adr and gdr : corporate financing
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ADR & GDRGroup – 5
Flow of PresentationDR - Depository Receipts
Origin
Issuance of a Depository Receipt
Benefits to the issuer company and the
investors
Types of Depository ReceiptsADR – American Depository Receipts
What is ADR
Structure/Types of ADR
Ratio of ADR
Pricing of ADR
Process of issuing ADR
Approval required for issuing depository
receipts
2
Cancellations of ADR’s
Fungibility
Head Room
Risks Associated with ADR
Trading of ADR’s
Arbitrage Opportunities
GDR – Global Depository Receipts
What is GDR
Difference between ADR & GDR
IDR- Indian Depository Receipts
Standard Chartered case Study
FCCB’s
Difference between FCCB’s & GDR
Case Study – Infosys
Introduction
Companies around the world like to raise capital abroad.Objectives being:
Cross border acquisitions Undertaking new projects abroad Expansion and Modernization of Existing Projects abroadFunding JVs & Subsidiaries abroad
3
Depositary Receipt
A depositary receipt (DR) is a type of negotiable
(transferable) financial security that is traded on a local
stock exchange but represents a security, in the form of
equity, that is issued by a foreign publicly listed
company. 4
Origin of DR’sIn 1920’s in USAThe first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges on the New York Curb Exchange, the American Stock Exchange's precursorInvestor’s demand of diversifying their financial resources internationallyDifficulty & Risk of investing in original foreign securities by American investors & brokersTap International Equity of Foreign Firms through an organized mechanismADR Created in 1927 by JP Morgan (Depository) in USA for a British Retailer Selfridges & Co (Issuer) 5
Depositary ReceiptA depository receipt trades on a local stock exchange, but a custodian bank in the foreign country holds the actual shares.
The DR, is a physical certificate, allows investors to hold shares in equity of other countries.
One of the most common types of DRs is the American depositary receipt
6
How Does the DR Work?The DR is created when a foreign company wishes to list its already publicly traded shares or debt 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, can also issue a DR.
DRs can be traded publicly or over-the-counter7
Basic Mechanism
Benefits
Issuer
Creates, broadens or diversifies investor baseEnhances visibility and global presenceIncreases liquidityDevelops and increases research coverage of your companyAccess capital in International Markets
Investor
Easy to purchase & holdTrades & settles in the same manner as any other security in the investor’s home marketGlobal / sector diversificationEliminates or reduces global custody safekeeping chargesPays dividends & delivers corporate action notifications in the investor’s home currency & language
9
Types of DRs
Depository Receipts
American Depository Receipts (ADRs)
Global Depository Receipts(GDRs)
10
AmericanDepositoryReceipts
American Depository Receipts (ADR)ADR’s are a negotiable instrument that represents ownership of shares (ADSs) in a non-US company.
An ADR is a Stock of a foreign company which is listed on the following stock exchanges in US New York Stock Exchange (NYSE), American Stock Exchange (AMEX), NASDAQ
ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies.
ADRs are dollar-denominated securities that trade, clear and settle like any other US security
Avoids inconvenience of Cross border & Cross Currency Transactions12
American Depository Receipts (ADR)ADRs do not eliminate the currency and economic risks
Securities of a foreign company that are represented by an ADR are called American depositary shares (ADSs).
For an ADR issue to become listed and trade on a major U.S. exchange, it must be sponsored by the underlying corporation. If not, the ADR issue is likely to be traded over the counter.
13
Types of ADR/ Structure ofADR
14
Types of ADR
Sponsored ADRs
Unsponsored ADRs
Privately Placed
Rule 144ALevel II Level IIILevel I
OffshoreReg S
Restricted Programs
Unsponsored Depositary ReceiptsAn American depositary receipt (ADR) issued by a depositary bank without the involvement or participation - or even the consent - of the foreign issuer whose stock underlies the ADR.
Usually established by depositary banks in response to investor demand.
Generally trade over-the-counter (OTC) rather than on United States exchanges.
Considered less favorable to issuers and investors due to lack of control by issuers
Multiple programmes: It is possible that competing depositary banks will create multiple unsponsored ADR programs for the same issuer 15
Unsponsored Depositary ReceiptsNo additional reporting/requirements (i.e. no SOX, no 20-F, etc.)
Exemption under Section 12 (g)
Creates a roadblock to the Issuer
Shareholder benefits and voting rights may not be extended to the holders of these particular securities
16
Sponsored ADRAn American depositary receipt (ADR) issued by a bank on behalf of the foreign company whose equity serves as the underlying asset.
Unsponsored ADRs can only trade on the over-the-counter market, while sponsored ADRs can be listed on major exchanges.
There is a direct involvement of foreign company
Treated just like common stock, with complete voting rights, and only denominated in the U.S. dollar.
