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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective.

DEPOSITORY RECEIPTS
INTRODUCTION: In an era of rapid globalisation, investors are looking beyond the boundaries of their countries for investment opportunities. This has given rise to opportunities for companies looking to expand into new markets, tap new customers, get hold of a new investor base and raise more capital

There was a great demand for foreign capital in some of the lesser developed countries. At the same time, supply of capital was in excess in the countries like U.S.A. and England. There was a need to bridge this gap and make a channel to enable the flow of funds from these countries to the ones that required the funds. Investing without such a channel was a challenge not just financially but also administratively. The transactions were complicated and settlement of the transactions in was very difficult owing to currency values. In an effort to bridge this gap, JP Morgan introduced a system of depositary receipts in 1927. JP Morgan intended to provide a channel that allows for easier flow of funds from U.S.A. to other countries by offering them investment options abroad. Hence, the depositary receipts program was intended as both an investment vehicle as well as an investment option. Currently, there are two major depositary receipt programs the American Depositary Receipts and the Global Depositary Receipts. American Depositary Receipts (ADRs) enable companies to tap into the worlds largest and most active capital market the American market. Global Depositary Receipts (GDRs) give the companies access to European markets besides the American market. 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.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. WORKING OF DRs 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-the-counter. Let us look at an example of how an ADR is created and traded. ORIGIN OF DRs 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 there as one of investors demand of diversifying their financial resources internationally, American Depository Receipts revealed. TYPES OF DRs 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.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. 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

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. BENEFITS OF DEPOSITORY RECEIPTS: No matter which type of program is utilized, issuing companies and investors like benefit from the unique features of the depositary receipt structure. The advantages are substantial.

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.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. 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.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. 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. 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.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective.

*Source ADR AND GDR OVERCOMING OBSTACLES OF INTERNATIONAL INVESTING

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective.

Capital Market
INTRODUCTION The deregulation and liberalization of the industry in India has been accompanied by change in financial sector. It is widely acknowledged that economic development of a country is directly related to the level of its industrial growth. The process of industrial growth essentially requires the development of capital market which provides long term finance to entrepreneurs. The capital market aims at mobilization & efficient allocation of resources to the desired investment outlets & thus, plays a vital role in the development of the national economy. The Indian capital market has been experiencing a process of structural transformation since the early eighties signifying the widening & deeping of the market by showing notable increases both in the number of participants as well as instruments. DEFINITION & MEANING OF CAPITAL MARKET The dictionary of commerce defines capital market as a market for medium and long-term finance. Capital market is one of the sources for raising long-term finance by the corporate. Capital market is the medium through which the companies and investors interact. The companies will enter the capital market with shares and/or debenture issues, which are subscribed by the investors. The investors will evaluate the companys offerings and based on the credentials of the offer take decisions regarding investment. investments. FEATURES OF CAPITAL MARKET The following are the main features of the capital market: 1 2 It is a market for long term funds exceeding a period of one year. Capital market supplies funds for financing the fixed capital requirements of trade, commerce as well as Govt. 3 The transaction in capital market involves various types of instruments like shares, debentures etc. 4 5 It is open for both institutions and individuals. Capital market instruments generally have Secondary market. The primary purpose of capital market is to direct the flow of savings into long term

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. TYPES OF CAPITAL MARKET On the basis of the status of the market, the capital markets in India is classified as a) Organised capital market and b) Unorganised capital market a) ORGANISED CAPITAL MARKET The constituents of the organised capital market are the Reserve Bank of India financial institutions like IFCI, LIC, IDBI, UTI commercial banks, stock markets etc. In the organised capital market the demand for capital comes from corporate enterprises and government and semi-government institutions and supply comes from household savings, institutions investors like banks investments trusts, insurance companies, finance corporations, governments and international financing agencies.

b) UNORGANISED CAPITAL MARKET Unorganised capital market consists of indigenous bankers, money lenders, chit funds, traders etc. A large part of the demand for funds in the unorganised capital market is for consumption purposes. In fact many purposes, for which funds are very difficult to get from the organised market, are financed by the unorganised sector. Unorganised capital market in India is characterised by the existence of multiplicity of interest rates, exorbitant rates of interest and lack of uniformity in their business dealings. On the basis of stage of development, capital market is classified into two types, viz. i) ii) Primary capital market Secondary capital market

i) PRIMARY CAPITAL MARKET OR NEW ISSUE MARKET Primary capital market is market for new issues, where long term funds are raised by industrial, commercial enterprises, state government & central government from investors through the issue of shares, debentures & bonds.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. ii) SECONDARY CAPITAL MARKET OR STOCK EXCHANGE MARKET Secondary market is markets for secondary sale of securities which have already passed through the new issue market are traded in this market. An active secondary market actually promotes the growth of the primary market & capital formation because investors in the primary market are assured of a continuous market & they can liquidate their investments.

ORIGIN OF STOCK EXCHANGE OR CAPITAL MARKET The stock exchanges are of recent origin. They did not exist in the ancient times. The growth of stock exchange has been linked with the growth of the joint stock companies. The stock exchanges were, in fact born after the industrial revolution. The stock exchanges were born with the birth of joint stock companies. So, the stock exchanges were the products of joint stock companies. The first stock exchange originated in London, widely popular as London Stock Exchange in the year 1773. The first organised stock exchange in India was started in Bombay in 1875 with the formation of the Native Share and Stock Brokers Association. In 1894 Ahmedabad Share and Stock Brokers Association was set up mainly to handle large blocks of textile shares. In 1908, the Calcutta Stock Exchange was formed primarily to deal in shares of plantations and jute mills. There are twenty-four stock exchanges in country. At present, only eight stock exchanges have got permanent recognition. Others have to renew it every year until permanent recognition is granted. IMPORTANCE OF CAPITAL MARKET The importance of capital market can be briefly summarised as follows: 1) It mobilises the savings of the people for further investment & enhances the capital formation by offering suitable rates of interest as the price of capital. 2) It helps industries in securing foreign capital to promote industrial & economic development in the country.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. 3) 4) It provides an avenue for investors to invest in financial assets which are more productive than physical assets. Moreover, it serves as an important source for technological up gradation in the industrial sector by utilising founds invested by the public. Thus, capital market serves link between savers & users of fund. CAPITAL MARKET PARTICIPANTS There are several major players in the primary market. These include the merchant bankers, mutual funds, financial institutions, foreign institutional investors (FIIs) and individual investors. In the secondary market, there are the stock brokers (who are members of the stock exchanges), the mutual funds, financial institutions, foreign institutional investors (FIIs), and individual investors. Registrars and Transfer Agents, Custodians and Depositories are capital market intermediaries that provide important infrastructure services for both primary and secondary markets. CAPITAL MARKET PROCESSES There are various processes that Issuers of securities follow or utilise in order to tap the savers for raising resources. Some of the commonly used processes and methods are described below.
INITIAL PUBLIC OFFERING (IPO)

