DEPOSITRAY RECEIPTS:

THE INDIAN PERSPECTIVE

 Depositary Receipts:

The Indian Perspective

Name of the Students

Mr. Neshwin Noel Almeida

Ms. Mishna Fernandes

Ms. Mrunalini Havaldar

Mr. Sushant Madhukar Mallya

Course
Bachelor of Commerce (B.Com.)

Year
2007 – 2008

Name of the Guide

Mr. Sanjay Sawant Desai

Name of the College

Vidya Vikas Mandal’s Shree Damodar College of Commerce & Economics

i
 DECLARATION

We declare that this project report has been prepared by us, and has

not previously formed the basis for the award of any diploma or

degree.

Class: T.Y. B.Com.

Name Roll No. Signature

Neshwin Noel Almeida 5002

Mishna Fernandes 5017

Mrunalini Havaldar 5025

Sushant Madhukar Mallya 5036

ii
 CERTIFICATE

Certified that the project report is a record of work done by

the candidates themselves during the period of study,

under my guidance and that to the best of my knowledge it

has not previously formed the basis of the award of any

degree or diploma in Goa University or elsewhere.

Mr. Sanjay Sawant Desai

Project Guide

iii
 ACKNOWLEDGEMENT

A lot of effort has gone into the completion of this project. We wish to place on

record our gratitude to the persons who made a contribution to the completion

of this project.

We express our sincere thanks to:

Mr. Sanjay S. Desai, for his never-ending support. We thank him for all his

valuable inputs which have contributed greatly to the project.

Dr. I Bhanu Murthy, Principal of Shree Damodar College of Commerce and

Economics, for all his love.

Our family and friends who supported and encouraged us all the way.

iv
 TABLE OF CONTENTS

1 Introduction 1–3
1.1 Introduction 1
1.2 Objectives of the Project 2
1.3 Methodology 3
1.4 Limitations 3

2 Depositary Receipts 4 – 21
2.1 Introduction 4
2.2 American Depositary Receipts (ADR) 5
2.3 Global Depositary Receipts (GDR) 18

3 ADR / GDR: Indian Perspective 22 – 41

3.1 Introduction 22
3.2 Scope for ADR / GDR in India 22
3.3. ADRs and India 23
3.4 GDRs and India 28
3.5 ADR vs. GDR 37

v
4 ADR / GDR vs. The Rest 42 - 48
4.1 Foreign Currency Convertible Bonds (FCCB) 42
4.2 Foreign Institutional Investors (FII) 45
4.3 The ADR / GDR Advantage 46

5 Conclusion 49

Press Clippings

Bibliography

vi
 LIST OF TABLES, GRAPHS AND PIE CHARTS

List of Tables
No. Table Details Pg. No.
1 List of companies that have issued ADRs 24

2 List of companies with funds raised through ADR 24

3 Issue wise break up of funds raised through ADR 25

4 Detailed break up of ADR: Shares ratio 27

5 List of companies that have issued GDRs 29-30

6 Detailed break up of GDR: Shares ratio 35

7 ADR / GDR issuing companies 38

8 Funds raised through issue of ADRs / GDRs 40

9 Funds raised through issue of FCCBs 43

List of Graphs
No. Graph Details Pg. No.
1 Funds raised through ADR by companies 25

2 Issue wise break up of funds raised through ADR 26

vii
3a Companies that have raised more than $100 million 32

3b Companies that have raised between $50 - $100 million 33

3c Companies that have raised less than $50 million 34

5 Average issue size of ADR / GDR program 41

6 Funds raised through issue of FCCBs 44

List of Pie Charts

No. Pie Chart Details Pg. No.
1 Percentage wise break up of ADR: Shares ratio 28

2 Percentage wise break up of GDR: Shares ratio 36

3 ADR / GDR issuing companies as a percentage of the total 39

4 Funds raised through ADR / GDR as a percentage of the total 40

viii
 CHAPTER 1
INTRODUCTION
 1.1 INTRODUCTION

The world has become flat. In today’s global economy, trade is not restricted to
the boundaries of the country. The world is believed to be one global village. It
is in this very global village that a whole new world of opportunities has arisen
for growth, expansion and diversification.

The Indian economy has assumed the personality of a young zealous, vibrant
person. India opened its gates to the world 17 long years ago. What transpired
ever since can be best described as the most amazing journey. We have been
growing constantly at 8 – 9% ever since. We have become the outsourcing
capital of the world. Just like our population, we are contributing more names
than ever before to Forbes’ Rich List.

On the global scene, India has just arrived. India is an “emerging market”. India
is the future. Our industrialists are buying out big companies – something we
thought would never happen. This liberal and global India has become a
destination for investors from all around the world. India has become a hotbed
for foreign investment.

And it is this foreign investment that has been driving our capital market
upwards into unprecedented territory. The indices of the two largest stock
exchanges in India – the Nifty 50 of the National Stock Exchange (NSE) and
the BSE Sensex of the Bombay Stock Exchange (BSE) – have touched levels of
20,000 and 6,000 points respectively; something solely attributed to the huge
inflow of foreign funds into our capital markets.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 1

The project attempts to study the depositary receipts program with special
reference to India. We wish to highlight the significance of this program in
channeling funds into India. We hope that this study leaves you with a better
understanding of the concept of depositary receipts and its significance in the
Indian economy.

1.2 OBJECTIVES OF THE PROJECT

To study the American Depository Receipts (ADR) and Global Depository

Receipts (GDR) markets

To understand the legalities involved in the issue of ADRs / GDRs.

To find out the amount of funds collected by Indian companies through the
issue of ADR / GDR.

To identify the reasons why companies raise funds through the issue of ADR
/ GDR.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 2

1.3 METHODOLOGY

In our quest for a better understanding of the concept of depositary receipts

program, we considered it imperative that our study shouldn’t be restricted to a
theoretical overview. Hence, we have provided a statistical analysis to establish
the importance of this program to India. We have compiled some statistics
which demonstrates this significance. We collected most of our data from the
internet since this is a dynamic concept that keeps changing itself to adjust to
the changing times. We have also studied in brief alternate means of raising
foreign finance with a view to establishing the superiority of the depositary
receipts program over such means.

1.4 LIMITATIONS

Despite our best efforts, this project suffers from certain limitations which were
beyond our control. We have enlisted them as under:

As a result of the topic being a dynamic one, we had to restrict ourselves to
the largely, not wholly, to the internet as a source.

With the ADR / GDR issuing companies being compelled to disclose

detailed statistics only to their depositary banks, we were unable to collect as
much statistical data as we would have liked

Although we have obtained the statistics from highly credible sources, we

cannot vouch for its accuracy.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 3

 CHAPTER 2
DEPOSITARY RECEIPTS
 2.1 INTRODUCTION

In an era of rapid globalisation, investors are looking beyond the boundaries of

their countries for investment opportunities. This has given rise to opportunities
for companies looking to expand into new markets, tap new customers, get hold
of a new investor base and raise more capital.

