adr and GRD

8/20/2019 adr and GRD

1/43

AMERICAN

DEPOSITORY

RECEIPT and

GLOBAL

DEPOSITORY

RECEIPT

REPORT

SUBMITTED BY

SURABHI KHANNA


2/43

AMERICAN DEPOSITORY RECEIPT

GLOBAL DEPOSITORY RECEIPTS

DEPOSITORY RECEIPTS

What are depositary receipts?

A depositary receipt (DR) is a type of negotiable (transferable) financial security that is traded ona local stock exchange but represents a security, usually in the form of equity that is issued by aforeign publicly listed company. The DR, which is a physical certificate, allows investors to holdshares in equity of other countries.

How does DR work?

The DR is created when a foreign company wishes to list its already publicly traded shares ordebt securities on a foreign stock exchange. Before it can be listed to a particular stock exchange,the company in question will first have to meet certain requirements put forth by the exchange.

Initial public offerings, however, can also issue a DR. DRs can be traded publicly or over-the-counter. Let us look at an example of how an ADR is created and traded.

Origin of Depository Receipts

The origin of depository receipt is USA. It started in 1920’s. In this period, it was difficult andrisky to invest on the originals of foreign securities by American investors and brokers. The risksin this condition have been causing delays and some kind of extra expenses. In order to avoid the practical problems, they should have looked for solutions. In the solution produced, it was aimedat constituting a system that will be able to eliminate those handicaps. In those times, financial

and economical system was national. For the system started to function badly, the investors and brokers were not able to transit to international market in the investment and financial activitiesthey have been carried out. They were as if trapped inside a no end box and it was impossible forthem to open global market. Something was clearer than anything else. The key was as ifclimbing up a hill in the desert under the sun in 70 C in vein, and it was time consuming.The distance between American and European stock exchange markets was high, for this reason,what is to be was to reach the international arena in world of stock exchange market. For the


3/43

reason of investor’s demand of diversifying their financial resources internationally, AmericanDepository Receipts revealed.

TYPES OF DR

There are a variety of DR program types. These can be divided into capital raising and noncapital raising structures. The type of program used will depend on the requirements of theissuer, the features of the issuer's domestic market and on investor attitudes.A third type of DR program is known as "unsponsored". This differs from other types in that thecompany whose shares are represented by unsponsored DRs is not involved in setting up the program.

*Source: ADR Reference Guide – JP Morgan, February 2005

NON CAPITAL RAISING DRS


4/43

SPONSORED ADR PROGRAM - LEVEL 1

A Level I sponsored ADR program is the easiest and least expensive means for a company to

provide for issuance of its shares in ADR form in the US. A Level I programis initiated by the issuer and involves the filing of an F-6 registration statement, but allows forexemption under Rule12g 3-2(b) from full SEC reporting requirements. The issuer has a certainamount of control over the ADRs issued under a sponsored Level I program, since a depositaryagreement is executed between the issuer and one selected depositary bank. Level I ADRs canhowever only be traded over-the-counter and cannot be listed on a national exchange in the US.

Advantages of a Level I ADR program:

It avoids full compliance with the SEC's reporting requirements. By working with asingle depositary bank, the issuer has greater control over its ADR program than would be the case with an unsponsored program.

The depositary acts as a channel of communication between the issuer and its USshareholder base. Dividend payments, financial statements and details of corporateactions will be passed on to US investors via the depositary.

The depositary bank maintains accurate shareholder records for the issuer and can, ifrequested, monitor large stock transactions and report them to the issuer.

Set-up costs are minimal and all transaction costs are absorbed by the ADR holder. It is easy and relatively inexpensive to upgrade the program to Level II or III as the

issuer and depositary bank do not have to negotiate cancellation of unsponsored ADRswith several depositaries, as would be the case if upgrading an unsponsored program.

Disadvantages of a Level I ADR program

It cannot be listed on any of the national exchanges in the US. As a result, investorinterest might be somewhat restricted which may limit the issuer's ability to enhance itsname recognition in the US.

Capital raising is not permitted under a Level I program.


5/43

SPONSORED ADR PROGRAM - LEVEL II

A sponsored Level II ADR must comply with the SEC's full registration and reportingrequirements. In addition to filing an F-6 registration statement, the issuer is also required to file

SEC Form 20-F and to comply with the SEC's other disclosure rules, including submission of itsannual report which must be prepared in accordance with US Generally Accepted AccountingPrinciples (GAAP). Registration allows the issuer to list its ADRs on one of the three majornational stock exchanges, namely the New York Stock Exchange (NYSE), the American StockExchange (AMEX), or the National Association of Securities Dealers Automated Quotation(NASDAQ) Stock Market, each of which has reporting and disclosure requirements. Level IIsponsored programs are initiated by non-US companies to give US investors access to theirstocks in the US. As with a Level I program, a depositary agreement is signed between the issuerand a depositary bank. The agreement defines the responsibilities of the depositary, whichusually include responding to investor enquiries, mailing annual reports and other importantmaterial to shareholders and maintaining shareholder records.

Advantages of a Level II ADR program:

It is more attractive to US investors than a Level I program because the ADRs may belisted on one of the major US exchanges. This raises the profile of the ADR program toinvestors, thus increasing the liquidity and marketability of the securities.

Listing and registration also enhance the issuer's name recognition in the US. US disclosure regulations for large investors enable the issuer to monitor the ownership

of its shares in the US.

Disadvantages of a Level II ADR program

More detailed SEC disclosure is required than for a Level I program. For example, theissuer's financial statements must conform to US Generally Accepted AccountingPrinciples (GAAP), or else a detailed summary of the differences in financial reporting between the home country and the US must be submitted.

SEC regulations do not permit a public offering of ADRs under a Level II program. It is more expensive and time-consuming to set up and maintain a Level II program than

a Level I program because of the more stringent reporting requirements and higher legal,accounting and listing costs.


6/43

CAPITAL RAISING DRs

SPONSORED ADR PROGRAM - LEVEL III

Level III sponsored ADRs are similar to Level II ADRs in that the issuer initiates the program,deals with one depositary bank, lists on one of the major US exchanges, and files Form F-6 and20-F registration statements with the SEC. The major difference is that a Level III programallows the issuer to raise capital through a public offering of ADRs in the US and this requiresthe issuer to submit a Form F-1

Advantages of a Level III ADR program

It permits public offerings of ADRs in the US which can be used for a variety of purposes, for example the raising of capital to finance acquisitions or theestablishment of an Employee Stock Ownership Plan (ESOP) for the issuer's USsubsidiary.

Disadvantages of a Level III ADR program

SEC reporting is more onerous than for Level I or II programs. The costs of setting up and maintaining a Level III program can be high. Set-upcosts,

which would include listing, legal, accounting, investor relations and "road show" costs,might amount to approximately US$ 300,000 to US$ 500,000.


7/43

RULE 144(a) ADRs (RADRs)

Rule 144(a) ADRs, or restricted ADRs (RADRs) are simply privately placed depositary receiptswhich are issued and traded in accordance with Rule 144(a). This rule was introduced by theSEC in April 1990 in part to stimulate capital raising in the US by non- US issuers . Some of the

former restrictions (under Rule 144) governing resale of privately placed securities (or "restrictedsecurities") have been lifted under Rule 144(a), providing the sale is made to "qualifiedinstitutional buyers" (QIBs), with the aim of adding liquidity to the private placement market. AQIB is currently defined as an institution, which owns and invests on a discretionary basis atleast US$ 100 million (or, in the case of registered broker-dealers, US$ 10 million) in securitiesof an unaffiliated entity.At present there are believed to be in excess of 4000 QIBs but the SEC may decide to broadenthe definition of a QIB to allow a larger number to participate in the Rule 144(a) market. Non-US companies now have easy access to the US equity private placement market and may thusraise capital through the issue of restricted ADRs without conforming to the full SEC registrationand reporting requirements. Additionally the cost of issuing Rule 144(a) ADRs is considerably

less than the cost of initiating a Sponsored Level III ADR program.In June 1990, the National Association of Securities Dealers (NASD) established a closedelectronic trading system for RADRs called "PORTAL" (Private Offerings, Resale and Tradingthrough Automated Linkages) this system is designed to provide a market for privately tradedsecurities such as RADRs and access to it is available to both investors and market makers.

Advantages of RADRs

ADRs offered under Rule 144(a) do not have to conform to full SEC reporting andregistration requirements. QIBs may demand certain financial disclosure, however, unlessthe reporting exemption under Rule 12g 3-2(b) has been granted.

