ADR / GDR Investments in

India



Dr. N. Tandon
JIMS KALKAJI
Agenda
Introduction
Genesis of International Market
Classification of International Instruments
Concept & Mechanism - ADR/GDR/IDR
360 Perspective of ADR/GDR/IDR
Case Study Infosys ADR Issue
Timeline of ADR/GDR/IDR
Debt Instruments
Hybrid Instruments
Conclusion

International Finance
International finance is the branch of economics
that studies the dynamics of exchange rates,
foreign investment, and how these affect
international trade. It also studies international
projects, international investments and capital
flows, and trade deficits.
Trends in International Finance
International financial market are influenced by the structural
changes in the world economy it is possible to differentiate
four phases relevant for the analysis of financial markets
globalization.

First phase (1960)
Second phase (1970)
Third phase (1980)
Fourth (1990)
Features

Scale and structure of financial resources

Structure of the basic groups of countries' share on
the market

Institutional and sector share

Degree of joining home with foreign markets
("osmosis")

Positive effects, risks and control
An American Depositary Receipt (ADR) is how
the stock of most foreign companies trades in
United States stock markets. Each ADR is
issued by a U.S. depositary bank and
represents one or more shares of a foreign
stock or a fraction of a share. If investors own
an ADR they have the right to obtain the
foreign stock it represents, but U.S. investors
usually find it more convenient to own the
ADR.
The price of an ADR is often close to the price
of the foreign stock in its home market,
adjusted for the ratio of ADRs to foreign
company shares. Depository banks have
numerous responsibilities to the holders of
ADRs and to the non-U.S. company the ADRs
represent. The largest depositary bank is The
Bank of New York. Individual shares of a
foreign corporation represented by an ADR are
called American Depositary Shares (ADS).
Classification of Instuments
Instruments in
International Market
Equity
ADR GDR IDR
Debt
Bonds
Yankee Samurai Bulldog
Hybrid
FCCB
FCEB
The Yankee market refers to the US stock
market because a Yankee is a nick name for us
citizens.
The Bulldog market is used to refer to the British
stock market after the famous bulldog that
comes from the UK.
The Samurai market refers to the Japanese
stock market after the famous samurai warriors.
Most of these terms are used outside of their
country and are nothing more than slang for
describing the different stock markets in different
parts of the world.

DRs - what are they and how do
they work?

Company - comply policies of stock exchanges
Investing directly - expensive, risky, problematic
Investing indirectly - DRs
Receipt - predefined number of shares
Listed on stock exchanges
ADR - Infosys
GDR - RIL
IDR

Players in International Market

Borrowers/Issuers
Corporates
Government
Supranational organizations
Supranationalism is a method of decision-making in multi-national
political communities, wherein power is transferred or delegated
to an authority by governments of member states.

Lenders/Investors
Institutional investors
HNIs
QIBs
Insurance companies
Intermediaries
Lead managers/Co-lead managers - offer circular,
marketing the issues
Underwriters - for the issue
Agents and Trustees - issue of bonds/convertibles
Lawyers and Auditors - Indian/English/American law and
financial information
Listing Agents and Stock exchanges - facilitate the
documentation
Depository bank - only issue DRs
Custodian - holds the shares underlying DRs





Mechanism for ADR, GDR and
IDR
ADR Programs
Level I The ADRs are issued against existing
shares and the issue cannot be listed on any of
the national stock exchange in US but can be
traded over the counter only. They are sold in the
US as registered public offering under the
securities act 1933. The depository agreement is
executed between the issuer and a selected
depository bank.



Level II (listed) It must comply with SECs full
registration requirements, including submission of
its annual reports which must be prepared in
accordance with the US Generally Accepted
Accounting Standards(GAAP). It can be listed on
any national stock exchange such NYSE, the
AMEX NASDAQ (national association of
securities dealers automated quotation.
Level III (offering) are similar to Level II ADRs but
only difference is level III allows the issuer to raise
capital through a public offering of ADRs in the
US. It further permits public offering of ADRs in
the US which can be used for a variety of
purposes.




