American Depository Receipts

and

Global Depository Receipts

Submitted By:

Shiraj Sherasia (09020242039)

Shruti Gupta (09020242040)

Shruti Srivastava (09020242041)

Swati Randhawa (09020242042)

Teena Deuri (09020242043)

Avinash Tirkey (09020242044)

Vinod Tripathi (09020242045)

Submitted To:

Mr. S. K. Vaze

Faculty

Trade Finance

Symbiosis Institute of International Business, Pune.

American Depositary Receipt (ADR)

Introduction

Buying stock in a foreign company is not only another way to diversify your portfolio, but some of the best growth opportunities may be in other countries, especially developing nations, such as China or India. However, investing directly in foreign companies is expensive, risky, and problematic because of the foreign language, and different foreign exchange and accounting rules. American Depositary Receipts simplifies investing in a foreign company.

First created in 1927 by J.P. Morgan, to make it easier for Americans to invest in the British retailer Selfridges & Co., American Depositary Receipts (ADR), also sometimes called American Depository Receipts.

An American Depositary Receipt (or ADR) represents ownership in the shares of a non-U.S. company and trades in U.S. financial markets. The stock of many non-US companies trade on US stock exchanges through the use of ADRs. ADRs enable U.S. investors to buy shares in foreign companies without the hazards or inconveniences of cross-border & cross-currency transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies.

Each ADR is issued by a U.S. depositary bank and can represent a fraction of a share, a single share, or multiple shares of the foreign stock. An owner of an ADR has the right to obtain the foreign stock it represents, but US investors usually find it more convenient simply to own the ADR. The price of an ADR often tracks the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares. In the case of companies incorporated in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government.

Depositary banks have various responsibilities to an ADR shareholder and to the non-US company the ADR represents. The first ADR was introduced by JPMorgan in 1927, for the British retailer Selfridges & Co. There are currently four major commercial banks that provide depositary bank services - JPMorgan, Citibank, Deutsche Bank and the Bank of New York Mellon.

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Individual shares of a foreign corporation represented by an ADR are called American Depositary Shares (ADS).

The ratio of company stock to its ADR can range from 100,000:1 to 1:100, because many ADRs don't have a one-to-one ratio between the depositary receipts and the shares of stock, financial ratios are often not included in stock listings.

Depositary receipts can, of course, be created and sold in other countries, using the native language for communications and the native currency for monetary exchanges, and thus, are sometimes called Global Depositary Receipts (GDR) or European Depositary Receipts (EDR) if such receipts are sold in Europe. Companies can create and sell depositary receipts in several countries to broaden their base of investors, to increase awareness of their company, to raise capital, and to provide more liquidity. Receipts can also be used as currency for mergers and acquisitions in those countries where receipts are available, or as stock option alternatives for employees of a U.S. subsidiary of the foreign company.

Types of ADR programs

When a company establishes an American Depositary Receipt program, it must decide what exactly it wants out of the program, and how much time, effort and resources they are willing to commit. For this reason, there are different types of programs that a company can choose.

Unsponsored shares

Unsponsored shares are a form of Level I ADRs that trade on the over-the-counter (OTC) market. These shares are issued in accordance with market demand, and the foreign company has no formal agreement with a depositary bank. Unsponsored ADRs are often issued by more than one depositary bank. Each depositary services only the ADRs it has issued.

Due to a recent SEC rule change making it easier to issue Level I depositary receipts, both sponsored and unsponsored, hundreds of new ADRs have been issued since the rule went into effect in October 2008. The majority of these were unsponsored Level I ADRs, and now approximately half of all ADR programs in existence are unsponsored.

Level I

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Level 1 depositary receipts are the lowest level of sponsored ADRs that can be issued. When a company issues sponsored ADRs, it has one designated depositary who also acts as its transfer agent.

A majority of American depositary receipt programs currently trading are issued through a Level 1 program. This is the most convenient way for a foreign company to have its equity traded in the United States.

Level 1 share can only be traded on the OTC market and the company has minimal reporting requirements with the U.S. Securities and Exchange Commission (SEC). The company is not required to issue quarterly or annual reports in compliance with U.S. GAAP. However, the company must have a security listed on one or more stock exchange in a foreign jurisdiction and must publish in English on its website its annual report in the form required by the laws of the country of incorporation, organization or domicile.

Companies with shares trading under a Level 1 program may decide to upgrade their program to a Level 2 or Level 3 program for better exposure in the United States markets.

