Depository Receipts:

Depository Receipts are a type of negotiable (transferable) financial security, representing a security usually in the form of equity, issued by a foreign publiclylisted company. They are certificates that represent an ownership interest in the ordinary shares of stock of a company, but that are marketed outside of the companys home country to increase its visibility in the world market. Depositary receipts are structured to resemble typical stocks on the exchanges that they trade Foreigners can buy an interest in the company without worrying about differences in currency, accounting practices, or language barriers, or be concerned about the other risks in investing in foreign stock directly

Creation of Depository Receipts:

When a foreign company wants to list its securities on another countrys stock exchange, it can do so through Depository Receipts (DR) mode. To allow creation of DRs, the shares of the foreign company, which the DRs represent, are first of all delivered and deposited with the custodian bank of the depository through which they intend to create the DR. On receipt of the delivery of shares, the custodian bank creates DRs and issues the same to investors in the country where the DRs are intended to be listed. These DRs are then listed and traded in the local stock exchanges of that country.

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 American Depository Receipts:

ADR is a security issued by a company outside the U.S. which physically remains in the country of issue, usually in the custody of a bank, but is traded on U.S. stock exchanges. In other words, ADR is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. American Depository Receipts popularly known as ADRs were introduced in the American market in 1927. ADRs allowed companies domiciled outside of the United States to tap the United States capital markets. ADRs are listed on the NYSE, AMEX, or NASDAQ

Mechanism for Issue of ADR:

Under the Depository Mechanism, Indian company issues shares to an Overseas Depository Bank (ODB) which has an office in India. These physical shares remain in India with a custodian with a Domestic Depository Bank (DDB) who shall be an agent of ODB. Against the underlying shares, the depository issues ADRs to the foreign investors. The foreign investors can sell these ADRs in the foreign stock exchanges or back to the depository and get delivery of the underlying Indian Rupeedenominated shares which can then be sold in Indian stock markets. The depository receives dividends directly from the Indian company in Rupees and issues dividend to ADR holders by converting the Rupee dividend into equivalent US Dollars.

Benefits of American Depository Receipts:

To Indian Company Better corporate image both in India and abroad which is useful for strengthening the business operations in the overseas market. Exposure to international markets and the stock prices in line with international trends. Means of raising capital abroad in foreign exchange. Use of foreign exchange proceeds for activities like overseas acquisitions, setting up offices abroad and other capital expenditure. Increased recognition internationally by bankers, customers, suppliers etc.
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 No risk of foreign exchange fluctuations as the company will be paying the interest and dividends in Indian rupees to the domestic depository bank. To Overseas Investors Assured liquidity due to presence of market makers Convenience to investors as ADRs are quoted and paid dividends in U.S. Dollars, and they are also traded exactly like any other U.S. securities. Cost effectiveness due to elimination of the need to custodise underlying securities in India. Overseas investors will not be taxed in India in respect of Capital gains on transfer of ADRs to another non-resident outside India.

Purpose of American Depository Receipts: ADRs were introduced with a view to simplify the physical handling and legal technicalities governing foreign securities as a result of the complexities involved in buying shares in foreign countries. Trading in foreign securities is prone to number of difficulties like different prices and in different currency values, which keep on changing almost on daily basis. In view of such problems, U.S. banks found a simple methodology wherein they purchase a bulk lot of shares from foreign company and then bundle these shares into groups, and reissue them and get these quoted on American stock markets.

