APPENDIX 18

A.18.1 LAUNCHING A GDR ISSUE

The first Indian GDR issue was made by Reliance in May 1992. During the latter
half of 1993, a number of Indian companies successfully tapped the global capital
markets by means of GDR and foreign currency convertible bond issues. A few
companies had taken this route earlier but the number and frequency of issues
increased significantly during this period. Towards the end of 1994 the market
became lukewarm towards issues from India. The investors' interest in emerging
markets suffered a further setback following the Asian crisis in the summer of 1997.
In 1999, IT majors from India began venturing out to the US capital markets by
using the ADR mechanism to get themselves listed on the US stock exchanges to
pave the way for acquisitions in the US as also issue stock options to their US
employees. Table A.18.1 presents the list of corporates which have raised capital
using the GDR/ADR route over the period 1992-20061.
Globally, firms raised about $21 billion in 1999 through ADR offerings -- more
than double the $10 billion raised in 1998. More than 43 per cent of the total
were from telecommunications, media and technology.Investors flocked to Indian
issues because of the enormous growth potential offered by India
____________________________________________________________
1 A comprehensive up-dated list of all Indian companies that have made ADR/GDR issues can
be accessed on the following web link of BNY Mellon:
http://160.254.123.37/dr_directory.jsp?country=IN

knowledge-based and manpower related companies. Indian software companies'

cutting edge technology and E-commerce drive helped them score over other
companies.
In the 1990's, the compounded annual growth rate of Depositary Receipt trading
and dollar trading volume globally has been 30% and 22% respectively. In
addition, an estimated 1.50 billion Depositary Receipt's valued at $20-25 billion
are traded on an average in the Over-The-Counter Exchange and European
markets every year.
During the years from 2007 to early 2010 there have been more than eighty
depository receipts issues by Indian companies about half of them not for raising
funds but to establish the presence of the company in foreign markets. In the year
2010 till the month of August, twenty firms have approached the depository
receipts market of which nineteen issues were for raising funds.
India has the distinction of having the largest number of GDR/ADR issues by any
country. The first issue was by Reliance Industries ($ 150 mill) in May 1992.
Since then, the depositary receipt concept developed considerably in India with a
total of 60 Indian companies raising over US$ 6.5 billion.
At the time of writing some more companies have obtained the necessary
approvals and are in the process of launching their ADR/GDR issues.
As mentioned in the text, companies found the external capital markets an
attractive source of funds for several reasons. The cost of capital was much lower,
it enabled the company to broaden its investor base and helped create a presence

in international markets (with possibly creating global awareness of company's

products too). For IT companies ADR issues provided a currency for foreign
acquisitions and grant of ESOPs. GDR/ADR issues provide apparently cheap
capital with no forex risk - unlike bond issues or other forms of borrowings- and no
risk of dilution of control since GDR/ADR holders have no voting rights. Voting
rights vest in the Depository which is the registered owner of the underlying shares.

TABLE A.18.1
INDIAN COMPANIES WITH GDR-ADR ISSUES
(AS ON NOVEMBER 30, 2006)

A scheme for issue of foreign currency convertible bonds and ordinary shares
(through the GDR/ADR mechanism) was first formulated and notified by the
Government of India in November 1993. It has been modified several times
thereafter, the last major revision having been effected in February 2005. At the
time of writing, the latest guidelines and regulations are contained in Master
Circular on Foreign Investment in India issued by RBI on July 1 2010. Some of
the salient points pertaining to GDR/ADR issues can be summarised as follows :
The original guidelines had specified a track record requirement such as a
three-year record of consistent profitability for a company to be eligible to
issue GDRs/ADRs. This requirement and the associated two-stage approval
process was abolished in 2000. Indian companies raising money through
ADRs/GDRs through registered exchanges would henceforth be free to
access the ADR/GDR markets through an automatic route without the
prior approval of the Ministry of Finance, Department of Economic
Affairs. Private placement of ADRs/GDRs would also be eligible for the
automatic approval provided the issue is lead managed by an investment
banker. (For the purpose of this scheme, an Investment Banker would be
defined as an Investment Banker registered with the Securities and
Exchange Commission in the USA, or under Financial Services Act in
U.K., or the appropriate regulatory authority in Europe, Singapore or in
Japan.) The track record condition will not be operative for ADR/GDR
issues.
ADR/GDR are reckoned as part of Foreign Direct Investment (FDI).
Accordingly, such issues would need to conform to the existing FDI Policy
and only in areas where FDI is permissible. Prior approval of FIPB
(Foreign Investment Promotion Board) is required.
In all cases of automatic approval mentioned above, the mandatory
approval requirement under FDI policy, approvals such as under the
Companies Act, approvals for overseas investments/business acquisition
(where ADR/GDR proceeds are utilised for overseas investments), etc.
would need to be obtained by the company prior to the ADR/GDR issues.
The issuer company would need to obtain RBI approval under the
provisions FERA/FEMA prior to the overseas issue.

