CHAPTER NO: 1 INTRODUCTION

CHAPTER NO: 1

INTRODUCTION

MEANING OF DEPOSITORY RECEIPT:-

Depository Receipts are a type of negotiable (transferable) financial security,

representing a security, usually in the form of equity, issued by a foreign publicly-listed

company.  However, DRs are   traded on a local stock exchange though the foreign

public listed company is not traded on the local exchange. 

CONCEPT OF DEPOSITORY RECEIPT

As the country grows and expands with the globalization of the economy, one

important aspect with regard to the investment opportunities available to investors is

the introduction of depository receipts(DRs) as an investment alternative.

A DR is a tradable instrument that represents an ownership interest in securities of a

foreign issuer typically trading outside its home market.

Most common types of depository receipts are the American depository receipts(ADRs)

and global depository receipts (GDRs). ADRs are issued by the united states (US) in

lieu of a non-US company’s shares which are traded on the US exchange although the

companies itself are not listed on the US exchange.

The DRs which are not listed on US exchange but in other country’s exchanges most

commonly in London or Luxemburg are termed as Global depository receipts (GDRs).

A depository receipt where the issuing bank is European will sometimes be called a

European depository receipt (EDR). While by creating a depository receipts program,

the companies are able to gain the flexibility and access they need to achieve the

company’s strategic goals it also hold special appeal for investors because they make

investing in a company beyond the investor’ home borders easy and convenient.

According to the placement planned, depository receipts are classified into three

categories, as follows

Global Depository Receipt (GDR):-

Which can be simultaneously issued to investors in two or more countries

American Depository Receipt (ADR):-

Which are issued only to investors in America

Indian Depository Receipt (IDR):-

Which are issued only to investors in India

Depository Receipts listed and traded in US markets are known as American

Depository Receipts (ADRs) and those listed and traded elsewhere are known as Global

Depository Receipts (GDRs).

In Indian context, DRs are treated as FDI.

CHAPTER NO: 2 CONCEPTUAL DATA

CHAPTER NO: 2

CONCEPTUAL DATA

How do Depository Receipts Created?  

When a foreign company wants to list its securities on another country’s stock

exchange, it can do so through  Depository Receipts (DR) mode. 

To allow creation of  DRs, the shares of the foreign company, which the DRs represent,

are first of all delivered and deposited with the custodian bank of the depository

through which they intend to create the DR.  

On receipt of the delivery of shares, the custodial bank creates DRs and  issues the 

same to investors in the country where the DRs are intended to be listed. These DRs are

then listed and traded in the local stock exchanges of that country.

MEANING OF ADR

Every company is interested to get investment from developed countries investors.

Simply, I can say that if my company name is Accounting Education Corporation and I

have registered this company in Indian Company registrar by making small association

of my friends. After this I can sell my company’s shares in Indian share market. But If I

want to make large scale company, for fulfill my other business aims like spreading

quality accounting education at international level, I need to buy high infrastructure.

For this I need money. Money can be received from selling large number of shares in

developed countries. USA is also developed country. Every dollar will become in India

Rs. 45, suppose if I sell 100 shares of $ 1 each, then it means I have received Rs. 4500.

But USA does not allow every company to trade in USA. For trading in USA, I need

ADR.

Definition of ADRs

American depository receipt is the receipt for trading of non US Company in the stock

market of USA. If any non USA company is interested to trade in USA stock market,

then it can receive ADR level one, ADR level two and ADR level three. ADR for level

one can easily get after accepting the conditions of SEC of USA but major problem is

that this ADR can only use for getting investment from USA and it cannot be used for

getting investment money from any other country. It is the reason that Indian company

prefers to get GDR instead of ADR. No one can sell shares with GDRs as the substitute

of ADRs. Any company can start trading in USA stock exchange after buying ADRs

from New York Stock exchange or NASDAQ.

FEATURES OF ADR

American Depository Receipts popularly known as ADRs were introduced in

the American market in 1927.

ADR is a security issued by a company outside the U.S. which physically

remains in the country of issue, usually in the custody of a bank, but is traded on

U.S. stock exchanges.

