AMERICA

N
DEPOSITO
RY
RECEIPT
and
GLOBAL
DEPOSITO
RY
RECEIPT
REPORT
 SUBMITTED BY
SURABHI KHANNA

AMERICAN DEPOSITORY
RECEIPT GLOBAL
DEPOSITORY RECEIPTS

DEPOSITORY RECEIPTS

What are depositary receipts?

A depositary receipt (DR) is a type of negotiable (transferable)

financial security that is traded on a local stock exchange but
represents a security, usually in the form of equity that is issued by
a foreign publicly listed company. The DR, which is a physical
certificate, allows investors to hold shares in equity of other
countries.
How does DR work?

The DR is created when a foreign company wishes to list its

already publicly traded shares or debt securities on a foreign stock
exchange. Before it can be listed to a particular stock exchange,
the company in question will first have to meet certain
requirements put forth by the exchange. Initial public offerings,
however, can also issue a DR. DRs can be traded publicly or over-
thecounter. Let us look at an example of how an ADR is created
and traded.

Origin of Depository Receipts

The origin of depository receipt is USA. It started in 1920s. In

this period, it was difficult and risky to invest on the originals of
foreign securities by American investors and brokers. The risks in
this condition have been causing delays and some kind of extra
expenses. In order to avoid the practical problems, they should
have looked for solutions. In the solution produced, it was aimed
at constituting a system that will be able to eliminate those
handicaps. In those times, financial and economical system was
national. For the system started to function badly, the investors
and brokers were not able to transit to international market in the
investment and financial activities they have been carried out.
They were as if trapped inside a no end box and it was impossible
for them to open global market. Something was clearer than
anything else. The key was as if climbing up a hill in the desert
under the sun in 70 C in vein, and it was time consuming.
The distance between American and European stock exchange
markets was high, for this reason, what is to be was to reach the
international arena in world of stock exchange market. For the
reason of investors demand of diversifying their financial
resources internationally, American Depository Receipts revealed.

TYPES OF DR
There are a variety of DR program types. These can be divided
into capital raising and non capital raising structures. The type of
program used will depend on the requirements of the issuer, the
features of the issuer's domestic market and on investor attitudes.
A third type of DR program is known as "unsponsored". This
differs from other types in that the company whose shares are
represented by unsponsored DRs is not involved in setting up the
program.
*Source: ADR Reference Guide JP Morgan, February
2005

NON CAPITAL RAISING DRS

SPONSORED ADR PROGRAM - LEVEL 1

A Level I sponsored ADR program is the easiest and least expensive
means for a company to provide for issuance of its shares in ADR
form in the US. A Level I program is initiated by the issuer and
involves the filing of an F-6 registration statement, but allows for
exemption under Rule12g 3-2(b) from full SEC reporting
requirements. The issuer has a certain amount of control over the
ADRs issued under a sponsored Level I program, since a
depositary agreement is executed between the issuer and one
selected depositary bank. Level I ADRs can however only be
traded over-the-counter and cannot be listed on a national
exchange in the US.

Advantages of a Level I ADR program:

It avoids full compliance with the SEC's reporting

requirements. By working with a single depositary bank,
the issuer has greater control over its ADR program than
would be the case with an unsponsored program.
The depositary acts as a channel of communication between
the issuer and its US shareholder base. Dividend payments,
 financial statements and details of corporate actions will be
passed on to US investors via the depositary.
The depositary bank maintains accurate shareholder records
for the issuer and can, if requested, monitor large stock
transactions and report them to the issuer.
Set-up costs are minimal and all transaction costs are
absorbed by the ADR holder.
It is easy and relatively inexpensive to upgrade the program
to Level II or III as the issuer and depositary bank do not
have to negotiate cancellation of unsponsored ADRs with
severadepositaries, as would be the case if upgrading an
unsponsored program.
l

Disadvantages of a Level I ADR program

It cannot be listed on any of the national exchanges in the

US. As a result, investor interest might be somewhat
restricted which may limit the issuer's ability to enhance its
name recognition in the US.
Capital raising is not permitted under a Level I program.
 SPONSORED ADR PROGRAM - LEVEL II

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

registration and reporting requirements. In addition to filing an F-6
registration statement, the issuer is also required to file SEC Form
20-F and to comply with the SEC's other disclosure rules,
including submission of its annual report which must be prepared
in accordance with US Generally Accepted Accounting Principles
(GAAP). Registration allows the issuer to list its ADRs on one of
the three major national stock exchanges, namely the New York
Stock Exchange (NYSE), the American Stock Exchange (AMEX),
or the National Association of Securities Dealers Automated
Quotation (NASDAQ) Stock Market, each of which has reporting
and disclosure requirements. Level II sponsored programs are
initiated by non-US companies to give US investors access to their
stocks in the US. As with a Level I program, a depositary
agreement is signed between the issuer and a depositary bank. The
agreement defines the responsibilities of the depositary, which
usually include responding to investor enquiries, mailing annual
reports and other important material to shareholders and
maintaining shareholder records.
 Advantages of a Level II ADR program:

It is more attractive to US investors than a Level I program

because the ADRs may be listed on one of the major US
exchanges. This raises the profile of the ADR program to
investors, thus increasing the liquidity and marketability of
the securities.
Listing and registration also enhance the issuer's name
recognition in the US.
US disclosure regulations for large investors enable the
issuer to monitor the ownership of its shares in the US.

Disadvantages of a Level II ADR program

More detailed SEC disclosure is required than for a Level I

program. For example, the issuer's financial statements must
conform to US Generally Accepted Accounting Principles
(GAAP), or else a detailed summary of the differences in
financial reporting between the home country and the US
must be submitted.
 SEC regulations do not permit a public offering of ADRs
under a Level II program.
It is more expensive and time-consuming to set up and
maintain a Level II program than a Level I program because
of the more stringent reporting requirements and higher
legal, accounting and listing costs.

CAPITAL RAISING DRs

SPONSORED ADR PROGRAM - LEVEL III

Level III sponsored ADRs are similar to Level II ADRs in that the
issuer initiates the program, deals with one depositary bank, lists
on one of the major US exchanges, and files Form F-6 and 20-F
registration statements with the SEC. The major difference is that
a Level III program allows the issuer to raise capital through a
public offering of ADRs in the US and this requires the issuer to
submit a Form F-1

Advantages of a Level III ADR program

It permits public offerings of ADRs in the US which can be
used for a variety of purposes, for example the raising of
capital to finance acquisitions or the establishment of an
Employee Stock Ownership Plan (ESOP) for the issuer's US
subsidiary.

Disadvantages of a Level III ADR program

SEC reporting is more onerous than for Level I or II
programs.
The costs of setting up and maintaining a Level III program
can be high. Set-upcosts, which would include listing, legal,
accounting, investor relations and "road show" costs, might
amount to approximately US$ 300,000 to US$ 500,000.

RULE 144(a) ADRs (RADRs)

Rule 144(a) ADRs, or restricted ADRs (RADRs) are simply
privately placed depositary receipts which are issued and traded in
accordance with Rule 144(a). This rule was introduced by the SEC
in April 1990 in part to stimulate capital raising in the US by non-
US issuers. Some of the former restrictions (under Rule 144)
governing resale of privately placed securities (or "restricted
securities") have been lifted under Rule 144(a), providing the sale
is made to "qualified institutional buyers" (QIBs), with the aim of
adding liquidity to the private placement market. A QIB is
currently defined as an institution, which owns and invests on a
discretionary basis at least US$ 100 million (or, in the case of
registered broker-dealers, US$ 10 million) in securities of an
unaffiliated entity.
At present there are believed to be in excess of 4000 QIBs but the
SEC may decide to broaden the definition of a QIB to allow a
larger number to participate in the Rule 144(a) market. NonUS
companies now have easy access to the US equity private
placement market and may thus raise capital through the issue of
restricted ADRs without conforming to the full SEC registration
and reporting requirements. Additionally the cost of issuing Rule
144(a) ADRs is considerably less than the cost of initiating a
Sponsored Level III ADR program.
In June 1990, the National Association of Securities Dealers
(NASD) established a closed electronic trading system for RADRs
called "PORTAL" (Private Offerings, Resale and Trading through
Automated Linkages) this system is designed to provide a market
for privately traded securities such as RADRs and access to it is
available to both investors and market makers.

