ADR/GDR

PRESENTED BY Akhilesh Maru Bharat Rohra

History
Companies Like: Bajaj Hinduatan,

Apollo,Centurion Bank, Essar Oil, Indiabulls Most Favorable Vehicle In 1990s Privately Placed Exchange Traded Current Position

Depository Receipts

Negotiable Instruments Issued by Depository Bank Represent a Company Traded Freely

Reasons

Expand Market Share Greater liquidity Enhance visibility and image Flexible mechanism Enable employees of subsidiaries companies

Benefits to Investor

Same Currency Diversification without obstacle Elimination of charges Familiar trade, clearance & settlement Liquidity Avoidance of higher tax

Two-Way Fungibility

Earlier: Convert in to Equity share and then sell the underlying equity Now: Cancel the ADR/GDR, sell the underlying equity and issue new ADR to the extent of ADR Cancelled.

Types of ADR

Sponsored
Unsponsored

Sponsored ADR

Level-I

Purpose/description Trading Regulations and disclosure Advantages/Disadvantages

Level-I
Advantages Simplest Method Over-the-counter (OTC) Market Does Not Require Full SEC Registration No SEC (U.S. GAAP) Financial Disclosure Enjoy The Benefits Of A Publicly Traded Security Lowest Cost To Enter Market

Level-I
Disadvantages

Difficult to develop U.S. liquidity Cannot be used to offer public, equity capital in the U.S. Is not listed on a national exchange (NYSE, Amex)

Level-II

Purpose/description Trading Regulations and disclosure Advantages/Disadvantages

Level-II
Advantage

Provides higher visibility and greater opportunity high-quality shareholder information and full transparency Enhances companys status and profile among analysts, investors and media Currency for potential U.S. mergers and acquisitions

Level-II
Disadvantage

Requires substantive and substantial disclosures to SEC disclosures to law, including GAAP reconciliation Continuing accounting, legal, corporate governance and administrative obligations and costs Continuous Reporting System

Level-III

Purpose/description Trading Regulations and disclosure Advantages/Disadvantages

Level-III
Advantages Highest measure of visibility and publicity Greater opportunity to raise Capital high-quality shareholder information and full transparency Enhances companys status and profile among analysts, investors and media Currency for potential U.S. mergers and acquisitions

Level-III
Disadvantages

Requires substantive and substantial disclosures to SEC, disclosures to law including GAAP reconciliation Continuing accounting, legal, corporate governance and administrative obligations and costs

Rule 144A

Purpose/description Trading Regulations and disclosure Advantages/Disadvantages

Rule 144A
Advantage

Maximizes placement of ADRs to QIBs No SEC review of offering materials U.S. GAAP reconciliation not required Quick, easy and least expensive

Rule 144A
Disadvantages

Limited liquidity in U.S. As a private, restricted security Potential flow back of securities

Regulation S Depositary Receipts

Purpose/description Trading Regulations and disclosure Advantages/Disadvantages

Regulation S Depositary Receipts

Advantages/Disadvantages

Home market disclosure practices Ready access to raise equity funds and distribute securities globally Reach generally limited to institutional investors Potential liquidity imbalances

Establishing An ADR Program

ADR Ratio

Establishing Ratio

What is the Correct Ratio? Can the Ratio be changed?

Critical stages in the process of ADR Issue

Presentation of Consolidated financial accounts to US GAAP Appointment of Legal experts, Lead managers, Investment Bankers and their Due Diligence Preparing the offer document and its vetting by the legal counsels Filing of the offer document and its review by the SEC

Critical stages in the process of ADR Issue

Replying to the comments of SEC and obtaining its clearance Road shows and book running Appointment of domestic and international depositary. Domestic depositary will act as a custodian of the underlying shares Selection of an American Stock Exchange

Critical stages in the process of ADR Issue

Allotment of underlying shares and creation of ADSs. Listing of ADSs on American Stock Exchange. Listing of underlying shares with domestic Stock Exchanges

Role & Responsibility of each Party

Depositary Provide advice/perspective on type of program to execute Provide advice/perspective on exchange or market to list or quote Advise on ratio of ADRs to local shares Appoint custodian File Form F-6 Coordinate with legal counsel, accountants, and investment bankers to ensure all program implementation steps move expeditiously toward completion Prepare and issue certificates and/or direct registration statements Announce ADR program to market: brokers, traders, media, retail/institutional investors via news releases, Internet distribution

