Introduction

In recent years, the internationalization of securities markets has accelerated its pace and

broadened in scope as it has become easier to trade securities around the world. A growing

number of countries- both developed and developing - are opening their stock markets to

foreign investors and abolishing laws restricting their citizens from investing abroad.

Companies that previously had to raise capital in the domestic market can now tap foreign

sources of capital that demand lower rates of return. In order to do so, companies may list

their stocks on foreign stock exchanges while investors may trade overseas.

Globalization of the principal securities markets has become a reality with which capital

markets have learned to cope since the beginning of the decade. Market participants have

been following a clear trend toward increased interaction between markets that were once

considered isolated. To illustrate, take the example of the European Economic Community,

where the free movement of capital and financial services, harmonized by a single body of

securities law, is indispensable to the realization of a single, international market for the

exchange of goods and services. The walls of domestic capital markets that once made

regulatory compliance a difficult task for foreign issuers are falling rapidly, and Indian

security markets are taking an active role in this metamorphosis.

Markets and investors are directly affected by this trend. Hundreds of American securities are

traded on foreign stock exchanges by the larger U.S., Japanese, and European broker-dealers

that have established trading desks at the major securities exchanges around the world. At the

same time, a growing number of foreign securities are traded in various markets, especially

through the use of American Depository Receipts (ADRs). The internationalization of

securities markets thus entails deeper integration between markets. This has been a key factor

for the success of Depository Receipts.

JPMorgan introduced the first American Depository Receipt (ADR) in 1927 to allow

Americans invest in the British retailer Selfridges. They were introduced in response to a law

passed in Britain, which prohibited British companies from registering shares overseas

without a British-based transfer agent. UK shares were not allowed physically to leave the

UK, and so, to accommodate US investor demand, a US instrument had to be created; this

was called an American Depositary Receipt. ADRs assumed their present form in 1955, when

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the Securities and Exchange Commission (SEC) established its Form S-12 for registering all

depositary receipt programs. Form S-12 was later replaced by Form F-6, which is still in use

today.

Since then, the ADR market has evolved in sophistication and in importance to become an

instrument used widely by companies to trade their shares in equity markets of more

developed countries. Managers of the larger, growing companies in emerging nations

perceived tremendous strategic, financial, political, marketing and operational benefits to

listing shares overseas

ADRs are US dollar denominated negotiable instruments issued in the US by a depositary

bank (e.g. Deutsche Bank), representing ownership in non-US securities, usually referred to

as the underlying ordinary shares. ADRs enable US investors to acquire and trade non-US

securities denominated in US dollars without concern for the differing settlement timetables

and the problems typically associated with overseas markets. They also provide non-US

companies with access to the US capital markets, the largest domestic investor base in the

world.

Depositary receipts hold special appeal for investors because they make investing in a

company beyond the investor’s home borders easy and convenient. That eases fuels investor

appetite, which in turn has driven explosive growth in the depositary receipt market.

Companies from more than 80 countries have gained new investors outside their home

markets.

More than 2,100 issuers have issued depositary receipts.

500 depositary receipt programs are listed on US exchanges, providing the issuing company

with important access to new capital.

More than 900 GDR programs are listed on stock exchanges, typically in London or

Luxembourg

Depositary receipts account for 16% of the entire US equity market

DR capital raisings totaled $12.4 billion dominated by activity in Russia and Mexico.

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U.S. investment in non-U.S. equities as of Q3 2012 was $4.5 trillion, up 7% from same

period in 2011

Through October 2012, world equity funds witnessed inflow of $11.0 billion.

DR trading volumes were down by 23.2 billion shares in 2012 to 139.9 billion shares, versus

163.2 billion in 2011.

Since JPMorgan established the first depositary receipt program in 1927, depositary receipts

have gained widespread popularity as both an investment vehicle and investment option. In

particular, investors appreciate how depositary receipts mitigate the concerns that normally

accompany cross-border investments, such as expensive and complicated transactions and

settlement.

The Indian economy is the second fastest growing economy in the world after China with a

growth rate of around 6%. India seems to have become an investor’s haven with high returns

on investments. Indian companies are recording higher profits and are gaining global

recognition because of operations in several countries. However, for international presence,

Indian companies need funds from time to time to expand their business. Companies either

raise funds from the domestic market or through international market. For international

funding, the most popular source amongst the Indian companies in the recent times has been

American Depository Receipts (ADR) and Global Depository Receipts (GDR).

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Depository Receipts (DR)

Meaning & Background

Historically, American Depositary Receipts (ADRs) were the first type of depositary receipt

to evolve. They were introduced in 1927 in response to a law passed in Britain, which

prohibited British companies from registering shares overseas without a British-based

transfer agent. UK shares were not allowed physically to leave the UK, and so, to

accommodate US investor demand, a US instrument had to be created; this was called an

American Depositary Receipt. ADRs assumed their present form in 1955, when the Securities

and Exchange Commission (SEC) established its Form S-12 for registering all depositary

receipt programs. Form S-12 was later replaced by Form F-6, which is still in use today.

A depositary receipt is a negotiable instrument denominated in US dollars or Euro (or in a

currency other than the domestic currency of the issuer company), which is issued to the

investors in one or more foreign countries. DRs are issued by the overseas depositary bank

(henceforth also referred to as depositary) to the international investors either against the

issuer’s local currency shares registered in depositary’s name in the shareholder books of the

company or against the physical delivery of local currency shares of the issuer company to

the depositary or, more commonly, to a domestic custodian bank appointed by the depositary.

The depositary in respect of a DR program is located in a foreign country, whereas the

custodian is located in a home country of the issuer company (henceforth also referred to as

issuer).

While depositary receipt programs can be structured in a variety of ways, there are two basic

options: American Depositary Receipt (ADRs) programs, which give companies outside of

the US access to the US capital markets, and Global Depositary Receipt (GDRs) programs,

which provide exposure to the global markets outside the issuer’s home market.

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Typical Structure of a DR Program

Each DR represents a certain number of underlying local currency equity shares of the issuer

traded in the home market of the issuer. The depositary sets the ratio of a single DR to per

local currency equity share of the issuer. This ratio can be less than, equal to or greater than 1

based on the market value of the local currency shares of the issuer and is decided in a

manner so as to make the price of a single DR trade in a range comfortable to the foreign

investors.

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6

Depository Capital raising Volumes

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Depository receipts Investment Snapshot

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Asia Pacific market snap shot

EMEA 53% China – 52%

LATAM 25% India- 11%

APAC 22% Taiwan – 9%

Australia – 9%

Japan – 8%

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Others – 11%-

Only "foreign institutional investors" can buy shares in India, while anyone can buy GDRs or

ADRs. FIIs face restrictions on the fraction of a firm that can be purchased. This imposes

ceilings on foreign ownership. In contrast, participation in the GDR or ADR market is

unencumbered, and hence GDRs or ADRs generally enjoy a premium. There are several

obstacles in investing directly investing in foreign markets. These are:-

Poor market design of the equity market in India

Restrictions on equity ownership by foreign investors

FIIs face restrictions of ceilings or stakes in Indian companies

Legal and institutional restrictions

Inconsistent settlements

Costly currency conversions

Unreliable custody services

Poor information flow

Confusing tax conventions

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Importance of Depository Receipts:-

1. Privatization

The privatization of state-owned assets is an important undertaking for governments

worldwide as they seek to restructure their economies and reduce fiscal deficits.

Infrastructure and service enterprises such as telecommunications, utilities, airlines and

petrochemicals are among those initially targeted for privatization. DRs have been used

successfully by governments seeking to privatize state-owned enterprises. Privatizations

require a successful offering of securities to investors, and DRs provide an effective

mechanism both to increase private ownership and to raise capital overseas.

2. Mergers and Acquisitions

Depositary Receipts can enhance the ease of trading and settlement related to cross border

Mergers and Acquisitions (M&A transactions), and they also can facilitate the execution of

corporate actions such as payment of dividends, structuring of rights offerings and

solicitation of votes. DRs enable issuers to address investor demands without the need to

build an independent U.S. shareholder support infrastructure or to modify the equity issuance

and trading patterns of the home market. Types of M&A transactions that have made

successful use of DRs include spin-offs of Non-U.S. subsidiaries, equity-based acquisitions

of U.S. business entities and equity-based acquisitions of Non-U.S. business entities.

Cost Benefits of DR investing

Depositary Receipt Conversion (Issue/Cancel) Fee

Depositary Receipt Custodian Safekeeping Fee

DTC Holding Fee

Brokerage Commissions

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Costs associated with ordinary share investing

Custodian Safekeeping Fee

Custodian Settlement Fee

Stamp Duty Tax

FX Conversion Fee

Miscellaneous Service Charges

Indirect Expenses

Broker Commission

Advantages to the Investor

Quoted and traded in U.S. Dollars:-

DRs make it easy to purchase and hold a non-US issuer’s securities. DRs trade easily and

conveniently in dollars and settle through US/ international clearing houses

Convenient means of holding shares:-

DRs eliminate the need for cross border custody of shares

Easy access to markets that have some of the world`s best companies and/or better valuation

than home market. This is because when high quality companies from nations, which have

low disclosure norms go for foreign listing in nations, having high disclosure norms send out

a signal to the investors that their operations are transparent and of high quality.