Advantages of RADRs

ADRs offered under Rule 144(a) do not have to conform to

full SEC reporting and registration requirements. QIBs may
demand certain financial disclosure, however, unless the
reporting exemption under Rule 12g 3-2(b) has been granted.
RADRs provide a cheaper means of raising equity capital
than through a public offering and they can be issued more
easily and quickly.
RADRs can be launched on their own or as part of a global
offering.
They can be traded through the NASDAQ's "PORTAL"
system and they clear through the DTC.

Disadvantages of RADRs
 RADRs cannot be created for classes of share already listed
on a US exchange.
RADRs can only be sold in the US to QIBs. Although there
are in excess of 4000 potential QIBs, the RADR market is
not as liquid as the public US equity market.

CAPITAL RASING VERSUS NON CAPITAL

RAISING ADR PROGRAMS

If the objective of the foreign company is to use existing shares to

broaden shareholder base (i.e. non capital razing) it has the option
of going with level 1 program that trades on non-NASDAQ OTC
market or a more stringent level II program that is listed on NYSE,
AMEX or NASDAQ, however if it plans to raise capital through
new shares, it has the option of going with a level III program
listed on NYSE. NASDAQ, AMEX, which is even more stringent
than a level II program or with a privately placed rule 144a ADR
program.

ADVANTAGES OF DRs
Depository stocks are within processing
mechanisms for foreign securities. Depository
receipt agreements serve various advantages to
investors like transfer and exchanging dividends
paid over foreign money currencies to their
currency.

Also, depository receipts are used in

privatization, mergers, foreign governments
Dept, imports and employment financing

Mostly, foreign securities are written for the

bearer. For this reason, the lists of securities can
not be pursued. Depository receipts try to
minimize the problems of promissory notes
written for the bearer. It makes having
information about the foreign company easier.

Foreign companies having relationships with

investors are restricted with law. Depositor or its
division can learn the information and
declarations send by the foreign importer. Even
though the securities are written for the bearer,
depository Bank has the best conditions to get
this information.
 BUYING AND SELLING DRS
If an investor wishes to purchase shares in a foreign company, he
can either buy the foreign shares in the local market through a
broker in that country or, providing the foreign company in
question has a DR program, the investor can request his broker to
buy DRs. The broker may either purchase existing DRs or, if none
are available, he may arrange for a depositary bank (e.g. Deutsche
Bank) to issue new ones.

The process for issuing new DRs is very simple. The investor's
broker contacts a broker in the issuing company's home market
and acquires shares in that company. These shares are then
deposited with the depositary bank's local custodian. Upon
confirmation that the custodian has received the shares, the
depositary issues the requisite number of DRs to the investor via
the broker.
In some exceptional cases there may be restrictions on the
issuance of new DRs under existing programs (e.g. Indian GDR
programs) because of local regulations. DRs can be sold in DR
form, in which case they trade and settle like other US or Euro
securities.
They can also, however, be cancelled. In this case the broker
acting on behalf of the owner of the DRs will request the
depositary bank to cancel the DRs and release the underlying
shares to a domestic broker in the issuing company's home market.
The domestic broker will then sell the shares locally and the
proceeds will be remitted to the investor who cancelled those DRs.

DRs certify that a stated number of underlying shares have

been deposited with the depositary's custodian in the foreign
country.
DR holders are entitled to all the dividends payable on the
underlying foreign shares and, furthermore, to have these
paid in the currency in which the DRs are denominated
usually US dollars.
The DRs may be bought or sold through investors' own
brokers, and they clear and settle through the Depository
Trust Company (DTC) for ADRs, through Euro clear and
Clear stream for EDRs and through all three (and possibly
other clearing systems) in the case of GDRs, depending on
which markets they access.
Shareholder information such as annual reports, notices of
general meetings and corporate actions, and official news
releases are provided by the issuer to the depositary and to
 the receipt holders, either direct or through the local
custodian.
The investor is thus spared the costs and difficulties often
encountered when direct investment is made in local
markets, where currency, settlement, and linguistic problems
may be compounded by an excessive number of
intermediaries.

WHY DO INVESTORS BUY DRs?

US investors have become increasingly interested in

overseas markets as a result of their higher yields compared
to the US equity market over recent years.
International investors are also eager to diversify their
portfolios, both geographically and by industry sector, in
order to increase their returns while spreading their risk.
 They have long been active in the debt markets, as evidenced
by the vast size of the Euromarkets, and sophisticated
international clearing systems have been developed to handle
Euro instruments.
Until recently, however, cross-border equity investments have
involved all the currency, settlement and linguistic problems
which occur when dealing with overseas equity markets.

Building on the concept of the ADR, investment banks developed

the EDR/GDR to solve these problems for international investors.

Liquidity and investor demand

Liquidity is enhanced when there are a significant number of
depositary receipts eligible for trading in the United States. In a
US public offering, retail and institutional investors are more
likely to buy depositary receipts that are perceived to be liquid and
fairly priced.
 A useful structuring tool
While DRs are generally used to make equity more widely
available or to raise capital outside the issuer's domestic market,
they can also be used as part of many other financing structures.
The concept of a receipt trading in one market, which represents
an instrument held in custody in a different market, can be adapted
to a wide variety of transactions.
*Source ADR AND GDR OVERCOMING OBSTACLES OF INTERNATIONA LINVESTING
 *Source- Freidland capital guide to American
depository receipt.

AMERICAN DEPOSITORY RECEIPTS

Background

ADRs were primarily created to increase investment access to

widely known and often multinational companies. They are
typically formed by a depository bank depositing ordinary shares
of a foreign company into a trust and issuing receipts of interest in
the underlying shares on a domestic exchange. The bank will act
as a custodian for the trust handling dividend distribution,
currency exchange, proxies, tax reporting, and regulatory filings. It
receives a management fee for these services, either from the
shareholders or the issuing company. Trading of ADRs occurs by
brokers purchasing/selling outstanding ADRs in the domestic
market, or on the foreign markets if no shares are available
domestically. In the case of purchases in the foreign market, the
broker then deposits the foreign shares with the bank in exchange
for newly created ADRs. In the case of sales in the local market,
the broker will cancel the ADR causing the depository bank to sell
the shares in the foreign market and deliver the proceeds in the
investors currency. Units in the trust are listed on large exchanges
primarily in countries with developed capital markets, as if they
were shares of a company domiciled in the same country
as the exchange. The listing company of the ADR must adhere to
the same regulatory requirements and disclosures as the other
listed issuers on the exchange. In effect, shares of a foreign
company can be purchased on a U.S. stock exchange in the same
manner as stock of a
U.S. company.
So why have the middlemen (trust)? Many investors do not have
efficient means of diversifying into foreign companies because of
the administrative and implementation issues. Often, trading in
foreign markets is more expensive relative to U.S. exchange
transaction costs, as well as difficult to execute due to time zone
differences. Also, foreign exchanges do not usually have the same
regulatory requirements that investors are familiar with here in the
U.S., and custody of the assets is costly. Currency exchanges will
also have to be utilized in order to purchase ordinary shares of
foreign companies. ADRs trade easily and pay dividends in U.S.
dollars and settle through U.S. clearinghouses. These
implementation barriers coupled with the desire of investors to
diversify internationally created a market for underwriters of ADR
trusts. There are also Global Depository Receipts (GDRs),
International Depository Receipts (IDRs), and European
Depository Receipts (EDRs), which accomplish the same benefits
already stated but trade in one or more international markets.

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

437 of 6008 listed in NASDAQ, and 61 out of 690 in the AMEX
were foreign companies from over 50 different countries. In
addition, 412 out of about 6,200 equity securities traded in the
OTC Bulletin Board were from foreign issuers. Clearly, foreign
firms must find listing in the US (or more generally, outside their
home market) advantageous. Then, why do foreign firms list their
shares in the US? From the firm's perspective, why is it that listing
in the US is desirable, and the cost-benefit tradeoff a positive one?
Listing in the US can take many forms. Foreign firms can list their
stock directly or through an American Depositary Receipt (ADR)
program. This listing can take place in an organized exchange (e.g.
NYSE, AMEX), NASDAQ, an OTC market, or as a private
placement. The listing can also be accompanied by an IPO, or a
seasoned equity offering.

