American Depository Receipt New

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AMERICAN

DEPOSITORY RECEIPTS&

GLOBAL

DEPOSITORY RECEIPTS

Submitted By:

A-19: Divya Duddu

A-24: Priyanka Kalke

A-49: Dharmish Shah

A-54: Falguni ShiyadB-44: Nirav Sangoi



DEPOSITORY RECEIPTS

What are depositary receipts?

A depositary receipt (DR) is a type of negotiable (transferable) financial security that is traded

on a local stock exchange but represents a security, usually in the form of equity that is issued

by a foreign publicly listed company. The DR, which is a physical certificate, allows investors to

hold shares in equity of other countries.

How does DR work?

The DR is created when a foreign company wishes to list its already publicly traded shares or

debt securities on a foreign stock exchange. Before it can be listed to a particular stock

exchange, the company in question will first have to meet certain requirements put forth by theexchange. Initial public offerings, however, can also issue a DR. DRs can be traded publicly or

over-the-counter. Let us look at an example of how an ADR is created and traded.

Origin of Depository Receipts

The origin of depository receipt is USA. It started in 1920’s. In this period, it was difficult and

risky to invest on the originals of foreign securities by American investors and brokers. The risks

in this condition have been causing delays and some kind of extra expenses. In order to avoid

the practical problems, they should have looked for solutions. In the solution produced, it was

aimed at constituting a system that will be able to eliminate those handicaps. In those times,

financial and economical system was national. For the system started to function badly, the

investors and brokers were not able to transit to international market in the investment and

financial activities they have been carried out. They were as if trapped inside a no end box and

it was impossible for them to open global market. Something was clearer than anything else.

The key was as if climbing up a hill in the desert under the sun in 70 C in vein, and it was time

consuming.

The distance between American and European stock exchange markets was high, for this

reason, what is to be was to reach the international arena in world of stock exchange market.

For the reason of investor’s demand of diversifying their financial resources internationally,

American Depository Receipts revealed.



TYPES OF DR

There are a variety of DR program types. These can be divided into capital raising and non

capital raising structures. The type of program used will depend on the requirements of the

issuer, the features of the issuer's domestic market and on investor attitudes.A third type of DR program is known as "unsponsored". This differs from other types in that the

company whose shares are represented by unsponsored DRs is not involved in setting up the

program.

*Source: ADR Reference Guide – JP Morgan, February 2005

NON CAPITAL RAISING DRS



SPONSORED ADR PROGRAM - LEVEL 1

A Level I sponsored ADR program is the easiest and least expensive means for a company to

provide for issuance of its shares in ADR form in the US. A Level I program is initiated by the

issuer and involves the filing of an F-6 registration statement, but allows for exemption under

Rule12g 3-2(b) from full SEC reporting requirements. The issuer has a certain amount of controlover the ADRs issued under a sponsored Level I program, since a depositary agreement is

executed between the issuer and one selected depositary bank. Level I ADRs can however only

be traded over-the-counter and cannot be listed on a national exchange in the US.

Advantages of a Level I ADR program:

It avoids full compliance with the SEC's reporting requirements. By working with a single

depositary bank, the issuer has greater control over its ADR program than would be the

case with an unsponsored program. The depositary acts as a channel of communication between the issuer and its US

shareholder base. Dividend payments, financial statements and details of corporate

actions will be passed on to US investors via the depositary.

The depositary bank maintains accurate shareholder records for the issuer and can, if

requested, monitor large stock transactions and report them to the issuer.

Set-up costs are minimal and all transaction costs are absorbed by the ADR holder.

It is easy and relatively inexpensive to upgrade the program to Level II or III as the issuer

and depositary bank do not have to negotiate cancellation of unsponsored ADRs with

several depositaries, as would be the case if upgrading an unsponsored program.

Disadvantages of a Level I ADR program

It cannot be listed on any of the national exchanges in the US. As a result, investor

interest might be somewhat restricted which may limit the issuer's ability to enhance its

name recognition in the US.

Capital raising is not permitted under a Level I program.



SPONSORED ADR PROGRAM - LEVEL II

A sponsored Level II ADR must comply with the SEC's full registration and reporting

requirements. In addition to filing an F- 6 registration statement, the issuer is also required to

file SEC Form 20 -F and to comply with the SEC's other disclosure rules, including submission of

its annual report which must be prepared in accordance with US Generally AcceptedAccounting Principles (GAAP). Registration allows the issuer to list its ADRs on one of the three

major national stock exchanges, namely the New York Stock Exchange (NYSE), the American

Stock Exchange (AMEX), or the National Association of Securities Dealers Automated Quotation

(NASDAQ) Stock Market, each of which has reporting and disclosure requirements. Level II

sponsored programs are initiated by non-US companies to give US investors access to their

stocks in the US. As with a Level I program, a depositary agreement is signed between the

issuer and a depositary bank. The agreement defines the responsibilities of the depositary,

which usually include responding to investor enquiries, mailing annual reports and other

important material to shareholders and maintaining shareholder records.

Advantages of a Level II ADR program:

It is more attractive to US investors than a Level I program because the ADRs may be

listed on one of the major US exchanges. This raises the profile of the ADR program to

investors, thus increasing the liquidity and marketability of the securities.

Listing and registration also enhance the issuer's name recognition in the US.

US disclosure regulations for large investors enable the issuer to monitor the ownership

of its shares in the US.