 While no detailed end uses are specified, the bar on investments in stock
markets and real estate mentioned in the earlier guidelines would continue
to be operative. Earlier guidelines used to contain a fairly detailed
specification of permitted uses of the funds raised.
Retention and deployment of funds abroad would be as prescribed by
RBI.
The Custodian shall be a 'Domestic Custodian Bank' (This was
notified in the November 1993 scheme).
There is no restriction on the number of issues floated by a company
during a financial year.(In the 1993 guidelines there were such
restrictions).
GDR issues would not be counted towards the ceiling imposed on
foreign portfolio investment in a company's equity which was raised
to 49% in the 2001-02 budget.
Originally, there as only a one-way fungibility viz. a GDR/ADR holder
could convert the DRs into underlying shares and hold them or sell them to a
resident. Re-conversion back into DRs was not permitted. The 2001-02
budget introduced two-way fungibility. Also, when the volume of
outstanding GDRs/ADRs declines because of redemption by investors,
companies are now permitted to make fresh issues without having to again
obtain government approval.
Funds raised with the ADR/GDR issue have to be kept abroad till actually
required in India. The July 1, 2010 master circular cited above specifies the
instruments in which the funds can be invested abroad till repatriated to
India.
An Indian company can also sponsor an issue of ADR/GDR. Under this
mechanism, the company offers its resident shareholders a choice to submit
their shares back to the company on the basis of which ADRs/GDRs are
issued abroad. The funds raised are remitted back to India and distributed
among the resident investors who had offered their shares for conversion.
While dividends paid on the underlying shares are not subject to any withholding
tax, the company has to pay a 10% tax on dividends paid. After converting the DRs
into shares, if such shares are held for longer than 12 months and then sold, any

capital gains would be taxed at a rate of 10%. If the period is less than a year, the
gains would be subject to normal income tax rates.
Along with the liberalization of the guidelines governing the issue of GDRs/ADRs,
the government has also been relaxing restrictions on overseas acquisitions and
investments by Indian companies in selected industries such as IT and
Pharmaceuticals. Procedures and restrictions governing grant of ESOPs to overseas
employees using GDRs/ADRs are also being progressively simplified.
GDRs could be offered to US investors only if very stringent requirements of
registration with the SEC are complied with. However, under an exemption granted
by Rule 144A of the securities act, securities can be offered to Qualified
Institutional Buyers without going through the registration process. As to ADRs,
offereings at various levels are possible with more and more stringent accounting
and disclosure requirements as one goes from lower to higher levels. The four types
of ADRs are briefly described below:
Unsponsored Depositary Receipts
These 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.
Sponsored Level I Depositary Receipts
This is the simplest method for companies to access the U.S. and nonU.S. capital markets. Level I Depositary Receipts are traded in the
U.S. 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 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.

 Sponsored Level II And III Depositary Receipts

Companies that wish to either list their securities on an exchange in
the U.S. and 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. Level II is used when the company does not wish to raise
funds i.e. just acquire listing while level III is used when funds are to
be raised. Correspondingly, the requirements for conformity with US
GAAP are stiffer for a level III offering.
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. Table A.18.2
provides a quick summary of the features of the three levels of ADR
programmes.

Table A.18.2

Types of ADR Programmes

________________________________________________________________

Type of
SEC Filing Required Exchange Listing
Capital Raising
Programme
________________________________________________________________
Level I

F-6(1)

Not permitted

Not permitted

Level II

F-6, 20-F(2)

NYSE, AMEX,
NASDAQ

Not permitted

Level III

F-6, 20-F(2)
F-1 (3) or F-3(4)

NYSE, AMEX
NASDAQ

Permitted

Rule 144A
None
Not Permitted
Permitted
________________________________________________________________
F-6 is used for the registration of shares deposited with the depository bank.
20-F is an annual report similar to the 10K filed by US Domestic issuers and must contain
financial statements with a US GAAP reconciliation.
(3)
F-1 is used to register shares to be issued in a public offering. Contains 20-F information
plus additional disclosure.
(4)
F-3 is a short form of F-1. If the existing public market value of the stock Issuers stock
(excluding stock held by affiliates of the issuer) is greater than $75 million, F-3 can be used.
(1)
(2)

