ADR and GDR : corporate financing

ADR & GDRGroup – 5

Flow of PresentationDR - Depository Receipts

Origin

Issuance of a Depository Receipt

Benefits to the issuer company and the

investors

Types of Depository ReceiptsADR – American Depository Receipts

What is ADR

Structure/Types of ADR

Ratio of ADR

Pricing of ADR

Process of issuing ADR

Approval required for issuing depository

receipts

2

Cancellations of ADR’s

Fungibility

Head Room

Risks Associated with ADR

Trading of ADR’s

Arbitrage Opportunities

GDR – Global Depository Receipts

What is GDR

Difference between ADR & GDR

IDR- Indian Depository Receipts

Standard Chartered case Study

FCCB’s

Difference between FCCB’s & GDR

Case Study – Infosys

Introduction

Companies around the world like to raise capital abroad.Objectives being:

Cross border acquisitions Undertaking new projects abroad Expansion and Modernization of Existing Projects abroadFunding JVs & Subsidiaries abroad

3

Depositary Receipt

A depositary receipt (DR) is a type of negotiable

(transferable) financial security that is traded on a local

stock exchange but represents a security, in the form of

equity, that is issued by a foreign publicly listed

company. 4

Origin of DR’sIn 1920’s in USAThe first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges on the New York Curb Exchange, the American Stock Exchange's precursorInvestor’s demand of diversifying their financial resources internationallyDifficulty & Risk of investing in original foreign securities by American investors & brokersTap International Equity of Foreign Firms through an organized mechanismADR Created in 1927 by JP Morgan (Depository) in USA for a British Retailer Selfridges & Co (Issuer) 5

https://en.wikipedia.org/wiki/J.P._Morgan

https://en.wikipedia.org/wiki/Selfridges

https://en.wikipedia.org/wiki/American_Stock_Exchange

Depositary ReceiptA depository receipt trades on a local stock exchange, but a custodian bank in the foreign country holds the actual shares.

The DR, is a physical certificate, allows investors to hold shares in equity of other countries.

One of the most common types of DRs is the American depositary receipt

6

http://www.investopedia.com/terms/d/depository.asp

http://www.investopedia.com/terms/r/receipt.asp

http://www.investopedia.com/terms/c/custodian.asp

http://www.investopedia.com/terms/a/adr.asp

How Does the DR Work?The DR is created when a foreign company wishes to list its already publicly traded shares or debt securities on a foreign stock exchange

Before it can be listed to a particular stock exchange, the company in question will first have to meet certain requirements put forth by the exchange.

Initial public offerings, can also issue a DR.

DRs can be traded publicly or over-the-counter7

http://www.investopedia.com/terms/i/ipo.asp

http://www.investopedia.com/terms/o/otc.asp

Basic Mechanism

Benefits

Issuer

Creates, broadens or diversifies investor baseEnhances visibility and global presenceIncreases liquidityDevelops and increases research coverage of your companyAccess capital in International Markets

Investor

Easy to purchase & holdTrades & settles in the same manner as any other security in the investor’s home marketGlobal / sector diversificationEliminates or reduces global custody safekeeping chargesPays dividends & delivers corporate action notifications in the investor’s home currency & language

9

Types of DRs

Depository Receipts

American Depository Receipts (ADRs)

Global Depository Receipts(GDRs)

10

AmericanDepositoryReceipts

American Depository Receipts (ADR)ADR’s are a negotiable instrument that represents ownership of shares (ADSs) in a non-US company.

An ADR is a Stock of a foreign company which is listed on the following stock exchanges in US New York Stock Exchange (NYSE), American Stock Exchange (AMEX), NASDAQ

ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies.

ADRs are dollar-denominated securities that trade, clear and settle like any other US security

Avoids inconvenience of Cross border & Cross Currency Transactions12

American Depository Receipts (ADR)ADRs do not eliminate the currency and economic risks

Securities of a foreign company that are represented by an ADR are called American depositary shares (ADSs).

For an ADR issue to become listed and trade on a major U.S. exchange, it must be sponsored by the underlying corporation. If not, the ADR issue is likely to be traded over the counter.

13

Types of ADR/ Structure ofADR

14

Types of ADR

Sponsored ADRs

Unsponsored ADRs

Privately Placed

Rule 144ALevel II Level IIILevel I

OffshoreReg S

Restricted Programs

Unsponsored Depositary ReceiptsAn American depositary receipt (ADR) issued by a depositary bank without the involvement or participation - or even the consent - of the foreign issuer whose stock underlies the ADR.

Usually established by depositary banks in response to investor demand.

Generally trade over-the-counter (OTC) rather than on United States exchanges.