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Table : ADR Prices of Indian Companies

COMPANY ADR CHANGE ISSUE PRICE PRICE (US$) (US$) LOCAL PRICE (Rs) PREM / TOTAL DOM MKT NO OF ADR (DISC) SHARES CAP ADRs MKT CAP TO LOCAL (m) (US$ m) (m) (US$ m)

DRREDDY(RDY) HDFCBANK(HDB) ICICIBANK(IBN) INFOSYSTECH.(INFY) MTNL(MTE) PATNICOMPUTERS(PTI) REDIFF.COM(REDF) SATYAMCOMP(SAY) SATYAMINFOWAY(SIFY) STERLITE IND. (SLT) TATA COMM.(TCL) TATAMOTORS(TTM) WIPRO(WIT)

3.5 33.7 37.3 58.8 1.1 20.2 7.1 34.7 3.7 9.3 8.6 28.8 11.0

-0.3% -0.5% -0.3% -0.3% -0.1% 0.4% 0.2% -0.0% -0.1% -0.3% -0.4% -0.1% -0.0%

10.0 1,679.9 59.4 11.0 507.7 917.0

-89.6% 10.0% 2.1% 2.9% -9.7% 2.1% NM 1,150.6% NM 2.6% -3.8% 403.8% -23.0%

169.3 2,349.4 1,151.8 574.2 630.0 137.8 NM 684.7 NM 3,361.2 285.0 3,338.6 2,454.4

5,665.0 23,765.5 21,044.1 32,788.4 387.2 1,359.9 NM 948.8 NM 7,647.9 1,273.3 19,071.2 20,932.7

76.5 94.5

266.3 3,187.9

368.4 13,745.0 270.6 15,901.5 315.0 68.9 51.3 157.3 141.5 177.1 142.5 349.7 1,388.3 364.3 5,452.0 518.0 1,654.3 1,225.5

17.0 2,866.1 7.5 20.3 12.0 9.7 0.4 13.4 0.0 0.0 41.2 30.9 495.3 NM 69.6 NM 114.2 224.3 286.7 428.1

353.0 10,159.3 422.1 4,622.5

* ADR prices as on 16 March 2012 * Domestic prices as on 16 March 2012

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 Global Depository Receipts:

Global Depository Receipts is a dollar denominated instrument of a company, traded in stock exchanges outside the country of origin i.e. in European and South Asian markets. It represents a certain number of underlying equity shares denominated in rupees. A GDR is quoted and traded in dollar terms. Instead of issuing in the names of individual shareholders, the shares are issued by the company to an intermediary called the depository, usually in Overseas Depository Bank, in whose name the shares are registered. It is the depository, which subsequently issues GDR to the subscribing public. The physical possession of the equity shares is with another intermediary called the custodian, who is an agent of the depository. Though the GDR represents the companys shares, it has a distinct identity and does not figure in the books of the company. The shares usually correspond to the GDR in a fixed ratio. It can be redeemed at the price of the corresponding shares of the issuing company ruling on the date of redemption. For all purposes, GDR can be treated as direct investments in the issuing companies. The main advantage to the issuer is that he does not assume any exchange risk, though he does enjoy the benefit of foreign exchange collected by way of issue proceeds. The dividend outflow is in rupee terms and the depository converts these rupees into dollars and pays the dividend in dollar terms to the ultimate investors.

Benefits of Global Depository Receipts:

GDRs, like ADRs, allow investors to invest in foreign companies without worrying about foreign trading practices, different laws, accounting rules, or cross-border transactions. Other benefits include i. ii. easier trading, the payment of dividends in the GDR currency, which is usually the United States dollar (USD), iii. corporate notifications, such as shareholders meetings and rights offerings, are in English
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Another major benefit to GDRs is that institutional investors can buy them, even when they may be restricted by law or investment objective from buying shares of foreign companies. Increased visibility in the target markets, which usually garners increased research coverage in the new markets. Larger and more diverse shareholder base. Ability to raise more capital in international markets.
GDR is a list of all the Indian Companies listed on more than one countrys stock exchange under the Global Depository Receipts (GDR) category and can be traded globally. This list gives you a Current Market Price (US $), P/E, Change (US $) and % Change. Company CMP(US$) PE Chg(US$) Dr. Reddy's (A) GAIL (G) Grasim Industries (G) ICICI Bank (A) Infosys Tech (A) Instanex Skindia DR Index ITC (G) L & T (G) Mahindra & Mah. (G) Ranbaxy Labs (G) Reliance (G) Satyam Computers (A) State Bank of India (G) Sterlite Industries (A) Tata Communications (A) Tata Motors (A)
33.23 46.18 57.52 39.79 59.60 2,593.06 4.12 29.34 15.27 9.16 33.55 2.87 98.38 10.57 9.56 27.56 40.53 20.30 13.59 27.85 28.19 23.84 21.44 21.96 14.75 -29.78 18.29 4.01 15.38 74.34 15.82 41.61 0.12 [1.39] [0.93] 0.05 0.00 [4.04] [0.05] [0.27] 0.17 [0.16] [0.15] 0.00 1.24 [0.18] [0.08] [0.20]