Issuance of GDR
Shareholder Approval Needed
Offering memorandum
Fixation of issue price
Opening of bank account outside India
Notifying the stock exchange
Appointment of a Lead Manager
Vital link - government and investors with the issuers
Advises the company
The industry - engaged
The international monetary and securities market
The economic conditions and
The terms, quantum of issue, stages of conversion, price of equity,
shares on conversion


Finalization of issue structure - government
The Documentation
Prospectus
Depository agreement
Custodian agreement
Subscription agreement
Trust deed
Paying and conversion agency agreement
Underwriting agreement
Listing agreement

The Launch
Euro-Equity Syndication - intermediaries
Segmented Syndication - geographically
targeted
Marketing
Lead manager & advertising agencies
Back-up material
Road shows - future profitability, growth
prospects
Face-to-face presentations - financial centres





Pricing and Closing
Underwriters response
Book-runner keeps the book open - 1to2 weeks
Fix a particular price
Costs
Lead-manager
Marketing cost
360 Perspective of
ADR/GDR/IDR

Investor Perspective

Company Perspective

Economy Perspective

Investor Perspective
Global portfolio
Benefits of higher risk; higher return equities
Quoted and traded in U.S. Dollars
Easy access to markets
Transparency
Lower transactions costs
Tax efficient
Prompt dividend payments

Company Perspective
Raise capital from international market
Enlarged investor base
Greater exposure & Shares liquidity
Boosting the company's prestige
Extend its research base to foreign countries
International shareholder base
Stock-swap acquisition
Costs of Cross Listing


Company Perspective
Arbitrage opportunities
Buy DR
Sell local
stock in
India
Convert
shares
from DR to
local
Deliver
shares to
stock
exchange
in India
Deposit
proceeds in
Indian bank
account
Repatriate
funds
Economys Perspective
Coupling of global economies

Risks
Political Risk
Exchange Rate Risk
Inflationary Risk

Impact on Companys Valuation Forex
exposure


Case Study Infosys ADR
Indian ADR Trading in US
Indian ADR Trading in US
ADR ISSUE SYMBOL INDUSTRY EXCH
DR. REDDY'S LABORATORIES LTD. RDY Pharmaceutical NYSE
HDFC BANK LTD. HDB Banks NYSE
ICICI BANK LTD. IBN Banks NYSE
INFOSYS TECHNOLOGIES LIMITED INFY Technology Services NASDAQ
MAHANAGAR TELEPHONE NIGAM LIMITED MTE Fixed Line Comm. NYSE
REDIFF.COM INDIA LTD REDF Technology Services NASDAQ
SATYAM COMPUTER SERVICES LIMITED SAY Technology Services NYSE
SIFY LTD. SIFY Technology Services NASDAQ
VIDESH SANCHAR NIGAM LIMITED VSL Fixed Line Comm. NYSE
WIPRO LTD. WIT Technology Services NYSE


Infosys
Incorporated 1981

53 Global Development Centers

47 Sales Offices around the world

ADR issue
IPO @ Rs. 95/share Feb 1993
Listed @Rs. 145/share June 1993
Private placement (FII,FI) Oct 1994
ADR issue 20,70,000 ADS @ $34 March
1999
Secondary ADR issue
o US $294m July 2003
o US $1.07b June 2005
o US $1.605b - Nov 2006

Details of ADR issue
Stock market data
ADS Listed @ NASDAQ
Ratio of ADS to equity shares (A:O)= 1:0.5
ADS symbol -- INFY
Date of ADS issue: March 11, 1999.
Amt raised US$ 70,380,000 (Rs 296.86 crore)
Details of ADR issue
Depository Bank: Deutsche Bank Trust
Company Americas
Custodian Bank: ICICI Bank Limited
Investment Banks:
Lead Bank: NationsBanc Montgomery Securities
Co-Lead Banks:
1. BankAmerica Robertson Stephens of San
Francisco
2. Brown of New York
Details of ADR issue
ADR issue expenses:

Rs.
Legal and accounting fees 1,28,26,437
Printing charges 77,03,653
TOTAL 2,05,30,090
Details of ADR issue
Forms related to the issue:

Form 20F

Form F-1
Strategic Perspective
Objectives - ADR Issue
Increase Visibility and Comfort for clients
Position as a US based Technology comp
Diversify Shareholder base
Unlock Share Value
Become part of Global Index
Issue Stock Options Overseas employees
Obtain Hot Money for M&A
Objectives - Secondary ADR issue

Issue Float
Primary Issue 11 Mar 1999 3%
Secondary Issue July 2003 9%
Secondary Issue June 2005 14%
Secondary Issue Nov 2006 19%
Research on ADR Premium
Data :
NSE: nseindia.com: INFYTECH

Yahoo Finance: finance.yahoo.com- INFY
ADR

Analysis ADR Premium
Demand Supply
Regulatory
Foreign Exchange Management Act
Two-way fungibility Feb 2002
Regulations: Issue of ADRs/GDRs
by Indian Companies
Issue ADRs/GDRs if eligible in terms of the Scheme for Issue
of FCCB and OS (Through DR) Scheme, 1993 and guidelines
issued by MoF, GoI

