AMERICAN DEPOSITORY RECIPTS (ADR)

What is ADR ?Certificates that represent shares of a foreign stock

owned and issued by a U.S bankThey buy up shares of the foreign stock and

repackage them into securities which can be traded on the NYSE, NASDAQ or AMEX.

The foreign shares are usually held in custody overseas, but the certificates trade in the U.S.

They provide easy access to gaining international equities exposure without actually having to exchange currencies and open additional accounts to transact in overseas

TYPES OF ADRLevel 1 – Basic, common, traded on OTC, least

regulation, no US accounting standard, no annual reports

Level 2 – Listed on stock exchange, higher trading volumes , Form 20F(annual report) U.S GAAP to be followed , shares listed on NYSE NASDAQ & AMEX.

Level 3 – Most rigorous regulations, go as far as raising capital from US investors , Form F-1 offering prospectus , Form 20 F & U.S GAAP to be followed

Issuance Process

U.S based broker/dealer

purchases shares of the issuer

U.S. broker/dealer deposits shares in a

bank

Bank issues ADRs to the broker/dealers custodian or the

broker-dealer who can apply them to client's account.

ADR Termination

Year after effective date of the termination liquidate and allocate proceeds to clients

Depositary bank continues to hold the securities and collect dividends but cease distribution

Owner surrender their ADRs (take possession of receipt) / do nothing

Owners of ADRs are typically notified in writing at least thirty days prior to a termination.

Owners ADRs notified at least thirty days prior to a termination.

Issuer requests for ADR cancellation

How to price ADR

Each ADR represent a single share, a fraction of shares or multiple shares.

The depository bank sets the ratio of US ADRS per home country share. Ratio can be =1,<1 and >1

Once ADR priced & sold in the market, its price moves based on the market conditions

ADR: Companies/Shareholder's perspective

Advantages Disadvantages

Cost EffectiveHassle Free Ease of UsageRisk DiversificationProtection of Ownership

Limited selectionLiquidityExchange rate riskLimited Diversification

Summary of the Infosys ADRs issued

Issue Day Stock Exchange

Amount Mobilized($ Million)

ADR: Domestic Share

% of Share in ADR form

Actual Price/share($)

1.03.1999 NASDAQ       68

  70.4 2:1    

30.07.2003       49

  294 1:1    

09.05.2005       67

  1050.13 1:1    

21.11.2006        

  1605 1:1 19.11* 53.5

* % of share in the form of ADRs as on March 31, 2007

Infosys ADR: 11th March 1999

Size of issue/No. of equity shares 1.8 mn ADS/ 0.9 mn equity shares

Number of ADS per equity share 2

Offer Price $ 27.88 per ADS/ $55.76 per share

Actual Price Obtained $34 per ADS/ $ 68 per share

Premium on the Offer Price 22% or $6.12 per ADS

Issue Amount $61.2 million

Green shoe Option 15% of $ 61.2mn = $ 9.18mn

Total Amount raised $ 70.38 million

BSE closing price Rs 3201/- as on 10 March, 1999

Infosys received net proceeds of US $ 70.38 million.

Size of issue/No. of equity shares 6mn ADSs/3mn Equity shares

Number of ADS per equity share 2 (After Infosys issued bonus shares to ADS holders, the ADS ratio became 1:1 )

Actual Price Obtained At $49 per share(26% premium over BSE closing price)

BSE Closing price Rs 3593.30

Total $ 294 million received through 6mn ADSs/3mn Equity shares

Infosys did not receive any of the proceeds

First Sponsored secondary ADS: July 31, 2003

Second sponsored secondary issue: May 2005

Size of issue/No. of equity shares 16 million shares, or 6% of its BSE/NSE listed shares.

Number of ADS per equity share 1

Actual Price Obtained $67 per ADS (34% premium over NSE price)

NSE closing price Rs 2171.20 as on May 25, 2005

Total US $ $294 million had received by Indian shareholders

Total issue increased the size of the US float to about 14% of its capital.

Infosys had not received any proceeds of this offering

Third sponsored secondary issue: November 21, 2006

Size of issue/No. of equity shares 30 million local shares into ADS

Number of ADS per equity share 1

Actual Price Obtained $ 53.50 per ADS

BSE closing price Rs 2,252 (34% premium over BSE closing on November 7, 2006 )

Total $ 1.6 billion received by Indian shareholders

Total issue increased US market cap of Infosys to $ 5.91 billion.

Infosys did not received any proceeds of this offering

Reasons why ADR’s was overpriced

Excess demand with limited supply of ADR’s. Few opportunities in the US to invest in

companies that are growing at the 20–30% rates

Official barriers prevent foreign investors from buying the shares trading in India

Returns are negatively correlated with other assets held by them.

ADR’s provides a value added layer – transparency, liquidity and greater coverage than the existing Indian stock.

Thank You