Considered less favorable to issuers and investors due to lack of control by issuers

Multiple programmes: It is possible that competing depositary banks will create multiple unsponsored ADR programs for the same issuer 15

Unsponsored Depositary ReceiptsNo additional reporting/requirements (i.e. no SOX, no 20-F, etc.)

Exemption under Section 12 (g)

Creates a roadblock to the Issuer

Shareholder benefits and voting rights may not be extended to the holders of these particular securities

16

Sponsored ADRAn American depositary receipt (ADR) issued by a bank on behalf of the foreign company whose equity serves as the underlying asset.

Unsponsored ADRs can only trade on the over-the-counter market, while sponsored ADRs can be listed on major exchanges.

There is a direct involvement of foreign company

Treated just like common stock, with complete voting rights, and only denominated in the U.S. dollar.

Usually traded through major exchanges like NYSE and AMEX or OTC 17

Sponsored ADRLEVEL I (‘OTC Facility’)

Traded in the U.S. over-the-counter (OTC) market with prices published in the Pink Sheets

Not listed on any US securities exchange such as the New York Stock Exchange or NASDAQ

Available for Retail Investors

Bid & Ask Prices

Expansion of Current Market base18


No reporting of accounts under U.S. GAAP or provide full SEC disclosure Maintain home market accounting and disclosure

standards. Easiest and less expensive

Control over the ADR’s – Depository AgreementThe company is not required to issue quarterly or annual reports in compliance with U.S. GAAPCompanies with shares trading under a Level 1 program may decide to upgrade their program to a Level 2 or Level 3 program for better exposure in the United States markets.

19

https://en.wikipedia.org/wiki/SEC_filings

https://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles_(United_States)

Over The Counter (OTC)

OTC stocks are generally unlisted stocks

Inability to meet the listing requirements

Traded over the Counter Bulletin Board (OTCBB) or on the pink sheets

Decentralized

20

OTC MarketSecurities are organised into 3 market places

OTC QX - The Best Marketplace with Qualified Companies

OTC QB - The Venture Stage Marketplace with Current U.S. Reporting Companies

OTC Pink - The Open Marketplace with Variable Reporting Companies

21

Pink Sheets

The "Pink Sheets" is an electronic quotation system that displays quotes from broker & dealers for many over-the-counter (OTC) securities

Bid and ask quotation prices A daily publication compiled by the National Quotation Bureau, Market

makers and brokers Published by Pink Sheets LLC Stock symbol; “.PK” Categorized into

Current Information Limited Information - No Information -

22


To establish a Level 1 sponsored ADR program, the following three principal steps are required:

File Form F-6 with SEC, register the DR’s with SEC

Sign a deposit agreement

Qualify for a Rule 12g3-2(b) exemption;

23

Form F– 6Basic registration of DRs with the SEC for Level I, II and III ADRs

ADRs may be registered under the Securities Act on Form F-6 if four conditions are satisfied :

The deposited securities are those of a foreign issuer; The holder of the ADR has the right to withdraw the deposited securities at

any time, subject to temporary delays, payment of fees and compliance with legal requirements;

The deposited securities are exempt from Securities Act registration and freely tradable in the United States (for example, they are not restricted securities under Securities Act Rule 144) or are separately registered under the Securities Act; and

As of the filing date of the Form F-6, the foreign company is reporting under the periodic reporting requirements of Section 13(a) or 15(d) of the Exchange Act or exempt from registration under Exchange Act Rule 12g3-2(b). 24


ADVANTAGES OF LEVEL I ADR► Same financial information & disclosures as per home market► Lowest cost to enter market► Simple to execute

DISADVANTAGES OF LEVEL I ADR► Limited visibility in US as it trades in OTC market► Not listed in NYSE, AMEX, NASDAQ► Cannot be used to offer public equity capital in the US

25

Sponsored Depositary Receipt LEVEL II (‘Listing Facility’)

Enables companies to list their ADRs on NASDAQ, AMEX, NYSECreated from deposits of Ordinary shares in the issuers Home Marketforeign company wants to set up a Level 2 program, it must file a registration statement with the SEC and is under SEC regulationHigher visibility, More active trading; greater liquidityRequires full registration with SEC Can be Promoted & Advertised

26


Level II ADR programs must comply with the full registration and reporting requirements of the SEC's Exchange Act, which entails the following:

Form F-6

Annual reports and any interim financial

Form 20-F

Form 6-K, Interim financial statements and current developments

27


ADVANTAGES OF LEVEL II ADR Provides higher visibility Greater opportunity to diversify issuer’s US investor base Enhances company’s status & profile

DISADVANTAGES OF LEVEL II ADR Substantial disclosures to SEC in accordance to US laws &

US GAAP Many legal, accounting & corporate obligations to fulfill Takes longer time as compared to level 1 & unsponsored

program 28

SPONSORED DEPOSITARY RECEIPT LEVEL III (‘OFFERING FACILITY’)

