Presentation on

Global Depository Receipts (GDRs),

American Depository Receipts
(ADRs) &
Foreign Currency Convertible Bonds
(FCCBs)

27.02.2009
 What is Global Depository Receipt (GDR) and
American Depository Receipt (ADR) ?
• GDRs/ ADRs are a way of raising capital from the international money
market.

• A Global Depository Receipt (GDR) is a stock which trades in the foreign

market but represents a specified number of shares of a domestic
corporation (like Infosys, etc).

• GDRs are created by the Overseas Depository Bank outside India and
issued to non-resident investors (NRIs) against the issue of shares or
FCCBs of issuing Company.

• A GDR issued in America, where the depository bank is in the USA, is an

American Depository Receipt (ADR). European banks issue European
depository receipts, and other banks issue Global Depository Receipts
(GDR). ADRs were first introduced in 1927.

• Simply put, it is an instrument that is issued abroad, listed and traded on

foreign stock markets.

• Reliance Industries Limited was the first Indian Company to raise funds
through a GDR issue.
 What is Foreign Currency Convertible
Bond (FCCB)?

• FCCBs- a quasi debt Instrument with features of both Equity & Debt
it is a Debt instrument issued in a currency different than the
Issuer’s domestic currency with an option to convert them into
common shares of the Issuer Company.

• The Advantages of issuing FCCBs :

For Investors – 1. Capital Protection

2. Chance to capitalize on increased share prices.
For Issuer – Source of low cost debt
 Salient Features of GDRs / ADRs

• Regulatory Mechanism - Governed by Issue of Foreign Currency

Convertible Bonds and Ordinary Shares (through Depository Receipt
Mechanism) Scheme, 1993. Reckoned as part of FDI in India. Thus they
require to be regulated through ‘Press Notes’ that publicly state the
Government’s position on FDI Policy.

• Underlying shares - issued by Issuer Co. to Depository (who is the

Registered Owner of shares), in whose name the shares are registered. It
is the Depository who subsequently issues the GDRs/ ADRs to the
Underwriters for final placement with investors. Physical possession of
equity shares is entrusted to Custodian, who is an agent of the Depository.

• Denomination – Dollars or some other freely convertible currency.

Underlying shares are however denominated in rupees.

• Dividend – In Rupees only but Depository converts rupees and pays

dividend to ultimate investor in US dollars. Thus, no exchange rate risk for
Issuer Company.
Salient Features of GDRs / ADRs contd..

• Listing –listed and traded on foreign Stock Exchange.

ADRs - NYSE, NASDAQ etc.

GDRs - Luxembourg, London Stock Exchange, Over the counter market in
London.

• Voting - No voting rights

• Transfer – Freely transferable and tradable in the overseas market

• Redemption and Sale - GDR/ADR holder has an option to redeem the

GDRs/ADRs into the equity shares underlying it.

In the case of redemption, the Depository will request the Custodian to get the
corresponding underlying shares released in favor of the non-resident investor.
A copy of the same will be sent to the Issuer Company for information and
record.

The shares will then be handed over to the non-resident directly and such
person will become a member of the Issuer Company and its name will be
entered in the Register of Members of the Issuer Company.
 Salient Features of GDRs / ADRs
contd…
• Sale - If an investor desires to sell GDRs/ADRs
held by him/her, he/she can request the Depository
who will forward the same to the Custodian to
release and sell such shares underlying the
ADRs/GDRs and remit the sales proceeds to the
investor.

• Listing of underlying shares - The underlying

shares are listed on a domestic stock exchange.
The underlying shares are denominated in Indian
currency only.
 Advantages to Investors
• GDRs/ADRs are designated in foreign currency which is
more acceptable to global investors.

• Global investors/holders of GDRs/ADRs do not need to be

registered with the Securities and Exchange Board of India
(the "SEBI").

• The identity of GDR/ADR holders is kept confidential since

they are freely transferable and in the records of the Issuer
Company, the name of the Overseas Depository appears as
Registered Owner of shares.

• Quick settlement of GDRs/ADRs due to the existence of

international systems like, Euroclear and Cedel in Europe
and the Depository Trust Company in the U.S.
 Advantages to the Issuer Company
• The Issuer Company collects the issue proceeds in foreign currency
and is thus able to utilize the same for meeting the foreign exchange
component of project cost, repayment of foreign currency loans, etc.

• Large amounts can be raised in the global market at cheaper rates.

• Dividend payable by the Issuer Company is in Rupees only. The

Depository Bank converts Rupees and pays dividend in US Dollars.