Usually traded through major exchanges like NYSE and AMEX or OTC 17
Sponsored ADRLEVEL I (‘OTC Facility’)
Traded in the U.S. over-the-counter (OTC) market with prices published in the Pink Sheets
Not listed on any US securities exchange such as the New York Stock Exchange or NASDAQ
Available for Retail Investors
Bid & Ask Prices
Expansion of Current Market base18
Sponsored ADRLEVEL I (‘OTC Facility’)
No reporting of accounts under U.S. GAAP or provide full SEC disclosure Maintain home market accounting and disclosure
standards. Easiest and less expensive
Control over the ADR’s – Depository AgreementThe company is not required to issue quarterly or annual reports in compliance with U.S. GAAPCompanies with shares trading under a Level 1 program may decide to upgrade their program to a Level 2 or Level 3 program for better exposure in the United States markets.
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Over The Counter (OTC)
OTC stocks are generally unlisted stocks
Inability to meet the listing requirements
Traded over the Counter Bulletin Board (OTCBB) or on the pink sheets
Decentralized
20
OTC MarketSecurities are organised into 3 market places
OTC QX - The Best Marketplace with Qualified Companies
OTC QB - The Venture Stage Marketplace with Current U.S. Reporting Companies
OTC Pink - The Open Marketplace with Variable Reporting Companies
21
Pink Sheets
The "Pink Sheets" is an electronic quotation system that displays quotes from broker & dealers for many over-the-counter (OTC) securities
Bid and ask quotation prices A daily publication compiled by the National Quotation Bureau, Market
makers and brokers Published by Pink Sheets LLC Stock symbol; “.PK” Categorized into
Current Information Limited Information - No Information -
22
Sponsored ADRLEVEL I (‘OTC Facility’)
To establish a Level 1 sponsored ADR program, the following three principal steps are required:
File Form F-6 with SEC, register the DR’s with SEC
Sign a deposit agreement
Qualify for a Rule 12g3-2(b) exemption;
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Form F– 6Basic registration of DRs with the SEC for Level I, II and III ADRs
ADRs may be registered under the Securities Act on Form F-6 if four conditions are satisfied :
The deposited securities are those of a foreign issuer; The holder of the ADR has the right to withdraw the deposited securities at
any time, subject to temporary delays, payment of fees and compliance with legal requirements;
The deposited securities are exempt from Securities Act registration and freely tradable in the United States (for example, they are not restricted securities under Securities Act Rule 144) or are separately registered under the Securities Act; and
As of the filing date of the Form F-6, the foreign company is reporting under the periodic reporting requirements of Section 13(a) or 15(d) of the Exchange Act or exempt from registration under Exchange Act Rule 12g3-2(b). 24
Sponsored ADRLEVEL I (‘OTC Facility’)
ADVANTAGES OF LEVEL I ADR► Same financial information & disclosures as per home market► Lowest cost to enter market► Simple to execute
DISADVANTAGES OF LEVEL I ADR► Limited visibility in US as it trades in OTC market► Not listed in NYSE, AMEX, NASDAQ► Cannot be used to offer public equity capital in the US
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Sponsored Depositary Receipt LEVEL II (‘Listing Facility’)
Enables companies to list their ADRs on NASDAQ, AMEX, NYSECreated from deposits of Ordinary shares in the issuers Home Marketforeign company wants to set up a Level 2 program, it must file a registration statement with the SEC and is under SEC regulationHigher visibility, More active trading; greater liquidityRequires full registration with SEC Can be Promoted & Advertised
26
Sponsored Depositary Receipt LEVEL II (‘Listing Facility’)
Level II ADR programs must comply with the full registration and reporting requirements of the SEC's Exchange Act, which entails the following:
Form F-6
Annual reports and any interim financial
Form 20-F
Form 6-K, Interim financial statements and current developments
27
Sponsored Depositary Receipt LEVEL II (‘Listing Facility’)
ADVANTAGES OF LEVEL II ADR Provides higher visibility Greater opportunity to diversify issuer’s US investor base Enhances company’s status & profile
DISADVANTAGES OF LEVEL II ADR Substantial disclosures to SEC in accordance to US laws &
US GAAP Many legal, accounting & corporate obligations to fulfill Takes longer time as compared to level 1 & unsponsored
program 28
SPONSORED DEPOSITARY RECEIPT LEVEL III (‘OFFERING FACILITY’)
Enables companies to list their ADRs on NASDAQ, the Amex, NYSE
It allows the issuer to raise capital Expansion of Current Market Base
Leads to much greater visibility in the U.S. market Highest Level, Adhere stricter rules, Most expensive to
establish Can be actively Promoted & Advertised
29
SPONSORED DEPOSITARY RECEIPT LEVEL III (‘OFFERING FACILITY’)
Level III ADR programs must comply with various SEC rules, including the full registration and reporting requirements of the SEC's Exchange Act.