Enables companies to list their ADRs on NASDAQ, the Amex, NYSE

It allows the issuer to raise capital Expansion of Current Market Base

Leads to much greater visibility in the U.S. market Highest Level, Adhere stricter rules, Most expensive to

establish Can be actively Promoted & Advertised

29


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

Form F-6 registration statement, to register the ADRs Form F-1, including a prospectus, the offering price for the securities and the plan for distributing the shares Form 20-F

30


ADVANTAGES OF LEVEL III ADR Provides higher visibility Greater opportunity to diversify issuer’s US investor base Enhances company’s status & profile Highest measure of visibility & publicity

DISADVANTAGES OF LEVEL III ADR Substantial disclosures to SEC in accordance to US laws &

US GAAP Takes longer time to establish & Most expensive

31

Restricted Programs

Foreign companies that want their stock to be limited to being traded by only certain individuals may set up a restricted program.

There are two SEC rules that allow this type of issuance of shareso Rule 144-Ao Regulation S

ADR programs operating under these 2 rules make up approximately 30% of all issued ADRs.

32

Rule 144A(Privately placed ADRs)

Rule 144A programs provide for raising capital through the private placement of Depositary Receipts with large institutional investors (QIBs) in the U.S.

Does not require full SEC registration Privately placed with QIBs under the rule 144A market Quoted on PORTAL Not accessible to the general public It allows the issuer company to raise capital in the U.S. without

adhering to the strict regulations required by Level 3 ADRs At least two years from the last deposit of shares in the Rule 144A

ADR facility, the ADRs issued under the Rule 144 program may be eligible to be merged into an unrestricted ADR facility. 33

ADVANTAGES OF Rule 144A Easy and quick to establish No financial reporting Low cost to establish Limited SEC registration

DISADVANTAGES OF Rule 144A Low visibility & Limited Liquidity

Rule 144A(Privately placed ADRs)

34

Regulation S(Offshore ADRs)

Regulation S (Reg S) DRs allow issuers to raise capital in markets outside the United States.

Listed on the London or Luxembourg stock exchanges

Euro market clearing system SEC Regulation S – Restricts US person to trade A Level I program can be established in addition to a Rule 144A

program, and a Regulation S program may be merged into a Level I program after the restricted period has expired

35

36Reg S only(non US) 144 only (US)

Objective

• Raise equity in the International Market outside the US

• Develop and broaden investor base

• Raise equity in the US among QIB’s

• Develop and broaden investor base

Disclosure • Depends on International market selected

• Home Market (unless the investor ask for the US GAAP)

Legal documents

and Exemption

• Depository Agreement• Prospectus prepare as

per the requirement of International Exchange

• Depository Agreement• Exempted from registration

under security Act 1934, as amended, pursuant to 12g3-2(b)

Reporting requirement • Depends on exchange

and/ or regulator

• Under Rule 12g3-2(b),English language versions of home country disclosure must be furnish to the SEC or pasted on the countries Website

Choosing the Right StructureGoal Where? Who? Options

Gain new shareholders

USA Retail InvestorsLevel I ADR

Level II ADR

Outside the USA

Institutional and Retail Investors Reg S

Raise Capital

USAInstitutional Investors Rule 144A DR

Retail Investors Level III ADR

Outside USA Institutional and Retail Investors Reg S

37

ADR Program Description

38

Setting the Ratio

Depository bank sets ratio of US ADR’s per home country share

Ratio can be less than, greater than or equal to 1

The issuer should consider: Industry peers Exchange options Investor appeal

39

RATIO OF ADRs

40

Basis Ratio

Single One ADR issued for 1 Share 1:1

Multiple One ADR issued for 3 shares 1:3

Fraction Two ADR’s issued for 1 Share 2:1

Process for Issuance of ADR

41

Selection of Syndicate Members

DocumentationAppointment of Intermediaries

Approval Requirements

Pre- Marketing

RoadshowsBook Building

Process & Pricing

Offering Circular Listing Task force for

due diligence

Closing of Issue &

Allotment

Post – Issue Support

42

o Approvals of Board of Directorso Board Resolutiono Shareholders consensus

o Approvals of RBIo ADR/GDR issue shall be treated as FDIo Aggregate Foreign Investment would need to be limited to existing

FDI Policyo Furnishing of Information

o In principle consent of Stock Exchanges for listing of underlying shareso Request for listing of underlying shareso Treatment after cancellation

Approval Requirements

► Lead Manager

► Overseas Depository Bank

► Domestic Custodian Banks

► Legal Advisors

► Auditors

► Underwriters

► Listing Agent

43

Appointment of Intermediaries

Roles & Responsibilities

Custodian

Depository

Issuer

Investment banks /Underwriters

1. Provide depositary with notices of stockholder meetings

2. Provides custodian and depositary with notices of annual and special / extraordinary stockholder, dividends and rights offerings

3. On-going compliance with any applicable stock exchange and SEC regulations (in coordination with legal counsel and accountants)

4. Executes US-focused investor relations (non-US-focused in the case of Regulation S GDRs) plan that may include management visits to targeted US investors, the development of sell-side research, and on-going shareholder communications.