Disadvantages of a Level II ADR program

More detailed SEC disclosure is required than for a Level I program. For example, the

issuer's financial statements must conform to US Generally Accepted Accounting

Principles (GAAP), or else a detailed summary of the differences in financial reporting

between the home country and the US must be submitted.

SEC regulations do not permit a public offering of ADRs under a Level II program.

It is more expensive and time-consuming to set up and maintain a Level II program than

a Level I program because of the more stringent reporting requirements and higher

legal, accounting and listing costs.



CAPITAL RAISING DRs

SPONSORED ADR PROGRAM - LEVEL III

Level III sponsored ADRs are similar to Level II ADRs in that the issuer initiates the program,

deals with one depositary bank, lists on one of the major US exchanges, and files Form F-6 and

20-F registration statements with the SEC. The major difference is that a Level III program

allows the issuer to raise capital through a public offering of ADRs in the US and this requiresthe issuer to submit a Form F-1

Advantages of a Level III ADR program

It permits public offerings of ADRs in the US which can be used for a variety of purposes, for

example the raising of capital to finance acquisitions or the establishment of an Employee Stock

Ownership Plan (ESOP) for the issuer's US subsidiary.

Disadvantages of a Level III ADR program

SEC reporting is more onerous than for Level I or II programs.

The costs of setting up and maintaining a Level III program can be high. Set-up costs,

which would include listing, legal, accounting, investor relations and "road show" costs,

might amount to approximately US$ 300,000 to US$ 500,000.



RULE 144(a) ADRs (RADRs)

Rule 144(a) ADRs, or restricted ADRs (RADRs) are simply privately placed depositary receipts

which are issued and traded in accordance with Rule 144(a). This rule was introduced by the

SEC in April 1990 in part to stimulate capital raising in the US by non- US issuers. Some of the

former restrictions (under Rule 144) governing resale of privately placed securities (or"restricted securities") have been lifted under Rule 144(a), providing the sale is made to

"qualified institutional buyers" (QIBs), with the aim of adding liquidity to the private placement

market. A QIB is currently defined as an institution, which owns and invests on a discretionary

basis at least US$ 100 million (or, in the case of registered broker-dealers, US$ 10 million) in

securities of an unaffiliated entity.

At present there are believed to be in excess of 4000 QIBs but the SEC may decide to broaden

the definition of a QIB to allow a larger number to participate in the Rule 144(a) market. Non-

US companies now have easy access to the US equity private placement market and may thus

raise capital through the issue of restricted ADRs without conforming to the full SEC registration

and reporting requirements. Additionally the cost of issuing Rule 144(a) ADRs is considerably

less than the cost of initiating a Sponsored Level III ADR program.

In June 1990, the National Association of Securities Dealers (NASD) established a closed

electronic trading system for RADRs called "PORTAL" (Private Offerings, Resale and Trading

through Automated Linkages) this system is designed to provide a market for privately traded

securities such as RADRs and access to it is available to both investors and market makers.

Advantages of RADRs

ADRs offered under Rule 144(a) do not have to conform to full SEC reporting andregistration requirements. QIBs may demand certain financial disclosure, however,

unless the reporting exemption under Rule 12g 3-2(b) has been granted.

RADRs provide a cheaper means of raising equity capital than through a public offering

and they can be issued more easily and quickly.

RADRs can be launched on their own or as part of a global offering.

They can be traded through the NASDAQ's "PORTAL" system and they clear through the

DTC.

Disadvantages of RADRs

RADRs cannot be created for classes of share already listed on a US exchange.

RADRs can only be sold in the US to QIBs. Although there are in excess of 4000 potential

QIBs, the RADR market is not as liquid as the public US equity market.



CAPITAL RASING VERSUS NON CAPITAL RAISING ADR PROGRAMS

If the objective of the foreign company is to use existing shares to broaden shareholder base

(i.e. non capital razing) it has the option of going with level 1 program that trades on non-

NASDAQ OTC market or a more stringent level II program that is listed on NYSE, AMEX or

NASDAQ, however if it plans to raise capital through new shares, it has the option of goingwith a level III program listed on NYSE. NASDAQ, AMEX, which is even more stringent than a

level II program or with a privately placed rule 144a ADR program.

ADVANTAGES OF DRs

Depository stocks are within processing mechanisms for foreign securities. Depository

receipt agreements serve various advantages to investors like transfer and exchanging

dividends paid over foreign money currencies to their currency.

Also, depository receipts are used in privatization, mergers, foreign governments Dept,

imports and employment financing

Mostly, foreign securities are written for the bearer. For this reason, the lists of

securities cannot be pursued. Depository receipts try to minimize the problems of

promissory notes written for the bearer. It makes having information about the foreign

company easier.

Foreign companies having relationships with investors are restricted with law. Depositor

or its division can learn the information and declarations send by the foreign importer.

Even though the securities are written for the bearer, depository Bank has the bestconditions to get this information.

BUYING AND SELLING DRS

If an investor wishes to purchase shares in a foreign company, he can either buy the foreign

shares in the local market through a broker in that country or, providing the foreign company in

question has a DR program, the investor can request his broker to buy DRs. The broker may

either purchase existing DRs or, if none are available, he may arrange for a depositary bank (e.g.

Deutsche Bank) to issue new ones.

The process for issuing new DRs is very simple. The investor's broker contacts a broker in the

issuing company's home market and acquires shares in that company. These shares are then

deposited with the depositary bank's local custodian. Upon confirmation that the custodian has

received the shares, the depositary issues the requisite number of DRs to the investor via the

broker.