There was a great demand for foreign capital in some of the lesser developed
countries. At the same time, supply of capital was in excess in the countries like
U.S.A. and England. There was a need to bridge this gap and make a channel to
enable the flow of funds from these countries to the ones that required the
funds. Investing without such a channel was a challenge not just financially but
also administratively. The transactions were complicated and settlement of the
transactions in was very difficult owing to currency values.

In an effort to bridge this gap, JP Morgan introduced a system of depositary

receipts in 1927. JP Morgan intended to provide a channel that allows for easier
flow of funds from U.S.A. to other countries by offering them investment
options abroad. Hence, the depositary receipts program was intended as both an
investment vehicle as well as an investment option. Currently, there are two
major depositary receipt programs – the American Depositary Receipts and the
Global Depositary Receipts.

American Depositary Receipts (ADRs) enable companies to tap into the world’s
largest and most active capital market – the American market. Global
Depositary Receipts (GDRs) give the companies access to European markets
besides the American market.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 4

 2.2 AMERICAN DEPOSITARY RECEIPTS (ADR)

2.2.1 ADR Overview

An American Depositary Receipt is a U.S. Dollar – denominated security that
trades on the American market. An ADR is offered by financial institutions in
the U.S. on behalf of the foreign company. The financial institution, usually
banks, buys shares of companies wishing to issue equity in the U.S. Then, it
bundles these shares into groups of shares and sells these “groups” of shares.
These “groups” are known as American Depositary Receipts. Therefore, one
American Depositary Receipt represents a fixed number of shares in the parent
company.

The companies wishing to issue ADRs have to sign a contract with the financial
institution. The financial institution which issues the ADRs on behalf of the
company is also known as sponsor bank / brokerage or depositary bank. The
contract which is signed by both parties is a comprehensive one. The provisions
of the contract include the number of home – country shares that are on offer,
the ratio of the shares – per – ADR, the voting rights of the U.S. investors and
the tax obligations, among many others.

The voting rights, if any, lie with the depositary bank. The holders of the ADRs
indicate to the depositary bank which way they want to vote. In the absence of
any concrete arrangement, and if it doesn’t violate any U.S. law, the depositary
bank votes as a proxy of the ADR – holder.

This contract is known as the Deposit Agreement. This agreement is the first
step towards raising finance from the United States.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 5

2.2.2 Working of ADR
These ADRs can be bought and sold just like any other American security. For
this purpose, ADRs can even be listed on the New York Stock Exchange
(NYSE), the American Stock Exchange (AMEX) or the NASDAQ. These
ADRs are issued on any of these exchanges by the sponsor bank / brokerage.
Hence, the company is required to disclose all financial information to the
sponsor bank / brokerage.

The sponsor bank / brokerage sets a ratio of ADRs to number of shares

purchased. This ratio should be either greater than or less than 1. This is done
by the sponsor bank / brokerage so that the ADR is high enough to show
substantial value yet be low enough to attract investors. For instance, let us
assume that Reliance, an Indian company, is currently trading at Rs. 300 on the
Bombay Stock Exchange. One ADR of Reliance, representing one share of
Reliance, would trade at $7.50 on the American market. Investors in the U.S.
would fall back from investing in such penny stocks. But if, one ADR of
Reliance represented 10 shares, it would be trading at $75 per ADR, which falls
in the substantial – yet – attractive category that was spoken about a little
earlier. As a result, majority of the ADRs trade at prices between $10 and $100
per ADR.

So, for companies whose shares trade at relatively lesser values in the home
country has an ADR that comprise of relatively greater number of shares. For
instance, if a company trading at Rs.40 on the BSE may have an ADR that
comprises of 40 shares, i.e. at a price of $40 per ADR.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 6

2.2.3 Price Determination
ADRs are just like any other security. The initial price or listing price, in case
the ADR is being listed, is determined by using the predetermined ratio as we
have just seen. Once listed, ADRs are traded just like other stocks in the market.
This means that the price of the ADR will be determined by the market
mechanism of demand and supply.

Let us recollect our earlier illustration wherein Reliance is going to the U.S.
market to raise capital. Let us assume that Reliance wishes to list on the NYSE
through JP Morgan. JP Morgan fixes a ratio of 10:1, i.e. 1 ADR for every 10
shares of Reliance. Reliance is currently trading at Rs. 300 per share on the
BSE. This equates to $75 per ADR at the fixed ratio. This means that the
investor pays $45 for 10 shares in Reliance. So, after the initial listing, the
Reliance ADR will be bought and sold at prices determined by the market. If
the price of the ADR increases from $75 to $85 per ADR, it implies that 10
shares in Reliance are now worth $85. This translates to Rs. 340 per share as
against the Rs. 300 that Reliance is trading at on the BSE.

Two important factors in the price determination of ADRs are the shares – ADR
ratio and the exchange rate of the home currency. While changes in the ratio are
predetermined, the exchange rate can prove to be extremely volatile. Hence,
there arises an opportunity for arbitrage. With the availability of real – time
news from all across the globe and modern technology that enables on line
transactions, ADR prices of companies have come to follow the trend of the
share prices in the home country.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 7

2.2.4 Structure
The structure of the American Depositary Receipts is one that offers investment
options to different kinds of investors. Investors can purchase ADRs through
stock exchanges or even over – the – counter (OTC). The structure offers the
interested companies the option of tapping retail investors as well as
institutional investors.

The ADR structure offers four types of programs to the investors:

• Level I Depositary Receipts
• Rule 144A Depositary Receipts
• Level II Depositary Receipts
• Level III Depositary Receipts

2.2.4.1 Unlisted programs (Level I and Rule 144A DRs)

A Level I ADR program is not listed on a stock exchange, but is available for
retail investors to purchase and trade in the over-the-counter market via
NASDAQ’s Pink Sheets. A Level I program does not create new capital in the
US; rather, it gives the company an opportunity to develop or expand its
shareholder base by establishing a foothold in the US market.

The highlights of this program are given below:

The issuing company has to maintain home – market accounting and
disclosure standards. They needn’t conform to the regulations laid down by
Securities Exchange Commission as regards accounting disclosure.

The issuing company makes use existing shares to raise funds from the
American market. This implies that the company tries to meet investor’s
demand and their own need for liquidity without issuing new shares for the
DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 8
 American market. However, they can issue new ADRs. They can do so by
first issuing the shares in the home market and then cancelling it. These
shares are then made available to be bundled and issued.

The issuing company is exempt from U.S. reporting requirements. The

reporting requirements include compliance with Rule 12g3-2(b).

The issuing company has to register itself with the United States Securities
Exchange Commission through form F-6.

The bid prices of the ADRs are electronically updated at the end of the
trading day through the Pink Sheets LLC information Service. Vendors like
OTCquote.com even post real – time and intra – day quotes posted in the
market. Such services, however, are available to the issuing company only
through subscription.

