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GLOBAL MARKETS

Topic: ADRs , GDRs & FCCBs


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AMERICAN DEPOSITORY RECEIPTS

(ADRS)

An American Depositary Receipt represents ownershipin theshares ofa non-U.S. company that tradesin U.S. financial markets.Thestockof many non-US companies trade on US stockexchangesthrough the use of ADRs. ADRsenable U.S. investors to buy sharesinforeign companies without thehazards orinconveniences of cross-border& cross-currency transactions. ADRs carry pricesin USdollars,pay dividendsin US dollars,and can be tradedlike thesharesof US-based companies.

In otherwords, ADRisa negotiable certificateissuedby a U.S. bankrepresenting aspecified numberofshares (oroneshare)in a foreign

stockthat is traded on a U.S. exchange. ADRsaredenominatedin U.S.dollars, with the underlying security heldby a U.S. financialinstitution overseas. ADRshelp to reduceadministration anddutycosts that would otherwisebelevied on each transaction.

ADRsarelisted on eitherthe NYSE, AMEX orNasdaq.


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Each ADRisissuedby a U.S. depository bankand can

represent a fraction ofashare,asingleshare, ormultipleshares of the

foreign stock. An ownerofan ADRhas theright to obtain the foreign

stockit represents,but US investors usually findit more convenientsimply to own the ADR. Theprice ofan ADR often tracks theprice

of the foreign stockin itshome market,adjusted fortheratio of

ADRs to foreign company shares. In the case of companies

incorporatedin the United Kingdom, creation of ADRsattractsa

1.5% stampduty reserve tax (SDRT) chargeby the UK government.

Depositary bankshave variousresponsibilities to an ADR

shareholderand to the non-US company the ADRrepresents. The

first ADR wasintroducedby JPMorgan in 1927, forthe British

retailerSelfridges. Thereare currently fourmajorcommercialbanksthat providedepositary bankservices - JPMorgan, Citibank, Deutsche

Bankand the Bankof New YorkMellon.

Individualshares ofa foreign corporation representedby an ADRare

calledAmerican Depositary Shares (ADS).


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TYPES OF ADR PROGRAM

W

hen a company establishesan American Depositary Receipt program,itmust decide what exactly it wants out of theprogram,andhow much time,effort

andresources they are willing to commit. Forthisreason, therearedifferent types

ofprograms that a company can choose:

Unsponsoredshares:area form of Level I ADRs that trade on the over-the-

counter(OTC) market. Thesesharesareissuedin accordance with marketdemand,and the foreign company has no formalagreement withadepositary

bank. UnsponsoredADRsare often issuedby more than onedepositary bank.

Eachdepositary services only the ADRsit hasissued. Now approximately half

ofall ADRprogramsin existenceare unsponsored.

Level I (OTC): Level 1 depositary receiptsare thelowest level ofsponsored

ADRs that can beissued.When a company issuessponsoredADRs,it has one

designateddepositary who also actsasits transferagent. A majority of American

depositary receipt programs currently trading areissued througha Level 1

program. Thisis the most convenient way fora foreign company to haveitsequity tradedin the United States.


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Level II (listed): Level 2 depositary receipt programsare more complicated fora

foreign company.When a foreign company wants to set upa Level 2 program,it

must filearegistration statement with the US SEC andis underSEC regulation.

In theirfilings, the company isrequired to follow U.S. GAAP standards orIFRS

aspublishedby the IASB. Theadvantage that the company hasby upgrading

theirprogram to Level 2 is that theshares can belisted on a U.S. stock

exchange. Theseexchangesinclude the New YorkStockExchange (NYSE),

NASDAQ,and the American StockExchange (AMEX).Whilelisted on these

exchanges, the company must meet theexchangeslisting requirements. Ifit

fails to do so,it may bedelistedand forced to downgradeits ADRprogram.

Level III (offering): A Level 3 American Depositary Receipt program is the

highest levela foreign company can sponsor. Because of thisdistinction, the

company isrequired to adhere to stricterrules that aresimilarto those followed

by U.S. companies. Setting upa Level 3 program means that the foreign

company isactually issuing shares to raise capital. In accordance with this

offering, the company isrequired to filea Form F-1, whichis the format foran

Offering Prospectus fortheshares. They also must filea Form 20-F annually and

must adhere to U.S. GAAP standards orIFRS aspublishedby the IASB.

Examplesinclude the German telephone company Vodafone (VOD), the Brazilian

oil company Petrobras (PBR),and the Chinese technology company ChinaInformation Technolo Inc. CNIT .


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SOURCING ADRS

One can eithersource new ADRsby depositing the

corresponding domestic shares of the company with the

depositary bankthat administers the ADRprogram or,instead,

one can obtain existing ADRsin thesecondary market. Thelatter

can beachievedeitherby purchasing the ADRs on a US stockexchange orviapurchasing the underlying domestic shares of the

company on theirprimary exchangeand then swapping them for

ADRs; theseswapsare called crossbookswapsand on many

occasionsaccount forthebulkof ADRsecondary trading.


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GLOBAL DEPOSITORY RECEIPTS

(GDRS)A bankcertificateissuedin more than one country forsharesin aforeign company. Thesharesareheldby a foreign branch ofan international

bank. Theshares tradeasdomestic shares,but are offered forsale globally

through the variousbankbranches.

In otherwords,a Global Depositary Receipt (GDR)isa certificateissuedby

adepository bank, whichpurchasesshares of foreign companiesanddepositsit on theaccount. GDRsrepresent ownership ofan underlying numberof

shares.

Global Depository Receipts facilitate trade ofshares,andare commonly used

to invest in companies from developing oremerging markets.

Prices of Global Depositary Receipt are often close to values ofrelatedshares,but they are tradedandsettledindependently of the underlying share.

Severalinternationalbanksissue GDRs,suchas JPMorgan Chase, Citigroup,

Deutsche Bank, Bankof New York.

GDRsare often listedin the Frankfurt StockExchange, Luxembourg Stock

Exchangeandin the London StockExchange, where they are traded on theInternational OrderBook(IOB).


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DIFFERENCE BETWEEN ADRS &

GDRS

Both ADRand GDRaredepository receipts,andrepresent a

claim on the underlying shares. The only differenceis thelocation

where they are traded.

If thedepository receipt is tradedin the United States of America

(USA),it is calledan American Depository Receipt, oran ADR.

If thedepository receipt is tradedin a country otherthan USA,it is

calleda Global Depository Receipt, ora GDR.


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FOREIGN CURRENCY CONVERTIBLE

BOND (FCCBS)

A type of convertiblebondissuedin a currency different thantheissuer'sdomestic currency. In otherwords, the money being

raisedby theissuing company isin the form ofa foreign currency. A

convertiblebondisa mixbetween adebt andequity instrument. It

actslikeabondby making regularcoupon andprincipalpayments,

but thesebondsalso give thebondholderthe option to convert the

bondinto stock.

These types ofbondsareattractive to bothinvestorsandissuers. The

investorsreceive thesafety of guaranteedpayments on thebondand

arealso able to takeadvantage ofany largepriceappreciation in thecompany'sstock. (Bondholders takeadvantage of thisappreciation

by means warrantsattached to thebonds, whichareactivated when

theprice of thestockreachesa certain point.) Due to theequity side

of thebond, whichadds value, the coupon payments on thebondare

lowerforthe company, thereby reducing itsdebt-financing costs.


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By: Rachana

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