Role & Responsibility of each Party

Custodian Receive local shares in issuers home country Confirm deposit of underlying shares Hold shares in custody for the account of depositary in the home market Accountants (Level II and Level III) Prepare non-U.S. issuers financial statements in accordance with, or reconcile to, U.S. GAAP Prepare and review SEC disclosure filings and offering circulars

Role & Responsibility of each Party

Investment banks

Advise on type of program to launch Advise on exchange or market to list or quote Advise on ADR ratio Cover issuer through research reports/promote ADRs to client base Advise on road shows, investor meetings, investors to target Advise on capital market issues Advise on potential merger/acquisition candidates, and other matters such as rights offerings, etc.

Role & Responsibility of each Party

Legal counsel (depositarys and issuers)

Prepare and file required forms and registration statements with the SEC, manage compliance with U.S. securities laws, rules and regulations Prepare offering circular/prospectus Negotiate Deposit Agreement Complete requirements for trading and settlement mechanisms Review road show and shareholder communications materials

Role & Responsibility of each Party

Investor relations advisor/firm Develop long-term plan to raise awareness of issuers program in U.S. Develop communications plan and information materials for launch activities Coordinate with issuers advertising and public relations teams on specific program plans to support and develop company image in U.S.

Maintaining the ADR program

Responsibilities of Issuer

Provides depositary with notices of stockholder meetings and corporate distributions Provides custodian and depositary with notices of annual and special/extraordinary stockholder meetings and corporate distributions including dividends and rights offerings Ongoing compliance with stock exchange and SEC regulations, including disclosure and reporting, and corporate governance requirements Executes U.S.-focused investor relations plan

Mechanics Of ADR Issuance & Cancellation

Trading Of Existing Shares

Buying Selling

Issuance Cancellation Liquidity

RBI Guidelines

Regulation 4B : Company may sponsor an issue of ADRs/GDRs with an overseas depository against shares held by its shareholders subject to compliance guidelines issued by the Central Government from time to time. The Operative Guidelines notified by the Government of India, Ministry of Finance Utilization of ADR/GDR proceeds from the acquisition of shares in the disinvestment process

Guidelines for ADR/GDR issues by the Indian Companies

Divestment by shareholders of their holdings of Indian companies, in the overseas markets would be allowed through the mechanism of Sponsored ADR/GDR issue in respect of:

Indian companies listed in India; Indian companies not listed in India but which are listed overseas.

Issued against block of existing shares held by shareholders Option to the Shareholdes Facitlity to be offered equally to all shareholders (No Special Privilege)

Guidelines for ADR/GDR issues by the Indian Companies

Special Resolution required Proceeds of issue to be repatriated into India within one month after the closure of the issue Issue of ADR/GDR would be Reckoned as FDI Such divestment would need to confirm to the FDI sectoral policy and the prescribed sectoral cap as applicable Approval of FIPB is required

Guidelines for ADR/GDR issues by the Indian Companies

Other mandatory approvals under the Companies Act If ADR/GDR is issued in more than one tranche, it would be considered as different transactions ADR/GDR to be kept in Escrow account After completition, full details to be submitted to Exchange control department of RBI

Guidelines for ADR/GDR issues by the Indian Companies

The issue related expenses The tax provision of the Income Tax Act, which is applicable to non-resident investors for ADR/GDR offering against issue of fresh underlying shares Resident shareholders divesting their holdings will be subject to Capital Gain tax provisions applicable under the Income Tax Act

Case Study

Satyam Computers

Satyam Computers

On may 15, 2001 Issue of 16.7 Mn. ADS Ratio 2:1 Issue was Oversubscribed 7 times Initially listed at $11.16 Raised $161.6Mn

Satyam Computers
Objectives

Raised Foreign Currency Provide Liquidity Attract attention of global/ technology investors Eliminate the perception of low float stock

Case Study

Reliance Energy

Reliance Energy

On March 6, 1996 Issue of 8.68 Mn. ADS Ratio 3:1 Listed on London Stock Exchange Initially listed at $14.40 Raised $125 Mn

Reliance Energy

One of the Cash Rich Companies Profitable form the Beginning High revenue generation per month Covering More than 5 million Consumers Covering area of 124300 Sq. Km

Reliance Energy
Objective

To Generate Foreign Exchange for the *** Brand Recognition