Form F-6 registration statement, to register the ADRs Form F-1, including a prospectus, the offering price for the securities and the plan for distributing the shares Form 20-F
30
SPONSORED DEPOSITARY RECEIPT LEVEL III (‘OFFERING FACILITY’)
ADVANTAGES OF LEVEL III ADR Provides higher visibility Greater opportunity to diversify issuer’s US investor base Enhances company’s status & profile Highest measure of visibility & publicity
DISADVANTAGES OF LEVEL III ADR Substantial disclosures to SEC in accordance to US laws &
US GAAP Takes longer time to establish & Most expensive
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Restricted Programs
Foreign companies that want their stock to be limited to being traded by only certain individuals may set up a restricted program.
There are two SEC rules that allow this type of issuance of shareso Rule 144-Ao Regulation S
ADR programs operating under these 2 rules make up approximately 30% of all issued ADRs.
32
Rule 144A(Privately placed ADRs)
Rule 144A programs provide for raising capital through the private placement of Depositary Receipts with large institutional investors (QIBs) in the U.S.
Does not require full SEC registration Privately placed with QIBs under the rule 144A market Quoted on PORTAL Not accessible to the general public It allows the issuer company to raise capital in the U.S. without
adhering to the strict regulations required by Level 3 ADRs At least two years from the last deposit of shares in the Rule 144A
ADR facility, the ADRs issued under the Rule 144 program may be eligible to be merged into an unrestricted ADR facility. 33
ADVANTAGES OF Rule 144A Easy and quick to establish No financial reporting Low cost to establish Limited SEC registration
DISADVANTAGES OF Rule 144A Low visibility & Limited Liquidity
Rule 144A(Privately placed ADRs)
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Regulation S(Offshore ADRs)
Regulation S (Reg S) DRs allow issuers to raise capital in markets outside the United States.
Listed on the London or Luxembourg stock exchanges
Euro market clearing system SEC Regulation S – Restricts US person to trade A Level I program can be established in addition to a Rule 144A
program, and a Regulation S program may be merged into a Level I program after the restricted period has expired
35
36Reg S only(non US) 144 only (US)
Objective
• Raise equity in the International Market outside the US
• Develop and broaden investor base
• Raise equity in the US among QIB’s
• Develop and broaden investor base
Disclosure • Depends on International market selected
• Home Market (unless the investor ask for the US GAAP)
Legal documents
and Exemption
• Depository Agreement• Prospectus prepare as
per the requirement of International Exchange
• Depository Agreement• Exempted from registration
under security Act 1934, as amended, pursuant to 12g3-2(b)
Reporting requirement • Depends on exchange
and/ or regulator
• Under Rule 12g3-2(b),English language versions of home country disclosure must be furnish to the SEC or pasted on the countries Website
Choosing the Right StructureGoal Where? Who? Options
Gain new shareholders
USA Retail InvestorsLevel I ADR
Level II ADR
Outside the USA
Institutional and Retail Investors Reg S
Raise Capital
USAInstitutional Investors Rule 144A DR
Retail Investors Level III ADR
Outside USA Institutional and Retail Investors Reg S
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ADR Program Description
38
Setting the Ratio
Depository bank sets ratio of US ADR’s per home country share
Ratio can be less than, greater than or equal to 1
The issuer should consider: Industry peers Exchange options Investor appeal
39
RATIO OF ADRs
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Basis Ratio
Single One ADR issued for 1 Share 1:1
Multiple One ADR issued for 3 shares 1:3
Fraction Two ADR’s issued for 1 Share 2:1
Process for Issuance of ADR
41
Selection of Syndicate Members
DocumentationAppointment of Intermediaries
Approval Requirements
Pre- Marketing
RoadshowsBook Building
Process & Pricing
Offering Circular Listing Task force for
due diligence
Closing of Issue &
Allotment
Post – Issue Support
42
o Approvals of Board of Directorso Board Resolutiono Shareholders consensus
o Approvals of RBIo ADR/GDR issue shall be treated as FDIo Aggregate Foreign Investment would need to be limited to existing
FDI Policyo Furnishing of Information
o In principle consent of Stock Exchanges for listing of underlying shareso Request for listing of underlying shareso Treatment after cancellation
Approval Requirements
► Lead Manager
► Overseas Depository Bank
► Domestic Custodian Banks
► Legal Advisors
► Auditors
► Underwriters
► Listing Agent
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Appointment of Intermediaries
Roles & Responsibilities
Custodian
Depository
Issuer
Investment banks /Underwriters
1. Provide depositary with notices of stockholder meetings
2. Provides custodian and depositary with notices of annual and special / extraordinary stockholder, dividends and rights offerings
3. On-going compliance with any applicable stock exchange and SEC regulations (in coordination with legal counsel and accountants)
4. Executes US-focused investor relations (non-US-focused in the case of Regulation S GDRs) plan that may include management visits to targeted US investors, the development of sell-side research, and on-going shareholder communications.
