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By Prof.

Ruchi Mehrotra

Issues related to Capital Structure

Capital structure
Debt BONDS Like most Japanese firms rely more on debt financing than most US firms do. Equity If Dividends are highly taxed, a preference for bond financing will arise.


Various Alternative Sources of Raising Funds by a Global Firm

Domestic Financial Market Operations
Intnl Bond Issue Less Prestigious Markets Intnl. Bond Issue Target Market / EuroBond Market

Equity Listings Less Prestigious Markets

Equity Issues Less Prestigious Markets

Equity Listings Target Markets (Cross List

Euro- Equity Issue Global Markets

Post liberalization 1992- Indian corporates to have access to global capital markets through FCCB & GDR/ADR mechanism Vision was to given them international edge Minimum track record of good performance of 3yrs were allowed

Depository receipts

These are certificates that represent an ownership interest in the ordinary shares of the stock of the company, but are marketed outside of the company's home country. Structured to resemble typical stocks on the stock exchanges that they trade so that foreigners can buy an interest in the company without worrying about the differences in currency, a/c practices, language barriers, and risks of investing in foreign stocks directly.

Depository receipts

Its a negotiable certificate denominated in US$ that represents a non US companys publicly traded equity or debt DRS are created when the local currency shares of an Indian company are delivered to the depositorys local custodian bank ,against which the depository bank issues DRs in US dollars . These are traded freely in overseas market like any $ denominated security on stock exchange/OTC or restructured group like QIBs.

Creation of DRs

When a broker purchases the company's shares on the home stock market Delivers them to the depositorys local custodian bank Which then instructs the depository bank to issue the depository receipts They are quoted & traded in the currency of the country in which they trade & are governed by the governed by the trading & settlement procedures of that market where they trade

Creation of DRs
Here Depository bank acts as agent for the issuer & provides all stock transfer (reregistration) and agency services in connection with the DR program These include the custodial arrangement for the safe keeping of ordinary shares, issuance & collection of receipts, maintenance of register of holders etc etc

Features of DRs

They may trade freely just like any other security either on exchanges or OTC market can be used to raise capital So is the way non-Us shares will trade in Newyork called as ADRs American depository receipts Most common DRs are ADRs & GDRs Reliance Industry was 1st company to raise funds through GDR issue. IDRs & EDRs are rare forms of DRs Most GDRs regardless of geographic market, are denominated in US $ although some trade in Euros & 9 British sterling

Depository receipts
These are traded freely in overseas market like any $ denominated security on stock exchange/OTC for restructured group like QIBs. There are more than 900GDRs listed on stock exchanges worldwide, with more than 2100 issuers from 80 countries

Growth of GDRs ADRs


Reasons for issue of Drs

Raise capital in foreign markets Increase consumer interest in their products by strengthening name recognition in foreign markets Increase liquidity of shares by broadening their shareholder base (DRs facilitate cross border trade) Gain visibility for possible mergers & acquisitions Allow employees outside the home market to participate in the parent company

American Depository Receipts

A dollar denominated negotiable certificate that represents the non-Us companys publicly traded equity It falls within the legal framework of USA, requires registration of ADRs & underlying shares with the SEC u/s 144A no registration required for SEC) Non-US companies can go for 5 types of ADR facilities


Features of ADRs

Most liquid market & largest market Size of ADR can expand or contract depending on the demand factor The issuing bank can withdraw or issue further corresponding shares in the local market Small companies DRs remain thinly traded and sometimes get ignored in the market Generally recommended that the ADRs should be made for above $300m.

American Depository Receipts

It is a stock that trades in US but represents a specified number of shares of foreign corporation. They are bought & sold in American markets just like regular stocks They are issued / sponsored in the US by a bank or a brokerage firm. The reason to introduce them was due to the complexity involved in buying shares in foreign countries. Only problem arises is with the trading at different prices & different currency values. 15

American Depository Receipts

US banks simply purchase a lot of shares from the company, bundle the shares into groups & re-issue them on the NYSE / NASDAQ The depository bank sets the ratio of US ADRs per the home country share the reason for this is as they wish to price the ADR high enough so as to show substantial value, yet still trying to show low enough so that individual investors can also purchase it. Majority range b/w 10$ to 100$ per share. If in a home country the shares were worth considerably less, then each would represent several real shares.

Types of ADRs

5 types depending on the type of requirement of the issuer Unsponsored ADR program Sponsored program Level 1 Level 2 Level 3



Types of sponsored (agreement with depository & signs registration statement) ADRs

Level 1 - This is the most basic type of ADR where foreign companies either don't qualify or don't wish to have their ADR listed on an exchange. Level 1 ADRs are found on the over-thecounter market and are an easy and inexpensive way to gauge interest for its securities in North America. Level 1 ADRs also have the loosest requirements from the SEC. Level 2 - This type of ADR is listed on an exchange or quoted on Nasdaq. Level 2 ADRs have slightly more requirements from the SEC, but they also get higher visibility trading volume. Level 3 - The most prestigious of the three, this is when an issuer floats a public offering of ADRs on a U.S. exchange. Level 3 ADRs are able to raise capital and gain substantial visibility in the U.S. financial markets.

ADR - Benefits to investors

DRs are US securities DRs are easy to buy & sell DRs are highly liquid Drs are Global Convenient to own Cost effective


ADR - Benefits to investors v/s Foreign Shares

Transaction cost savings Settlement Custody Transparency Legal restrictions Research coverage Liquidity Dividends, corporate action SEC compliances Price translation & fungibililty Trading hours & foreign exchange


Ramifications of Indian ADRs

Positives : Huge pool of funds Improved quality of disclosure Capital formation Broaden global visibility Better valuation The merger & acquisitions ESOPs Corporate segmentation


Global Depository Receipts

They are traded & settled outside the US.

Rule 144A of SC, USA permits the companies from outside USA to offer their GDRs to QIBs. ADRs are DRs issued in the US & have to be in accordance with the stringent provisions stipulated by the SEC.

Global Depository Receipts

GDRs is in the nature of a depository receipt or certificate created by an overseas depository bank (authorized by the issuing company) outside India & is issued to non-resident investors against the issue of FCCBs or shares of the issuer company. It is a negotiable certificate in US$ & traded freely in foreign markets like other securities & can be issued by way of private placement also. Permission is reqd. from MOF & GOI

Global Depository Receipts

Holders of GDRs are entitled to receive dividend on underlying shares Registered holders of shares withdrawn from the depository arrangement will be entitled to vote & exercise other direct shareholders rights in acco. With the Indian Law.

American Depository Receipts

In 1927 These are issued in USA in acco. With the provisions of SEC. $ denominated negotiable instrument issued in US by a depository bank representing ownership in non-US securities (ordinary shares) Compliance by companies with USGAAP.

Learn on advantages & dis-advantages of GDRs GDR wrt FDI