The key parties involved in a GDR/ADR issue apart from the issuing
company are :
The Lead Manager(s) : An investment bank which has the primary
responsibility for assessing the market and successfully marketing the
issue. It helps the company at all stages from preparing the
documentation, making investor presentation, selection of other
managers(subscribers) and post- issue support. It also owes a
responsibility to investors of presenting an accurate picture of the
company's present status and future prospects, to the best of its
knowledge. This means that it must exercise due diligence in
collecting and evaluating all possible information which may have a
bearing on the issue.
Other managers or subscribers to the issue agree to take and market
parts of the issue as negotiated with the lead manager

 Depository : A bank or financial institution, appointed by the issuing

company which has certain duties and functions to be discharged visa-vis the GDR holders and the company. For this it receives
compensation both from the company as well as the GDR holders.
Custodian : A bank appointed by the Depository, generally in
consultation with the issuing company which keeps custody of all
deposited property such as share certificates, dividends, right and
bonus shares etc. It receives its fees from the Depository.
Clearing Systems : EUROCLEAR (Brussels), CEDEL(London) are
the registrars in Europe and Depository Trust Company (DTC) are the
registrar in USA who keep records of all particulars of GDRs and
GDR holders.
The key steps involved in the GDR mechanism after obtaining the necessary
approvals from the Government can be summarised as follows :
The amount of issue is finalised in US dollars. The company
considers factors such as gearing, dilution effect on future earnings
per share etc. The lead manager assesses the market conditions.
The lead manager and other managers agree to subscribe to the
issue at a price to be determined on the issue date. These agreements
are embodied in a subscription agreement signed on the issue date.
Usually, the lead manager has an option to subscribe to specified
additional quantity of GDRs. This option called green shoe has to be
exercised within a certain number of days.
Simultaneously, the Depository and the Custodian are appointed and
the issuer is ready to launch the issue.
The company issues a share certificate equal to the number of
GDRs to be sold. This certificate is in the name of the Depository,
kept in custody of the Custodian. Before receipts of the proceeds of
the issue, the certificate is kept in escrow.
Investors pay money to the subscribers.
The subscribers (i.e. the lead manager and other managers to the
issue) deposit the funds with the Depository after deducting their
commissions and expenses.

 The company registers the Depository or its nominee as holder of

shares in its register of shareholders.
The Depository delivers the European Master GDR to a common
depository for CEDEL and EUROCLEAR and holds an American
Master GDR registered in the name of DTC or its nominee.
CEDEL, EUROCLEAR and DTC allot GDRs to each of the
ultimate investors based on the data provided by the managers
through the Depository.
The GDR holders pick up their GDR certificates. Anytime after a
specified "cooling off" period after close of the issue they can convert
their GDRs into the underlying shares by surrendering the GDR to the
Depository. The Custodian will issue the share certificates in
exchange for the GDR.
The GDRs are listed on stock exchanges in Europe such as
Luxembourg and London. ADRs level II and III are listed on one or
more US exchanges.
Keep in mind that this is a very bland summary of the procedural steps. In
reality the whole issue process is quite complex involving obtaining the various
clearances, preparation and scrutiny of various documents, pinning down all the
legal details, a series of meetings between the Company, the lead managers, the
legal advisers, presentations to potential investors, and so forth.

The costs of the issue consist of various fees, commissions and expenses
paid to the lead manager and other managers, fees and expenses paid to the
depository, preparation of documents, legal fees, expenses involved in investor
presentation (road shows etc.), listing fees for the stock exchanges, stamp duties
etc. Fees and commissions paid to managers vary but are generally in the

neighbourhood of 3-4% of the issue amount.

A very large number of documents have to be prepared prior to launching the
issue. Apart from the various internal and government approvals, the key
documents from the point of view of presentation to the subscribers are the
offering circular and the research report. The lead manager compiles the former,
while the latter is prepared by an independent agency on the basis of information
provided by the company and other independent sources. Even though the lead
manager is required to exercise due diligence in compiling the offering document,
primary legal obligation for any misrepresentation or withholding material facts is
on the issuing company. As to the research document, the liability is with the
managers. Both these documents are circulated prior to the "road shows" and oneto-one meetings with prospective investors. Road shows are gatherings of potential
investors organised in the major financial centres of the world where the company
with the assistance of the lead manager makes a presentation and holds discussions
to assess investor interest.
GDR/ADR holders have the right to dividends, the right to subscribe to new
shares and the right to bonus shares. All these rights are exercised through the
depository. The depository converts the dividends from rupees to foreign currency.
DR holders have no voting rights. The depository may vote if necessary as per the
provisions in the Depository Agreement.