American Deposit Receipts

(ADRs)

GVSMKSK Pavankumar (09927856)

Manikumar Myla (09927913)
What is ADR?
• ADR is a stock that trades in the United States but
represents a specified number of shares in a foreign
corporation.

• To reduce the complexities involved in buying the

foreign shares, U.S. banks simply purchase a bulk
lot of shares from the company, bundle the shares
into groups, and reissues them on the stock
exchange which are called American depositary
receipts (ADR)

American
Depositary
• Denominated in U.S. dollars, with the underlying
Receipt
security held by a Custodian bank overseas.

2
Flow of ADRs

3
 What is ADR ? (Cont)
• To buy shares in a foreign
company while realizing any
dividends and capital gains in
U.S. dollars
•ADRs do not eliminate the
currency and economic risks for
the underlying shares in another
country
•Will bundle them to show more
substantial value
•The depository bank sets the ratio
of U.S. ADRs per home-country
share (can be less than 1)
• ADRs help to reduce
administration and duty costs
that would otherwise be levied
on each transaction
• Once an ADR is priced and sold
on the market, its price is
determined by supply and
demand, just like an ordinary
stock
• The underlying shares are
called ADSs (American
Depositary Shares)
4
 What for an Investor ?

Benefits Risks
• Diversification • Currency exchange
• Invest in High- risk
growth economies • Political risk
• Lower transaction • Inflationary risk
costs
• Less complexities

5
 Benefits for a Company Benefits
Benefits forfor Depositary Bank
a Company

Broadening and diversifying a company’s US Commission on the trade, just like any other trade.
huge investor base

Enhancing a company’s visibility, status and

Deduct their fees from dividends that investors are
profile in the US and internationally, among
to receive
investors.

Offers a new avenue for raising equity Pass on expenses related to currency conversion to
capital, often at highly competitive rates. investors

6
 Types of ADRs
  Unsponsored Level I Level II Level III

Description Unlisted Unlisted Listing US listing and

public offering

Develop/ Develop/ Develop/

broaden US broaden US broaden US Raise equity in
Objective investor base investor base investor base US/broaden
with existing with existing with existing US investor base
shares shares shares

Minimal
Accounting Company’s requirements by US GAAP US GAAP
Home market
SEC
US Reporting Form F-1 &
Exempt Exempt Form 20-F
requirements Form 20-F

7
 How to price the ADR
• Say an Indian company share is traded at Rs.47 ($1 ),
• The Bank buys 1million shares and issues at a ratio of 10:1.
• Implies 1 ADR is worth 10 shares of the company on the
Indian stock exchange equals $10.
• After selling on the exchange, the price is determined by the
supply - demand rule

8
 Arbitrage in ADR

The Process

1. Buy American Deposit Receipts

2. Sell local stock in India
3. Convert shares from DR to local shares
4. Deliver shares to stock exchange in India

The Costs

5. Foreign brokerage
6. Local brokerage
7. Custodian charge for conversion (local and global)
8. Charges for transfer
9
 ADR price Vs. Actual stock price
• Determined by supply and demand, but the price will not
deviate too much from the equivalent value of the underlying
stock.
• If the ADR is trading at a higher price than the equivalent
foreign shares of the company, then more shares of the
company will be bought and held in the custodian bank, and
more ADRs will be created.
• If the ADR trades below the equivalent price, then some ADRs
will be cancelled, and the corresponding shares of the
company will be released by the custodian bank.
• This maintains parity between the price of the ADR and the
foreign shares, after accounting for the currency exchange
rate.
10
 Dividends
• The custodian bank receives it
• Withholds any foreign taxes
• Exchanges it for U.S. dollars
• Sends it to the depositary bank
• Sends it to the investors
• The largest United States depositary banks are the Bank of
New York, J.P. Morgan, and Citibank
•  If the dollar appreciates, for instance, then the amount of
dividend in U.S. dollars will be reduced, and the market price
of the ADR will drop

11
 Bonus ADRs
• Just like the Companies give the Bonus shares, the Depositary bank gives the Bonus ADRs

Example:
• Wipro approved 2 bonus shares per every 3 shares held
• To effect the bonus issue for the ADR program,
• ADR holders will receive 2 additional ADRs for every 3 ADRs held
• Fractional shares resulting from the bonus issue will be sold and the net proceeds, if any, will
be allocated and paid in cash
• Source: http://www.wipro.com/corporate/investors/pdf-files/adr-bonus-announcement.pdf

12
 Regulations for Indian companies

• An Indian Company, which is not eligible to raise funds from the Indian Capital
Market will not be eligible to issue ADRs
• The guidelines allow an Indian company to issue its Rupee denominated shares to
a person resident outside India being a depository for the purpose of issuing ADRS
• The ADRs are issued in accordance with the Scheme for issue of Foreign Currency
Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism)
Scheme, 1993 and guidelines issued by the Central Government there under from
time to time
• There are no end-use restrictions on ADR issue proceeds, except for an express
ban on investment in real estate and stock markets
•  The issue related 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 pro-rata basis

