of employment

44

(a) CASE STUDY ON SISTEMA SHYAM TELESERVICES LTD

AND PERFORMANCE OF GDRs

Sistema, the largest public diversified corporation in Russia, acquired a 10% stake in Shyam

Telelink for a total cash consideration of US$ 11.4 million at the end of September 2007.

Shantanu Telecom along with their partner Sistema had applied for UASL licence in 22 telecom

circles of India. In August 2008, they became the first new mobile operator to get a pan-India

start-up spectrum to start their mobile service operations in the country. They provide mobile

services based on CDMA technology under the brand name MTS India. Shyam Telecom gave

Project to ZTE and Huawei for their network expansion. MTS launched operations in Uttar

Pradesh East and West in October 2010.

On 2 February 2012, the Supreme Court of India cancelled 122 licences of 22 mobile operators,

including 21 of MTS' 22 licenses, in connexion with the 2G spectrum scam. MTS lost all its

licences except the one for Rajasthan circle. The Supreme Court directed the Government of

India to conduct fresh auctions for sale of the spectrum within a period of four months, asking

the TRAI to come up with fresh recommendations. On 21 February 2013, MTS officially

announced that it would participate in the spectrum auction in March 2013, and had filed

application in the Supreme Court in January 2013, stating that it intended to do so. On the same

date, MTS also announced that it would close operations in 10 telecom circles within 30 days.

The 10 circles are - Assam, Andhra Pradesh, Bihar, Himachal Pradesh, Haryana, Jammu and

Kashmir, Madhya Pradesh, North East, Orissa and Punjab. MTS had approximately 2.32 million

subscribers in those 10 circles at the time of the announcement. MTS had a total national

subscriber base of 14.88 million. According to MTS officials, the 10 circles where MTS ceased

operations constituted 15.62% of its total subscriber base and less than 15% of the company's

overall revenue.

In the 2013 spectrum auction, MTS won back licences and spectrum in 8 circles - Delhi NCR,

Kolkata, Gujarat, Karnataka, Tamil Nadu, Kerala, Uttar Pradesh (West) & West Bengal. SSTL

chose not to bid for Mumbai, Maharashtra and Uttar Pradesh (East), which meant that it would

45

have to close operations in those circles. MTS had over 15 lakh subscribers in those 3 circles at

the time.

Apr 02, 2012

Unitech Ltd MD Sanjay Chandra, facing trial in the 2G spectrum case, today told a Delhi court

that applications for grant of 2G licences filed by rival ShyamTelelink Ltd, which has entered in

joint venture with Russia's Sistema, were required to be "summarily rejected" as there were

defects in it. Chandra alleged ShyamTelelink took "advantage" of net worth of Sistema to apply

for UAS licences without entering into agreement before the September 25, 2007, cut-off date.

These arguments were made by Chandra's counsel Rebecca John, who was cross-examining T

Narasimhan, a prosecution witness and Deputy CEO of Indo-Russian joint venture

SistemaShyam Teleservices which operates under the brand name MTS. Narasimhan, however,

denied all the allegations leveled by Chandra's counsel and during his deposition before Special

CBI Judge O P Saini said applications for UAS licences were filed by ShyamTelelink based on

the net worth of Sistema JSFC and there was agreement prevailing between them when the

applications were submitted on September 25, 2007. "It is wrong to suggest that the applications

filed by ShyamTelelink Ltd were full of defects and were required to be summarily rejected by

the DoT. It is wrong to suggest that ShyamTelelink took advantage of net worth of Sistema,

though by that time it had not even entered into an agreement with it. "It is wrong to suggest that

promoters of ShyamTelelink sold their shares to Sistema and made huge profits in the bargain,"

Narasimhan said, adding "the shares were sold at par".

Feb 28, 2012

The collateral damage from Supreme Court's 2G license cancellation order continues. Sources

say Sistema of Russia has invoked arbitration clause against government of India, reports

CNBC-TV18's SiddharthZarabi. The actual statement says that a six-month timeline has been set

for a settlement. Even pre-arbitration, you are allowed to have negotiations to settle outside of

court. Then there are specific clauses, which set out a process for beginning an arbitration

process under international laws, essentially covered under several United Nation covenants with

respect to international arbitration claims. Things like jurisdiction, the mandates will come later.

46

The essential news, at this point of time, is that this is the first case of a bunch of foreign

investors who had come into the Indian telecom space post 2008 invoking this kind of arbitration

claim. Post six months, if there is no settlement, it becomes a formal arbitration process.

Companies like Bahrain Telecom, Emirates Telecom have more or less announced the fact that

they will quit and they are seeking to exit out of the joint ventures. But Sistema's case is different

from those. Sistema was a pre-existing operator prior to the grant of license. It had invested in a

company which already had a running operation in the state of Rajasthan�ShyamTelelink. It

acquired that company. Sistema has investments from a Russian state agency. Therefore, the

company has now invoked and sort protection under the bilateral investment protection

agreement, which was notified in 1995 initialed in 1994 between the Russian Federation and the

Government of India. There are several clauses within it which allow a company to seek

arbitration. One of them deals with expropriation of investments, essentially to deal with the fact

that if there are investments that been made and if act happens in overseas domain, which this

case would be India, then the affected companies and parties can seek arbitration as well as seek

compensation with interest.Now, that will come at the later stage. But this is the first step clearly.