Roles & Responsibilities
Custodian
Depository
Issuer
Investment banks /Underwriters
1. Advise the depositary for complete delivery instructions
2. Registers the shares in the depositary’s account as necessary with the issuer’s transfer agent / registrar
3. Confirms release of local shares upon cancellation
4. Notifies the depositary of corporate actions announced in issuer’s home market
5. Provide depositary with copies of notices of shareholders’ meetings, annual reports
6. Remits dividend payments
7. Maintains and communicates up-to-date local market information on tax withholding, reclaim, regulatory and settlement issues
8. Provides statements of share balances for reconciliation by depositary.
Roles & Responsibilities
1. Provide advice/perspective on type of program, exchange or market on which to list or quote
2. Advise on ratio 3. Appoint custodian4. File Form F-6 if Level One, Two or Three program5. Review draft registration statement or offering
memorandum, depending upon type of program to be established
6. Coordinate with all partners to complete program implementation
7. Provides stock transfer and registration services & handles depositary receipt holder services
8. Detailed reporting to issuer with information on DR holders, the markets, trends and developments
Custodian
Depository
Issuer
Investment banks /Underwriters
Roles & Responsibilities1. Coordinate with legal counsel on Deposit Agreement
and securities law matters
2. Prepare and issue certificates
3. Solicit market makers (Level I ADR only)
4. Announce DR program to market
5. Dividend Payment
6. Produces tax withholding documents (for ADRs), if applicable.
7. Promotes benefit of investment in depositary receipts to market
8. Serves in M&A transactions as exchange agent or cash depositary
Custodian
Depository
Issuer
Investment banks /Underwriters
Roles & Responsibilities
(Level II/III/Rule 144A /Regulation S ADRs only)
1. Advise on type of program to launch and exchange or market on which to list or quote
2. Advise on ratio
3. Cover issuer through research reports/promote DRs to investors
4. Advise on roadshows, investor meetings, investors to target
5. Advise on capital market issues
6. Where applicable, advise on potential merger/ acquisition candidates, and other matters such as rights offerings, stock distributions, etc.
Custodian
Depository
Issuer
Investment banks /Underwriters
Roles & Responsibilities
(Level II/III/Rule 144A /Regulation S ADRs only)
7. If concurrent public offering:Advise on size, pricing and marketing of offering
8. Act as placement agent or underwriter in offering
9. Conduct roadshows with management / introduce issuer to institutional and other investors
10. Line up selected dealers and co-underwriters for offering
Custodian
Depository
Issuer
Investment banks /Underwriters
Roles & Responsibilities
1. Prepare draft deposit agreement (depositary bank’s counsel) and file required registration statements with the SEC
2. Manage compliance with US securities laws, rules and regulations and perfect any securities law exemptions (if Rule 144A/Reg S program)(issuer counsel)
Legal Counsel (Depositary’s and Issuer’s)
Investor Relations Advisor/firm
Accountants (Level 2/3 ADR’s only
Roles & Responsibilities
1. Develop long-term plan to raise awareness of issuer’s program in the US
2. Develop communications plan and information materials for launch activities (roadshow and presentations to investors, launch day promotion, meetings with financial media)
3. Coordinate with issuer’s advertising and public relations teams on specific program plans to support and develop company image in the US
Legal Counsel (depositary’s and issuer’s)
Investor Relations Advisor/firm
Accountants (Level 2/3 ADR’s only
Roles & Responsibilities
1. Prepare issuer’s financial statements in accordance with, or reconcile to, US GAAP
2. Review registration statement or offering circular
Legal Counsel (depositary’s and issuer’s)
Investor Relations Advisor/firm
Accountants (Level 2/3 ADR’s only
o Process A careful analysis of the orders would be conducted Identify investors who are critical to the transaction The ultimate price level would be set at a level where it
seeks to maximize proceeds while ensuring appropriate investor allocations and a healthy aftermarket
53
Closing of Issue & Allotment
SyndicateUnderwriting SyndicateSyndicate MembersSyndicate Manager
Responsibilities Maximize demandOptimize the sustainable offer priceFacilitate orderly marketingAttract key “anchor” investors
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Selection of Syndicate Members
Duties of team of legal, technical & financial experts :Understanding the issuer’s business
Identifying potential risks
Analyzing of financial statement
Analyzing future prospects of the company
Obtaining information to draft the Prospectus (Offering Circular)
55
Task force for due diligence
o Form F-6 A short document to be filed to register ADRs