2.2.4.2 Rule 144A Depositary Receipts

A Rule 144A DR is the quickest, easiest, and most cost-effective way to raise
capital in the United States. Under this program, new restricted shares are
created and then privately placed with institutional investors. Rule 144A
facilitates the resale of privately placed securities to Qualified Institutional
Buyers in the US.

These institutions manage at least $100 million in securities, or are registered

broker-dealers that own or invest, on a discretionary basis, $10 million in
securities of non-affiliates.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 9

Let us study the highlights of this program:

Companies issuing Rule 144A DRs are not subject to U.S. reporting
requirements. In fact they aren’t even registered with the U.S. Securities and
Exchange Commission.

These DRs may not be advertised for or actively promoted by the issuer.
This is because the sale of such DRs takes place through private placement.

Under Rule 144A of the Securities Act, 1933, such trades are to take place
electronically on a system developed and managed by the National
Association of Securities Dealers. The system is called PORTAL.

These DRs can be traded only to Qualified Institutional Buyers (QIBs). This
underlies the essence of such DRs – that they are privately placed DRs.
This type of an ADR may be converted into the unrestricted ADR type.
However, for such a conversion to take place, at least two years from the last
deposit of shares under this program have got to lapse. It is only after these two
years that the Rule 144A type ADR is eligible to be converted.

2.2.4.3 Level II and Level III Depositary Receipts

Listing your ADR means it will be traded on one of the three major US
exchanges – the New York Stock Exchange (NYSE), The American Stock
Exchange (Amex), or the (NASDAQ). ADRs that are listed on the NYSE or
Amex, or quoted on NASDAQ, have higher visibility in the US market, are
more actively traded, and have increased potential liquidity.

In order to list your company’s securities, you must meet the listing
requirements of your chosen exchange or market. Your company must also
comply with the registration provisions and continued reporting requirements of
the Securities Exchange Act of 1934, as amended (“The Exchange Act”), as

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 10

well as certain registration provisions of the Securities Act, which generally
entail the following:
Form F-6 registration statement, to register the ADRs to be issued.

Form 20-F registration statement, to register the ADRs under the Exchange Act.
This requires detailed financial disclosure from the issuer, including financial
statements and a reconciliation of those statements to US GAAP (Generally
Accepted Accounting Principles).

Annual reports (on Form 20-F) have to be filed on a regular, timely basis with
the US Securities and Exchange Commission (SEC). Interim financial
statements and current developments, furnished on a timely basis to the SEC on
Form 6-K, to the extent such information is made public or filed with an
exchange in the home country or distributed to shareholders.

A Level II ADR uses existing shares to satisfy investor demand and liquidity.
New ADRs are created from deposits of ordinary shares in the issuer’s home
market. Because these securities are listed or quoted on a major US exchange,
Level II ADRs reach a broader universe of potential shareholders and gain
increased visibility through reporting in the financial media. Listed securities
can be promoted and advertised, and may be covered by analysts and the media.
In addition, listed securities can be used to structure incentives for an issuer’s
US employees, or could be used to facilitate US mergers and acquisitions.

Level III ADRs are a public offering of new shares into the US markets. These
capital raisings have a high profile: They are followed closely by the financial
press and other media, often generating significant visibility for the issuer. In
addition to the requirements noted above, an issuing company establishing a

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 11

Level III ADR program is required to file Form F-1. This registers the securities
underlying the ADRs that will be offered publicly in the US, including a
prospectus informing potential investors about the issuer and any risks inherent
in its business, the offering price of the securities, and the issuer’s plan for
distributing the ADRs. In certain circumstances, an abbreviated registration
statement (Form F-3) may be acceptable.

The company may substitute Form 8-A for Form 20-F registration to register
under the Exchange Act. However, Form 20-F annual reports must be filed
thereafter. This annual filing contains detailed financial disclosure from the
issuer, financial statements and a full reconciliation of those statements to US
Generally Accepted Accounting Principles (GAAP).

Level III ADRs can be actively promoted and advertised to increase investor
awareness and market liquidity. As with Level II ADRs, the securities can be
used to structure incentives for an issuer’s US employees, and may be used to
facilitate US mergers and acquisitions.

2.2.5 Legal Framework: United States

The Securities and Exchange Commission (SEC) was set up in 1929, just before
the Great Depression. It was formed to regulate the American capital market. It
is the SEC that regulates the ADRs in the U.S. In order to have its securities
listed and traded in the U.S. through an ADR, the non – U.S. company must
comply with these laws and regulations.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 12

2.2.5.1 Federal Securities Acts
There are two federal securities laws that govern the creation of ADRs: The
Securities Act, 1933, and The Securities Exchange Act, 1934 (amended as The
Exchange Act).

The Securities Act, 1933

The Securities Act, 1933, governs the offer and sale of securities. The Act
requires full and fair disclosure of all information that the investors should be
aware of in order to make a well informed decision as regards the securities on
offer. It also contains requirements for the registration of these securities to be
offered.

The Securities Exchange Act, 1934

The Securities Exchange Act, 1934, regulates the secondary markets for listed
or unquoted securities. The Act requires on – going reporting from the issuers of
these securities.

In short, the Securities Act governs the offer, sale and registration of securities
while the Securities Exchange Act regulates the secondary markets through
mandatory on – going reporting and disclosure by the issuers.

2.2.5.2 Key SEC Rulings

The regulatory and disclosure requirements imposed upon the sponsor bank /
brokerage depends on the kind of program that it has opted for.

Rule 12g3-2(b)
Under this rule, the ADR – issuer is exempt from periodic disclosure and
reporting norms if it plans to make its Level I ADRs available to the investors

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 13

over – the – counter (OTC). This enables the ADR – issuer to make available to
the SEC those details that it has already made public. Hence, it is freed from the
burden of extensive reporting and other related requirements.

Form F-6: Registration of Level I, II and III ADRs with SEC

Under the Securities Act, any sponsor bank / brokerage establishing an ADR
program must register the ADRs with the SEC. They do so by filing form F-6
along with a copy of the Depositary Agreement.

Besides the Depositary Agreement, sponsor banks / brokerages must also file
the legal opinion of their counsel. This legal opinion states the rights that the
holders of these ADRs will have access to.

Once the SEC receives the Form F-6 along with the other documents and has no
further comments, the sponsor bank / brokerage will file an Acceleration
Request with effectiveness on a particular date, on which the ADRs can be
issued. To put it simply, the Acceleration Request filed by the sponsor bank /
brokerage is more like an information slip notifying the SEC about when it
plans to issue the proposed ADRs. This date on which they will issue the ADRs,
is the effectiveness date.