Level II (listed)

Level 2 depositary receipt programs are more complicated for a foreign company. When a foreign company wants to set up a Level 2 program, it must file a registration statement with the US SEC and is under SEC regulation. In addition, the company is required to file a Form 20-F annually. Form 20-F is the basic equivalent of an annual report (Form 10-K) for a U.S. company. In their filings, the company is required to follow U.S. GAAP standards.

The advantage that the company has by upgrading their program to Level 2 is that the shares can be listed on a U.S. stock exchange. These exchanges include the New York Stock Exchange (NYSE), NASDAQ, and the American Stock Exchange (AMEX).

While listed on these exchanges, the company must meet the exchange’s listing requirements. If it fails to do so, it may be delisted and forced to downgrade its ADR program.

Level III (offering)

A Level 3 American Depositary Receipt program is the highest level a foreign company can sponsor. Because of this distinction, the company is required to adhere to stricter rules that are similar to those followed by U.S. companies.

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Setting up a Level 3 program means that the foreign company is not only taking steps to permit shares from its home market to be deposited into an ADR program and traded in the U.S.; it is actually issuing shares to raise capital. In accordance with this offering, the company is required to file a Form F-1, which is the format for an Offering Prospectus for the shares. They also must file a Form 20-F annually and must adhere to U.S. GAAP standards. In addition, any material information given to shareholders in the home market must be filed with the SEC through Form 8K.

Foreign companies with Level 3 programs will often issue materials that are more informative and are more accommodating to their U.S. shareholders because they rely on them for capital. Overall, foreign companies with a Level 3 program set up are the easiest on which to find information.

Restricted programs

Foreign companies that want their stock to be limited to being traded by only certain individuals may set up a restricted program. There are two SEC rules that allow this type of issuance of shares in the U.S.: Rule 144-A and Regulation S. ADR programs operating under one of these 2 rules make up approximately 30% of all issued ADRs.

144-A

Some foreign companies will set up an ADR program under SEC Rule 144(a). This provision makes the issuance of shares a private placement. Shares of companies registered under Rule 144-A are restricted stock and may only be issued to or traded by Qualified Institutional Buyers (QIBs). NYSE US public shareholders are generally not permitted to invest in these ADR programs, and most are held exclusively through the Depository Trust & Clearing Corporation, so there is often very little information on these companies.

Regulation S

The other way to restrict the trading of depositary shares to US public investors is to issue them under the terms of SEC Regulation S. This regulation means that the shares are not, and will not be registered with any United States securities regulation authority.

Regulation S shares cannot be held or traded by any “U.S. Person” as defined by SEC Regulation S rules. The shares are registered and issued to offshore, non-US residents.

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Regulation S ADRs can be merged into a Level 1 program after the restriction period has expired, and the foreign issuer elects to do this.

Sourcing ADRs

One can either source new ADRs by depositing the corresponding domestic shares of the company with the depositary bank that administers the ADR program or, instead, one can obtain existing ADRs in the secondary market. The latter can be achieved either by purchasing the ADRs on a US stock exchange or via purchasing the underlying domestic shares of the company on their primary exchange and then swapping them for ADRs; these swaps are called crossbook swaps and on many occasions account for the bulk of ADR secondary trading. This is especially true in the case of trading in ADRs of UK companies where creation of new ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government; sourcing existing ADRs in the secondary market (either via crossbook swaps or on exchange) instead is not subject to SDRT.

ADR Termination

Most ADR programs are subject to possible termination. Termination of the ADR agreement will result in cancellation of all the depositary receipts, and a subsequent delisting from all exchanges where they trade. The termination can be at the discretion of the foreign issuer or the depositary bank, but is typically at the request of the issuer. There may be a number of reasons why ADRs terminate, but in most cases the foreign issuer is undergoing some type of reorganization or merger.

Owners of ADRs are typically notified in writing at least thirty days prior to a termination. Once notified, an owner can surrender their ADRs and take delivery of the foreign securities represented by the Receipt, or do nothing. If an ADR holder elects to take possession of the underlying foreign shares, there is no guarantee the shares will trade on any US exchange. The holder of the foreign shares would have to find a broker who has trading authority in the foreign market where those shares trade. If the owner continues to hold the ADR past the effective date of termination, the depositary bank will continue to hold the foreign deposited securities and collect dividends, but will cease distributions to ADR owners.

Usually up to one year after the effective date of the termination, the depositary bank will liquidate and allocate the proceeds to those

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respective clients. Many US brokerages can continue to hold foreign stock, but may lack the ability to trade it overseas.

The Global Depositary Receipt as a Financial Instrument

A GDR is issued and administered by a depositary bank for the corporate issuer. The depositary bank is usually located, or has branches, in the countries in which the GDR will be traded. The largest depositary banks in the United States are JP Morgan, the Bank of New York Mellon, and Citibank.