Several changes have also been introduced in recent years in the manner in which the IPOs can be marketed. For example they can now take the book building route or they can even be marketed through the secondary market by brokers or DPs. All these changes have been made with the objective of making the process more investor friendly by reducing risk, controlling cost, greater transparency in the pricing mechanism and protecting liquidity in the hands of the investor. Some of the IPOs have been available for subscription online - where the bids are made in real time and the information is made available on an instantaneous basis on the screen.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. D-MAT ISSUES As per SEBI mandate, all new IPOs are compulsorily traded in D-materialised form. The admission to a depository for D-materialisation of securities is a prerequisite for making a public or rights issue or an offer for sale. The investors would however, have option of either subscribing to securities in physical form or D-materialised form, the companies Act,1956 requires that every public listed company making IPO of any security for Rs.10 crore or more shall issue the same only in D-materialised form. BOOK BUILDING METHOD The essence of the book building method is that the pricing of the issues is left to the investors. The issuing company incorporates all the details of the issue proposal in the offer document on the lines of the public issue method including the reserve/minimum price. The investors are required to quote the number of securities and the price which they wish to acquire. PRIVATE PLACEMENT Many companies choose to raise capital for their operations through various intermediaries by taking what in marketing terms would be known as the wholesale route. The retail route of approaching the public is expensive as well as time consuming. This is called in financial markets as private placement. SEBI has prescribed the eligibility criteria for companies and instruments as well as procedures for private placement. However, liquidity for the initial investors in privately placed securities is ensured as they can be traded in the secondary market. But such securities have different rules for listing as well as for trading. PREFERENTIAL OFFER/RIGHTS ISSUE Companies can expand their capital by offering the new shares to their existing shareholders. Such offers for sale can be made to the existing shareholders by giving them a preferential treatment in allocation or the offer can be on a rights basis, i.e., the existing holders can get by way of their right, allotment of new shares in certain proportion to their

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. earlier holding. All such offers have also to be approved by SEBI which has laid out certain criteria for these routes of tapping the public. These have to be complied with. INTERNET BROKING With the Internet becoming ubiquitous, many institutions have set up securities trading agencies that provide online trading facilities to their clients from their homes. This has been possible since all the players in the securities market, viz., stockbrokers, stock exchanges, clearing corporations, depositories, DPs, clearing banks, etc., are linked electronically. Thus, information flows amongst them on a real time basis. The trading platform, which was converted from the trading hall to the computer terminals at the brokers' premises, has now shifted to the homes of investors. This has introduced a higher degree of transparency in transactions. The investor knows exactly when and at what rate his order was processed. It also creates an end-to-end audit trail that makes market manipulation difficult. The availability of securities in D-mat form has given a further fillip to this process. However, the emergence of, what is known as, "day-traders" has resulted in the business environment of brokers which has changed. Investors, who can now trade directly, no longer require their intermediation. Service charges have therefore been declining - all of which has been in favor of investors. SPEED-E In order to extend the benefits of technological progress to investors, NSDL has launched SPEED-e services. SPEED-e is an internet based facility for clients of all Depository Participants (DPs) that enables the accountholders to submit instructions to their DPs through SPEED-e website on internet. The clients can submit instructions at a time convenient to them from a place convenient to them using SPEED-e website of NSDL. The accountholders can also view the status of their instructions submitted through SPEED-e on the website itself. SPEED-e is expected to greatly reduce the time and efforts required in processing the instructions.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. NATIONAL STOCK EXCHANGE In order to provide a nationwide stock trading facility to investors, upgrading the trading facilities and to bring the Indian capital market in line with international markets, the National Stock Exchange has been established in 1995 as a first step in reforming the securities market through improved technology and introduction of best practices in management. Before the NSE was set up, trading on the stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time consuming and inefficient. To overcome this, the NSE introduced screen-based trading system (SBTS) where trading members can stay at their offices and execute the trading, since they are linked through a communication network. The prices at which the buyer and seller are willing to transact will appear on the screen. When the prices match the transaction will be completed and a confirmation slip will be printed at the office of the trading member. NSE has several advantages over the traditional trading exchanges. They are as follows: v v NSE brings an integrated stock market trading network across the nation. Investors can trade at the same price from anywhere in the country since intermarket operations are streamlined coupled with the countrywide access to the securities. v Delays in communication, late payments and the malpractices prevailing in the traditional trading mechanism can be done away with greater operational efficiency and informational transparency in the stock market operations, with the support of total computerized network.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. OVER THE COUNTER EXCHANGE OF INDIA (OTCI) Over The Counter Exchange of India was incorporated under section 25 of the Companies Act in October 1990 and started functioning from September 1992. Over The Counter Exchange of India is a negotiated stock market which is fully computerised and having special features of ringless, scripless stock exchange with trading and settlement standards in tune with the global standards OTC has a unique feature of trading compared to other traditional exchanges. That is, certificates of listed securities and initiated debentures are not traded at OTC. The original certificate will be safely with the custodian. But, a counter receipt is generated out at the counter which substitutes the share certificate and is used for all transactions. Compared to the traditional Exchanges, OTC Exchange network has the following advantages: u OTCEI has widely dispersed trading mechanism across the country which provides greater liquidity and lesser risk of intermediary charges. u Greater transparency and accuracy of prices is obtained due to the screen-based scripless trading. u u Faster settlement and transfer process compared to other exchanges. In the case of an OTC issue (new issue), the allotment procedure is completed in a month and trading commences after a month of the issue closure, whereas it takes a longer period for the same with respect to other exchanges. Thus, with the superior trading mechanism coupled with information transparency investors are gradually becoming aware of the manifold advantages of the OTCEI.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) It was established on 12th of April 1988. On January 30, 1992 an ordinance was passed to give SEBI a legal status with the objectives of improving market efficiency, enhancing transparency, checking unfair trade practices and bringing the Indian market up to international standards, regulate and develop the securities market. ORGANISATION OF SEBI The Board of SEBI consists of six members 1 2 Chairman nominated b the Central Government. Two members from the office of central ministries who are well versed with finance and law. 3 4 POWERS SEBI has been vested with the following powers: 1 Power to call periodical returns and explanation from recognised stock exchanges or their members. 2 3 4 5 Power to make or amend bye-laws of recognised stock exchanges. Power to control and regulate stock exchange Power to grant registration to market intermediaries. Power to levy fees or other charges for carrying out the purpose of regulation. One member deputed by RBI Two members nominated by the Central Government.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective.