ADRs offer lower trading and custody costs when compared with shares bought directly in

the foreign market. This is because depository banks like Bank of New York provide custody

services, thereby eliminating the costs.

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Investors can choose ADRs from over 2,000 companies and from more than 75 countries

Facilitating diversification into Non-U.S. securities.

Benefits of higher-risk, higher-return equities, without having to endure the added risks of

going directly into foreign markets.

Allowing easy comparison to securities of similar companies trading in the investor’s home

market.

Publicly traded DRs are registered with the international regulators. For e.g.Level II and

Level III ADRs may be registered with the US Securities and Exchange Commission (SEC).

Simplified Trading and settlement of foreign equities:-

Trade, clear and settle within the same systems and time periods as exist for other U.S.

securities that trade in U.S. markets

Advantages to the Issuer

Gain access to U.S. investors that are unable to invest overseas

Access capital outside issuer’s home market.

Build company’s visibility in US & internationally

Broaden and diversify shareholder base.

Increase liquidity of company shares

Expand opportunity to increase local share price as a result of global

demand/trading

Facilitate merger and acquisition activity through use as acquisition currency

A DR program can stimulate investor interest, enhance a company’s visibility, broaden its

shareholder base, and increase liquidity. By enabling a company to tap international equity

markets (for e.g. the US markets through the ADR route), the DR offers a new avenue for

raising capital, often at highly competitive costs. Further, for companies with a desire to build

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a stronger presence in the US, an ADR program can help finance US initiatives or facilitate

US acquisitions. DRs can provide enhanced communications with global investors and

shareholders. ADRs provide an easy way for US employees of non-US companies to invest

in their companies’ employee stock purchase plans. DR ratios can be adjusted to help ensure

that an issuer’s DRs trade in a comparable range with those of its peers in the international

market.

Disadvantages of DR

Highly fluctuating currency values

Foreign Tax liability

Lower liability

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Types of Depository Receipt Programs

Issuer Company has the option of issuing one or more types of the available choices ofDR

programs. A broader classification of DR programs is on the basis of the countrieswhere DR

programs are issued and or listed. While American Depositary Receipts(ADRs) are issued

and or listed only in the US markets, Global Depositary Receipts(GDRs) are simultaneously

issued and or listed in the more than one market, typicallyin the European and US markets.

DR programs can also be classified into the followingfour categories based on the regulatory

complexity of the issuance process, purpose andthe post issuance reporting requirements of

the program (Table 1).

1. Unsponsored American Depositary Receipts.

2. Sponsored American Depositary Receipts.

3. Privately Placed Depositary Receipts.

4. Global Depositary Receipts and Its Variants.

1. Unsponsored American Depositary Receipts

These are issued by one or moredepositaries in response to market demand but without a

formal agreement with theissuer company. Unsponsored DRs are created in order to satisfy

the investors’ demandfor the securities of a particular foreign company. When investors show

their buyinginterest in the shares of a particular foreign company, broker(s) purchase those

shareslisted on the company's home market and request the delivery of the shares to

thedepositary bank’s custodian operating in that country. The broker then converts the

USdollars or Euro received from the investor into the corresponding foreign currency inorder

to make payment for the purchased shares from the company’s home market. Onthe same day

custodian notifies the depositary bank that the delivery of the shares hasbeen received. Upon

such notification, DRs are issued and delivered to the initiatingbroker(s), who then delivers

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the DRs to the investor. If the DR facility is establishedwithout the active participation of the

issuer company, then the fee payable to thedepositary bank is borne by the holders of

unsponsored DRs.

Table 1

Types of Depository Receipt Programs

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The depositary bank assumes the issuers responsibility to file a registration documents with

the SEC and is required to sign Form F-6 on behalf of issuer. However, the depositary and its

officers remain shielded from any liability arising from the content of the registration

document. The filing of Form F-6 is obligatory even in case of the sponsored DR programs.

However, the issuer is a party to the depositary agreement of the sponsored programs, and

hence is liable for any liability arising from the content of the registration document.

Unsponsored ADR programs are exempted from the Securities Exchange Commission (SEC)

reporting requirements and can only be traded on the over-the-counter market and listed in

the pink sheets. Unsponsored ADR programs have several advantages over the sponsored

ADR programs. First, they are relatively inexpensive and easier way for expanding the

investor base in the US. Second all costs associated with establishment of an unsponsored

ADR program are borne by the investor. Third, SEC registration and reporting requirements

are minimal. Fourth, the issuer is not a party to the depository agreement, or a registration

applicant and therefore is not subject to any US liability arising in connection with the ADR

program.

However, unsponsored DR programs have become a rarity in the recent years. Foreign

companies, which are popular amongst the investors, most willingly sponsor their DR

program(s). The main reasons for the gradual obsolescence of unsponsored DR programs in

the recent years are: (i) the issuer being not a party to the depository agreement has little

control over the unsponsored DR program; (ii) the unsponsored programs can easily be

duplicated by other depository banks as there is no need of any consent from the issuer

company; (iii) conversion of a unsponsored DR program into a sponsored DR program is

very expensive for the issuer as it requires a payment of the cancellation fees for the

outstanding unsponsored DRs; and (iv) unsponsored DRs have low liquidity, as they are

restricted from trading on the regular stock exchanges.

2. Sponsored American Depositary Receipts

Issuer takes the initiative of launching a sponsored DR program by appointing the depositary

and other intermediaries involved in a DR program. Sponsored DR programs offer several

advantages to the issuer. First, issuer has complete control over the sponsored DR facility.

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Second, issuer can choose from the several types of sponsored DR programs, some of which

can be used for raising the fresh capital and for listing on the foreign stock exchange(s).

Sponsored DRs to be issued in the US markets must be registered with SEC using the Form

F-6. The filing in the Form-6 is made pursuant to provisions of the Securities Act 1933. It

incorporates by reference various provisions of the depositary agreement. Typically, the

Form F-6 for a sponsored DR program is executed by the depository bank, but must also be

signed by a majority of the issuer’s board of directors, who undertake, if necessary, to make

the required future disclosures.

(d) Global Depositary Receipts and Its Variants

During 1990s, the surge in capital raised through DR programs prompted the emerging

markets issuers to create several innovative DR programs. Emerging markets issuers realized

that there are numerous advantages of floating DR programs on the less stringent European

markets or elsewhere. Floating a GDR program on the European market is easier and faster

than floating an ADR program on the US market. Issuer does not have to fulfill the onerous

regulatory requirements of SEC. This prompted the development of GDR programs and their

several variants, for example, Euro Depositary Receipt (EDR), Retail DepositaryReceipt

(RDR) and Singapore Depositary Receipt (SDR) programs. Citibank introduced the first

GDR program in December 1990 for the Samsung International, a Korean company.GDRs

have been explained in details in later part of the report.

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American Depositary Receipt (ADR) Stock Prices of Indian

Companies.

ADR is a list of all the Indian Companies listed on New York Stock

Exchange under the American Depository Receipts (ADR) category.

Company CMP(US$) Volume(Nos)

Tata Motors Ltd 23.61 1271097

Wipro Ltd 9.13 894069

Sify Technologies Ltd 1.76 52226

Rediff.com India Ltd 2.39 47005

Infosys Ltd 47.61 1428687

HDFC Bank Ltd 30.10 1132302

ICICI Bank Ltd 27.68 2192568

Dr Reddys Laboratories Ltd 33.00 204629

Silverline Technologies Ltd 5.41 2237261

Mahanagar Telephone Nigam Ltd 0.30 13030

Tata Communications Ltd 4.50 0

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Indian Scenario

The Indian stock market remained largely outside the global integration process until the

early 1990s. In line with the global trend, reform of the Indian stock market began with the

establishment of the Securities and Exchange Board of India (SEBI) in 1988 and the process

gained momentum after the widespread economic reforms in 1991.Among the other

significant measures of global financial integration, the structural reforms received a major

impetus in 1991, when the Indian corporate sector was allowed to go global with depository

receipts issues to foreign investors. While Indian companies have issued ADRs since the

early 1990s, most of these earlier issues were privately placed. Exchange-traded ADRs of

Indian origin have been a relatively recent phenomenon, being issued since 1999. Currently

there are several active Depository Receipts of Indian origin that are listed either on

American exchanges like the New York Stock Exchange (NYSE) and the National

Association of Securities Dealers Automatic Quotation (NASDAQ) or on European/Asian

stock exchanges (like Luxembourg, London, Dubai, Singapore).