Form 20-F: Annual Disclosure & Registration Document for Level II and III
This form is used as both – a form for registration as well as for annual report
filing. This form can be used for registration only by Level II and Level III
ADR issuers. For sponsor banks / brokerages that have already registered, they
have to use this form to file the annual reports. Depending on the use of this
form, certain exemptions are made available.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 14

The following are some of the disclosures required to be made:
• Identity of directors and other senior management
• Historical financial information
• Description of the properties
• Financial prospects
• Major stakeholders and related party transactions
• Offer and listing plans
• Company documents
• Quantitative and qualitative disclosure of market risks
• Code of ethics

EDGAR Filings
The SEC has put in place a system for electronic filing of disclosure documents.
This system is known as EDGAR System, short for Electronic Data Gathering
and Retrieval system. The major purpose of putting such a system in place is to
enable the investors to analyse all the documents filed by the company before
making any investment.

Under the EDGAR System the following forms need to be filed electronically:
• Form F-6 (For registrations of ADRs)
• Form 6-K (For informational reports)
• Form 20-F (For Annual report / registration)
• Forms F-1, F-2, F-3, F-4 (For public offerings)

The regulations regarding filing of these forms are relaxed a little bit for
sponsor bank / brokerage issuing Level I ADRs. However, such relaxation of
regulation does not extend to the filing of Form F-6.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 15

2.2.6 Legal Framework: India
In India, there wasn’t any specific regulation regarding the issue of ADRs for a
long time. It was only in 2000 that the Reserve Bank of India (RBI) issued a
notification permitting the issue of ADRs through the Foreign Exchange
Regulation Act (FERA).

Notification No. F.E.R.A. 214 /2000-RB

The Reserve Bank of India issued this notification on 20th January, 2000.
Putting it quite simply, this notification permits the issue of ADRs by Indian
companies. The following points highlight the essence of this notification:
• All companies governed by the Indian Companies Act, 1956, are permitted
to raise funds through the issue of ADRs

• The permission, however, shall stand to be cancelled if the company raising

funds violates any norms or exceeds any limits laid down by the Foreign
Investment Promotion Board (FIPB) or the Secretariat for Industrial
Assistance (SIA).

• The company has to get approval from the Ministry of Finance, Government
of India, to make such an issue.

• The company is permitted to enter into any agreement / sign any contract
with foreign agencies provided that such a contract is essential for the issue
of ADRs.

• The companies are allowed to make payments to the relevant authorities and
the sponsor bank / brokerage towards their fees.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 16

• The companies are permitted to make any payments to U.S. government
towards any tax liability incurred as a result of issue of ADRs

• The companies are allowed to maintain bank accounts in the U.S. to deposit
the money collected.

• The companies are also permitted to maintain a register of foreign members

if the company feels it necessary.

This notification cleared a lot of ambiguities that existed in the Foreign

Exchange Regulation Act in the absence of any concrete provision regards
ADRs.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 17

 2.3 GLOBAL DEPOSITARY RECEIPTS (GDR)

2.3.1 GDR Overview

A Global Depositary Receipt is a security that is traded in the European
markets. A GDR and an ADR are essentially the same. The only difference is
that the GDR is traded either on the Luxembourg Stock Exchange or the
London Stock Exchange.

Just as in the case of ADRs, companies wishing to issue GDRs have to sign a
Deposit Agreement with a sponsor bank / brokerage in Europe. GDR holders do
not enjoy any voting rights.

2.3.2 Working of GDR

GDRs can be bought and sold just like any other security. They are listed
usually on the London Stock Exchange or the Luxembourg Stock Exchange.

Similar to ADR program, the sponsor bank / brokerage sets a ratio of number of
shares in every GDR. One more significant difference between ADRs and
GDRs is that in case of GDRs, a lot of companies have a ratio of one share per
GDR. This is something that is not found in ADRs. Once the GDRs are listed,
they are traded just like shares on the exchange.

An important point in this regard is that the investors who pick the shares from
London or Luxembourg could be investors from other countries. For example,
an investor from Japan can buy GDRs of an Indian company listed on the
London Stock Exchange. Later on he can sell these GDRs to another investor
from Brazil. This makes the program truly global in the sense that funds can be
raised from different countries at one single point. This is the primary reason for
DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 18
these depositary receipts being christened Global Depositary Receipts and not
British Depositary Receipts.

The GDRs are traded in Europe on one the Euromarket clearing systems –
Euroclear and Clearstream. These clearing systems are similar to the American
National Association of Securities Dealers’ Automated Quotation System
(NASDAQ). These systems offer investors the benefits of real – time prices and
online instant transactions among many other benefits.

2.3.3 Structure
The most significant difference between the ADR and GDR lies in their
structures. There are two types of GDRs – The Reg S Depositary Receipts and
the pairing type.

2.3.3.1 Reg S Type Depositary Receipts

The Reg S Type Depositary Receipt is the equivalent of the ADR. It is issued to
the public through a sponsor bank / brokerage. Once issued, this GDR is listed
on either the Luxembourg Stock Exchange or the London Stock Exchange.

This type of a GDR is open for every kind of investor. Unlike ADRs, where
each type of ADR determines the investors that can trade it, the Reg S type
GDR can be traded from any kind of investor to any kind of investor.

2.3.3.2 Pairing Type

This GDR is a combination of the Reg S type GDR and a Rule 144A ADR. So
when one such GDR is sold, it essentially implies the sale of a Reg S type GDR
along with a Rule 144A ADR.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 19

The Reg S type GDR may be listed either in London or Luxembourg. The
holders of these GDRs will be regular investors. However, the Rule 144A
ADRs are privately placed through Qualified Institutional Buyers in the U.S.

The biggest reason for such a program being subscribed to is the fact that such a
program enables the issuing company to raise funds not just from the U.S. and
not just from Europe, but from both markets simultaneously.

2.2.4 Legal Framework: India

In India, GDRs are governed by the same notification issued for ADRs.

Notification No. F.E.R.A. 214 /2000-RB

The Reserve Bank of India issued this notification on 20th January, 2000. It
allows the issue of GDRs. The following points highlight the essence of this
notification:
• All companies governed by the Indian Companies Act, 1956, are permitted
to raise funds through the issue of GDRs

• The permission, however, shall stand to be cancelled if the company raising

funds violates any norms or exceeds any limits laid down by the Foreign
Investment Promotion Board (FIPB) or the Secretariat for Industrial
Assistance (SIA).

• The company has to get approval from the Ministry of Finance, Government
of India, to make such an issue.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 20

• The company is permitted to enter into any agreement / sign any contract
with foreign agencies provided that such a contract is essential for the issue
of GDRs.

• The companies are allowed to make payments to the relevant authorities and
the sponsor bank / brokerage towards their fees.

• The companies are permitted to make any payments to concerned

government towards any tax liability incurred as a result of issue of GDRs

• The companies are allowed to maintain bank accounts abroad to deposit the
money collected through such an issue.

• The companies are also permitted to maintain a register of foreign members

if the company feels it necessary.

This notification cleared a lot of ambiguities that existed in the Foreign

Exchange Regulation Act in the absence of any concrete provision regards
GDRs.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 21

 CHAPTER 3
ADR / GDR: INDIAN
PERSPECTIVE
 3.1 INTRODUCTION

India was totally out of the picture as far as the ADR and GDR markets are
concerned. This is primarily attributed to the protectionist policy followed by
the government. The Indian economy opened up only in 1991 with the
government deciding to adopt the policy of Liberalisation, Privatisation and
Globalisation.

