CHAPTER 1

DEPOSITORY RECEIPTS

1

INTRODUCTION

Receipts, which are traded like ordinary stocks, are called Depository Receipts. Each receipt

amounts to a claim on the predefined number of shares of that company. The issuing bank acts as

a depository for these shares – that is, it stores the shares on behalf of the receipt holders. This is

what happens: The company deposits a large number of its shares with a bank located in the

country where it wants to list indirectly. The bank issues receipts against these shares, each

receipt having a fixed number of shares. Every publicly traded company issues shares and these

shares are listed and traded on various stock exchanges.

Companies in India issue shares which are traded on Indian stock exchanges like BSE (The Stock

Exchange, Mumbai), NSE (National Stock Exchange), etc. But to list on a foreign stock

exchange, the company has to comply with the policies of those stock exchanges. Many times, the

policies of these exchanges in US or Europe are much more stringent than the policies of the

exchanges in India. This deters these companies from listing on foreign stock exchanges directly.

But many good companies get listed on these stock exchanges indirectly – using ADRs and

GDRs.

American Depository Receipts popularly known as ADRs were introduced in the American

market in 1927. ADR is a security issued by a company outside the U.S. which physically

remains in the country of issue, usually in the custody of a bank, but is traded on U.S. stock

exchanges.  In other words, ADR is a stock that trades in the United States but represents a

specified number of shares in a foreign corporation. Thus, we can say ADRs are one or more units

of a foreign security traded in American market.   They are traded just like regular stocks of other

corporate but are issued sponsored in the U.S. by a bank or brokerage. 

Global Depository Receipt (GDR) these are similar to the ADR but are  usually listed on

exchanges outside the U.S., such as Luxembourg or London. Dividends are usually paid in U.S.

dollars. The first GDR was issued in 1990.

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MEANING

A negotiable financial instrument issued by a bank to represent a foreign company's publicly

traded securities. The depositary receipt trades on a local stock exchange. Depositary receipts

make it easier to buy shares in foreign companies because the shares of the company don't have to

leave the home state. When the depositary bank is in the U.S., the instruments are known as

American Depositary Receipts (ADRs). European banks issue European depositary receipts, and

other banks issue global depositary receipts (GDRs).

A depositary receipt (DR) is a type of negotiable (transferable) financial security that is traded on

a local stock exchange but represents a security, usually in the form of equity, that is issued by a

foreign publicly listed company. The DR, which is a physical certificate, allows investors to hold

shares in equity of other countries. One of the most common types of DRs is the American

depositary receipt (ADR), which has been offering companies, investors and traders global

investment opportunities since the 1920s.

Since then, DRs have spread to other parts of the globe in the form of global depositary receipts

(GDRs) (the other most common type of DR), European DRs and international DRs. ADRs are

typically traded on a U.S. national stock exchange, such as the New York Stock Exchange

(NYSE) or the American Stock Exchange, while GDRs are commonly listed on European stock

exchanges such as the London Stock Exchange. Both ADRs and GDRs are usually denominated

in U.S. dollars, but can also be denominated in euros.

DEFINITION

A negotiable financial instrument issued by a bank to represent a foreign company's publicly

traded securities. The depositary receipt trades on a local stock exchange.Depositary receipts

make it easier to buy shares in foreign companies because the shares of the company don't have to

leave the home state. When the depositary bank is in the U.S., the instruments are known as

American Depositary Receipts (ADRs). European banks issue European depositary receipts, and

other banks issue global depositary receipts (GDRs).

3

ORIGIN

The origin of depository receipt is USA. It started in 1920’s. In this period, it was difficult and

risky to invest on the originals of foreign securities by American investors and brokers. The risks

in this condition have been causing delays and some kind of extra expenses. In order to avoid the

practical problems, they should have looked for solutions. In the solution produced, it was aimed

at constituting a system that will be able to eliminate those handicaps. In those times, financial

and economical system was national. For the system started to function badly, the investors and

brokers were not able to transit to international market in the investment and financial activities

they have been carried out. They were as if trapped inside a no end box and it was impossible for

them to open global market. Something was clearer than anything else. The key was as if

climbing up a hill in the desert under the sun in 70 C in vein, and it was time consuming. The

distance between American and European stock exchange markets was high, for this reason, what

is to be was to reach the international arena in world of stock exchange market. For the reason of

investor’s demand of diversifying their financial resources internationally, American Depository

Receipts revealed.

How do depositary receipts work?

The DR is created when a foreign company wishes to list its already publicly traded shares or debt

securities on a foreign stock exchange. Before it can be listed to a particular stock exchange, the

company in question will first have to meet certain requirements put forth by the exchange. Initial

public offerings, however, can also issue a DR. DRs can be traded publicly or over-the-counter.

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TYPES OF DEPOSITORY RECEIPTS

American Depositary Receipts (ADR):

Companies have a choice of four types of Depositary Receipt facilities: unsponsored and

three levels of sponsored Depositary Receipts. Unsponsored Depositary Receipts are issued by

one or more depositaries in response to market demand, but without a formal agreement with the

company. Today, unsponsored Depositary Receipts are considered obsolete and, under most

circumstances, are no longer established due to lack of control over the facility and its hidden

costs. Sponsored Depositary Receipts are issued by one depositary appointed by the company

under a Deposit Agreement or service contract. Sponsored Depositary Receipts offer control over

the facility, the flexibility to list on a national exchange in the U.S. and the ability to raise capital.