Custodian

Depository

Issuer


1. Advise the depositary for complete delivery instructions

2. Registers the shares in the depositary’s account as necessary with the issuer’s transfer agent / registrar

3. Confirms release of local shares upon cancellation

4. Notifies the depositary of corporate actions announced in issuer’s home market

5. Provide depositary with copies of notices of shareholders’ meetings, annual reports

6. Remits dividend payments

7. Maintains and communicates up-to-date local market information on tax withholding, reclaim, regulatory and settlement issues

8. Provides statements of share balances for reconciliation by depositary.


1. Provide advice/perspective on type of program, exchange or market on which to list or quote

2. Advise on ratio 3. Appoint custodian4. File Form F-6 if Level One, Two or Three program5. Review draft registration statement or offering

memorandum, depending upon type of program to be established

6. Coordinate with all partners to complete program implementation

7. Provides stock transfer and registration services & handles depositary receipt holder services

8. Detailed reporting to issuer with information on DR holders, the markets, trends and developments

Custodian

Depository

Issuer


Roles & Responsibilities1. Coordinate with legal counsel on Deposit Agreement

and securities law matters

2. Prepare and issue certificates

3. Solicit market makers (Level I ADR only)

4. Announce DR program to market

5. Dividend Payment

6. Produces tax withholding documents (for ADRs), if applicable.

7. Promotes benefit of investment in depositary receipts to market

8. Serves in M&A transactions as exchange agent or cash depositary

Custodian

Depository

Issuer



(Level II/III/Rule 144A /Regulation S ADRs only)

1. Advise on type of program to launch and exchange or market on which to list or quote

2. Advise on ratio

3. Cover issuer through research reports/promote DRs to investors

4. Advise on roadshows, investor meetings, investors to target

5. Advise on capital market issues

6. Where applicable, advise on potential merger/ acquisition candidates, and other matters such as rights offerings, stock distributions, etc.

Custodian

Depository

Issuer



(Level II/III/Rule 144A /Regulation S ADRs only)

7. If concurrent public offering:Advise on size, pricing and marketing of offering

8. Act as placement agent or underwriter in offering

9. Conduct roadshows with management / introduce issuer to institutional and other investors

10. Line up selected dealers and co-underwriters for offering

Custodian

Depository

Issuer



1. Prepare draft deposit agreement (depositary bank’s counsel) and file required registration statements with the SEC

2. Manage compliance with US securities laws, rules and regulations and perfect any securities law exemptions (if Rule 144A/Reg S program)(issuer counsel)

Legal Counsel (Depositary’s and Issuer’s)

Investor Relations Advisor/firm

Accountants (Level 2/3 ADR’s only


1. Develop long-term plan to raise awareness of issuer’s program in the US

2. Develop communications plan and information materials for launch activities (roadshow and presentations to investors, launch day promotion, meetings with financial media)

3. Coordinate with issuer’s advertising and public relations teams on specific program plans to support and develop company image in the US

Legal Counsel (depositary’s and issuer’s)




1. Prepare issuer’s financial statements in accordance with, or reconcile to, US GAAP

2. Review registration statement or offering circular

Legal Counsel (depositary’s and issuer’s)



o Process A careful analysis of the orders would be conducted Identify investors who are critical to the transaction The ultimate price level would be set at a level where it

seeks to maximize proceeds while ensuring appropriate investor allocations and a healthy aftermarket

53

Closing of Issue & Allotment

SyndicateUnderwriting SyndicateSyndicate MembersSyndicate Manager

Responsibilities Maximize demandOptimize the sustainable offer priceFacilitate orderly marketingAttract key “anchor” investors

54

Selection of Syndicate Members

Duties of team of legal, technical & financial experts :Understanding the issuer’s business

Identifying potential risks

Analyzing of financial statement

Analyzing future prospects of the company

Obtaining information to draft the Prospectus (Offering Circular)

55

Task force for due diligence

o Form F-6 A short document to be filed to register ADRs

o Registration Statement (Form F-1) Filed to US Securities Act of 1933 with the SEC

o Form 8-A A document to be filed so that the securities can be listed on the exchange

56

Listing

NYSEo 1mn shares worth $100 mn or moreo Earned $10 mn over the last 3 years

NASDAQo 1.25 mn shares worth $70mn or moreo $11mn over the last 3 years

London Stock Exchangeo Market cap – 7 lac poundso 3 years audited financial statements 57