RADRs provide a cheaper means of raising equity capital than through a public offeringand they can be issued more easily and quickly.

RADRs can be launched on their own or as part of a global offering. They can be traded through the NASDAQ's "PORTAL" system and they clear through

the DTC.

Disadvantages of RADRs

RADRs cannot be created for classes of share already listed on a US exchange. RADRs can only be sold in the US to QIBs. Although there are in excess of 4000

potential QIBs, the RADR market is not as liquid as the public US equity market.


8/43

CAPITAL RASING VERSUS NON CAPITAL RAISING ADR PROGRAMS

If the objective of the foreign company is to use existing shares to broaden shareholder base (i.e.non capital razing) it has the option of going with level 1 program that trades on non-NASDAQ

OTC market or a more stringent level II program that is listed on NYSE, AMEX or NASDAQ,however if it plans to raise capital through new shares, it has the option of going with a level III program listed on NYSE. NASDAQ, AMEX, which is even more stringent than a level II program or with a privately placed rule 144a ADR program.

ADVANTAGES OF DRs

Depository stocks are within processing mechanisms for foreign securities. Depositoryreceipt agreements serve various advantages to investors like transfer and exchangingdividends paid over foreign money currencies to their currency.

Also, depository receipts are used in privatization, mergers, foreign governmentsDept, imports and employment financing

Mostly, foreign securities are written for the bearer. For this reason, the lists of securitiescan not be pursued. Depository receipts try to minimize the problems of promissory noteswritten for the bearer. It makes having information about the foreign company easier.

Foreign companies having relationships with investors are restricted with law. Depositoror its division can learn the information and declarations send by the foreign importer.Even though the securities are written for the bearer, depository Bank has the best

conditions to get this information.

BUYING AND SELLING DRS

If an investor wishes to purchase shares in a foreign company, he can either buy the foreignshares in the local market through a broker in that country or, providing the foreign company inquestion has a DR program, the investor can request his broker to buy DRs. The broker mayeither purchase existing DRs or, if none are available, he may arrange for a depositary bank (e.g.

Deutsche Bank) to issue new ones.

The process for issuing new DRs is very simple. The investor's broker contacts a broker in theissuing company's home market and acquires shares in that company. These shares are thendeposited with the depositary bank's local custodian. Upon confirmation that the custodian hasreceived the shares, the depositary issues the requisite number of DRs to the investor via the broker.


9/43

In some exceptional cases there may be restrictions on the issuance of new DRs underexisting programs (e.g. Indian GDR programs) because of local regulations. DRs can be sold inDR form, in which case they trade and settle like other US or Euro securities.They can also, however, be cancelled. In this case the broker acting on behalf of the owner of theDRs will request the depositary bank to cancel the DRs and release the underlying shares to a

domestic broker in the issuing company's home market. The domestic broker will then sell theshares locally and the proceeds will be remitted to the investor who cancelled those DRs.

• DRs certify that a stated number of underlying shares have been deposited with thedepositary's custodian in the foreign country.

• DR holders are entitled to all the dividends payable on the underlying foreign shares and,furthermore, to have these paid in the currency in which the DRs are denominated –usually US dollars.

• The DRs may be bought or sold through investors' own brokers, and they clear and settlethrough the Depository Trust Company (DTC) for ADRs, through Euro clear and Clearstream for EDRs and through all three (and possibly other clearing systems) in the case of

GDRs, depending on which markets they access.• Shareholder information such as annual reports, notices of general meetings and

corporate actions, and official news releases are provided by the issuer to the depositaryand to the receipt holders, either direct or through the local custodian.

• The investor is thus spared the costs and difficulties often encountered when directinvestment is made in local markets, where currency, settlement, and linguistic problemsmay be compounded by an excessive number of intermediaries.

WHY DO INVESTORS BUY DRs?

US investors have become increasingly interested in overseas markets as a result of theirhigher yields compared to the US equity market over recent years.

International investors are also eager to diversify their portfolios, both geographically and by industry sector, in order to increase their returns while spreading their risk.

They have long been active in the debt markets, as evidenced by the vast size of theEuromarkets, and sophisticated international clearing systems have been developed to

handle Euro instruments.Until recently, however, cross-border equity investments have involved all the currency,settlement and linguistic problems which occur when dealing with overseas equity markets.

Building on the concept of the ADR, investment banks developed the EDR/GDR

to solve these problems for international investors.


10/43

Liquidity and investor demandLiquidity is enhanced when there are a significant number of depositary receipts eligible for

trading in the United States. In a US public offering, retail and institutional investors are morelikely to buy depositary receipts that are perceived to be liquid and fairly priced.

A useful structuring toolWhile DRs are generally used to make equity more widely available or to raise capital outsidethe issuer's domestic market, they can also be used as part of many other financing structures.The concept of a receipt trading in one market, which represents an instrument held in custody ina different market, can be adapted to a wide variety of transactions.


11/43

*Source ADR AND GDR OVERCOMING OBSTACLES OF INTERNATIONA LINVESTING


12/43

*Source- Freidland capital guide to American depository receipt.


13/43

AMERICAN DEPOSITORY RECEIPTS

Background

ADRs were primarily created to increase investment access to widely known and oftenmultinational companies. They are typically formed by a depository bank depositing ordinaryshares of a foreign company into a trust and issuing receipts of interest in the underlying shareson a domestic exchange. The bank will act as a custodian for the trust handling dividend

distribution, currency exchange, proxies, tax reporting, and regulatory filings. It receives amanagement fee for these services, either from the shareholders or the issuing company.Trading of ADRs occurs by brokers purchasing/selling outstanding ADRs in the domesticmarket, or on the foreign markets if no shares are available domestically. In the case of purchasesin the foreign market, the broker then deposits the foreign shares with the bank in exchange fornewly created ADRs. In the case of salesin the local market, the broker will cancel the ADR causing the depository bank to sell the sharesin the foreign market and deliver the proceeds in the investor’s currency. Units in the trust arelisted on large exchanges primarily in countries with developed capital markets, as if they wereshares of a company domiciled in the same countryas the exchange. The listing company of the ADR must adhere to the same regulatory

requirements and disclosures as the other listed issuers on the exchange. In effect, shares of aforeign company can be purchased on a U.S. stock exchange in the same manner as stock of aU.S. company.So why have the middlemen (trust)? Many investors do not have efficient means of diversifyinginto foreign companies because of the administrative and implementation issues. Often, tradingin foreign markets is more expensive relative to U.S. exchange transaction costs, as well asdifficult to execute due to time zone differences. Also, foreign exchanges do not usually have thesame regulatory requirements that investors are familiar with here in the U.S., and custody of theassets is costly. Currency exchanges will also have to be utilized in order to purchase ordinaryshares of foreign companies. ADRs trade easily and pay dividends in U.S. dollars and settlethrough U.S. clearinghouses. These implementation barriers coupled with the desire of investors

to diversify internationally created a market for underwriters of ADR trusts. Thereare also Global Depository Receipts (GDRs), International Depository Receipts (IDRs), andEuropean Depository Receipts (EDRs), which accomplish the same benefits already stated buttrade in one or more international markets.

By early 1998, 429 out of 3,104 companies listed in the NYSE, 437 of 6008 listed in NASDAQ,and 61 out of 690 in the AMEX were foreign companies from over 50 different countries. Inaddition, 412 out of about 6,200 equity securities traded in the OTC Bulletin Board were from


14/43

foreign issuers. Clearly, foreign firms must find listing in the US (or more generally, outsidetheir home market) advantageous. Then, why do foreign firms list their shares in the US? Fromthe firm's perspective, why is it that listing in the US is desirable, and the cost-benefit tradeoff a positive one? Listing in the US can take many forms. Foreign firms can list their stock directly orthrough an American Depositary Receipt (ADR) program. This listing can take place in an

organized exchange (e.g. NYSE, AMEX), NASDAQ, an OTC market, or as a private placement.The listing can also be accompanied by an IPO, or a seasoned equity offering.

ADRs are issued by a U.S. bank that functions as a depositary, having ADR being backed by aspecific number of shares in the non-U.S. company. ADRs can be traded on any of the US stockexchange (NYSE, NASDAQ, or AMEX) and over-the-counter. In the case of Rule 144A, theyare privately placed and traded. The same concept for ADR has been spread into other regionswith the creation of the global depositary receipts (GDRs), international depositary receipts(IDRs), and European depositary receipts (EDRs), which are generally traded or listed in one ormore international markets. As of February 2005, this instrument is used by around 2,100 non-

US issuers from approximately 80 countries. About 500 of those ADRs are listed in the USexchanges.