RESEARCH METHODOLOGY

OBJECTIVE OF THE STUDY: To understand the legal norms for American Depository Receipt & Global Depository Receipt. To know the procedure for the issue of American Depository Receipt & Global Depository Receipt. To find out the amount of funds collected by Indian companies through the issue of American Depository Receipt & Global Depository Receipt. METHODOLOGY: In quest for a better understanding of the concept of depositary receipts program, I considered it imperative that the study shouldnt be restricted to a theoretical overview. Hence, I have provided a statistical analysis to establish the importance of this program to India. I have compiled some statistics which demonstrates this significance. I collected most of the data from the internet since this is a dynamic concept that keeps changing itself to adjust to the changing times. I have also studied in brief alternate means of raising foreign finance with a view to establishing the superiority of the depositary receipts program over such means. LIMITATIONS: Despite our best efforts, this project suffers from certain limitations which were beyond our control. Some are enlisted as under: As a result of the topic being a dynamic one, I had to restrict myself to the largely, not wholly, to the internet as a source. With the American Depository Receipt & Global Depository Receipts issuing companies being compelled to disclose detailed statistics only to their depositary banks, I was unable to collect as much statistical data as I would have liked. Although I have obtained the statistics from highly credible sources, I cannot vouch for its accuracy.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective.

AMERICAN DEPOSITORY RECEIPTS


American Depository Receipt Overview: An American Depositary Receipt is a U.S. Dollar denominated security that trades on the American market. An ADR is offered by financial institutions in the U.S. on behalf of the foreign company. The financial institution, usually banks, buys shares of companies wishing to issue equity in the U.S. Then, it bundles these shares into groups of shares and sells these groups of shares. These groups are known as American Depositary Receipts. Therefore, one American Depositary Receipt represents a fixed number of shares in the parent company. The companies wishing to issue ADRs have to sign a contract with the financial institution. The financial institution which issues the ADRs on behalf of the company is also known as sponsor bank / brokerage or depositary bank. The contract which is signed by both parties is a comprehensive one. The provisions of the contract include the number of home country shares that are on offer, the ratio of the shares per ADR, the voting rights of the U.S. investors and the tax obligations, among many others. The voting rights, if any, lie with the depositary bank. The holders of the ADRs indicate to the depositary bank which way they want to vote. In the absence of any concrete arrangement, and if it doesnt violate any U.S. law, the depositary bank votes as a proxy of the ADR holder. This contract is known as the Deposit Agreement. This agreement is the first step towards raising finance from the United States.

History of the ADR: John Piermont Morgan (yes, that J.P. Morgan), launched the first ADR for the U.K.'s Selfridges Provincial Stores Limited, the famous retailer now known as Selfridges Plc. Even the audacious J.P. Morgan probably had no idea of the trend he was touching off. As of mid-2008, there were more than 2,250 depositary programs representing more than 1,800 companies from over 70 countries listed on global stock exchanges. According to

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. the Bank of New York Mellon, in the first half of 2008, 52 billion shares of ADRs changed hands, representing a value of $2.07 trillion. Working of ADR: These ADRs can be bought and sold just like any other American security. For this purpose, ADRs can even be listed on the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) or the NASDAQ. These ADRs are issued on any of these exchanges by the sponsor bank / brokerage. Hence, the company is required to disclose all financial information to the sponsor bank / brokerage. The sponsor bank / brokerage sets a ratio of ADRs to number of shares purchased. This ratio should be either greater than or less than 1. This is done by the sponsor bank / brokerage so that the ADR is high enough to show substantial value yet be low enough to attract investors. For instance, let us assume that Reliance, an Indian company, is currently trading at Rs. 300 on the Bombay Stock Exchange. One ADR of Reliance, representing one share of Reliance, would trade at $7.50 on the American market. Investors in the U.S. would fall back from investing in such penny stocks. But if, one ADR of Reliance represented 10 shares, it would be trading at $75 per ADR, which falls in the substantial yet attractive category that was spoken about a little earlier. As a result, majority of the ADRs trade at prices between $10 and $100 per ADR. So, for companies whose shares trade at relatively lesser values in the home country has an ADR that comprise of relatively greater number of shares. For instance, if a company trading at Rs.40 on the BSE may have an ADR that comprises of 40 shares, i.e. at a price of $40 per ADR. Price Determination: ADRs are just like any other security. The initial price or listing price, in case the ADR is being listed, is determined by using the predetermined ratio as we have just seen. Once listed, ADRs are traded just like other stocks in the market. This means that the price of the ADR will be determined by the market mechanism of demand and supply. Let us

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. recollect our earlier illustration wherein Reliance is going to the U.S. market to raise capital. Let us assume that Reliance wishes to list on the NYSE through JP Morgan. JP Morgan fixes a ratio of 10:1, i.e. 1 ADR for every 10 shares of Reliance. Reliance is currently trading at Rs. 300 per share on the BSE. This equates to $75 per ADR at the fixed ratio. This means that the investor pays $45 for 10 shares in Reliance. So, after the initial listing, the Reliance ADR will be bought and sold at prices determined by the market. If the price of the ADR increases from $75 to $85 per ADR, it implies that 10 shares in Reliance are now worth $85. This translates to Rs. 340 per share as against the Rs. 300 that Reliance is trading at on the BSE. Two important factors in the price determination of ADRs are the shares ADR ratio and the exchange rate of the home currency. While changes in the ratio are predetermined, the exchange rate can prove to be extremely volatile. Hence, there arises an opportunity for arbitrage. With the availability of real time news from all across the globe and modern technology that enables on line transactions, ADR prices of companies have come to follow the trend of the share prices in the home country. Structure: The structure of the American Depositary Receipts is one that offers investment options to different kinds of investors. Investors can purchase ADRs through stock exchanges or even over the counter (OTC). The structure offers the interested companies the option of tapping retail investors as well as institutional investors. The ADR structure offers four types of programs to the investors: Level I Depositary Receipts Rule 144A Depositary Receipts Level II Depositary Receipts Level III Depositary Receipts

Unlisted programs (Level Me and Rule 144A DRs): A Level I ADR program is not listed on a stock exchange, but is available for retail investors to purchase and trade in the over-the-counter market via NASDAQs Pink

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. Sheets. A Level I program does not create new capital in the US; rather, it gives the company an opportunity to develop or expand its shareholder base by establishing a foothold in the US market. The highlights of this program are given below: The issuing company has to maintain home market accounting and disclosure standards. They neednt conform to the regulations laid down by Securities Exchange Commission as regards accounting disclosure. The issuing company makes use existing shares to raise funds from the American market. This implies that the company tries to meet investors demand and their own need for liquidity without issuing new shares for the American market. However, they can issue new ADRs. They can do so by first issuing the shares in the home market and then canceling it. These shares are then made available to be bundled and issued. The issuing company is exempt from U.S. reporting requirements. The reporting requirements include compliance with Rule 12g3-2(b). The issuing company has to register itself with the United States Securities Exchange Commission through form F-6. The bid prices of the ADRs are electronically updated at the end of the trading day through the Pink Sheets LLC information Service. Vendors like OTCquote.com even post real time and intra day quotes posted in the market. Such services, however, are available to the issuing company only through subscription. Rule 144A Depositary Receipts: A Rule 144A DR is the quickest, easiest, and most cost-effective way to raise capital in the United States. Under this program, new restricted shares are created and then privately placed with institutional investors. Rule 144A facilitates the resale of privately placed