Sponsored Level I Depositary Receipts:

A sponsored Level I Depositary Receipt program is the simplest method for companies to

access the U.S. and non-U.S. capital markets. Level I Depositary Receipts are traded in the U.S.

over-the-counter ("OTC") market and on some exchanges outside the United States. The company

does not have to comply with U.S. Generally Accepted Accounting Principles ("GAAP") or full

Securities and Exchange Commission ("SEC") disclosure. Essentially, a Sponsored Level I

Depositary Receipt program allows companies to enjoy the benefits of a publicly traded security

without changing its current reporting process. The Sponsored Level I Depositary Receipt market

is the fastest growing segment of the Depositary Receipt business. Of the more than 1,600

Depositary Receipt programs currently trading, the vast majority of the sponsored programs are

Level I facilities. In addition, because of the benefits investors receive by investing in Depositary

Receipts, it is not unusual for a company with a Level I program to obtain 5% to 15% of its

shareholder base in Depositary Receipt form. Many well-known multinational companies have

established such programs including: Roche Holding, ANZ Bank, South African Brewery,

Guinness, Cemex, Jardine Matheson Holding, Dresdner Bank, Mannesmann, RWE, CS Holding,

Shiseido, Nestle, Rolls Royce, and Volkswagen to name a few.

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Sponsored Level II And III Depositary Receipts:

Companies that wish to either list their securities on an exchange in the U.S. or raise

capital use sponsored Level II or III Depositary Receipts respectively. These types of Depositary

Receipts can also be listed on some exchanges outside the United States. Each level requires

different SEC registration and reporting, plus adherence to U.S. GAAP. The companies must also

meet the listing requirements of the national exchange (New York Stock Exchange, American

Stock Exchange) or NASDAQ, whichever it chooses. Each higher level of Depositary Receipt

program generally increases the visibility and attractiveness of the Depositary Receipt.

Private Placement (144A) Depositary Receipt:

In addition to the three levels of sponsored Depositary Receipt programs that trade

publicly, a company can also access the U.S. and other markets outside the U.S. through a private

placement of sponsored Depositary Receipts. Through the private placement of Depositary

Receipts, a company can raise capital by placing Depositary Receipts with large institutional

investors in the United States, avoiding SEC registration and to non-U.S. investors in reliance on

Regulation S. A Level I program can be established alongside a 144A program.

Global Depositary Receipts (GDR):

GDRs are securities available in one or more markets outside the company’s home

country. (ADR is actually a type of GDR issued in the US, but because ADRs were developed

much earlier than GDRs, they kept their denotation.) The basic advantage of the GDRs, compared

to the ADRs, is that they allow the issuer to raise capital on two or more markets simultaneously,

which increases his shareholder base. They gained popularity also due to the flexibility of their

structure. GDR represents one or more (or fewer) shares in a company. The shares are held by the

custody of the depositary bank in the home country. A GDR investor holds the same rights as the

shareholders of ordinary shares, but typically without voting rights. Sometimes voting rights can

be the executed by the depositary bank on behalf of the GDR holders.

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ADVANTAGES

The DR functions as a means to increase global trade, which in turn can help increase not only

volumes on local and foreign markets but also the exchange of information, technology,

regulatory procedures as well as market transparency. Thus, instead of being faced with

impediments to foreign investment, as is often the case in many emerging markets, the DR

investor and company can both benefit from investment abroad.

The following are the advantages of depository receipts:

Quotation in U.S. dollars and payment of dividends or interest in U.S. dollars.

Diversification without many of the obstacles that mutual funds, pension funds and other

institutions may have in purchasing and holding securities outside of their local market.

Elimination of global custodian safekeeping charges, potentially saving Depositary

Receipt investors up to 10 to 40 basis points annually.

Familiar trade, clearance and settlement procedures.

Competitive U.S. dollar/foreign exchange rate conversions for dividends and other cash

distributions.

Ability to acquire the underlying securities directly upon cancellation.

Depository stocks are within processing mechanisms for foreign securities. Depository

receipt agreements serve various advantages to investors like transfer and exchanging

dividends paid over foreign money currencies to their currency.

Also, depository receipts are used in privatization, mergers, foreign governments

department, imports and employment financing.

Mostly, foreign securities are written for the bearer. For this reason, the lists of securities

can not be pursued. Depository receipts try to minimize the problems of promissory notes

written for the bearer. It makes having information about the foreign company easier.

Foreign companies having relationships with investors are restricted with law. Depositor

or its division can learn the information and declarations send by the foreign importer.

Even though the securities are written for the bearer, depository Bank has the best

conditions to get this information.

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Advantages to Compan ies:

Currently, there are over 2,250 Depositary Receipt programs for companies from over 70

countries. The establishment of a Depositary Receipt program offers numerous advantages to

non-U.S. companies. The primary reasons to establish a Depositary Receipt program can be

divided into two broad considerations: capital and commercial. Advantages may include:

Expanded market share through broadened and more diversified investor exposure with

potentially greater liquidity, which may increase or stabilize the share price.

Enhanced visibility and image for the company's products, services and financial instruments

in a marketplace outside its home country.

Flexible mechanism for raising capital and a vehicle or currency for mergers and acquisitions.

Enables employees of U.S. subsidiaries of non-U.S. companies to invest more easily in the

parent company.

Advantages to Investor s:

Increasingly, investors aim to diversify their portfolios internationally. However, obstacles

such as undependable settlements, costly currency conversions, unreliable custody services, poor

information flow, unfamiliar market practices, confusing tax conventions and internal investment

policy may discourage institutions and private investors from venturing outside their local market.

Depositary Receipt advantages may include:

Quotation in U.S. dollars and payment of dividends or interest in U.S. dollars.

Diversification without many of the obstacles that mutual funds, pension funds and other

institutions may have in purchasing and holding securities outside of their local market.

Elimination of global custodian safekeeping charges, potentially saving Depositary

Receipt investors up to 10 to 40 basis points annually.

Familiar trade, clearance and settlement procedures.

Competitive U.S. dollar/foreign exchange rate conversions for dividends and other cash

distributions.

Ability to acquire the underlying securities directly upon cancellation.

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CHAPTER 2

AMERICAN DEPOSITORY

RECEIPTS

9

INTRODUCTION

Introduced to the financial markets in 1927, an American depositary receipt (ADR) is a stock that

trades in the United States but represents a specified number of shares in a foreign corporation.