Co. should not be ineligible to issue shares to non-resident
persons in terms of the Foreign Exchange Management Act
(FEMA)

Foreign investment - GDRs, ADRs - treated as FDI

No restriction on the number of GDRs/ADRs/FCCBs floated
by a co. or a group of cos. in a financial year

No enduse restrictions on GDR/ADR issue proceeds
except ban on investment in real estate and stock markets
Swap or exchange of shares of an
Indian Company
Indian co. permitted to acquire shares of foreign co.
engaged in same core activity, in exchange for
ADRs/GDRs provided:
Investment don't exceed USD 100 million or 10 times
the export earnings of Indian party in preceding FY,
whichever is higher
Indian co. already floated ADR/GDR listed on any
bourse outside India
ADR/GDR issue for the purpose of acquisition is
backed by underlying fresh equity shares issued by
the Indian party
Total foreign holding should be within the prescribed
sectoral cap limits
Govt. Policies: Amendments in
ADR/GDR Norms
Amendments in May 1998
Three Year Track Record required for ADR/GDR
issue
Unlisted co. with 3yrs track record can float
ADR/GDR
Euro Issue proceeds to be treated as FDI
No restrictions on the no. of Euro - issues in a
financial year
NBFCs registered with RBI allowed to raise GDR
Liberal end - use specifications
Repatriation of proceeds Cos. may retain
proceeds abroad or may remit funds into India
ADR, GDR norms further relaxed -
February 2003
Conversion and reconversion ( fungibility) of shares of Indian
co. into DR listed in foreign bourses

Cos. allowed to invest 100% of proceeds of ADR/GDR issues
(earlier 50%) for acquisitions of foreign cos. and direct
investments in JV and wholly-owned subsidiaries overseas

FII investment limit in a co. through portfolio investment
increased to 49%

Two way fungibility in ADR/GDR issues of Indian cos.
introduced subject to sectoral caps wherever applicable
Two-way Fungibility Scheme of
ADR/GDR
Registered broker in India can purchase shares of
Indian co. on behalf of a person resident outside
India to convert the shares so purchased into
ADRs/GDRs
Purchase and re-conversion of shares which is
equal to or less than the number of shares
emerging on surrender of ADRs/GDRs which
have been actually sold in the market

Benefits of Fungibility
Improvement in liquidity and
Elimination of arbitrage

Proposed changes in Pricing Rules
- August 2008
Higher of the two months' average price or the
last 15 days average price as against last six
months' average price or last 15 days' average
price

New pricing rules will reflect accurate and
more up to date - prices of the ADR/GDR
issues

Move is significant when funds for companies
are not easily forthcoming from the domestic
equity market
Indian Depository Receipts - Rules
and Regulations
Issuers Eligibility Criteria MUST
Average turn over of US$ 500 million in previous 3 fin.
yrs
Capital and free reserves aggregating to at least
US$100 million
Making profit for the prev. 5 years and must have
declared a dividend of 10% in each such year
Pre issue debt-equity ratio must be not more than 2:1
Listed in its home country
Not been prohibited by any regulatory body to issue
securities
Good track record with compliance with securities
market regulations
Comply with any additional criteria set by SEBI
Procedure for making IDR Issue
Cannot raise funds in India by issuing IDR without
permission from the SEBI
Application seeking permission made to the SEBI
at least 90 days prior to the opening date of the
issue with a non-refundable fee of US $10,000
Issuing co. shall obtain necessary
approvals/exemption from the appropriate
authorities from the country of its incorporation
under the relevant laws relating to issue of capital
Issuing co. shall appoint an overseas custodian
bank, a domestic depository and a merchant
banker for the purpose of issue of IDRs

Who can Invest in IDRs???
Indian Companies
Qualified Institutional Buyers
NRIs and FIIs with permission of RBI

The Issue
The minimum issue size is Rs. 50 crores
90% of the issue must be subscribed
Automatic fungibility is not permitted

Conditions to be applied for IDR
Issue
Market cap (in any fin. Yr) cannot exceed 15 % of the
paid up capital and free reserves of the issuer

Redemption into underlying shares prohibited for 1
year, beginning the issue date

Repatriation of proceeds: Subject to Indian foreign
exchange laws, prevailing at time of repatriation

Issue must be in rupees

Issuer is subject to Clause 49 of the listing agreement
International Bond Market
Bonds can be defined as negotiable debt
instruments with original maturity in excess
of one year
It has an estimated size of US $47 trillion
Size of US bond market is largest, equal to US
$ 25 trillion
Eurobond is the largest international bond
market(1963)

Foreign Bonds
Euro Bonds





Reasons for Issuing Yankee Bonds
Attractive opportunities
Somewhat shielded form the expensive
regulation
Dollar income stream
US interest rates
Currency strengths (Value of dollar)
Yankee Bonds
Dollar-denominated bonds issued in the United
States by foreign corporations, banks, and
governments.
Free from currency risks
Interest rates
Registered
Pay Interest semi-annually
Major issuers
Interest equalization tax (1963-1974)
Largest and most active market in the world but
potential borrowers must meet stringent
disclosure.