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. securities to Qualified Institutional Buyers in the US. These institutions manage at least $100 million in securities, or are registered broker-dealers that own or invest, on a discretionary basis, $10 million in securities of non-affiliates. Let us study the highlights of this program: Companies issuing Rule 144A DRs are not subject to U.S. reporting requirements. In fact they arent even registered with the U.S. Securities and Exchange Commission. These DRs may not be advertised for or actively promoted by the issuer. This is because the sale of such DRs takes place through private placement. Under Rule 144A of the Securities Act, 1933, such trades are to take place electronically on a system developed and managed by the National Association of Securities Dealers. The system is called PORTAL. These DRs can be traded only to Qualified Institutional Buyers (QIBs). This underlies the essence of such DRs that they are privately placed DRs. This type of an ADR may be converted into the unrestricted ADR type. However, for such a conversion to take place, at least two years from the last deposit of shares under this program have got to lapse. It is only after these two years that the Rule 144A type ADR is eligible to be converted. Level II and Level III Depositary Receipts: Listing your ADR means it will be traded on one of the three major US exchanges the New York Stock Exchange (NYSE), The American Stock Exchange (Amex), or the (NASDAQ). ADRs that are listed on the NYSE or Amex, or quoted on NASDAQ, have higher visibility in the US market, are more actively traded, and have increased potential liquidity. In order to list your companys securities, you must meet the listing requirements of your chosen exchange or market. Your company must also comply with

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. the registration provisions and continued reporting requirements of the Securities Exchange Act of 1934, as amended (The Exchange Act), as well as certain registration provisions of the Securities Act, which generally entail the following: Form F-6 registration statement, to register the ADRs to be issued. Form 20-F registration statement, to register the ADRs under the Exchange Act. This requires detailed financial disclosure from the issuer, including financial statements and a reconciliation of those statements to US GAAP (Generally Accepted Accounting Principles). Annual reports (on Form 20-F) have to be filed on a regular, timely basis with the US Securities and Exchange Commission (SEC). Interim financial statements and current developments, furnished on a timely basis to the SEC on Form 6-K, to the extent such information is made public or filed with an exchange in the home country or distributed to shareholders. A Level II ADR uses existing shares to satisfy investor demand and liquidity. New ADRs are created from deposits of ordinary shares in the issuers home market. Because these securities are listed or quoted on a major US exchange, Level II ADRs reach a broader universe of potential shareholders and gain increased visibility through reporting in the financial media. Listed securities can be promoted and advertised, and may be covered by analysts and the media. In addition, listed securities can be used to structure incentives for an issuers US employees, or could be used to facilitate US mergers and acquisitions. Level III ADRs are a public offering of new shares into the US markets. These capital raisings have a high profile: They are followed closely by the financial press and other

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. media, often generating significant visibility for the issuer. In addition to the requirements noted above, an issuing company establishing a Level III ADR program is required to file Form F-1. This registers the securities underlying the ADRs that will be offered publicly in the US, including a prospectus informing potential investors about the issuer and any risks inherent in its business, the offering price of the securities, and the issuers plan for distributing the ADRs. In certain circumstances, an abbreviated registration statement (Form F-3) may be acceptable. The company may substitute Form 8-A for Form 20-F registration to register under the Exchange Act. However, Form 20-F annual reports must be filed thereafter. This annual filing contains detailed financial disclosure from the issuer, financial statements and a full reconciliation of those statements to US Generally Accepted Accounting Principles (GAAP). Level III ADRs can be actively promoted and advertised to increase investor awareness and market liquidity. As with Level II ADRs, the securities can be used to structure incentives for an issuers US employees, and may be used to facilitate US mergers and acquisitions. Tax Treatment of ADRs: Tax treatment of ADRs by the IRS is generally the same as for domestic investments. Investors are subject to the same capital gains and dividend taxes at the same rates. There is a little twist, however: many countries will withhold taxes on dividends paid. While the American investor must still pay U.S. income tax on the net dividend, the amount of the foreign tax may be claimed by the investor as a deduction against income or claimed against U.S. income tax. Investors are encouraged to consult a professional tax or investment advisor to make sure they are recording (and paying taxes on) their ADR investments properly.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. Legal Framework: United States The Securities and Exchange Commission (SEC) was set up in 1929, just before the Great Depression. It was formed to regulate the American capital market. It is the SEC that regulates the ADRs in the U.S. In order to have its securities listed and traded in the U.S. through an ADR, the non U.S. company must comply with these laws and regulations. Federal Securities Acts There are two federal securities laws that govern the creation of ADRs: The Securities Act, 1933, and The Securities Exchange Act, 1934 (amended as The Exchange Act). The Securities Act, 1933 The Securities Act, 1933, governs the offer and sale of securities. The Act requires full and fair disclosure of all information that the investors should be aware of in order to make a well informed decision as regards the securities on offer. It also contains requirements for the registration of these securities to be offered. The Securities Exchange Act, 1934 The Securities Exchange Act, 1934, regulates the secondary markets for listed or unquoted securities. The Act requires on going reporting from the issuers of these securities. In short, the Securities Act governs the offer, sale and registration of securities while the Securities Exchange Act regulates the secondary markets through mandatory on going reporting and disclosure by the issuers. Key SEC Rulings The regulatory and disclosure requirements imposed upon the sponsor bank / brokerage depends on the kind of program that it has opted for. Rule 12g3-2(b) Under this rule, the ADR issuer is exempt from periodic disclosure and reporting norms if it plans to make its Level I ADRs available to the investors over the counter (OTC). This enables the ADR issuer to make available to the SEC those details that it has already made public. Hence, it is freed from the burden of extensive reporting and other related requirements. Form F-6: Registration of Level I, II and III ADRs with SEC Under the Securities Act, any sponsor bank / brokerage establishing an ADR program must register the ADRs with the SEC. They do so by filing form F-6 along with a copy of the Depositary Agreement.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. Besides the Depositary Agreement, sponsor banks / brokerages must also file the legal opinion of their counsel. This legal opinion states the rights that the holders of these ADRs will have access to. Once the SEC receives the Form F-6 along with the other documents and has no further comments, the sponsor bank / brokerage will file an Acceleration Request with effectiveness on a particular date, on which the ADRs can be issued. To put it simply, the Acceleration Request filed by the sponsor bank / brokerage is more like an information slip notifying the SEC about when it plans to issue the proposed ADRs. This date on which they will issue the ADRs, is the effectiveness date. Form 20-F: Annual Disclosure & Registration Document for Level II and III This form is used as both a form for registration as well as for annual report filing. This form can be used for registration only by Level II and Level III ADR issuers. For sponsor banks / brokerages that have already registered, they have to use this form to file the annual reports. Depending on the use of this form, certain exemptions are made available. The following are some of the disclosures required to be made: Identity of directors and other senior management Historical financial information Description of the properties Financial prospects Major stakeholders and related party transactions Offer and listing plans Company documents Quantitative and qualitative disclosure of market risks Code of ethics

EDGAR Filings The SEC has put in place a system for electronic filing of disclosure documents. This system is known as EDGAR System, short for Electronic Data Gathering and Retrieval system. The major purpose of putting such a system in place is to enable the investors to analyse all the documents filed by the company before making any investment.