In some exceptional cases there may be restrictions on the issuance of new DRs under existing

programs (e.g. Indian GDR programs) because of local regulations. DRs can be sold in DR form,

in which case they trade and settle like other US or Euro securities.

They can also, however, be cancelled. In this case the broker acting on behalf of the owner of

the DRs will request the depositary bank to cancel the DRs and release the underlying shares to

a domestic broker in the issuing company's home market. The domestic broker will then sell theshares locally and the proceeds will be remitted to the investor who cancelled those DRs.

DRs certify that a stated number of underlying shares have been deposited with the

depositary's custodian in the foreign country.

DR holders are entitled to all the dividends payable on the underlying foreign shares

and, furthermore, to have these paid in the currency in which the DRs are denominated

– usually US dollars.

The DRs may be bought or sold through investors' own brokers, and they clear and

settle through the Depository Trust Company (DTC) for ADRs, through Euro clear and

Clear stream for EDRs and through all three (and possibly other clearing systems) in thecase of GDRs, depending on which markets they access.

Shareholder information such as annual reports, notices of general meetings and

corporate actions, and official news releases are provided by the issuer to the

depositary and to the receipt holders, either direct or through the local custodian.

The investor is thus spared the costs and difficulties often encountered when direct

investment is made in local markets, where currency, settlement, and linguistic

problems may be compounded by an excessive number of intermediaries.

WHY DO INVESTORS BUY DRs?

US investors have become increasingly interested in overseas markets as a result of

their higher yields compared to the US equity market over recent years.

International investors are also eager to diversify their portfolios, both

geographically and by industry sector, in order to increase their returns while

spreading their risk.

They have long been active in the debt markets, as evidenced by the vast size of the

Euromarkets, and sophisticated international clearing systems have been developed

to handle Euro instruments.

Until recently, however, cross-border equity investments have involved all the currency,

settlement and linguistic problems which occur when dealing with overseas equity markets.

Building on the concept of the ADR, investment banks developed the EDR/GDR to

solve these problems for international investors.



AMERICAN DEPOSITORY RECEIPTS

Background

ADRs were primarily created to increase investment access to widely known and often

multinational companies. They are typically formed by a depository bank depositing ordinary

shares of a foreign company into a trust and issuing receipts of interest in the underlying shares

on a domestic exchange. The bank will act as a custodian for the trust handling dividend

distribution, currency exchange, proxies, tax reporting, and regulatory filings. It receives a

management fee for these services, either from the shareholders or the issuing company.

Trading of ADRs occurs by brokers purchasing/selling outstanding ADRs in the domestic

markets, or on the foreign markets if no shares are available domestically. In the case of

purchases in the foreign market, the broker then deposits the foreign shares with the bank inexchange for newly created ADRs. In the case of sales in the local market, the broker will cancel

the ADR causing the depository bank to sell the shares in the foreign market and deliver the

proceeds in the investor’s currency. Units in the trust are listed on large exchanges primarily in

countries with developed capital markets, as if they were shares of a company domiciled in the

same country as the exchange. The listing company of the ADR must adhere to the same

regulatory requirements and disclosures as the other listed issuers on the exchange. In effect,

shares of a foreign company can be purchased on a U.S. stock exchange in the same manner as

stock of a U.S. company.

So why have the middlemen (trust)? Many investors do not have efficient means of diversifying

into foreign companies because of the administrative and implementation issues. Often,trading in foreign markets is more expensive relative to U.S. exchange transaction costs, as well

as difficult to execute due to time zone differences. Also, foreign exchanges do not usually have

the same regulatory requirements that investors are familiar with here in the U.S., and custody

of the assets is costly. Currency exchanges will also have to be utilized in order to purchase

ordinary shares of foreign companies. ADRs trade easily and pay dividends in U.S. dollars and

settle through U.S. clearinghouses. These implementation barriers coupled with the desire of

investors to diversify internationally created a market for underwriters of ADR trusts. There are

also Global Depository Receipts (GDRs), International Depository Receipts (IDRs), and European

Depository Receipts (EDRs), which accomplish the same benefits already stated but trade in one

or more international markets.



By early 1998, 429 out of 3,104 companies listed in the NYSE, 437 of 6008 listed in NASDAQ,

and 61 out of 690 in the AMEX were foreign companies from over 50 different countries. In

addition, 412 out of about 6,200 equity securities traded in the OTC Bulletin Board were from

foreign issuers. Clearly, foreign firms must find listing in the US (or more generally, outside their

home market) advantageous. Then, why do foreign firms list their shares in the US? From the

firm's perspective, why is it that listing in the US is desirable, and the cost-benefit tradeoff a

positive one? Listing in the US can take many forms. Foreign firms can list their stock directly or

through an American Depositary Receipt (ADR) program. This listing can take place in an

organized exchange (e.g. NYSE, AMEX), NASDAQ, an OTC market, or as a private placement. The

listing can also be accompanied by an IPO, or a seasoned equity offering.

ADRs are issued by a U.S. bank that functions as a depositary, having ADR being backed by a

specific number of shares in the non-U.S. company. ADRs can be traded on any of the US stock

exchange (NYSE, NASDAQ, or AMEX) and over-the-counter. In the case of Rule 144A, they are

privately placed and traded. The same concept for ADR has been spread into other regions with

the creation of the global depositary receipts (GDRs), international depositary receipts (IDRs),and European depositary receipts (EDRs), which are generally traded or listed in one or more

international markets. As of February 2005, this instrument is used by around 2,100 non-US

issuers from approximately 80 countries. About 500 of those ADRs are listed in the US

exchanges.

