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4/27/12
AMERICAN DEPOSITORY
RECEIPTS
Saranya Gopinath P
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WHAT IS ADR?
An American DepositoryReceipt is a negotiable securitythat represents the underlying
securities of a non U.S company inthe U.S financial market.
Individual shares of the securities ofthe foreign company represented byan ADR called American Depository
Shares [ ADS]
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HISTORY OF ADR
The first ADR was introduced by J.P.Morgan in 1927 for the British retailerSelfridges.
Depositary Receipts (DRs) werecreated in 1927, primarily tocircumvent the difficulties associated
with different currencies in theforei n market
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With ADRs, however, investors cantake advantage of foreign marketswhile trading in U.S stock markets.
Since each ADR represents a share or
shares of the foreign company, theprice of the ADR changes with theprice of the foreign stock.
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Benefits to companies
Broadening and diversifying acompanys U.S investor base.
Enhancing a companys visibility,
status and profile in the US andinternationally among the investors.
Offers a new avenue for raising
equity capital often at highly
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Benefits to investors
Convenient to purchase and hold anon US issuers securities.
Opportunity to invest and earn in US
dollars. Diversifying portfolio.
Invest in high growth economics
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WORKING OF ADR MARKET
Sponsored ADR program
INVESTOR
USEXCHANGE
BROKE/
DEALER
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3 LEVELS OF SPONSOREDPROGRAMS
Under the sponsored program thereare 3 levels and they are ;
Level 1- Level 1 depositary receiptsare the lowest level of sponsored
ADRs that can be issued. When acompany issues sponsored ADRs, ithas one designated depositary whoalso acts as its transfer agent.
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Level 2 depositary receipt programsare more complicated for a foreigncompany. When a foreign company
wants to set up a Level 2 program, itmust file a registration statementwith the U.S. SEC and is under SEC
regulation.
The advantage that the company has
by upgrading their program to Level
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A Level 3 American DepositaryReceipt program is the highest levela foreign company can sponsor.
Because of this distinction, thecompany is required to adhere tostricter rules that are similar to those
followed by U.S. companies.
Foreign companies with Level 3
programs will often issue materials
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UNSPONSORED ADRPROGRAM
Unsponsored shares trade on theover-the-counter (OTC) market.
These shares are issued in
accordance with market demand,and the foreign company has noformal agreement with a depositary
bank
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INDIAN DEPOSITORY
RECEIPTS
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An Indian Depository Receipt isan instrument denominated in IndianRupees in the form of a depository
receipt created by a DomesticDepository (custodian of securitiesregistered with the Securities and
Exchange Board of India) against theunderlying equity of issuing companyto enable foreign companies to raisefunds from the Indian securitiesMarkets.
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The foreign company IDRs willdeposit shares to an Indiandepository.
The depository would issue receiptsto investors in India against theseshares.
The benefit of the underlying shares
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Standard Chartered PLC became thefirst global company to file for anissue of Indian depository receipts in
India.
Rules (principal rules) wereoperationalised by the Securities andExchange Board of India(SEBI)theIndian markets regulator in 2006.
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ELIGIBILITIES FOR ISSUINGIDR
It has net tangible assets of at leastIndian Rupee three core in each ofthe preceding three full years (of
twelve months each), of which notmore than fifty per cent are held inmonetary assets
It has a track record of distributableprofits in terms of section 205 of the
Companies Act, 1956, for at least
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It has a net worth of at least onecore in each of the preceding threefull years
The aggregate of the proposed issueand all previous issues made in thesame financial year in terms of issuesize does not exceed five times itspre-issue net worth as per the
audited balance sheet of the
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the issuing company is listed in itshome country
the issuing company is not prohibitedto issue securities by any regulatorybody
the issuing company has track record
of compliance with securities market
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PROCESS OF ISSUING IDR
The process is similar to an IPOwhere a draft prospectus is filed withthe SEBI.
The minimum issue size is $500million (around Rs 2,250 core).
Shares underlying IDRs will be
deposited with an overseas custodian
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BENEFIT TO KEY HOLDERS
To Foreign companies:
A company which has significantbusiness in India can increase itsvalue through IDRs by breaking downmarket segmentations, reachingtrapped pools of liquidity, achieving
global benchmark valuation,accessing international shareholderbase and improving its brand's
presence through global visibility
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To Investors:
IDRs can lead to better portfoliomanagement and diversification forinvestors by giving them a chance tobuy into the stocks of reputedcompanies abroad.
To Employees:
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To Regulator:
IDRs will lead to more liquid capitalmarkets and a continuousimprovement in regulatoryenvironment, thereby increasingtransactional revenues for theregulator
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GLOBAL DEPOSITORY
RECEIPTS
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A Global Depository Receipt orGlobal Depositary Receipt (GDR)is a certificate issued by a depository
bank, which purchases shares offoreign companies and deposits it onthe account.
GDRs represent ownership of anunderlying number of shares
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Several international banks issueGDRs, such as JPMorgan Chase,Citigroup, Deutsche Bank, Bank of
New York.
GDRs are often listed in theFrankfurt Stock Exchange,Luxembourg Stock Exchange and inthe London Stock Exchange, where
they are traded on the International
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PROCEDURE FOR THE ISSUEOF GDR
APPROVALSThe issue of GDR require approvals of board
of directors, shareholders and otherregulatory authorities and financial
institutions
APPOINTMENT OF INTERMEDIARIES
GDR normally involve a number ofintermediaries including lead manager , core
manager, legal advisor, legal agent
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PRINCIPAL DOCUMENATAIONThe principle documents required to beprepared include subscription agreement
depository agreement, custodianagreement and trust deed
PRE AND POST LAUNCH
Apart from obtaining necessaryapprovals , documentation, additional keyactions necessary for making the issue ofGDR a success include timing, pricing and
size of issue
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WHICH INDIAN COMPANIESHAVE GDR AND ADR
COMPANY ADR GDR
Bajaj auto NO YES
Dr. Reddys YES YES
HDFC bank YES YES
ICICI bank YES YES
ITC NO YES
L&T NO YES
MTNL YES YES
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COMPANY ADR GDR
Hindalco NO YES
Infosys technologies YES YES
Tata motors YES NO
Patni computers YES NO
State bank of India NO YES
Wipro YES YES
VSNL YES YES
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STOCK EXCHANGESTRADING GDR ARE:
London stock exchange
Singapore stock exchange
Dubai international financial
exchange
Luxemburg stock exchange
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