In some ways Sistema also is looking at the six month window possibly on account of what will

be the new auction rules that will be framed up because the Supreme Court order which orders

the cancellation of license has not come into effect. There is a four month timeline that has been

set for that to come into effect. So, there is some give and take. But, for the moment, it is very

clear that one of the largest Indian investors in Russia and a very large corporation by Russian

standard, which is listed on the London Stock Exchange, has made this definitive move. This

would now bring us to the second question that when it comes to Telenor, would it also do

something similar? In the past, we have heard from that camp to that such a possibility could be

considered because India also has a similar sort of treaty with the country of Norway. At this

point of time, this is an arbitration process which has been sort of set in motion. But there is a

six-month window. If there is some sort of negotiation and if the matters get sorted out before

that, then there is no possibility. But for now the big news really is that Russian company taking

the Indian government and notifying it that it will take it to court to protect its investments in

India

47

Feb 23, 2011

The Telecom companies, which allegedly benefitted in 2G spectrum allocation, questioned the

findings of the CAG report and contended in the Supreme Court that the licences issued to them

cannot be cancelled on its basis. The six companies -- Videocon , Uninor, Idea , ShyamTelelink

and Aircel -- filed their affidavits in response to the apex court''s notices seeking their views on

"why their licence should not be cancelled for having benefited in 2G spectrum allocation" when

A Raja was Telecom Minister. The apex court had on January 10 had issued notices to 11

telecom companies Etisalat, Uninor, Loop Telecom, Videocon, S-Tel, Allianz Infra, Idea

Cellular, Tata Tele Services , SistemaShyam Teleservices, Dishnet wireless and Vodafone-Essar.

Electronic company Videocon, in its 16-page affidavit, submitted the petition seeking

cancellation of its licence was based on "incorrect" facts and it should be dismissed. "CAG report

contains flawed and misconceived findings regarding its eligibility in getting 2G spectrum,"

Videocon said. The company pleaded that the government has already served a notice for

cancellation of licence and it has filed a detailed response to the Centre. Uninor, which is JV

between real estate major Unitech and Norway''s telecom company Telenor, in its 29-page

affidavit, said the "CAG report was made without seeking any clarification and explanation from

it and so adverse inference cannot be drawn against it on the basis of the report."

2013

NEW DELHI:

The government may ask Russian conglomerate Sistema's Indian telecom venture, SSTL to pay

around Rs 463 crore as charges for the one-year period up to February 15, 2013 when it

continued operations without valid permits, sources said.

SSTL lost 21 licences after Supreme Court had cancelled a total of 122 telecom licences on

February 2, 2012. The apex court had said that telecom companies, whose licences were

cancelled, could continue their operations till the time the government completed auctions.

"The due amount has been calculated considering...all the 122 licences have continuing their

operation after 2.2.2012 up to 15.02.2013," sources said.

http://economictimes.indiatimes.com/topic/SSTL

http://economictimes.indiatimes.com/topic/Supreme%20Court

48

The Department of Telecommunications has calculated provisional liability on all 122 telecom

licences amounting to Rs 2,764.29 crore, following order of the apex court, assuming that all

licences were operational till February 15, 2013.

According to the provisional charges, liability of Etisalat DB amounts to Rs 605.02 crore, Idea

Cellular Rs 162.04 crore, Loop Telecom Rs 389.48 crore, S Tel Rs 17.96 crore, Spice

Communications (acquired by Idea Cellular) Rs 108.9 crore, Tata Teleservices Rs 3.22 crore,

UninorRs 513.4 crore and VideoconTelecommunicationsRs 501.11 crore.

On February 15, 2013, the apex court asked telecom companies, who did not win spectrum in

November 2012 auction, to close their operations.

The court has directed to fix separate liability on companies who discontinued their services

following cancellation of their permits.

In March 2013, SSTL announced it won spectrum in the 800 MHz band in eight circles,

including Delhi, Kolkata, Gujarat, Karnataka, Tamil Nadu, Kerala and Uttar Pradesh (West).

Most of these companies, except SSTL, closed or scaled down their operations before February

15, 2013 and hence the provisional demand, sources said will "further need confirmation of

period of operation and quantum of spectrum to be charged".

SistemaShyam Teleservices Ltd (SSTL) is a venture, involving equity participation by Sistema

of Russia, the Government of the Russian Federation and the Shyam Group of India. Sistema is

the majority shareholder in the joint venture company, which operates its telecom services under

the MTS brand.

The sponsored depositary receipt universe

At the end of 2012, there were more than 2,300 Sponsored DR programs available for

more than 1,750 companies from across 85 countries (Figure 1). 37% were Level 1

ADRs traded on the US OTC market while 35% were exchange listed DRs on NYSE,

NASDAQ, LSE or Luxembourg (Figure 1).

http://economictimes.indiatimes.com/idea-cellular-ltd/stocks/companyid-3154.cms

http://economictimes.indiatimes.com/idea-cellular-ltd/stocks/companyid-3154.cms

http://economictimes.indiatimes.com/spice-communications-ltd-merged/stocks/companyid-3257.cms

http://economictimes.indiatimes.com/spice-communications-ltd-merged/stocks/companyid-3257.cms

http://economictimes.indiatimes.com/tata-teleservices-maharashtra-ltd/stocks/companyid-3545.cms

http://economictimes.indiatimes.com/videocon-industries-ltd/stocks/companyid-10502.cms

http://economictimes.indiatimes.com/topic/Tamil%20Nadu

http://economictimes.indiatimes.com/topic/Russia

http://economictimes.indiatimes.com/topic/majority%20shareholder

50

The majority of the programs were from Asia and Europe (41% and 21% respectively)

(Figure2).