ADRs are issued by a U.S. bank that functions as a depositary,

having ADR being backed by a specific number of shares in the
non-U.S. company. ADRs can be traded on any of the US stock
exchange (NYSE, NASDAQ, or AMEX) and over-the-counter. In
the case of Rule 144A, they are privately placed and traded. The
same concept for ADR has been spread into other regions with the
creation of the global depositary receipts (GDRs), international
depositary receipts (IDRs), and European depositary receipts
(EDRs), which are generally traded or listed in one or more
international markets. As of February 2005, this instrument is used
by around 2,100 nonUS issuers from approximately 80 countries.
About 500 of those ADRs are listed in the US exchanges.

ADR PROGRAM TYPES

SPONSORED AND UNSPONSORED ADR
PROGRAMS

Issuers seeking the benefits of ADRs generally pursue what are

called sponsored ADR programs. They initiate the process and,
working with a depositary bank, actively manage the program
going forward. The issuer benefits by making a strategic foray into
the U.S. market, controlling
its image and reputation in the capital markets. In general, only
sponsored ADRs can be listed on the major stock exchanges or
quoted under the NASDAQ system. While most new ADR
programs are sponsored, many unsponsored programs (in which
the ADRs are created and offered to investors without a company's
active participation) still exist.

THE VARIOUS TYPES OF SPONSORED ADR

PROGRAMS
, or
Issuers can choose from four different types of sponsored ADR
programs, each with its own set of benefits as well as its own set of
legal and regulatory requirements: Level I, Level II, Level III, and
Rule 144A/GDR. In general, American Depositary Receipts are
used for two objectives: raising new capital, or increasing US
ownership of shares already issued and trading in the market.
There are three basic ADR typeslevels as they are usually referred
to, designed to achieve a companys objectives.
 LEVEL I ADRS-SPONSORED
Level I ADRs are the simplest method for companies to access the
US capital markets. Level I ADRs are traded in the over-the-
counter (OTC) market, with bid and ask prices published daily and
distributed by the National Daily Quotation Bureau in the pink
sheets. The issuing company does not have to comply with US
Generally Accepted Accounting Principles (GAAP) or provide US
Securities and Exchange Commission (SEC) disclosure.
Level I ADRs essentially enable a company to obtain the benefits
of a US publicly traded security without altering their current
reporting process.
Level I DRs account for more than 60% of the US ADRs.
Companies that have Level I ADR programs can migrate to a
Level II or Level III ADR program if they desire to trade on the
New York Stock Exchange, the American Stock Exchange,
Nasdaq or the OTC Bulletin Board, or if the company desires to
raise capital directly in the United States.
Level I ADR programs currently require minimal SEC
registration: The issuer seeks exemption from the SEC's traditional
reporting requirements under Rule 12g3-2(b). With that
exemption, the company agrees to send to the SEC summaries or
copies of any public reporting documents required in its home
market (including documents for regulatory agencies, stock
exchanges, or direct shareholder communications). The depositary
bank, working with the issuer, also files the Form F-6 registration
statement with the SEC in order to establish the program.

LEVEL II ADRS- SPONSORED

Level II ADRs enable companies to list their ADRs on NASDAQ,

the American Stock
Exchange, the New York Stock Exchange and the OTC Bulletin
Board, thereby offering higher visibility in the U.S. market, more
active trading, and greater liquidity.

Level II ADRs require full registration with the Securities and

Exchange Commission. Companies must also meet the listing
requirements of the appropriate stock exchange. Level II ADRs
require a Form 20-F and Form F-6 to be filed with the SEC, as
well as meeting the listing requirements and filing a listing
application with the designated stock exchange. Upon F-6
effectiveness and approval of the listing application, the ADRs
begin trading.
Level II ADR programs must comply with the full registration and
reporting requirements of the SEC's Exchange Act, which entails
the following:
Form F-6 registration statement, to register the ADRs to be
issued
Form 20-F registration statement, which contains detailed
financial disclosure about the issuer, including financial
statements and a reconciliation of those statements to U.S.
GAAP, to register the listing of the ADRs
Annual reports and any interim financial statements submitted on
a regular, timely basis to the
SEC

Level III ADRs-SPONSORED

Level III ADRs enable to companies to list their ADRs on
NASDAQ, the Amex, the New York Stock Exchange or the OTC
Bulletin Board, and make a simultaneous public offering of ADRs
in the United States.
In the most high-profile form of sponsored ADR program, Level
III, an issuer floats a public offering of ADRs in the United States
and lists the ADRs on one of the U.S. exchanges or NASDAQ.
The benefits of a Level III program are substantial: It allows the
issuer to raise capital and leads to much greater visibility in the
U.S. market.

Level III ADR programs must comply with various SEC rules,
including the full registration and reporting requirements of the
SEC's Exchange Act. This entails the following:

Form F-6 registration statement, to register the ADRs

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

detailed financial disclosure from the issuer, including Form F-1,
to register the equity securities underlying the ADRs that are
offered publicly in the U.S. for the first time, including a
prospectus to inform potential investors about the company and
the risks inherent in its businesses, the offering price for the
securities, and the plan for distributing the shares Annual reports
and any interim financial statements submitted on a regular,
timely basis to the SEC and to all registered public shareholders.

RULE 144A ADRS

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

by issuing restricted securities under Rule 144A, which do not
require SEC review. Rule144A facilitates the trading of privately
placed securities by sophisticated institutional investors (also
known as Qualified Institutional Buyers, or QIBs; they must own
or manage at least $100 million in securities).

SPONSORED VERSUS UNSPONSORED DR

PROGRAMS
Unsponsored programs are issued by a depository in response to
the market demand for the shares of a foreign company, but
without a formal agreement between the depository and the
foreign company. Once a depository creates an unsponsored ADR
facility it is common for other depositories to clone it, creating
numerous unsponsored facilities which are considered fungible.
In contrast sponsored program are issued by an exclusive
depository appointed by the foreign company under a deposit
agreement, the depository bank agrees to issue ADR certificates
and the issuer agrees to pay certain costs of the depository such as
such as dividend disbursement fees.

ADAVANTAGES OF USING ADRs

 The main advantage of buying an American Depositary
Receipt rather than the foreign stock itself is the ease of the
transaction.
ADRs are a great way to invest abroad without having to
convert U.S. dollars to many different currencies
Another advantage offered by an ADR is that if the foreign
stock does pay dividends, the investment bank will convert
the dividends to U.S. dollars and remit the payment to you.
In addition, if the dividend is subject to foreign tax, the
investment bank will withhold the tax so you don't have to
worry about it
Therefore, if exchange rates were to move against you, it
would hurt the value of your ADR. If you are considering
investing in foreign stocks, ADRs should be part of your
investment decision; however, you should become familiar
with all the risks associated with foreign investing before
making an investment decision.

Advantages to Issuers o Provides a simple means of diversifying a

companys shareholder base and accessing important U.S.
market o May increase the liquidity of the underlying shares of
the issuer
 ADRs can be used as an equity financing tool in both M&A
transactions and ESOPs for
U.S. subsidiaries o Helps increase a non-U.S. companys
visibility and name recognition in the U.S. investor community
May raise capital in the U.S. market through some types of
programs

Advantages to Investors o Offers a

convenient means of holding
foreign shares
Simplifies the trading & settlement of foreign securities;
ADRs trade and settle just like
U.S. securities o Offers lower trading & custody costs
when compared with shares bought directly in the foreign
market

DISADVANTAGES OF USING ADRs

Despite all the described advantages, the ADRs do represent the
same asset as local shares but may not be fully fungible in
several countries (meaning they cannot be seamless exchanged
with its home market security). For example, until 2001 there was
no two-way fungibility for Indian ADRs; in that environment,
investors could convert ADRs into local shares but they could not
reconvert them back to ADRs. This and other capital control
regulations prevent risk less arbitrage opportunities to exist
between ADRs and the underlying stock and are one of the
reasons that premiums/discounts exist in the ADR market.

PROCEDURES AND MECHANICS OF ISSUING ADRS

ADRs are issued by a US bank, such as J. P. Morgan or The

Bank of New York, which functions as a depositary, or stock
transfer and issuing agent for the ADR program.
The foreign, or local shares, remain on deposit with the
Depositarys custodian issuers home market.
Each ADR is backed by a specific number of an issuers
local shares (e.g. one ADR representing one share, one ADR
representing ten shares, etc.) This is the ADR ratio, which is
designed to set the price of each ADR in US dollars.
Financial information, including annual reports and proxies
are delivered to US holders on a consistent basis by the
Depositary. The dividends are converted into dollars and
paid to ADR holders by the Depositary.
KEY COMPONENTS OF A SUCCESSFUL ADR
PROGRAM

Successful ADR programs are actively traded and widely held.