ADR PROGRAM TYPES

SPONSORED AND UNSPONSORED ADR PROGRAMS

Issuers seeking the benefits of ADRs generally pursue what are called sponsored ADR programs.They initiate the process and, working with a depositary bank, actively manage the programgoing forward. The issuer benefits by making a strategic foray into the U.S. market, controllingits image and reputation in the capital markets. In general, only sponsored ADRs can be listed onthe major stock exchanges or quoted under the NASDAQ system. While most new ADR programs are sponsored, many unsponsored programs (in which the ADRs are created andoffered to investors without a company's active participation) still exist.

THE VARIOUS TYPES OF SPONSORED ADR PROGRAMS


15/43

ADR

PROGRAMS

LEVEL I LEVEL II LEVEL III

Issuers can choose from four different types of sponsored ADR programs, each with its own setof benefits as well as its own set of legal and regulatory requirements: Level I, Level II, LevelIII, and Rule 144A/GDR. In general, American Depositary Receipts are used for two objectives:raising new capital, or increasing US ownership of shares already issued and trading in themarket. There are three basic ADR types, or “levels” as they are usually referred to, designed toachieve a company’s objectives.

LEVEL I ADRS-SPONSORED

Level I ADRs are the simplest method for companies to access the US capital markets. Level IADRs are traded in the over-the-counter (OTC) market, with bid and ask prices published dailyand distributed by the National Daily Quotation Bureau in the pink sheets. The issuing companydoes not have to comply with US Generally Accepted Accounting Principles (GAAP) or provideUS Securities and Exchange Commission (SEC) disclosure.Level I ADRs essentially enable a company to obtain the benefits of a US publicly tradedsecurity without altering their current reporting process.Level I DRs account for more than 60% of the US ADRs. Companies that have Level I ADR programs can “migrate” to a Level II or Level III ADR program if they desire to trade on the New York Stock Exchange, the American Stock Exchange, Nasdaq or the OTC Bulletin Board,or if the company desires to raise capital directly in the United States.Level I ADR programs currently require minimal SEC registration: The issuer seeks exemptionfrom the SEC's traditional reporting requirements under Rule 12g3-2(b). With that exemption,the company agrees to send to the SEC summaries or copies of any public reporting documentsrequired in its home market (including documents for regulatory agencies, stock exchanges, or

144a


16/43

direct shareholder communications). The depositary bank, working with the issuer, also files theForm F-6 registration statement with the SEC in order to establish the program.

LEVEL II ADRS- SPONSORED

Level II ADRs enable companies to list their ADRs on NASDAQ, the American StockExchange, the New York Stock Exchange and the OTC Bulletin Board, thereby offering highervisibility in the U.S. market, more active trading, and greater liquidity.

Level II ADRs require full registration with the Securities and Exchange Commission.Companies must also meet the listing requirements of the appropriate stock exchange. Level IIADRs require a Form 20-F and Form F-6 to be filed with the SEC, as well as meeting the listingrequirements and filing a listing application with the designated stock exchange. Upon F-6effectiveness and approval of the listing application, the ADRs begin trading.

Level II ADR programs must comply with the full registration and reporting requirements of theSEC's Exchange Act, which entails the following:• Form F-6 registration statement, to register the ADRs to be issued• Form 20-F registration statement, which contains detailed financial disclosure about the issuer,including financial statements and a reconciliation of those statements to U.S. GAAP, to registerthe listing of the ADRs• Annual reports and any interim financial statements submitted on a regular, timely basis to theSEC

Level III ADRs-SPONSORED

Level III ADRs enable to companies to list their ADRs on NASDAQ, the Amex, the New YorkStock Exchange or the OTC Bulletin Board, and make a simultaneous public offering of ADRsin the United States.In the most high-profile form of sponsored ADR program, Level III, an issuer floats a publicoffering of ADRs in the United States and lists the ADRs on one of the U.S. exchanges or NASDAQ. The benefits of a Level III program are substantial: It allows the issuer to raise capitaland leads to much greater visibility in the U.S. market.

Level III ADR programs must comply with various SEC rules, including the full registration andreporting requirements of the SEC's Exchange Act. This entails the following:

• Form F-6 registration statement, to register the ADRs

• Form 20-F registration statement, an annual filing that contains detailed financial disclosurefrom the issuer, including Form F-1, to register the equity securities underlying the ADRs thatare offered publicly in the U.S. for the first time, including a prospectus to inform potentialinvestors about the company and the risks inherent in its businesses, the offering price for the


17/43

securities, and the plan for distributing the shares Annual reports and any interim financialstatements submitted on a regular, timely basis to the SEC and to all registered publicshareholders.

RULE 144A ADRS

Many companies seek to raise capital in the U.S. markets privately by issuing restrictedsecurities under Rule 144A, which do not require SEC review. Rule144A facilitates the tradingof privately placed securities by sophisticated institutional investors (also known as QualifiedInstitutional Buyers, or QIBs; they must own or manage at least $100 million in securities).

SPONSORED VERSUS UNSPONSORED DR PROGRAMS

Unsponsored programs are issued by a depository in response to the market demand for theshares of a foreign company, but without a formal agreement between the depository and the

foreign company. Once a depository creates an unsponsored ADR facility it is common for otherdepositories to clone it, creating numerous unsponsored facilities which are considered fungible.In contrast sponsored program are issued by an exclusive depository appointed by the foreign

company under a deposit agreement, the depository bank agrees to issue ADR certificates andthe issuer agrees to pay certain costs of the depository such as such as dividend disbursementfees.

ADAVANTAGES OF USING ADRs

• The main advantage of buying an American Depositary Receipt rather than the foreignstock itself is the ease of the transaction.

• ADRs are a great way to invest abroad without having to convert U.S. dollars to manydifferent currencies

• Another advantage offered by an ADR is that if the foreign stock does pay dividends, theinvestment bank will convert the dividends to U.S. dollars and remit the payment to you.In addition, if the dividend is subject to foreign tax, the investment bank will withhold thetax so you don't have to worry about it

• Therefore, if exchange rates were to move against you, it would hurt the value of yourADR. If you are considering investing in foreign stocks, ADRs should be part of yourinvestment decision; however, you should become familiar with all the risks associatedwith foreign investing before making an investment decision.

Advantages to Issuerso Provides a simple means of diversifying a company’s shareholder base and accessing

important U.S. marketo May increase the liquidity of the underlying shares of the issuer


18/43

o ADRs can be used as an equity financing tool in both M&A transactions and ESOPs forU.S. subsidiaries

o Helps increase a non-U.S. company’s visibility and name recognition in the U.S. investorcommunity

o May raise capital in the U.S. market through some types of programs

Advantages to Investorso Offers a convenient means of holding foreign shareso Simplifies the trading & settlement of foreign securities; ADRs trade and settle just like

U.S. securitieso Offers lower trading & custody costs when compared with shares bought directly in the

foreign market

DISADVANTAGES OF USING ADRs

Despite all the described advantages, the ADRs do represent the same asset as local shares butmay not be “fully fungible” in several countries (meaning they cannot be seamless exchangedwith its home market security). For example, until 2001 there was no two-way fungibility forIndian ADRs; in that environment, investors could convert ADRs into local shares but they couldnot reconvert them back to ADRs. This and other capital control regulations prevent risk lessarbitrage opportunities to exist between ADRs and the underlying stock and are one of thereasons that premiums/discounts exist in the ADR market.

PROCEDURES AND MECHANICS OF ISSUING ADRS

ADRs are issued by a US bank, such as J. P. Morgan or The Bank of New York, whichfunctions as a depositary, or stock transfer and issuing agent for the ADR program.

The foreign, or local shares, remain on deposit with the Depositary’s custodian issuer’shome market.

Each ADR is backed by a specific number of an issuer’s local shares (e.g. one ADR

representing one share, one ADR representing ten shares, etc.) This is the ADR ratio,which is designed to set the price of each ADR in US dollars.

Financial information, including annual reports and proxies are delivered to US holderson a consistent basis by the Depositary. The dividends are converted into dollars and paidto ADR holders by the Depositary.