A GDR is based on a Deposit Agreement between the depositary bank and the corporate issuer, and specifies the duties and rights of each party, both to the other party and to the investors. Provisions include setting record dates, voting the issuer’s underlying shares, depositing the issuer’s shares in the custodian bank, the sharing of fees, and the execution and delivery or the transfer and the surrender of the GDR shares.

A separate custodian bank holds the company shares that underlie the GDR. The depositary bank buys the company shares and deposits the shares in the custodian bank, and then issues the GDRs representing an ownership interest in the shares. The DR shares actually bought or sold are called depositary shares.

The custodian bank is located in the home country of the issuer and holds the underlying corporate shares of the GDR for safekeeping. The custodian bank is generally selected by the depositary bank rather than the issuer, and collects and remits dividends and forwards notices received from the issuer to the depositary bank, which then sends them to the GDR holders. The custodian bank also increases or decreases the number of company shares held per instructions from the depositary bank.

The exchanges on which the GDR trades are chosen by the company. Currently, the stock exchanges trading GDRs are the:

1. London Stock Exchange,

2. Luxembourg Stock Exchange,

3. Dubai International Financial Exchange (DIFX),

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4. Singapore Stock Exchange,

5. Hong Kong Stock Exchange.

The Details of a GDR Purchase by an Investor

1. An investor calls her broker to buy GDRs for a particular company.

2. The broker fills the order by either buying the GDRs on any of the exchanges that it trades, or by buying ordinary company shares in the home market of the company by using a broker in the issuer's country. The foreign broker then delivers the shares to the custodian bank.

3. The investor’s broker notifies the depositary bank that ordinary shares have been purchased in the issuer's market and will be delivered to the custodian bank and requests depositary shares to be issued in the investor’s account.

4. The custodian notifies the depositary bank that the shares have been credited to the depositary bank’s account.

5. The depositary bank notifies the investor’s broker that the GDRs have been delivered.

6. The broker then debits the account of the investor for the GDR issuance fee.

The Details of a GDR Sale by an Investor

1. An investor instructs his broker to sell his GDRs. The investor must deliver the shares within 3 business days if the shares are not in the street name of the broker.

2. The broker can either sell the shares on the exchanges where the GDR trades or the GDRs can be cancelled, and converted into the ordinary shares of the issuing company.

3. If the broker sells the shares on an exchange, then the broker uses the services of a broker in the issuer's market.

4. If, instead, the shares are cancelled, then the broker will deliver the shares to the depositary bank for cancellation and provide instructions for the delivery of the ordinary shares of the company

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issuer. The investor pays the cancellation fees and any other applicable fees.

5. The depositary bank instructs the custodian bank to deliver the ordinary shares to the investor’s broker, who then credits the account of its customer.

What is the difference between ADR and GDR?

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.

If the depository receipt is traded in the United States of America (USA), it is called an American Depository Receipt, or an ADR.

If the depository receipt is traded in a country other than USA, it is called a Global Depository Receipt, or a GDR.

Which Indian companies have ADRs and / or GDRs?

Some of the best Indian companies have issued ADRs and / or GDRs.

Below is a partial list.

Company ADR GDR

Bajaj Auto No Yes

Dr. Reddy's 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

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WIPRO Yes Yes

THE COMPREHENSIVE GDR LISTING

GDR Companies # euro convertible bond**adjusted for bonus

Industry Segregation

Date Of GDR Issue

SizeOf GDRIssueUS $Mill

SharesperGDR

GDR Issue Price **(US$)

Arvind Mills Textiles 03-Feb-94 125.00 1.0 9.78

Ashok Leyland Autos 20-Mar-95 137.77 3.0 12.79

Bajaj Auto Autos 27-Oct-94 110.00 1.0 16.89

Ballarpur Ind.# Paper 27-May-94 35.00 1.0 8.77

Bombay Dye Textiles 16-Nov-93 50.00 1.0 9.20

BSES Ltd Power 04-Mar-96 125.00 3.0 14.40

Century Textiles Diversified 21-Sep-94 100.00 2.0 254.00

CESC Power 14-Apr-94 125.00 1.0 10.67

Core Parent Pharma 21-Jun-94 70.00 1.0 12.60

Crompton Greaves Electrical 02-Jul-96 50.00 1.0 7.56

DCW Diversified 19-May-94 25.00 5.0 13.55

Dr. Reddy's Pharma 18-Jul-94 48.00 1.0 11.16m

E. I. Hotels Hotels 07-Oct-94 40.00 1.0 9.30

EID Parry Fertiliser 07-Jul-94 40.00 1.0 8.39

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Finolex Cab Cables 19-Jul-94 55.00 1.0 16.60

