Global Depositary Receipts

Introduction to Depository Receipts

Depositary receipts (DRs) are certificates that represent an ownership interest in the ordinary shares of stock of a company, but that are marketed outside of the companys home country to increase its visibility in the world market and to access a greater amount of investment capital in other countries. Depositary receipts are structured to resemble typical stocks on the exchanges that they trade so that foreigners can buy an interest in the company without worrying about differences in currency, accounting practices, or language barriers, or be concerned about the other risks in investing in foreign stock directly.

Background
istorically, !merican Depositary Receipts (!DRs) were the first type of depositary receipt to evolve. "hey were introduced in #$%& in response to a law passed in 'ritain, which prohibited 'ritish companies from registering shares overseas without a 'ritish( based transfer agent. )* shares were not allowed physically to leave the )*, and so, to accommodate )+ investor demand, a )+ instrument had to be created, this was called an !merican DepositaryReceipt. !DRs assumed their present form in #$--, when the +ecurities and .xchange /ommission (+./) established its 0orm +(#% for registering all depositary receipt programs. 0orm +(#% was later replaced by 0orm 0(1, which is still in use today.

American Depository Receipts (ADR)

!DRs are )+ dollar denominated negotiable instruments issued in the )+ by a depositary bank (eg Deutsche 'ank), representing ownership in non()+ securities, usually referred to as the underlying ordinary shares. !DRs enable )+ investors to ac2uire and trade non(

)+ securities denominated in )+ dollars without concern for the differing settlement timetables and the problems typically associated with overseas markets. "hey also provide non()+ companies with access to the )+ capital markets, the largest domestic investor base in the world.

"here are several types of !DR, each of which involves a different level of disclosure of information and compliance with the regulations of the +./. 'ut perhaps the most important distinction for issuers of !DRs is that some structures allow the company to raise capital in the )+, while others simply provide a mechanism which makes it easy for )+ investors to buy and trade existing shares. Structure of ADR Level I ! 3evel 4 sponsored !DR program is the easiest and least expensive means for a company to provide for issuance of its shares in !DR form in the )+. ! 3evel 4 program involves the filing of an 0(1 registration statement, but allows for exemption under Rule#%g 5(%(b) from full +./ reporting re2uirements. "he issuer has a certain amount of control over the !DRs issued under a sponsored 3evel 4 program, since a depositary agreement is executed between the issuer and one selected depositary bank. 3evel 4 !DRs can however only be traded overthe-counter and cannot be listed on a national exchange in the US. Level II ! sponsored 3evel 44 !DR must comply with the +./6s full registration and reporting re2uirements. 4n addition to filing an 0(1 registration statement, the issuer is also re2uired to file +./ 0orm %7(0 and to comply with the +./6s other disclosure rules, including submission of its annual report which must be prepared in accordance with )+ 8enerally !ccepted !ccounting 9rinciples (8!!9). Registration allows the issuer to list its !DRs on one of the three ma:or national stock exchanges, namely the ;ew <ork +tock

.xchange (;<+.), the !merican +tock .xchange (!=.>), or the ;ational !ssociation of +ecurities Dealers !utomated ?uotation (;!+D!?) +tock =arket, each of which has reporting and disclosure re2uirements. 3evel 44 sponsored programs are initiated by nonUS companies to give US investors access to their stock in the US. !s with a 3evel 4 program, a depositary agreement is signed between the issuer and a depositary bank. Level III 3evel 444 sponsored !DRs are similar to 3evel 44 !DRs in that the issuer initiates the program, deals with one depositary bank, lists on one of the ma:or )+ exchanges, and files 0orm 0(1and %7(0 registration statements with the +./. "he ma:or difference is that a 3evel 444 program allows the issuer to raise capital through a public offering of ADRs in the US and this re2uires the issuer to submit a 0orm 0(# to the +./.