The top 4 countries in terms of number of programs are from the BRIC nations,

representing 35% of the DR universe. India comes out on top in terms of the total

number of programs as well as in terms of the number of companies. Australia ranks

fifth by number of programs but ranks second by the number companies owing to

large number of Level 1 ADRs which have been setup in recent years. Together the top

10 countries account for 63% of programs in the DR universe (Figure 3/4). Out of the top

10 countries, by both number of programs and companies, 6 are from the emerging

markets (Figure 3/4).

52

Analysis of the universe by industry shows that 15% of all DR programs in the universe

are in the banking and financial sectors followed by metals & mining (7 %), utilities (6%),

telecoms (6%) and pharma/biotech (5%) (Figure 5).

In 2012, a total of USD 12.1 billion was raised through 36 DR programs as compared

to USD 14.8 billion in 2011 through 69 DR programs, representing a drop of 18%

(Figure 6). The amount of capital raised through depositary receipts has seen a

consistent drop in the last 3 years since the financial crisis by 31% (2010), 32% (2011)

and 18% (2012) (Figure 6 ). 39% of capital raised in 2012 was through follow-on

issues as compared to 49% in 2011. The share of follow-on issues as a percentage

of total capital raised has come down in 2011 and 2012 from an average of 65%

between 2008–2010 (Figure 6 ) The share of capital raised through GDRs, compared

to ADRs, has increased from an average of 28% between 2008–2010 to 64% in 2011

and 62% in 2012.

53

50% of total capital raised in 2012 was from CIS which maintained its top

position (Figure 7). Contribution from Asia has gone down considerably from

35% in 2011 to 11% in 2012, mainly owing to the lackluster IPO market in China

and a drop in GDR IPOs from India. Latin America saw a growth in capital

raised mainly on account of one deal of USD 3.2 billion (Santander Mexico)

(Figure 7).

54

60% of capital raised in 2012 was from the banking and financial services industry

and 18% from Telecom (Figure 8).

55

Capital raising depositary receipt transactions in 2012

A total of USD 12.1 billion was raised by 26 companies from 13 countries through 36

DR programs in 2012 as compared to USD 14.8 billion in 2011 by 54 companies from

15 countries through 69 DR programs (Table 2). In 2012, the top 5 deals accounted for

78% of the total capital raised as compared to 44% in 2011 (Table 2). Average deal size

in 2012 was USD 466.5 million as compared to USD 274.3 million in 2011 (Table 2).

56

Issue Country Region

Capital

Raised Exchange Industry

USD

million

Sberbank of

Russia RUSSIA CIS 3,510 –

Banking &

Financial

Services

Grupo

Financiero

Santander

México

MEXICO Latin

America 3,241 NYSE

Banking &

Financial

Services

MegaFon OAO RUSSIA CIS 1,691 LONDON Telecommunications

KCELL JSC KAZAKHSTAN CIS 526 LONDON Telecommunications

Globaltrans

Investment CYPRUS Europe 470 LONDON Transportation

Bancolombia COLOMBIA Latin

America 307 NYSE

Banking &

Financial

Services

MD Medical Group

Investments PLC RUSSIA CIS 289 LONDON

Healthcare-

Services

Cencosud CHILE Latin

America 238 NYSE Food & Agro

TPK Holding Co.,

Ltd. TAIWAN Asia 236 LUXEMBOURG Electronics

Pacasmayo

Cement PERU

Latin

America 230 NYSE Building Materials

Chailease Holding

Co.Ltd. TAIWAN Asia 206 LUXEMBOURG Real Estate

WIN

Semiconductors TAIWAN Asia 158 LUXEMBOURG Semiconductors

E.Sun Financial

Holding Co Ltd TAIWAN Asia 106 LUXEMBOURG

Banking &

Financial

Services

57

Fibria Celulose

SA BRAZIL

Latin

America 104 NYSE

Forest

Products&Paper

Wintek Corp TAIWAN Asia 100 LUXEMBOURG Electronics

Edwards UNITED

KINGDOM Europe 100 NASDAQ

Machinery &

Tools

WNS Holdings INDIA Asia 99 NYSE Commercial

Services

YY Inc. CHINA Asia 82 NASDAQ Software &

Internet

Luxfer Holdings

PLC

UNITED

KINGDOM Europe 80 NYSE Metal & Mining

Ram Kaashyap

Investment INDIA Asia 75 – Oil&Gas Services

Vipshop Holdings

Ltd CHINA Asia 72 NYSE

Software &

Internet

Industrial

Investment Trust INDIA Asia 60 –

Banking &

Financial

Services

Parade

Technologies TAIWAN Asia 59 LUXEMBOURG Semiconductors

Videocon Industries INDIA Asia 51 LUXEMBOURG Household

Products

Acquity Group

Limited HONG KONG Asia 33 NYSE

Software &

Internet

Raj Oil Mills INDIA Asia 8 LUXEMBOURG Household

Products

58

(b) PROCEDURAL AND PROCESS FOR GDRs

The procedural requirements for issue of GDRs are briefly set out here below:

1. Preliminary Meetings

2. Authorization by Board of Directors.

3. Organizational Meetings.

4. Legal and accounting due diligence on Issuer.

5. Authorization by the shareholders.

6. Statutory Approvals.

7. Application for listing the additional shares on the Indian Stock Exchange.

8. Filings.

Preliminary Meetings

The Issuer generally holds preliminary discussions and meets with different global merchant/

investment bankers (who would act as the Lead Manager, Co- Managers, Underwriters), Legal

Advisors (Indian and Foreign), Auditors, and other intermediaries before deciding to float a

GDRs Issue.