Background of ADR in India

• Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt

Mechanism) Scheme (1993) issued

• Consistent track record of good performance for a minimum period of three years

• Obtain prior permission of the Department of Economic Affairs, Ministry of Finance

• Ordinary shares issued against the Global Depository Receipts were to be treated as direct

foreign investment in the issuing company

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• Till 1995:- foreign listings through private placement

• 1996-97:- SBI and ICICI:-

Indian government gave a boost to the financial services companies and banks and the

collective amount raised by SBI and ICICI through private placements was $ 600 million

• 3yr track record relaxed for infrastructure companies which encouraged companies like

MTNL, VSNL to go for foreign listing of their shares.

• 1998-99:- Infosys as 1st exchange traded ADR

• 2002:- Two-way Fungibility introduced

• 2005-06:-Major revision to guidelines for unlisted companies in the Monetary Policy

Unlisted Indian companies were allowed to sponsor an issue of ADRs orGDRs with an

overseas depository against the shares held by its shareholders. Further, the facility of

sponsored ADR/GDR offering by unlisted companies was to be made available to all

categories of shareholders of the company whose shares are being sold in the ADR/ GDR

market overseas. The huge increase in 2005-06 was also attributable to the booming Indian

stock markets that offered the corporate sector the opportunity to issue equities abroad.The

boom in the Indian industry is being translated into growing domestic production and exports,

along with companies setting up new capacities. Indian companies have raised a record level

of capital in 2005-06 both from the domestic capital markets and foreign capital markets.

Some companies went in for simultaneous offerings in domestic and foreign markets. The

expansion spree of the Indian corporate sector coupled with easing of ADR/GDR norms by

the Ministry of Finance resulted in a commensurate rise in the amounts raised through

ADR/GDR issues in 2005-06. In fact, Indian companies also began to enter new markets like

the Singapore stock exchange and the Dubai stock exchange to enlarge their investor base

even further.

Approval required for issue of DRs:

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Approval as per Companies Act:-

• The Company should pass a Board resolution for taking a decision for issue of ADR/GDR

• The Company has to get permission from its shareholder for the issue

Approval as per Ministry of Finance / RBI:-

• ADR/GDR issue shall be treated as FDI

• Aggregate Foreign Investment would need to conform to existing FDI Policy

• Issue Related Expenses

• 4% in the case of GDR’s

• 7% in the case of ADR’s

• 2% in case of Private Placement

• Furnishing of Information

• Within 30 days of completion of transaction company would furnish following to Exchange

Control Department of the RBI

• Amount raised through ADR’s / GDR’s

• Number of ADR’s / GDR’s issued

• Underlying shares offered

• % of foreign equity level in the Indian Company on account of issue of ADR’s/GDR’s

• Details of repatriation, etc.

As per the Stock Exchange

• Indian companies first required to list equity share in recognized Indian stock exchanges, and

then in overseas exchange

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• Approval before Issue and allotment

• Final Listing and Trading approval after allotment

• Allotment and upload of Credit to Domestic Custodian

Recent developments

American Depositary Debentures (ADDs)

A debt based facility allowing the issuance of a security similar in style to an equity

depositary receipt but backed by debt securities placed into trust in the issuers home market.

Exchangeable Bonds or Notes

An exchangeable bond gives the holder the option to exchange the bond for the stock of a

company other than the issuer (usually a subsidiary) at some future date and under prescribed

conditions. This is different from a convertible bond, which gives the holder the option to

exchange the bond for other securities (usually stock) offered by the issuer

American Depositary Warrants (ADWs)

Embedded Restricted Securities (ERS)

N Shares

Global Registered Shares (GRSs

American Depositary Notes (ADNs)

Concept of American Depository Receipts (ADRs)

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American Depository Receipts

American Depositary Receipts offer the issuing company access to the world’s largest and

most active capital market. Correspondingly, ADRs provide investors in the US with a

convenient way to directlyinvest in international companies while avoiding the risks

traditionally associated with securities held inother countries.

An American Depositary Receipt (or ADR) represents ownership in the shares of a foreign

company trading on US financial markets. The stock of many non-US companies trades on

US exchanges through the use of ADRs. ADRs enable US investors to buy shares in foreign

companies without undertaking cross-border 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 US depositary bank and can represent a fraction of a share, a single

share, or multiple shares of 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 is often close to the price of the foreign stock in its home

market, adjusted for the ratio of ADRs to foreign company shares.

Depositary banks have numerous responsibilities to an ADR holder and to the non-US

company the ADR represents. The first ADR was introduced by J P Morgan in 1927, for the

British retailer Selfridges & Co. The largest depositary bank is the Bank of New York.

Individual shares of a foreign corporation represented by an ADR are called American

Depositary Shares (ADS).

Concept of ADS

An American Depositary Share ("ADS") is a vehicle for foreign corporations to list their

ordinary equity on an American stock exchange, such as the New York Stock Exchange or

the NASDAQ.

Foreign corporations listed in other markets are not permitted to make direct secondary

listings in the United States markets, thus this form of indirect ownership has been devised.

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ADSs are U.S. dollar denominated and each share represents one or more underlying shares

in the subject. These ADSs confer full rights of ownership (including dividends, voting

rights) to these underlying shares, which are held on deposit by a custodian bank in the

company's home country or territory

TRADING OF DEPOSITORY RECEIPTS

Where the DRs are traded?

Deposit Receipts certify that a stated number of underlying shares have been deposited with

the depositary's custodian in the foreign country.

Depository receipts are traded publicly i.e. on major stock exchanges or in the over-the-

counter (OTC) market. In addition, DRs can be created or cancelled to satisfy investor

demand in either the U.S. or local trading market.

ADR(American Depository Receipt) is one of the most eminent depository receipts in US

that offers American investors and companies an opportunity to make global investment.

ADRs are traded on New York Stock Exchange(NYSE) and American Stock Exchange.

Depository receipts are also available under the name of GDR(Global Depository Receipts).

GDRs are bank certificates issued for shares of a foreign company. GDRs are usually listed

on European stock exchanges like London Stock Exchange.

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 Euroclear and Clearstream

for EDRs and through all three (and possibly other clearing systems) in the case of GDRs,

depending on which markets they access.

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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.

LISTING

Where to List

One of the more important decisions facing a prospective issuer of DRs is determining where

tolist them. Listing on a recognised stock exchange is important partly because many

institutional investors are required to limit their investment in unlisted securities. Critical

factors such as share liquidity, visibility, listing costs and funding requirements must be

carefully evaluatedbefore the exchange which best suits the issuer's needs can be selected. In

order to ensure that the correct decision is reached, the prospective issuer should hold in-

depth discussions with the major exchanges.

Secondary trading on listed and unlisted markets in the US

The NYSE and Amex are auction markets, while NASDAQ and OTC are dealer

markets.Level II and Level III issuers must choose an exchange on which to list their

securities. Each exchange has particular listing requirements which must be met by the issuer.

The type of DR program desired will determine what listing options are available.

The principal US listed markets are The New York Stock Exchange (NYSE) and NASDAQ

Stock Market (NASDAQ) and The American Stock Exchange (Amex).

Agent and Principal Markets

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The NYSE and Amex are auction-based physical markets where transactions take place as

buyers and sellers come together through brokerage firms that act as agents.

NASDAQ is a dealer market. With no physical trading floor, it operates over a computerized

network. Dealers act as principals – buying and selling from their own inventories of stocks –

and profit from spreads, or the difference between the prices at which they will buy and sell

shares.

US LISTINGS

OTC Traded DRs

Level l DRs trade in the U.S. in the Over-the-Counter (OTC) market and are not listed on an

exchange. Brokers wishing to trade in these securities access information through the Pink

Sheets and or the OTC Bulletin Board.

The Over-The-Counter (OTC) Market

The OTC market is not an organized marketplace or exchange, but rather it is a network of

securities dealers that make markets in many different securities. OTC securities may be

issued by companies that choose not to list or are unable to comply with the standards for

listing on a U.S. exchange or on Nasdaq.

This is a centralized quotation service that collects and publishes market maker quotes for

OTC securities in real time. Pink Sheets is neither a SEC registered stock exchange nor a

broker-dealer. Issuers are not required to register securities with the SEC or be current in their

reporting requirements to be quoted on the Pink Sheets.

National Quotation Bureau for brokers and dealers (the market maker community) daily

publishes and distributes the pink sheets (named for their color) to the brokers and dealers.

These sheets provide the detailed informationabout the prices and the market makers for the

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OTC stocks. The pink sheets are not available to the general public. The system displays real-

time, bid-and-ask quotation prices and is used by brokers and market makers.

The OTC Bulletin Board

Shares of several thousand US public companies that don’t meet NASDAQ’s financial

requirements—yet are registered with the SEC and are subject to periodic reporting

requirements—trade on the OTC Bulletin Board, a NASD-operated over-the-counter market

that displays real-time pricing electronically.

This board is a regulated transaction and quotation service that displays real time quotes and

last sale prices for U.S. securities not listed on Nasdaq or on a national securities exchange.