An ADR can be described as a negotiable derivative instrument, traded on a US

exchange, issued by a US bank, representing specified number of shares of

foreign company

ADRs are always denominated in US dollars and are normally issued only to

US residents.

The underlying shares of the foreign company represented by an ADR are

called American Depository Shares (ADS)

The relationship between the ADR and underlying shares is referred to as ADR

ratio.

ADRs are listed on the NYSE, AMEX, or NASDAQ

ADVANTAGES OF ADRs

ADRs can be bought and sold just like shares

You don't need a foreign brokerage account or a new broker; you can use the

same broker that you normally deal with.

Prices for ADRs are quoted in U.S. dollars, and dividends are paid in dollars.

ADRs trade during U.S. market hours and are subject to similar clearing and

settlement procedures as American stocks.

You can customize your portfolio however you like, depending on which

countries or sectors you are interested in.

DISADVANTAGES OF ADRs

ADRs have some important limitations and drawbacks.

Limited selection:

Not all foreign companies are available as ADRs. For example, Japan's Toyota

Motor has an ADR, but Germany's BMW does not.

Liquidity:

Plenty of companies have ADR programs available, but some may be very

thinly traded.

Exchange rate risk:

While ADRs are priced in dollars, for sake of convenience, your investment is

still exposed to fluctuations in the value of foreign currencies.

Because ADRs are like stocks, you need to buy enough of them to ensure

adequate diversification.

So if you don't have enough investment capital to spread around, say 25 to 30

ADRs (or more), you won't be able to create a truly diversified portfolio on your

own.

Types of ADR

Unsponsored Sponsored

level 1 level 2 level 3 Restricted

Section 144A "S"

TYPES OF ADR:-

A) Unsponsored ADR:-

With an unsponsored ADR, the custodian bank buys shares of the foreign company,

brings the shares into the United States and then issues ADR shares to U.S. investors.

The foreign company does not support or authorize an unsponsored ADR. While a

sponsored ADR can only have one custodian bank, multiple banks can choose to issue

unsponsored ADRs of a single foreign company.

Multiple ADRs for a foreign stock can result in differing ADR share prices and

dividend payment amounts. Unsponsored ADR shares only trade over the counter.

B) Sponsored ADR:-

With a sponsored ADR, the foreign company initiates and supports the ADR program

in the United States.

The company must meet certain Securities and Exchange Commission reporting

requirements.

With a sponsored ADR the foreign company knows how many of its shares are in the

ADR program and has access to investors owning the shares.

Only sponsored ADRs can be listed on the stock exchanges, the New York Stock

Exchange and NASDAQ. However, some sponsored ADRs list on the over-the-counter

-- OTC -- markets.

1. Sponsored Level 1 ADR Program:

This is the first step for an issuer. In this instrument only minimum disclosure is

required by the SEC. The issuer is not allowed to raise fresh capital or list itself on any

of the National Stock Exchanges.

2. Sponsored Level 2 ADR Program:

The Company is allowed to enlarge the investor base for existing shares to greater

extent. But significant disclosure has to be arranged. The Company now can test itself

on American or New York Stock Exchange.

3. Sponsored Level 3 ADR Program:

This level is to raise fresh capital through public offering in the US capital market.

4. Restricted ADR

In addition to the sponsored ADR issues a company can also access the US and

other capital markets through ADR program falling under rule 144 or

regulation ‘S’ of the SEC.

These issues have certain limitations in terms of target investors etc.

a) Rule 144:

This rule provides for raising capital through private placement of ADRs with

large institutional investors called qualified institutional bodies (QIB’s).

Such issues operate at Level 1 status and do not require fulfillment of GAAP standards.

b) Regulation ‘S’:

Regulation ‘S’ provides for raising capital through the placement of ADR’s to

offshore non-US investors.

Section ‘S’ of the SEC regulation permits ADR’s to be issued to individuals and

corporate entities without any restrictions outside the US.

For example:-

Let's assume the ADRs of XYZ Company, a French company, pay an annual cash

dividend of 3 euros per share. Let's also assume that the exchange rate between the two

currencies is even-meaning one Euro has an equivalent value to one dollar.