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Under the EDGAR System the following forms need to be filed electronically: Form F-6 (For registrations of ADRs) Form 6-K (For informational reports) Form 20-F (For Annual report / registration) Forms F-1, F-2, F-3, F-4 (For public offerings)

The regulations regarding filing of these forms are relaxed a little bit for sponsor bank / brokerage issuing Level I ADRs. However, such relaxation of regulation does not extend to the filing of Form F-6. 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 dont have to worry about it Therefore, if exchange rates were to move against you, it would hurt the value of your ADR. If you are considering investing in foreign stocks, ADRs should be part of your investment decision; however, you should become familiar with all the risks associated with foreign investing before making an investment decision. Advantages to Issuers Provides a simple means of diversifying a companys shareholder base and accessing important U.S. market May increase the liquidity of the underlying shares of the issuer ADRs can be used as an equity financing tool in both M&A transactions and ESOPs for

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. U.S. subsidiaries 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 Offers a convenient means of holding foreign shares Simplifies the trading & settlement of foreign securities; ADRs trade and settle just like 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. 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

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. 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 The text of the ADR certificate (see specimen below) is attached as an exhibit to the Deposit Agreement. A typical ADR certificate resembles an ordinary share certificate, and contains the general terms and conditions of the ADR applicable to ADR holders.

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

Legal Framework: India In India, there wasnt any specific regulation regarding the issue of ADRs for a long time. It was only in 2000 that the Reserve Bank of India (RBI) issued a notification permitting the issue of ADRs through the Foreign Exchange Regulation Act (FERA). Notification

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. No. F.E.R.A. 214 /2000-RB.The Reserve Bank of India issued this notification on 20th January, 2000.Putting it quite simply, this notification permits the issue of ADRs by Indian companies. The following points highlight the essence of this notification: All companies governed by the Indian Companies Act, 1956, are permitted to raise funds through the issue of ADRs The permission, however, shall stand to be cancelled if the company raising funds violates any norms or exceeds any limits laid down by the Foreign Investment Promotion Board (FIPB) or the Secretariat for Industrial Assistance (SIA). The company has to get approval from the Ministry of Finance, Government of India, to make such an issue. The company is permitted to enter into any agreement / sign any contract with foreign agencies provided that such a contract is essential for the issue of ADRs. The companies are allowed to make payments to the relevant authorities and the sponsor bank / brokerage towards their fees. The companies are permitted to make any payments to U.S. government towards any tax liability incurred as a result of issue of ADRs The companies are allowed to maintain bank accounts in the U.S. to deposit the money collected. The companies are also permitted to maintain a register of foreign members if the company feels it necessary. This notification cleared a lot of ambiguities that existed in the Foreign Exchange Regulation Act in the absence of any concrete provision regards ADRs.

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GLOBAL DEPOSITORY RECEIPTS


Global Depository Receipt Overview A Global Depositary Receipt is a security that is traded in the European markets. A GDR and an ADR are essentially the same. The only difference is that the GDR is traded either on the Luxembourg Stock Exchange or the London Stock Exchange. Just as in the case of ADRs, companies wishing to issue GDRs have to sign a Deposit Agreement with a sponsor bank / brokerage in Europe. GDR holders do not enjoy any voting rights. 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. Global Depository Receipts 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 Global Depository Receipts 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

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. 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. Working of GDR GDRs can be bought and sold just like any other security. They are listed usually on the London Stock Exchange or the Luxembourg Stock Exchange. Similar to ADR program, the sponsor bank / brokerage sets a ratio of number of shares in every GDR. One more significant difference between ADRs and GDRs is that in case of GDRs, a lot of companies have a ratio of one share per GDR. This is something that is not found in ADRs. Once the GDRs are listed, they are traded just like shares on the exchange. An important point in this regard is that the investors who pick the shares from London or Luxembourg could be investors from other countries. For example, an investor from Japan can buy GDRs of an Indian company listed on the London Stock Exchange. Later on he can sell these GDRs to another investor from Brazil. This makes the program truly global in the sense that funds can be raised from different countries at one single point. This is the primary reason for these depositary receipts being christened Global Depositary Receipts and not British Depositary Receipts.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. The GDRs are traded in Europe on one the Euro market clearing systems Euro clear and Clear stream. These clearing systems are similar to the American National Association of Securities Dealers Automated Quotation System (NASDAQ). These systems offer investors the benefits of real time prices and online instant transactions among many other benefits. STRUCTURE: 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 issuers 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 issuers 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.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. ADVANTAGES OF GDR: 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 Clear stream, Euro clear.

DISADVANTAGES OF GDR: 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. PRICING OF GDR The pricing of GDR issues should be made at a price not less than the higher of the following two averages: (i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; (ii) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. Legal Framework: India In India, GDRs are governed by the same notification issued for ADRs. Notification No. F.E.R.A. 214 /2000-RB.The Reserve Bank of India issued this notification on 20th January, 2000. It allows the issue of GDRs. The following points highlight the essence of this notification: All companies governed by the Indian Companies Act, 1956, are permitted to raise funds through the issue of GDRs. The permission, however, shall stand to be cancelled if the company raising funds violates any norms or exceeds any limits laid down by the Foreign Investment Promotion Board (FIPB) or the Secretariat for Industrial Assistance (SIA). The company has to get approval from the Ministry of Finance, Government of India, to make such an issue. The company is permitted to enter into any agreement / sign any contract with foreign agencies provided that such a contract is essential for the issue of GDRs. The companies are allowed to make payments to the relevant authorities and the sponsor bank / brokerage towards their fees. The companies are permitted to make any payments to concerned government towards any tax liability incurred as a result of issue of GDRs The companies are allowed to maintain bank accounts abroad to deposit the money collected through such an issue. The companies are also permitted to maintain a register of foreign members if the company feels it necessary. This notification cleared a lot of ambiguities that existed in the Foreign Exchange Regulation Act in the absence of any concrete provision regards GDRs.