ADRs are bought and sold on American markets just like regular stocks, and are issued/sponsored

in the U.S. by a bank or brokerage. ADRs were introduced as a result of the complexities

involved in buying shares in foreign countries and the difficulties associated with trading at

different prices and currency values. For this reason, U.S. banks simply purchase a bulk lot of

shares from the company, bundle the shares into groups, and reissues them on either the New York

Stock Exchange (NYSE), American Stock Exchange (AMEX) or the Nasdaq. In return, the foreign company

must provide detailed financial information to the sponsor bank. The depositary bank sets the

ratio of U.S. ADRs per home-country share. This ratio can be anything less than or greater than.

This is done because the banks wish to price an ADR high enough to show substantial value, yet

low enough to make it affordable for individual investors. Most investors try to avoid investing in

penny stocks, and many would shy away from a company trading for 50 Russian roubles per share,

which equates to US$1.50 per share. As a result, the majority of ADRs range between $10 and

$100 per share. If, in the home country, the shares were worth considerably less, then each ADR

would represent several real shares. An American Depositary Receipt represents ownership in the

shares of a non-U.S. company that trades in U.S. financial markets. The stock of many non-US

companies trade on US stock exchanges through the use of ADRs. ADRs enable U.S. investors to

buy shares in foreign companies without the hazards or inconveniences of cross-border & cross-

currency transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be

traded like the shares of US-based companies. Each ADR is issued by a U.S. depository bank and

can represent a fraction of a share, a single share, or multiple shares of the foreign stock. An

owner of an ADR has the right to obtain the foreign stock it represents, but US investors usually

find it more convenient simply to own the ADR. The price of an ADR often tracks the price of the

foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares. In the

case of companies incorporated in the United Kingdom, creation of ADRs attracts a 1.5% stamp

duty reserve tax (SDRT) charge by the UK government.

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MEANING

Investing money in your own country's stock market is relatively simple. You call your broker or

login to your online account and place a buy or sell order. Investing in a company that is listed on

a foreign exchange is much more difficult. Would you even know where to start? Does your

broker provide services in other countries? For example, imagine the commission and foreign

exchange costs on an investment in Russia or Indonesia.

However, now there is an easy way around this through American depositary receipts (ADRs). More than

2,000 foreign companies provide this option for U.S. and Canadian investors interested in buying

shares. In this tutorial, we'll explain how this investment vehicle works and help you sort out

whether it could be a good choice for your portfolio.

DEFINITION

A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one

share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars,

with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce

administration and duty costs that would otherwise be levied on each transaction.

This is an excellent way to buy shares in a foreign company while realizing any dividends and

capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks

for the underlying shares in another country. For example, dividend payments in euros would be

converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with

the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq.

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HISTORY

ADRs were primarily created to increase investment access to widely known and often

multinational companies. They are typically formed by a depository bank depositing ordinary

shares of a foreign company into a trust and issuing receipts of interest in the underlying shares on

a domestic exchange. The bank will act as a custodian for the trust handling dividend distribution,

currency exchange, proxies, tax reporting, and regulatory filings. It receives a management fee for

these services, either from the shareholders or the issuing company.

Trading of ADRs occurs by brokers purchasing/selling outstanding ADRs in the domestic market,

or on the foreign markets if no shares are available domestically. In the case of purchases in the

foreign market, the broker then deposits the foreign shares with the bank in exchange for newly

created ADRs. In the case of sales in the local market, the broker will cancel the ADR causing the

depository bank to sell the shares in the foreign market and deliver the proceeds in the investor’s

currency. Units in the trust are listed on large exchanges primarily in countries with developed

capital markets, as if they were shares of a company domiciled in the same country as the

exchange. The listing company of the ADR must adhere to the same regulatory requirements and

disclosures as the other listed issuers on the exchange. In effect, shares of a foreign company can

be purchased on a U.S. stock exchange in the same manner as stock of a U.S company.

So why have the middlemen (trust)? Many investors do not have efficient means of diversifying

into foreign companies because of the administrative and implementation issues. Often, trading in

foreign markets is more expensive relative to U.S. exchange transaction costs, as well as difficult

to execute due to time zone differences. Also, foreign exchanges do not usually have the same

regulatory requirements that investors are familiar with here in the U.S., and custody of the assets

is costly. Currency exchanges will also have to be utilized in order to purchase ordinary shares of

foreign companies. ADRs trade easily and pay dividends in U.S. dollars and settle through U.S.

clearinghouses. These implementation barriers coupled with the desire of investors to diversify

internationally created a market for underwriters of ADR trusts. There are also Global Depository

Receipts (GDRs), International Depository Receipts (IDRs), and European Depository Receipts

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(EDRs), which accomplish the same benefits already stated but trade in one or more international

markets.

By early 1998, 429 out of 3,104 companies listed in the NYSE, 437 of 6008 listed in NASDAQ

and 61 out of 690 in the AMEX were foreign companies from over 50 different countries. In

addition, 412 out of about 6,200 equity securities traded in the OTC Bulletin Board were from

foreign issuers. Clearly, foreign firms must find listing in the US (or more generally, outside their

home market) advantageous. Then, why do foreign firms list their shares in the US? From the

firm's perspective, why is it that listing in the US is desirable, and the cost-benefit tradeoff a

positive one? Listing in the US can take many forms. Foreign firms can list their stock directly or

through an American Depositary Receipt (ADR) program. This listing can take place in an

organized exchange (e.g. NYSE, AMEX), NASDAQ, an OTC market, or as a private placement.

The listing can also be accompanied by an IPO, or a seasoned equity offering.

