American Deposit Receipts (ADRs)

GVSMKSK Pavankumar (09927856)Manikumar Myla (09927913)

2

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)

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

American Depositary

Receipt

3

Flow of ADRs

4

What is ADR ? (Cont)• 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)

• 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)

5

What for an Investor ?

Benefits

• Diversification• Invest in High-

growth economies• Lower transaction

costs• Less complexities

Risks

• Currency exchange risk

• Political risk• Inflationary risk

6

Broadening and diversifying a company’s US huge investor base

Enhancing a company’s visibility, status and profile in the US and internationally, among investors.

Offers a new avenue for raising equity capital, often at highly competitive rates.

Commission on the trade, just like any other trade.

Deduct their fees from dividends that investors are to receive

Pass on expenses related to currency conversion to investors

Benefits for a Company Benefits for a CompanyBenefits for Depositary Bank

7

Types of ADRs Unsponsored Level I Level II Level III

Description Unlisted Unlisted Listing US listing and public offering

Objective

Develop/broaden US

investor base with existing

shares

Develop/broaden US

investor base with existing

shares

Develop/broaden US

investor base with existing

shares

Raise equity in US/broaden

US investor base

Accounting Company’s Home market

Minimal requirements by

SECUS GAAP US GAAP

US Reporting requirements Exempt Exempt Form 20-F Form F-1 &

Form 20-F

8

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

9

Arbitrage in ADR

The Process

1. Buy American Deposit Receipts2. Sell local stock in India3. Convert shares from DR to local shares4. Deliver shares to stock exchange in India

The Costs

5. Foreign brokerage6. Local brokerage7. Custodian charge for conversion (local and global)8. Charges for transfer

10

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.

11

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

12

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

13

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

14

Indian ADRsCOMPANY ADR PRICE

(US$)ISSUE PRICE

(US$)Domestic MKTCAP

(US$ m) NO OFADRs (m) ADR MKT CAP (US$ 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 16,199.10MTNL(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 8,006.00WIPRO(WIT) 13.4 41.2 21,602.60 703.6 9,392.70

15

India and China (YTD)Security Name Last Value (Mn$) Volume

ICICI BANK LTD [IBN] 41.24 15,280.70 39,25,50,419

STERLITE INDUSTRIES

INDIA LTD [SLT]12.93 4,107.77 25,88,57,337

INFOSYS TECHNOLOGIES

LTD [INFY]57.64 14,823.81 25,30,98,844

TATA MOTORS LTD [TTM] 21.25 4,094.05 22,62,80,142

SATYAM COMPUTER

SERVICES LTD [SAY]

4.52 855.14 16,46,51,673

WIPRO LTD [WIT] 13.03 1,449.20 11,02,01,022

DR REDDYS LABORATORIES

LTD [RDY]28.62 2,290.17 8,19,49,496

HDFC BANK LTD [HDB] 160.68 6,598.48 4,72,23,458

MAHANAGAR TELEPHONE

NIGAM [MTE]2.65 53.12 1,70,10,180

TATA COMMUNICATIO

NS LTD [TCL]14.13 175.71 1,38,55,182

Total 49,728 1,56,56,77,753

Security Name Last Value (Mn$) Volume

BAIDU INC [BIDU] 77.32 1,58,845.10 2,60,40,64,267

JA SOLAR HOLDINGS CO

LTD [JASO]5.9 7,915.52 1,44,07,60,014

YINGLI GREEN ENERGY HOLDING

CO LTD [YGE]10.83 9,451.84 78,17,27,967

SUNTECH POWER HOLDINGS CO

LTD [STP]7.72 7,986.66 64,88,83,970

TRINA SOLAR LTD [TSL] 24.86 14,207.29 64,36,20,033

LDK SOLAR CO LTD [LDK] 6.81 3,524.81 52,22,61,904

CHINA UNICOM LTD [CHU] 13.69 5,035.45 41,32,50,005

SOLARFUN POWER

HOLDINGS CO LTD [SOLF]

10.47 3,327.19 39,61,47,126

CTRIP.COM INTERNATIONAL

LTD [CTRP]41.51 14,536.53 38,88,56,162

RENESOLA LTD [SOL] 8.58 2,015.28 31,92,59,566

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

16

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

17

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

18

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

timeEffects:• Smaller companies move to other markets• Increase in Level-1 ADRs

19

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.

20

IDR

• Indian Depositary Receipts• 1st IDR: Standard chartered

• Expected more IDRs in future due to increase in potential of the Indian capital markets

21

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

22