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AMERICAN DEPOSITORY RECEIPTS / GLOBAL DEPOSITORY RECEIPTS: INDIAN PERSPECTIVE


INTRODUCTION: India was totally out of the picture as far as the ADR and GDR markets are concerned. This is primarily attributed to the protectionist policy followed by the government. The Indian economy opened up only in 1991 with the government deciding to adopt the policy of Liberalisation, Privatisation and Globalisation. SCOPE OF ADRS/GDRs: With the opening up of the economy in 1991, Indian companies have been growing at a rapid pace. With this the economy has also been growing rapidly. All this has resulted in the opening up of huge opportunities for investment in India. The following points highlight the need for / scope of ADRs/GDRs in India: Rapid Growth: Indias economy has been growing at a rapid pace. To maintain the pace of such growth, huge amounts of investments are required. ADRs and GDRs enable such huge investments to be made in India. Non availability of funds: The funds available in India fall far short of the funds required to maintain and increase the growth rate of the economy. ADRs and GDRs channel funds from foreign sources to India, thereby enabling such investments to be made. Bullish Market: The Indian market has been showing bullish tendencies in the recent past. Indexes of the two major stock exchanges in India Nifty 50 of the National Stock Exchange (NSE) and BSE Sensex of the Bombay Stock Exchange (BSE) have been rising upwards consistently in the last two to three years. This upward trend is both the cause and effect of foreign funds flowing in. Growing Investor confidence: As a result of India sustaining the bullish trend and Indian companies growing as fast as they are, global investors have greater

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. confidence in Indian stocks than ever before. This sort of confidence is displayed by institutional investors as well as individual investors. PROCEDURE FOR ISSUE AND CANCELLATION OF ADRs/GDRs:

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Depository

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. 1. Approvals
The issue of 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.

2. 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.

3. 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 (i) Co appointment of various agencies and proper institution of a Board Sub-Committee (ii) Selection of Syndicate Members (iii) Constitution of a task force for due diligence (iv) Listing (v) Offering Circular (vi) Research Papers (vii) Pre-marketing (viii) Timing, pricing and size of the issue (ix) Road shows (x) Book Building and pricing of the issue (xi) Closing of the issue (xii) Allotment

ISSUANCE AND CANCELLATION:

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. The depositary and custodian will work closely on the issuance and cancellation of underlying shares and depositary receipts in support of your depositary receipt program. Depositary receipts are normally created when shares currently trading in a foreign market, or newly issued shares resulting from an offering of securities, are deposited with the depositarys custodian bank in the issuers home market. The depositary then issues depositary receipts representing those shares. Conversely, when the demand for shares in the home market is higher than the demand for depositary receipts, the depositary receipts can be cancelled, and the shares are released back into the home market. Often, depositary receipts are often the only way certain US investors can invest in non-US companies, given the investment criteria of many institutional funds. Investor demand is driven by a number of factors, including: Company fundamentals and track record, market conditions and sector performance Relative valuations and analyst recommendations NYSE/Amex specialist or NASDAQ market maker commitment to supply liquidity of the stock. Liquidity of shares in the local market and visibility of the company internationally.

In some cases, a broker-dealer will choose to purchase shares in the home market even if depositary receipts are available, based on their assessment of factors such as availability, Pricing and market conditions in the home market vs. the investors market. WHO CAN ISSUE ADR/GDR: A company can issue ADR/GDR, if it is eligible to issue shares to person resident outside India under the FDI Scheme. WHO CANNOT ISSUE ADR/GDR: An Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue ADRs/GDRs.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. Erstwhile OCBs who are not eligible to invest in India through the portfolio route and entities prohibited to buy, sell or deal in securities by SEBI will not be eligible to subscribe to ADRs / GDRs issued by Indian companies. END USE RESTRICTIONS: No end-use restrictions except for a ban on deployment / investment of such funds in Real Estate or the Stock Market. LIMIT OF OFFERINGS: There is no monetary limit up to which an Indian company can raise ADRs / GDRs. VOTING RIGHTS: Voting rights on shares issued under the Scheme shall be as per the provisions of Companies Act, 1956 and in a manner in which restrictions on voting rights imposed on ADR/GDR issues shall be consistent with the Company Law provisions. RBI regulations regarding voting rights in the case of banking companies will continue to be applicable to all shareholders exercising voting rights. LISTING REQUIREMENT: WHERE TO LIST One of the more important decisions facing a prospective issuer of DRs is determining where to list them. Listing on a recognised stock exchange is important partly because many institutional investors are required to limit their investment in unlisted securities. Critical factors such as share liquidity, visibility, listing costs and funding requirements must be carefully evaluated before the exchange which best suits the issuer's needs can be selected. In order to ensure that the correct decision is reached, the prospective issuer should hold in-depth discussions with the major exchanges. We would be happy to introduce issuers to representatives of the various exchanges in the US and in Europe.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. The type of DR program desired will determine what listing options are available. For example, a listing on one of the three national US exchanges, the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) or NASDAQ, is only possible for Level II and Level III ADRs. We set out below a summary of the differences between the "over-the-counter" market and the major US exchanges, and information on the London and Luxembourg Stock Exchanges where most GDRs are currently listed. This is followed by details of the minimum requirements for listing on each exchange and their respective listing charges. 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.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. 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.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. EUROPEAN LISTINGS GDRs 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 recognised 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.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective.

American Depository Receipts and Indian


The Indian ADR market came to life only in 2000 when the Reserve Bank of India (RBI) announced properly laid out rules and regulations for the issue of depositary receipts. The first company to raise funds through the issue of ADR is Rediff.com India Limited. The company raised $55.3 million or Rs. 2.3 billion ($1= Rs. 43) from their first issue in 2000. There are 11 companies that have raised $7.9 billion through 14 programs. Of the 11 companies, 8 are listed on the NYSE and the other 3 on NASDAQ. Table 1: List of companies that have issued ADRs

Source: Bank of New York Let has have a look at the total funds raised by each of the companies mentioned above. The following table lists the companies that have raised funds through the issue of ADRs Table 2: List of companies with funds rose through ADR

Source: Bank of New York

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. Graph 1: Funds rose through ADR by companies

Source: Bank of New York As can be seen in the graph, ICICI Bank is the largest funds raiser. It has raised a total of $3,359 million. It raised $466 million from their first issue in March 2005, $433 million from their second issue in December 2005 and $2,460 million from their last issue in June 2007. Table 3: Issue wise break up of funds rose through ADR

Source: Bank of New York The table above gives a break up of the funds raised from each issue. From the following graph, which is a graphical representation of the table given above, we can see that Infosys has raised the highest amount of funds through a single issue.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. Graph 2: Issue wise break of funds rose through ADR

Source: Bank of New York ICICI Bank and HDFC Bank are the only companies that have issued ADRs three times. HDFC Bank made their issues in 2001, 2005 and 2007. Amongst the others, all have made two issues except for SIFY. Note: Data for Tata Motors, Mahanagar Telephone Nagar Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL) for use in Graph 1 and Graph 2 was not available. The ADRs issued have different ratios. It is not necessary that the ADRs listed on the same exchange have the same ratio. From amongst the Indian companies, most of the ADRs are in the ratio 1:2. This implies that for every ADR there are two homes country shares. In other words, two shares make up one ADR. Earlier, we said that the sponsor bank / brokerage in the U.S. prefers to keep the ratio of shares per ADR high enough to instill confidence in the investors and at the same time low enough for it to look like an attractive investment. Usually the ratio is 1:10. But in case of the Indian companies, the range of the ratio lies between 1:0.5 to 1:3. This shows not only the financial strength of the Indian companies, but also the investors confidence in Indian stocks.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. The following table shows the number of programs having the corresponding ADR: Shares Ratio. Table 4: Detailed break up of ADR: Shares ratio

Source: Bank of New York Pie Chart 1: Percentage wise break up of ADR: Shares ratio

Source: Bank of New York

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective.