Authorization by the Board of Directors

The Issuer is required to pass a Board Resolution approving the proposed GDRs issue.

The Issuer's Board should also approve the notice calling for a General Meeting of the

shareholders for the purpose.

It is advisable to constitute a Committee of Directors and confer on it necessary powers for

approving various matters/ documents connected with the Euro issue, once the Board of

Directors (the “Board”) of the Issuer has decided to float GDRs in the global market. The

following matters /documents could then be approved by the Committee of Directors, namely:

Offering Circular

59

Escrow Agreement to be executed by the Escrow Agent

Placing Agreement to be executed by the Lead Manager and the Issuer

Deposit Agreement to be executed by the Depository

Allotment of shares in favor of the Depository

Opening of bank account outside India and operation of the said account Making/filing

the necessary applications of the Securities and Exchange Commission, U.S., and /or

making applications to Luxembourg Stock Exchange or other exchanges Signing and

executing any deed, document, writing, confirmation, undertaking, indemnity in favour

of any party including, Lead Manager, Co- Managers, Underwriters, Legal Advisors,

Accountants and others who may be related to the issue.

As per the listing agreement of the stock exchanges, the Issuer should notify the stock exchange,

the date of the Board meeting at which the proposal will be considered and also inform it of the

decision of the Board.

Organizational Meetings

The Issuer formally appoints the Lead Manager, Co- Managers, Underwriters to market the issue

and organize the road shows, printers, Legal Advisors (Indian and Foreign), Depository (to issue

GDRs to the Underwriters to arrange to place them with the ultimate investors), the Custodian

(who physically holds the shares of the Issuer on behalf of the Depository) and the overseas

bankers.

The Issuer gives the necessary details about the Issuer to the Lead Manager, Co- Managers and

other intermediaries. It also provides the relevant clarifications to the Indian and foreign Legal

Advisors relating to legal matters of the company and the issue. The Issuer will, along with the

Lead Manager to the issue decide the following issues, namely:

- Public private placement

- The number of GDRs to be issued

- The issue price

60

Legal and Accounting Due Diligence on the Issuer

A team consisting of legal, technical, and financial key persons from the Lead Manager, Co-

Managers, Underwriters, Legal Advisors, and Auditors would visit the Issuer for carrying on

legal and accounting due diligence. During the due diligence, the team usually collects various

documents, which assist them in preparing the prospectus.

AUTHORIZATION BY SHAREHOLDERS

The shareholders must approve the proposed foreign issues of GDR/ADRs by a special

resolution passed at the general meeting according to the provisions of section 81 (1A) of the

Companies Act.

Approvals should be also taken from the Issuer's shareholders with regard to Section 94 (increase

in authorized share capital), Section 16 (alteration of Capital Clause of the Memorandum of

Association for change in authorized share capital) and Section 31 (alteration of Share capital

Clause in Articles of Association) of the Companies Act, 1956, if required.

Statutory Approvals

Approval of the Foreign Investment Promotion Board („FIPB‟)

Under the Foreign Exchange Management (Transfer or issue of security by a person resident

outside India) Regulations (―the Regulations‖), a person resident outside India may purchase

shares of an Indian company under the foreign direct investment scheme, subject to the terms

and conditions specified in Schedule 1 of the Regulations.

Schedule 1 provides that an issuer company which is engaged or proposes to engage in any

activity specified in this regard or beyond the specified sectoral cap, shall only issue shares to a

person resident outside India, provided it has secured prior approval of Secretariat for Industrial

61

Assistance (―SIA‖) or, as the case may be of FIPB of the Government of India and the terms and

conditions of such an approval are complied with.

Reporting to the RBI

The issuing company is required to furnish a statement to the Exchange Control Department of

RBI, Central Office, Mumbai, within thirty (30) days from the date of closing, stating details of

the issue such as number of GDRs issued, number of underlying fresh shares issued, capital

structure before and after the issue, etc.

Stock Exchanges Approval

In principal approval from the Stock Exchanges in India where the shares of the Company are

listed, is required prior to listing on the Overseas Exchange.

Filings with SEBI

Issue of shares requires the filing of an Offering Circular with SEBI for its information

and records.

Other Approvals

Prior to the launch of its issue, the Issuer must obtain the consent of the financial

institutions/banks if it has obtained any financial facilities (term loans, guarantees etc.).

62

PROCESS OF GDR‟S

Payment Dividends

(c) PROCEDURE AND PRICING OF THE GDRs

Convene a Board Meeting to approve the proposed GDR Issue for not exceeding certain

value in foreign currency.

Convene the EGM for the approval of the shareholders for the proposed GDR Issue under

Sec 81(1A) of the Companies Act, 1956.

Identify the Agencies.

Convene a Board Meeting to approve the Agencies.

Appoint the Agencies and sign the Engagement Letters.

India

ISSUER CO. CUSTODIAN

N

Underlying

shares

DEPOSITORY

Overseas

Foreign Stock Exchange

OVERSEAS INVESTORS

Listed

63

The Indian Legal Counsel to undertake the Due Diligence.

Prepare the first draft of the IM in consultation with the Indian Legal Counsel and submit

the same to various Agencies for their comments thereon.

