AMERICAN DEPOSITORY

RECEIPTS

WHAT IS ADR?
An American Depository Receipt is a negotiable
security that represents the underlying securities of a
non U.S company in the U.S financial market.
Individual shares of the securities of the foreign
company represented by an ADR called American
Depository Shares [ ADS]
The stock of many non-U.S. companies trade on U.S.
stock exchanges through the use of ADRs. ADRs are
denominated, and pay dividends, in U.S. dollars, and
may be traded like shares of stock of U.S.

HISTORY OF ADR
The first ADR was introduced by J.P.
Morgan in 1927 for the British retailer
Selfridges.

Depositary Receipts (DRs) were created

in 1927, primarily to circumvent the
difficulties associated with different
currencies in the foreign market

 With ADRs, however, investors can take advantage of

foreign markets while trading in U.S stock markets.
Since each ADR represents a share or shares of the
foreign company, the price of the ADR changes with
the price of the foreign stock.
Therefore, any change in price in the foreign
company's stock applies to the change in price of the
ADR. In this way, investors can benefit from this
price changes.

Benefits to companies
Broadening and diversifying a companys
U.S investor base.
Enhancing a companys visibility, status
and profile in the US and internationally
among the investors.
Offers a new avenue for raising equity
capital often at highly competitive rates.

Benefits to investors
Convenient to purchase and hold a
non US issuers securities.
Opportunity to invest and earn in US
dollars.
Diversifying portfolio.
Invest in high growth economics

WORKING OF ADR MARKET

Sponsored ADR program

INVE
STOR

BROK
E/
DEAL
ER

US
EXCH
ANG
E

3 LEVELS OF SPONSORED
PROGRAMS
Under the sponsored program there are 3 levels and
they are ;
Level 1- Level 1 depositary receipts are the lowest
level of sponsored ADRs that can be issued. When a
company issues sponsored ADRs, it has one designated
depositary who also acts as its transfer agent.
Level 1 shares can only be traded on the OTC market
and the company has minimal reporting requirements
with the U.S. Securities and Exchange Commission
[SEC]

 Level 2 depositary receipt programs are more

complicated for a foreign company. When a foreign
company wants to set up a Level 2 program, it
must file a registration statement with the U.S. SEC
and is under SEC regulation.
The advantage that the company has by upgrading
their program to Level 2 is that the shares can be
listed on a U.S. stock exchange. These exchanges
include the New York Stock Exchange (NYSE),
NASDAQ, and the American Stock Exchange
(AMEX).

 A Level 3 American Depositary Receipt program

is the highest level a foreign company can
sponsor. Because of this distinction, the company
is required to adhere to stricter rules that are
similar to those followed by U.S. companies.
Foreign companies with Level 3 programs will
often issue materials that are more informative
and are more accommodating to their U.S.
shareholders because they rely on them for
capital

UNSPONSORED ADR
PROGRAM
Unsponsored shares trade on the
over-the-counter (OTC) market.

These shares are issued in

accordance with market demand,
and the foreign company has no
formal agreement with a depositary
bank

INDIAN DEPOSITORY
RECEIPTS

 An Indian Depository Receipt is

an instrument denominated in Indian
Rupees in the form of a depository
receipt created by a Domestic
Depository (custodian of securities
registered with the Securities and
Exchange Board of India) against the
underlying equity of issuing company
to enable foreign companies to raise
funds from the Indian securities

 The foreign company IDRs will deposit

shares to an Indian depository.
The depository would issue receipts to
investors in India against these shares.
The benefit of the underlying shares
(like bonus, dividends etc) would accrue
to the depository receipt holders in India

 Standard Chartered PLC became the first global

company to file for an issue of Indian depository
receipts in India.
Rules (principal rules) were operationalised by the
Securities and Exchange Board of India(SEBI)the
Indian markets regulator in 2006.
Operation instructions under the Foreign Exchange
Management Act were issued by the Reserve Bank of
India on July 22, 2009. The SEBI has been notifying
amendments to these guidelines from time to time.

ELIGIBILITIES FOR ISSUING

IDR
It has net tangible assets of at least Indian
Rupee three core in each of the preceding
three full years (of twelve months each), of
which not more than fifty per cent are held
in monetary assets
It has a track record of distributable profits
in terms of section 205 of the Companies
Act, 1956, for at least three out of the
immediately preceding five years

 It has a net worth of at least one core in

each of the preceding three full years
The aggregate of the proposed issue and
all previous issues made in the same
financial year in terms of issue size does
not exceed five times its pre-issue net
worth as per the audited balance sheet of
the preceding financial year

 the issuing company is listed in its home

country
the issuing company is not prohibited to
issue securities by any regulatory body
the issuing company has track record of
compliance with securities market
regulations in its home country

PROCESS OF ISSUING IDR

The process is similar to an IPO where a draft prospectus is
filed with the SEBI.
The minimum issue size is $500 million (around Rs 2,250 core).
Shares underlying IDRs will be deposited with an overseas
custodian who will hold share s on behalf of a domestic
depository.
IDRs will be issued through a public offer in India in the demat
form and will be listed on Indian exchanges.
Trading and settlement will be similar to those of Indian shares

BENEFIT TO KEY HOLDERS

To Foreign companies:
A company which has significant
business in India can increase its
value through IDRs by breaking down
market segmentations, reaching
trapped pools of liquidity, achieving
global benchmark valuation,
accessing international shareholder
base and improving its brand's
presence through global visibility

To Investors:
IDRs can lead to better portfolio management and
diversification for investors by giving them a chance to buy
into the stocks of reputed companies abroad.
To Employees:
Foreign companies that do not have a listed subsidiary in
India can give employee stock options (ESOPs) to the
employees of their Indian subsidiaries through the IDR
route. This will enable the local employees to participate in
the parent companies success.

To Regulator:
IDRs will lead to more liquid capital
markets and a continuous
improvement in regulatory
environment, thereby increasing
transactional revenues for the
regulator

GLOBAL DEPOSITORY
RECEIPTS

 A Global Depository Receipt or Global

Depositary Receipt (GDR) is a certificate issued
by a depository bank, which purchases shares of
foreign companies and deposits it on the account.
GDRs represent ownership of an underlying
number of shares
Global Depository Receipts facilitate trade of
shares, and are commonly used to invest in
companies from developing or emerging markets.

 Several international banks issue GDRs, such as

JPMorgan Chase, Citigroup, Deutsche Bank, Bank of
New York.
GDRs are often listed in the Frankfurt Stock
Exchange, Luxembourg Stock Exchange and in the
London Stock Exchange, where they are traded on
the International Order Book (IOB).
Normally 1 GDR = 10 Shares, but not always. It is
negotiable instrument which is denominated in some
freely convertible currency.

PROCEDURE FOR THE ISSUE OF

GDR
APPROVALS
The issue of GDR require approvals of
board of directors, shareholders and other
regulatory authorities and financial
institutions

APPOINTMENT OF INTERMEDIARIES
GDR normally involve a number of
intermediaries including lead manager ,
core manager, legal advisor, legal agent

PRINCIPAL DOCUMENATAION
The principle documents required to be
prepared include subscription agreement
depository agreement, custodian
agreement and trust deed

PRE AND POST LAUNCH

Apart from obtaining necessary approvals
, documentation, additional key actions
necessary for making the issue of GDR a
success include timing, pricing and size of
issue

WHICH INDIAN COMPANIES HAVE

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

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

STOCK EXCHANGES TRADING GDR

ARE:
London stock exchange
Singapore stock exchange
Dubai international financial exchange
Luxemburg stock exchange
Hong Kong stock exchange