o Registration Statement (Form F-1) Filed to US Securities Act of 1933 with the SEC
o Form 8-A A document to be filed so that the securities can be listed on the exchange
56
Listing
NYSEo 1mn shares worth $100 mn or moreo Earned $10 mn over the last 3 years
NASDAQo 1.25 mn shares worth $70mn or moreo $11mn over the last 3 years
London Stock Exchangeo Market cap – 7 lac poundso 3 years audited financial statements 57
Listing Requirements
Background of the companyCapital Structure (existing & future)Financial DataDescription of sharesDeployment of issue proceedsEconomic & regulatory policies of Govt. of IndiaTerms & Condition of ADRMarket price of securitiesStatus of approvalsReport of statutory auditorsTax aspectsDetails of Indian security market
58
Offering Circular/ Prospectus
Objectives Introduce the offering to investors Address key investor concerns Familiarize investors with the investment story To evaluate prospects of issue Helps in making certain important decisions like timing,
size & price of the issue.Process
• Contacting key investors• Meeting with institutional Investors• Feedback Collection• Determine target investors for road show 59
Pre- marketing
It represents meetings of issuers, analysts & potential investors• A series of group presentations to potential institutional investors• One-on-one meetings with key “anchor” accounts
Details about the company is presented• History, Organization Structure• Principle Objects• Business Lines• Position of the Company (Domestic & international)• Past performance & Future plans• Competitors (Domestic & international)• Financial Results & operating profits• Valuation of Shares• Review of Local stock market & economic situations 60
Roadshows
PROCESS : Establish price talkInvestors submit indications of interestAnalysis of demand at various price levels
Pricing depends on:Near future, Earning potentials, Fundamentals governing industryEconomic state of the country , Credit rating of the countryInvestors sentiments, Behavior towards particular countryInterest rateAvailability of exit route
61
Book Building Process & Pricing
o Process A careful analysis of the orders would be conducted Identify investors who are critical to the transaction The ultimate price level would be set
62
Closing of Issue & Allotment
Manage over-allotment option by Green shoe optionSupport investor relationsAftermarket stabilization
63
Post – Issue Support
Corporate Governance rules: Sarbanes-Oxley
Audit Committee requirementsAudit Committee Financial reportCertification of Financial ReportsManagement Assessment of Internal controlsImproper influence of AuditsProhibition on loans to officers and directorsCEO & CFO reimbursement of issuer relating to an accounting restatementDisclosure of Material off Balance sheet transactionsDisclosure of Pro-forma, or non-GAAP financial informationCorrecting Adjustment disclosuresCode of ethics for senior financial officersMateriality, anti-fraud and fair disclosure 64
No. of companies issuing Drs - country-wise
Country-wise Amount of Capital Raised
Issuance of ADR68
Investor (US)
Local Custodian (India)
Local Stock Market (India)
Local Broker (India)
Depositary (USA)
DR Broker(US) 2
1
3
4
56
7
Cancellation of ADR 69
US Investor
US Broker Depository(US)
Custodian(India)
Local Broker(India)
Surrender ADRs
Release Shares
Sell in Home Country
Fungibility of ADR/GDR
Fungibility - A good or asset's interchangeability with other individual goods/assets of the same type.
Forward FungibilityReverse Fungibility
70
One-Way Fungibility
Existed in India prior to 2002
DR investors could convert DRs to underlying shares but could not reconvert back to DRs
Affects liquidity in the DR market
71
Two-Way Fungibility
Conversion of DRs into local shares and vice versa
The GOI permitted two-way fungibility in the 2001-2002 union budget
It is subject to availability of Headroom
72
Effect of one-way and two-way fungibility on the trading volume
Head RoomThe ADRs have only “limited two way fungibility”. What this implies is that ADRs can be freely converted to equity shares, but equity shares in India can be converted to ADRs only to the extent of past conversion of ADRs in that company into shares.
This is technically called “headroom”.
Since every GDR/ADR has a given number of underlying shares backing it, the number of shares qualifying for re-conversion into GDRs/ADRs is limited to the number which were converted into local shares.
Head Room Example
Say company X has an original issuance of 15m ADRs.
The total number of cancellations (which takes place when the overseas investor sells back the DRs to the depository bank for converting them into local shares) is 5m.
Head Room = 5 m
Head Room
The reasoning is that when a company decides to float a GDR/ADR issue, it is subject to sectoral caps set for foreign shareholding in the company and the overseas equity issue has been floated only after being vetted by regulatory agencies and the Foreign Investment Promotion Board (FIPB).