Prepare the 2nd

/3rd

draft of IM incorporating the comments.

The Listing Agent to submit the IM with the overseas Stock Exchange for their

comments and In principle Listing Approval.

Simultaneously submit draft IM to the Indian Stock Exchanges where the Issuing

Company‘s shares are listed for In principle approval for listing of the underlying shares.

Hold Board Meeting to approve the Deposit Agreement, Subscription Agreement and the

Escrow Agreement.

On receipt of the comments on the IM from the Overseas and Indian Stock Exchanges

incorporate the same and file the final IM with Overseas Stock Exchange and obtain

Final Listing.

The Issuing Company can open the Issue for the GDR on receipt of the In principle

Listing Approval from the Overseas and the Indian Stock Exchanges.

Open the Escrow Account with the Escrow Agent and execute the Escrow Agreement.

In consultation with the Lead Manager to finalize

whether the GDR will be through public or a private placement,

The number of GDRs to be issued.

The issue price. (The Issue price is normally 5-10 % discounted prevalent market

price of the shares of the Issuing Company one day prior to the opening of the

GDR Issue.

Number of underlying shares to be issued against each GDR.

64

On the day of the opening of the Issue execute the Deposit and Subscription Agreements.

The Issue should be kept open for a minimum period of 3 working days.

Immediately on closing of the Issue convene a Board/ Committee Meeting for allotment

of the underlying shares against the Issue of the GDRs.

Then Deliver the share certificate to the Domestic Custodian Bank who will in terms of

the Agreement instruct the Overseas Depository Bank to Issue the GDR to Non Resident

Investor against the shares held by the Domestic Custodian Bank.

On receipt of Listing Approval from Overseas Stock Exchange submit the required

documents for Final In principle Listing approval from Indian Stock Exchange.

After GDRs are listed the Lead Manager to instruct the Escrow Agent to transfer the

Funds to the Company‘s Account.

The Company can either remit the entire funds or in part as per its discretion.

Number of underlying shares to be issued against each GDR.

On obtaining the Final Approval from Indian Stock Exchanges admit the underlying

shares to the depository i.e., NSDL and CDSL.

Obtain Trading approval.

Intimate the Custodian for converting the physical shares into Demat.

Then Deliver the share certificate to the Domestic Custodian Bank who will in terms of

the Agreement instruct the Overseas Depository Bank to Issue the GDR to Non Resident

Investor against the shares held by the Domestic Custodian Bank.

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PRICING OF THE GDRS

The pricing of Global Depositary Receipt and Foreign Currency Convertible Bond issues

should be made at a price not less than the higher of the following two (2) averages:

(i) The average of the weekly high and low of the closing prices of the related shares quoted

on the stock exchange during the six (6) months preceding the relevant date;

(ii) The average of the weekly high and low of the closing prices of the related shares quoted

on a stock exchange during the two (2) weeks preceding the relevant date.

The ―relevant date‖ means the date thirty (30) days prior to the date on which the meeting of

the general body of shareholders is held, in terms of section 81(IA) of the Companies Act,

1956, to consider the proposed issue.

The Securities & Exchange Board of India (Sebi) is in talks with the finance ministry to tighten

rules relating to issuance of Global Depository Receipts as the regulator has found that several

local companies are skirting guidelines to raise funds overseas.

According to Sebi Chairman UK Sinha, some firms are misusing the facility to raise funds

through issuance of equity overseas in the form of Global Depository Receipts (GDRs) which

have underlying shares of Indian companies. Over the past six months, a surveillance system put

in place by Sebi to monitor GDR transactions has thrown up evidence that some issuers are

attempting to bypass the rules, he said.

What is worrying policymakers is that the liberal norms for raising foreign funds through GDRs

are now being misused by a set of companies whose track record and pedigree are viewed as

dubious by bankers. The government first allowed companies to list abroad by issuing GDRs and

American Depository Receipts (ADRs) in 1993. The first set of issuers included India's blue chip

companies led by Reliance Industries and a few Tata Group companies.

Compared to the rules on raising foreign debt, the norms on GDRs were far more liberal with

restrictions limited to investment in real estate and the stock market. Sinha told the media on

Friday that in a few cases of violation of GDR rules, the funds raised were not repatriated or

http://economictimes.indiatimes.com/topic.cms?search=Sebi

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brought back to the country. "There are also instances where companies have raised GDRs 12-13

times the paid-up equity," he said, while warning violators of stringent action.

The policymakers' decision to revise the rules comes in the wake of regulatory action in

September. Last month, Sebi banned seven companies, including Asahi Infrastructure, IKF

Technologies, Avon Corp, K Sera Sera and Cals Refineries, from issuing any shares or altering

their capital structure in any manner till further notice for alleged manipulation of GDR norms.

EThad reported in December 2010 several instances of companies skirting rules on GDRs, with

little known firms also securing approvals to raise funds overseas. Sinha said Sebi had also made

disclosures by foreign portfolio investors more stringent.

"From October 31, FIIs will file elaborate disclosures which would include the source and name

of end beneficiaries. It is operational from end of second quarter (September 30), so the

disclosures will start coming from October-end," he said. The Sebi chief said there have been

instances of misconduct in the market in the past few months, which have been dealt with

strongly.

"There is a provision for client code modifications. During a transaction, there could be a

mistake but we found that transactions involving client code modification is close to .`56,000

crore few months ago which we felt cannot be just an error. We came down heavily on that. It is

now only .`120 crore. But still I am not satisfied," he said.