They typically share the following attributes:
Attractive market, industry and equity story
Active communication of the story to US investors
Investor friendly ADR structure (ratio of shares to ADRs)
Research and market-making by US investment banks and
brokers

US LISTINGS ADRs

THE OVER-THE-COUNTER MARKET

Over-The-Counter (OTC) market trades are listed in the "Pink
Sheets". The Pink Sheets are published daily by the National
Quotation Bureau and represent a non-automated listing of stocks,
which trade outside the three major exchanges. Listing fees are
paid by the broker dealer who seeks the listing.
The broker-dealer must file a National Quotation Form 211, which
includes updated financials of the company and other relevant
information. Listing on the "Pink Sheets" is available for
sponsored Level I and unsponsored ADR programs, while a listing
on NASDAQ, AMEX or the NYSE is only available to Level II
and III sponsored programs.

THE NATIONAL EXCHANGES

Issuers of Level II or III sponsored ADRs will benefit in several
ways from a listing on any one of the three national exchanges.
The increased visibility to the US investment community, which a
listing provides, together with access to the automated trading and
efficient market pricing available on the national exchanges,
should lead to a significant expansion of the issuer's investor base.
Importantly, listing fees for ADRs are generally less expensive
than those for ordinary shares in the US. A description of the three
exchanges follows

NASDAQ (NATIONAL ASSOCIATION OF SECURITIES

DEALERS AUTOMATED QUOTATION)

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

competing market makers linked to investors by sophisticated
telecommunications networks. There are two options for listing;
the Small Cap Market which, as its name implies caters for smaller
companies, and the National Market System, where the majority
of NASDAQ securities are listed.
While criteria for listing on these two markets differ, the ADR
listing charges are very similar. The NASD also operates
PORTAL, the market for securities issued under Rule 144(a).

AMEX (AMERICAN STOCK EXCHANGE)

AMEX operates an auction market system, intended to facilitate
trading between buyers and sellers with minimum intervention
from professional dealers. Each listed stock is handled by a
specialist unit. There are special listings requirements for non-US
issuers, with "Alternate" requirements intended to cover
companies which are financially sound but which, because of the
nature of their business, would not qualify under the "Regular"
requirements.

NYSE (NEW YORK STOCK EXCHANGE)

The NYSE, like AMEX, operates an auction market system where
stock prices are determined largely by public orders competing
with each other. By value of shares listed and by volume of
trading, the NYSE is the largest exchange in the United States.
Foreign companies listing on the NYSE can choose to qualify
either under the "Alternate
Listing Standards" designed specifically for non-US corporations,
or under the "Original" or "Alternate Original" standards which
apply to US domestic corporations. Each of the exchanges sets
additional standards concerning corporate governance. However,
non-US corporations may be exempted from these requirements
upon application. Confidential meetings can be arranged with the
exchanges in advance of any decision-making to discuss specific
concerns or exemptions.

FOLLOWING ARE A FEW INDIAN ADRs

TRADING IN US

HDFC BANK LTD

ICICI BANK LTD
INFOSYS TECHNOLOGIES LTD
VIDESH SANCHAR NIGAM LTD
WIPRO LTD
REDIFF.COM INDIA LTD

HOW ARE ADRs PRICED?

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

This is equivalent to US$4.58 assume this for simplicity

Now, a US bank purchases 30 million shares of Russian

Vodka Ltd. and re-issues them in the US at a ratio of 10:1

This means that each ADR you purchase is worth 10 shares

on the Russian stock exchange

A quick calculation tells us that each ADR should have an

issue price of US$45.80 (US$4.58 per share X 10 shares)
since 10 shares equal 1 ADR

Once an ADR is priced and sold, its subsequent price is

determined by supply and demand factors, like any ordinary
share
 ADR ARBITRAGE OPPORTUNITIES

Several Indian companies actively trade on the and New York

Stock Exchanges and due to the time differences, market news,
sentiments etc. sometimes the prices of the DR(Depository
receipt) trade at discounts or premiums to the underlying stock.
This presents a knowledgeable fund manager an arbitrage
opportunity, where he buys the DR abroad and sells the same
stock in India at a higher price (the difference being the profit).

Same DRs trade during India market hours offering a live arbitrage
opportunity. As there is very little risk in such trades the gap
between the DR and underlying stock is minimal. DRs which trade
in the US markets offer better gaps, but there is the overnight risk
to be factored in. Hence the fund manager must take into
consideration the local market conditions before buying the stock
in the US, as he must be confident of the selling off the stock the
next morning in India at the profitable gap.
Once the stock is bought, arrangements are made to deliver the
stock in India, which involves several procedures (stock is
borrowed at times for this). Once the stock is delivered in India the
proceeds are allowed to be repatriated and the process repeated.
There are some stocks which are also allowed to be bought in India
and converted into the DR forms, which is attractive if the DR is
trading at a premium to the Indian stock price.

Main Reasons for Discrepancies between the Prices

of ADR and Local Shares
There are significant limitations for an investor to buy an ADR on
the NYSE and sell it on a local exchange in the same day. Fees
and other transaction costs are also incurred in this transaction.
Finally, depending on the ADR level and the local government
regulations, different rights and protections are accompanied by
the certificate. This section in the paper will discuss the main
reasons for discrepancies between the prices of ADRs and local
shares while questioning whether they should be subjected to the
law of one price.

Are ADRs and local shares the same assets?

Despite ADRs being certificates that represent the underling

foreign shares that are being held custody outside the U.S., ADRs
and local shares are different certificates and may not be fully
fungible in several countries. For example, until 2001 there was
no two-way fungibility for Indian ADRs; in that environment,
investors could convert ADRs into local shares but they could not
reconvert them back to ADRs.
In 2001, the Indian Reserve Bank created the regulation that
allowed two-way fungibility between ADRs and local shares with
restrictions, however, to what shares could be converted to ADRs.
Under this regulation, only local shares that were created through
conversion of ADRs can be reconverted. The high demand for
Indian shares in the U.S. during the past few years and the
relatively low volume of ADRs available for investors resulted in
most Indian ADRs trading at a premium over their local shares.
Because of the fungibility problem, however, this premium cannot
be arbitraged away by investors so companies such as Infosys and
Wipro are making secondary ADR offerings with the goal of
increasing liquidity and arbitrage the price differential themselves.

Correlation to stock index between ADRs and local

shares

Another important source of disparity between ADR prices and its

local traded securities are the co-movements between the stocks
and the markets they are traded rather than where the company is
established. A good example of this correlation with the US
market is the Infosys ADR, which has been following the
technology companies in the NASDAQ much more closely than
the Indian stock market. Even more interesting, is the ADR
premium of Wipro, which has been presenting a much more
modest premium compared to Infosys. Considering both
companies are in the same sector and in the same market, the
differences between the ADR premium of Wipro and Infosys can
only be explained by differences in investors perception rather
than true valuation fundamentals.

Limits to Arbitrage Opportunities

Despite all of the advantages of the ADR, they are not seamless
interchangeable with the local underlying stock. While the
previous section of this paper explored the potential reasons for
discrepancies between the ADR and the local stock, this section
will describe the difficulties of acting on those discrepancies in
order to generate profitable arbitrage.
The basic mechanics of the execution of the arbitrage from the
perspective of an US investor would be the following:
 U.S. investor acquires ADR by the ask price with U.S. dollars;
ADR is converted into the local security;
Local security is sold in the local market in local currency at the
bid price;
Local currency amount is then converted into U.S. dollar at the
ask exchange rate. Taxes, fees, liquidity issues, bid/ask spreads
and restrictions can occur at any point of the transaction.

Operational issues
There are several operational issues that make the mechanics of
the
arbitrage difficult. The first one is related to time zone, which
could potentially shrink trading sessions overlap, making it
difficult for the arbitrage to occur simultaneously or even in the
same day. Additionally, public information about the companies
with ADR listing will also hit the market in local business hours,
delaying reflections is the price of the ADR.

Low liquidity for certain ADRs

There are many instances of firms with multiple listings in
different markets and countries having very low liquidity and
trading in some of their listed securities. In this case, prices and
premiums/discounts do not mean anything since these prices are
not applicable for large trades (sometimes these issues trade less
than 1,000 shares/day) and differences in prices cannot be
exploited (large inefficiencies in bid and ask spreads, higher
transaction costs of trading small lots, etc.).