19/43

KEY COMPONENTS OF A SUCCESSFUL ADR PROGRAM

Successful ADR programs are actively traded and widely held. They typically share thefollowing attributes:

Attractive market, industry and equity story Active communication of the story to US investors Investor friendly ADR structure (ratio of shares to ADRs) Research and market-making by US investment banks and brokers

US LISTINGS – ADRs

THE OVER-THE-COUNTER MARKETOver-The-Counter (OTC) market trades are listed in the "Pink Sheets". The Pink Sheets are

published daily by the National Quotation Bureau and represent a non-automated listing ofstocks, which trade outside the three major exchanges. Listing fees are paid by the broker dealerwho seeks the listing.The broker-dealer must file a National Quotation Form 211, which includes updated financials ofthe company and other relevant information. Listing on the "Pink Sheets" is available forsponsored Level I and unsponsored ADR programs, while a listing on NASDAQ, AMEX or the NYSE is only available to Level II and III sponsored programs.

THE NATIONAL EXCHANGES

Issuers of Level II or III sponsored ADRs will benefit in several ways from a listing on any one

of the three national exchanges. The increased visibility to the US investment community, whicha listing provides, together with access to the automated trading and efficient market pricingavailable on the national exchanges, should lead to a significant expansion of the issuer's investor base. Importantly, listing fees for ADRs are generally less expensive than those for ordinaryshares in the US. A description of the three exchanges follows

NASDAQ (NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATEDQUOTATION)

NASDAQ, the first electronic stock market, operates a system of competing market makerslinked to investors by sophisticated telecommunications networks. There are two options forlisting; the Small Cap Market which, as its name implies caters for smaller companies, and the National Market System, where the majority of NASDAQ securities are listed.While criteria for listing on these two markets differ, the ADR listing charges are very similar.The NASD also operates PORTAL, the market for securities issued under Rule 144(a).


20/43

AMEX (AMERICAN STOCK EXCHANGE)AMEX operates an auction market system, intended to facilitate trading between buyers andsellers with minimum intervention from professional dealers. Each listed stock is handled by aspecialist unit. There are special listings requirements for non-US issuers, with "Alternate"requirements intended to cover companies which are financially sound but which, because of the

nature of their business, would not qualify under the "Regular" requirements.

NYSE (NEW YORK STOCK EXCHANGE)

The NYSE, like AMEX, operates an auction market system where stock prices are determinedlargely by public orders competing with each other. By value of shares listed and by volume oftrading, the NYSE is the largest exchange in the United States.Foreign companies listing on the NYSE can choose to qualify either under the "AlternateListing Standards" designed specifically for non-US corporations, or under the "Original" or"Alternate Original" standards which apply to US domestic corporations. Each of the exchangessets additional standards concerning corporate governance. However, non-US corporations may be exempted from these requirements upon application. Confidential meetings can be arrangedwith the exchanges in advance of any decision-making to discuss specific concerns orexemptions.

FOLLOWING ARE A FEW INDIAN ADRs TRADING IN US

HDFC BANK LTDICICI BANK LTDINFOSYS TECHNOLOGIES LTDVIDESH SANCHAR NIGAM LTDWIPRO LTDREDIFF.COM INDIA LTD

HOW ARE ADRs PRICED?

• Let us assume that Russian Vodka Ltd, trades on a Russian stock exchange at 127Russian roubles

• This is equivalent to US$4.58 – assume this for simplicity


21/43

• Now, a US bank purchases 30 million shares of Russian Vodka Ltd. and re-issues them inthe US at a ratio of 10:1

• This means that each ADR you purchase is worth 10 shares on the Russian stockexchange

• A quick calculation tells us that each ADR should have an issue price of US$45.80(US$4.58 per share X 10 shares) – since 10 shares equal 1 ADR

• Once an ADR is priced and sold, its subsequent price is determined by supply anddemand factors, like any ordinary share

ADR ARBITRAGE OPPORTUNITIES

Several Indian companies actively trade on the and New York Stock Exchanges and due to thetime differences, market news, sentiments etc. sometimes the prices of the DR(Depositoryreceipt) trade at discounts or premiums to the underlying stock. This presents a knowledgeablefund manager an arbitrage opportunity, where he buys the DR abroad and sells the same stock inIndia at a higher price (the difference being the profit).

Same DRs trade during India market hours offering a live arbitrage opportunity. As there is verylittle risk in such trades the gap between the DR and underlying stock is minimal. DRs whichtrade in the US markets offer better gaps, but there is the overnight risk to be factored in. Hencethe fund manager must take into consideration the local market conditions before buying thestock in the US, as he must be confident of the selling off the stock the next morning in India atthe profitable gap.Once the stock is bought, arrangements are made to deliver the stock in India, which involvesseveral procedures (stock is borrowed at times for this). Once the stock is delivered in India the proceeds are allowed to be repatriated and the process repeated.There are some stocks which are also allowed to be bought in India and converted into the DRforms, which is attractive if the DR is trading at a premium to the Indian stock price.

Main Reasons for Discrepancies between the Prices of ADR and Local Shares

There are significant limitations for an investor to buy an ADR on the NYSE and sell it on alocal exchange in the same day. Fees and other transaction costs are also incurred in thistransaction. Finally, depending on the ADR level and the local government regulations, differentrights and protections are accompanied by the certificate. This section in the paper will discussthe main reasons for discrepancies between the prices of ADRs and local shares whilequestioning whether they should be subjected to the law of one price.


22/43

Are ADRs and local shares the same assets?

Despite ADRs being certificates that represent the underling foreign shares that are being held

custody outside the U.S., ADRs and local shares are different certificates and may not be “fullyfungible” in several countries. For example, until 2001 there was no two-way fungibility forIndian ADRs; in that environment, investors could convert ADRs into local shares but they couldnot reconvert them back to ADRs.In 2001, the Indian Reserve Bank created the regulation that allowed two-way fungibility between ADRs and local shares with restrictions, however, to what shares could be converted toADRs.Under this regulation, only local shares that were created through conversion of ADRs can bereconverted. The high demand for Indian shares in the U.S. during the past few years and therelatively low volume of ADRs available for investors resulted in most Indian ADRs trading at a premium over their local shares. Because of the fungibility problem, however, this premium

cannot be arbitraged away by investors so companies such as Infosys and Wipro are makingsecondary ADR offerings with the goal of increasing liquidity and arbitrage the price differentialthemselves.

Correlation to stock index between ADRs and local shares

Another important source of disparity between ADR prices and its local traded securities are theco-movements between the stocks and the markets they are traded rather than where thecompany is established. A good example of this correlation with the US market is the InfosysADR, which has been following the technology companies in the NASDAQ much more closelythan the Indian stock market. Even more interesting, is the ADR premium of Wipro, which has been presenting a much more modest premium compared to Infosys. Considering bothcompanies are in the same sector and in the same market, the differences between the ADR premium of Wipro and Infosys can only be explained by differences in investor’s perceptionrather than true valuation fundamentals.

Limits to Arbitrage Opportunities

Despite all of the advantages of the ADR, they are not seamless interchangeable with thelocal underlying stock. While the previous section of this paper explored the potential reasons fordiscrepancies between the ADR and the local stock, this section will describe the difficulties ofacting on those discrepancies in order to generate profitable arbitrage.


23/43

The basic mechanics of the execution of the arbitrage from the perspective of an US investorwould be the following:

1. U.S. investor acquires ADR by the ask price with U.S. dollars;2. ADR is converted into the local security;

3. Local security is sold in the local market in local currency at the bid price;4. Local currency amount is then converted into U.S. dollar at the ask exchange rate.Taxes, fees, liquidity issues, bid/ask spreads and restrictions can occur at any point of thetransaction.

Operational issuesThere are several operational issues that make the mechanics of thearbitrage difficult. The first one is related to time zone, which could potentially shrink tradingsessions overlap, making it difficult for the arbitrage to occur simultaneously or even in the sameday. Additionally, public information about the companies with ADR listing will also hit themarket in local business hours, delaying reflections is the price of the ADR.

Low liquidity for certain ADRsThere are many instances of firms with multiple listings in different markets and countrieshaving very low liquidity and trading in some of their listed securities. In this case, prices and premiums/discounts do not mean anything since these prices are not applicable for large trades(sometimes these issues trade less than 1,000 shares/day) and differences in prices cannot beexploited (large inefficiencies in bid and ask spreads, higher transaction costs of trading smalllots, etc.).