Global Depository Receipts ( GDR )

! negotiable certificate held in the bank of one country representing a specific number of shares of a stock traded on an exchange of another country "o raise money in more than one market, some corporations use global depositary receipts(8DRs) to sell their stock on markets in countries other than the one where they have their head2uarters. "he 8DRs are issued in the currency of the country where the stock is trading. 0or example, a 4ndian company might offer 8DRs priced in pounds in 3ondon and in yen in "okyo. 4ndividual investors in the countries where the 8DRs are issued buy them to diversify into international markets. 8DRs let you do this without having to deal with currency conversion and other complications of overseas investing. "he ob:ective of a 8DR is to enable investors in developed markets, who would not necessarily feel happy buying emerging market securities directly in the securities home market, to gain economic exposure to the intended company and, indeed, the overall emerging economy using the procedures with which they are familiar. 8lobal Depository Receipt (8DR) ( certificate issued by international bank, which can be sub:ect of worldwide circulation on capital markets. 8DR6s are emitted by banks, which

purchase shares of foreign companies and deposit it on the accounts. 8lobal Depository Receipt facilitates trade of shares, especially those from emerging markets. 9rices of 8DR6s are often close to values of related shares. 8DRs are securities available in one or more markets outside the companys home country."he basic advantage of the 8DRs, compared to the !DRs, is that they allow the issuer to raise capital on two or more markets simultaneously, which increases his shareholder base. "hey gained popularity also due to the flexibility of their structure. 8DRs are typically denominated in )+D, but can also be denominated in .uros. 8DRs are commonly listed on .uropean stock exchanges, such as the 3ondon +tock .xchange (3+.) or 3uxembourg +tock .xchange, or 2uoted on +.!? (+tock .xchange !utomated ?uotations) 4nternational, and traded at two other places besides the place of listing, e.g. on the @"/ market in 3ondon and on the private placement market in the )+. 3arge part of the 8DR programs consists of a )+ tranche, which is privately placed and a non()+ trance that is sold to investors outside the )nited +tates, typically in the .uro markets.

! 8DR is similar to an !DR, but is a depositary receipt sold outside of the )nited +tates and outside of the home country of the issuing company. =ost 8DRs are, regardless of the geographic market, denominated in )nited +tates dollars, although some trade in .uros or 'ritish sterling. "here are more than $77 8DRs listed on exchanges worldwide, with more than %,#77 issuers from A7 countries. !lthough !DRs were the most prevalent form of depositary receipts, the number of 8DRs has recently surpassed !DRs because of the lower expense and time savings in issuing 8DRs, especially on the 3ondon and 3uxembourg stock exchanges. 4n the last few years, the depositary receipt concept has developed considerably. 4ssuers in a variety of countries have realiBed that there are advantages in making their stock available in a form convenient not only to )+ investors but also, or alternatively, to investors in the .uromarkets or elsewhere. "his has prompted the development of .uropean Depositary Receipts (.DRs) and 8lobal Depositary Receipts (8DRs).

"he .DR accesses the .uromarkets but not the )+ market. 4t settles and trades through the .uromarket clearing systems, .uroclear and /learstream, and may be listed on a .uropean +tock .xchange, normally 3ondon or 3uxembourg. ! 8DR will access two or more markets, usually the .uromarkets (like an .DR) and the )+ (like an !DR). DRs are often launched for capital raising purposes! so the )+ element is generally either a Rule "##$a% ADR or a &evel ''' ADR! depending on whether the issuer aims to tap the private placement or public )+ markets.

GDR - A Financial Instrument

! 8DR is issued and administered by a depositary bank for the corporate issuer. "he depositary bank is usually located, or has branches, in the countries in which the 8DR will be traded. "he largest depositary banks in the )nited +tates are C9 =organ, the 'ank of ;ew <ork =ellon, and /itibank. Sponsored Vs nsponsored DR programmers are either DsponsoredD by an issuing company or DunsponsoredD. 4f a company sponsors a DR programme, it enters into a contractual agreement with the depositary bank (and, in the case of an !merican Depositary Receipt programme governed by )+(law, also with the holders of the !DRs). "his contractual agreement is known as the Ddeposit agreementD. Deposit Agreement ! 8DR which is based on a Deposit !greement between the depositary bank and the corporate issuer, specifies the duties and rights of each party, both to the other party and to the investors. "he Deposit !greement sets out the rights and obligations of the /ompany, the Depositary and the DR holders with respect to the creation and maintenance of the deposit facility. 4t covers such matters as the issuance of DRs upon deposit of shares (and the withdrawal of underlying shares upon presentation of DRs), the treatment of dividends and other distributions, the procedure for voting the underlying

shares, and how the deposit agreement can be amended or terminated. 8enerally, the /ompany agrees to indemnify the Depositary for liabilities arising in connection with the programme. "he Deposit !greement also specifies the fees the Depositary will charge DR holders.