13
 Indian ADRs
ADR PRICE ISSUE PRICE Domestic MKTCAP ADR MKT CAP (US$
COMPANY (US$) (US$) (US$ m) NO OFADRs (m) m)
DRREDDY
(RDY) 28.3 10 4,792.00 76.5 2,161.70
HDFCBANK
(HDB) 165.8 59.4 22,008.40 94.5 15,669.10
ICICIBANK
(IBN) 42.5 11 23,758.10 368.4 15,668.10
INFOSYSTECH.
(INFY) 59.9 17 34,078.00 270.6 16,199.10
MTNL
(MTE) 2.8 7.5 873.3 315 878.9
PATNICOMPUTERS
(PTI) 22.8 20.3 1,574.40 68.9 1,570.90
REDIFF.COM
(REDF) 2.1 12 NM 51.3 105.2
SATYAMCOMP
(SAY) 4.6 9.7 1,237.90 157.3 717.3
SATYAMINFOWAY
(SIFY) 1.3 0.4 NM 141.5 189.6
STERLITE IND.
(SLT) 13.6 13.4 11,531.20 708.5 9,635.50
TATA COMM.
(TCL) 14.7 0 2,106.80 142.5 2,090.50
TATAMOTORS
(TTM) 22.7 0 9,797.90 353 8,006.00
WIPRO
(WIT) 13.4 41.2 21,602.60 703.6 9,392.70
14
 Security Name Last
India and China (YTD)
Value (Mn$) Volume
ICICI BANK LTD Security Name Last Value (Mn$) Volume
41.24 15,280.70 39,25,50,419
[IBN]
STERLITE BAIDU INC [BIDU] 77.32 1,58,845.10 2,60,40,64,267
INDUSTRIES 12.93 4,107.77 25,88,57,337
INDIA LTD [SLT] JA SOLAR
INFOSYS HOLDINGS CO 5.9 7,915.52 1,44,07,60,014
TECHNOLOGIES 57.64 14,823.81 25,30,98,844 LTD [JASO]
LTD [INFY]
TATA MOTORS 21.25 4,094.05 22,62,80,142 YINGLI GREEN
LTD [TTM] ENERGY HOLDING 10.83 9,451.84 78,17,27,967
SATYAM CO LTD [YGE]
COMPUTER
4.52 855.14 16,46,51,673 SUNTECH POWER
SERVICES LTD
[SAY] HOLDINGS CO 7.72 7,986.66 64,88,83,970
WIPRO LTD LTD [STP]
13.03 1,449.20 11,02,01,022
[WIT] TRINA SOLAR LTD
DR REDDYS 24.86 14,207.29 64,36,20,033
[TSL]
LABORATORIES 28.62 2,290.17 8,19,49,496
LTD [RDY] LDK SOLAR CO
6.81 3,524.81 52,22,61,904
HDFC BANK LTD LTD [LDK]
160.68 6,598.48 4,72,23,458
[HDB]
MAHANAGAR CHINA UNICOM
13.69 5,035.45 41,32,50,005
TELEPHONE 2.65 53.12 1,70,10,180 LTD [CHU]
NIGAM [MTE] SOLARFUN
TATA POWER
COMMUNICATIO 14.13 175.71 1,38,55,182 10.47 3,327.19 39,61,47,126
HOLDINGS CO
NS LTD [TCL] LTD [SOLF]
Total 49,728 1,56,56,77,753
CTRIP.COM
INTERNATIONAL 41.51 14,536.53 38,88,56,162
LTD [CTRP]
RENESOLA LTD 8.58 2,015.28 31,92,59,566
[SOL]

Total 2,26,846 8,15,88,31,014

15
 SOX
• Sarbanes-Oxley or Public Company Accounting Reform and
Investor Protection Act or SOX
• US Federal law enacted in response to a number of major
corporate and accounting scandals
• To increase the investor confidence
• Applies new standards for all U.S. public company boards,
management and public accounting firms
• Does not apply to privately held companies
• Act contains 11 Titles/Sections and requires the SEC to
implement rulings on requirements to comply with the new
law
16
 11 Titles/Sections in SOX
• Public Company Accounting Oversight Board (PCAOB)
• Auditor Independence
• Corporate Responsibility
• Enhanced Financial Disclosures
• Analyst Conflicts of Interest
• Commission Resources and Authority
• Studies and Reports
• Corporate and Criminal Fraud Accountability
• White Collar Crime Penalty Enhancement
• Corporate Tax Returns
• Corporate Fraud Accountability
17
 Sox - ADRs
• Level-1 ADRs do not need to comply with Sox
• Level-2 and Level-3 must comply
• Can be costly for a company beginning a U.S. ADR
Program
• Intangible cost: Diversion of senior management
time
Effects:
• Smaller companies move to other markets
• Increase in Level-1 ADRs
18
 GDR
• A GDR is very similar to an American Depositary
Receipt. 
• A Bank certificate issued in more than one country
for shares in a foreign company. The shares are
held by a foreign branch of an international bank.
• The shares trade as domestic shares, but are
offered for sale globally
• These instruments are called EDRs when private
markets are attempting to obtain Euros.
19
 IDR
• Indian Depositary Receipts
• 1st IDR: Standard chartered

• Expected more IDRs in

future due to increase in
potential of the Indian
capital markets

20
 References
• http://www.equitymaster.com/stockquotes/adr.asp
• http://economictimes.indiatimes.com/articleshow/5970646.cms
• http://www.adr.com/MarketOverview/MarketOverview.aspx
• http://www.investopedia.com/terms/a/adr.asp
• http://en.wikipedia.org/wiki/American_Depositary_Receipt

21
22