Transaction costsTransactions costs are probably one of the major inhibitors of arbitrage opportunities. Not everyinvestor can maintain trading accounts in different countries and sustain minimal levels ofinvestment and costs to be able to profitably exploit ADR-local shares arbitrage opportunities.Transaction costs oftentimes add up to a significant amount and have to be add up to the stock price (either the ADR or local stock) so as to calculate the “full price” for the stock and compareit to the price of the ADR (or vice versa). Although these costs may not disallow arbitrageopportunities to emerge, they create what we call a no-arbitrage band.


24/43

PROCEDURE FOR ISSUE OF ADRs/GDRs


25/43

1. Approvals

The issue of ADRs/GDRs requires theapprovals of Board of Directors, Shareholders,

Ministry of Finance, Ministry of Company Affairs,

Reserve Bank of India, Stock Exchange and FinancialInstitutions.

2. Appointment of Intermediaries

ADR/GDR normally involve a number ofIntermediaries including lead Manager, Co-Manager,

Overseas Depository Banks, Listing Agent, LegalAdvisor, Printer, Auditors and Underwrites.

3. Principal Documentation

The principal documents required to be preparedinclude subscription agreement, DepositoryAgreement, Custodian Agreement, Agency

Agreement and Trust Deed.


26/43

4. Pre and Post Launch

Additional Key ActionsApart from obtaining necessary approvals,

Documentation, additional key actions necessary forMaking the issue of ADR/GDR a success, include

(i) Co appointment of various agencies and properinstitution of a Board Sub-Committee

(ii) Selection of Syndicate Members(iii) Constitution of a task force for due diligence

(iv) Listing(v) Offering Circular(vi) Research Papers

(vii) Pre-marketing(viii) Timing, pricing and size of the issue

(ix) Road shows(x) Book Building and pricing of the issue

(xi) Closing of the issue(xii) Allotment


27/43

US SECURITIES AND ECXHANGE COMPLIANCE

The following table outlines the different filings required by the SEC in the US, the way

ADRs are traded and whether new capital can be raised, according to the type of ADR program issued

GDR - Filings for any US tranche will depend on which structure is chosen:Normaly a Level III or Rule 144(a) program.

The right granted to existing shareholders of a company to receive or to subscribe to new shares

under a "rights" or "bonus" issue is also extended to registered ADR holders. However, a USinvestor can only take possession of these rights in the US if the issuer undertakes to register theoffering, or if an exemption from registering it is available. In all other cases, the depositary mustarrange to sell the entitlement to the rights in the home country and distribute the cash proceedsto the ADR holders.

Form F-6

Form F-6 is used for the registration of depositary shares as evidenced by ADRs (or GDRs) thatare issued by a depositary bank against the deposit of securities of a foreign issuer under theSecurities Act of 1933. The information is prepared by the company under the guidance of thedepositary bank at the inception of either an unsponsored or sponsored program.

Form 20-F

A Form 20-F is filed as a registration statement/annual report by issuers of Level II or III


28/43

sponsored ADRs/GDRs. It is a comprehensive report of all material business activities andfinancial results and must comply with US GAAP. The Form 20-F consists of four distinct parts.Part I requires a full description of the issuer's business, details of its property, any outstandinglegal proceedings, taxation and any exchange controls that might affect security holders.Part II requires a description of any securities to be registered, the name of the depositary bank

for the DRs and all fees to be charged to the holders of DRs.Part III requires information on any defaults upon senior securities.Part IV requires various financial statements to be submitted.

Form F-1

Foreign issuers planning a public offering in the US via a Level III DR program must register the proposed new securities by filing Form F-1. This form requires the following information to beincluded in the prospectus: use of proceeds, summary information, risk factors and ratio ofearnings to fixed charges, determination of offering price, dilution, plan of distribution,description of securities to be registered, name of legal counsel and disclosure of commissions.

GAAP Conversion (Level II and Level III ADR Programs)

The process of converting financial statements to the US standard of Generally AcceptedAccounting Principles (GAAP) can be complex but depends on the compatibility of accounting procedures in the issuer's home country with those of the US. Regulated industries such as banking may find the costs of conversion more onerous than those companies in less regulatedsectors.

Tax Compliance

US Tax Non-US companies are not responsible for complying with the US tax requirements regardingdividend payments made in the US under their DR program. The depositary bank handles anysuch issues.

Local TaxThe depositary provides registered GDR holders with tax certification forms prior to each payment date and returns them to the issuer so that the correct tax can be deducted according tolocal regulations.


29/43

‘Indian ADRs Will Shine in 2009’

(Created by EQUITIES Magazine)

India’s cheaper than it’s been in decades and offering 5% growth.By Anthony W. Haddad

Like many emerging markets, the past year was a difficult one for India. After five years of 9%GDP growth and a booming stock market, a global recession, a group of terrorists, and an Enron-type scandal at Satyam helped shed 60% from shares in the country’s companies and 20% of thevalue of the rupee against the dollar.

Though its growth is expected to be trimmed by more than a third this year, this country of morethan a billion people is still estimated to grow by more than 5%, beating even China. And thegrowth rates of the past are expected to return in years to come. Since the reforms of the early1990s, India’s development has always been more a question of “when” than “if.”

After all, the country’s growth was never based on exporting cheap, labor-intensive goods todeveloped countries. It was about the development of a consumption-based domestic market onthe back of technology, services, and natural resources.

India is the largest democracy in the world. With the exception of the recent scandal, it usesconservative accounting practices. English is its official language of business, and its studentscompete with Western students in the global marketplace.

In the recent past, these qualities have made India a popular destination for investment capital. Inthe very near future, it will return as such. The country still has robust economic growth,contained inflation, and a growing middle class whose current spending potential dwarfs thelevel it will soon become.

Millions of Indians have benefited from its years of economic expansion, but millions more stilllive in abject poverty. Its road network is the second largest in the world yet still in need ofupgrades. Its cities can dazzle with light, but power outages are common. Over the next fiveyears, India intends on investing a half-trillion dollars on infrastructure.

One company that can benefit from this is Sterlite Industries Ltd. (NYSE: SLT), India’s largestcopper producer. Valued at less than $4 billion, the stock trades at a 75% discount to its 2007high, has a little less than $4 billion in cash and equivalents on the books, and is virtually debtfree.

Like many other commodities, the price of copper is down to multiyear lows, affecting Sterlite’s bottom line. The question remains exactly how long the company can survive with decreaseddemand, a glut of copper, and a weak economy. But with that much cash—and at the extremely


30/43

low price it can produce copper—the company seems to be positioned well to survive thisdownturn, and perhaps even grow at robust rates in the latter half of this year.

You may have heard about the incredible expansion of mobile phones in India. But keep in mindthat it’s still going on. The country adds millions of new users to its network every month, and

still only 20% to 30% of people have them today.

Mahanagar Telephone Nigam Ltd. (NYSE: MTE), a provider of telecommunications servicesin Delhi and Mumbai, is down 70% from its highs to a market cap of less than $1 billion. It’sholding $700 million in cash and is debt free. The company raised its dividend in September andhas a dividend yield of about 5% at the current numbers. Mahanagar may be tempting at theselevels.

A story about India seems incomplete without some mention of its outsourcing companies.You’ve probably spoken to employees from WNS Limited (NYSE: WNS) before. Its clientsinclude about 20 U.S. retail banks, 10 financial advisory firms, electronics giants, pharmaceutical

companies, and more. It has more than 20,000 employees.

A smaller company, WNS had been hit harder than Sterlite, but it’s mounted a nice gain off itslows. With about a $300 million (and growing) market cap, the company stands at an 80%discount to its highs. The company has less cash on hand than many will feel comfortable with.Although I expect them to survive, waiting for their March 2009 annual filing seems prudent,even at the cost of missing out on the early gains.

India’s rising middle class will create even more opportunities. In 2005, its middle class wasabout 5% of the population. By 2015, it is expected to rise to 20% and by 2025 to more than40%. While much of this segment’s money goes to consumables and luxury items, some of it

ends up as investments with financial institutions. After all, the middle class can afford to sendtheir children to school, buy businesses, and retire younger. This is why some of the biggestgains we’ll see in India will be in financials. This long-term trend in India also has many short-term opportunities right now. Financials are cheaper today than they’ve been in years. Andthough it’s current growth pales in comparison to previous years, it dwarfs the growth, or lackthereof, that we’re seeing in most of the largest economies. (The U.S. economy is expected tocontract by 2%, Japan by 4%, German by 2.5%, and Britain by 3%.)