Allowing a free flow of conversions between GDRs/ADRs and domestic shares has been constrained by the want of regulatory for overseas equity issues
The Depository bank provides a daily update on the availability of Head Room on its website
Head room available for re-issuance is monitored by the custodian of the underlying shares in coordination with the depository bank
If Headroom is not available and ADR is trading at a premium then no possibility of Arbitrage opportunity
Trading of ADR/GDR 78
US Investor
Indian Broker to Buys Shares
US Broker Custodian(India)
Overseas Depository
Role of the CustodianProvide a certificate to the RBI and the SEBI stating that the sectoral caps for foreign investment in the relevant company have not been breachedMonitor the total number of ADRs that have been converted into underlying shares by non-resident investorsLiaise with the issuer company to ensure that the foreign investment restrictions, if any, are not being breachedFile a monthly report about the ADR transactions under the two-way fungibility arrangement with the RBI and the SEBI
Arbitrage Strategy
Arbitrage opportunity involves simultaneous buying and selling of equivalent assets in two separate markets in order to profit from discrepancies in their price relationship
ADR/GDR trading at premiumSell in International MarketBuy in domestic market
ADR/GDR trading at discountSell in DomesticBuy in International market
80
Example of Potential Arbitrage ProcessAssumptions:ADR Price: $10.06 (ADR at a premium)ORD Price (in USD): $10.00Depositary Fee to Issue: 3c per ADR
81
Step Action Result
1. Identify Opportunity
2. Borrow ADR and sell it short for $10.06 ADR borrowed and sold for $10.06
3. Buy ORD for $10.00 (implied FX rate included) $
$10.06 - $10.00 = $0.06 and one ORD
4. Exchange ORD for ADR at Depositary and pay 3c per ADR
$0.06 - $0.03 = $0.03 and one ADR
5. Return borrowed ADR and close position Return ADR to Lender and profit 3c
Reasons for difference in prices of ADR & Local Shares
When there is heightened buy/sell demand in one market over the other, the ADR/Local share will trade at a relative premium/discount as the case maybe.
Differences in liquidity between the two markets
Restriction on the number of shares that can be owned by foreigners
Limitations to Arbitrage OpportunitiesNon-synchronous trading sessionIndian market regulationTransaction costs
Direct Trading Costs: Includes the commissions, taxes, foreign exchange rate commission and fees involved with buying and selling in each market (including brokerage)Global Custodian and Safe Keeping Fees: The arbitrageur has to deposit the shares with a global custodian and pay a fixed one time settlement fee $115 per trade and pay a separate global safe keeping feeDR Conversion Fees: The arbitrageur has to instruct the global custodian to convert the shares to GDRs by giving instructions to the depository bank which charges a maximum of $0.05 per DR issuance fee
83
Risks Involved
Political Risk
Exchange Rate Risk
Inflationary Risk
84
Specimen of ADR Certificate
86Major Indian Companies On The US Exchanges
NYSE
NASDAQ
GlobalDepositoryReceipts
GDRs
Beyond the ADR, there is a second category of DR. A Global Depositary Receipt (GDR) represents a bank certificate issued in more than one country for shares in a foreign company
The term GDR is used throughout the globe and designates any foreign firm that trades on an exchange outside its home country
The basic advantage of the GDRs, compared to the ADRs, is that they allow the issuer to raise capital on two or more markets simultaneously, which increases his shareholder base
About GDRs
Listed on London Stock ExchangeLuxemburg Stock ExchangeFrankfurt Stock Exchange
London Stock Exchange dominates
Other exchanges which will list GDRs include Dubai International Financial Exchange (DIFX), Singapore Stock Exchange Hong Kong Stock Exchange
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About GDRs
They are also known as:European Depository ReceiptsInternational Depository Receipts
Either issued in US Currency or in the currency of the country the GDR is listed in.
Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York
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Structure
The most significant difference between the ADR and GDR lies in their structures
There are two types of GDRs –The Reg S Depositary ReceiptsThe pairing type
Reg S Type Depositary ReceiptsThe Reg S Type Depositary Receipt is the equivalent of the ADR.It is issued to the public through a sponsor bank/ brokerageOnce issued, this GDR is listed on either the Luxembourg Stock Exchange or the London Stock ExchangeThis type of a GDR is open for every kind of investorUnlike ADRs, where each type of ADR determines the investors that can trade it, the Reg S type GDR can be traded from any kind of investor to any kind of investor
Pairing TypeThis GDR is a combination of the Reg S type GDR and a Rule 144A ADR. So when one such GDR is sold, it essentially implies the sale of a Reg S type GDR along with a Rule 144A ADRThe Reg S type GDR may be listed either in London or Luxembourg.The holders of these GDRs will be regular investorsHowever, the Rule 144A ADRs are privately placed through Qualified Institutional Buyers in the U.SThe biggest reason for such a program being subscribed to is the fact that such a program enables the issuing company to raise funds not just from the U.S. and not just from Europe, but from both markets simultaneously
Arbitrage Example
A bid order comes to the EGX demanding 2000 shares at EGP196 equivalent to $35.13 ($/EGP 5.58)a second later in LSE there is a demand on 2000 shares of the GDR for an ask of $35.59An active arbitrageur can buy 2000 shares of the underpriced stock on the EGX and short sell 2000 share of the overpriced GDR making a gross profit of $920
Difference between ADR & GDR 95
ADR GDR
Most Commonly listed on
NYSE LSE
Issuing Company Access the US Market Global access
To Raise Capital Within US
Within US & Outside US using different structure
combinations
Foreign Currency Convertible BondA foreign currency convertible bond (FCCB) is a type of corporate bond issued by an Indian listed company in an overseas market and hence, in a currency different from that of the issuer. The highlight of the FCCB, however, is the option of converting the bonds into equity at a price determined at the time the bond is issued.