Listing Requirements

Background of the companyCapital Structure (existing & future)Financial DataDescription of sharesDeployment of issue proceedsEconomic & regulatory policies of Govt. of IndiaTerms & Condition of ADRMarket price of securitiesStatus of approvalsReport of statutory auditorsTax aspectsDetails of Indian security market

58

Offering Circular/ Prospectus

Objectives Introduce the offering to investors Address key investor concerns Familiarize investors with the investment story To evaluate prospects of issue Helps in making certain important decisions like timing,

size & price of the issue.Process

• Contacting key investors• Meeting with institutional Investors• Feedback Collection• Determine target investors for road show 59

Pre- marketing

It represents meetings of issuers, analysts & potential investors• A series of group presentations to potential institutional investors• One-on-one meetings with key “anchor” accounts

Details about the company is presented• History, Organization Structure• Principle Objects• Business Lines• Position of the Company (Domestic & international)• Past performance & Future plans• Competitors (Domestic & international)• Financial Results & operating profits• Valuation of Shares• Review of Local stock market & economic situations 60

Roadshows

PROCESS : Establish price talkInvestors submit indications of interestAnalysis of demand at various price levels

Pricing depends on:Near future, Earning potentials, Fundamentals governing industryEconomic state of the country , Credit rating of the countryInvestors sentiments, Behavior towards particular countryInterest rateAvailability of exit route

61

Book Building Process & Pricing

o Process A careful analysis of the orders would be conducted Identify investors who are critical to the transaction The ultimate price level would be set

62

Closing of Issue & Allotment

Manage over-allotment option by Green shoe optionSupport investor relationsAftermarket stabilization

63

Post – Issue Support

Corporate Governance rules: Sarbanes-Oxley

Audit Committee requirementsAudit Committee Financial reportCertification of Financial ReportsManagement Assessment of Internal controlsImproper influence of AuditsProhibition on loans to officers and directorsCEO & CFO reimbursement of issuer relating to an accounting restatementDisclosure of Material off Balance sheet transactionsDisclosure of Pro-forma, or non-GAAP financial informationCorrecting Adjustment disclosuresCode of ethics for senior financial officersMateriality, anti-fraud and fair disclosure 64

No. of companies issuing Drs - country-wise

Country-wise Amount of Capital Raised

Issuance of ADR68

Investor (US)

Local Custodian (India)

Local Stock Market (India)

Local Broker (India)

Depositary (USA)

DR Broker(US) 2

1

3

4

56

7

Cancellation of ADR 69

US Investor

US Broker Depository(US)

Custodian(India)

Local Broker(India)

Surrender ADRs

Release Shares

Sell in Home Country

Fungibility of ADR/GDR

Fungibility - A good or asset's interchangeability with other individual goods/assets of the same type.

Forward FungibilityReverse Fungibility

70

One-Way Fungibility

Existed in India prior to 2002

DR investors could convert DRs to underlying shares but could not reconvert back to DRs

Affects liquidity in the DR market

71

Two-Way Fungibility

Conversion of DRs into local shares and vice versa

The GOI permitted two-way fungibility in the 2001-2002 union budget

It is subject to availability of Headroom

72

Effect of one-way and two-way fungibility on the trading volume

Head RoomThe ADRs have only “limited two way fungibility”. What this implies is that ADRs can be freely converted to equity shares, but equity shares in India can be converted to ADRs only to the extent of past conversion of ADRs in that company into shares.

This is technically called “headroom”.

Since every GDR/ADR has a given number of underlying shares backing it, the number of shares qualifying for re-conversion into GDRs/ADRs is limited to the number which were converted into local shares.

Head Room Example

Say company X has an original issuance of 15m ADRs.

The total number of cancellations (which takes place when the overseas investor sells back the DRs to the depository bank for converting them into local shares) is 5m.

Head Room = 5 m

Head Room

The reasoning is that when a company decides to float a GDR/ADR issue, it is subject to sectoral caps set for foreign shareholding in the company and the overseas equity issue has been floated only after being vetted by regulatory agencies and the Foreign Investment Promotion Board (FIPB).