Eurodollar Bonds
A US dollar denominated bond issued by a
overseas company and held in a foreign
institution outside both US and the issuers
home nation
Issuers
Major trading center
Constitute most of the Eurobond market
Fewer regulatory restrictions
Pay Interest annually without deduction of tax

Unavailability of suitable database of Eurobond
returns and related information




Bulldog Bonds
A bulldog bond is a sterling bond whose issuer is not British
Usually issued to acquire a revenue stream or assets in
sterling

Samurai Bonds
A Yen-denominated bond issued in Tokyo by a non-
Japanese Co.
Not subjected to Japanese withholding taxes
Minimum maturities of 5 years or longer
No secondary market restrictions
Minimum rating, size of issue, maturity etc




ECB-External Commercial
Borrowing
Meaning A source of funds for financing expansion of
existing capacity and for fresh investment out of territory

External Commercial Borrowings (ECB) refer to
commercial loans availed from non-resident lenders




Regulator
Clause (d) of sub-section 3 of section 6 of the Foreign
Exchange Management Act, 1999 (FEMA)


With section 6 of Notification No. FEMA 3 / 2000-RB
dated May 3, 2000 (amended)



Considered Aspects:
Eligibility : ECB for investment in real sector -industrial
sector, especially infrastructure sector-in India, are under
Automatic Route, i.e. do not require RBI permission
Government approval. In case of doubt as regards
eligibility to access
Automatic Route, applicants may take recourse to the
Approval Route.

Eligible Borrowers
Corporate (registered under the Companies Act except
financial intermediaries)

Units in Special Economic Zones (SEZ) are allowed to
raise ECB for their own requirement.

Individuals, Trusts and Non-Profit making organizations
are not eligible to raise ECB.
Recognized Lenders
International banks
International capital markets
Multilateral financial institutions (IFC, ADB,)
Export credit agencies
Suppliers of equipment
Foreign collaborators
Foreign equity holders

Amount of Maturity
Maximum ECB which can be raised is $ 500 m or equivalent
during a financial year.

1. ECB up to $ 20 m or equivalent in a financial year with
minimum average maturity of three years .
2. ECB above $ 20 m and up to USD 500 million or
equivalent with a minimum average maturity of five
years.

Utilization
Import of capital goods (as classified by DGFT in the
Foreign Trade Policy), by new or existing production
units, in real sector - industrial sector SME and
infrastructure sector
Power, Telecommunication, Railways, road including
bridges, sea port and airport, industrial parks, urban
infrastructure (water supply, sanitation and sewage
projects)
Overseas direct investment in Joint Ventures (JV)/Wholly
Owned Subsidiaries (WOS)

Restricted Areas
Utilization of ECB is not permitted for on-lending or
investment in capital market or acquiring a company (or a
part thereof) in India by a corporate
Utilization of ECB is not permitted in real estate
Utilization of ECB is not permitted for working capital,
general corporate purpose and repayment of existing Rupee
loans.

FCCB - Foreign Exchange
Convertible Bonds
Meaning Foreign Currency Convertible Bonds
(FCCB) are debt instruments issued in a currency
different than the issuers domestic currency with an
option to convert them in common shares of the issuer
company.



Features of FCCB
A debt instrument which can be converted into a
companys equity shares if the investor chooses to do so, at
a pre-determined strike rate.
FCCB issues have a Call and Put option to suit the
structure of the bond, both the options are subject to RBI
guidelines.
The interest on FCCBs is generally 30% -40% less than on
normal debt paper or foreign currency loans or ECBs. This
translates to cost saving of approx 2-3 percent p.a.

Features of FCCB
FCCB can be secured as well as unsecured. Most of the
FCCB issued by Indian Companies are generally unsecured.
FCCB can be converted into Indian Shares or American
Depository Receipts (ADR)
FCCB are generally listed to improve liquidity, generally
Indian issuer have listed at Singapore Stock Exchange and
in many cases also on Luxembourg Stock Exchange.