Global Depository Receipts and India


India entered the GDR market soon after the opening up of the economy in 1991. It entered the market with the Reliance issue in May 1992. Reliance raised $150 million through this issue. This was followed by the Grasim issue through which the company raised $90 million. Thereafter, there was a lull in the GDR market until the end of 1993. This was because of the securities scam that haunted the Indian stock markets during 1992 93. The number of companies that have raised funds through the issue of GDRs is far greater than the number of companies that have raised funds through ADRs. Despite this, the total amount raised through GDRs is $7.2 billion. The following table lists out all the companies that have raised funds through the issue of GDRs along with the amount of funds raised. Table 5: List of companies that have issued GDRs

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective.

Source: www.gdr.in Majority of the funds raised by these companies was post 1993. The securities scam not only shattered investor confidence in India, but also the confidence of the global investors who had invested or were considering an investment in Indian stocks. The 1994-95 seasons were the peak. Most of these companies got themselves listed during this time. Videsh Sanchar Nigam Limited (VSNL) raised the largest amount of funds through the issue of GDRs. It has raised $527 million in this market. The companies closest to VSNL in terms of funds raised are Reliance, whove raised $450 million and Mahanagar Telecom Nigam Limited (MTNL) who raised $419 million. From amongst the rest of the

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. companies, SBI has raised $370 million while Tata Motors have raised $319 million. There are a handful of companies that have risen between $100 - $200 million. Then theres a big group of companies who have raised a capital of less than $100 million. Graph 3a: Companies that have raised more than $100 million through GDRs

Source: www.gdr.in

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. Graph 3b: Companies that have raised funds between $50 - $100 million through GDRs

Source: www.gdr.in

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. Graph 3c: Companies that have raised less than $50 million through GDRs

Source: www.gdr.in The pattern of the ratio of shares per GDR is quite different from the pattern of the ratio of shares per ADR. In fact, nearly 55% of the GDRs are in the ratio 1:1. This means that one GDR represents only one share in India. One factor that plays an important role in this is the difference in the mindset of the European investors from their American counterparts as regards Indian stocks. European investors seem to have greater confidence in Indian stocks than the Americans.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. The following table shows the number of programs having the corresponding GDR: Shares Ratio. Table 6 : Detailed break up of GDR: Shares ratio

Source: www.gdr.in Pie Chart 2 : Percentage wise break up of GDR: Shares ratio

Source: www.gdr.in The chart shows that the GDR: shares ratio ranges from 1:0.5 to 1:100. This indicates the presence of different kinds of companies. It indicates the presence of a large number of big Indian companies and quite a few numbers of small companies.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective.

American Depository Receipts Vs. Global Depository Receipts


Indias entry into the GDR market dates back to 1992 with Reliances $150 million issue. Indian companies were hesitant to enter the ADR market until 2000, when the Reserve Bank of India issued clearly defined guidelines. Apart from this, there are several other reasons for most Indian companies preference towards the GDR market. They are listed as under: Disclosure norms: Companies listed on any of the American stock exchanges are required to adhere to comprehensive disclosure norms. They have to disclose information relating not just to the ADR, but also detailed financial and non financial information regarding the company. In contrast, the London Stock Exchange (where all of the Indian companies are listed) requires disclosure of only that information which relates to GDRs being issued. Voting Rights: American rules make it a necessity for ADR holders to be given voting rights. The London Stock Exchange (LSE) makes no such demand. Although companies wishing to give such voting rights are permitted to do so, they are not compelled to give these rights Accounting System Differences: Both U.S. and England follow accounting systems that differ from the Indian system. The Securities and Exchange Commission (SEC) makes it compulsory for companies issuing ADRs either to prepare their accounts under US GAAP or reconcile the accounts to US GAAP. The LSE, on the other hand, is satisfied with a Statement of Difference between the English accounting system and the Indian system. Initial Listing Costs: There is a significant difference in the initial listing costs of listing in the U.S. and listing on the LSE. A U.S. listing could cost the issuing company anywhere between $1 - $2 million or Rs.400 Rs. 800 crores ($1 = Rs. 40). These costs are down to about $200,000 - $400,000 or Rs. 0.8 Rs. 1.6 crores for listing on the LSE.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. The following table shows the number of companies that have issued ADRs as against the number of companies that have issued GDRs. Table 7: ADR / GDR issuing companies

Source: Bank of New York and www.gdr.in Of the 74 companies that have raised funds through the issue of ADRs and GDRs, 11 have issued ADRs while the other 63 have issued GDRs. The following pie chart shows this in terms of percentage of total number of companies who have raised funds through depositary receipts. Pie Chart 3: ADR / GDR issuing companies as a percentage of the total

Source: Bank Of New York and www.gdr.in As shown above, an astounding 85.14% of the companies issue GDR for the various reasons that we listed above. One interesting point worth noting is that the measures which deter Indian companies from listing in the U.S. affect the smaller companies in a far greater manner. The companies listed in the U.S. are the big boys of India Inc. The fact that the bigger companies are listed in the U.S. is evident from the amount of funds

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. raised through these issues. It would be logical to assume that since 85.14% of the companies have issued GDRs, a near equal percent of funds would be raised. However, GDRs account for only 47.52% of the funds rose. Table 8: Total funds rose through issue of ADRs / GDRs

Source: Bank of New York and www.gdr.in The following pie chart shows the amount of funds raised through ADRs and GDRs as a percentage of the total funds raised. Pie Chart 4: Funds rose through ADR / GDR as a percentage of the total

Source: Bank of New York and www.gdr.in Although ADRs account for only 14.86% of the total issue of depositary receipts, they account for 52.48% of the funds raised. This goes to prove, as we stated earlier, that the Indian companies issuing ADRs are bigger than the ones issuing GDRs. As a result of the more funds being raised from lesser companies through the issue of ADRs, the average issue size of a company issuing ADR is much higher than a company issuing a GDR. The