Transaction costs
Transactions costs are probably one of the major inhibitors of
arbitrage opportunities. Not every investor can maintain trading
accounts in different countries and sustain minimal levels of
investment and costs to be able to profitably exploit ADR-local
shares arbitrage opportunities. Transaction costs oftentimes add up
to a significant amount and have to be add up to the stock price
(either the ADR or local stock) so as to calculate the full price
for the stock and compare it to the price of the ADR (or vice
versa). Although these costs may not disallow arbitrage
opportunities to emerge, they create what we call a no-arbitrage
band.

PROCEDURE FOR ISSUE OF ADRs/GDRs

 Approvals

The issue of ADRs/GDRs

requires the approvals of Board of
Directors, Shareholders,
 Ministry of Finance, Ministry of
Company Affairs,
Reserve Bank of India, Stock
Exchange and
Financial
Institutions.

Appointment of Intermediaries

ADR/GDR normally involve a number of

Intermediaries including lead Manager, Co-Manager,
Overseas Depository Banks, Listing Agent, Legal
Advisor, Printer, Auditors and Underwrites.

Principal Documentation
 The principal documents required to be prepared include
subscription agreement, Depository Agreement, Custodian
Agreement, Agency

Agreement and Trust Deed.

4. Pre and Post Launch

Additional Key Actions

Apart from obtaining necessary approvals,
Documentation, additional key actions
necessary for Making the issue of
ADR/GDR a success, include

Co appointment of various agencies and proper institution of

a Board Sub-Committee

Selection of Syndicate Members

Constitution of a task force for due diligence
Listing
Offering Circular
Research Papers
Pre-marketing
Timing, pricing and size of the issue
Road shows
Book Building and pricing of the issue
Closing of the issue (xii) Allotment
 US SECURITIES AND ECXHANGE
COMPLIANCE
The following table outlines the different filings required by the
SEC in the US, the way ADRs are traded and whether new
capital can be raised, according to the type of ADR program
issued
 GDR - Filings for any US tranche will depend
on which structure is chosen: Normaly a Level
III or Rule 144(a) program.

The right granted to existing shareholders of a company to receive

or to subscribe to new shares under a "rights" or "bonus" issue is
also extended to registered ADR holders. However, a US investor
can only take possession of these rights in the US if the issuer
undertakes to register the offering, or if an exemption from
registering it is available. In all other cases, the depositary must
arrange to sell the entitlement to the rights in the home country
and distribute the cash proceeds to the ADR holders.
Form F-6
Form F-6 is used for the registration of depositary shares as
evidenced by ADRs (or GDRs) that are issued by a depositary
bank against the deposit of securities of a foreign issuer under the
Securities Act of 1933. The information is prepared by the
company under the guidance of the depositary bank at the
inception of either an unsponsored or sponsored program.

Form 20-F
A Form 20-F is filed as a registration statement/annual report by
issuers of Level II or III
sponsored ADRs/GDRs. It is a comprehensive report of all
material business activities and financial results and must comply
with US GAAP. The Form 20-F consists of four distinct parts. Part
I requires a full description of the issuer's business, details of its
property, any outstanding legal proceedings, taxation and any
exchange controls that might affect security holders. Part II
requires a description of any securities to be registered, the name
of the depositary bank for the DRs and all fees to be charged to the
holders of DRs.
Part III requires information on any defaults
upon senior securities. Part IV requires various
financial statements to be submitted.

Form F-1
Foreign issuers planning a public offering in the US via a Level III
DR program must register the proposed new securities by filing
Form F-1. This form requires the following information to be
included in the prospectus: use of proceeds, summary information,
risk factors and ratio of earnings to fixed charges, determination of
offering price, dilution, plan of distribution, description of
securities to be registered, name of legal counsel and disclosure of
commissions.

GAAP Conversion (Level II and Level III ADR Programs)

The process of converting financial statements to the US standard
of Generally Accepted
Accounting Principles (GAAP) can be complex but depends on the
compatibility of accounting procedures in the issuer's home
country with those of the US. Regulated industries such as
banking may find the costs of conversion more onerous than those
companies in less regulated sectors.

Tax Compliance
US Tax
Non-US companies are not responsible for complying with the US
tax requirements regarding dividend payments made in the US
under their DR program. The depositary bank handles any such
issues.

Local Tax
The depositary provides registered GDR holders with tax
certification forms prior to each payment date and returns them to
the issuer so that the correct tax can be deducted according to local
regulations.
 Indian ADRs Will Shine in 2009

Indias cheaper than its been in decades and offering 5%

growth.
By Anthony W. Haddad

Like many emerging markets, the past year was a difficult one for
India. After five years of 9% GDP growth and a booming stock
market, a global recession, a group of terrorists, and an Enrontype
scandal at Satyam helped shed 60% from shares in the countrys
companies and 20% of the value of the rupee against the dollar.

Though its growth is expected to be trimmed by more than a third

this year, this country of more than a billion people is still
estimated to grow by more than 5%, beating even China. And the
growth rates of the past are expected to return in years to come.
Since the reforms of the early 1990s, Indias development has
always been more a question of when than if.

After all, the countrys growth was never based on exporting

cheap, labor-intensive goods to developed countries. It was about
the development of a consumption-based domestic market on the
back of technology, services, and natural resources.
India is the largest democracy in the world. With the exception of
the recent scandal, it uses conservative accounting practices.
English is its official language of business, and its students
compete with Western students in the global marketplace.

In the recent past, these qualities have made India a popular

destination for investment capital. In the very near future, it will
return as such. The country still has robust economic growth,
contained inflation, and a growing middle class whose current
spending potential dwarfs the level it will soon become.

Millions of Indians have benefited from its years of economic

expansion, but millions more still live in abject poverty. Its road
network is the second largest in the world yet still in need of
upgrades. Its cities can dazzle with light, but power outages are
common. Over the next five years, India intends on investing a
half-trillion dollars on infrastructure.

One company that can benefit from this is Sterlite Industries Ltd.
(NYSE: SLT), Indias largest copper producer. Valued at less than
$4 billion, the stock trades at a 75% discount to its 2007 high, has
a little less than $4 billion in cash and equivalents on the books,
and is virtually debt free.
Like many other commodities, the price of copper is down to
multiyear lows, affecting Sterlites bottom line. The question
remains exactly how long the company can survive with decreased
demand, a glut of copper, and a weak economy. But with that
much cashand at the extremely low price it can produce
copperthe company seems to be positioned well to survive this
downturn, and perhaps even grow at robust rates in the latter half
of this year.

You may have heard about the incredible expansion of mobile

phones in India. But keep in mind that its still going on. The
country adds millions of new users to its network every month,
and still only 20% to 30% of people have them today.

Mahanagar Telephone Nigam Ltd. (NYSE: MTE), a provider

of telecommunications services in Delhi and Mumbai, is down
70% from its highs to a market cap of less than $1 billion. Its
holding $700 million in cash and is debt free. The company raised
its dividend in September and has a dividend yield of about 5% at
the current numbers. Mahanagar may be tempting at these levels.

A story about India seems incomplete without some mention of its

outsourcing companies. Youve probably spoken to employees
from WNS Limited (NYSE: WNS) before. Its clients include
about 20 U.S. retail banks, 10 financial advisory firms, electronics
giants, pharmaceutical companies, and more. It has more than
20,000 employees.

A smaller company, WNS had been hit harder than Sterlite, but
its mounted a nice gain off its lows. With about a $300 million
(and growing) market cap, the company stands at an 80% discount
to its highs. The company has less cash on hand than many will
feel comfortable with. Although I expect them to survive, waiting
for their March 2009 annual filing seems prudent, even at the cost
of missing out on the early gains.

Indias rising middle class will create even more opportunities. In

2005, its middle class was about 5% of the population. By 2015, it
is expected to rise to 20% and by 2025 to more than 40%. While
much of this segments money goes to consumables and luxury
items, some of it ends up as investments with financial
institutions. After all, the middle class can afford to send their
children to school, buy businesses, and retire younger. This is why
some of the biggest gains well see in India will be in financials.
This long-term trend in India also has many shortterm
opportunities right now. Financials are cheaper today than theyve
been in years. And though its current growth pales in comparison
to previous years, it dwarfs the growth, or lack thereof, that were
seeing in most of the largest economies. (The U.S. economy is
expected to contract by 2%, Japan by 4%, German by 2.5%, and
Britain by 3%.)