3.2 SCOPE FOR ADRs / GDRs

With the opening up of the economy in 1991, Indian companies have been
growing at a rapid pace. With this the economy has also been growing rapidly.
All this has resulted in the opening up of huge opportunities for investment in
India.

The following points highlight the need for / scope of ADRs and GDRs in India:
• Rapid Growth: India’s economy has been growing at a rapid pace. To
maintain the pace of such growth, huge amounts of investments are required.
ADRs and GDRs enable such huge investments to be made in India.

• Non – availability of funds: The funds available in India fall far short of the
funds required to maintain and increase the growth rate of the economy.
ADRs and GDRs channel funds from foreign sources to India, thereby
enabling such investments to be made.

• Bullish Market: The Indian market has been showing bullish tendencies in
the recent past. Indexes of the two major stock exchanges in India – Nifty 50
of the National Stock Exchange (NSE) and BSE Sensex of the Bombay
DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 22
 Stock Exchange (BSE) – have been rising upwards consistently in the last
two to three years. This upward trend is both the cause and effect of foreign
funds flowing in.

• Growing Investor confidence: As a result of India sustaining the bullish

trend and Indian companies growing as fast as they are, global investors
have greater confidence in Indian stocks than ever before. This sort of
confidence is displayed by institutional investors as well as individual
investors

3.3 ADRs AND INDIA

The Indian ADR market came to life only in 2000 when the Reserve Bank of
India (RBI) announced properly laid out rules and regulations for the issue of
depositary receipts.

The first company to raise funds through the issue of ADR is Rediff.com India
Limited. The company raised $55.3 million or Rs. 2.3 billion ($1= Rs. 43) from
their first issue in 2000. There are 11 companies that have raised $7.9 billion
through 14 programs. Of the 11 companies, 8 are listed on the NYSE and the
other 3 on NASDAQ.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 23

 Company Ticker Industry Exchange
DR. Reddy's Laboratories Ltd. RDY Pharmaceutical NYSE
HDFC Bank Limited HDB Banks NYSE
ICICI Bank Limited IBN Banks NYSE
Infosys Technologies Limited INFY Technology services NASDAQ
Mahanagar Telephone Nigam Limited MTE Fixed line communication NYSE
Rediff.com India Limited REDF Technology services NASDAQ
Satyam Computer Services Limited SAY Technology services NYSE
SIFY Limited SIFY Technology services NASDAQ
Videsh Sanchar Nigam Limited VSL Fixed line communication NYSE
Wipro Ltd. WIT Technology services NYSE
Tata Motors TTM Automobile NYSE
Table 1: List of companies that have issued ADRs
Source: Bank of New York

Let has have a look at the total funds raised by each of the companies
mentioned above. The following table lists the companies that have raised funds
through the issue of ADRs
Companies Total Capital Raised Through ADR ($Million)
Dr. Reddy's 362
HDFC Bank 1,080
ICICI Bank 3,359
Infosys 2,489
Rediff 103
Satyam 484
SIFY 44
Table 2: List of companies with funds raised through ADR
Source: Bank of New York

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 24

 Graph 1: Funds raised through ADR by companies
Source: Bank of New York
As can be seen in the graph, ICICI Bank is the largest funds – raiser. It has
raised a total of $3,359 million. It raised $466 million from their first issue in
March 2005, $433 million from their second issue in December 2005 and
$2,460 million from their last issue in June 2007.

Company 1st Issue 2nd Issue 3rd Issue

HDFC Bank 607 300 172
Dr. Reddy's 229 133 -
SIFY 44 - -
Infosys 1,605 884 -
Rediff 48 55 -
Satyam 323 162 -
ICICI Bank 246 433 466
Table 3: Issue – wise break up of funds raised through ADR
Source: Bank of New York

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 25

The table above gives a break – up of the funds raised from each issue. From
the following graph, which is a graphical representation of the table given
above, we can see that Infosys has raised the highest amount of funds through a
single issue.

All figures in $ million

Graph 2: Issue wise break of funds raised through ADR

Source: Bank of New York

ICICI Bank and HDFC Bank are the only companies that have issued ADRs
three times. HDFC Bank made their issues in 2001, 2005 and 2007. Amongst
the others, all have made two issues except for SIFY.

Note: Data for Tata Motors, Mahanagar Telephone Nagar Limited (MTNL) and Videsh
Sanchar Nigam Limited (VSNL) for use in Graph 1 and Graph 2 was not available.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 26

The ADRs issued have different ratios. It is not necessary that the ADRs listed
on the same exchange have the same ratio. From amongst the Indian companies,
most of the ADRs are in the ratio 1:2. This implies that for every ADR there are
two home – country shares. In other words, two shares make up one ADR.

Earlier, we said that the sponsor bank / brokerage in the U.S. prefers to keep the
raito of shares per ADR high enough to instill confidence in the investors and at
the same time low enough for it to look like an attractive investment. Usually
the ratio is 1:10. But in case of the Indian companies, the range of of the ratio
lies between 1:0.5 to 1:3. This shows not only the financial strength of the
Indian companies, but also the investor’s confidence in Indian stocks.

The following table shows the number of programs having the corresponding
ADR: Shares Ratio.
ADR: Shares Ratio Number of Programs Percentage
1:0.5 2 12.50%
1:1 5 31.25%
1:2 6 37.50%
1:3 3 18.75%
Table 4: Detailed break up of ADR: Shares ratio
Source: Bank of New York

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 27

 Pie Chart 1: Percentage wise break up of ADR: Shares ratio
Source: Bank of New York

3.4 GDRs AND INDIA

India entered the GDR market soon after the opening up of the economy in
1991. It entered the market with the Reliance issue in May 1992. Reliance
raised $150 million through this issue. This was followed by the Grasim issue
through which the company raised $90 million. Thereafter, there was a lull in
the GDR market until the end of 1993. This was because of the securities scam
that haunted the Indian stock markets during 1992 – 93.

The number of companies that have raised funds through the issue of GDRs is
far greater than the number of companies that have raised funds through ADRs.
Despite this, the total amount raised through GDRs is $7.2 billion.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 28

 The following table lists out all the companies that have raised funds through
the issue of GDRs along with the amount of funds raised.