(ustodian )ank ! separate custodian bank holds the company shares that underlie the 8DR. "he depositary bank buys the company shares and deposits the shares in the custodian bank, then issues the 8DRs representing an ownership interest in the shares. "he DR shares actually bought or sold are called depositary shares. "he custodian bank is located in the home country of the issuer and holds the underlying corporate shares of the 8DR for safekeeping. "he custodian bank is generally selected by the depositary bank rather than the issuer, and collects and remits dividends and forwards notices received from the issuer to the depositary bank, which then sends them to the 8DR holders. "he custodian bank also increases or decreases the number of company shares held per instructions from the depositary bank. "he voting provisions in most deposit agreements stipulate that the depositary bank will vote the shares of a 8DR holder according to his instructions, otherwise, without instructions, the depositary bank will not vote the shares Structure "he most significant difference between the !DR and 8DR lies in their structures. "here are two types of 8DRs E "he Reg + Depositary Receipts and the pairing type. Reg S Type Depositary Receipts

"he Reg + "ype Depositary Receipt is the e2uivalent of the !DR. 4t is issued to the public through a sponsor bank F brokerage. @nce issued, this 8DR is listed on either the 3uxembourg +tock .xchange or the 3ondon +tock .xchange. "his type of a 8DR is open for every kind of investor. )nlike !DRs, where each type of !DR determines the investors that can trade it, the Reg + type 8DR can be traded from any kind of investor to any kind of investor.

Pairing Type

"his 8DR is a combination of the Reg + type 8DR and a Rule #GG! !DR. +o when one such 8DR is sold, it essentially implies the sale of a Reg + type 8DR along with a Rule #GG! !DR. "he Reg + type 8DR may be listed either in 3ondon or 3uxembourg. "he holders of these 8DRs will be regular investors. owever, the Rule #GG! !DRs are privately placed through ?ualified 4nstitutional 'uyers in the ).+. "he biggest reason for such a program being subscribed to is the fact that such a program enables the issuing company to raise funds not :ust from the ).+. and not :ust from .urope, but from both markets simultaneously.

GDR Ad!antages to Issuer

8DRs have several benefits to offer to both issuers as well as the investors. 3isted below are the various ways in which the issuers of !DRs F 8DRs stand to gain

"idened In!estor Base# Hith the issue of !DRs F 8DRs, 4ndian companies can expand their investor base to beyond the borders of the country. 0urther, this facilitates the company to diversify their investors. Increased $i%uidity# !s in the case of any issue, the issue of !DRs F 8DRs will increase the li2uid position of the company. "he compay can use these funds to fuel their expansion plans. Global Visibility# .ntering the depositary receipts market would result in the issuing company becoming globally visible. "his enables 4ndian companies to enhance their reputation not :ust amongst foreign investors, but also amongst domestic investors.

&rice &arity# 4ndian companies can compete to be at par with =;/s with regards to their stock prices. Hith the issue of !DRs F 8DRs, 4ndian companies with the =;/s in their own turf. Facilitates 'arket (ntry# @nce a company has got itself recognised and accepted by the investors, 4ndian companies can set up shop abroad with far lesser difficulty. 4n fact, some of the 4ndia companies have issued !DRs F 8DRs not :ust to raise funds, but also to establish their brand in the country. 4n this manner, they can enter foreign market with a lesser risk of failure.

GDR Ad!antages to In!estors

8DRs have several benefits to offer to both issuers as well as the investors. 3isted below are the various ways in which the issuers of 8DRs stand to gain (ase o) In!estment# 8DRs are very easy to invest in and hold. "hey are treated like :ust other securities. ence, there is no complicated procedure involved in the purchase of a 8DR. Simple to *rade# +ince 8DR is given the same treatment as local securities, it becomes that much easier and simpler for the investor to trade in 8DRs. Global Access# 8DRs provide the investors opportunities to invest globally. "his permits them to invest in foreign companies without having to transfer funds out of the country. 0urther, investors can diversify the industries into which they wish to invest. (nables +omparison#

@wing to the fact that all transactions take place in their home country, investors can easily compare their investments in 8DRs as against their investments in other local securities. "his is also made possible with the transactions taking place electronically. Access to Institutional In!estors# 8DRs offer the institutional investors an opportunity to hold securities which they are not permitted to hold in the home country of the 8DR issuing company.