Proposed changes in the ADR/GDR‟s Pricing guidelines

The ―Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary

Receipt Mechanism) Scheme, 1993‖ was initiated in 1993 to allow the Indian Corporate sector to

access global capital markets through issue of Foreign Currency Convertible Bonds

(FCCBs)/Equity Shares under the Global Depository Receipt Mechanism (GDR) and American

Depository Receipt Mechanism (ADR). The Scheme has been amended several times since then.

2. In order to bring the ADR/GDR guidelines in alignment with SEBI‘s guidelines on domestic

capital issues, Government, vide Press Note dated August 31, 2005, amended the pricing

guidelines for Indian listed companies issuing FCCB/ADR/GDR. The present pricing clause,

thus, reads as under:

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―Listed Companies – The pricing should not be less than the higher of the following two

averages:


the stock exchange during the six months preceding the relevant date;


a stock exchange during the two week preceding the relevant date.

The ―relevant date‖ means the date thirty days prior to the date on which the meeting of the

general body of shareholders is held, in terms of section 81 (IA) of the Companies Act, 1956, to

consider the proposed issue.‖

3. In the normal circumstances the extant pricing norms provides protection from price

manipulation by the Issuer in domestic market.

4. In the recent period, Government has received a number of representations from corporates

that the extant pricing norms affect them adversely in the falling market.

5. In order to remove hardship to companies in a falling market, Government is considering

modifying the pricing guidelines for ADR/GDR issues. The proposal is to amend the parameter

(i) of the pricing norms to ‗two months‘ in place of ‗six months‘. In addition the definition of

‗the relevant date‘ for such issues is also proposed to be modified as per SEBI (DIP) guidelines

on preferential allotment and qualified institutions placements (QIP).

6. After the incorporation of proposed changes, the new pricing norms for ADR/GDR issues will

read as under:

“Listed Companies – The pricing should not be less than the higher of the following two

averages:


the stock exchange during the two months preceding the relevant date;


a stock exchange during the two week preceding the relevant date.

The ―relevant date‖ means the date when the Board of the issuing company passes the

resolution authorizing the proposed issue.

7. Comments of the public are invited on the proposed changes mentioned above. Comments

may be sent to Shri A.M. Bajaj, Director (External Market), Department of Economic Affairs,

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Ministry of Finance, Room No.71, North Block, New Delhi‐110001 by mail or at

[email protected] by e‐mail within the next 15 days.

(d) ISSUER MECHANISM

Issuer

It is the company that plans to tap the foreign market through the global issue mechanism (the

“Issuer”).

MECHANISM

As we have already said that GDR represents a certain number of underlying equity shares. In

Reliance issue, one GDR represents two equity shares. Though the GDR is quoted and traded in

US dollars, the underlying equity shares are denominated in rupees.

The shares are issued by the company to an intermediary called the depository, in whose

name the shares are registered. It is the depository which subsequently called the GDRs. The

physical possession of the equity shares is entrusted to another intermediary called the custodian.

Who is an agent of the depository, thus, while GDRs represents the issuing of a company‘s

shares it has a distinct identity and, in fact, it does not figure in the issuing of a company.

The main advantage of the GDRs to the issuer is that the company does not assume any

foreign exchange risk. Although it is able to garner foreign exchange by way of issue proceeds.

The dividend outflow from the company is only in rupees terms, but the depository converts

these rupees and pays the dividend in US dollar terms to ultimate investors after deducting a

withholding tax of 10% on dividend.

Once a GDR is issued it can be traded freely among international investors. An investor

who wants to cancel a GDR can send it back to India for exchanging against share certificates.

The earlier requirement of a lock in period of two years has now been removed. The object of the

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lock in period was to prevent investors form taking advantage of the arbitrage opportunity arising

out of discount to market price at which the GDR issued.

In the international security market, the GDR are prevalent for last sixty years and have

been facilitating settlement of securities across borders.

(e) AGENCIES AND DOCUMENTS OF GDR

Lead Manager -The firm should be registered with the appropriate regulatory authority

in Europe/ Singapore or Japan.

Depository – Is an Overseas Bank authorized by the Issuing Company to Issue the

GDRs.

Listing Agent - Is a person who is responsible for the listing of the GDRs at any of the

recognized Overseas Stock Exchanges. Generally the Depository also acts as the Listing

Agent.

Custodian: - It is the domestic Bank who holds the underlying shares/ Bonds Issued

against the GDRs.

Escrow Agent - An Overseas Bank where an Escrow Account has to be opened for

deposit of the monies received from Investors against the GDR Issue till the Final Listing

Approval is obtained from the Overseas Stock Exchange

Main agreements to be executed and related documents

In Case of GDRs issue:

Escrow Agreement to be executed by the Escrow Agent.

Placing Agreement to be executed by the Lead Manager and the Issuer.

Deposit Agreement to be executed by the Depository.

Offering Circular.

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(f) CONDITIONS AND REPORTING REQUIREMENTS

BEFORE AND AFTER ISSUING GDRS

CONDITIONS FOR BEFORE ISSUE OF GDRS

The GDRs are issued in accordance with the Scheme for issue of Foreign

Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt

Mechanism) Scheme, 1993 and guidelines issued by the Central Government

thereunder from time to time.

A GDR is permitted by RBI under Automatic Route subject to the sectoral caps as

specified vide Press Note No.14 (1997 series) dated 8th October 1997 issued by

the Government of India, Ministry of Industry.