Company Industry Funds Raised (In $ million)

Arvind Mills Textiles 125
Ashok Leyland Automobile 138
Bajaj Auto Automobile 110
Ballarpur Industries Paper 35
Bombay Dyeing Textiles 50
BSES Ltd Power 125
Century Textiles Diversified 100
CESC Power 125
Core Parent Pharmaceutical 70
Crompton Greaves Electrical 50
DCW Diversified 25
Dr. Reddy's Labs Pharmaceutical 48
E. I. Hotels Hotels 40
EID Parry Fertiliser 40
Finolex Cab Cables 55
Flex Industries Packaging 30
G.E. Shipping Shipping 100
G.N.F.C Fertiliser 61
GAIL Oil & Refineries 23
Garden Silk Textiles 45
Grasim Diversified 190
Gujarat Ambuja Cement Cement 80
Himachal Future Telecommunication 50
Hindalco Aluminum 172
Hindustan Dev. Diversified 76
India Cements Cement 90
Indian Aluminum Aluminum 60
Indian Hotels Hotels 86
Indian Rayon Diversified 125
Indo Gulf Fertiliser 100
Indo Rama Textiles 50
ICICI Bank Finance 230
Infosys IT 70
DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 29
IPCL Petrochemicals 85
ITC Cigarettes 69
J.K. Corporation Diversified 55
Jain Irrigation Plastics 30
JCT Ltd. Textiles 45
Kesoram Ind Diversified 30
Larsen & Toubro Diversified 285
Mahindra & Mahindra Automobile 75
MTNL Telecommunication 419
NEPC Micon Diversified 48
Nippon Denro Steel 125
Oriental Hotels Hotels 30
Ranbaxy Labs Pharmaceutical 100
Raymond Woolen Textile 60
Reliance Diversified 450
Reliance Petroleum Diversified 100
S.A.I.L. Steel 125
Satyam Infoway IT 75
S.I.E.L. Diversified 40
Sanghi Poly Textiles 50
SIV Ind Textiles 45
SPIC Fertiliser 65
SBI Banking 370
Sterlite India Diversified 100
Tata Electric Power 65
Tata Motors Automobile 315
Tube Invest Cycles 46
United Phos. Pesticides 55
Usha Beltron Cables 35
Videocon International Electronics 90
VSNL Telecommunication 527
Wockhardt Pharmaceutical 75
Table 5: List of companies that have issued GDRs
Source: www.gdr.in

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 30

Majority of the funds raised by these companies was post 1993. The securities
scam not only shattered investor confidence in India, but also the confidence of
the global investors who had invested or were considering an investment in
Indian stocks. The 1994-95 season was the peak. Most of these companies got
themselves listed during this time.

Videsh Sanchar Nigam Limited (VSNL) raised the largest amount of funds
through the issue of GDRs. It has raised $527 million in this market. The
companies closest to VSNL in terms of funds raised are Reliance, who’ve raised
$450 million and Mahanagar Telecom Nigam Limited (MTNL) who raised
$419 million. From amongst the rest of the companies, SBI has raised $370
million while Tata Motors have raised $319 million. There are a handful of
companies that have raised between $100 - $200 million. Then there’s a big
group of companies who have raised a capital of less than $100 million.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 31

 Companies That Have Raised More Than $100
million

Tata Motors 315

100
Sterlite India

SBI 370

S.A.I.L. 125

Reliance Petroleum 100

450
Reliance

Ranbaxy Labs 100

125
Nippon Denro#

MTNL 419

L&T 285

Indo Gulf 100

125 Total Capital Raised

Indian Rayon
Through GDR ($Million)

ICICI 230

Hindalco 172

Grasim 190

G.E. Shipping 100

CESC 125

Century Textiles 100

125
BSES Ltd

Bajaj Auto 110

Ashok Leyland 138

125
Arwind Mills

VSNL 527

0 200 400 600

Graph 3a: Companies that have raised more than $100 million through GDRs
Source: www.gdr.in

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 32

 Companies that have raised between $50 -
$100 million
Wockhardt 75
Videocon Int. 90

United Phos. 55
Tata Electric 65

SPIC 65

Satyam Infoway 75

Sanghi Poly 50
Raymond Woolen 60
Mahindra & Mahindra 75

J.K. Corp 55

ITC 69

IPCL 85

Infosys 70 Total Capital Raised

Indo Rama 50 Through GDR ($Million)

Indian Hotels 86

Indian Alum. 60

Hindustan Dev. 76

Himachal Futuri 50
Guj Ambuja 80
G.N.F.C 61

Finolex Cab 55
Crompton Greaves 50

Core Parent 70
Bombay Dye 50

India Cements 90

0 50 100

Graph 3b: Companies that have raised between $50 - $100 million through GDRs
Source: www.gdr.in

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 33

 Companies that have raised less than $50 million

Usha Beltron 35

Tube Invest 46

SIV Ind 45

S.I.E.L. 40

Oriental Hotels 30

NEPC Micon 48

Kesoram Ind 30

JCT Ltd. 45

Jain Irrig 30 Total Capital Raised Through

GDR ($Million)
Garden Silk 45

GAIL 23

Flex Industries 30

EID Parry 40

E. I. Hotels 40

DCW 25

Ballarpur Ind. 35

Dr. Reddy's 48

0 10 20 30 40 50

Graph 3c: Companies that have raised less than $50 million through GDRs
Source: www.gdr.in

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 34

The pattern of the ratio of shares per GDR is quite different from the pattern of
the ratio of shares per ADR. In fact, nearly 55% of the GDRs are in the ratio
1:1. This means that one GDR represents only one share in India. One factor
that plays an important role in this is the difference in the mindset of the
European investors from their American counterparts as regards Indian stocks.
European investors seem to have greater confidence in Indian stocks than the
Americans.

The following table shows the number of programs having the corresponding
GDR: Shares Ratio.

GDR: Shares Ratio Number Of Companies Percentage

1:0.5 2 2.82%
1:1 39 54.93%
1:1.5 1 1.41%
1:2 9 12.68%
1:3 4 5.63%
1:4 1 1.41%
1:5 8 11.27%
1:6 1 1.41%
1:10 3 4.23%
1:15 2 2.82%
1:100 1 1.41%
Table 6: Detailed break up of GDR: Shares ratio
Source: www.gdr.in

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 35

 Pie Chart 2: Percentage wise break up of GDR: Shares ratio
Source: www.gdr.in

The chart shows that the GDR: shares ratio ranges from 1:0.5 to 1:100. This
indicates the presence of different kinds of companies. It indicates the presence
of a large number of big Indian companies and quite a few number of small
companies.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 36

 3.5 ADRs vs. GDRs

India’s entry into the GDR market dates back to 1992 with Reliance’s $150
million issue. Indian companies were hesitant to enter the ADR market until
2000, when the Reserve Bank of India issued clearly defined guidelines. Apart
from this, there are several other reasons for most Indian companies’ preference
towards the GDR market. They are listed as under:
• Disclosure norms: Companies listed on any of the American stock
exchanges are required to adhere to comprehensive disclosure norms. They
have to disclose information relating not just to the ADR, but also detailed
financial and non – financial information regarding the company. In contrast,
the London Stock Exchange (where all of the Indian companies are listed)
requires disclosure of only that information which relates to GDRs being
issued.