Indications of interest are displayed in Non-U.S. securities and DRs that are not listed in the

U.S. market (e.g., Level I programs). This quotation service is dealer driven. Market makers–

not the issuer company–can apply to include a security on the OTC Bulletin Board. There are

no listing and maintenance fees paid by issuers in this market.

EXCHANGE LISTING

Exchange Traded DRs

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 forordinary shares

in the US.

A description of the three exchanges follows:-

NASDAQ (National Association of Securities Dealers Automated Quotation)

NASDAQ National Market:

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NASDAQ Capital Market:

AMEX (American Stock Exchange)

NYSE (New York Stock Exchange)

.

Non-US listing standards

The non-US listing standards are designed to provide flexibility to major foreign corporations

seeking to list their shares on the NYSE. The principal criteria focus on worldwide rather

than US share distribution and financial results.

The Trading Mechanism

Step1:

An offering of depository receipts usually starts with the appointment of a financial adviser—

a financial institution such as an international investmentbank—to manage the process. The

adviser sets the number of shares to be represented by one depository receipt—that is, the

depository receipt ratio.The ratio is set so that the price of a depository receipt is comparable

to that ofsimilar securities in international markets.

The adviser also appoints a depository bank in the host market and a custodian bank in the

country of the issuer. The depository bank has responsibilities relating to shareholder rights

(such as payment of dividends and voting at shareholder meetings), which are stated in the

depository receipt certificate, and must also maintain a share register of depository receipt

owners.

Step 2:

An American broker, through an international office or a local brokerage house in India

purchases domestic shares from the Indian market and delivers them to the local custodian

bank of the depository bank—say Bank of New York.

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Step 3:

The local Indian custodian bank verifies the delivery of the shares by informingthe Bank of

New York that the shares can now be issued in the United States andthe Bank of New York

delivers the ADRs to the broker who initially purchased them. Based on the determined ADR

ratio, each ADR is issued as representing one or more of the Indian local shares and the

company determines the number of shares to be sold in the international market and delivers

the shares to the custodian bank.

Step 4:

The custodian registers these shares in the name of the depository bank, which issues the

appropriate number of depository receipts and delivers them to the members of the

underwriting syndicate. These ADRs represent the local Indian shares held by the depository,

and can be traded on the NYSE, likeother US securities.

Trading then begins. Although depository receipts are traded exclusively in the host market,

continuous arbitrage between the host market and the issuer’s home market tends to minimize

the price differential between the two markets.

Depository receipt issues are usually marketed through a book-building route, an offering

method that leads to efficient price discovery. Typically the lead manager, or book runner,

builds the order book by forming a syndicate that fans out on a marketing run among

institutional investors. The price and size of the issue are determined on the basis of both an

in-house valuation of the issuing company’s intrinsic worth and the bids received. Since

depository receipts trade mainly among large institutional investors, shares can be sold in

bulk and thus quickly and cheaply.

Buying of DRs

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

foreignshares 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 to issue new ones.

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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.

Selling of DRs

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

existingprograms (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 the shares locally and the proceeds will be remitted to the investor who

cancelled those DRs.

Issuance of Depository Receipts

Depositary receipts are normally created when shares currently trading in a foreign market, or

newly issued shares resulting from an offering of securities, are deposited with the

depositary’s custodian bank in the issuer’s home market. The depositary then issues

depositary receipts representing those shares.

Based upon availability and market conditions, an investor may acquire a DR by either

purchasing existing DRs or purchasing shares in an issuer’s home market and arranging for

the creation of new DRs.

New DRs are created once the underlying shares are deposited with the depositary’s

custodian in the issuer’s home market. The depositary then issues DRs, which represent the

shares on deposit, to the investor or to the investor’sbroker. This is referred to as an issuance

of DRs.

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DR Issuance Process

1. Investor contacts broker and requests the purchase of a DR issuer company’s shares. If

existing DRs of that company are not available, the issuance process begins.

2. To issue new DRs, the broker contacts a local broker in the issuer’s home market.

3. The local broker purchases ordinary shares on an exchange in the local market.

4. Ordinary shares are deposited with a local custodian.

5. The local custodian instructs the depositary to issue DRs that represent the shares received.

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6. The depositary issues DRs and delivers them in physical form or book entry form through

DTC/Euroclear/Clearstream (as applicable).

7. The broker delivers DRs to the investor or credits the investor’s account.

Intra-Market Trading

Suppose an investor who is holding Depository Receipts wishes to sell them. The investor

has to first notify his broker. The broker can either sell the Depository Receipts in the US

market through an intra-market transaction where the Depository Receipts are sold to

subsequent US investors by transferring them from the existing holder (who is now the seller)

to the new holder (who is thebuyer). Intra-market trading accounts for approximately 95% of

all Depository Receipt trading.

An intra-market transaction is settled in the same manner as any other U.S. security purchase:

in U.S. dollars on the third business day after the trade date and typically through The

Depository Trust Company (DTC).

Intra-market trading accounts for approximately 95 percent of all Depositary Receipt trading

in the market today. Accordingly, the most important role of a depositary bank is that of

Stock Transfer Agent and Registrar. It is therefore critical that the depositary bank maintain

sophisticated stock transfer systems and operating capabilities.

Cross-border Transaction

The investor can also sell the shares back into the home market through a cross-border

transaction. In this case, the US broker surrenders the Depository Receipts to the depository

bank, so as to deliver the shares to a buyer in the home market. The depository bank cancels

the Depository Receipt and instructs the custodian to release the underlying shares and

delivers them to the local broker. The Indian broker pays for them in equivalent Rupees that

are converted into dollars by the US broker.

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DRs also may play a critical role in different types of cross border transactions such as

privatizations and mergers and acquisitions.

Cancellation of Depository Receipts

Based upon demand and market conditions, an investor may sell a DR in the market in which

it trades, or the investor may cancel the DR and sell the ordinary share in its home market.

When the demand for shares in the home market is higher than the demand for depositary

receipts, the depositary receipts can be cancelled, and the shares are released back into the

home market.

Upon receipt of investor instructions to cancel DRs, the broker delivers DRs to the depositary

for cancellation and instructs the depositary to deliver the ordinary shares to a local custody

account. The depositary cancels the DRs andinstructs the local custodian to release and

deliver the underlying shares to the seller’s broker in the issuer’s home market. The broker

may then, either safe keep or sells the ordinary shares in the local market.

Investor demand is driven by following factors:

1. Company fundamentals and track record, market conditions and sector performance

2. Relative valuations and analyst recommendations

3. NYSE/Amex specialist or NASDAQ market maker commitment to supply liquidity of the

stock

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4. Liquidity of shares in the local market and visibility of the company internationally

DR Cancellation Process

1. The investor instructs the broker to cancel DRs.

2. The broker delivers the DRs to the depositary for cancellation and instructs the depositary to

deliver the ordinary shares to a local custody account.

3. The depositary cancels the DRs and instructs the local custodian to release and deliver the

underlying shares to the seller’s broker in the issuer’s home market.

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4. The local custodian delivers the underlying ordinary shares as instructed to the local broker.

The local broker safe-keeps the ordinary shares or delivers them to or on behalf of the new

investor.

The choice between DRs and underlying shares

Institutional investors may choose to hold either DRs or underlying shares at any particular

point in time.While they may have the infrastructure in place to efficiently manage foreign

exchange and global custody challenges, several complex factors influence their purchase

decisions:

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DR Premium

The DR Premium is the differential between the ordinary share price in the local currency

and the price of the DR, which is quoted and traded in $US. Historically, when the U.S.

market outperforms the Non-U.S. market, the premium grows. When the local market

outperforms the U.S. market, the premium shrinks.

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The limited two-way market promotes cross border liquidity up to a point, but does not

significantly reduce the size of the DR premium compared to a one-way market.

Under a free two-way market, the effect of the higher performing market on the size of the

DR premium is minimized. International investors will sometimes buy at a premium because

Non-U.S. ownership of ordinary shares is limited, and DRs are the only way to own a

particular security.

Where do ADRs trade?

You can find ADRs on the Big Board as well as on Nasdaq-Amex. In addition ADRs trade

Over the Counter (OTC). Brokers can access information about these OTC securities through

the National Quotation Bureau’s (NQB) “Pink Sheets” or the OTC Bulletin Board. Trading is

conducted through market makers in that particular security.

Three ways to buy ADRs

Traditional Brokers

Purchase ADRs through brokerage firms, just as you would U.S. Securities.

Gain advice and benefits of in-depth research from experts in the business.

Choose to invest from an extensive list of issuers.

On-line Brokers

Purchase ADRs through on-line brokerage services, just as you would US Securities

Benefit from convenience of 24 hour/7 day a week access to your accounts combined with on

demand research and other investment tools.

Direct Investment Plans

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Purchase participating exchange-listed NYRS/DRs directly from a depository bank.

Reinvest dividends through Dividend Reinvestment Programs (DRPs) and purchase

additional shares at nominal costs.