HDFC Bank Ltd. (NYSE: HDB) is a private sector bank and

financial services company. The $7.5 billion company engages in
retail banking, wholesale banking, and treasury operations. It has
been affected by the economic downturn, but its all overblown,
and the company doesnt deserve the 60% loss in its price. Asset
growth has slowed, but it continues to grow steadily.

Management believes that loans will grow at 20% during the next
year, marginally lower than the previous year. This is largely
because of the lower demand for property. The company believes
that customers are waiting for property prices to drop.
Indias second-largest private sector lender beat forecasts with a
45% jump in profits in its most recent quarterly report, but its
shares have fallen. Banks in India are dealing with rising defaults
by customers, caused by high borrowing costs and a slowing
economy that has hit some jobs.

The companys gross non-performing loans rose to $392 million

in the most recent quarter, up 14% from July to September 2008.
In the kind of environment we are going through, [nonperforming
loans] are expected to go up, Executive Director Paresh
Sukthankar said on CNBC. With adequate provisioning, we are
not concerned by the slight rise. HDFC has seen 30% or better
growth in net profit for 27 consecutive quarters. It has raised its
dividend five times in the past six years. Its sitting on $3.5 billion
in cash (a little less than half its market cap) and has a 15% ROE.
Quarterly revenue growth for the most recent quarter is up 58%
over the 2007 quarter. The company pays a paltry dividend (about
1%), but this kind of growth isnt cheap.

While Id be a fool to promise that any banking company doesnt

have potential time bombs, HDFC appears healthy, and I expect a
25% capital gain by the end of the year, bringing it into the upper
$60s. And while thats attractive, its nothing compared to what
HDFC will do in coming years.

Not only will it benefit from Indias continued boom, but also its
not difficult to imagine it entering the U.S. and U.K. markets.
After all, they understand how to grow, and its a more open
playing field these days.

ICICI Bank (NYSE: IBN) is an Indian bank in the United States,

Canada, and the United Kingdom, where the company is gaining
customers and increasing its deposit base by offering higher
interest rates. But thats not hurting their bottom line. In the fourth
quarter of 2008, the companys profits were up 25% over the same
period in 2007. The $7.5 billion bank offers commercial banking,
treasury and investment banking, and other products such as
insurance and asset management. The company has about 1,500
branches around the world, and it expects to open another 500 in
the next two years.

Having fallen from the low $70s to the low teens, ICICI looks like
a steal. Revenue has shot up 40% in the fourth quarter over 2007.
Its P/E is around 10, and its trailing yield (dividends over the last
12 months/the current stock price) is nearly 4%. (Although I
wouldnt bet the bank that ICIC will give that out this year.)

With a quarter of its loan book coming from international

business, investors are still worried about problems that might
appear amid the current crises. ICICI has slowed credit growth and
is looking to preserve capital. This is part of the reason we wont
likely see the full dividend this year, but I dont see the growth
story being interrupted. I expect the company to gain 50% and
pass the $20 mark this year.

GLOBAL DEPOSITORY RECEIPTS

A negotiable certificate held in the bank of one country
representing a specific number of shares of a stock traded on an
exchange of another country
To raise money in more than one market, some corporations use
global depositary receipts (GDRs) to sell their stock on markets in
countries other than the one where they have their headquarters.
The GDRs are issued in the currency of the country where the
stock is trading. For example, a Mexican company might offer
GDRs priced in pounds in London and in yen in Tokyo. Individual
investors in the countries where the GDRs are issued buy them to
diversify into international markets. GDRs let you do this without
having to deal with currency conversion and other complications
of overseas investing. The objective of a GDR is to enable
investors in developed markets, who would not necessarily feel
happy buying emerging market securities directly in the securities
home market, to gain economic exposure to the intended company
and, indeed, the overall emerging economy using the procedures
with which they are familiar. Global Depository Receipt (GDR) -
certificate issued by international bank, which can be subject of
worldwide circulation on capital markets. GDR's are emitted by
banks, which purchase shares of foreign companies and deposit it
on the accounts. Global Depository Receipt facilitates trade of
shares, especially those from emerging markets. Prices of GDR's
are often close to values of related shares.
GDRs are securities available in one or more markets outside the
companys home country. The basic advantage of the GDRs,
compared to the ADRs, is that they allow the issuer to raise capital
on two or more markets simultaneously, which increases his
shareholder base. They gained popularity also due to the flexibility
of their structure.

GDRs are typically denominated in USD, but can also be

denominated in Euros. GDRs are commonly listed on European
stock exchanges, such as the London Stock Exchange (LSE) or
Luxembourg Stock Exchange, or quoted on SEAQ (Stock
Exchange Automated Quotations) International, and traded at two
other places besides the place of listing, e.g. on the OTC market in
London and on the private placement market in the US. Large part
of the GDR programs consists of a US tranche, which is privately
placed and a non-US tranche that is sold to investors outside the
United States, typically in the Euro markets.

An overwhelming majority of DR programs by companies from

Central and Eastern European countries are established as GDRs,
typically listed in London and traded by qualified institutional
investors in Euromarkets under regime of so called Regulation S
and some of them also in the American OTC markets in
accordance with Rule 144A.

Two different GDR structures

When GDRs are structured with a Rule 144(a) offering for the US
and a "Regulation S" offering for non-US investors, there are two
possible options for the structure.

Unitary Structures

Under a unitary structure, a single class of DRs is offered both to

QIBs in the US and to offshore purchasers outside the issuer's
domestic market, in accordance with Regulation
S. All DRs are governed by one Deposit Agreement and all are
subject to deposit, Withdrawal and resale restrictions.
 Bifurcated Structure

Under a bifurcated structure, Rule 144(a) ADRs are offered to

QIBs in the US and Regulation S DRs are offered to offshore
investors outside the issuer's domestic market.
The two classes of DRs are offered using two separate DR
facilities and two separate
Deposit Agreements. The Regulation S DRs are not restricted
securities, and can therefore be deposited into a "side-by-side"
Level I DR program, and are not normally subject to restrictions
on deposits, withdrawals or transfers. However, they may be
subject to temporary resale restrictions in the US.

ADVANTAGES OF GDR/EDR

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

offering.
They allow a single fungible security to be placed in one or
more international markets, thus giving access to a global
investor base.
 They may allow the issuer to overcome local selling
restrictions to foreign share ownership.
GDRs are eligible for settlement through Clearstream,
Euroclear.