XYZ Company's dividend payment would therefore equal $3 from the perspective of a

U.S. investor. However, if the euro were to suddenly decline in value to an exchange

rate of one euro per $0.75, then the dividend payment for ADR investors would

effectively fall to $2.25. The reverse is also true.

If the euro were to strengthen to $1.50, then XYZ Company's annual dividend payment

would be worth $4.50.

COMPANIES THAT HAVE ISSUED ADRS ARE:

1.     Dr. Reddys

2.     HDFC Bank

3.     ICICI Bank

4.     Infosys Technologies

5.     MTNL

6.     Patni Computers

7.     Tata Motors

8.     VSNL

9.     WIPRO

MEANING OF GDR

GDR is a depository receipt sold outside of the United States and outside of the home

GDRs

country of the issuing company.

Definition of GDRs

GDRs mean global depository receipts. It is negotiable and transferable from one body

to another. It is also evidence of ownership of a company's shares. When a

bank purchases shares of foreign company, at that time it issues a certificate, that

certificate is called global depository receipt.

Suppose A USA based company wants to buy the shares of Indian company, then it

only possible by getting GDRs. USA Company can buy Indian company shares by the

help of his bank. Bank takes some charges and issues GDR.

Importance of GDRs

If any company gets GDRs for his purchased shares, then these can be sold in any stock

market of world through global network of banks and financial institutions.

Global Depositary Receipts (GDRs) give power to investors and companies access to

two or more markets, most frequently the US market and the Euromarkets, with one

security. GDRs are most commonly used when the company is raising capital in the

local market as well as in the international and US markets, either through private

placement or public offerings.

Securities and Exchange Commission of USA has allowed USA companies and also

foreign companies to buy and sell shares through GDRs. Among the Indian Companies,

Reliance Industries Ltd. was the first company to get funds through a GDR issue, after

this many other Indian Companies like Infosys, WIPRO AND ICICI have started to

raise funds via GDRs. 

It is the good way for getting foreign investment for developing economy.

FEATURES OF GDR

First GDR was issued in 1990.

GDR can be issued in any freely convertible currency

Holders of GDRs do not acquire any voting rights.

Proceeds of GDR issue are permitted to be used for any normal business activity

but cannot be used for trading in securities or in real estate.

Investments in GDRs entitle the holders to all corporate benefits such as

dividend, bonus shares, right shares etc.

GDRs can be sold in multiple markets simultaneously.

GDR do not require approval of local regulatory authority.

GDR issues are normally listed on international stock exchange in London and

Luxemburg.

GDR issue of Indian companies is classified as Foreign Direct investment

(FDI).

Among the Indian companies Reliance Industries Ltd. was the first company to

raise funds though a GDR issue.

ADVANTAGES OF GDRs

GDRs, like ADRs, allow investors to invest in foreign companies without

worrying about foreign trading practices, different laws, or cross-border

transactions.

GDRs offer most of the same corporate rights, especially voting rights, to the

holders of GDRs that investors of the underlying securities enjoy.

 Other benefits include Easier trading, the payment of dividends in the GDR

currency, which is usually the United States dollar (USD).

 Corporate notifications, such as shareholders’ meetings and rights offerings,

are in English.

Another major benefit to GDRs is that institutional investors can buy them,

even when they may be restricted by law or investment objective from buying

shares of foreign companies.

GDRs also overcome limits on restrictions on foreign ownership or the

movement of capital that may be imposed by the country of the corporate

issuer, avoids risky settlement procedures, and eliminates local or transfer

taxes that would otherwise be due if the company’s shares were bought or sold

directly.

There are also no foreign custody fees, which can range from 10 to 35 basis

points per year for foreign stock bought directly.

GDRs are liquid because the supply and demand can be regulated by creating

or cancelling GDR shares.

DISADVANTAGE OF GDRs

GDRs have foreign exchange risk if the currency of the issuer is different from the

currency of the GDR, which is usually USD.

PARTIES INVOLVED IN GDR ISSUE:

1. Lead manager:

A lead manager is usually an investment bank appointed by the issuing company.