Roles and Responsibilities:

In order to establish a DR program, the issuer develops a team of advisors that typically

includes investment bankers, lawyers and accountants. The issuer also selects a depositary

bank,a key partner that enlists the services of a custodian to handle the implementation of the

program.The issuer and the depositary execute a Deposit Agreement that sets forth the terms

of the DR program. Based upon this contract the depositary performs certain specified

services on behalf of the issuer and the DR holders.

Many of these same parties play key roles in the long-term development and day-to-day

management of the issuer’s DR program. The depositary bank remains a critical liaison

between the issuer and brokers and custodians, while the function of lawyers and accountants

becomes focused on periodic reporting. Generally, investment bankers are not involved with

the ongoing management of a DR program unless the issuer is going back to the market.

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ISSUER

InvestmentBankers

Lawyers

AccountantCustodian

Depository

Brokers

DR holders (Investors) fall into one of two categories: registered holders or beneficial

holders.

Registered holders

They are listed directly with the depositary bank or transfer agent and are typically individual

investors who have physical possession of their DR certificates or hold their securities

through the direct registration system of the depositary.

Beneficial holders

Such holders include both individual and institutional investors whose depositary shares are

heldby third-party broker –dealers or custodian banks. These shares are typically held in The

Depository Trust Company (DTC), the centralized clearing system in the United States.

These two groups are handled differently during corporate actions. Registered holders

provide voting instructions whereas DTC delegates the proxy voting authority on all

depositary shares held in its nominee name (i.e. for beneficial holders of DRs) to DTCs

participant banks, brokers and custodial institutions. The expense incurred by DTC

participants to forward voting materials to their customers is borne by theissuer.

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ADR Certificate

Rights and Privileges

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.

Like equity holders, ADS holders get voting rights and are entitled to dividends and bonus

shares. Dividend is declared in Indian rupees, but ADS holders will receive it in dollars,

converted at the prevailing exchange rate. Without capital account convertibility, CAC

defined it as the freedom to convert local financial assets into foreign financial assets and

vice versa at market determined rates of exchange. In simple language what this means is that

CAC allows anyone to freely move from local currency into foreign currency and back

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Key Roles in Establishment of a DR Program

Brokers

Submit required forms to become a market maker in a security (for Level l programs), as

needed

Make securities available to investors

Depositary

Advise on DR facility structure

Appoint custodian

Assist with DR registration requirements Coordinate with lawyers and investment bankers to

ensure that all implementation steps are completed

Prepare and issue DRs

Enlist market makers, if applicable

Announce program establishment to brokers and traders

Custodian

Receive underlying shares

Confirm deposit of underlying shares

Issuer

Determine financial objectives

Appoint depositary, lawyers, investment bank and accountants

Determine program type

Obtain approval from board of directors, shareholders and regulators, as needed

Provide financial information to accountants

Develop investor relations plan

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Investment Bankers

Lead underwriting process

Establish syndicate of participating banks

Advise on capital structure

Advise on type of DR structure

Conduct due diligence

Draft prospectus

Obtain CUSIP number

Obtain DTC, Euroclear and Clearstream eligibility, as needed

Coordinate road show

Organize book-building and line up market makers

Price and launch securities

Lawyers

Advise on facility structure

Negotiate Deposit Agreement

Prepare appropriate registration statements or establish exemptions with SEC, as applicable

Prepare listing agreements to list on U.S. exchanges (Level II and Level III

DR facilities)

Draft offering circular/prospectus

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Accountants

Prepare financial statements in accordance with (or reconciled to) U.S. Generally Accepted

Accounting Principles (U.S. GAAP) for Securities Act registered securities (Level II and

Level III DR facilities)

Fungibility

Fungibility, in general terms, means interchangeability of any security of a class. They could

be bearer instruments, securities and goods which are substitutable. Fungibility makes

depository receipts homogenous and convertible into shares underlying them. By making

this possible the foreign investors is given a two way exit route – i.e. the exit can be either

through the sale of the ADR in the American market or through the sales of the underlying

shares in the underlying market

Fungibility can be classified into

One way Fungibility

Two way Fungibility

One way Fungibility

Under the one-way Fungibility, once a company issued ADR/GDR, the holder could convert

the ADR/GDR into shares of the Indian Company, but it was not possible to reconvert the

equity shares into ADR/GDR. No re-issuance of Depository receipts was permitted—

investors could only cancel the depository receipts and avail of the underlying shares or take

back the proceeds by selling the underlying shares. Hence over a period of time, the

outstanding balance of depository receipts would decline, thereby reducing the liquidity of

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depository receipts for the international investors. The result was, every time a conversion

took place, companies had to seek government permission to reissue the depositories.

An investor in depository receipts intending to use the Fungibility route for exit has to

approach the global depository directly or trough or foreign broker for the cancellation of

the depository receipts. The depositary then directs the domestic custodian in India to release

the share to the counter party broker in India .the custodian then informs the issuer company,

which in turn would instruct the STA to release the share. if the share have been issued in

dematerialized mode in India , suitable instruction have to be passed to the domestic

depository (NSDL or CDSL) by the STA. the counter part broker receives the credit of the

share in its DP account which are then sold in the secondary market. The proceeds received

in rupees are remitted in foreign exchange to the foreign broker to the Indian broker. The

foreign broker pays off the investor upon the receipts of the proceeds. The net effect of the

truncation would be that the total stock of the depository receipt get reduce by the amount

by the amount that have been converted in to share . It also means that the stock of tradable

shares of the company in the domestic market in India goes up by the same extent. Therefore

the property of the Fungibility of the depository receipt could lead to the change of the in the

respective floating stock of the company tradable equity in domestic and foreign bourses

Two way Fungibility

India started their ADR programmers as one-way programs and converted toLimited two-

way programs in 2002, whereby the re-issuance of ADRs once cancelled is restricted by the

initial offering size.

In India, with limited two-way Fungibility, a foreign investor is now permitted to placean

order with an Indian stock broker to buy local shares, with an intention to convertthem into

depository receipts. The stock broker has to apply to the domestic custodianBank for

verification and approval of the order. Once the approval is granted, theBroker purchases

local shares on the Indian stock market and delivers the shares to the domestic custodian for

further credit to the overseas depository. The overseasDepository issues proportional

Depository Receipts to the foreign investor. ThisConversion of the domestic share into ADR

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is subject to the extent of the originalIssue of the ADRs. Consequently, the foreign investor

can engage in secondaryMarket trading on the American stock exchange or cancel the ADR.

Under the limited two ways FungibilityRBI came with the separate guidelines throughtwo

distinct methods:

1. A) Re-issue of ADR in the overseas market through overseas market through secondary

market purchase of shares in India

2. b) through a sponsored ADR issue where by Indian investors can hope to encash some of

the gains of a higher price in the overseas market

Sponsored ADR Issue

The RBI has allowed a company to sponsored a ADR issued based on the underlying

domestic shares through an appointed lead manager , the domestic custodian and a

overseas depository . The price for buy back of the domestic share for the purchase of the

sponsored issues would be determined by the lead manager based on the head room

availability. suppose the ADR of the company is currently quoted at the equivalent of Rs

8000 in the overseas market and the underlying shares in India is quoting at Rs 6000 ,

the lead manger would be able to make a offer of a price ranging between these two

price . the lead manager buys from the local market at a price slightly higher than the

prevailing market price and sell them at a slightly lower price in the overseas market than

the prevalent ADR price.

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ADR Ratio & Pricing

Each ADR can represent one, more than one, or a fraction of underlying shares. The

relationship between the ADR and the ordinary share is referred to as the ratio. While many

ADR programs are established with a 1:1 ratio (one underlying share equals one depositary

share), current ADR programs have ratios ranging from 100,000:1 to 1:100.

Setting the Ratio

A primary step in establishing a DR program is determining the ratio of underlying shares to

Depositary Shares (DSs), the securities represented by a DR. DSs are established as a

multiple or fraction of the underlying shares and the ratio can influence the price trading

range. In setting the ratio, the issuer should consider:

Industry peers: To the extent that securities of companies in the issuer’s industry generally

trade in a certainprice range, the issuer may want to conform to industry norms in the market

where the DR will be listed;

Exchange options: Each exchange has average price ranges for the shares listed and,

generally speaking, issuers may want to conform to that range;

Investor appeal: U.S. institutional and retail investors are more likely to buy shares which

they perceive as well priced and valued fairly.

While many DR programs are established with a 1:1 ratio (one underlying share equals one

DS), current DR programs have ratios ranging from 100,000:1 to 1:100. The depositary will

work with issuers to determine the most appropriate ratio at the inception of the DR program.

The ratio can be adjusted at a future date to address changes in market conditions.

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Pricing

1) For listed companies

The price of ADR/GDR should not be less than 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.

2) For unlisted companies

As per the recent changes, the applicant company is required to be a listed company or a

simultaneous listing of shares should be done. Therefore, the earlierrequirement that pricing

should be in accordance with the regulations notified under FEMA is not applicable any

more.