&rocedure )or issue o) GDR

,-Appro!als "he issue of !DRsF8DRs re2uires the approvals of 'oard of Directors, +hareholders, I @ther regulatory authorities I 0inancial 4nstitutions in ome /ounty. .- Appointment o) Intermediaries !DRF8DR normally involve a number of 4ntermediaries including lead =anager, /o( =anager, @verseas Depository 'anks, 3isting !gent, 3egal !dvisor, 9rinter, !uditors and )nderwrites. /- &rincipal Documentation "he principal documents re2uired to be prepared include subscription agreement, Depository !greement, /ustodian !greement, !gency !greement and "rust Deed. 0- &re and &ost $aunc1

!dditional *ey !ctions. !part from obtaining necessary approvals, Documentation, additional key actions necessary for =aking the issue of !DR 8DR a success, include "iming, pricing and siBe of the issue 'ook 'uilding and pricing of the issue /losing of the issue I !llotment.

GDR 'arket
!s derivatives, depositary receipts can be created or canceled depending on supply and demand. Hhen shares are created, more corporate stock of the issuer is purchased and placed in the custodian bank in the account of the depositary bank, which then issues new 8DRs based on the newly ac2uired shares. Hhen shares are canceled, the investor turns in the shares to the depositary bank, which then cancels the 8DRs and instructs the custodian bank to transfer the shares to the 8DR investor. "he ability to create or cancel depositary shares keeps the depositary share price in line with the corporate stock price, since any differences will be eliminated through arbitrage. "he price of a 8DR primarily depends on its depositary ratio (aka DR ratio), which is the number of 8DRs to the underlying shares, which can range widely depending on how the 8DR is priced in relation to the underlying shares, # 8DR may represent an ownership interest in many shares of corporate stock or fractional shares, depending on whether the 8DR is priced higher or lower than corporate shares.

=ost 8DRs are priced so that they are competitive with shares of like companies trading on the same exchanges as the 8DRs. "ypically, 8DR prices range from J& ( J%7. 4f the 8DR price moves too far from the optimum range, more 8DRs will either be created or canceled to bring the 8DR price back within the optimum range determined by the depositary bank. ence, more 8DRs will be created to meet increasing demand or more will be canceled if demand is lacking or the price of the underlying company shares rises significantly. =ost of the factors governing 8DR prices are the same that affects stocksK company fundamentals and track record, relative valuations and analysts recommendations, and market conditions. "he international status of the company is also a ma:or factor. @n most exchanges 8DRs trade :ust like stocks, and also have a "L5 settlement time in most :urisdictions, where a trade must be settled in 5 business days of the trading exchange. "he exchanges on which the 8DR trades are chosen by the company. /urrently, the stock exchanges trading 8DRs are theK

i. $ondon Stock (2c1ange3 ii.$u2embourg Stock (2c1ange3 iii.Dubai International Financial (2c1ange (DIF4)3 iv.Singapore Stock (2c1ange3 v.5ong 6ong Stock (2c1ange/ompanies choose a particular exchange because it feels the investors of the exchanges country know the company better, because the country has a larger investor base for international issues, or because the companys peers are represented on the exchange. =ost 8DRs trade on the 3ondon or 3uxembourg exchanges because they were the #st to list 8DRs and because it is cheaper and faster to issue a 8DR for those exchanges. =any 8DR issuers also issue privately placed !DRs to tap institutional investors in the )nited +tates. "he market for a 8DR program is broadened by including a #GG! private

placement offering to ?ualified 4nstitutional 4nvestors in the )nited +tates. !n offering based on +./ Rule #GG! eliminates the need to register the offering under )nited +tates security laws, thus saving both time and expense. owever, a #GG! offering must, under Rule #%g5(%(b), provide a home country disclosure in .nglish to the +./ or the information must be posted on the companys website.