ADRs are issued by a U.S. bank that functions as a depositary, having ADR being backed by a

specific number of shares in the non-U.S. company. ADRs can be traded on any of the US stock

exchange (NYSE, NASDAQ, or AMEX) and over-the-counter. In the case of Rule 144A, they are

privately placed and traded. The same concept for ADR has been spread into other regions with

the creation of the global depositary receipts (GDRs), international depositary receipts (IDRs),

and European depositary receipts (EDRs), which are generally traded or listed in one or more

international markets. As of February 2005, this instrument is used by around 2,100 non-US

issuers from approximately 80 countries. About 500 of those ADRs are listed in the US

exchanges.

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TYPES OF ADRs

There are three different types of ADR issues:

TYPES OF ADR

LEVEL 2

Level I - This is the most basic type of ADR where foreign companies either don't qualify

or don't wish to have their ADR listed on an exchange. Level 1 ADRs are found on the

over-the-counter market and are an easy and inexpensive way to gauge interest for its

securities in North America. Level 1 ADRs also have the loosest requirements from the

Securities and Exchange Commission (SEC).

Level II - This type of ADR is listed on an exchange or quoted on Nasdaq. Level 2 ADRs

have slightly more requirements from the SEC, but they also get higher visibility trading

volume.

Level III - The most prestigious of the three, this is when an issuer floats a public offering

of ADRs on a U.S. exchange. Level 3 ADRs are able to raise capital and gain substantial

visibility in the U.S. financial markets.

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TYPES OF ADR

LEVEL IILEVEL I

III III

LEVEL III

LEVEL I ADRs

Level I ADRs are the simplest method for companies to access the US capital markets. Level I

ADRs are traded in the over-the-counter (OTC) market, with bid and ask prices published daily

and distributed by the National Daily Quotation Bureau in the pink sheets. The issuing company

does not have to comply with US Generally Accepted Accounting Principles (GAAP) or provide

US Securities and Exchange Commission (SEC) disclosure.Level I ADRs essentially enable a

company to obtain the benefits of a US publicly traded security without altering their current

reporting process.

Level I DRs account for more than 60% of the US ADRs. Companies that have Level I ADR

programs can “migrate” to a Level II or Level III ADR program if they desire to trade on the New

York Stock Exchange, the American Stock Exchange, Nasdaq or the OTC Bulletin Board, or if

the company desires to raise capital directly in the United States.

Advantages of a Level I ADR program:

It avoids full compliance with the SEC's reporting requirements. By working with a single

depositary bank, the issuer has greater control over its ADR program than would be the

case with an unsponsored program.

The depositary acts as a channel of communication between the issuer and its US

shareholder base. Dividend payments, financial statements and details of corporate actions

will be passed on to US investors via the depositary.

The depositary bank maintains accurate shareholder records for the issuer and can, if

requested, monitor large stock transactions and report them to the issuer.

Set-up costs are minimal and all transaction costs are absorbed by the ADR holder.

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Disadvantages of a Level I ADR program

It cannot be listed on any of the national exchanges in the US. As a result, investor interest

might be somewhat restricted which may limit the issuer's ability to enhance its name

recognition in the US.

Capital raising is not permitted under a Level I program.

LEVEL II ADRs

Level II ADRs enable companies to list their ADRs on NASDAQ, the American Stock Exchange,

the New York Stock Exchange and the OTC Bulletin Board, thereby offering higher visibility in

the U.S. market, more active trading, and greater liquidity.

Level II ADRs require full registration with the Securities and Exchange Commission. Companies

must also meet the listing requirements of the appropriate stock exchange. Level II ADRs require

a Form 20-F and Form F-6 to be filed with the SEC, as well as meeting the listing requirements

and filing a listing application with the designated stock exchange. Upon F-6 effectiveness and

approval of the listing application, the ADRs begin trading.

Level II ADR programs must comply with the full registration and reporting requirements of the

SEC's Exchange Act, which entails the following:

Form F-6 registration statement, to register the ADRs to be issued.

Form 20-F registration statement, which contains detailed financial disclosure about the

issuer, including financial statements and a reconciliation of those statements to U.S.

GAAP, to register the listing of the ADRs.

Annual reports and any interim financial statements submitted on a regular, timely basis to

the SEC.

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Advantages of a Level II ADR program:

It is more attractive to US investors than a Level I program because the ADRs may be

listed on one of the major US exchanges. This raises the profile of the ADR program to

investors, thus increasing the liquidity and marketability of the securities.

US disclosure regulations for large investors enable the issuer to monitor the ownership of

its shares in the US.

Disadvantages of a Level II ADR program

More detailed SEC disclosure is required than for a Level I program. For example, the

issuer's financial statements must conform to US Generally Accepted Accounting

Principles (GAAP), or else a detailed summary of the differences in financial reporting

between the home country and the US must be submitted.

It is more expensive and time-consuming to set up and maintain a Level II program than a

Level I program because of the more stringent reporting requirements and higher legal,

accounting and listing costs.

Level III ADRs

Level III ADRs enable to companies to list their ADRs on NASDAQ, the Amex, the New York

Stock Exchange or the OTC Bulletin Board, and make a simultaneous public offering of ADRs in

the United States.

In the most high-profile form of sponsored ADR program, Level III, an issuer floats a public

offering of ADRs in the United States and lists the ADRs on one of the U.S. exchanges or

NASDAQ. The benefits of a Level III program are substantial: It allows the issuer to raise capital

and leads to much greater visibility in the U.S. market.

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Level III ADR programs must comply with various SEC rules, including the full registration and

reporting requirements of the SEC's Exchange Act. This entails the following:

Form F-6 registration statement, to register the ADRs.

Form 20-F registration statement, an annual filing that contains detailed financial

disclosure from the issuer, including Form F-1, to register the equity securities underlying

the ADRs that are offered publicly in the U.S. for the first time, including a prospectus to

inform potential investors about the company and the risks inherent in its businesses, the

offering price for the securities, and the plan for distributing the shares Annual reports and

any interim financial statements submitted on a regular, timely basis to the SEC and to all

registered public shareholders.