Pricing Criteria

The various criteria considered for pricing of ADR/GDR issues are prospective earnings,

market price of the share, price earning ratio, turnover and market capitalization, fundamental

analysis of the company and size of the issue.

While PAT and EPS will be evaluated from the point of view of investor’s interest, the GDR

is usually issued at a discount of 10-20 % to the market price and a discount in excess of 20%

could result in arbitrage trading of securities.

Cost of issue being high, companies should be large enough in terms of a turnover of Rs. 500

crores and market capitalization of 1500 crores to attract investors.

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Companies with lower Debt:Equity are preferred.

Size of the issue is arrived after road shows. To ensure stability of the price after issue, the

issue demand should be limited to two- thirds of the assessed demand

How to Determine Price of ADRs?

Let's use an example to give you a better idea of how the ADR process works. Suppose a

recent boom in the popularity of Bloody Mary drinks has increased the prospects for the

vodka industry. Russian Vodka Inc. wants to list shares on the NYSE to gain exposure to

the U.S. market and to tap into the growing demand for vodka.

Russian Vodka already trades on the Russian Stock Exchange at 127 Russian roubles, which,

at this time, is equivalent to US$4.58. Let's say that a U.S. bank purchases 30 million shares

from Russian Vodka Inc. and issues them in the U.S. at a ratio of 10:1. This means each ADR

share you purchase is worth 10 shares on the Russian Stock Exchange. A quick calculation

tells us that the new ADR should have an issue price of around US$45.80 each (10 times

$4.58)

Once an ADR is priced and sold on the market, its price is determined by supply and demand,

just like an ordinary stock. However, if the U.S. price varies too far from the Russian price

after taking the currency exchange rate and the ratio of ADRs to home country shares into

account, an arbitrage opportunity may arise. ADRs tend to follow the general trend of the

home country shares, but this is not always the case.

Risks involved

There are several factors that determine the value of the ADR beyond the performance of the

company. Analyzing these foreign companies involves further scrutiny than merely looking

at the fundamentals. Here are some other risks that investors should consider:

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Political Risk - Ask yourself if you think the government in the home country of the ADR is

stable? For example, you might be wary of Russian Vodka Inc. because of the characteristic

instability of the Russian government.

Exchange Rate Risk - Is the currency of the home country stable? Remember the ADR

shares track the shares in the home country. If a country's currency is devalued, it will trickle

down to your ADR. This can result in a big loss, even if the company had been performing

well.

Inflationary Risk - This is an extension of the exchange rate risk. Inflation is the rate at

which the general level of prices for goods and services is rising and, subsequently,

purchasing power is falling. Inflation can be a big blow to business because the currency of a

country with high inflation becomes less and less valuable each day.

Reasons for Premium on Indian ADR:

There has been a continuous existence of premium on Indian ADRs over the last 3-4 years

and there are several reasons for the same. If any security, carrying the same risk-reward

characteristics, trades at two different prices in different markets, the arbitrageurs will soon

step in to take advantage of the situation, till the time the security trades at one price, across

all markets. That has not happened in the case of these Indian ADRs. There are various

possible sources of the premium:

1. Legal / Institutional: Laws regarding capital account transactions in India, including the

rules and exact procedures for investment by foreign nationals in Indian securities market and

repatriation of those funds. If the foreign nationals have limited or no access to Indian stock

markets, it is probable that ADRs in the US markets are valued under different assumptions

compared to the valuation of underlying equity in the Indian stock markets (which is, to an

extent, same as saying that the two securities have two different bodies of investors, with

different expectations and assumptions).

2. Liquidity: Measuring the relative liquidity of ADRs in the US to the underlying stock in

India, this may be a partial cause of the premiums. In case the liquidity of ADRs is higher,

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the ADRS would carry certain liquidity premium vis-à-vis equity listed on the Indian stock

markets.

3. Risk preferences: The investors may assign different risk-reward characteristics to Indian

equities and Indian ADRs on account of currency risk, repatriation risk or risk of procedural

delays in security transactions in India. This may also result in a premium on ADRs.

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Global Depository Receipts (GDRs) and European Depository Receipts

(EDRs)

Introduction & Definition

During 1990s, the surge in capital raised through Depository Receipt (DR) programs

prompted the emerging markets issuers to create several innovative DR programs. Emerging

markets issuers realized that there are numerous advantages of floating DR programs on the

less stringent European markets or elsewhere. Floating a Global Depositary Receipts (GDRs)

program on the European market is easier and faster than floating an ADR program on the

US market. Issuer does not have to fulfill the onerous regulatory requirements of SEC. This

prompted the development of GDR programs and their several variants, for example, Euro

Depositary Receipt (EDR), Retail Depositary Receipt (RDR) and Singapore Depositary

Receipt (SDR) programs. Citibank introduced the first GDR program in December 1990 for

the Samsung International, a Korean company.

Global Depositary Receipts (GDRs)are negotiable certificates that enabledomestic investors

of a country to own shares inforeign companies.GDRs are issued by nonresident companies

to residents of another countrythrough depositories situated in the country fromwhich a

company intends to raise funds throughdepository receipts. Each unit of GDRrepresents a

given number of a company’s shares andcan be traded freely as any other security in the

capitalmarket.The role of depositories in an issue ofGDR is very crucial, as depositories act

ascustodians of the shares, against which theGDRs are issued. As the names suggest, ADRs

are issued in American capital markets while GDRs areissued in all other countries.

The European Depositary Receipts (EDRs) accesses the Euromarkets but not the US

market.It settles and trades through the Euro market clearing systems, Euroclear and

Clearstream, and may be listed on a EuropeanStock Exchange, normally London or

Luxembourg.

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Global Depositary Receipts (GDRs) allow an issuer to raise capital simultaneously in two or

more markets through a global offering. GDRs use a global settlement convention linking

DTC with Euroclear and Clearstream to provide global clearing and settlement via the

DTC/Euroclear/Clearstream Bridge. It accesses two markets and is often used for capital

raising purposes, so the US element is generally either a Rule 144 (a) ADR or a level III

ADR, depending on whether the issuer aims to tap the private placement or public US

markets.

Similarly, EDRs are designed to attract new capital and investors from within the Euro

community. EDRs are priced in Euros and all distributions (dividends, stock splits, and rights

issues) are made in Euros. The potential market for EDRs includes: institutional investors

diversifying holdings from EU issuers into favorable global sectors; and individual investors

adopting an equity culture, and seeking global renowned issuers. EDRs can be listed or traded

on exchanges such as London, Luxembourg, Paris, Frankfurt, Brussels, Amsterdam and

Vienna.

EDRs and GDRs are generally denominated in US dollars, but may be denominated in

anycurrency. They represent the underlying shares in exactly the same way as ADRs, and

make itpossible for foreign investors to trade in the issuing company's stock without the

problemsassociated with custody and settlement in foreign markets.

The US component of a GDR is normally structured either as a Level III ADR with full

disclosure and reporting to the SEC, or privately placed under Rule 144(a), in which case full

compliance with the SEC's onerous reporting and registration requirements is avoided.

Benefits of GDRs/EDRs

The advantages of an EDR/GDR program are similar to those of an ADR program. An EDR

program gives access to the vast pool of international capital, while a GDR combines this

with access to the domestic US market. This allows capital raising on a scale, which could be

difficult in some domestic market’s, and in the case of an EDR avoids all the US SEC

reporting and registration requirements associated with ADRs.

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Advantages to a non-US corporation of initiating an EDR/GDR program:

It increases the issuer's visibility and name recognition in the international markets, which

mayenhance knowledge of its products and ease the path of future capital raising exercises.

GDRs/EDRs 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 and DTC.

Disadvantages of GDRs/EDRs

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.

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 Qualified Institutional

Buyers (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

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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.

Regulation S was adopted to provide an exemption from registration under the Securities Act

for offerings and sales of securities occurring outside the U.S. The exemption was intended to

help U.S. and foreign companies raise capital overseas quickly and inexpensively without

having to comply with the full-blown registration process mandated under Section 5 of the

Securities Act. But there had been some amendments like lock in period for sales for upto

one year.

Regulation S provides two safe harbors from the Securities Act's registration requirements.

One safe harbor is applicable to offers and sales by issuers, distributors and their respective

affiliates, and the other is applicable to re-sales by other parties. An offer, sale or resale of

securities meeting all of the requirements of the applicable Regulation S safe harbor is

deemed to occur outside the U.S., and accordingly is not subject to the Securities Act's

registration requirements.

The availability of either safe harbor is subject to the satisfaction of two basic conditions (in

addition to other requirements): first, the offer or sale of securities must take place in an

"offshore transaction," meaning that (1) the offer is not made to a person in the U.S. and (2)

the buyer is (or is reasonably believed by the seller to be) outside the U.S. at the time of the

sale, or the sale is made through an established foreign securities exchange, or through the

facilities of a designated foreign securities market, and the transaction is not pre-arranged

with a U.S. buyer. Second, no "directed selling efforts" may be made in the U.S. in

connection with the transaction. "Directed selling efforts" means any activity undertaken for

the purpose of or that could be reasonably expected to result in, conditioning the U.S. market

for the relevant securities (for example, advertising the offering in a widely circulated

publication in the U.S.). Regulation S excludes certain types of advertisements and other

activities from the definition of "directed selling efforts."

