ADR and GDR

Global Depository Receipts(GDR) / American

Deposit Receipts (ADR)
What is an ADR / GDR?
 ADR stands for American Depository Receipt. GDR stands for Global
Depository Receipt.
 Every publicly traded company issues shares – and these shares are
listed and traded on various stock exchanges.
 These shares are sometimes also listed and traded on foreign stock
exchanges like NYSE (New York Stock Exchange) or NASDAQ
(National Association of Securities Dealers Automated Quotation).
 But to list on a foreign stock exchange, the company has to comply
with the policies of those stock exchanges. Many times, the policies of
these exchanges in US or Europe are much more stringent than the
policies of the exchanges in India. This deters these companies from
listing on foreign stock exchanges directly.
 But many good companies get listed on these stock exchanges
indirectly – using ADRs and GDRs.
 This is what happens: The company deposits a large number of its
shares with a bank located in the country where it wants to list
indirectly. The bank issues receipts against these shares, each receipt
having a fixed number of shares as an underlying (Usually 2 or 4).
 These receipts are then sold to the people of this foreign country (and
anyone who is allowed to buy shares in that country). These receipts
are listed on the stock exchanges. They behave exactly like regular
stocks – their prices fluctuate depending on their demand and supply,
and depending on the fundamentals of the underlying company.
 These receipts, which are traded like ordinary stocks, are called
Depository Receipts. Each receipt amounts to a claim on the
predefined number of shares of that company. The
issuing bank
acts as a depository for these shares – that is, it stores
the shares on behalf of the receipt holders.
 Depositary Receipts (DRs) are thus negotiable securities issued outside India by a
Depository Bank, on behalf of an Indian company, which represent the local Rupee
denominated equity shares of the company held as deposit by a Custodian Bank in
India. DRs are traded in Stock Exchanges in the US, Singapore, Luxembourg etc.
DRs listed and traded in the US markets are known as American Depository
Receipts (ADRs) and those listed and traded elsewhere are known as Global
Depository Receipts (GDRs). In the Indian context, DRs are treated as FDI.

 Indian companies can raise foreign currency resources abroad through the issue of
ADRs/GDRs, 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 thereunder from
time to time.
 
 The company can issue ADRs/GDRs if it is eligible to issue shares to persons
resident outside India under the FDI Scheme. However, 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.
 Domestic 1.Public
Custodian bank 2.Private
3.Number of
Issuing ADR/GDR
company’s
4.Issue price
5.Rate of
Track record Interest
of 3 years
6.conversion
Investment Price
Banker 7.coupon
(overseas Rate
depository Pricing
Bank) issuer of conversion
Of ADR/ option
GDR
Conditions
Ordinary shares of issuing company should be in
Indian currency
The issued ordinary shares or bonds should be
delivered to DCB(Domestic custodian bank)
DCB instructs ODB(Overseas depository Bank) to
issue GDR/ADR certificates to non- resident
investors against the shares in DCB
GDR may be listed on any international stock
exchange for trading outside India.
Conditions to be fulfilled by issuing
domestic company
Prior permission from Department of Economic
affairs, Ministry of finance, GOI
Indian companies are allowed to raise equity capital in
the international market through the issue of
GDR/ADRs/FCCBs. These are not subject to any
ceilings on investment. An applicant company seeking
Government's approval in this regard should have a
consistent track record for good performance (financial
or otherwise) for a minimum period of 3 years
Issue of GDRs/ADRs by IT software
/services companies
Eligible to offer to non residents/resident permanent
employees including overseas working directors against
the issue of ordinary shares.
Atleast 80% of its turnover is from software related
activities.
Annual export earning of 100 crore from such
company.
The shares issued against ADR/ GDR ahould be treated
as direct foreign investment in the issuing company.
It can not exceed more than 51% of the subscribed
capital.
Advantages of ADR/GDR
1. Can be listed on any of the overseas stock
exchanges/OTC/Book entry transfer system
2.Freely transferable by non resident
3.They can be redeemed by ODB
4.The ODB should request DCB to get the
corresponding underlying shares released in favour of
non resident investors.(Share holder of issuing
company)
local custodian bank is a bank in a country outside the
United States that holds the corresponding amount of
shares of stock trading on the home stock market
represented by an ADR trading in the U.S, with each
multiple representing some multiple of the underlying
foreign share. This multiple allows the ADRs to possess a
price per share conventional for the US market (typically
between $20 and $50 per share) even if the price of the
foreign share is unconventional when converted to US
dollars directly. This bank acts as custodian bank for the
company that issues the ADRs in the U.S. stock.