ADR PROGRAM TYPES

SPONSORED AND UNSPONSORED ADR PROGRAMS

Issuers seeking the benefits of ADRs generally pursue what are called sponsored ADR programs.

They initiate the process and, working with a depositary bank, actively manage the program

going forward. The issuer benefits by making a strategic foray into the U.S. market, controlling

its image and reputation in the capital markets. In general, only sponsored ADRs can be listed

on the major stock exchanges or quoted under the NASDAQ system. While most new ADR

programs are sponsored, many unsponsored programs (in which the ADRs are created and

offered to investors without a company's active participation) still exist.



THE VARIOUS TYPES OF SPONSORED ADR PROGRAMS

ADR

PROGRAMS

LEVEL I LEVEL II LEVEL III 144a

Issuers can choose from four different types of sponsored ADR programs, each with its own

set of benefits as well as its own set of legal and regulatory requirements: Level I, Level II,

Level III, and Rule 144A/GDR. In general, American Depositary Receipts are used for two

objectives: raising new capital, or increasing US ownership of shares already issued and trading

in the market. There are three basic ADR types, or “levels” as they are usually referred to,

designed to achieve a company’s objectives.

LEVEL I ADRS-SPONSORED

Level I ADRs are the simplest method for companies to access the US capital markets. Level I

ADRs are traded in the over-the-counter (OTC) market, with bid and ask prices published daily

and distributed by the National Daily Quotation Bureau in the pink sheets. The issuing company

does not have to comply with US Generally Accepted Accounting Principles (GAAP) or provide

US Securities and Exchange Commission (SEC) disclosure.

Level I ADRs essentially enable a company to obtain the benefits of a US publicly traded securitywithout altering their current reporting process.

Level I DRs account for more than 60% of the US ADRs. Companies that have Level I ADR

programs can “migrate” to a Level II or Level III ADR program if they desire to trade on the New

York Stock Exchange, the American Stock Exchange, Nasdaq or the OTC Bulletin Board, or if the

company desires to raise capital directly in the United States.

Level I ADR programs currently require minimal SEC registration: The issuer seeks exemption

from the SEC's traditional reporting requirements under Rule 12g3-2(b). With that exemption,

the company agrees to send to the SEC summaries or copies of any public reporting documents

required in its home market (including documents for regulatory agencies, stock exchanges, or

direct shareholder communications). The depositary bank, working with the issuer, also filesthe Form F-6 registration statement with the SEC in order to establish the program.



LEVEL II ADRS- SPONSORED

Level II ADRs enable companies to list their ADRs on NASDAQ, the American Stock Exchange,

the New York Stock Exchange and the OTC Bulletin Board, thereby offering higher visibility in

the U.S. market, more active trading, and greater liquidity.

Level II ADRs require full registration with the Securities and Exchange Commission. Companies

must also meet the listing requirements of the appropriate stock exchange. Level II ADRs

require a Form 20-F and Form F-6 to be filed with the SEC, as well as meeting the listing

requirements and filing a listing application with the designated stock exchange. Upon F-6

effectiveness and approval of the listing application, the ADRs begin trading.

Level II ADR programs must comply with the full registration and reporting requirements of

the SEC's Exchange Act, which entails the following:

Form F-6 registration statement, to register the ADRs to be issued

Form 20-F registration statement, which contains detailed financial disclosure about the

issuer, including financial statements and a reconciliation of those statements to U.S.

GAAP, to register the listing of the ADRs

Annual reports and any interim financial statements submitted on a regular, timely basis

to the SEC

Level III ADRs-SPONSORED

Level III ADRs enable to companies to list their ADRs on NASDAQ, the Amex, the New York

Stock Exchange or the OTC Bulletin Board, and make a simultaneous public offering of ADRs in

the United States.In the most high-profile form of sponsored ADR program, Level III, an issuer floats a public

offering of ADRs in the United States and lists the ADRs on one of the U.S. exchanges or

NASDAQ. The benefits of a Level III program are substantial: It allows the issuer to raise capital

and leads to much greater visibility in the U.S. market.

Level III ADR programs must comply with various SEC rules, including the full registration and

reporting requirements of the SEC's Exchange Act. This entails the following:

Form F-6 registration statement, to register the ADRs

Form 20-F registration statement, an annual filing that contains detailed financial

disclosure from the issuer, including Form F-1, to register the equity securitiesunderlying the ADRs that are offered publicly in the U.S. for the first time, including a

prospectus to inform potential investors about the company and the risks inherent in its

businesses, the offering price for the securities, and the plan for distributing the shares

Annual reports and any interim financial statements submitted on a regular, timely basis

to the SEC and to all registered public shareholders.



RULE 144A ADRS

Many companies seek to raise capital in the U.S. markets privately by issuing restricted

securities under Rule 144A, which do not require SEC review. Rule144A facilitates the trading of

privately placed securities by sophisticated institutional investors (also known as Qualified

Institutional Buyers, or QIBs; they must own or manage at least $100 million in securities).

SPONSORED VERSUS UNSPONSORED DR PROGRAMS

Unsponsored programs are issued by a depository in response to the market demand for the

shares of a foreign company, but without a formal agreement between the depository and the

foreign company. Once a depository creates an unsponsored ADR facility it is common for other

depositories to clone it, creating numerous unsponsored facilities which are considered

fungible.

In contrast sponsored program are issued by an exclusive depository appointed by the foreign

company under a deposit agreement, the depository bank agrees to issue ADR certificates and

the issuer agrees to pay certain costs of the depository such as such as dividend disbursement

fees.