It also has the benefits of a debt instrument as it includes guaranteed returns or yields which are payable in foreign currency.For companies, FCCBs gave them access to funds at cheaper rates, given the fact that many of these were zero coupon bonds with a yield-to-maturity structure , meaning the company would have to make large-scale payments only when the bonds were redeemed. Also, the interest rates were much lower than that of normal debt.
Difference between FCCB & GDR
FCCB
Issues bonds denominated in foreign currencyMix between a debt and equity instrumentConvertible in natureConversion to EquityLiability of the company
GDR
Company deposits its shares to a depositoryCompany gets proportionate amount of GDRsGDRs are then issued to investors in the foreign marketCompany’s own fund
Guidelines for ADR/GDR issues by the Indian Companies
Divestment by shareholders of their holdings of Indian companies, in the overseas markets would be allowed through the mechanism of Sponsored ADR/GDR issue in respect of:-
Divestment by shareholders of their holdings of Indian companies listed in India;Divestment by shareholders of their holdings of Indian companies not listed in India but which are listed overseas.
Such a facility would be available pari-passu to all categories of shareholders, of the company whose shares are being sold in the ADR/GDR markets overseas. This would ensure that no class of shareholders gets a special dispensationThe sponsoring company, whose shareholders propose to divest existing shares in the overseas market through issue of ADRs/GDRs will give an option to all its shareholders indicating the number of shares to be divested and the mechanism how the price will be determined under the ADR/GDR norms. If the shares offered for divestment are more than the pre-specified number to be divested, shares would be accepted for divestment in proportion to existing holdings
Guidelines for ADR/GDR issues by the Indian Companies
The proposal for divestment of the existing shares in the ADR/GDR market would have to be approved by a special resolution of the company whose shares are being divested.The proceeds of the ADR/GDR issue raised abroad shall be repatriated into India within a period of one month of the closure of the issue.Such ADR/GDR issues against existing shares arising out of the divestment would also come within the purview of the existing SEBI Takeover Code if the ADRs/GDRs are cancelled and the underlying shares are to be registered with the company as shareholdersDivestment of existing shares of Indian companies in the overseas markets for issue of ADRs/GDRs would be reckoned as FDI. Such proposals would require FIPB approval as also other approvals, if any, under the FDI policySuch divestment inducting foreign equity would also need to conform to the FDI sectoral policy and the prescribed sectoral cap as applicable. Accordingly the facility would not be available where the company whose shares are to be divested is engaged in an activity where FDI is not permittedEach case would require the approval of FIPB for foreign equity induction through offer of existing shares under the ADR/GDR route.
Guidelines for ADR/GDR issues by the Indian Companies
Other mandatory approvals such as those under the Companies Act, etc. as applicable would have to be obtained by the company prior to the ADR/GDR issueThe issue related expenses (covering both fixed expenses like underwriting commissions, lead managers charges, legal expenses and reimbursable expenses) for public issue shall be subject to a ceiling of 4% in the case of GDRs and 7% in the case of ADRs and 2% in case of private placements of ADRs/GDRs. Issue expenses beyond the ceiling would need the approval of RBI. The issue expenses shall be passed onto the shareholders participating in the sponsored issue on a prorata basis.The shares earmarked for the sponsored ADR/GDR issue may be kept in an escrow account created for this purpose and in any case, the retention of shares in such escrow account shall not exceed 3 monthsIf the issues of ADR/GDR are made in more than one tranche, each tranche would have to be treated as a separate transactionAfter completing the transactions, the companies would need to furnish full particulars thereof including amount raised through ADRs/GDRs, number of ADRs/GDRs issued and the underlying shares offered, percentage of foreign equity level in the Indian company on account of issue of ADRs/GDRs, details of issue parameters, details of repatriation, and other details to the Exchange Control Department of the Reserve Bank of India, Central Office, Mumbai within 30 days of completion of such transactions
CASE STUDY
About InfosysStarted in 1981Global leader in consulting, technology and outsourcing solutionsOperations in more than 30 countriesThe underwriters, NationsBanc Montgomery Securities LLC, BancBoston Roberston Stephens, BT Alex Brown and Thomas Weisel Partners LLC.