HDFC Bank Ltd. (NYSE: HDB) is a private sector bank and financial services company. The$7.5 billion company engages in retail banking, wholesale banking, and treasury operations. Ithas been affected by the economic downturn, but it’s all overblown, and the company doesn’tdeserve the 60% loss in its price. Asset growth has slowed, but it continues to grow steadily.

Management believes that loans will grow at 20% during the next year, marginally lower thanthe previous year. This is largely because of the lower demand for property. The company believes that customers are waiting for property prices to drop.


31/43

India’s second-largest private sector lender beat forecasts with a 45% jump in profits in its mostrecent quarterly report, but its shares have fallen. Banks in India are dealing with rising defaults by customers, caused by high borrowing costs and a slowing economy that has hit some jobs.

The company’s gross non-performing loans rose to $392 million in the most recent quarter, up

14% from July to September 2008. “In the kind of environment we are going through, [non- performing loans] are expected to go up,” Executive Director Paresh Sukthankar said on CNBC.“With adequate provisioning, we are not concerned by the slight rise.” HDFC has seen 30% or better growth in net profit for 27 consecutive quarters. It has raised its dividend five times in the past six years. It’s sitting on $3.5 billion in cash (a little less than half its market cap) and has a15% ROE. Quarterly revenue growth for the most recent quarter is up 58% over the 2007quarter. The company pays a paltry dividend (about 1%), but this kind of growth isn’t cheap.

While I’d be a fool to promise that any banking company doesn’t have potential time bombs,HDFC appears healthy, and I expect a 25% capital gain by the end of the year, bringing it intothe upper $60s. And while that’s attractive, it’s nothing compared to what HDFC will do in

coming years.

Not only will it benefit from India’s continued boom, but also it’s not difficult to imagine itentering the U.S. and U.K. markets. After all, they understand how to grow, and it’s a more open playing field these days.

ICICI Bank (NYSE: IBN) is an Indian bank in the United States, Canada, and the UnitedKingdom, where the company is gaining customers and increasing its deposit base by offeringhigher interest rates. But that’s not hurting their bottom line. In the fourth quarter of 2008, thecompany’s profits were up 25% over the same period in 2007. The $7.5 billion bank offerscommercial banking, treasury and investment banking, and other products such as insurance and

asset management. The company has about 1,500 branches around the world, and it expects toopen another 500 in the next two years.

Having fallen from the low $70s to the low teens, ICICI looks like a steal. Revenue has shot up40% in the fourth quarter over 2007. Its P/E is around 10, and its trailing yield (dividends overthe last 12 months/the current stock price) is nearly 4%. (Although I wouldn’t bet the bank thatICIC will give that out this year.)

With a quarter of its loan book coming from international business, investors are still worriedabout problems that might appear amid the current crises. ICICI has slowed credit growth and islooking to preserve capital. This is part of the reason we won’t likely see the full dividend thisyear, but I don’t see the growth story being interrupted. I expect the company to gain 50% and pass the $20 mark this year.


32/43

GLOBAL DEPOSITORY RECEIPTS

A negotiable certificate held in the bank of one country representing a specific number of sharesof a stock traded on an exchange of another countryTo raise money in more than one market, some corporations use global depositary receipts(GDRs) to sell their stock on markets in countries other than the one where they have theirheadquarters.The GDRs are issued in the currency of the country where the stock is trading. For example, aMexican company might offer GDRs priced in pounds in London and in yen in Tokyo.Individual investors in the countries where the GDRs are issued buy them to diversify intointernational markets. GDRs let you do this without having to deal with currency conversion andother complications of overseas investing. The objective of a GDR is to enable investors indeveloped markets, who would not necessarily feel happy buying emerging market securities

directly in the securities’ home market, to gain economic exposure to the intended company and,indeed, the overall emerging economy using the procedures with which they are familiar.Global Depository Receipt (GDR) - certificate issued by international bank, which can be subjectof worldwide circulation on capital markets. GDR's are emitted by banks, which purchase sharesof foreign companies and deposit it on the accounts. Global Depository Receipt facilitates tradeof shares, especially those from emerging markets. Prices of GDR's are often close to values ofrelated shares.GDRs are securities available in one or more markets outside the company’s home country. The basic advantage of the GDRs, compared to the ADRs, is that they allow the issuer to raise capitalon two or more markets simultaneously, which increases his shareholder base. They gained popularity also due to the flexibility of their structure.

GDRs are typically denominated in USD, but can also be denominated in Euros. GDRs arecommonly listed on European stock exchanges, such as the London Stock Exchange (LSE) orLuxembourg Stock Exchange, or quoted on SEAQ (Stock Exchange Automated Quotations)International, and traded at two other places besides the place of listing, e.g. on the OTC marketin London and on the private placement market in the US. Large part of the GDR programsconsists of a US tranche, which is privately placed and a non-US tranche that is sold to investorsoutside the United States, typically in the Euro markets.

An overwhelming majority of DR programs by companies from Central and Eastern Europeancountries are established as GDRs, typically listed in London and traded by qualified institutional

investors in Euromarkets under regime of so called Regulation S and some of them also in theAmerican OTC markets in accordance with Rule 144A.


33/43

Two different GDR structures

When GDRs are structured with a Rule 144(a) offering for the US and a "Regulation S"offering for non-US investors, there are two possible options for the structure.

Unitary Structures

Under a unitary structure, a single class of DRs is offered both to QIBs in the US and tooffshore purchasers outside the issuer's domestic market, in accordance with RegulationS. All DRs are governed by one Deposit Agreement and all are subject to deposit, Withdrawaland resale restrictions.

Bifurcated Structure

Under a bifurcated structure, Rule 144(a) ADRs are offered to QIBs in the US andRegulation S DRs are offered to offshore investors outside the issuer's domestic market.

The two classes of DRs are offered using two separate DR facilities and two separateDeposit Agreements. The Regulation S DRs are not restricted securities, and can therefore bedeposited into a "side-by-side" Level I DR program, and are not normally subject to restrictionson deposits, withdrawals or transfers. However, they may be subject to temporary resalerestrictions in the US.

ADVANTAGES OF GDR/EDR

o EDRs/GDRs can be launched as part of a private or public offering.o They allow a single fungible security to be placed in one or more international markets,

thus giving access to a global investor base.o They may allow the issuer to overcome local selling restrictions to foreign share

ownership.o GDRs are eligible for settlement through Clearstream, Euroclear.

DISADVANTAGES

If the US tranche of a GDR is structured as a Rule 144(a) private placement, the disadvantages ofan RADR program will apply. If it is structured as a Level III program, the reporting and costfeatures of such programs will apply.

INDIAN GDRs


34/43

THE COMPREHENSIVE GDR LISTING

GDRCompanies

# euro convertible bond**adjusted for bonus

IndustrySegregation

DateOf

GDR

Issue

SizeOf GDRIssue

US $Mill

SharesperGDR

GDRIssue

Price **(US$)

Arvind Mills Textiles 03-Feb-94 125.00 1.0 9.78

Ashok Leyland Autos 20-Mar-95 137.77 3.0 12.79

Bajaj Auto Autos 27-Oct-94 110.00 1.0 16.89

Ballarpur Ind.# Paper 27-May-94 35.00 1.0 8.77

Bombay Dye Textiles 16-Nov-93 50.00 1.0 9.20

BSES Ltd Power 04-Mar-96 125.00 3.0 14.40

Century Textiles Diversified 21-Sep-94 100.00 2.0 254.00

CESC Power 14-Apr-94 125.00 1.0 10.67

Core Parent Pharma 21-Jun-94 70.00 1.0 12.60

Crompton Greaves Electrical 02-Jul-96 50.00 1.0 7.56

DCW Diversified 19-May-94 25.00 5.0 13.55

Dr. Reddy's Pharma 18-Jul-94 48.00 1.0 11.16m

E. I. Hotels Hotels 07-Oct-94 40.00 1.0 9.30

EID Parry Fertiliser 07-Jul-94 40.00 1.0 8.39

Finolex Cab Cables 19-Jul-94 55.00 1.0 16.60

Flex Industries Packaging 30-Nov-95 30.00 2.0 8.05

G.E. Shipping Shipping 17-Feb-94 100.00 5.0 15.94

G.N.F.C Fertiliser 06-Oct-94 61.11 5.0 12.75

GAIL Oil & Refineries 04-Nov-99 22.50 6.0 9.67

Garden Silk Textiles 04-Mar-94 45.00 5.0 26.28

Grasim (1st) Diversified 25-Nov-92 90.00 1.0 12.98

Grasim (2nd) Diversified 09-Jun-94 100.00 1.0 20.50

Guj Ambuja # Cement 26-Nov-93 80.00 1.0 5.95

Himachal Futuri Telecomm. 02-Aug-95 50.00 4.0 9.30

Hindalco (1st) Aluminium 22-Jul-93 72.00 1.0 10.73

Hindalco (2nd) Aluminium 08-Jul-94 100.00 1.0 16.00

Hindustan Dev. Diversified 21-Sep-94 76.00 1.0 2.05

India Cements Cement 11-Oct-94 90.00 1.0 4.23

Indian Alum. Aluminium 22-Feb-94 60.00 1.0 6.77

Indian Hotels Hotels 28-Apr-95 86.25 1.0 16.60 Indian Rayon Diversified 25-Jan-94 125.00 1.0 15.01