Allowing a free flow of conversions between GDRs/ADRs and domestic shares has been constrained by the want of regulatory for overseas equity issues

The Depository bank provides a daily update on the availability of Head Room on its website

Head room available for re-issuance is monitored by the custodian of the underlying shares in coordination with the depository bank

If Headroom is not available and ADR is trading at a premium then no possibility of Arbitrage opportunity

Trading of ADR/GDR 78

US Investor

Indian Broker to Buys Shares

US Broker Custodian(India)

Overseas Depository

Role of the CustodianProvide a certificate to the RBI and the SEBI stating that the sectoral caps for foreign investment in the relevant company have not been breachedMonitor the total number of ADRs that have been converted into underlying shares by non-resident investorsLiaise with the issuer company to ensure that the foreign investment restrictions, if any, are not being breachedFile a monthly report about the ADR transactions under the two-way fungibility arrangement with the RBI and the SEBI

Arbitrage Strategy

Arbitrage opportunity involves simultaneous buying and selling of equivalent assets in two separate markets in order to profit from discrepancies in their price relationship

ADR/GDR trading at premiumSell in International MarketBuy in domestic market

ADR/GDR trading at discountSell in DomesticBuy in International market

80

Example of Potential Arbitrage ProcessAssumptions:ADR Price: $10.06 (ADR at a premium)ORD Price (in USD): $10.00Depositary Fee to Issue: 3c per ADR

81

Step Action Result

1. Identify Opportunity

2. Borrow ADR and sell it short for $10.06 ADR borrowed and sold for $10.06

3. Buy ORD for $10.00 (implied FX rate included) $

$10.06 - $10.00 = $0.06 and one ORD

4. Exchange ORD for ADR at Depositary and pay 3c per ADR

$0.06 - $0.03 = $0.03 and one ADR

5. Return borrowed ADR and close position Return ADR to Lender and profit 3c

Reasons for difference in prices of ADR & Local Shares

When there is heightened buy/sell demand in one market over the other, the ADR/Local share will trade at a relative premium/discount as the case maybe.

Differences in liquidity between the two markets

Restriction on the number of shares that can be owned by foreigners

Limitations to Arbitrage OpportunitiesNon-synchronous trading sessionIndian market regulationTransaction costs

Direct Trading Costs: Includes the commissions, taxes, foreign exchange rate commission and fees involved with buying and selling in each market (including brokerage)Global Custodian and Safe Keeping Fees: The arbitrageur has to deposit the shares with a global custodian and pay a fixed one time settlement fee $115 per trade and pay a separate global safe keeping feeDR Conversion Fees: The arbitrageur has to instruct the global custodian to convert the shares to GDRs by giving instructions to the depository bank which charges a maximum of $0.05 per DR issuance fee

83

Risks Involved

Political Risk

Exchange Rate Risk

Inflationary Risk

84

Specimen of ADR Certificate

86Major Indian Companies On The US Exchanges

NYSE

NASDAQ

GlobalDepositoryReceipts

GDRs

Beyond the ADR, there is a second category of DR. A Global Depositary Receipt (GDR) represents a bank certificate issued in more than one country for shares in a foreign company

The term GDR is used throughout the globe and designates any foreign firm that trades on an exchange outside its home country

The basic advantage of the GDRs, compared to the ADRs, is that they allow the issuer to raise capital on two or more markets simultaneously, which increases his shareholder base

About GDRs

Listed on London Stock ExchangeLuxemburg Stock ExchangeFrankfurt Stock Exchange

London Stock Exchange dominates

Other exchanges which will list GDRs include Dubai International Financial Exchange (DIFX), Singapore Stock Exchange Hong Kong Stock Exchange

89

About GDRs

They are also known as:European Depository ReceiptsInternational Depository Receipts

Either issued in US Currency or in the currency of the country the GDR is listed in.

Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York

90

Structure

The most significant difference between the ADR and GDR lies in their structures

There are two types of GDRs –The Reg S Depositary ReceiptsThe pairing type

Reg S Type Depositary ReceiptsThe Reg S Type Depositary Receipt is the equivalent of the ADR.It is issued to the public through a sponsor bank/ brokerageOnce issued, this GDR is listed on either the Luxembourg Stock Exchange or the London Stock ExchangeThis type of a GDR is open for every kind of investorUnlike ADRs, where each type of ADR determines the investors that can trade it, the Reg S type GDR can be traded from any kind of investor to any kind of investor

Pairing TypeThis GDR is a combination of the Reg S type GDR and a Rule 144A ADR. So when one such GDR is sold, it essentially implies the sale of a Reg S type GDR along with a Rule 144A ADRThe Reg S type GDR may be listed either in London or Luxembourg.The holders of these GDRs will be regular investorsHowever, the Rule 144A ADRs are privately placed through Qualified Institutional Buyers in the U.SThe biggest reason for such a program being subscribed to is the fact that such a program enables the issuing company to raise funds not just from the U.S. and not just from Europe, but from both markets simultaneously

Arbitrage Example

A bid order comes to the EGX demanding 2000 shares at EGP196 equivalent to $35.13 ($/EGP 5.58)a second later in LSE there is a demand on 2000 shares of the GDR for an ask of $35.59An active arbitrageur can buy 2000 shares of the underpriced stock on the EGX and short sell 2000 share of the overpriced GDR making a gross profit of $920

Difference between ADR & GDR 95

ADR GDR

Most Commonly listed on

NYSE LSE

Issuing Company Access the US Market Global access

To Raise Capital Within US

Within US & Outside US using different structure

combinations

Foreign Currency Convertible BondA foreign currency convertible bond (FCCB) is a type of corporate bond issued by an Indian listed company in an overseas market and hence, in a currency different from that of the issuer. The highlight of the FCCB, however, is the option of converting the bonds into equity at a price determined at the time the bond is issued.