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Where to List

One of the most important decisions facing a prospective issuer of DRs is determining where

to list them. Listing on a recognised stock exchange is important partly because many

institutional investors are required to limit their investment in unlisted securities. Critical

factors such as share liquidity, visibility, listing costs and funding requirements must be

carefully evaluated before the exchange which best suits the issuer's needs. In order to ensure

that the correct decision is reached, the prospective issuer should hold in-depth discussions

with the major exchanges.The type of DR program desired will determine what listing

options are available.

London and Luxembourg

Most of the GDRs are listed on London or Luxembourg exchange as these are the traditional

exchanges for listing euro-market instruments.

A listing on a recognised stock exchange adds to the visibility of the issue and provides a

widerpotential market; many institutional investors have limits on the number of unlisted

securities, orsecurities which are not listed on certain specified exchanges, in which they can

invest.

Both the London and Luxembourg Stock Exchanges list GDRs, and since both are governed

bythe same European Union directive, their listing requirements are broadly similar.

Thedifferences lie mainly in the level of disclosure, the ease and speed with which listings

can beobtained and the level of visibility afforded by the listing.

Listings on the London Stock Exchange are generally arranged by the Lead Manager of the

GDRissue acting as Listing Agent, while for Luxembourg the Listing Agent must be a

Luxembourgbank with a seat on the Luxembourg Stock Exchange. This is not normally a

service the LeadManager of the GDR issue can provide directly.

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A listing on the London Stock Exchange makes it easier for a GDR to be quoted on SEAQ

(Stock Exchange Automated Quotation System) International, the exchange's electronic price

quotation service, although such a listing is nota requirement for trading on SEAQ. It is the

London Stock Exchange’s service for mid-cap securities and the mostliquid AIM (Alternative

Investment Market) securities. The service is based on two-way continuous quotes, offered

by competingmarket makers.

Security Regulations and Requirements

Issuers of Depositary Receipts must comply with the regulations of the markets in which their

DRs are issued. Issue related expenses covering both fixed expenses like underwriting

commissions, lead managers’ fee, legal expenses and other reimbursable expenses shall be

subject to a ceiling of 4% of the issue size in the case of GDRs and 7% in the case of ADRs.

For issue expenses to be incurred beyond the above ceiling, approval of the RBI would be

necessary.

A GDR may be listed in the negotiable form and may be listed on any international stock

exchanges for trading outside India or OTC exchanges or through book entry transfer systems

prevalent abroad and such receipts may be purchased, possessed and freely transferable by a

person who is non-resident within the meaning of FEMA subject to the provisions of that

Act.

A GDR may be issued for one or more underlying shares or bonds held with the domestic

custodian bank. The FCCBs and GDRs may be denominated in any freely convertible foreign

currency. The ordinary shares underlying the GDRs and the shares issued upon conversion of

the FCCBs will be denominated only in Indian currency. There would be no lock-in period

for the GDRs/ADRs issued under the Government of India scheme.

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How do GDR work?

Key Participants in a GDR Offering

A GDR Offering will typically involve the following parties:

The Issuer

The Issuer is typically a non – U.S. or U.K. domiciled corporation, and is responsible for

issuing,registering and depositing the GDRs with the Depositary Bank. The Issuer will also

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haveresponsibility for making cash and share dividends as well as other relevant distributions

available to the Depositary Bank for payment to GDR holders.

The End Investors

These are the actual and ultimate purchasers and holders of the GDRs.

The Depositary Bank

The Depositary Bank issues the GDRs to End Investors and holds the underlying Shares

backing the GDRs through the Local Custodian for the benefit of the GDR holders. Any

payments received by the Depositary Bank from the Issuer on behalf of the End Investors are

held in trust for the relevant holder until duly paid thereto.

The Depositary Bank acts as the Registrar for the GDRs, maintaining a register of all record

holders. The Depositary Bank is also responsible for passing information from the Annual

General Meetings of the Issuer to the End Investors. The Depositary Bank is authorized and

regulated by the Financial Services Authority (FSA) of the U.K.

How do GDR trades settle?

GDR trades are settled bilaterally by registered brokers on the LSE, without the use of a

central counterparty such as the Central Securities Clearing System on the NSE. Electronic

settlement and clearing takes place in an agreed location (typically the Euroclear bank or the

Depositary Trust and Clearing Corporation, DTCC). However, counterparties may agree to

an alternative settlement venue. Standard settlement period is T + 3 days.

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Indian Depository Receipts (IDRs)

Indian Depository Receipts (IDRs) are basically financial instruments that allow foreign

companiesto mobilise funds from Indian markets by offering equity and getting listed on

Indian stockexchanges. This instrument is similar to the GDRs and ADRs that allow foreign

companies to raisefunds from European and American markets, respectively. In the year

2000, by the introductionof Section 605 A of the Companies Act, 1956, the first step to give

foreign companies access toraise capital via the Indian stock market was taken.

The second step was taken in 2004 when the Indian Depository Receipt rules were framed.

FinallySEBI has taken the third step on April 3rd 2006, in the back drop of the Indian stock

exchangesboom, by the introduction of Chapter VIA in the Disclosure and Investor

Protection Guidelines, byframing the eligibility criteria for foreign companies to raise capital

on the Indian bourses byissuing IDRs against their underlying shares. The objective of

introducing this provision seems tobe to provide Indian investors with one more alternative to

acquire a share of the global pie as wellas to allow global companies to access funds at,

presumably, cheaper cost.

Rules and Regulations for IDRs

IDRs can be understood as a mirror image of the familiar ADRs/GDRs. In an IDR,

foreigncompanies issue shares to an Indian Depository, which would, in turn, issue

Depository Receipts toinvestors in India. The Depository Receipts would be listed on stock

exchanges in India and wouldbe freely transferable. The actual shares underlying the IDRs

would be held by an Overseas Custodian, which shall authorize the Indian Depository to

issue the IDRs. The Overseas Custodianis required to be a foreign bank having a place of

business in India and needs approval from theFinance Ministry for acting as a custodian

while the Indian Depository needs to be registered withSEBI.

Issuers Eligibility Criteria

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Pre-issue paid up capital of and free reserves of US$50 million and minimum average

capitalisation during the (last three years) of US$100 million

A track record of distribution of profits in three out of five years;

A continuous trading record of at least three years in the stock exchange of the parent

country;

The underlying shares shall not exceed 25 percent of the post issue number of equity shares

of the company

Must be listed in its home country.

Must not be prohibited by any regulatory body to issue securities

Must comply with any additional criteria set by SEBI

Procedure for making an issue of IDRs

(i) (a) No issuing company shall raise funds in India by issuing IDRs unless it has obtainedprior

permission from the SEBI.

(b) An application seeking permission under clause (a) shall be made to the SEBI atleast 90

days prior to the opening date of the issue, in such form furnishing suchinformation as may

be notified from time to time with a non-refundable fee of US$10,000:

Provided that, on permission being granted, an applicant shall pay an issue fee of half

apercent of the issue value subject to a minimum of Rs.10 lakhs where the issue is

uptoRs.100 crore in Indian rupees:

Provided further where the issue value exceeds Rs.100 crore, every additional value of

issueshall be subject to a fee of 0.25 percent of the issue value.

(c) The SEBI may, on receipt of an application, seeking permission under clause (a),call for

such further information, and explanations, as may be necessary, for disposalof such

application.

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(d) The issuing company shall obtain the necessary approvals or exemption from

theappropriate authorities from the country of its incorporation under the relevant

lawsrelating to issue of capital, where required.

(e) The issuing company shall appoint an overseas custodian bank, a domesticdepository and

a merchant banker for the purpose of issue of IDRs.

(f) The issuing company shall deliver the underlying equity shares or cause them to

bedelivered to an Overseas Custodian Bank and the said bank shall authorize thedomestic

depository to issue IDRs.

(g) The issuing company shall file through a merchant banker or the domesticdepository a

due diligence report with the Registrar and with SEBI in the formspecified.

(ii) (a) The issuing company shall, through a merchant Banker file a prospectus or letter ofoffer

certified by two authorized signatories of the issuing company, one of whomshall be a whole-

time director and other the Chief Accounts Officer, stating theparticulars of the resolution of

the Board by which it was approved, with the SEBIand Registrar of Companies, New Delhi,

before such issue.

(b) The draft prospectus or draft letter of offer shall be filed with SEBI, through themerchant

banker, at least 21 days prior to the filing under clause (a).

Provided that if within 21 days from the date of submission of draft prospectus or letter

ofoffer, SEBI specifies any changes to be made therein, the prospectus shall not be filed

withthe SEBI/Registrar of Companies unless such changes have been incorporated therein.