Advantages of a Level III ADR program

It permits public offerings of ADRs in the US which can be used for a variety of purposes,

for example the raising of capital to finance acquisitions or the establishment of an

Employee Stock Ownership Plan (ESOP) for the issuer's US subsidiary.

Disadvantages of a Level III ADR program

SEC reporting is more onerous than for Level I or II programs.

The costs of setting up and maintaining a Level III program can be high. Set-upcosts,

which would include listing, legal, accounting, investor relations and "road show" costs,

might amount to approximately US$ 300,000 to US$ 500,000.

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PARTIES INVOLVED IN ADRs

An American depositary receipt (ADR) is a legal certificate issued by a recognized U.S.

bank that represents a specific number of shares of a foreign corporation traded on a U.S. stock

exchange. An ADR will be used by a foreign corporation that wishes to have a portion of its

equity traded in the U.S. market, but doesn't want to actually list its company's shares on a U.S.

exchange.There are four main parties that come into play with ADRs:

The issuing corporation is the first party. This is typically a large foreign-based

corporation that is already listed on a major foreign exchange. Rather than dual list its

shares on its home exchange and on a U.S. exchange, the issuer sells a bulk amount of its

shares to a trusted U.S. party - a recognized bank.

U.S bank is the second party in this process; by accepting the issuing company's shares

and selling representative certificates to investors, the bank is said to sponsor the security,

making it accessible to investors in the ADR's local market. Essentially, the bank accepts

the shares from the foreign corporation, stores all of them in its vault, and prints a bunch

of certificates that represent the shares. Those certificates are then issued to investors via

an exchange.

A major U.S exchange (i.e. NYSE or Nasdaq) then lists the bank's certificates for trading,

allowing investors to buy and sell ADR units just as they would normal shares. Investors

set market prices for the ADRs through the bidding process, pricing and freely trading the

units back and forth in U.S. dollars. Because they are ADRs, investors avoid the problem

of converting into foreign currency each time the units are bought and sold. They also

don't have to deal with foreign trading rules or laws; however, the appropriate Securities

and Exchange Commission (SEC) rules do apply.

The SEC is the fourth major party involved in ADRs. While it plays no direct role in the

issuance and trading of the ADR units, the SEC requires ADR issuers to file certain

documents with the SEC before allowing the proposed ADR units to be issued and traded

in the U.S. markets.

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ADAVANTAGES OF ADRs

The main advantage of buying an American Depositary Receipt rather than the foreign

stock itself is the ease of the transaction.

ADRs are a great way to invest abroad without having to convert U.S. dollars to many

different currencies.

Another advantage offered by an ADR is that if the foreign stock does pay dividends, the

investment bank will convert the dividends to U.S. dollars and remit the payment to you.

In addition, if the dividend is subject to foreign tax, the investment bank will withhold the

tax so you don't have to worry about it.

Therefore, if exchange rates were to move against you, it would hurt the value of your

ADR. If you are considering investing in foreign stocks, ADRs should be part of your

investment decision; however, you should become familiar with all the risks associated

with foreign investing before making an investment decision.

Advantages to Issuers :

Provides a simple means of diversifying a company’s shareholder base and accessing

important U.S. market.

May increase the liquidity of the underlying shares of the issuer.

ADRs can be used as an equity financing tool in both M&A transactions and ESOPs for

U.S. subsidiaries

Helps increase a non-U.S. company’s visibility and name recognition in the U.S. investor

community.

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Advantages to Investors :

Offers a convenient means of holding foreign shares.

Simplifies the trading & settlement of foreign securities; ADRs trade and settle just like

U.S. securities

Offers lower trading & custody costs when compared with shares bought directly in the

foreign market.

DISADVANTAGES OF ADRs

Despite all the described advantages, the ADRs do represent the same asset as

local shares but may not be “fully fungible” in several countries (meaning they cannot be

seamless exchanged with its home market security). For example, until 2001 there was no two-

way fungibility for Indian ADRs; in that environment, investors could convert ADRs into local

shares but they could not reconvert them back to ADRs. This and other capital control regulations

prevent risk less arbitrage opportunities to exist between ADRs and the underlying stock and are

one of the reasons that premiums/discounts exist in the ADR market.

21

RISK IN ADRs

There are several factors that determine the value of the ADR beyond the performance of the

company. Analyzing these foreign companies involves further scrutiny than merely looking at the

fundamentals. Here are some other risks that investors should consider:

Political Risk - Ask yourself if you think the government in the home country of the ADR

is stable? For example, you might be wary of Russian Vodka Inc. because of the

characteristic instability of the Russian government.

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

shares track the shares in the home country. If a country's currency is devalued, it will

trickle down to your ADR. This can result in a big loss, even if the company had been

performing well.

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

which the general level of prices for goods and services is rising and, subsequently,

purchasing power is falling. Inflation can be a big blow to business because the currency

of a country with high inflation becomes less and less valuable each day.

22

PROCEDURES AND MECHANISM OF ISSUING ADRS

ADRs are issued by a US bank, such as J. P. Morgan or The Bank of New York,

which functions as a depositary, or stock transfer and issuing agent for the ADR

program.

The foreign, or local shares, remain on deposit with the Depositary’s custodian

issuer’s home market.

Each ADR is backed by a specific number of an issuer’s local shares (e.g. one ADR

representing one share, one ADR representing ten shares, etc.) This is the ADR ratio,

which is designed to set the price of each ADR in US dollars.

Financial information, including annual reports and proxies are delivered to US

holders on a consistent basis by the Depositary. The dividends are converted into

dollars and paid to ADR holders by the Depositary.