This institution has the responsibility of collecting and evaluating information about the

issuing company documentation and presenting to investors a current picture of the

company’s strengths and future prospects. Lead managers may involve other managers

to subscribe to the issue.

2. Depository:

A depository bank is a bank organized in the United States which provides all the stock

transfer and agency services in connection with a depository receipt programme.

This function includes arranging for a custodian to accept deposits of ordinary shares,

issuing the negotiable receipts which back up the shares, maintaining the register of

holders to reflect all transfers and exchanges and distributing dividends in U.S. dollars.

3. Custodian:

An agent that safe keeps securities for its customers and performs related corporate

action services.

With regard to DRs, the custodian may be the overseas branch, affiliate or

correspondent of the depository and is responsible for safekeeping of the securities

underlying the DRs and performing related corporate action services.

4. Clearing system:

It is like registrars who keep record of all particulars of GDRs for investors.

In US, Depository Trust Company (DTC) does this function.

In Europe there is Euro CLEAR (Brussels)- An International clearing organization,

located in Brussels, responsible for holding, clearing and settling international

securities transactions and similarly DEDEL in (London).

STEPS IN GDR ISSUE:

GDRs are the best way of raising finance from USA and other European countries'

investors. No Indian company has right to sell their shares in foreign capital market

without GDRs. So, it is very necessary to know the procedure of issue GDRs. Only

GDRs connects foreign investors with Indian Companies. 

Following are the simple steps of issuing GDRs :

1st Step 

To find the Depository bank

Depository bank has only right to issue the GDRs. So, it is necessary to find depository

bank in USA and other European countries.

2nd Step

Issue the Shares to Depository bank

Shares cannot issued to foreign investors. But shares are issued to depository bank and

depository bank will accept the shares of Indian companies as the custodian of foreign

investors. 

3rd Step

Deposit the fees 

For issuing GDRs, either investors or Company has to deposit the fees for issuing the

certificate named global depository receipt. 

4th Step 

Issue of GDRs and Record

Depository bank has right to issue one GDR certificate for 2 to 10 shares. The issue of

GDRs to those investors who will pay the amount of shares of Indian companies. After

this, it will be assumed that USA or other foreign countries' investors have acquired the

shares of Indian companies. Indian company gets money of shares through depository

banks. On the other side, foreign investors' name registered and they will get dividend

through this bank in USA Dollar. Not only Indian companies but many other

developing countries' companies are using same procedure for getting fund through

GDRs. This year, a Kuwaiti investment company successfully issued shares in the form

of Global Depository Receipts (GDRs) to foreign investors. After issuing GDRs, these

shares can deal in any foreign stock exchange and GDRs will be one of the security

type in stock exchange list of stocks. 

Tips and Warnings

Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to

issue its Rupee denominated shares to a person resident outside India being a

depository for the purpose of issuing Global Depository Receipts (GDRs) and/ or

American Depository Receipts (ADRs).

Purchasing the shares through GDRs will have the risk of currency and all currency risk

will be of Investors and not of depository bank or company will suffer currency risk.

For example, if the dollar increases in value against the Indian currency, the dollar

value of Indian's stock will decline even if the share price in Indian Rupees does not.

So, this currency loss will be USA Investor.

COMPANIES THAT HAVE ISSUED GDRS:

1.     Dr. Reddys

2.     Bajaj Auto

3.     HDFC Bank

4.     Hindalco

5.     ICICI Bank

6.     Infosys Technologies

7.     ITC

8.     L&T

9.     MTNL

10. Ranbaxy Laboratories

11.  State Bank of India

12. VSNL

13.  WIPRO

DISTINGUISH BETWEEN GDR & ADR:

GDR ADR

1.GDRs can be sold in multiple markets

simultaneously.ADRs can be sold only in US market.

2.GDRs can be denominated in freely

convertibility currency.

ADRs can be denominated only in US

dollars.

3.

The depository bank issuing GDR can be

located in any country outside the country

of issuing company.

The depository bank issuing ADR has to

be located only in the US.

4.

No approval is required from local

regulatory agency where the GDRs are

issued

ADRs are issued only with the approval

SEC.

5.There are no sub classification in case of

GDRs.