(iii) The issuing company, seeking permission under sub-rule (i) above, shall obtain in-

principlelisting permission from one or more stock exchanges having nation wide trading

terminalsin India.

(iv) The issuing company may appoint underwriters registered with SEBI to underwrite the

issue of IDRs.

Who can Invest?

1. Indian Companies

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2. Qualified Institutional Buyers

3. NRI’s and FII’s with permission of the Reserve Bank Of India.

The Issue

The minimum issue size is Rs. 50 crores,

90% of the issue must be subscribed.

Automatic Fungibility is not permitted.

The following conditions would also apply:

In one financial year the market cap cannot exceed 15 % of the paid up capital and

freereserves of the issuer

Redemption into underlying shares is prohibited for 1 year, beginning the issue date.

Repatriation of proceeds is subject to Indian foreign exchange laws, prevailing at time

ofrepatriation.

The issue must be in rupees.

The issuer is subject to Clause 49 of the listing agreement.

Legal Implications of IDR Rules

An IDR issue needs to be approved by SEBI and an application in this regard has to be made

aminimum of 90 days before the issue-opening date. The overseas company also has to file a

duediligence report and a Prospectus or Letter of Offer with SEBI and the ROC. Further, the

overseascompany will have to obtain in-principle permission for listing on stock exchanges in

India.

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The overseas company undertaking the IDR issue needs to have a pre-issue paid-up capital

and free reserve of at least $100 million and an average turnover of $500 million during the

last three financial years. However, overseas companies also need to have earned profits in at

least five years preceding the issue and should have declared dividends of at least 10 per cent

each year during this period. Further, the pre-issue debt-equity ratio of such company should

not be more than 2:1. It is interesting to note that while Indian unlisted companies coming out

with an IPO also need to comply with certain criteria relating to net worth and profitability,

there is no criteria relating to the dividend distribution track record and debt-equity ratio.

Exchange Control Issues

The IDR Rules specify that the repatriation of proceeds of the IDR issue would be subject to

prevalent exchange control regulations. Further, although there would be no restriction on the

purchase or transfer of the IDRs as the investors would be Indian residents as defined under

FEMA, any acquisition of underlying shares would be subject to compliance with the FEMA

provisions prevalent at that time.The IDR route is an addition to the options available to

Indian investors for overseas investment.

Case study on Infosys

Overview

Infosys, one of India’s leading information technology (“IT”) services companies, uses an

extensive non-U.S. based (“offshore”) infrastructure to provide managed software solutions

to clients world wide. Headquartered in Bangalore, India, Infosys has seventeen state-of-the-

artsoftware development facilities throughout India and one development center in Canada.

CASE INFORMATION:-

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1. Infosys Technologies Limited (ITL) launched its American Depository Receipt (ADR)

offering on NASDAQ with much fanfare on March 11, 1999. The company offered 2.07

million ADRs representing 1,035,000 equity shares of the company at an offer price of $34

each through its lead manager Nations Banc Montgomery Securities LLC.

2. Two ADRs could be exchanged for one equity share in Infosys (NASDAQ: INFY). The ADR

opened at $37.375 at 10:45 AM and rose to a high of $50 before settling at $46.875 at 4 PM

when the markets closed. NR Narayana Murthy, ITL’s Chief Executive Officer, was ecstatic.

The ADR had appreciated almost 40% on its first day of trading, beyond his expectations.

“The fact that the stock jumped to $50 on the first day amid volumes nearly twice the issue

size itself is an indicator of the interest from individual investors," a dealer in London said.

3. “Of the 7,543 trades on the first day, 7,530 were non-bloc trades, which mean there were

these many retail trades as against institutional ones. Since the placement is thus in many

hundreds of accounts, there is greater stability in this for the company,” commented John

Wall, President of NASDAQ International

4. Back in India, there was jubilation at the company headquarters as champagne bottles popped

in celebration. On the Mumbai Stock Exchange (BSE), ITL shares hit an all time high of Rs.

3,457 (equivalent to an pre-bonus level of Rs. 6,914) before closing the day at Rs. 3,392 .

Major Reasons for Infosys’ Success

1. The ability to consistently attract and retain the best talent in the industry. Infosys does

thiswith a series of policies that are aimed at ensuring all of their employees are empowered

andcompensated at a level unheard of in the Indian software industry.

2. The unique corporate culture and management style at Infosys. This has allowed the

company to maintain an environment that encourages the free flow of ideas and informationat

all levels in the company.

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3. Maintaining a clear vision and strategy. “To be a globally respected software company

thatprovides best-of-breed software solutions delivered by best-in-class people.”

4. The company maintains a distinct identity by doing some things differently than

othercompanies in the same industry.

5. Infosys has diverse management talent with mutually exclusive yet complimentary

skills.This ensures that every issue raised within the company has a champion who is an

expert inthat area and a number of extremely intelligent people who can assist him/her in

analyzingthat issue.

6. The company has responded with speed and imagination in ensuring that it maintains

aleadership position in the industry. This has manifested itself in the company producing

ahistory of “firsts” that were unheard of in Indian industry a few years ago.

7. Senior management has maintained an equitable mix between individual goals and

corporategoals at all levels in the company.

8. The ability to accept that all problems that arise lie within the company and can be

solvedgiven the right level of expertise and internal talent.

9. The ability to keep all issues transaction based and oriented. All employees have the right

todissent and are welcome to fiercely debate any issue that is raised, but once a consensus

isreached, they will work as a team in resolving the issue.

10. All members of the Infosys family must make value added contributions towards

thecompany. If it is determined that any person is not contributing to the best interests of

thecompany then that individual will no longer be accepted by the company, irrespective

ofhis/her position within the company.

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First IDR listed in India - Standard Charted Bank

After 152 years of providing world class banking solutions to Indians, British bank, Standard

Chartered Bank got its Indian depositary Receipts (IDRs) listed at Indian bourses on June 11,

2010.

The StanChart IDRs were issued at the lower end of the price band, at Rs 104

The Asia-focused bank is also listed in London Stock Exchange and the Hong Kong Stock

Exchange. IDRs represents ownership in shares of a foreign firm, which trades in domestic

capital market, as foreign companies are disallowed to list shares directly in Asia's third-

largest economy, and this was the first ever IDR issue in India. Each 10 IDR represent 1

share in Standard Chartered Plc, and buyers can earn bonuses or dividends.

The lending major, raised about $530 million or Rs 2,490 crore, pricing the issue at the lower

end of the spectrum, from 24 crore receipts, or 240 million IDRs, including 36 million shares

set aside for anchor investors. The issue was oversubscribed 2.2 times, the response

highlights the strength of Indian primary capital markets that invested in a foreign bank's

depository receipts that was offered amid worried global markets over eurozone concerns

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Conclusion

The prime objective for a company to cross list its shares is the reduction of cost of fund.

Unless there is significant financial benefit from cross listing, companies may not tap the

foreign capital market as it involves certain other explicit cots in terms annual listing fees,

costs associated with recasting the annual report as per the foreign country GAAP

requirement, costs associated with abiding by the listings requirement foreign country stock

exchanges.

But does cross listing really help companies in reducing cost of capital? Many research

studies have tried to find out the impact of cross listing on company’s cost of capital. In this

section findings of few research studies have been reported, though many more studies have

been undertaken to analyze different dimensions of cross listing and its benefit to the issuer.

It is found that as the cross listing specifically ADR issues increases the accounting

disclosure quality. They find that cross listing firms experience a decrease in their cost of

equity averaging over 0.2% per week. This decrease is not present in a matched group of

similar companies, which do not crosslist.

Bakera et al ( 2002) study shows that international firms listing their shares on the New York

Stock Exchange (NYSE) or the London Stock Exchange (LSE) experience a significant

increase in visibility, as proxied by analyst coverage and print media attention (The Wall

Street Journal or Financial Times). The increase in analyst following is also associated with a

decrease in the cost of equity capital. Their findings are stronger for NYSE listing firms than

for LSE listing firms. This may partially compensate firms for the higher costs associated

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with NYSE listing (compared to LSE listing).

Bibliography

www.adr.db.com

www.bankofny.com

www.indlaw.com

wwss.citissb.com

www.gtb.db.com

www.isas.nus.edu.sg

Business Wire, “Infosys Technologies Limited lists on the NASDAQ Stock Market; First

Indian Registered Direct Listing on a US Market”, March 11, 1999

ITL Infosys offer document for 1.8 million American Depository Receipts, March 11, 1999

The Economic Times, “INFY’s still firm on Nasdaq, hits record high at home”, March 12,

1999

The Economic Times, “Infosys did better than other entrants on Day 1: John Wall”, March

12, 1999

The Times of India, “Arbitrage opportunity in Infosys scrip?” March 15, 1999

Infosys Technologies Limited Press Release, February 10, 1999

The Economic Times, “Infosys net profit doubles to Rs. 1,352.7 million in FY 99”,April 9,

1999

Highlights of Infosys conference call to announce results from the company website, April 9,

1999

 

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