Automatic and Approval Route
The automatic route is available to real sector i.e.
Industrial sector, specially infrastructure sector-in
India
Approval Route : Financial Institutions dealing
exclusively with infrastructure or export finance
such as IDFC, Power Finance Corporation, Power
Trading Corporation and EXIM Bank

Banks and financial institutions which had participated
in the textile or steel sector restructuring package as
approved by the Government are also permitted to the
extent of their investment in the package and assessment
by RBI based on prudential norms. Any ECB availed for
this purpose so far are deducted from their entitlement.

Regulations
Minimum Average Maturity shall be 3 years for borrowing
up to $ 20 m and 5 years in case it exceeds $ 20 m


The maximum amount of ECB to be raised in a financial
year can be $ 500 m


Utilization
(a) Investment purposes like Import of Capital goods, New
projects, modernization/expansion programs in Industrial
and infrastructure sector
(b) Overseas direct investment in JV or wholly owned
subsidiaries abroad
(c) RBI guidelines provide that funds received through FCCB
should be parked abroad till the actual requirement arises
in India.


Pricing of FCCB
The pricing should be made at a price not less than the
higher of the following two averages:
(i) The average of the weekly high and low of the closing
prices of the related shares quoted on the stock exchange
during the two months preceding the relevant date;
(ii) The average of the weekly high and low of the closing
prices of the related shares quoted on a stock exchange
during the two weeks preceding the relevant date.

Issuance of FCCB By Indian
Companies
FCCBs can be issued by Indian companies in the overseas
market in accordance with Scheme for Issue of FCCB &
Ordinary Shares (Through Depository Receipt Mechanism)
Scheme, 1993.

The FCCB issue needs to conform to External Commercial
Borrowing guidelines, issued by RBI vide Notification No.
FEMA 3/2000-RB dated May 3, 2000 as amended from
time to time.

TATA MOTORS LTD
First issue of Fccbs: 2003

Amount:$100 million of $1000 each

Fccb issue expenses: Rs. 11.89 crores

Maturity:5 years
Coupon Rate: 1%

Purpose:
Retire expensive foreign currency debt amt. $40 mio approx
Capital expenditure plan of $150 mio

Conversion Price: Rs.250 per share






Second Issue: 2004

Amount: $400 million of $100 mio

Multi Tranche Offer
Tranche I: $ 100 mio for 5 years maturity , 0 coupon
Tranche II: $ 300 mio for 7 years maturity, 1%

Purpose:
Capital expansion plan of Rs.6000
Refinancing loan taken for Daewoo commercial plant

Listed on: Singapore Stock Exchange

Conversion Price:
Tranche I: Rs.573.106 per share i.e. 17.5% premium
Tranche II: Rs. 780.40 per share i.e. 60 % premium

Max equity dilution: 6.4% (2.1% in I and 4.3% in II tranche)



Simultaneous ADR Issue:FY-05 and fccb issue in 06
Giving Fccb holders robust platform to trade in shares

Latest Development: June 2008
Completed acquisition of Jaguar and &Land Rover- Deal
worth $2.3 billion
Received shareholders approval to raise $1 billion

Raised Companys overall borrowing limit to $ 5 billion (Rs.
20k cr.)

EPS diluted: Rs. 52.64 to Rs. 46.48
Current Issues For Borrower
Investors not exercising conversion from bond to equity

Borrowers burden of debt servicing

Have to redeem the FCCB on maturity

Inadequate provision for FCCB redemption as its not
pure debt

May have to raise new debt, increasing debt to equity
ratio



Illustration: ABC SPORTS LTD
FCCB issue: $ 10 mio
10,000 convertible bonds
Face value : $ 1000 each
Yield: 5%
Conversion Premium: 25%
Stock price: $ 40 at issue

Conversion Price: $40 * 1.25= $50

Conversion Ratio: 20:1 ($ 1000/ $ 50= 20)
1 bond= 20 shares

Current Stock price: $ 25






Impact of tumbling stock price
Investor A: Has 1 bond Face value $ 1000

He will not exercise the put option

As on maturity:
on redemption of bond he will get $ 1000
he can buy 40 shares of the co. ($1000/$ 25)

On exercising put option:
He will get 20 shares of the company. ($1000/ $50)


Depreciation of Rupee
In a months time -
depreciated by more than
8.5%

Debt value increases as it
is denominated in dollar.

Company must show
mark to market losses,
reducing its PAT.

Possible Solution
Making Put option attractive

Attractive swap price/ conversion price

Example: Spice Jet

Prev. conversion price: Rs.57 per share

Current conversion price: Rs. 25 per share

Have to issue 3.5 times more equity than originally
planned

Leads to higher equity dilution


New Problem: Equity Dilution
Larger equity base to service

EPS reduces as No of shares increases

Other way out: Extend Maturity Date
Bad impact on the credibility of the company

Longer period to service debt



Thank You