• Voting Rights: American rules make it a necessity for ADR holders to be

given voting rights. The London Stock Exchange (LSE) makes no such
demand. Although companies wishing to give such voting rights are
permitted to do so, they are not compelled to give these rights

• Accounting System Differences: Both U.S. and England follow accounting

systems that differ from the Indian system. The Securities and Exchange
Commission (SEC) makes it compulsory for companies issuing ADRs either
to prepare their accounts under US GAAP or reconcile the accounts to US
GAAP. The LSE, on the other hand, is satisfied with a Statement of
Difference between the English accounting system and the Indian system.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 37

• Initial Listing Costs: There is a significant difference in the initial listing
costs of listing in the U.S. and listing on the LSE. A U.S. listing could cost
the issuing company anywhere between $1 - $2 million or Rs.400 – Rs. 800
crores ($1 = Rs. 40). These costs are down to about $200,000 - $400,000 or
Rs. 0.8 – Rs. 1.6 crores for listing on the LSE.

The following table shows the number of companies that have issued ADRs as
against the number of companies that have issued GDRs.

Instrument Issued No. of Companies Percentage

ADR 11 14.86%
GDR 63 85.14%
Table 7: ADR / GDR issuing companies
Source: Bank of New York and www.gdr.in

Of the 74 companies that have raised funds through the issue of ADRs and
GDRs, 11 have issued ADRs while the other 63 have issued GDRs. The
following pie chart shows this in terms of percentage of total number of
companies who have raised funds through depositary receipts.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 38

 Pie Chart 3: ADR / GDR issuing companies as a percentage of the total
Source: Bank Of New York and www.gdr.in

As shown above, an astounding 85.14% of the companies issue GDR for the
various reasons that we listed above. One interesting point worth noting is that
the measures which deter Indian companies from listing in the U.S. affect the
smaller companies in a far greater manner. The companies listed in the U.S. are
the “big boys” of “India Inc.”

The fact that the bigger companies are listed in the U.S. is evident from the
amount of funds raised through these issues. It would be logical to assume that
since 85.14% of the companies have issued GDRs, a near equal percent of funds
would be raised. However, GDRs account for only 47.52% of the funds raised.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 39

 Instrument Funds Raised Percentage
ADR 7,92,13,84,003 52.48%
GDR 7,17,13,90,000 47.52%
Table 8: Total funds raised through issue of ADRs / GDRs
Source: Bank of New York and www.gdr.in

The following pie chart shows the amount of funds raised through ADRs and
GDRs as a percentage of the total funds raised.

Pie Chart 4: Funds raised through ADR / GDR as a percentage of the total
Source: Bank of New York and www.gdr.in

Although ADRs account for only 14.86% of the total issue of depositary
receipts, they account for 52.48% of the funds raised. This goes to prove, as we
stated earlier, that the Indian companies issuing ADRs are bigger than the ones
issuing GDRs.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 40

As a result of the more funds being raised from lesser companies through the
issue of ADRs, the average issue size of a company issuing ADR is much
higher than than a company issuing a GDR. The average issue size in case of
an ADR is about $720 million while this average drops to around $114 million
in case of GDRs. The following graph shows the average issue size in case of
ADR as against in case of a GDR.

Graph 5: Average issue size of a ADR / GDR program

Source: Bank of New York and www.gdr.in

Although the general preference amongst Indian companies is to issue GDRs,

India have managed to raise more funds in lesser time through the ADR market.
It took us 16 years 63 companies to raise $7.2 billion through GDRs but only 7
years and 11 companies to raise $7.9 billion.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 41

 CHAPTER 4
ADR / GDR VS. THE REST
4.1 FOREIGN CURRENCY CONVERTIBLE BONDS

Foreign Currency Convertible Bonds (FCCBs) are a means of debt financing.

FCCBs are bonds issued by companies in a foreign currency. The holders of
these bonds have the option of converting the bonds into shares. Hence, a
convertible bond can be said to be a mix between an equity instrument and a
debt instrument.

The company that issues FCCBs offers the investor an option to convert his
bonds into equity in the same company. Generally, the company permits such
conversions at predetermined exchange rates and at predetermined prices. Most
of the Indian companies set the conversion rate of these bonds at 10 – 50
percent. The investors can exercise this option only after having stayed invested
in the FCCB for about 1 – 2 years after the issue.

FCCBs are attractive as both – an investment opportunity and as a channel to

raise finance. These convertible bonds have proved to be an attractive prospect
to both the investors as well as the companies issuing the bonds. The investors
enjoy the safety of a guarantee of payments on the bond. The investors stand to
gain a lot with a substantial increase in the companies stocks. They stand to gain
from the improved stock position of the company by way of the warrants
attached to the bonds. These warrants are activated when the price of the
company’s stock reaches a certain point.

Companies issuing such bonds have a preference towards FCCBs owing to the
equity aspect. This allows the company to reduce its debts by converting these
debts into equity. Further, such a conversion adds value to the company.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 42

 In the recent past, there has been an increasing preference for raising funds
through the issue of FCCBs in India. Leading from the front in this respect are
the IT majors, who seem to be making good use of the available opportunities.

The table below shows the amount of funds raised by a few companies through
the issue of FCCBs

Companies Funds Raised Through FCCB ($ Million)

Videocon Indisutries 75
CESC 40
India Cements 100
Jindal 65
Indiabulls 130
Apollo Hospitals 65
EMCO Ltd. 10
Bharat Forge 100
Centurian Bank 10
Nagarjuna Constructions 100
HDFC 500
Tata Power 200
Tata Motors 400
Ashok Leyland 100
Bharti Group 115
Zee Telefilms 100
Table 9: Funds raised through issue of FCCBs
Source: www.rediff.com

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 43

Graph 6: Funds raised through issue of FCCBs
Source: www.rediff.com

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 44

 4.2 FOREIGN INSTITUTIONAL INVESTORS (FII)

Foreign Institutional Investor (FII) refers to a non – Indian institution that

invests directly in India. A FII is an investor or and investment fund that invests
in India, but is not registered in India. The FIIs in India include hedge funds,
incsurance companies, penison funds and mutual funds.

FIIs enter the Indian market through the back door. They buy and sell shares
from the exchange and do not directly invest their funds in the operations of
Indian companies. The FIIs have to get themselves registered witht the
Securities and Exchange Board of India (SEBI). SEBI has laid down guidelines
with regards not solely to the quantum of investment, but also the procedures to
be followed prior to such investment.

Recently, FIIs have been permitted to short sell equity in the Indian market
through the notification no. A. P. (DIR Series) Circular No. 23, issued by the
RBI. However, the custodian banks of these FIIs have to report on all
transactions seperately to the RBI for the purpose of monitoring.

FIIs have been pouring in a lot of funds into the Indian markets in the recent
past. In fact, FIIs have been playing a major role in the Indices of the country’s
two major stock exchanges – Nifty 50 of the NSE and BSE Sensex of the BSE.
The recent bullsihness of the Indian markets is attributed to the huge inflow of
funds from the FIIs.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 45

4.3 THE ADR / GDR ADVANTAGE

ADRs / GDRs have several benefits to offer to both issuers as well as the
investors. Listed below are the various ways in which the issuers of ADRs /
GDRs stand to gain

Widened Investor Base: With the issue of ADRs / GDRs, Indian companies
can expand their investor base to beyond the borders of the country. Further,
this facilitates the company to divesify their investors.

