OVERSEAS SOURCES OF CAPITAL (ECB / ADR / GDR)

WHAT ARE ADR’s?An American Depositary Receipt

represents ownership in the shares of a non-U.S.

company that trades in U.S. financial markets.

Stock of many non-US companies trade on US stock exchanges through the use of ADRs

WHAT ARE ADR’s?ADRs

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

based companies. is issued by a U.S. depository bank. May represent one share, several shares or a

fraction of a share

History of ADR’s  First ADR was introduced by JPMorgan in 1927, for

the British retailer Selfridges&Co. 

In 2003 more than 2,000 ADRs issued by companies in 79 countries were available to U.S. investors.

About 500 of them were listed on the New York Stock

Exchange, American Stock Exchange or Nasdaq. Others trade on the US OTC market.

TYPES OF ADR’s

1. Unsponsored ADR

2. Sponsored ADR Level I (OTC) Level II (Listed) Level III (Offering)

Unsponsored ADR created by a U.S. investment bank or brokerage that

buys the shares in the country where the shares trade, deposits them in custodian bank.

Issued in accordance with market demand & only traded on OTC markets

foreign company has no formal agreement with a depositary bank;

often issued by more than one depositary bank; costs including those associated with disbursement

of dividends are borne by the investor. Due to a recent SEC rule change in October

2008, approx. half of all ADR programs in existence are unsponsored.

Sponsored ADR Most often, the company will sponsor the creation of its own ADR

Level 1 ADR Traded in the OTC market, with bid and ask prices published daily distributed by the National Daily Quotation Bureau in the pink

sheets issuing company does not have to comply with US GAAP or

provide US Securities and Exchange Commission (SEC) disclosure.

enable a company to obtain the benefits of a US publicly traded security without altering their reporting process.

can “migrate” to a Level II or Level III ADR program if they desire to trade on NYSE,ASE, Nasdaq or the OTC Bulletin Board.

Sponsored ADR Level II ADR (Listed)

Companies have to register with the SEC; The company is required to file a Form 20-F annually that

complies with GAAP standards lowest level of ADRs that can be listed on a US stock

exchange

Level III (offering): allows foreign companies to issue shares directly into the

US The company is required to file a Form F-1, which is the

format for an Offering Prospectus for the shares. The company is also required to file a Form 20-F annually

and must adhere to U.S. GAAP standards In addition, any material information given to shareholders

in the home market, must be filed with the SEC through Form 8K.

Restricted ADRs Allowed to be placed only among selected investors &face restriction on

their re-sale Two SEC rules that allow this type of issuance of shares in the U.S.-

Rule 144-A provision makes the issuance of shares a private placement may only be issued to or traded by QIBs most ADRs held exclusively through the DTC

Regulation S shares are not, and will not be registered with any United States

securities regulation authority. cannot be held or traded by any “U.S. Person” as defined by SEC

Regulation S rules shares are registered and issued to offshore, non-US residents. can be merged into a Level 1 program after the restriction period

has expired.

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

Benefits For Companies In Issuing ADRs

Broadening and diversifying a company’s US investor base

Enhancing a company’s visibility, status and profile in the US and internationally, among investors, consumers and customers

Increasing US liquidity

Developing and/or increasing institutional research coverage in the United States

Offering a new avenue for raising equity capital, often at highly competitive rates (depending on the ADR program selected)

Enhancing communications with shareholders in US

Provides an easy way for U.S. employees of non-U.S. companies to invest in their companies' employee stock purchase plans

Benefits For InvestorsAs US securities, ADRs are quoted in US dollars.

ADRs trade easily and conveniently in U.S. dollars and settle through U.S. clearinghouses.

Publicly traded ADRs are registered with SEC.

Dividends are paid promptly in U.S. dollars at competitive foreign exchange rates.

Many institutional investors are restricted from investing in securities that do not trade on a U.S. exchange, so listed ADRs represent a way to add international exposure to a portfolio.

ADRs are as liquid as the underlying securities, as the two are interchangeable.

Liquidity Issues of ADRs of Indian Corporates

• Arbitrage opportunities arise due to time zone differences, market news, sentiments, etc.

• Two-way fungibility approved by RBI– Implies that an investor who holds ADRs/GDRs can

cancel them with the depository and sell the underlying shares in the market.

• To increase liquidity and depth of ADR/GDR market and reduce arbitrage between the underlying securities and ADRs

• Provides investors with greater flexibility• Step towards achieving Capital Account

Convertibility

Investor

Broker

Depositary

Custodian

Home Market

Local Broker

Creation Of ADRs

Investor

Broker

Depositary

Custodian

Home Market

Local Broker

Cancellation Of ADRs

Indian ADRs

• First Indian ADR – Infosys 1999

• Indian ADRs – 19– HDFC Bank, ICICI Bank– Infosys, Wipro, Cognizant, Genpact, Mahindra Satyam,

Patni Computer, iGate Corp– Sify Ltd, Rediff.com– The India Fund Ltd.– MTNL, Tata Communication– Sterlite Ind– Tata Motors– WNS, Syntel Inc.– Dr. Reddy’s

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.

