ADR GDR ecb__swap_hari.13531415

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HARI BALAJI I FMH I SRU-COLLEGE OF MANAGEMENT I MAY 2011

Transcript of ADR GDR ecb__swap_hari.13531415

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H A R I B A L A J I I F M H I S R U - C O L L E G E O F M A N A G E M E N T I M A Y 2 0 1 1

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ADR & GDR

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ADR - American Depositary Receipts

• A negotiable certificate issued by a U.S. bank

• Represents a specified number of shares of a foreign company

• ADRs are denominated in U.S. dollars.

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WHAT IS ADR

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• Let us take Infosys example – trades on the Indian stock at around Rs.2000/-

• This is equivalent to US$ 40 – assume for simplicity

• Now a US bank purchases 10000 shares of Infosys and issues them in US in the ratio of 10:1

• This means each ADR purchased is worth 10 Infosys shares.

• Quick calculation means 1 ADR = US $400

• Once ADR are priced and sold, its subsequent price is determined by supply and demand factors, like any ordinary shares.

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HOW DOES ADR/GDR WORK ?

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• Single

1 ADR = 1 SHARE

ADR Ratio = 1:1

• Multiple

1 ADR = 5 SHARES

ADR Ratio = 1:5

• Fraction

1 ADR = ½ SHARE

ADR Ratio = 2:1

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ADR RATIO

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SPECIMEN COPY OF ADR

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TYPES of ADR:

Unsponsored ADR

Sponsored ADR

Level 1

Level 2

Level 3

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ADR

ADR listing:

NASDAQ

AMEX

NYSE

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• It is an easy and cost effective way to buy shares of a foreign company

• Reduces administrative costs and avoids foreign taxes on every transaction

• Helps companies which are listed to tap the American equity markets

• Any foreigner can purchase these securities

• The purchaser has a theoretical right to exchange shares (non- voting right shares for voting rights)

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ADVANTAGES OF ADR

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• A bank certificate issued in more than one country for shares in a foreign company

• Offered for sale globally through the various bank branches

• Shares trade as domestic shares

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GDR - GLOBAL DEPOSITARY RECEIPTS

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• Custodian Bank located in same country

• Works with the Depository Bank and follows instructions from the depository bank.

• Collects, remits dividends and forwards notices

received from the depository bank.

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GDR - CUSTODIAN BANK/DEPOSITORY BANK

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• GDRs can be created or cancelled depending on demand and supply.

• When shares are created, more corporate stock is placed in the custodian bank in the depositary bank account. The depositary bank then issues the new GDRs

• Factors governing GDR prices are company track record, analysts recommendations, relative valuations, market conditions and also international status of the company

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GDR MARKET

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• London Stock Exchange

• Luxembourg Stock Exchange

• Singapore Exchange

• Hong Kong Exchange

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GDR LISTING

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• GDRs allow investors to invest in foreign companies without worrying about foreign trading practices, laws

• Easier trading, payments of dividends are in the GDR currency

• GDRs are liquid because they are based on demand and supply which is regulated by creating or cancelling shares

• GDR issuance provides the company with visibility, more larger and diverse shareholder base and the ability to raise more capital in international markets

• However, they have foreign exchange risk i.e. currency of issuer is different from currency of GDR

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GDR- ADVANTAGES & DISADVANTAGES

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COMPANY SHARE

DEPOSITARY BANK

INVESTOR

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IN SIMPLE TERMS ADR / GDR ISSUE

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• Both ADR and GDR are depository receipts, and represent a claim on the underlying shares. The only difference is the location where they are traded.

• Depositary receipts traded in USA – ADR

• Depositary receipts traded in a country other than USA - GDR

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DIFFERENCE - ADR & GDR

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INDIA - ADR & GDR

• ADRs and GDRs are an excellent means of investment for NRIs and foreign nationals wanting to invest in India

• By buying these, they can invest directly in Indian companies without going through the hassle of understanding the rules and working of the Indian financial market – since ADRs and GDRs are traded like any other stock

• NRIs and foreigners can buy these using their regular equity trading accounts

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H A R I B A L A J I I F M H I S R U - C O L L E G E O F M A N A G E M E N T I M A Y 2 0 1 1

COMPANY ADR GDR

Bajaj Auto No Yes

Dr. Reddys Yes Yes

HDFC Bank Yes Yes

Hindalco No Yes

ICICI Bank Yes Yes

Infosys Technologies Yes Yes

ITC No Yes

L & T No Yes

MTNL Yes Yes

Patni Computers Yes No

Ranbaxy Laboratories No Yes

Tata Motors Yes No

State Bank of India No Yes

VSNL Yes Yes

WIPRO Yes Yes

INDIAN COMPANIES USING ADR/GDR

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ECB

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• The ECB is the central bank for Europe's single currency, the euro.

• The ECB’s main task is to maintain the euro's purchasing power and thus price stability in the euro area.

• The euro area comprises the 17 European Union countries that have introduced the euro since 1999.

ECB

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The tasks of the ESCB and of the Eurosystem are laid down in the Treaty establishing the European Community. They are specified in the Statute of the European System of Central Banks (ESCB) and of the European Central Bank (ECB). The Statute is a protocol attached to the Treaty. The Treaty text refers to the ‘ESCB' rather than to the 'Eurosystem'. It was drawn up on the premise that eventually all EU Member States will adopt the euro. Until then, the Eurosystem will carry out the tasks.

ECB - TASKS

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"The primary objective of the ESCB shall be to maintain price stability". and: "without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2." (Treaty article 105.1) The objectives of the Union (Article 2 of the Treaty on European Union) are a high level of employment and sustainable and non-inflationary growth.

ECB – OBJECTIVES

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ECB – BASIC TASKS

According to the Treaty establishing the European Community (Article 105.2), the basic tasks are the definition and implementation of monetary policy for the euro area; • the conduct of foreign exchange operations; • the holding and management of the official foreign reserves

of the euro area countries (portfolio management). • the promotion of the smooth operation of payment systems.

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SWAP

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SWAP

• Swap is an agreement between two parties, called counterparties to trade cash flows over a period of time.

• Swaps are flexible and are useful in many financial situations

• There are 2 types of swap:

Currency swap

Interest- rate swap

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• Specifically, the two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap.

• The swap agreement defines the dates when the cash flows are to be paid and the way they are calculated.

• Usually at the time when the contract is initiated at least one of these series of cash flows is determined by a random or uncertain variable such as an interest rate, foreign exchange rate, equity price or commodity price.

SWAP

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• These two swaps can be combined when interest on loans in two currencies are swapped.

• The interest rate and currency swap markets enable firms to arbitrage the difference between capital markets.

• For example, in the case of a swap involving two bonds, the benefits in question can be the periodic interest (or coupon) payments associated with the bonds.

SWAP

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THANK YOU