Chg(%)
0.0 [0.0] [0.0] 0.0 0.0 [0.0] [0.0] [0.0] 0.0 [0.0] [0.0] 0.0 0.0 [0.0] [0.0] [0.0]

Comparison between ADR & GDR:

ADRs are listed on an American Stock Exchange where as all GDRs are listed in stock exchanges other than American stock exchanges like London, Luxemborg etc. The disclosure requirements for GDR issues are less stringent than that for ADR issues. GDR market is mainly an institutional market with lower liquidity, whereas an ADR listing allows US retail investors to participate in the offering which in turn leads to wider interest and better valuations of a companys stock.

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 Guidelines for ADR/GDR Issues:

With a view to liberalising the operational guidelines of ADR/GDR issues, given that investments ADR/GDR being risk capital, tract record scrutiny process has been dispensed with. Indian companies raising funds by issue of ADRs/GDRs through registered stock exchanges are allowed under Automatic route and the prior approval of Ministry of Finance, Department of Company Affairs is not required. Private placement of ADRs/GDRs would be eligible for automatic approval provided the issue is lead managed by a Investment Banker. In all cases of Automatic Approval, the companies are required to obtain other approvals under FDI policy, Companies Act and approvals for overseas investment/ business acquisition etc before ADR/GDR issue. A limited two- way fungibility scheme has been put in place by the Government of India for ADRs/GDRs. Under this scheme, a stock broker in India, registered with SEBI, can purchase the shares from the market for conversion into ADR/GDR. Reissuance of ADR/GDR would be permitted to the extent of ADRs/GDRs which have been redeemed into underlying shares and sold in the domestic market.

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 Indian Depository Receipts:

Indian Depository Receipts (IDRs). An IDR is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities markets.

An issuing company making an issue of IDR is required to satisfy the following: (a) it should be listed in its home country18. (b) it should not be prohibited to issue securities by any regulatory body. (c) it should have a track record of compliance with securities market regulations in its home country.

Conditions for issue of IDR:

An issue of IDR is subject to the following conditions: 1. issue size should not be less than Rs.50 crore. 2. procedure to be followed by each class of applicant for applying should be mentioned in the prospectus; 3. minimum application amount should be Rs.20,000; 4. at least 50 %. of the IDR issued should be allotted to qualified institutional buyers on proportionate basis. 5. the balance 50 % may be allocated among the categories of non-institutional investors and retail individual investors including employees19 at the discretion of the issuer and the manner of allocation has to be disclosed in the prospectus. Allotment to investors within a category will be on proportionate basis. Further, atleast 30% of the IDRs issued will be allocated to retail individual investors and in case of under-subscription in retail individual investor category, spill over to other categories to the extent of undersubscription may be permitted.
6. At any given time, there will be only one denomination of IDR of the issuing company.

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BIBLIOGRAPHY

Bharti .V. Pathak, Indian Financial System, Pearson Publication 2nd Edition, Pg 152-153 Ravi . M. Kishore, Financial Management, Taxmann Publications, Pg 1298-1303 www.indiainfoline.com www.wikepedia.com www.investopedia.com

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