DISADVANTAGES

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

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

INDIAN GDRs

THE COMPREHENSIVE GDR LISTING

GDR Industry Date Size Shares GDR
Companies Segregation Of Of GDR per Issue
# euro convertible bond GDR GDR
Issue Price **(US$)
**adjusted for bonus
Issue US $
Mill
Arvind Mills Textiles 03-Feb-94 125.00 1.0 9.78
Ashok Leyland Autos 20-Mar-95 137.77 3.0 12.79
Bajaj Auto Autos 27-Oct-94 110.00 1.0 16.89
Ballarpur Ind.# Paper 27-May-94 35.00 1.0 8.77
Bombay Dye Textiles 16-Nov-93 50.00 1.0 9.20
BSES Ltd Power 04-Mar-96 125.00 3.0 14.40
Century Textiles Diversified 21-Sep-94 100.00 2.0 254.00
CESC Power 14-Apr-94 125.00 1.0 10.67
Core Parent Pharma 21-Jun-94 70.00 1.0 12.60
Crompton Greaves Electrical 02-Jul-96 50.00 1.0 7.56
DCW Diversified 19-May-94 25.00 5.0 13.55
Dr. Reddy's Pharma 18-Jul-94 48.00 1.0 11.16m
E. I. Hotels Hotels 07-Oct-94 40.00 1.0 9.30
EID Parry Fertiliser 07-Jul-94 40.00 1.0 8.39
Finolex Cab Cables 19-Jul-94 55.00 1.0 16.60
Flex Industries Packaging 30-Nov-95 30.00 2.0 8.05
G.E. Shipping Shipping 17-Feb-94 100.00 5.0 15.94
G.N.F.C Fertiliser 06-Oct-94 61.11 5.0 12.75
GAIL Oil & Refineries 04-Nov-99 22.50 6.0 9.67
Garden Silk Textiles 04-Mar-94 45.00 5.0 26.28
Grasim (1st) Diversified 25-Nov-92 90.00 1.0 12.98
Grasim (2nd) Diversified 09-Jun-94 100.00 1.0 20.50
Guj Ambuja # Cement 26-Nov-93 80.00 1.0 5.95
Himachal Futuri Telecomm. 02-Aug-95 50.00 4.0 9.30
Hindalco (1st) Aluminium 22-Jul-93 72.00 1.0 10.73
Hindalco (2nd) Aluminium 08-Jul-94 100.00 1.0 16.00
Hindustan Dev. Diversified 21-Sep-94 76.00 1.0 2.05
India Cements Cement 11-Oct-94 90.00 1.0 4.23
Indian Alum. Aluminium 22-Feb-94 60.00 1.0 6.77
Indian Hotels Hotels 28-Apr-95 86.25 1.0 16.60
Indian Rayon Diversified 25-Jan-94 125.00 1.0 15.01
Indo Gulf Fertiliser 18-Jan-94 100.00 1.0 4.51
Indo Rama Textiles 21-Mar-96 50.00 10.0 11.37
ICICI Finance 02-Aug-96 230.00 5.0 11.50
ICICI (ADR) Finance 22-Sep-99 315 5.0 9.80
Infosys IT 11-Mar-99 70.38 0.5 34
IPCL Petrochemicals 08-Dec-94 85.00 3.0 13.87
ITC Cigarettes 13-Oct-93 68.85 1.0 7.65
J.K. Corp Diversified 17-Oct-94 55.00 1.0 8.00
Jain Irrig Plastics 25-Feb-94 30.00 1.0 11.13
JCT Ltd. Textiles 29-Jul-94 45.00 10.0 16.96
Kesoram Ind Diversified 31-Jul-96V 30.00 1.0 1.60
L & T (1st) Diversified 18-Nov-94 150.00 2.0 16.70
L & T (2nd) Diversified 01-Mar-96 135.00 2.0 15.35
Mah & Mah Autos 30-Nov-93 74.75 1.0 4.46
MTNL Telecom 04-Dec-97 418.53 2.0 11.958
NEPC Micon Diversified 07-Nov-94 47.70 1.0 3.18
Nippon Denro# Steel 03-Mar-94 125.00 10.0 21.36
Oriental Hotels Hotels 14-Dec-94 30.00 1.5 12.75
Ranbaxy Labs Pharma 29-Jun-94 100.00 1.0 19.38
Raymond Woolen Textile 09-Nov-94 60.00 2.0 10.61
Reliance Diversified 27-May-92 150.00 2.0 16.35
Reliance (2nd) Diversified 15-Feb-94 300.00 2.0 23.50
Reliance Petroleum Diversified 18-Oct-99 100 15.0 23.0
S.A.I.L. Steel 07-Mar-96 125.00 15.0 12.97
Satyam Infoway IT 19-Oct-99 75.00 1.0 18.0
S.I.E.L. Diversified 14-Oct-94 40.00 3.0 14.64
Sanghi Poly Textiles 28-Jul-94 50.00 5.0 9.56
SIV Ind Textiles 01-Aug-94 45.00 1.0 6.37
SPIC Fertiliser 28-Sep-93 65.00 5.0 11.15
SBI Banking 03-Oct-96 369.95 2.0 14.15
Sterlite India# Diversified 22-Dec-93 100.00 1.0 17.86
Tata Electric Power 22-Feb-94 65.00 100.0 710.00
Telco (1st) Autos 15-Jul-94 115.00 1.0 8.75
Telco (2nd) Autos 06-Aug-96 200.00 1.0 14.25
Tube Invest Cycles & Acc. 20-May-94 45.60 1.0 6.58
United Phos. Pesticides 25-Feb-94 55.00 1.0 20.50
Usha Beltron Cables 06-Oct-94 35.00 1.0 10.70
Videocon Int. Electronics 26-Jan-94 90.00 1.0 8.10
VSNL Telecomm. 24-Mar-97 527.00 0.5 13.93
Wockhardt Pharma 25-Feb-94 75.00 1.0 14.35

EUROPEAN LISTINGS LONDON AND

LUXEMBOURG

At the time of writing, most GDRs have consisted of a Rule 144a

offering in the US and a Euromarkets element. With these
instruments there is no listing in the US, but many are listed in
London or Luxembourg, the traditional exchanges for listing euro
market instruments.
A listing on a recognized stock exchange adds to the visibility of
the issue and provides a wider potential market; many institutional
investors have limits on the number of unlisted securities, or
securities 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 by the same
European Union directive, their listing requirements are broadly
similar. The differences lie mainly in the level of disclosure, the
ease and speed with which listings can be obtained and the level of
visibility afforded by the listing.
Listings on the London Stock Exchange are generally arranged by
the Lead Manager of the GDR issue acting as Listing Agent, while
for Luxembourg the Listing Agent must be a Luxembourg bank
with a seat on the Luxembourg Stock Exchange. This is not
normally a service the Lead Manager of the GDR issue can
provide directly.
A listing on the London Stock Exchange makes it easier for a
GDR to be quoted on SEAQ International, the exchange's
electronic price quotation service, although such a listing is not a
requirement for trading on SEAQ.

REGULATORY PROVISIONS FOR ADR/GDR

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

1. Section 6 (3) (b) of Foreign Exchange Management Act

(FEMA), 1999 reads as follows:
6. Capital account transactions.
Subject to the provisions of sub-section (2), any person may sell
or draw foreign exchange to or from an authorized person for a
capital account transaction.

The Reserve Bank may, in consultation with the Central

Government, specify-
Any class or classes of capital account transactions which are
permissible;
the limit up to which foreign exchange shall be admissible for
such transactions: Provided that the Reserve Bank shall not
impose any restriction on the drawl of foreign exchange for
payments due on account of amortization of loans or for
depreciation of direct investments in the ordinary courts of
business.
(3) Without prejudice to the generality of the provisions of sub-
section (2), the Reserve Bank may, by regulations, prohibit,
restrict or regulate the following-

Transfer or issue of any foreign security by a person resident in

India;
Transfer or issue of any security by a person resident outside
India

FOREIGN EXCHANGE MANAGEMENT ACT

(FEMA)
An Indian corporate can raise foreign currency resources abroad
through the issue of American Depository Receipts (ADRs) or
Global Depository Receipts (GDRs). Regulation 4 of Schedule I
of FEMA Notification no. 20 allows an Indian company to issue
its Rupee denominated shares to a person resident outside India
being a depository for the purpose of issuing Global Depository
Receipts (GDRs) and/ or American Depository Receipts (ADRs),
subject to the conditions that:

the ADRs/GDRs are issued in accordance with the Scheme

for issue of Foreign Currency Convertible Bonds and
 Ordinary Shares (Through Depository Receipt Mechanism)
Scheme, 1993 and guidelines issued by the Central
Government there under from time to time
The Indian company issuing such shares has an approval
from the Ministry of Finance, Government of India to issue
such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs
in terms of the relevant scheme in force or notification issued
by the Ministry of Finance, and
There are no end-use restrictions on GDR/ADR issue
proceeds, except for an express ban on investment in real
estate and stock markets.
The FCCB issue proceeds need to conform to external
commercial borrowing end use requirements; in addition, 25
per cent of the FCCB proceeds can be used for general
corporate restructuring
Is not otherwise ineligible to issue shares to persons resident
outside India in terms of these Regulations.
There is no limit up to which an Indian company can raise
ADRs/GDRs. However, the Indian company has to be
otherwise eligible to raise foreign equity under the extant
FDI policy.

A company engaged in the manufacture of items covered under

Automatic route, whose direct foreign investment after a proposed
GDRs/ADRs issue is likely to exceed the percentage limits under
the automatic route, or which is implementing a project falling
under Government approval route, would need to obtain prior
Government clearance through FIPB before seeking final approval
from the Ministry of Finance.

WHO CAN ISSUE ADR/GDR?

A company can issue ADR/GDR, if it is eligible to issue shares
to person resident outside India under the FDI Scheme.

WHO CANNOT ISSUE ADR/GDR?

a company which has been restrained from accessing the

securities market by the Securities and Exchange Board of
India (SEBI) will not be eligible to issue ADRs/GDRs.
Erstwhile OCBs who are not eligAn Indian listed company,
which is not eligible to raise funds from the Indian Capital
Market including ible to invest in India through the portfolio
route and entities prohibited to buy, sell or deal in securities
 by SEBI will not be eligible to subscribe to ADRs / GDRs
issued by Indian companies.