23

ADRs ARBITRAGE OPPORTUNITIES

Several Indian companies actively trade on the and New York Stock Exchanges

and due to the time differences, market news, sentiments etc. sometimes the prices of the

DR(Depository receipt) trade at discounts or premiums to the underlying stock. This presents a

knowledgeable fund manager an arbitrage opportunity, where he buys the DR abroad and sells the

same stock in India at a higher price (the difference being the profit).

Same DRs trade during India market hours offering a live arbitrage opportunity.

As there is very little risk in such trades the gap between the DR and underlying stock is minimal.

DRs which trade in the US markets offer better gaps, but there is the overnight risk to be factored

in. Hence the fund manager must take into consideration the local market conditions before

buying the stock in the US, as he must be confident of the selling off the stock the next morning

in India at the profitable gap. Once the stock is bought, arrangements are made to deliver the

stock in India, which involves several procedures (stock is borrowed at times for this). Once the

stock is delivered in India the proceeds are allowed to be repatriated and the process repeated.

There are some stocks which are also allowed to be bought in India and converted into the DR

forms, which is attractive if the DR is trading at a premium to the Indian stock price.

Limits to Arbitrage Opportunities:

Despite all of the advantages of the ADR, they are not seamless interchangeable

with the local underlying stock. While the previous section of this paper explored the potential

reasons for discrepancies between the ADR and the local stock, this section will describe the

difficulties of acting on those discrepancies in order to generate profitable arbitrage.

24

CHAPTER 3

GLOBAL DEPOSITORY

RECEIPTS

25

INTRODUCTION

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.To raise money in more than one

market, some corporations use global depositary receipts (GDRs) to sell their stock on markets in

countries other than the one where they have their headquarters.

The GDRs are issued in the currency of the country where the stock is trading. The objective of a

GDR is to enable investors in developed markets, who would not necessarily feel happy buying

emerging market securities directly in the securities’ home market, to gain economic exposure to

the intended company and, indeed, the overall emerging economy using the procedures with

which they are familiar.

Global Depository Receipt (GDR) - certificate issued by international bank, which can be subject

of worldwide circulation on capital markets. GDR's are emitted by banks, which purchase shares

of foreign companies and deposit it on the accounts. Global Depository Receipt facilitates trade of

shares, especially those from emerging markets. Prices of GDR's are often close to values of

related shares. GDRs are securities available in one or more markets outside the company’s home

country. The basic advantage of the GDRs, compared to the ADRs, is that they allow the issuer to

raise capital on two or more markets simultaneously, which increases his shareholder base. They

gained popularity also due to the flexibility of their structure.

GDRs are typically denominated in USD, but can also be denominated in Euros. GDRs are

commonly listed on European stock exchanges, such as the London Stock Exchange (LSE) or

Luxembourg Stock Exchange, or quoted on SEAQ (Stock Exchange Automated Quotations)

International, and traded at two other places besides the place of listing,

26

MEANING & DEFINITION

A negotiable certificate held in the bank of one country representing a specific number of shares

of a stock traded on an exchange of another country. American Depositary Receipts make it easier

for individuals to invest in foreign companies, due to the widespread availability of price

information, lower transaction costs, and timely dividend distributions also called European

Depositary Receipt.

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

or Euros. A GDR is very similar to an American Depositary Receipt. These instruments are called

EDRs when private markets are attempting to obtain Euros.

Global Depository Receipt (GDR) - certificate issued by international bank, which can be subject

of worldwide circulation on capital markets. GDR's are emitted by banks, which purchase shares

of foreign companies and deposit it on the accounts. Global Depository Receipt facilitates trade of

shares, especially those from emerging markets. Prices of GDR's are often close to values of

related shares. Very similar to GDR's are ADR's. GDR's are also spelled as Global Depositary

Receipt.

27

STRUCTURES OF GDRs

When GDRs are structured with a Rule 144(a) offering for the US and a "Regulation S" offering

for non-US investors, there are two possible options for the structure.

The two different GDR structures are as follows:

Unitary Structure:

Under a unitary structure, a single class of DRs is offered both to QIBs in the US and to

offshore purchasers outside the issuer's domestic market, in accordance with Regulation S.

All DRs are governed by one Deposit Agreement and all are subject to deposit,

Withdrawal and resale restrictions.

Bifurcated Structure:

Under a bifurcated structure, Rule 144(a) ADRs are offered to QIBs in the US and

Regulation S DRs are offered to offshore investors outside the issuer's domestic market.

The two classes of DRs are offered using two separate DR facilities and two separate

Deposit Agreements. The Regulation S DRs are not restricted securities, and can therefore

be deposited into a "side-by-side" Level I DR program, and are not normally subject to

restrictions on deposits, withdrawals or transfers. However, they may be subject to

temporary resale restrictions in the US.

28

ADVANTAGES OF GDR

GDRs can be launched as part of a private or public offering.

They allow a single fungible security to be placed in one or more international

markets, thus giving access to a global investor base.

They may allow the issuer to overcome local selling restrictions to foreign share

ownership.

GDRs are eligible for settlement through Clear stream, Euro clear.

DISADVANTAGES OF GDR

If the US tranche of a GDR is structured as a Rule 144(a) private placement, the disadvantages of

an ADR program will apply. If it is structured as a Level III program, the reporting and cost

features of such programs will apply.

29

CHAPTER 4

PROCEDURE

AND REGULATIONS OF

ADRs &GDRs

30

PROCEDURE FOR ISSUE OF ADRs/GDRs

31

32

1. Approvals

The issue of ADRs/GDRs requires the approvals of Board of Directors, Shareholders, Ministry of Finance, Ministry of Company Affairs, Bank of India, Stock Exchange and

Financial Institutions.

2. Appointment of Intermediaries

ADR/GDR normally involve a number ofIntermediaries including lead Manager, Co-Manager,

Overseas Depository Banks, Listing Agent, LegalAdvisor, Printer, Auditors and Underwrites.