Indo Gulf Fertiliser 18-Jan-94 100.00 1.0 4.51

Indo Rama Textiles 21-Mar-96 50.00 10.0 11.37

ICICI Finance 02-Aug-96 230.00 5.0 11.50

ICICI (ADR) Finance 22-Sep-99 315 5.0 9.80

Infosys IT 11-Mar-99 70.38 0.5 34


35/43

IPCL Petrochemicals 08-Dec-94 85.00 3.0 13.87

ITC Cigarettes 13-Oct-93 68.85 1.0 7.65

J.K. Corp Diversified 17-Oct-94 55.00 1.0 8.00

Jain Irrig Plastics 25-Feb-94 30.00 1.0 11.13

JCT Ltd. Textiles 29-Jul-94 45.00 10.0 16.96

Kesoram Ind Diversified 31-Jul-96V 30.00 1.0 1.60 L & T (1st) Diversified 18-Nov-94 150.00 2.0 16.70

L & T (2nd) Diversified 01-Mar-96 135.00 2.0 15.35

Mah & Mah Autos 30-Nov-93 74.75 1.0 4.46

MTNL Telecom 04-Dec-97 418.53 2.0 11.958

NEPC Micon Diversified 07-Nov-94 47.70 1.0 3.18

Nippon Denro# Steel 03-Mar-94 125.00 10.0 21.36

Oriental Hotels Hotels 14-Dec-94 30.00 1.5 12.75

Ranbaxy Labs Pharma 29-Jun-94 100.00 1.0 19.38

Raymond Woolen Textile 09-Nov-94 60.00 2.0 10.61

Reliance Diversified 27-May-92 150.00 2.0 16.35 Reliance (2nd) Diversified 15-Feb-94 300.00 2.0 23.50

Reliance Petroleum Diversified 18-Oct-99 100 15.0 23.0

S.A.I.L. Steel 07-Mar-96 125.00 15.0 12.97

Satyam Infoway IT 19-Oct-99 75.00 1.0 18.0

S.I.E.L. Diversified 14-Oct-94 40.00 3.0 14.64

Sanghi Poly Textiles 28-Jul-94 50.00 5.0 9.56

SIV Ind Textiles 01-Aug-94 45.00 1.0 6.37

SPIC Fertiliser 28-Sep-93 65.00 5.0 11.15

SBI Banking 03-Oct-96 369.95 2.0 14.15

Sterlite India# Diversified 22-Dec-93 100.00 1.0 17.86 Tata Electric Power 22-Feb-94 65.00 100.0 710.00

Telco (1st) Autos 15-Jul-94 115.00 1.0 8.75

Telco (2nd) Autos 06-Aug-96 200.00 1.0 14.25

Tube Invest Cycles & Acc. 20-May-94 45.60 1.0 6.58

United Phos. Pesticides 25-Feb-94 55.00 1.0 20.50

Usha Beltron Cables 06-Oct-94 35.00 1.0 10.70

Videocon Int. Electronics 26-Jan-94 90.00 1.0 8.10

VSNL Telecomm. 24-Mar-97 527.00 0.5 13.93

Wockhardt Pharma 25-Feb-94 75.00 1.0 14.35


36/43

EUROPEAN LISTINGS LONDON AND LUXEMBOURG

At the time of writing, most GDRs have consisted of a Rule 144a offering in the US and aEuromarkets element. With these instruments there is no listing in the US, but many are listed in

London or Luxembourg, the traditional exchanges for listing euro market instruments.A listing on a recognized stock exchange adds to the visibility of the issue and provides a wider potential market; many institutional investors have limits on the number of unlisted securities, orsecurities which are not listed on certain specified exchanges, in which they can invest.Both the London and Luxembourg Stock Exchanges list GDRs, and since both are governed bythe same European Union directive, their listing requirements are broadly similar. Thedifferences lie mainly in the level of disclosure, the ease and speed with which listings can beobtained and the level of visibility afforded by the listing.Listings on the London Stock Exchange are generally arranged by the Lead Manager of the GDRissue acting as Listing Agent, while for Luxembourg the Listing Agent must be a Luxembourg bank with a seat on the Luxembourg Stock Exchange. This is not normally a service the Lead

Manager of the GDR issue can provide directly.A listing on the London Stock Exchange makes it easier for a GDR to be quoted on SEAQInternational, the exchange's electronic price quotation service, although such a listing is not arequirement for trading on SEAQ.

REGULATORY PROVISIONS FOR ADR/GDR

The issue of ADR/GDR by India Inc. is governed by following legal provisions:

1. Section 6 (3) (b) of Foreign Exchange Management Act (FEMA), 1999 reads as follows:

6. Capital account transactions. –

(1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange toor from an authorized person for a capital account transaction.

(2) The Reserve Bank may, in consultation with the Central Government, specify-

(a) Any class or classes of capital account transactions which are permissible;

(b) the limit up to which foreign exchange shall be admissible for such transactions: Providedthat the Reserve Bank shall not impose any restriction on the drawl of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in theordinary courts of business.


37/43

(3) Without prejudice to the generality of the provisions of sub-section (2), the Reserve Bankmay, by regulations, prohibit, restrict or regulate the following-

(a) Transfer or issue of any foreign security by a person resident in India;

(b) Transfer or issue of any security by a person resident outside India

FOREIGN EXCHANGE MANAGEMENT ACT (FEMA)

An Indian corporate can raise foreign currency resources abroad through the issue of AmericanDepository Receipts (ADRs) or Global Depository Receipts (GDRs). Regulation 4 of Schedule Iof FEMA Notification no. 20 allows an Indian company to issue its Rupee denominated shares toa person resident outside India being a depository for the purpose of issuing Global DepositoryReceipts (GDRs) and/ or American Depository Receipts (ADRs), subject to the conditions that:

• the ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign CurrencyConvertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism)Scheme, 1993 and guidelines issued by the Central Government there under from time totime

• The Indian company issuing such shares has an approval from the Ministry of Finance,Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/GDRs in terms of the relevant scheme in force or notification issued by the Ministry ofFinance, and

• There are no end-use restrictions on GDR/ADR issue proceeds, except for an express banon investment in real estate and stock markets.

• The FCCB issue proceeds need to conform to external commercial borrowing end userequirements; in addition, 25 per cent of the FCCB proceeds can be used for general

corporate restructuring• Is not otherwise ineligible to issue shares to persons resident outside India in terms of

these Regulations.• There is no limit up to which an Indian company can raise ADRs/GDRs. However, the

Indian company has to be otherwise eligible to raise foreign equity under the extant FDI policy.

A company engaged in the manufacture of items covered under Automatic route, whose directforeign investment after a proposed GDRs/ADRs issue is likely to exceed the percentage limitsunder the automatic route, or which is implementing a project falling under Governmentapproval route, would need to obtain prior Government clearance through FIPB before seeking

final approval from the Ministry of Finance.


38/43

WHO CAN ISSUE ADR/GDR?

A company can issue ADR/GDR, if it is eligible to issue shares to person resident outsideIndia under the FDI Scheme.

WHO CANNOT ISSUE ADR/GDR?

o An Indian listed company, which is not eligible to raise funds from the Indian CapitalMarket including a company which has been restrained from accessing the securitiesmarket by the Securities and Exchange Board of India (SEBI) will not be eligible to issueADRs/GDRs.

o Erstwhile OCBs who are not eligible to invest in India through the portfolio route andentities prohibited to buy, sell or deal in securities by SEBI will not be eligible tosubscribe to ADRs / GDRs issued by Indian companies.

END USE RESTRICTIONS

No end-use restrictions except for a ban on deployment / investment of such funds in Real Estateor the Stock Market.