END USE RESTRICTIONS

No end-use restrictions except for a ban on deployment /
investment of such funds in Real Estate or the Stock Market.

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

VOTING RIGHTS
Voting rights on shares issued under the Scheme shall be as per
the provisions of Companies Act, 1956 and in a manner in which
restrictions on voting rights imposed on ADR/GDR issues shall be
consistent with the Company Law provisions.
RBI regulations regarding voting rights in the case of banking
companies will continue to be applicable to all shareholders
exercising voting rights.
 PRICING OF ADR/GDR
The pricing of ADR / GDR issues should be made at
a price not less than the higher of the following two
averages:
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;
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.

TWO WAY FUNGIBILITY SCHEME

Under the limited Two-way fungibility Scheme, a registered

broker in India can purchase shares of an Indian company on
behalf of a person resident outside India for the purpose of
converting the shares so purchased into ADRs/GDRs. The
operative guidelines for the same have been issued vide A.P. (DIR
Series) Circular No.21 dated February 13, 2002. The Scheme
provides for purchase and re-conversion of only as many shares
into ADRs/GDRs which are equal to or less than the number of
shares emerging on surrender of ADRs/GDRs which have been
actually sold in the market. Thus, it is only a limited two-way
fungibility wherein the headroom available for fresh purchase of
shares from domestic market is restricted to the number of
converted shares sold in the domestic market by nonresident
investors. So long ADRs/GDRs are quoted at discounts to the
value of shares in domestic market, an investor will gain by
converting the ADRs/GDRs into underlying shares and selling
them in the domestic market. In case of ADRs/GDRs being quoted
at premium, there will be demand for reverse fungibility, i.e.
purchase of shares in domestic market for re-conversion into
ADRs/GDRs.
The scheme is operationalized through the Custodians of securities
and stockbrokers under SEBI

ADR AND GDR POTENTIAL IN CENTRAL

EUROPE

Depositary receipts (mostly denoted as ADR or GDR), an equity

instrument representing shares of a company listed on a foreign
exchange, are still very little known in the Czech Republic (and
not only there), although their history reaches back to 1927. DRs
have gained much popularity in the 1990s. After a slowdown in
2001/2002, the years 2003 and especially 2004 brought a renewed
progress of the DR markets, which seems to be sustained in 2005.
Also the Central European companies are gradually becoming
aware of the advantages of DR offering. There is, however, still
enough unused potential.
In case the domestic and DR markets are integrated, there is a
possibility of cross-border trading. The prices of underlying shares
in the local market and the DRs should be therefore virtually
equal, not allowing for arbitrage opportunities. The first
hypothesis we tested is that the price of ordinary share in the local
market and underlying local currency equivalent of the DR price
are very closely correlated.
The price of underlying shares in the local market rarely remains
unaffected by the DR issue. A company listing its equity
internationally can gain from diversified shareholders base,
increased demand or lower cost of capital. These are only some of
the factors that may drive the shares price up. Several studies
have dealt with response of the underlying shares price to the DR
offering. The obtained results are, however, ambiguous. We
focused on the impact of DR program establishment on the price
of Czech, Polish and Hungarian shares. We wanted to prove that a
price increase would follow the DR offering.
It is usually expected a DR listing also improves liquidity of the
companys stock, as the potential investors base is extended, the
visibility of the company both in DR and local markets is
enhanced and cross-border trading is enabled. On the other hand,
some argue, that trading in the stock shifts to the DR market and
they worry about the impact on the overall liquidity of the local
market. We tested whether a positive reaction of the domestic
markets to the DR offering in terms of trading activity can be
observed on a sample of Central European shares.
The first chapter brings an insight into the DR world. In the second
chapter we focus on prices of depositary receipts and the
underlying shares. The two fields of interest are the correlation
between the underlying shares price and the local currencys
equivalent of the DR Price, and the response of the ordinary
shares price in the local market to the DR program introduction.
The third chapter deals with liquidity effects subsequent to the DR
listing. In the last chapter, we identify a few areas, where DRs are
frequently employed and we suggest there is an unused potential
of the instrument in the Czech Republic.
Ministry of Finance Department of Economic

Affairs
31st July, 2008

Proposed changes in the ADR/GDRs Pricing

guidelines

The Issue of Foreign Currency Convertible Bonds and Ordinary

Shares (Through Depositary Receipt Mechanism) Scheme, 1993
was initiated in 1993 to allow the Indian Corporate sector to
access global capital markets through issue of Foreign Currency
Convertible Bonds (FCCBs)/Equity Shares under the Global
Depository Receipt Mechanism (GDR) and American Depository
Receipt Mechanism (ADR). The Scheme has been amended
several times since then. In order to bring the ADR/GDR
guidelines in alignment with SEBI guidelines on domestic capital
issues, Government, vide Press Note dated August 31, 2005,
amended the pricing guidelines for Indian listed companies issuing
ADR/GDR. The present pricing clause, thus, reads as under:

Listed Companies The pricing should not be less than the

higher of the following two averages:
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;
The average of the weekly high and low of the closing prices
of the related shares quoted on a stock exchange during the two
week preceding the relevant date.
The relevant date means the date thirty days prior to the date on
which the meeting of the general body of shareholders is held, in
terms of section 81 (IA) of the Companies Act, 1956, to consider
the proposed issue.

In the normal circumstances the extant pricing norms

provides protection from price manipulation by the Issuer in
domestic market. In the recent period, Government has received a
number of representations from corporate that the extant pricing
norms affect them adversely in the falling market. In order to
remove hardship to companies in a falling market, Government is
considering modifying the pricing guidelines for ADR/GDR
issues. The proposal is to amend the parameter of the pricing
norms to two months in place of six months. In addition the
definition of the relevant date for such issues is also proposed to
be modified as per SEBI (DIP) guidelines on preferential
allotment and qualified institutions placements (QIP).

INDIAN DEPOSITORY RECEIPTS

Recently SEBI has issued guidelines for foreign companies who

wish to raise capital in India by issuing Indian Depository
Receipts. Thus, IDRs will be transferable securities to be listed on
Indian stock exchanges in the form of depository receipts. Such
IDRs will be created by a Domestic Depositories in India against
the underlying equity shares of the issuing company which is
incorporated outside India.

Though IDRs will be freely priced yet in the prospectus the issue
price has to be justified. Each IDR will represent a certain
number of shares of the foreign company. The shares will not be
listed in India, but have to be listed in the home country.

The IDRs will allow the Indian investors to tap the opportunities
in stocks of foreign companies and that too without the risk of
investing directly which may not be too friendly. Thus, now
Indian investors will have easy access to international capital
market.

Normally, the DR are allowed to be exchanged for the underlying

shares held by the custodian and sold in the home country and
vice-versa. However, in the case of IDRs, automatic fungibility is
not permitted.

SEBI has issued guidelines for issuance of IDRs in April, 2006;

some of the major norms for issuance of IDRs are as follows.
SEBI has set Rs 50 crore as the lower limit for the IDRs to be
issued by the Indian companies. Moreover, the minimum
investment required in the IDR issue by the investors has been
fixed at Rs two lakh. Non-Resident Indians and Foreign
Institutional Investors (FIIs) have not been allowed to purchase or
possess IDRs without special permission from the Reserve Bank
of India (RBI). Also, the IDR issuing company should have good
track record with respect to securities market regulations and
companies not meeting the criteria will not be allowed to raise
funds from the domestic market If the IDR issuer fails to receive
minimum 90 per cent subscription on the date of closure of the
issue, or the subscription level later falls below 90 per cent due to
cheques not being honoured or withdrawal of applications, the
company has to refund the entire subscription amount received,
SEBI said. Also, in case of delay beyond eight days after the
company becomes liable to pay the amount, the company shall pay
interest at the rate of 15 per cent per annum for the period of
delay.

REFERENCES

www.google.com

www.investopedia.com

www.nasdaq.com

www.businessfinance.com

Depository Receipt Hand book by Deutsche Bank

BOOKS
 - Indian Financial System by M.Y. Khan

-ADR IN CORPORATE ENVIRONMENT

by

M. THERESE REILLY

DEBORAH L. MACKENZIE