33

3. Principal Documentation

The principal documents required to be preparedinclude subscription agreement, DepositoryAgreement, Custodian Agreement, Agency

Agreement and Trust Deed.

4. Pre and Post Launch

Additional Key ActionsApart from obtaining necessary approvals,

Documentation, additional key actions necessary forMaking the issue of ADR/GDR a success, include

(i) Co appointment of various agencies and properinstitution of a Board Sub-Committee

(ii) Selection of Syndicate Members(iii) Constitution of a task force for due diligence

(iv) Listing(v) Offering Circular(vi) Research Papers(vii) Pre-marketing

(viii) Timing, pricing and size of the issue(ix) Road shows

(x) Book Building and pricing of the issue(xi) Closing of the issue

(xii) Allotment

REGULATORY PROVISIONS FOR ADR/GDR

The issue of ADR/GDR by India Inc. is governed by following legal provisions:

Section 6 (3) (b) of Foreign Exchange Management Act (FEMA), 1999 reads as follows:

Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange

to or from an authorized person for a capital account transaction.

The Reserve Bank may, in consultation with the Central Government, specify-

Any class or classes of capital account transactions which are permissible;

Without prejudice to the generality of the provisions of sub-section (2), the Reserve Bank

may, by regulations, prohibit, restrict or regulate the following:

Transfer or issue of any foreign security by a person resident in India.

Transfer or issue of any security by a person resident outside India.

34

FOREIGN EXCHANGE MANAGEMENT ACT (FEMA)

An Indian corporate can raise foreign currency resources abroad through the issue of American

Depository Receipts (ADRs) or Global Depository Receipts (GDRs). Regulation 4 of Schedule I

of FEMA Notification no. 20 allows an Indian company to issue its Rupee denominated shares to

a person resident outside India being a depository for the purpose of issuing Global Depository

Receipts (GDRs) and/ or American Depository Receipts (ADRs), subject to the conditions that:

The ADRs/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 there

under from time to time.

The Indian company issuing such shares has an approval from the Ministry of Finance,

Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/

GDRs in terms of the relevant scheme in force or notification issued by the Ministry of

Finance, and

There are no end-use restrictions on GDR/ADR issue proceeds, except for an express

ban on investment in real estate and stock markets.

The FCCB issue proceeds need to conform to external commercial borrowing end user

requirements; in addition, 25 per cent of the FCCB proceeds can be used for general

corporate restructuring.

Is not otherwise ineligible to issue shares to person’s resident outside India in terms of

these Regulations.

There is no limit up to which an Indian company can raise ADRs/GDRs.

35

WHO CAN ISSUE ADR/GDR?

A company can issue ADR/GDR, if it is eligible to issue shares to person resident

outside India under the FDI Scheme.

WHO CANNOT ISSUE ADR/GDR?

An Indian listed 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 ADRs/GDRs.

Erstwhile 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 ADRs / GDRs issued by Indian companies.

END USE RESTRICTIONS

No end-use restrictions except for a ban on deployment / investment of such funds in Real

Estate or the Stock Market.

LIMIT OF OFFERINGS

There is no monetary limit up to which an Indian company can raise ADRs / GDRs.

VOTING RIGHTS

Voting rights on shares issued under the Scheme shall be as per the provisions of Companies Act, 1956 and in a manner in which restrictions on voting rights imposed on ADR/GDR 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.

36

PRICING OF ADR/GDR

The pricing of ADR / GDR issues should be made at a price not less than the higher of the

following two averages:

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;

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.