ADRs are classified in terms of approval

level provided by the SEC i.e. sponsored

or unsponsored.

6.

1. Many Indian Companies listed foreign

stock market through foreign bank’s

GDR. Names of these Indian

Companies are following :- (A) Bajaj

Auto (B) Hindalco (C) ITC ( D) L&T (E)

Ranbaxy Laboratories (F) SBI

2. Some of Indian Companies are listed

in USA stock exchange only through

ADRs :- (A) Patni Computers (B) Tata

Motors

MEANING OF IDR

IDR’s are financial instruments that allow foreign companies to mobilize funds

from Indian markets by offering entitlement to foreign equity and getting listed on

Indian Stock Exchange.

This instrument is similar to the GDR and ADR. IDRs need to be registered with

SEBI.

The Government opened this avenue for the foreign companies to raise funds from

the country, as a step towards globalizing the Indian capital market and to provide

local investors exposure in global companies.

ADVANTAGES OF IDRs

1.   For Indian Investors and Rights

No resident Indian individual can hold more than $200,000 worth of foreign

securities purchased per year as per Indian foreign exchange regulations.

However, this will not be applicable for IDRs which gives Indian residents the

chance to invest in an Indian listed foreign entity.

Additional key requisites for investing in foreign securities such as a securities

trading account outside India to hold foreign securities, know your customer

norms (KYC) with foreign broker and foreign bank account to hold funds are

generally too cumbersome for most Indian investors. Such requirements are

avoided in holding IDRs.

Whatever benefits accrue to the shares, by way of dividend, rights, splits or

bonuses would be passed on to IDR holders also, to the extent permissible under

Indian law. 

2.    For International Issuers

It provides enhanced local branding and target business opportunities in India.

It gives access to the large Indian capital pool and creates opportunities for

future fund raising.

It provides a currency for any acquisition in India which otherwise would be

possible only through cash.

DISADVANTAGES OF IDRs

There is the possibility of IDR issues being undersubscribed if they are not well

marketed or fail to catch the imagination of investors. 

In addition, the challenges mentioned below are certain challenges with respect to the

issuance of IDRs.

1.    Stringent eligibility norms: 

The stringent eligibility criteria, disclosure and corporate governance norms (Although

in the investor’s interests, they compare unfavourably with listing norms on other tier II

global exchanges such as Luxembourg, London’s Alternate Investment Market (AIM)

and Dubai. This could result in higher compliance costs for companies seeking to tap

the Indian capital markets).

2.    Voting Rights: 

It is not entirely clear whether IDR holders will have voting rights or not – the SEBI

guidelines do not specifically mention voting rights, it leaves that to the discretion of

the issuer.

3.    Market: 

Indian financial markets are still considered volatile and contain emerging market risk.

COMPANIES THAT HAVE ISSUED IDRs

Standard Chartered PLC

DIFFERENCE BETWEEN ADR, GDR AND IDR

The difference between ADR, GDR and IDR is only in the places where the

Depositories are listed. 

If the Depository Receipt is to be traded in India, then it is called Indian

Depository Receipt (IDR).

If the Depository Receipt is to be traded in US, then it is known as American

Depository Receipt (ADR).

If the Depository Receipt is to be traded elsewhere in the world, then it is

known as Global Depository Receipt (GDR).

CHAPTER NO: 3 CONCLUSION

CHAPTER NO: 3

CONCLUSION

Depository receipt give the opportunity to add the benefits of foreign investment while

avoiding the unnecessary risks of investing outside your own borders, you may want to

consider adding these securities to your portfolio.

ADR and GDR have emerged as an innovative instrument of investment.

It may also be concluded that for a developing country like India, these depository

receipts have enabled the investors as well as the companies to tap the global market

and become an international player.

CHAPTER NO: 4 APPENDIX

CHAPTER NO: 4

APPENDIX

BIBLIOGRAPHY

International banking and finance by Himalaya publication

International banking and finance by Vipul publication

WEBLIOGRAPHY

www.investopedia.com

www.outshiners.blogspot.com

www.deepakbfm.blogspot.com

www.elearning.nokomis.in

www.allbankingsolution.com

www.svtuition.org

www.investinganswers.com