It also has the benefits of a debt instrument as it includes guaranteed returns or yields which are payable in foreign currency.For companies, FCCBs gave them access to funds at cheaper rates, given the fact that many of these were zero coupon bonds with a yield-to-maturity structure , meaning the company would have to make large-scale payments only when the bonds were redeemed. Also, the interest rates were much lower than that of normal debt.

Difference between FCCB & GDR

FCCB

Issues bonds denominated in foreign currencyMix between a debt and equity instrumentConvertible in natureConversion to EquityLiability of the company

GDR

Company deposits its shares to a depositoryCompany gets proportionate amount of GDRsGDRs are then issued to investors in the foreign marketCompany’s own fund

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:-

Divestment by shareholders of their holdings of Indian companies listed in India;Divestment by shareholders of their holdings of Indian companies not listed in India but which are listed overseas.

Such a facility would be available pari-passu to all categories of shareholders, of the company whose shares are being sold in the ADR/GDR markets overseas. This would ensure that no class of shareholders gets a special dispensationThe sponsoring company, whose shareholders propose to divest existing shares in the overseas market through issue of ADRs/GDRs will give an option to all its shareholders indicating the number of shares to be divested and the mechanism how the price will be determined under the ADR/GDR norms. If the shares offered for divestment are more than the pre-specified number to be divested, shares would be accepted for divestment in proportion to existing holdings


The proposal for divestment of the existing shares in the ADR/GDR market would have to be approved by a special resolution of the company whose shares are being divested.The proceeds of the ADR/GDR issue raised abroad shall be repatriated into India within a period of one month of the closure of the issue.Such ADR/GDR issues against existing shares arising out of the divestment would also come within the purview of the existing SEBI Takeover Code if the ADRs/GDRs are cancelled and the underlying shares are to be registered with the company as shareholdersDivestment of existing shares of Indian companies in the overseas markets for issue of ADRs/GDRs would be reckoned as FDI. Such proposals would require FIPB approval as also other approvals, if any, under the FDI policySuch divestment inducting foreign equity would also need to conform to the FDI sectoral policy and the prescribed sectoral cap as applicable. Accordingly the facility would not be available where the company whose shares are to be divested is engaged in an activity where FDI is not permittedEach case would require the approval of FIPB for foreign equity induction through offer of existing shares under the ADR/GDR route.


Other mandatory approvals such as those under the Companies Act, etc. as applicable would have to be obtained by the company prior to the ADR/GDR issueThe issue related expenses (covering both fixed expenses like underwriting commissions, lead managers charges, legal expenses and reimbursable expenses) for public issue shall be subject to a ceiling of 4% in the case of GDRs and 7% in the case of ADRs and 2% in case of private placements of ADRs/GDRs. Issue expenses beyond the ceiling would need the approval of RBI. The issue expenses shall be passed onto the shareholders participating in the sponsored issue on a prorata basis.The shares earmarked for the sponsored ADR/GDR issue may be kept in an escrow account created for this purpose and in any case, the retention of shares in such escrow account shall not exceed 3 monthsIf the issues of ADR/GDR are made in more than one tranche, each tranche would have to be treated as a separate transactionAfter completing the transactions, the companies would need to furnish full particulars thereof including amount raised through ADRs/GDRs, number of ADRs/GDRs issued and the underlying shares offered, percentage of foreign equity level in the Indian company on account of issue of ADRs/GDRs, details of issue parameters, details of repatriation, and other details to the Exchange Control Department of the Reserve Bank of India, Central Office, Mumbai within 30 days of completion of such transactions

CASE STUDY

About InfosysStarted in 1981Global leader in consulting, technology and outsourcing solutionsOperations in more than 30 countriesThe underwriters, NationsBanc Montgomery Securities LLC, BancBoston Roberston Stephens, BT Alex Brown and Thomas Weisel Partners LLC.

Summary of Infosys ADRIssue day Stock

exchangeAmount mobilized

Actual price per share ($)

ADR: Domestic share

1.03.1999 NASDAQ $ 70.38 million

68 2:1

30.07.2003 NASDAQ $ 294 million 49 1:1

09.05.2005 NASDAQ $ 1.07 billion $ 67 1:1

21.11.2006 NASDAQ $ 1.6 billion 53.5 1:1

Reasons For Charging PremiumExcess demand with limited supply of ADR’s.