37

CHAPTER 4

STATISTICAL DATA

38

39

40

41

THE COMPREHENSIVE GDR LISTING

42

GDR Companies # euro convertible bond **adjusted for bonus

Industry Segregation

Date Of GDR Issue

Size Of GDR

Issue US $ Mill

Shares per GDR

GDR Issue Price

**(US$)

Arvind Mills Textiles 03-Feb-94 125.00 1.0 9.78

Ashok Leyland Autos 20-Mar-95 137.77 3.0 12.79

Bajaj Auto Autos 27-Oct-94 110.00 1.0 16.89

Ballarpur Ind.# Paper 27-May-94 35.00 1.0 8.77

Bombay Dye Textiles 16-Nov-93 50.00 1.0 9.20

BSES Ltd Power 04-Mar-96 125.00 3.0 14.40

Century Textiles Diversified 21-Sep-94 100.00 2.0 254.00

CESC Power 14-Apr-94 125.00 1.0 10.67

Core Parent Pharma 21-Jun-94 70.00 1.0 12.60

Crompton Greaves Electrical 02-Jul-96 50.00 1.0 7.56

DCW Diversified 19-May-94 25.00 5.0 13.55

Dr. Reddy's Pharma 18-Jul-94 48.00 1.0 11.16m

E. I. Hotels Hotels 07-Oct-94 40.00 1.0 9.30

EID Parry Fertiliser 07-Jul-94 40.00 1.0 8.39

Finolex Cab Cables 19-Jul-94 55.00 1.0 16.60

Flex Industries Packaging 30-Nov-95 30.00 2.0 8.05

G.E. Shipping Shipping 17-Feb-94 100.00 5.0 15.94

G.N.F.C Fertiliser 06-Oct-94 61.11 5.0 12.75

GAIL Oil &Refineries 04-Nov-99 22.50 6.0 9.67

Garden Silk Textiles 04-Mar-94 45.00 5.0 26.28

Grasim (1st) Diversified 25-Nov-92 90.00 1.0 12.98

Grasim (2nd) Diversified 09-Jun-94 100.00 1.0 20.50

43

Guj Ambuja # Cement 26-Nov-93 80.00 1.0 5.95

Himachal Futuri Telecomm. 02-Aug-95 50.00 4.0 9.30

Hindalco (1st) Aluminium 22-Jul-93 72.00 1.0 10.73

Hindalco (2nd) Aluminium 08-Jul-94 100.00 1.0 16.00

Hindustan Dev. Diversified 21-Sep-94 76.00 1.0 2.05

India Cements Cement 11-Oct-94 90.00 1.0 4.23

Indian Alum. Aluminium 22-Feb-94 60.00 1.0 6.77

Indian Hotels Hotels 28-Apr-95 86.25 1.0 16.60

Indian Rayon Diversified 25-Jan-94 125.00 1.0 15.01

Indo Gulf Fertiliser 18-Jan-94 100.00 1.0 4.51

Indo Rama Textiles 21-Mar-96 50.00 10.0 11.37

ICICI Finance 02-Aug-96 230.00 5.0 11.50

ICICI (ADR) Finance 22-Sep-99 315 5.0 9.80

Infosys IT 11-Mar-99 70.38 0.5 34

IPCL Petrochemical 08-Dec-94 85.00 3.0 13.87

ITC Cigarettes 13-Oct-93 68.85 1.0 7.65

J.K. Corp Diversified 17-Oct-94 55.00 1.0 8.00

Jain Irrig Plastics 25-Feb-94 30.00 1.0 11.13

JCT Ltd. Textiles 29-Jul-94 45.00 10.0 16.96

Kesoram Ind Diversified 31-Jul-96V 30.00 1.0 1.60

44

L & T (1st) Diversified 18-Nov-94 150.00 2.0 16.70

L & T (2nd) Diversified 01-Mar-96 135.00 2.0 15.35

Mah & Mah Autos 30-Nov-93 74.75 1.0 4.46

MTNL Telecom 04-Dec-97 418.53 2.0 11.958

NEPC Micon Diversified 07-Nov-94 47.70 1.0 3.18

Nippon Denro# Steel 03-Mar-94 125.00 10.0 21.36

Oriental Hotels Hotels 14-Dec-94 30.00 1.5 12.75

Ranbaxy Labs Pharma 29-Jun-94 100.00 1.0 19.38

Raymond Woolen Textile 09-Nov-94 60.00 2.0 10.61

Reliance Diversified 27-May-92 150.00 2.0 16.35

Reliance (2nd) Diversified 15-Feb-94 300.00 2.0 23.50

Reliance Petroleum Diversified 18-Oct-99 100 15.0 23.0

S.A.I.L. Steel 07-Mar-96 125.00 15.0 12.97

Satyam Infoway IT 19-Oct-99 75.00 1.0 18.0

S.I.E.L. Diversified 14-Oct-94 40.00 3.0 14.64

Sanghi Poly Textiles 28-Jul-94 50.00 5.0 9.56

SIV Ind Textiles 01-Aug-94 45.00 1.0 6.37

SPIC Fertiliser 28-Sep-93 65.00 5.0 11.15

45

SBI Banking 03-Oct-96 369.95 2.0 14.15

Sterlite India# Diversified 22-Dec-93 100.00 1.0 17.86

Tata Electric Power 22-Feb-94 65.00 100.0 710.00

Telco (1st) Autos 15-Jul-94 115.00 1.0 8.75

Telco (2nd) Autos 06-Aug-96 200.00 1.0 14.25

Tube Invest Cycles & Acc. 20-May-94 45.60 1.0 6.58

United Phos. Pesticides 25-Feb-94 55.00 1.0 20.50

Usha Beltron Cables 06-Oct-94 35.00 1.0 10.70

Videocon Int. Electronics 26-Jan-94 90.00 1.0 8.10

VSNL Telecomm. 24-Mar-97 527.00 0.5 13.93

ockhardt Pharma 25-Feb-94 75.00 1.0 14.35

Indian companies have ADRs and / or GDRs

Some of the best Indian companies have issued ADRs and / or GDRs. Below is a partial list.

Company ADR GDRBajaj Auto No YesDr. Reddys Yes YesHDFC Bank Yes Yes

46

Hindalco No YesICICI Bank Yes YesInfosys Technologies Yes YesITC No YesL&T No YesMTNL Yes YesPatni Computers Yes NoRanbaxy Laboratories No YesTata Motors Yes NoState Bank of India No YesVSNL Yes YesWIPRO Yes Yes

47

CHAPTER 6

CONCLUSION

48

CONCLUSION

Depository receipt giving you the opportunity to add the benefits of foreign investment while by

passing the unnecessary risks of investing outside your own borders, you may want to consider

adding these securities to your portfolio. As with any security, however, investing in ADRs

requires an understanding of why they are used, and how they are issued and traded.

ADR is an acronym for American depositary receipt. ADRs trade just like stocks but represent

shares of a foreign company trading on a foreign stock exchange. ADR shares float on supply

and demand, just like a regular stock. There are three types of ADRs - Level 1, Level 2 and

Level 3. Levels 1 and 2 are listings in the U.S., while Level 3 ADRs are public offerings to

investors. Remember that there are other risks associated with buying ADRs, including

inflationary risk, political risk and exchange rate risk.

With globalization dissolving borders, it only makes sense that we have the ability to invest in

foreign entities. Many nations who are striving to become industrialized are undervalued

compared to the levels they will eventually reach Many people therefore consider ADRs an

undiscovered gem in financial markets.  Diversification does not stop at just investing in different

types of stocks or bonds. By investing in different countries, you gain the potential to capitalize

on emerging economies, which hopefully leads to more green in your pocket.

49

GDR is an acronym for Global depositary receipt. The objective of a GDR is to enable investors

in developed markets, who would not necessarily feel happy buying emerging market securities

directly in the securities’ home market, to gain economic exposure to the intended company and,

indeed, the overall emerging economy using the procedures with which they are familiar.

These instruments are also called EDRs when private markets are attempting to obtain Euros.

CHAPTER 7

BIBLIOGRAPHY

50

BIBLIOGRAPHY

www.google.com

www.investopedia.com

www.nasdaq.com

www.businessfinance.com

www.wikiepedia.com

51