ADVANTAGES OF USING ADRs

The main advantage of buying an American Depositary Receipt rather than the foreign

stock itself is the ease of the transaction.

ADRs are a great way to invest abroad without having to convert U.S. dollars to many

different currencies.

Another advantage offered by an ADR is that if the foreign stock does pay dividends, the

investment bank will convert the dividends to U.S. dollars and remit the payment to

you. In addition, if the dividend is subject to foreign tax, the investment bank will

withhold the tax so you don't have to worry about it.

Therefore, if exchange rates were to move against you, it would hurt the value of your

ADR. If you are considering investing in foreign stocks, ADRs should be part of your

investment decision; however, you should become familiar with all the risks associated

with foreign investing before making an investment decision.



Advantages to Issuers

Provides a simple means of diversifying a company’s shareholder base and accessing

important U.S. market

May increase the liquidity of the underlying shares of the issuer

ADRs can be used as an equity financing tool in both M&A transactions and ESOPs for

U.S. subsidiaries Helps increase a non-U.S. company’s visibility and name recognition in the U.S. investor

community

May raise capital in the U.S. market through some types of programs

Advantages to Investors

Offers a convenient means of holding foreign shares

Simplifies the trading & settlement of foreign securities; ADRs trade and settle just like

U.S. securities

Offers lower trading & custody costs when compared with shares bought directly in

the foreign market

DISADVANTAGES OF USING ADRs

Despite all the described advantages, the ADRs do represent the same asset as local shares but

may not be “fully fungible” in several countries (meaning they cannot be seamless exchanged

with its home market security). For example, until 2001 there was no two-way fungibility for

Indian ADRs; in that environment, investors could convert ADRs into local shares but they could

not reconvert them back to ADRs. This and other capital control regulations prevent risk less

arbitrage opportunities to exist between ADRs and the underlying stock and are one of thereasons that premiums/discounts exist in the ADR market.

PROCEDURES AND MECHANICS OF ISSUING ADRS

ADRs are issued by a US bank, such as J. P. Morgan or The Bank of New York, which

functions as a depositary, or stock transfer and issuing agent for the ADR program.

The foreign, or local shares, remain on deposit with the Depositary’s custodian

issuer’s home market.

Each ADR is backed by a specific number of an issuer’s local shares (e.g. one ADR

representing one share, one ADR representing ten shares, etc.) This is the ADR ratio,

which is designed to set the price of each ADR in US dollars.

Financial information, including annual reports and proxies are delivered to US

holders on a consistent basis by the Depositary. The dividends are converted into

dollars and paid to ADR holders by the Depositary.



KEY COMPONENTS OF A SUCCESSFUL ADR PROGRAM

Successful ADR programs are actively traded and widely held. They typically share the following

attributes:

Attractive market, industry and equity story Active communication of the story to US investors

Investor friendly ADR structure (ratio of shares to ADRs)

Research and market-making by US investment banks and brokers

US LISTINGS – ADRs

THE OVER-THE-COUNTER MARKET

Over-The -Counter (OTC) market trades are listed in the "Pink Sheets". The Pink Sheets arepublished daily by the National Quotation Bureau and represent a non-automated listing of

stocks, which trade outside the three major exchanges. Listing fees are paid by the broker

dealer who seeks the listing.

The broker-dealer must file a National Quotation Form 211, which includes updated financials

of the company and other relevant information. Listing on the "Pink Sheets" is available for

sponsored Level I and unsponsored ADR programs, while a listing on NASDAQ, AMEX or the

NYSE is only available to Level II and III sponsored programs.

THE NATIONAL EXCHANGES

Issuers of Level II or III sponsored ADRs will benefit in several ways from a listing on any one of the three national exchanges. The increased visibility to the US investment community, which a

listing provides, together with access to the automated trading and efficient market pricing

available on the national exchanges, should lead to a significant expansion of the issuer's

investor base. Importantly, listing fees for ADRs are generally less expensive than those for

ordinary shares in the US. A description of the three exchanges follows

NASDAQ (NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED

QUOTATION)

NASDAQ, the first electronic stock market, operates a system of competing market makers

linked to investors by sophisticated telecommunications networks. There are two options for

listing; the Small Cap Market which, as its name implies caters for smaller companies, and

the National Market System, where the majority of NASDAQ securities are listed.

While criteria for listing on these two markets differ, the ADR listing charges are very similar.

The NASD also operates PORTAL, the market for securities issued under Rule 144(a).



AMEX (AMERICAN STOCK EXCHANGE)

AMEX operates an auction market system, intended to facilitate trading between buyers and

sellers with minimum intervention from professional dealers. Each listed stock is handled by a

specialist unit. There are special listings requirements for non-US issuers, with "Alternate"

requirements intended to cover companies which are financially sound but which, because of

the nature of their business, would not qualify under the "Regular" requirements.

NYSE (NEW YORK STOCK EXCHANGE)

The NYSE, like AMEX, operates an auction market system where stock prices are determined

largely by public orders competing with each other. By value of shares listed and by volume of

trading, the NYSE is the largest exchange in the United States.

Foreign companies listing on the NYSE can choose to qualify either under the "Alternate

Listing Standards" designed specifically for non-US corporations, or under the "Original" or

"Alternate Original" standards which apply to US domestic corporations. Each of the exchangessets additional standards concerning corporate governance. However, non-US corporations

may be exempted from these requirements upon application. Confidential meetings can be

arranged with the exchanges in advance of any decision-making to discuss specific concerns or

exemptions.