GDR inde2es
B78 'ellon GDR Inde2 # 0or global depositary receipt (8DR) investors, ';< =ellon 8DR 4ndex is an ideal benchmarking tool as it is the only index that tracks all 8DRs traded on "he 3ondon +tock .xchange. ';< =ellon 8DR 4ndex is calculated on a continuous basis throughout the trading day ( beginning with the open of the ).*. market through its close.4n addition to the 'ank6s /omposite 8DR 4ndex, there are six regional indices (.astern .urope, =.;!, .astern .urope( Russia, !sia, =iddle .ast and !frica), one market index (.merging) and %5 country indices. Skindia GDR Inde2 4ndian 8DRs traded on international bourses are governed by parameters specific to the market in which they are traded, making their prices uni2ue. "o capture their movement and performance, it is necessary to develop reliable market indicators which can be used

as a tool by investors for measuring their portfolio returns vis(M(vis market returns. 4n response to this need, +kindia 0inance pioneered a 8DR index which became popularly known as the 6+kindia 8DR 4ndex6. "he base of the +kindia 8DR 4ndex is !pril #-, #$$G with the index set consisting of %% actively traded 8DRs. "he 4ndex, a market value weighted index (total number of 8DRs issued multiplied by 8DR price), is one of the most popular 8DR 4ndices worldwide.

ADR Vs GDR
4ndias entry into the 8DR market dates back to #$$% with Reliances J#-7 million issue. 4ndian companies were hesitant to enter the !DR market until %777, when the Reserve 'ank of 4ndia issued clearly defined guidelines. !part from this, there are several other reasons for most 4ndian companies preference towards the 8DR market. "hey are listed as underK 9 Disclosure norms# /ompanies listed on any of the !merican stock exchanges are re2uired to adhere to comprehensive disclosure norms. "hey have to disclose information relating not :ust to the !DR, but also detailed financial and non E financial information regarding the company. 4n contrast, the 3ondon +tock .xchange (where all of the 4ndian companies are listed) re2uires disclosure of only that information which relates to 8DRs being issued.

9 Voting Rig1ts# !merican rules make it a necessity for !DR holders to be given voting rights. "he 3ondon +tock .xchange (3+.) makes no such demand. !lthough companies wishing to give such voting rights are permitted to do so, they are not compelled to give these rights Accounting System Di))erences# 'oth ).+. and .ngland follow accounting systems that differ from the 4ndian system. "he +ecurities and .xchange /ommission (+./) makes it compulsory for companies issuing !DRs either to prepare their accounts under )+ 8!!9 or reconcile the accounts to )+ 8!!9. "he 3+., on the other hand, is satisfied with a +tatement of difference between the .nglish accounting system and the 4ndian system.

Initial Listing Costs:

"here is a significant difference in the initial listing costs of listing in the ).+. and listing on the3+.. ! ).+. listing could cost the issuing company anywhere between J# ( J% million. "hese costs are down to about J%77,777 ( JG77,777 for listing on the 3+..

GDR $egal Frame:ork in India

4n 4ndia, 8DRs are governed by the same notification issued for !DRs. ;otification ;o. 0...R.!. %#G F%777(R' "he Reserve 'ank of 4ndia issued this notification on %7th Canuary, %777. 4t allows the issue of 8DRs. "he following points highlight the essence of this notificationK N !ll companies governed by the 4ndian /ompanies !ct, #$-1, are permitted to raise funds through the issue of 8DRs N "he permission, however, shall stand to be cancelled if the company raising funds violates any norms or exceeds any limits laid down by the 0oreign 4nvestment 9romotion 'oard (049') or the +ecretariat for 4ndustrial !ssistance (+4!).

N "he company has to get approval from the =inistry of 0inance, 8overnment of 4ndia, to make such an issue. N"he company is permitted to enter into any agreement F sign any contract with foreign agencies provided that such a contract is essential for the issue of 8DRs. N "he companies are allowed to make payments to the relevant authorities and the sponsor bank F brokerage towards their fees. N "he companies are permitted to make any payments to concerned government towards any tax liability incurred as a result of issue of 8DRs N "he companies are allowed to maintain bank accounts abroad to deposit the money collected through such an issue. N "he companies are also permitted to maintain a register of foreign members if the company feels it necessary.
ADVANTAGES OF GDR/EDR .DRsF8DRs can be launched as part of a private or public offering.

