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i.
ii.
ADVANTAGES OF DRs :
a) Depository stocks are within processing mechanisms for foreign
securities. Depository receipt agreements serve various advantages
investors like transfer and exchanging dividends paid over
to
foreign
In some exceptional cases there may be restrictions on the issuance of new DRs
under existing programs (e.g. Indian GDR programs) because of local
regulations. DRs can be sold in DR 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 the DRs 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 the shares locally and the proceeds
will be remitted to the investor who cancelled those DRs.
1. DRs certify that a stated number of underlying shares have been deposited
with the depositary's custodian in the foreign country.
2. 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.
3. The DRs may be bought or sold through investors' own brokers, and they
clear and settle through the Depository Trust Company (DTC) for ADRs,
through Euro clear and Clear stream for EDRs and through all three (and
possibly other clearing systems) in the case of GDRs, depending on which
markets they access.
4. Shareholder information such as annual reports, notices of general
meetings and corporate actions, and official news releases are provided by
the issuer to the depositary and to the receipt holders, either direct or
through the local custodian.
5. The investor is thus spared the costs and difficulties often encountered
when direct investment is made in local markets, where currency,
settlement, and linguistic problems may be compounded by an excessive
number of intermediaries.
WHY DO INVESTORS
BUY DRs?
Benefits OF DRS
For Issuer
For Investors
Easy to purchase
Trades and settles in the same
manner as any other security
available in the investors home
market
Facilitates global /
sector diversification by
providing access to new
companies
Familiar trade, clearance and
settlement procedures
Pays dividends in investors
home currency and delivers
corporate action notifications in
investors home language
CAPITAL RAISING
DRs
Introduced in 1920
ADR are DRs that are publicly available to investors in the U.S. Offer the
issuing company access to the worlds largest capital market. Provide
investors in the US with a convenient way to directly invest in international
companies.
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ii.
iii.
iv.
v.
ADRs are listed on either the NYSE, AMEX or NASDAQ as well as OTC.
Each ADR represents a certain number of a company's ordinary shares.
Issued by a U.S. depository bank against the underlying security held by a
custodian bank.
LEVEL 2
Level II ADRs enable companies to list their ADRs on NASDAQ, the American
Stock Exchange, the New York Stock Exchange and the OTC Bulletin Board,
thereby offering higher visibility 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 II ADRs require a Form 20-F and Form F-6 to
be filed with the SEC, as well as meeting the listing requirements and filing a
listing application with the designated stock exchange. Upon F-6 effectiveness
and approval of the listing application, the ADRs begin trading.
Level II ADR programs must comply with the full registration and reporting
requirements of the
SEC's Exchange Act, which entails the following:
1) Form F-6 registration statement, to register the ADRs to be issued
2) 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 register the listing of
the ADRs
3) Annual reports and any interim financial statements submitted on a regular,
timely basis to the SEC
Level III
Level III ADRs enable to companies to list their ADRs on NASDAQ, the
Amex, the New York Stock Exchange or the OTC Bulletin Board, and make a
simultaneous public offering of ADRs in the United States.
In the most high-profile form of sponsored ADR program, Level III, an issuer
floats a public offering 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 capital and leads to much greater
visibility in the U.S. market.
Level III ADR programs must comply with various SEC rules, including the full
registration and reporting 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 disclosure from the issuer, including Form F-1, to register the equity
securities underlying the ADRs that are offered publicly in the U.S. for the first
time, including a prospectus to inform potential investors about the company
and the risks inherent in its businesses, the offering price for the
ICIC BANK
Rediff.com
Tata motors
HDFC Bank
Infosys
Dr.Reddys
The main advantage of buying an American Depositary Receipt rather than the
foreign stock itself is the ease of the transaction.
ADRs are a great way to invest abroad without having to convert U.S. dollars to
many different currencies. Another advantage offered by an ADR is that if the
foreign stock does pay dividends, the investment 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 the tax so you don't have
to worry about it. Therefore, if exchange rates were to move against you, it
would hurt the value of your ADR. If you are considering investing in foreign
stocks, ADRs should be part of your investment decision; however, you should
become familiar with all the risks associated with foreign investing before
making an investment decision.
Advantages to Issuers Provides a simple means of diversifying a companys
shareholder base and accessing important U.S. market may increase the liquidity
of the underlying shares of the issuer ADRs can be used as an equity financing
tool in both M&A transactions and ESOPs for U.S. subsidiaries helps increase a
non-U.S. companys visibility and name recognition in the U.S. investor
community may raise capital in the U.S. market through some types of programs
Advantages to Investors
Offers a convenient means of holding foreign shares Simplifies the trading &
settlement of foreign securities; ADRs trade and settle just like U.S. securities o
Offers lower trading & custody costs when compared with shares bought directly
in the foreign market
5. 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
FUNGIBILITY
Types of fungiblity :
i.
ii.
ONE WAY
TWO WAY
3)
4)
depository
Price volatility
Liquidity problem
by
of a
from
the
underlying shares.
First GDR was issued in 1990.
Global depositary receipts are certificates held in depository banks used to
purchase shares of foreign companies; these receipts represent the
number of
Give issuers exposure to the global markets outside their home market 1990:
Citibank issued the first GDR Samsung Corporation Simultaneous access to
European & U.S. Markets.
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
Types of 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 to offshore purchasers outside the issuer's domestic market, in accordance
with Regulation S. All DRs are governed by one Deposit Agreement and all are
subject to deposit, Withdrawal and resale restrictions.
Bifurcated Structure
Under a bifurcated structure, Rule 144(a) ADRs are offered to QIBs in the US and
Regulation 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 separate Deposit Agreements. The Regulation S DRs are not restricted
securities, and can therefore be deposited into a "side-by-side" Level I DR
program, and are not normally subject to restrictions on deposits, withdrawals or
transfers. However, they may be subject to temporary resale restrictions in the US.
ADVANTAGES OF DR/EDR
EDRs/GDRs can be launched as part of a private or public offering.
They allow a single fungible security to be placed in one or more international
markets, thus giving access to a global investor base.
They may allow the issuer to overcome local selling restrictions to foreign
share ownership.
DISADVANT AGES
If the US tranche of a GDR is structured as a Rule 144(a) private placement, the
disadvantages of an RADR program will apply. If it is structured as a Level III
program, the reporting and cost features of such programs will apply.
An Indian listed company, which is not eligible to raise funds from the
Indian Capital Market including a company which has been restrained
from accessing the securities market by the Securities and Exchange
Board of India (SEBI) will not be eligible to issue ADRs/GDRs.
o Erstwhile OCBs who are not eligible to invest in India through the
portfolio route and entities prohibited to buy, sell or deal in securities by
SEBI will not be eligible to subscribe to ADRs / GDRs issued by Indian
companies.
LIMIT OF OFFERINGS
VOTING RIGHTS
Voting rights on shares issued under the Scheme shall be as per the provisions of
Companies Act, 1956 and in a manner in which restrictions on voting rights
imposed on ADR/GDR issues shall be consistent with the Company Law
provisions.
RBI regulations regarding voting rights in the case of banking companies will
continue to be applicable 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 the following two averages:
(i)
The average of the weekly high and low of the closing prices of the related
shares quoted on the 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 on a stock exchange during the two weeks preceding the
relevant date.
Most Commonly
listed on
GAAP
ADR
NYSE
Reconcile their accounts to US
GAAP
GDR
LSE
Depends on International
Exchange
selected for listing
Issued only to QIBs
Investor
Profile
To Raise
Capital
Within US
Cost
Comparatively Inexpensive
for the issuer