FOLLOWING ARE A FEW INDIAN ADRs TRADING IN US:

HDFC BANK LTD

ICICI BANK LTD

INFOSYS TECHNOLOGIES LTD

VIDESH SANCHAR NIGAM LTDWIPRO LTD

REDIFF.COM INDIA LTD

HOW ARE ADRs PRICED?

Let us assume that Russian Vodka Ltd, trades on a Russian stock exchange at 127

Russian roubles

This is equivalent to US$4.58 – assume this for simplicity

Now, a US bank purchases 30 million shares of Russian Vodka Ltd. and re-issues them in

the US at a ratio of 10:1

This means that each ADR you purchase is worth 10 shares on the Russian stock

exchange

A quick calculation tells us that each ADR should have an issue price of US$45.80

(US$4.58 per share X 10 shares) – since 10 shares equal 1 ADR

Once an ADR is priced and sold, its subsequent price is determined by supply and

demand factors, like any ordinary share



ADR ARBITRAGE OPPORTUNITIES

Several Indian companies actively trade on the and New York Stock Exchanges and due to the

time differences, market news, sentiments etc. sometimes the prices of the DR(Depository

receipt) trade at discounts or premiums to the underlying stock. This presents a knowledgeable

fund manager an arbitrage opportunity, where he buys the DR abroad and sells the same stockin India at a higher price (the difference being the profit).

Same DRs trade during India market hours offering a live arbitrage opportunity. As there is

very little risk in such trades the gap between the DR and underlying stock is minimal. DRs

which trade in the US markets offer better gaps, but there is the overnight risk to be factored

in. Hence the fund manager must take into consideration the local market conditions before

buying the stock in the US, as he must be confident of the selling off the stock the next

morning in India at the profitable gap. Once the stock is bought, arrangements are made to

deliver the stock in India, which involves several procedures. Once the stock is delivered in

India the proceeds are allowed to be repatriated and the process repeated. There are some

stocks which are also allowed to be bought in India and converted into the DR forms, which is

attractive if the DR is trading at a premium to the Indian stock price.

Main Reasons for Discrepancies between the Prices of ADR and Local Shares

There are significant limitations for an investor to buy an ADR on the NYSE and sell it on a local

exchange in the same day. Fees and other transaction costs are also incurred in this transaction.

Finally, depending on the ADR level and the local government regulations, different rights and

protections are accompanied by the certificate. This section in the paper will discuss the main

reasons for discrepancies between the prices of ADRs and local shares while questioning

whether they should be subjected to the law of one price.

Are ADRs and local shares the same assets?

Despite ADRs being certificates that represent the underling foreign shares that are being held

custody outside the U.S., ADRs and local shares are different certificates and may not be “fully

fungible” in several countries. For example, until 2001 there was no two -way fungibility for

Indian ADRs; in that environment, investors could convert ADRs into local shares but they could

not reconvert them back to ADRs. In 2001, the Indian Reserve Bank created the regulation that

allowed two-way fungibility between ADRs and local shares with restrictions, however, to what

shares could be converted to ADRs.Under this regulation, only local shares that were created through conversion of ADRs can be

reconverted. The high demand for Indian shares in the U.S. during the past few years and the

relatively low volume of ADRs available for investors resulted in most Indian ADRs trading at a

premium. Because of the fungibility problem, however, this premium cannot be arbitraged

away by investors so companies such as Infosys and Wipro are making secondary ADR offerings

with the goal of increasing liquidity and arbitrage the price differential themselves.



Correlation to stock index between ADRs and local shares

Another important source of disparity between ADR prices and its local traded securities are

the co-movements between the stocks and the markets they are traded rather than where the

company is established. A good example of this correlation with the US market is the Infosys

ADR, which has been following the technology companies in the NASDAQ much more closelythan the Indian stock market. Even more interesting, is the ADR premium of Wipro, which has

been presenting a much more modest premium compared to Infosys. Considering both

companies are in the same sector and in the same market, the differences between the ADR

premium of Wipro and Infosys can only be explained by differences in investor’s perception

rather than true valuation fundamentals.

Limits to Arbitrage Opportunities

Despite all of the advantages of the ADR, they are not seamless interchangeable with the

local underlying stock. While the previous section of this paper explored the potential reasons

for discrepancies between the ADR and the local stock, this section will describe the difficulties

of acting on those discrepancies in order to generate profitable arbitrage.

The basic mechanics of the execution of the arbitrage from the perspective of an US investor

would be the following:

1. U.S. investor acquires ADR by the ask price with U.S. dollars;

2. ADR is converted into the local security;

3. Local security is sold in the local market in local currency at the bid price;

4. Local currency amount is then converted into U.S. dollar at the ask exchange rate.Taxes, fees, liquidity issues, bid/ask spreads and restrictions can occur at any point of

the transaction.

Operational issues

There are several operational issues that make the mechanics of the

arbitrage difficult. The first one is related to time zone, which could potentially shrink trading

sessions overlap, making it difficult for the arbitrage to occur simultaneously or even in the

same day. Additionally, public information about the companies with ADR listing will also hit

the market in local business hours, delaying reflections is the price of the ADR.

Low liquidity for certain ADRs

There are many instances of firms with multiple listings in different markets and countries

having very low liquidity and trading in some of their listed securities. In this case, prices and

premiums/discounts do not mean anything since these prices are not applicable for large trades

(sometimes these issues trade less than 1,000 shares/day) and differences in prices cannot be

exploited (large inefficiencies in bid and ask spreads, higher transaction costs of trading small

lots, etc.).