Summary of Infosys ADRIssue day Stock
exchangeAmount mobilized
Actual price per share ($)
ADR: Domestic share
1.03.1999 NASDAQ $ 70.38 million
68 2:1
30.07.2003 NASDAQ $ 294 million 49 1:1
09.05.2005 NASDAQ $ 1.07 billion $ 67 1:1
21.11.2006 NASDAQ $ 1.6 billion 53.5 1:1
Reasons For Charging PremiumExcess demand with limited supply of ADR’s.
Few opportunities in the US to invest in companies that are growing at the 20–30% rates
Official barriers prevent foreign investors from buying the shares trading in India
ADR’s provides a value added layer – transparency, liquidity and greater coverage than the existing Indian stock
Details of ADR Issue, March 1999
Size of Issue 1.8 million ADS/ 0.9 million equity shares
Number of ADS per equity share 2
Offer Price $ 27.88 per ADS/ $55.76 per share
Actual Price Obtained $34 per ADS/ $ 68 per share
Premium on the Offer Price 22% or $6.12 per ADS
Issue Amount $61.2 million
Green shoe Option 15% of $ 61.2mn = $ 9.18mn
Total Amount raised $ 70.38 million
BSE closing price Rs 3201/- as on 10 March, 1999
Sponsored Secondary ADR ProgramConversion of existing domestic equity shares into ADRs
Allows shareholders in India to convert and sell their equity shares in the US market and realize the proceeds, net of issue expenses
There will be no additional issue of any equity shares by the company
No money will accrue to the company out of this issue
First Sponsored Secondary ADS: July 2003
Issue cost $ 11.7 million (about 4% of Issue Size)
Second Sponsored Secondary ADR:May 2005
Net issue expense = 3.98% of the gross proceeds
Infosys had not received any proceeds of this offering
Total issue increased the size of US float to 14% of its capital
Third Sponsored Secondary ADR: November 2006
Issue expense 3.98% of the gross proceeds
Indian Depository Receipts (IDRs)These are financial instruments that allow foreign companies to mobilize funds from Indian Capital Markets.
IDRs are depository receipts denominated in Indian Rupees issued by a Domestic Depository in India.
IDRs represents interest in the shares of a Non-Indian company’s equity.
IDRs provides a chance to the Indian investors to hold equity shares of foreign company.
It is created by the Indian Depository in India against the underlying equity shares of the issuing foreign company to raise funds from the Indian markets.
IDRs are issued in the Demat form. However, at the option of the IDRs holders these can be converted into physical form.
Like equity shares, these are unsecured instruments and negotiable from one investor to another investor
Showing Issuance of IDRs
Issuer (Outside India)
Domestic Depository
(In India)
Custodian (Outside India)
Holds shares for
Domestic Depository
Issuer of IDRs to
Investors in India
IDRs
Demat IDRs listed on NSE/BSE
IDR Holders – FIIs, NRIs, Retail, Non-
Institutional Investors
Eligibility Criteria:As per the Companies IDR rules, as amended till date, the undernoted are the eligibility criteria for the issue of IDRs:
Sl. No. Criteria Requirements
1 CapitalThe issuer company should have a pre-issue capital and free
reserve of at least US $ 50 million (app. 225 crore)
2Market
Capitalization
The foreign issuing company should have a market
capitalization of $ 100 million or more during last three years.
3Operating
History
Continuous trading record or history on a stock exchange in its
Parent Country for at least three immediately preceding years.
4 ProfitsA track record of distributable profits for at least three out of
immediately preceding five years.
5Other
Requirements
Fulfils such other eligibility criteria as may be laid down by
SEBI from time to time in this behalf.
Other conditions:Sl. No. Criteria Requirements
1 Issue Size The size of an IDR issue shall not be less than Rs. 50 crore
2
Minimum
application
amount
The minimum application amount shall be Rs. 20,000/-
3 Extent of issue
The number of underlying equity shares offered in a financial
year through IDRs offering shall not exceed 25% of the post-
issue number of equity shares of the issuing company.
4
Allocation of
shares/
Reservation of
quota
Retail individual investors 30% (including NRIs)
Non-institutional investors 20% (including NRIs)
Qualified institutional buyers 50% (Except Insurance
Companies and Venture Capital funds)
The IDR issueStandard Chartered PLC → the first global company to file for an issue of Indian depository receipts in India.
Standard Chartered PLC listed on the London and Hong Kong stock Exchanges.
Objective of the issue: To grow our market visibility and brand presence in India
To List it on BSE and NSE
End use of the fund proposed to be raised through the issue is to support growth across the business of the company internationally
114
IDR issued 115
Parties to the Issue:
Details of the Issue:
Issuing Company (Sponsor) Standard Chartered Plc
Overseas Custodian Bank of New York Mellon
Domestic Depository Standard Chartered Securities (India) Ltd
R&T Agent Karvy Computershare Private Limited
Listing Date Friday, June 11, 2010
Issue Size 240 million IDRs
Listing price Rs 106
Ratio 10 IDRs to 1 underlying
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