REPORTING REQUIREMENTS AFTER ISSUING GDRS

After completing the transaction, the Issuer, within thirty (30) days of the completion of such

transaction, would be required to furnish the following information to the Foreign Investment

Division, Central Office at Mumbai:

Details of the purpose for which the GDRs have been raised. If funds are deployed for overseas

investment, details thereof;

Details about the Depository, Lead Manager, Sub-Mangers to the Issue, Indian

Custodian;

Details of the FIPB Approval or the relevant NIC Code in case of automatic route;

Details of Authorized and Issued paid up capital before the issue and after the issue;

In case of private placement, details of investors and ADRs/GDRs issued to each of

them:

Number of GDRs/ADRs issued

Ratio of GDRs/ADRs to the underlying shares

Details of Issue related expenses

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Details of listing arrangements

Amount raised and the amount repatriated

(g) CHARACTERISTIC OF GDRs

1. GDR‘s are issued to investors in more than one country and may be denominated

in any acceptable freely convertible currency.

2. GDR‘s are issued to investors by the depository bank and not the issuing company.

This means that in the books of issuing company, the depository bank appears as the

shareholder. GDR holder therefore does not acquire any voting rights. The voting

rights accrue only to the depository bank.

3. Although the GDR is quoted and traded in a foreign currency the underlying shares

are denominated in INR. Thus the GDR derives its value through the price of the

underlying shares and the current exchange rate. It is therefore exposed to exchange

rate risk.

4. GDR holders have the option of cancelling GDR‘s and arranging sale of the

underlying shares in the domestic market if the international price is less than the

corresponding domestic price. This provision can however be used only after a

―Cooling off‖ period of 45 days from the date of the issue.

5. GDR holders are entitled to all corporate benefits available to equity holders such

as dividend, bonus and rights in the same proportion as their entitlement.

6. The foreign currency funds acquired by the company through a GDR issue are

permitted to be used for any normal business activity, but cannot be used for trading

in international securities or real estate.

7. Issuer company has to prepare Drafts for international investors and provide the

accurate data with regard to pricing of the GRD in foreign Currency Units.

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(h) FEATURS, ADVANTAGES & DISADVANTAGES OF GDRs

FEATURES OF THE DEPOSITORY RECEIPT

FOR ISSUERS FOR INVESTORS

Creates, broadens or diversifies

investor base to include investors in

other capital markets.

Enhances visibility and global presence

among investors, consumers and

customers.

Increases liquidity by tapping new

investors.

Develops and increases research

coverage of your company.

Improves communication with

shareholders globally.

Enables price parity with global peers.

Offers a new venue for raising equity

capital.

Facilitates merger and acquisition

activity by creating a desirable stock-

swap ―acquisition currency‖.

IF OFFERED IN THE US:

„ Allows for the creation of direct

Easy to purchase and hold.

Trades and settles in the same manner

as any other security available in the

investor‘s home market.

Facilitates global / sector

diversification by providing

access to new companies.

Enables comparison with other

investments due to accessible price

information.

Eliminates or reduces global custody

safekeeping charges.

Pays dividends and delivers corporate

action notifications in the investor‘s

home currency and language.

IF PUBLICLY-LISTED:

„ Conforms to disclosure and

accounting

Requirements.

Offers institutional investors (mutual

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purchase and

dividend reinvestment programs to

attract retail

Investors.

Aids in the creation of competitive

incentive

programs for US employees, such as

stock

Purchase and option plans.

funds,

pension funds) the opportunity to hold

international securities that might

otherwise

Not be permitted.

„ If listed on a major US exchange,

lowers

dividend tax rate for individual and

retail

investors

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ADVANTAGES AND DISADVANTAGES OF GDRs

ADVANTAGES DISADVANTAGES

1. GDR allows the investors to hold share in

foreign companies without bothering about

their accounting practice, laws or any other

rules. It facilitates easy trading method since in

the global market you can buy shares or sell it

using dollars and the stock market offerings are

listed out in English. Another important

advantage in buying GDR is you can buy them

even you are restricted by any investment

objective which prevents you from buying

stocks of foreign companies.

2. GDR does not impose any limit to the buyer

and thus you are privileged to buy as many

stocks of any foreign company. You need not

pay any transfer taxes if you buy GDR or else

you should pay local taxes when you purchase

any foreign company's share directly.

3. Accessibility to foreign capital markets

4. Increase in visibility of the issuing company

5. Rise in the capital because of foreign

investors

1. One disadvantage in buying global

depositary receipt is you must pay the currency

conversion if you are buying shares of the

company outside America, since GDR exists

usually in US dollars.

2. Depositary ratio determines the price of the

GDR and it also fixes the price of GDR to the

underlying shares. Sometimes the GDR is

priced higher than the corporate shares while it

goes lower.

3. Helps in diversification, hence reducing risk

4. More transparency since competitor‘s

securities can be compared

5. Prompt dividend and capital gain payments

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(i) BENEFITS TO ISSUING COMPAY AND INVESTORS

BENEFITS TO THE ISSUING COMPANY

The companies have found that the establishment of a GDRs programme offers numerous

advantages the primary reasons why a company would establish a GDR programme can be

divided in to two types of benefits (a) capital and (b) commercial. These benefits are as follows:

GDR issue makes it possible to enlarge the market for its shares through a broadened and

more diversified exposure which may increase or stabilize the share price.

GDR issue enhances the image of the company‘s products, services or financial

instruments in a market place outside their home country.