LIMIT OF OFFERINGSThere is no monetary limit up to which an Indian company can raise ADRs / GDRs.

VOTING RIGHTSVoting rights on shares issued under the Scheme shall be as per the provisions of CompaniesAct, 1956 and in a manner in which restrictions on voting rights imposed on ADR/GDR issuesshall be consistent with the Company Law provisions.RBI regulations regarding voting rights in the case of banking companies will continue to beapplicable to all shareholders exercising voting rights.

PRICING OF ADR/GDR

The pricing of ADR / GDR issues should be made at a price not less than the higher of thefollowing two averages:(i) The average of the weekly high and low of the closing prices of the related shares quoted onthe stock exchange during the six months preceding the relevant date;(ii) The average of the weekly high and low of the closing prices of the related shares quoted ona stock exchange during the two weeks preceding the relevant date.


39/43

TWO WAY FUNGIBILITY SCHEME

Under the limited Two-way fungibility Scheme, a registered broker in India can purchase sharesof an Indian company on behalf of a person resident outside India for the purpose of convertingthe shares so purchased into ADRs/GDRs. The operative guidelines for the same have beenissued vide A.P. (DIR Series) Circular No.21 dated February 13, 2002. The Scheme provides for purchase and re-conversion of only asmany shares into ADRs/GDRs which are equal to or less than the number of shares emerging onsurrender of ADRs/GDRs which have been actually sold in the market. Thus, it is only a limitedtwo-way fungibility wherein the headroom available for fresh purchase of shares from domesticmarket is restricted to the number of converted shares sold in the domestic market by non-resident investors. So long ADRs/GDRs are quoted at discounts to the value of shares in

domestic market, an investor will gain by converting the ADRs/GDRs into underlying shares andselling them in the domestic market. Incase of ADRs/GDRs being quoted at premium, there will be demand for reverse fungibility, i.e. purchase of shares in domestic market for re-conversion into ADRs/GDRs.The scheme is operationalized through the Custodians of securities and stockbrokers under SEBI

ADR AND GDR POTENTIAL IN CENTRAL EUROPE

Depositary receipts (mostly denoted as ADR or GDR), an equity instrument representing sharesof a company listed on a foreign exchange, are still very little known in the Czech Republic (andnot only there), although their history reaches back to 1927. DRs have gained much popularity inthe 1990s. After a slowdown in 2001/2002, the years 2003 and especially 2004 brought a

renewed progress of the DR markets, which seems to be sustained in 2005. Also the CentralEuropean companies are gradually becoming aware of the advantages of DR offering. There is,however, still enough unused potential.In case the domestic and DR markets are integrated, there is a possibility of cross-border trading.The prices of underlying shares in the local market and the DRs should be therefore virtuallyequal, not allowing for arbitrage opportunities. The first hypothesis we tested is that the price ofordinary share in the local market and underlying local currency equivalent of the DR price arevery closely correlated.


40/43

The price of underlying shares in the local market rarely remains unaffected by the DR issue. Acompany listing its equity internationally can gain from diversified shareholders’ base, increaseddemand or lower cost of capital. These are only some of the factors that may drive the share’s price up. Several studies have dealt with response of the underlying share’s price to the DRoffering. The obtained results are, however, ambiguous. We focused on the impact of DR

program establishment on the price of Czech, Polish and Hungarian shares. We wanted to provethat a price increase would follow the DR offering.It is usually expected a DR listing also improves liquidity of the company’s stock, as the potential investors’ base is extended, the visibility of the company both in DR and local marketsis enhanced and cross-border trading is enabled. On the other hand, some argue, that trading inthe stock shifts to the DR market and they worry about the impact on the overall liquidity of thelocal market. We tested whether a positive reaction of the domestic markets to the DR offering interms of trading activity can be observed on a sample of Central European shares.The first chapter brings an insight into the DR world. In the second chapter we focus on prices ofdepositary receipts and the underlying shares. The two fields of interest are the correlation between the underlying share’s price and the local currency’s equivalent of the DR Price, and the

response of the ordinary share’s price in the local market to the DR program introduction. Thethird chapter deals with liquidity effects subsequent to the DR listing. In the last chapter, weidentify a few areas, where DRs are frequently employed and we suggest there is an unused potential of the instrument in the Czech Republic.

Ministry of Finance Department of Economic Affairs 31 st July, 2008

Proposed changes in the ADR/GDR’s Pricing guidelines

The “Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through DepositaryReceipt Mechanism) Scheme, 1993” was initiated in 1993 to allow the Indian Corporate sector toaccess global capital markets through issue of Foreign Currency Convertible Bonds(FCCBs)/Equity Shares under the Global Depository Receipt Mechanism (GDR) and AmericanDepository Receipt Mechanism (ADR). The Scheme has been amended several times since then.In order to bring the ADR/GDR guidelines in alignment with SEBI guidelines on domesticcapital issues, Government, vide Press Note dated August 31, 2005, amended the pricing

guidelines for Indian listed companies issuing ADR/GDR. The present pricing clause, thus, readsas under:

“Listed Companies – The pricing should not be less than the higher of the following twoaverages:(i) The average of the weekly high and low of the closing prices of the related shares quoted onthe stock exchange during the six months preceding the relevant date;


41/43

(ii) The average of the weekly high and low of the closing prices of the related shares quoted ona stock exchange during the two week preceding the relevant date.The “relevant date” means the date thirty days prior to the date on which the meeting of thegeneral body of shareholders is held, in terms of section 81 (IA) of the Companies Act, 1956, toconsider the proposed issue.”

(iii) In the normal circumstances the extant pricing norms provides protection from pricemanipulation by the Issuer in domestic market. In the recent period, Government hasreceived a number of representations from corporate that the extant pricing normsaffect them adversely in the falling market. In order to remove hardship to companiesin a falling market, Government is considering modifying the pricing guidelines forADR/GDR issues. The proposal is to amend the parameter of the pricing norms to‘two months’ in place of ‘six months’. In addition the definition of ‘the relevant date’for such issues is also proposed to be modified as per SEBI (DIP) guidelines on preferential allotment and qualified institutions placements (QIP).

INDIAN DEPOSITORY RECEIPTS

Recently SEBI has issued guidelines for foreign companies who wish to raise capital in India byissuing Indian Depository Receipts. Thus, IDRs will be transferable securities to be listed onIndian stock exchanges in the form of depository receipts. Such IDRs will be created by a

Domestic Depositories in India against the underlying equity shares of the issuing companywhich is incorporated outside India.

Though IDRs will be freely priced yet in the prospectus the issue price has to be justified. EachIDR will represent a certain number of shares of the foreign company. The shares will not belisted in India, but have to be listed in the home country.

The IDRs will allow the Indian investors to tap the opportunities in stocks of foreign companiesand that too without the risk of investing directly which may not be too friendly. Thus, nowIndian investors will have easy access to international capital market.

Normally, the DR are allowed to be exchanged for the underlying shares held by the custodianand sold in the home country and vice-versa. However, in the case of IDRs, automaticfungibility is not permitted.

SEBI has issued guidelines for issuance of IDRs in April, 2006; some of the major norms forissuance of IDRs are as follows. SEBI has set Rs 50 crore as the lower limit for the IDRs to beissued by the Indian companies. Moreover, the minimum investment required in the IDR issue by the investors has been fixed at Rs two lakh. Non-Resident Indians and Foreign Institutional


42/43

Investors (FIIs) have not been allowed to purchase or possess IDRs without special permissionfrom the Reserve Bank of India (RBI). Also, the IDR issuing company should have good trackrecord with respect to securities market regulations and companies not meeting the criteria willnot be allowed to raise funds from the domestic market If the IDR issuer fails to receiveminimum 90 per cent subscription on the date of closure of the issue, or the subscription level

later falls below 90 per cent due to cheques not being honoured or withdrawal of applications,the company has to refund the entire subscription amount received, SEBI said. Also, in case ofdelay beyond eight days after the company becomes liable to pay the amount, the company shall pay interest at the rate of 15 per cent per annum for the period of delay.


43/43

REFERENCES

www.google.com

www.investopedia.com

www.nasdaq.com

www.businessfinance.com

Depository Receipt Hand book by Deutsche Bank

BOOKS

- Indian Financial System by M.Y. Khan

-ADR IN CORPORATE ENVIRONMENT by

M. THERESE REILLY

DEBORAH L. MACKENZIE

Documents

adr and GRD