Global Depository Receipts

“Issuing Company“"Domestic Custodian Bank“"Overseas Depositary Bank““Lead Manager(s)”“Other Manager(s)”“Clearing Systems”

Parties Involved

Indian GDRs• India has the distinction of having

the largest number of GDR issues (Rule 144A/Reg S) by any country

• First GDR – RIL ($ 150 mn) in May 1992

• July 2009 – Tata Power Company launched

a GDR issuance of US $ 250 mn – Tata Steel sold GDRs worth

$400 mn – Suzlon offered $175 mn in

GDRs.

Facilitates trade of shares, especially those from emerging markets.

To raise money in more than one market.

Objective of a GDR

Unitary Structure

Bifurcated Structure

GDR structures

Can be launched as part of a private or public offering.

Allow the issuer to raise capital on two or more markets simultaneously.

Allow the issuer to overcome local selling restrictions to foreign share ownership.

GDR holders do not enjoy voting rights.

Raised through public issues

More expensive in terms of administrative expenses.

AdvantagesDisadvantages

Indian stock market to some extent is shifting from Bombay to Luxemborg.

Indian stock market is no longer independence from the rest of the world.

Indian retail investors can no longer expect to make easy money on heavily discounted rights/public issues.

IMPACT OF GDR ON INDIAN CAPITAL MARKET

i. GDR’S are sold primarily to institutional investors.

ii. Demand is likely to be dominated by emerging market funds.

iii. Switching by foreign institutional investors from ordinary share in to GDRs is likely.

iv. Major demand in UK, USA, South East Asia and to some extent continental Europe.

Among the Indian Companies, Reliance Industries Ltd. was the first company to raise funds through a GDR issue.

Markets of GDR’s

What is ECB?

Source of funds for corporates from abroad with advantage of lower rates of interest prevailing in the international financial markets, longer maturity period and for financing expansion of existing capacity as well as for fresh investment

Defined as to include commercial loans [in the form of bank loans, buyers’ credit, suppliers’ credit, securitised instruments (e.g. floating rate notes and fixed rate bonds, CP)] availed from non-resident lenders with minimum average maturity of 3 years

Modes of raising ECBs Commercial Bank Loans : in the form of term loans from banks outside

India Buyer's Credit Supplier's Credit Securitised instruments such as Floating Rate Notes (FRNs), Fixed Rate

Bonds (FRBs), Syndicated Loans etc. Syndicated Loan, CP Credit from official export credit agencies Commercial borrowings from the private sector window of multilateral

financial institutions such as International Finance Corporation (Washington), ADB, AFIC,CDC

Loan from foreign collaborator/equity holder, etc and corporate/institutions with a good credit rating from internationally recognised credit rating agency

Lines of Credit from foreign banks and financial institutions Financial Leases Import Loans Foreign currency loan raised by residents from recognised lenders

Modes of raising ECBs

Two Routes for ECB and Bases of Comparison

ECBs can be accessed under two routes

(i) Automatic Route and

(ii) Approval Route.

Bases of Comparison Eligibility criteria for accessing international financial markets. Total quantum limit of funds that can be raised through ECBs. Maturity period and the cost involved. End uses of the funds raised.

Criteria Automatic Route Approval Route

Procedure Agreement with lender Application submission though dealer to RBI

Borrowers • Companies• NGOs – Micro Finance• Special Economic Zone

• FIs with infrastructure or export finance• NBFCs – import financial equipments•> US $ 500 million ECB in a year

Lenders • International Banks, Capital Markets • Qualified Overseas Organizations and Individuals

Except QOI

End Use • Real Sector – SME and infrastructure• Investment in JV, Subsidiaries• Lending for Micro Finance

SME and InfrastructureJV, Wholly owned subsidiary

Why ECB is attractive?Investor ECB is for specific period, which can be as short as three years Fixed Return, usually the rates of interest are fixed The interest and the borrowed amount are repatriable No owners risk as in case of Equity Investment

Borrower No dilution in ownership Considerably large funds can be raised as per requirements of

borrower Usually only a fixed rate of interest is to be paid Easy Availability of funds because ECB is more appealing to

Investors

Recent Developments - ECB Minimum Average Maturity: ECB up to USD 500 million per borrower

per financial year is permitted for rupee expenditure and/ or foreign currency expenditure for permissible end-uses under the automatic route

Parking of ECB proceeds: The borrowers have been provided with a flexibility to either keep their ECB proceeds offshore or keep it with the overseas branches/ subsidiaries of Indian banks abroad or to remit these funds to India to credit to their Rupee accounts with banks in India, pending utilization for permissible end-uses.

All-in-Cost Ceilings: ECB beyond the permissible all-in-cost ceiling can be availed of under the Approval Route.

Definition of Infrastructure expanded to include, power,

telecommunication, mining exploration and refining