Flex Industries Packaging 30-Nov-95 30.00 2.0 8.05

G.E. Shipping Shipping 17-Feb-94 100.00 5.0 15.94

G.N.F.C Fertiliser 06-Oct-94 61.11 5.0 12.75

GAIL Oil & Refineries 04-Nov-99 22.50 6.0 9.67

Garden Silk Textiles 04-Mar-94 45.00 5.0 26.28

Grasim (1st) Diversified 25-Nov-92 90.00 1.0 12.98

Grasim (2nd) Diversified 09-Jun-94 100.00 1.0 20.50

Guj Ambuja # Cement 26-Nov-93 80.00 1.0 5.95

Himachal Futuri Telecomm. 02-Aug-95 50.00 4.0 9.30

Hindalco (1st) Aluminium 22-Jul-93 72.00 1.0 10.73

Hindalco (2nd) Aluminium 08-Jul-94 100.00 1.0 16.00

Hindustan Dev. Diversified 21-Sep-94 76.00 1.0 2.05

India Cements Cement 11-Oct-94 90.00 1.0 4.23

Indian Alum. Aluminium 22-Feb-94 60.00 1.0 6.77

Indian Hotels Hotels 28-Apr-95 86.25 1.0 16.60

Indian Rayon Diversified 25-Jan-94 125.00 1.0 15.01

Indo Gulf Fertiliser 18-Jan-94 100.00 1.0 4.51

Indo Rama Textiles 21-Mar-96 50.00 10.0 11.37

ICICI Finance 02-Aug-96 230.00 5.0 11.50

ICICI (ADR) Finance 22-Sep-99 315 5.0 9.80

Infosys IT 11-Mar-99 70.38 0.5 34

IPCL Petrochemicals 08-Dec-94 85.00 3.0 13.87

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ITC Cigarettes 13-Oct-93 68.85 1.0 7.65

J.K. Corp Diversified 17-Oct-94 55.00 1.0 8.00

Jain Irrig Plastics 25-Feb-94 30.00 1.0 11.13

JCT Ltd. Textiles 29-Jul-94 45.00 10.0 16.96

Kesoram Ind Diversified 31-Jul-96V 30.00 1.0 1.60

L & T (1st) Diversified 18-Nov-94 150.00 2.0 16.70

L & T (2nd) Diversified 01-Mar-96 135.00 2.0 15.35

Mah & Mah Autos 30-Nov-93 74.75 1.0 4.46

MTNL Telecom 04-Dec-97 418.53 2.0 11.958

NEPC Micon Diversified 07-Nov-94 47.70 1.0 3.18

Nippon Denro# Steel 03-Mar-94 125.00 10.0 21.36

Oriental Hotels Hotels 14-Dec-94 30.00 1.5 12.75

Ranbaxy Labs Pharma 29-Jun-94 100.00 1.0 19.38

Raymond Woolen Textile 09-Nov-94 60.00 2.0 10.61

Reliance Diversified 27-May-92 150.00 2.0 16.35

Reliance (2nd) Diversified 15-Feb-94 300.00 2.0 23.50

Reliance Petroleum Diversified 18-Oct-99 100 15.0 23.0

S.A.I.L. Steel 07-Mar-96 125.00 15.0 12.97

Satyam Infoway IT 19-Oct-99 75.00 1.0 18.0

S.I.E.L. Diversified 14-Oct-94 40.00 3.0 14.64

Sanghi Poly Textiles 28-Jul-94 50.00 5.0 9.56

SIV Ind  Textiles 01-Aug-94 45.00 1.0 6.37

SPIC Fertiliser 28-Sep-93 65.00 5.0 11.15

SBI Banking 03-Oct-96 369.95 2.0 14.15

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Sterlite India# Diversified 22-Dec-93 100.00 1.0 17.86

Tata Electric Power 22-Feb-94 65.00 100.0 710.00

Telco (1st) Autos 15-Jul-94 115.00 1.0 8.75

Telco (2nd) Autos 06-Aug-96 200.00 1.0 14.25

Tube Invest Cycles & Acc. 20-May-94 45.60 1.0 6.58

United Phos. Pesticides 25-Feb-94 55.00 1.0 20.50

Usha Beltron Cables 06-Oct-94 35.00 1.0 10.70

Videocon Int. Electronics 26-Jan-94 90.00 1.0 8.10

VSNL Telecomm. 24-Mar-97 527.00 0.5 13.93

Wockhardt Pharma 25-Feb-94 75.00 1.0 14.35

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