Increased Liquidity: As in the case of any issue, the issue of ADRs / GDRs
will increase the liquid position of the company. The compay can use these
funds to fuel their expansion plans.

Global Visibilty: Entering the depositary receipts market would result in the
issuing company becoming globally visible. This enables Indian companies
to enhance their reputation not just amongst foreign investors, but also
amongst domestic investors.

Price Parity: Indian companies can compete to be at par with MNCs with
regards to their stock prices. With the issue of ADRs / GDRs, Indian
companies with the MNCs in their own turf.

Facilitates Market Entry: Once a company has got itself recognised and
acepted by the investors, Indian companies can set up shop abroad with far
lesser difficulty. In fact, some of the India companies have issued ADRs /
GDRs not just to raise funds, but also to establish their brand in the country.
In this manner, they can enter foregin market with a lesser risk of failure.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 46

ADR / GDR is a very good option for investors to consider. The following
points highlight the advantages that accrue to investors investing in ADRs /
GDRs:

Ease of Investment: ADRs / GDRs are very easy to invest in and hold.
They are treated like just other securities. Hence, there is no complicated
procedure involved in the pruchase of a ADR / GDR.

Simple to Trade: Since ADR / GDR is given the same treatment as local
securities, it becomes that much easier and simpler for the investor to trade
in ADRs / GDRs.

Global Access: ADRs / GDRs provide the investors opportunities to invest

globally. This permits them to invest in foreign companies without having to
transfer funds out of the country. Further, investors can divesify the
industries into which they wish to invest.

Enables Comparison: Owing to the fact that all transactions take place in
their home country, investors can easily compare their investments in ADRs
/ GDRs as against their investments in other local securities. This is also
made possible with the trasactions taking place electronically.

Access to Institutional Investors: ADRs / GDRs offer the institutional

investors an opportunity to hold securities which they are not permitted to
hold in the home country of the ADR / GDR issuing company.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 47

ADRs / GDRs have proved to be very vital to India’s recovery from the
financial crisis in 1991. Although, alternate means look more attractive, the
ADR / GDR is fundamentally and structurally sound.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 48

CHAPTER 5
CONCLUSION
 5.1 CONCLUSION

As we conclude this project, we are filled with a sense of satisfaction of having

achieved what we set out to. This project is the result of all the efforts that we
have been putting in over the last year. The experience has left us better
equipped in more than one way.

We are now better positioned to conduct a similar research on other topics. The
project has enlightened us with what it takes to actually achieve the goals that
you set. Further, we are better prepared to work in a team.

We have fully understood the concept and the need for a depositary receipts
program. We have identified its significance in India’s growth. We have also
got an insight into the functioning of the American markets along with the
European market.

We have observed that the sudden surge in ADR issues took place after the
government put in place clearly defined rules. Similarly, GDR issues kicked off
immediately after the opening up of the economy. We hope that the RBI can
further relax the ADR / GDR guidelines to enable Indian companies to gain
even greater access to global markets. We also believe that Indian companies
raising funds globally should attempt to make this growth more inclusive.

ADRs and GDRs have proved to be quite a revolution. It wouldn’t be too daring
to dream of a day when we can issue new shares in foreign markets without the
company’s presence in the country.

DEPOSITARY RECEIPTS: THE INDIAN PERSPECTIVE 49

 Press Clippings

“Government Amends Norms for ADRs / GDRs”

NEW DELHI: The finance ministry has amended norms for the issuance of equity
and convertible bonds by Indian companies in the international markets.

The new norms will be a breather to companies like SIFY and Rediff.com which
were suppose to list their companies in the domestic market by March 31, 2006.
However, with the new norms, they can go for domestic listing within three years
after they start making profit.

According to new norms, unlisted companies which had issued Foreign Currency
Convertible Bonds (FCCBs), American Depository Receipts (ADRs) and Global
Depository Receipts (GDRs) prior to August 31, 2005 and are not making profit have
been permitted to sponsor ADR/GDRs, against existing shares held by shareholders
in the domestic market and will have to list on the domestic stock exchanges, within
three years of making profit.

However, unlisted companies which have not issued FCCBs, ADRs and GDRs prior
to August 31, 2005 would require prior or simultaneous listing in the domestic stock
exchanges or issues against existing shares under the scheme.

At the same time, unlisted Indian companies can sponsor an issue of ADRs and
GDRs in the international market against shares held by its shareholders provided
such facility would be available pari-passu to all categories of shareholders of the
company whose ADRs and GDRs are being traded in the global market.
(Source: Times of India dt. 29 June 2006)

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“Government curtails voting rights of depositaries ”
NEW DELHI: RBI has tightened the voting rights norms in a bank for American
Depository Receipt (ADR) and Global Depository Receipt (GDR) holders through
depositories.

RBI, in a communique to the scheduled commercial banks has asked them not to take
cognizance to voting by depositories, which hold underlying shares of ADRs and
GDRs, if they vote in contravention to its agreement with the banks.

The letter noted that banks enter into an agreement with the depositories, while
issuing shares to them, that they would not exercise voting rights in respect of the
shares held by them or if at all they exercise voting rights, they will do as directed by
the board of directors of banks.

In the communique RBI said, "Further, to eliminate the possibility of any

interference of depositories in the bank's management, they should give an
undertaking to the RBI that, (i) they would not give cognizance to voting by the
depository, should the depository vote in contravention of its agreement with the
bank and (ii) no change would be made in terms of the Depository Agreement
without prior approval of RBI."

Therefore, now, banks cannot grant voting rights to depositories. Ideally, the RBI
assumed banks were following the practice of not allowing depositories to vote. But
it came to the notice of the RBI that banks issuing ADR/GDR enter into a trust
agreement with the depository granting them the right to vote as directed by the
board of directors of the bank.

(Source: The Hindu Business Line dt. 9th February, 2007)

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 Bibliography

Source: Books
 Security Analysis of Portfolio Management by V.K. Bhatia
 Foreign Direct Investment in India by Lata Chakravarthy
 International Finance by V.A. Avadhani
 Foreign Exchange Market by S. Yadav, P.K. Yadav & Max Peyrard

Source: Newspapers
 The Hindu Business Line (dt. 9th February, 2007)
 Times of India (dt. 29th June 2006)

Source: Magazines
 Fortune
 Business Today
 Time

Source: Internet
 www.adr.com
 www.jpmorgan.com
 www.gdr.in
 www.adr.in
 www.investopedia.com
 www.thehindubusinessline.com
 www.bnymellon.com
 www.moneycontrol.com

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Source: Other Documentation
 JP Morgan Depositary Receipts Guide
 Deutsche Bank Depositary Receipts Guide

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