GDR-issue can also provide a mechanism for raising capital or as a vehicle for an

acquisition.

GDR also enables employees to invest easily in the parent company.

BENEFITS TO THE INVESTORS

Increasingly, investors aim to diversify their portfolios internationally. Obstacles such as

undependable settlements (in terms of procedure and period), costly currency conversions,

unreliable custody services, poor information flow, unfamiliar market practices, confusing tac

conventions, etc. may discourage institutions and private investors from venturing outside their

local market. As a result, more and more investors are using GDRs for investment purpose. The

important benefits are:

GDRs are usually quoted in dollars, and interest and dividend payments are also in

dollars.

GDRs overcome obstacles that mutual fund, pension funds and other institutions may

have in purchasing and holding securities outside their domestic markets.

Global custodian/ safekeeping charges are eliminated, savings GDR investors 30 to 60

basis points annually.

GDRs are as liquid as the underlying securities because the two are interchangeable.

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GDRs clear and settled according to US standards.

GDRs overcome foreign investment restrictions

ROLE OF A DEPOSITORY

A depository‘s role falls in to three broad categories:

Depository: issuing Depository Receipts up on delivery of the underlying security to its

custodian account and releasing the underlying security in to the home market up on

cancellation of the ‗DR‘.

Transfer agent and registrar: Processing ‗DR‘ transfers, maintaining records of registered

holders, paying dividends and responding to shareholder enquiries.

Administrator: holding consultations with the issuer, how to promote its DR programme,

rporting on the progress, supplying trading and shareholding information and providing

assistance in ensuring regulatory compliance.

(j) DETAILS OF A GDRs PURCHASE AND SALES

THE DETAILS OF A GDR PURCHASE BY AN INVESTOR

1. An investor calls her broker to buy GDRs for a particular company.

2. The broker fills the order by either buying the GDRs on any of the exchanges that it trades, or

by buying ordinary company shares in the home market of the company by using a broker in the

issuer's country. The foreign broker then delivers the shares to the custodian bank.

3. The investor‘s broker notifies the depositary bank that ordinary shares have been purchased in

the issuer's market and will be delivered to the custodian bank and requests depositary shares to

be issued in the investor‘s account.

4. The custodian notifies the depositary bank that the shares have been credited to the depositary

bank‘s account.

5. The depositary bank notifies the investor‘s broker that the GDRs have been delivered.

6. The broker then debits the account of the investor for the GDR issuance fee.

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THE DETAILS OF A GDR SALE BY AN INVESTOR

1. An investor instructs his broker to sell his GDRs. The investor must deliver the shares

within 3 business days if the shares are not in the street name of the broker.

2. The broker can either sell the shares on the exchanges where the GDR trades, or the

GDRs can be canceled, and converted into the ordinary shares of the issuing company.

3. If the broker sells the shares on an exchange, then the broker uses the services of a broker

in the issuer's market.

4. If, instead, the shares are canceled, then the broker will deliver the shares to the

depositary bank for cancellation and provide instructions for the delivery of the ordinary

shares of the company issuer. The investor pays the cancelation fees and any other

applicable fees.

5. The depositary bank instructs the custodian bank to deliver the ordinary shares to the

investor‘s broker, who then credits the account of its customer.

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CONCLUSIONS:

Along with all incentives behind the use of DRs, the access to more efficient and developed

market can be an important motive for companies specially from emerging markets to enhance

their capital resources and diversify their investor basis. These markets are characterized by

naturally wide investor bases interested in investment in foreign companies‘ shares while

avoiding the risks associated in direct investment in their markets, better performance, and

higher liquidity.

The review of market for GDRs‘ programs shows remarkable growth and decline in Indian

GDRs‘ markets which has been driven by increasing demand for this instrument. The fast growth

of market for GDRs, increasing number of countries and companies engaged in GDRs,

particularly from emerging countries assert the success of this innovative product to overcome

some limitations in cross country investment; provision of wider capital base; changing the

pattern of risk and reducing it; and providing safer equity baked by companies‘ shares, all in an

efficient manner. Particularly, for fast growing emerging countries, GDRs have approved to be

an efficient tool for providing extra sources of capital through international markets.

In other words, the ability of GDRs programs to meet different requirements of investors and

issuers has been the main force behind the increasing demand for this instrument. The success of

GDR‘s programs in providing different beneficial effect form the investors‘ and issuers‘ point of

view, as explained in this chapter, cannot be denied.

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The results of the study of host markets for the GDR programs have been consistent with the

random walk idea, asserting the efficiency of the markets. In fact, using GDRs has enabled the

companies to tap developed and efficient international market at lower cost and risks to enhance

their capital resources.

The efficiency of GDR as an instrument used for tapping efficient international market may

become clearer where by the end of 2012, five stock exchanges (NYSE, NASDAQ, LSE,

LuxSE, SGx) accounted for 85% of all new sponsored GDRs programs listed on exchanges, and

98% of total Sponsored GDR listed on exchanges. During the same period, 97% of worldwide

trading values of GDRs have been in five exchanges viz. NYSE, NASDAQ, LuxSE, SGx and

LSE.

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BIBLIOGRAPHY

Web sites:

www.google.com

www.moneycontrol.com

www.investopedia.com

www.sebi.com

www.rbi.com

BOOKS:

International financial management, by A.K.SETH

International financial management, by V.A.AVADHANI

case study on GLOBAL DEPOSITORY RECEIPTS

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