O "hey allow a single fungible security to be placed in one or more international markets, thus giving access to a global investor base. O "hey may allow the issuer to overcome local selling restrictions to foreign share ownership. O 8DRs are eligible for settlement through /learstream, .uroclear. D'SAD*A+,A -S

4f the )+ tranche of a 8DR is structured as a Rule #GG(a) private placement, the disadvantages of an R!DR program will apply. 4f it is structured as a 3evel 444 program, the reporting and cost features of such programs will apply.

REGULATORY PROVISIONS FOR GDR "he issue of 8DR by 4ndia 4nc. is governed by following legal provisionsK

#. +ection 1 (5) (b) of 0oreign .xchange =anagement !ct (0.=!), #$$$ reads as followsK 1. /apital account transactions. E (#) +ub:ect to the provisions of sub(section (%), any person may sell or draw foreign exchange to or from an authoriBed person for a capital account transaction. (%) "he Reserve 'ank may, in consultation with the /entral 8overnment, specify( (a) !ny class or classes of capital account transactions which are permissible, (b) the limit up to which foreign exchange shall be admissible for such transactionsK 9rovided that the Reserve 'ank shall not impose any restriction on the drawl of foreign

exchange for payments due on account of amortiBation of loans or for depreciation of direct investments in the ordinary courts of business. (5) Hithout pre:udice to the generality of the provisions of sub(section (%), the Reserve 'ank may, by regulations, prohibit, restrict or regulate the following( (a) "ransfer or issue of any foreign security by a person resident in 4ndia, (b) "ransfer or issue of any security by a person resident outside 4ndia

H @ /!; 4++). 8DRP ! company can issue !DRF8DR, if it is eligible to issue shares to person resident outside 4ndia under the 0D4 +cheme. H @ /!;;@" 4++). 8DRP O !n 4ndian listed company, which is not eligible to raise funds from the 4ndian /apital =arket including a company which has been restrained from accessing the securities market by the +ecurities and .xchange 'oard of 4ndia (+.'4) will not be eligible to issue 8DRs.

O .rstwhile @/'s who are not eligible to invest in 4ndia through the portfolio route and entities prohibited to buy, sell or deal in securities by +.'4 will not be eligible to subscribe to 8DRs issued by 4ndian companies. .;D )+. R.+"R4/"4@;+ ;o end(use restrictions except for a ban on deployment F investment of such funds in Real .state or the +tock =arket. 34=4" @0 @00.R4;8+ "here is no monetary limit up to which an 4ndian company can raise !DRs F 8DRs. Q@"4;8 R48 "+ Qoting rights on shares issued under the +cheme shall be as per the provisions of /ompanies !ct, #$-1 and in a manner in which restrictions on voting rights imposed on !DRF8DR issues shall be consistent with the /ompany 3aw provisions. R'4 regulations regarding voting rights in the case of banking companies will continue to be pplicable to all shareholders exercising voting rights. 9R4/4;8 @0 8DR "he pricing of 8DR issues should be made at a price not less than the higher of the following two averagesK (i) "he average of the weekly high and low of the closing prices of the related shares 2uoted on the stock exchange during the six months preceding the relevant date, (ii) "he average of the weekly high and low of the closing prices of the related shares 2uoted on a stock exchange during the two weeks preceding the relevant date.

ow can 8DRs be used to raise capitalP

Hhat options are there for raising capitalP 4n simple terms there are two primary ways to use 8DRs to raise capitalK ! company can offer 8DRs on an international exchange outside the )+ (i.e., without any participation from )+ investors) and outside the companys home market. "his is generally known as a Regulation + 8DR offering. +ome companies want to access a bigger pool of li2uidity and do so by including a )+ institutional element. "his type of restricted placement to )+ institutional investors is known as a private placement. +ome of these private placements 2ualify for Rule #GG!, which allows the securities to be resold to certain institutional investors. "he institutional investors legally able to participate in Rule #GG! offerings are ?ualified 4nstitutional 'uyers (?4's) institutions which meet certain criteria. "he advantage of relying on Rule #GG! is that the issuer benefits from an +./ exemption pursuant to which the offering need not be registered under the )+ federal securities laws, thereby avoiding initial and ongoing disclosure re2uirements and other rules that generally apply to companies seeking to raise capital in the )+ public markets.