Few opportunities in the US to invest in companies that are growing at the 20–30% rates

Official barriers prevent foreign investors from buying the shares trading in India

ADR’s provides a value added layer – transparency, liquidity and greater coverage than the existing Indian stock

Details of ADR Issue, March 1999

Size of Issue 1.8 million ADS/ 0.9 million equity shares

Number of ADS per equity share 2

Offer Price $ 27.88 per ADS/ $55.76 per share

Actual Price Obtained $34 per ADS/ $ 68 per share

Premium on the Offer Price 22% or $6.12 per ADS

Issue Amount $61.2 million

Green shoe Option 15% of $ 61.2mn = $ 9.18mn

Total Amount raised $ 70.38 million

BSE closing price Rs 3201/- as on 10 March, 1999

Sponsored Secondary ADR ProgramConversion of existing domestic equity shares into ADRs

Allows shareholders in India to convert and sell their equity shares in the US market and realize the proceeds, net of issue expenses

There will be no additional issue of any equity shares by the company

No money will accrue to the company out of this issue

First Sponsored Secondary ADS: July 2003

Issue cost $ 11.7 million (about 4% of Issue Size)

Second Sponsored Secondary ADR:May 2005

Net issue expense = 3.98% of the gross proceeds

Infosys had not received any proceeds of this offering

Total issue increased the size of US float to 14% of its capital

Third Sponsored Secondary ADR: November 2006

Issue expense 3.98% of the gross proceeds

Indian Depository Receipts (IDRs)These are financial instruments that allow foreign companies to mobilize funds from Indian Capital Markets.

IDRs are depository receipts denominated in Indian Rupees issued by a Domestic Depository in India.

IDRs represents interest in the shares of a Non-Indian company’s equity.

IDRs provides a chance to the Indian investors to hold equity shares of foreign company.

It is created by the Indian Depository in India against the underlying equity shares of the issuing foreign company to raise funds from the Indian markets.

IDRs are issued in the Demat form. However, at the option of the IDRs holders these can be converted into physical form.

Like equity shares, these are unsecured instruments and negotiable from one investor to another investor

Showing Issuance of IDRs

Issuer (Outside India)

Domestic Depository

(In India)

Custodian (Outside India)

Holds shares for

Domestic Depository

Issuer of IDRs to

Investors in India

IDRs

Demat IDRs listed on NSE/BSE

IDR Holders – FIIs, NRIs, Retail, Non-

Institutional Investors

Eligibility Criteria:As per the Companies IDR rules, as amended till date, the undernoted are the eligibility criteria for the issue of IDRs:

Sl. No. Criteria Requirements

1 CapitalThe issuer company should have a pre-issue capital and free

reserve of at least US $ 50 million (app. 225 crore)

2Market

Capitalization

The foreign issuing company should have a market

capitalization of $ 100 million or more during last three years.

3Operating

History

Continuous trading record or history on a stock exchange in its

Parent Country for at least three immediately preceding years.

4 ProfitsA track record of distributable profits for at least three out of

immediately preceding five years.

5Other

Requirements

Fulfils such other eligibility criteria as may be laid down by

SEBI from time to time in this behalf.

Other conditions:Sl. No. Criteria Requirements

1 Issue Size The size of an IDR issue shall not be less than Rs. 50 crore

2

Minimum

application

amount

The minimum application amount shall be Rs. 20,000/-

3 Extent of issue

The number of underlying equity shares offered in a financial

year through IDRs offering shall not exceed 25% of the post-

issue number of equity shares of the issuing company.

4

Allocation of

shares/

Reservation of

quota

Retail individual investors 30% (including NRIs)

Non-institutional investors 20% (including NRIs)

Qualified institutional buyers 50% (Except Insurance

Companies and Venture Capital funds)

The IDR issueStandard Chartered PLC → the first global company to file for an issue of Indian depository receipts in India.

Standard Chartered PLC listed on the London and Hong Kong stock Exchanges.

Objective of the issue: To grow our market visibility and brand presence in India

To List it on BSE and NSE

End use of the fund proposed to be raised through the issue is to support growth across the business of the company internationally

114

IDR issued 115

Parties to the Issue:

Details of the Issue:

Issuing Company (Sponsor) Standard Chartered Plc

Overseas Custodian Bank of New York Mellon

Domestic Depository Standard Chartered Securities (India) Ltd

R&T Agent Karvy Computershare Private Limited

Listing Date Friday, June 11, 2010

Issue Size 240 million IDRs

Listing price Rs 106

Ratio 10 IDRs to 1 underlying

THANK YOU

Date post:	15-Apr-2017
Category:	Economy & Finance
Upload:	92neil
View:	916 times
Download:	22 times

ADR and GDR : corporate financing

Economy & Finance