Transaction costs

Transactions costs are probably one of the major inhibitors of arbitrage opportunities. Not

every investor can maintain trading accounts in different countries and sustain minimal levels

of investment and costs to be able to profitably exploit ADR-local shares arbitrage

opportunities. Transaction costs oftentimes add up to a significant amount and have to be add

up to the stock price (either the ADR or local stock) so as to calculate the “full price” for thestock and compare it to the price of the ADR (or vice versa). Although these costs may not

disallow arbitrage opportunities to emerge, they create what we call a no-arbitrage band.

Procedure of issue of ADR/GDR



US SECURITIES AND EXCHANGE COMPLIANCE

The following table outlines the different filings required by the SEC in the US, the way

ADRs are traded and whether new capital can be raised, according to the type of ADR

program issued

- Filings for any US tranche will depend on which structure is chosen:

Normaly a Level III or Rule 144(a) program.

The right granted to existing shareholders of a company to receive or to subscribe to newshares under a "rights" or "bonus" issue is also extended to registered ADR holders. However, a

US investor can only take possession of these rights in the US if the issuer undertakes to

register the offering, or if an exemption from registering it is available. In all other cases, the

depositary must arrange to sell the entitlement to the rights in the home country and distribute

the cash proceeds to the ADR holders.

Form F-6

Form F-6 is used for the registration of depositary shares as evidenced by ADRs (or GDRs) that

are issued by a depositary bank against the deposit of securities of a foreign issuer under the

Securities Act of 1933. The information is prepared by the company under the guidance of the

depositary bank at the inception of either an unsponsored or sponsored program.



Form 20-F

A Form 20-F is filed as a registration statement/annual report by issuers of Level II or III

sponsored ADRs/GDRs. It is a comprehensive report of all material business activities and

financial results and must comply with US GAAP. The Form 20- F consists of four distinct parts.

Part I requires a full description of the issuer's business, details of its property, any outstanding

legal proceedings, taxation and any exchange controls that might affect security holders.Part II requires a description of any securities to be registered, the name of the depositary bank

for the DRs and all fees to be charged to the holders of DRs.

Part III requires information on any defaults.

Part IV requires various financial statements to be submitted.

Form F-1

Foreign issuers planning a public offering in the US via a Level III DR program must register the

proposed new securities by filing Form F-1. This form requires the following information to be

included in the prospectus: use of proceeds, summary information, risk factors and ratio of

earnings to fixed charges, determination of offering price, dilution, plan of distribution,

description of securities to be registered, name of legal counsel and disclosure of commissions.

GAAP Conversion (Level II and Level III ADR Programs)

The process of converting financial statements to the US standard of Generally Accepted

Accounting Principles (GAAP) can be complex but depends on the compatibility of accounting

procedures in the issuer's home country with those of the US. Regulated industries such as

banking may find the costs of conversion more onerous than those companies in less regulated

sectors.

Tax Compliance

US Tax

Non-US companies are not responsible for complying with the US tax requirements regarding

dividend payments made in the US under their DR program. The depositary bank handles any

such issues.

Local Tax

The depositary provides registered GDR holders with tax certification forms prior to each

payment date and returns them to the issuer so that the correct tax can be deducted according

to local regulations.



GLOBAL DEPOSITORY RECEIPTS

A negotiable certificate held in the bank of one country representing a specific number of

shares of a stock traded on an exchange of another country

To raise money in more than one market, some corporations use global depositary receipts

(GDRs) to sell their stock on markets in countries other than the one where they have theirheadquarters.

The GDRs are issued in the currency of the country where the stock is trading. For example, a

Mexican company might offer GDRs priced in pounds in London and in yen in Tokyo. Individual

investors in the countries where the GDRs are issued buy them to diversify into international

markets. GDRs let you do this without having to deal with currency conversion and other

complications of overseas investing. The objective of a GDR is to enable investors in developed

markets, who would not necessarily feel happy buying emerging market securities directly in

the securities’ home market, to gain economic exposure to the intended company and, indeed,

the overall emerging economy using the procedures with which they are familiar.

Global Depository Receipt (GDR) - certificate issued by international bank, which can be subject

of worldwide circulation on capital markets. GDR's are emitted by banks, which purchase shares

of foreign companies and deposit it on the accounts. Global Depository Receipt facilitates trade

of shares, especially those from emerging markets. Prices of GDR's are often close to values of

related shares.

GDRs are securities available in one or more markets outside the company’s home country. The

basic advantage of the GDRs, compared to the ADRs, is that they allow the issuer to raise

capital on two or more markets simultaneously, which increases his shareholder base. They

gained popularity also due to the flexibility of their structure.

GDRs are typically denominated in USD, but can also be denominated in Euros. GDRs are

commonly listed on European stock exchanges, such as the London Stock Exchange (LSE) orLuxembourg Stock Exchange, or quoted on SEAQ (Stock Exchange Automated Quotations)

International, and traded at two other places besides the place of listing, e.g. on the OTC

market in London and on the private placement market in the US. Large part of the GDR

programs consists of a US tranche, which is privately placed and a non-US tranche that is sold to

investors outside the United States, typically in the Euro markets.

An overwhelming majority of DR programs by companies from Central and Eastern European

countries are established as GDRs, typically listed in London and traded by qualified

institutional investors in Euromarkets under regime of so called Regulation S and some of them

also in the American OTC markets in accordance with Rule 144A.