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. average issue size in case of an ADR is about $720 million while this average drops to around $114 million in case of GDRs. The following graph shows the average issue size in case of ADR as against in case of a GDR. Graph 4: Average issue size of an ADR / GDR program

Source: Bank of New York and www.gdr.in Although the general preference amongst Indian companies is to issue GDRs, India has managed to raise more funds in lesser time through the ADR market. It took us 16 years 63 companies to raise $7.2 billion through GDRs but only 7 years and 11 companies to raise $7.9 billion.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. RECENT GROWTH TREND AND EFFECT OF ADRs & GDRs: In the first four months of fiscal year 2009-10, Indian firms raised about $3 billion (Rs.14,686 crore) through QIP route and about $2.5 billion (Rs.11,990 crore) through GDR (Global Depository Receipt) and ADR (American Depository Receipts) issues, according to an estimate of Delhi-based research firm PRIME Database. The trend of tapping GDR/ADR route actually revived in July 2009 only, during which the Indian firms moped up more than $2 billion through these instruments. After touching the peak levels of $5.32 billion QIP offerings and $6.39 billion GDRs/ADRs during 2007-08, the global meltdown of equity markets had turned the year 2008-09 in to a drought year. Table 9: Issue of ADRs/GDRs and Funds raised through ADR s/ GDR s
QIPs Year No. of Issues 2006-2007 2007-2008 2008-2009 2009-2010 (Till Jul,09) 25 38 2 16
Amount (Rs.Crore)

GDRs / ADRs Amount ($ mln) 1024.36 5318.96 38.97 3031.23 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 (Till Jul,09) Year No. of Issues 14 56 21 33 12 7
Amount (Rs.Crore)

Amount ($ mln) 915.47 3280.89 1016.00 6387.88 184.40 2474.81

4963.03 25770.38 188.82 14686.32

4435.45 15895.91 4922.50 30949.26 893.42 11990.47

Source: PRIME Database Indian Companies Become One of the Biggest Fund Raisers In Overseas Markets The $1.5 billion (Rs.7,305 crore) ADS issue of Sterlite Industries, a subsidiary of Londonlisted Vedanta Resources Plc. and Indias largest copper producer, closed in just six hours on 16th July 2009. It was the largest U.S. share sale by an Indian company in the last two years. Earlier, Indias largest private sector bank ICICI Bank had raised $2.46 billion through ADS offering in June 2007.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective. The other big fund raisers through ADR/GDR route in the recent weeks are, by the worlds sixth largest steel maker Tata Steel Ltd($500 million), India's largest private power producing company Tata Power ($335 million) and the world's fifth-largest windturbine maker Suzlon Energy Ltd($110 million). Tata Steels $500 million GDR issue is not only the largest ever Indian Global Depository Receipt (GDR) offering in London, but also one of the biggest new equity issues to be conducted by a company outside its home market on any global exchange in the last 12 months. "As a globally ambitious Indian company, with significant operations in Europe, Tata Steel is a high profile addition to our markets. Tata Steel's listing demonstrates that London remains the market of choice for companies from across the globe seeking to access a truly global pool of international investment capital and benefit from trading on the International Order Book, the world's most liquid trading platform for GDRs". London Stock Exchange Groups Xavier Rolet, Chief Executive appreciating Tata Steels offering said.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective.

FINDINGS & CONCLUSION


Through this project it is found out that, with globalization dissolving borders, it only makes sense that people have the ability to invest in foreign entities. Many nations who are striving to become industrialized are undervalued compared to the levels they will eventually reach. Many people, therefore, consider ADRs and GDRs as an undiscovered gem in the financial markets. Diversification does not stop at just investing in different types of stocks or bonds. By investing in different countries, you gain the potential to capitalize on emerging economies, which hopefully leads to more green in your pocket. To conclude this project, it has enlightened with what it takes to actually achieve the goals that are set. I have tried to understand the concept and the need for the American Depositary Receipts program & Global Depository Receipts program. I have identified its significance in Indias growth. I have also got an insight into the functioning of the American markets along with the European market. I have observed that the sudden surge in ADR issues took place after the government put in place clearly defined rules. Similarly, GDR issues kicked off immediately after the opening up of the economy. I hope that the RBI can further relax the ADR / GDR guidelines to enable Indian companies to gain even greater access to global markets. I also believe that Indian companies raising funds globally should attempt to make this growth more inclusive. ADRs and GDRs have proved to be quite a revolution. It wouldnt be too daring to dream of a day when we can issue new shares in foreign markets without the companys presence in the country. The appetite of global investors for Indian equity is increasing again, as reflected by a spurt in overseas fund raising by Indian companies in recent times. The fact that India still continues to grow at 6% - 7% while the global economy is facing one of its most severe economic crises, has made the global investors less risk-aver se to India. They are realising and appreciating that as soon as the global economic conditions improve, Indias growth rate would move closer to double digit.

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective.

A Spurt In Overseas Fund-Raising By Indian Companies Indian Companies Preferring GDR More In Comparison To ADS Route Institutional Fund Raising Through Qualified Institutional Placement Also On Rise

Foreign Institutional Investors Turned Net Buyers In The Indian Markets

However warns that it should not be viewed as hype. Investors are still very selective in what they are buying. They are willing to look at investment opportunities from credible companies with a substantial track record and where the pricing is attractive. Overall, I like to conclude that the ADRs & GDRs are not superfluous and that they deliver a valuable and economically efficient service & Investors should look beyond the confines of the US & the UK borders in an effort to diversify and maximize returns. Many investors ignore the foreign-equity asset class entirely, and this is not beneficial to their portfolios. ADRs & GDRs are one way to diversify your portfolio and help you achieve better returns when the US and the UK market are in a slump

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Comparative Study of American Depository Receipts & Global Depository Receipts on Indian perspective.

BIBLIOGRAPHY
Source: Other Documentation JP Morgan Depositary Receipts Guide Deutsche Bank Depositary Receipts Guide Source: Text Book Madhu Vij - International Financial Management (Pg no. : 588 611) Source: Internet http://www.bnymellon.com/depositaryreceipts/index.html Last accessed on February 08, 2010. http://finance.indiamart.com/markets/bse/bse30.html Last accessed on February 08, 2010. http://www.business-standard.com/india/index2.php Last accessed on February 15, 2010. http://www.jpmorgan.com/tss/WssHome/Securities_Services/1114735 358205 Last accessed on February 28, 2010. http://www.gdr.co.in/ Last accessed on March 02, 2010. http://www.adr.co.in/ Last accessed on March 08, 2010. http://www.investopedia.com/?viewed=1 Last accessed on March 18, 2010. http://www.moneycontrol.com/news/indian-adrs/indian-adrs-patnigains-37-wipro-infosys-down_448328.html Last accessed on March 26, 2010.

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