Two different GDR structures

When GDRs are structured with a Rule 144(a) offering for the US and a "Regulation S"

offering for non-US investors, there are two possible options for the structure.

Unitary Structures

Under a unitary structure, a single class of DRs is offered both to QIBs in the US and to

offshore purchasers outside the issuer's domestic market, in accordance with Regulation

S. All DRs are governed by one Deposit Agreement and all are subject to deposit, Withdrawal

and resale restrictions.

Bifurcated Structure

Under a bifurcated structure, Rule 144(a) ADRs are offered to QIBs in the US and

Regulation S DRs are offered to offshore investors outside the issuer's domestic market.

The two classes of DRs are offered using two separate DR facilities and two separate

Deposit Agreements. The Regulation S DRs are not restricted securities, and can therefore be

deposited into a "side-by-side" Level I DR program, and are not normally subject to restrictions

on deposits, withdrawals or transfers. However, they may be subject to temporary resale

restrictions in the US.

ADVANTAGES OF GDR/EDR

EDRs/GDRs can be launched as part of a private or public offering.

They allow a single fungible security to be placed in one or more international markets,

thus giving access to a global investor base.

They may allow the issuer to overcome local selling restrictions to foreign share

ownership.

GDRs are eligible for settlement through Clearstream, Euroclear.

DISADVANTAGES

If the US tranche of a GDR is structured as a Rule 144(a) private placement, the disadvantages

of an RADR program will apply. If it is structured as a Level III program, the reporting and cost

features of such programs will apply.



REGULATORY PROVISIONS FOR ADR/GDR

The issue of ADR/GDR by India Inc. is governed by following legal provisions:

1. Section 6 (3) (b) of Foreign Exchange Management Act (FEMA), 1999 reads as follows:6. Capital account transactions. –

(1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to

or from an authorized person for a capital account transaction.

(2) The Reserve Bank may, in consultation with the Central Government, specify-

(a) Any class or classes of capital account transactions which are permissible;

(b) the limit up to which foreign exchange shall be admissible for such transactions: Provided

that the Reserve Bank shall not impose any restriction on the drawl of foreign exchange for

payments due on account of amortization of loans or for depreciation of direct investments in

the ordinary courts of business.

(3) Without prejudice to the generality of the provisions of sub-section (2), the Reserve Bank

may, by regulations, prohibit, restrict or regulate the following-

(a) Transfer or issue of any foreign security by a person resident in India;

(b) Transfer or issue of any security by a person resident outside India



FOREIGN EXCHANGE MANAGEMENT ACT (FEMA)

An Indian corporate can raise foreign currency resources abroad through the issue of American

Depository Receipts (ADRs) or Global Depository Receipts (GDRs). Regulation 4 of Schedule I of

FEMA Notification no. 20 allows an Indian company to issue its Rupee denominated shares to a

person resident outside India being a depository for the purpose of issuing Global DepositoryReceipts (GDRs) and/ or American Depository Receipts (ADRs), subject to the conditions that:

the ADRs/GDRs 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

The Indian company issuing such shares has an approval from the Ministry of Finance,

Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs

in terms of the relevant scheme in force or notification issued by the Ministry of

Finance, and

There are no end-use restrictions on GDR/ADR issue proceeds, except for an express

ban on investment in real estate and stock markets.

The FCCB issue proceeds need to conform to external commercial borrowing end use

requirements; in addition, 25 per cent of the FCCB proceeds can be used for general

corporate restructuring

Is not otherwise ineligible to issue shares to persons resident outside India in terms of

these Regulations.

There is no limit up to which an Indian company can raise ADRs/GDRs. However, the

Indian company has to be otherwise eligible to raise foreign equity under the extant FDI

policy.

A company engaged in the manufacture of items covered under Automatic route, whose

direct foreign investment after a proposed GDRs/ADRs issue is likely to exceed the

percentage limits under the automatic route, or which is implementing a project falling under

Government approval route, would need to obtain prior Government clearance through FIPB

before seeking final approval from the Ministry of Finance.



WHO CAN ISSUE ADR/GDR?

A company can issue ADR/GDR, if it is eligible to issue shares to person resident outside

India under the FDI Scheme.

WHO CANNOT ISSUE ADR/GDR?

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.

Erstwhile OCBs who are not eligible to invest in India through the portfolio route and

entities prohibited to buy, sell or deal in securities by SEBI will not be eligible to

subscribe to ADRs / GDRs issued by Indian companies.

END USE RESTRICTIONS

No end-use restrictions except for a ban on deployment / investment of such funds in Real

Estate or the Stock Market.

LIMIT OF OFFERINGS

There is no monetary limit up to which an Indian company can raise ADRs / GDRs.

VOTING RIGHTS

Voting rights on shares issued under the Scheme shall be as per the provisions of Companies

Act, 1956 and in a manner in which restrictions on voting rights imposed on ADR/GDR issues

shall be consistent with the Company Law provisions.

RBI regulations regarding voting rights in the case of banking companies will continue to be

pplicable to all shareholders exercising voting rights.

PRICING OF ADR/GDR

The pricing of ADR / GDR issues should be made at a price not less than the higher of the

following two averages:

(i) The average of the weekly high and low of the closing prices of the related shares quoted on

the stock exchange during the six months preceding the relevant date;

(ii) The average of the weekly high and low of the closing prices of the related shares quoted

on a stock exchange during the two weeks preceding the relevant date.

American Depository Receipt New

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