• There is certainty of raising new capital and the issue terms are much
better than those which can be obtained in the local market.

• Owing to the restrictive voting rights in the Depository agreement,

control is not affected immediately.

• It is possible for the Issuer Company to float more than one foreign
equity issue in a year .
Parties involved in the issue of ADRs /
GDRs / FCCBs
¾ Issuer Company

Company that plans to tap the foreign market through the global issue
mechanism.

¾ Domestic Custodian Bank (DCBs)

A Banking Company which acts as a Custodian for the ordinary shares or

FCCBs of an Indian Company which are issued by it against GDRs or
Certificates.

¾ Overseas Depository Bank (ODBs)

• Bank authorised by the Issuer Company to issue Certificates/ GDRs against

issue of FCCBs or ordinary shares of the Issuer Company.
• Overseas agent of the Issuer Company .
• Registered owner of shares. Its name appears in the Register of Members of the
Issuer.
• Prepares and issue deposit certificates
• Advices on ratio of DRs to common shares,
• Appoints custodian,
• Assist with stock exchange compliance,
• Registration and reporting requirements.
 Parties involved…. Contd.
Lead Manager

• Responsible for marketing the issue,

• Advising the Issuer on the type of security to be issued i.e. Equity, Bonds, FCCBs, the rate of
interest, price of the security, etc. and
• Decides on the nature of investment i.e. GDR/ADR, coupon rate on bonds, conversion price,
etc.

Underwriter

• Manage the entire transaction, including overall co-ordination

• Advice on type of program, listing venue, DR ratio and all capital markets issues
• Co-ordinate due diligence process
• Line-up participating underwriting syndicate and sell securities
• Introduce company to institutional investor client base
• Conduct road show with management
• Pricing and general marketing of the offer

Accountants/Auditors

• Prepare financial statements in accordance with recognized GAAP

• Prepare and review financial sections, stock exchange disclosure filings and offering circulars
 Parties involved…. Contd.
International Counsel

• Prepare and file required documents for securities commission of listing venue
• Manage compliances with Securities Laws, Rules & Regulations
• Prepare offering circular/prospectus with the working parties
• Review research, road show and investor communication materials

Legal Advisors/ Indian Counsel

• Assistance in preparation of prospectus, depository agreement, indemnity agreement and

subscription agreement.
• Enabling the Issuer to comply with proper disclosures relating to the issue
• Provide legal opinion on DR issuance
• Advise Company/underwriters on compliances with domestics regulation relating to DR
issuance

Other Parties

• Printers
• Stock Exchange
• Custodian
 Working Mechanism of ADRs/ GDRs

India: Custodian
Issuer Company Underlying shares (Banking Co. situated in
India which has the physical
(in India) possession of shares
(Through Lead Manager)
underlying GDRs/ADRs)

Overseas: GDR/ADR listing

Overseas European or U.S.
Depository Stock Exchange

Monies Dividend

Overseas
Investor
 Documentations for ADRs and GDRs
Prospectus The key offering document would be the offering circular which would be used for marketing
Drafting and road-shows
Underwriting • An agreement among the lead underwriter (acting on behalf of itself and the other underwriters
Agreement in the syndicate), the issuer
• Contains terms and conditions under which the underwriters will purchase and re-offer the
securities
Legal Opinions • A confirmation from Legal Counsel to the underwriters on the legality and validity of certain
agreements and other documents
• Provided comfort on the accuracy of information in the registration statement and the
prospectus
Auditor’s Issued by independent auditors to the underwriters and directors of the issuer which covers the
Comfort Letter following:
• Conformity of financial information contained in the offering circular
• Absence of any material and adverse changes since the date of the financial statements
• Performance of special procedure to ensure consistency between the reported financial
statements and the internal accounting/financial records

Listing • An application to be submitted to the exchange to list the securities

Application and • An agreement between the exchange and the issuer which set-forth the issuer’s obligations
Listing after the securities have been accepted for listing
Agreement

Deposit • An agreement outlining the terms under which the depository holds the shares issued by a
Agreement issuer Company and against which the depository issues GDRs to investors
(for depository
shares)
 Procedural Aspects

¾ Preliminary Meetings

The Issuer to hold preliminary discussions and meets with different global
merchant/ investment bankers (who would act as the Lead Manager, Co-
Managers, Underwriters), Legal Advisors (Indian and Foreign), Auditors, and
other intermediaries before deciding to float a GDR/ADR/ FCCB Issue.

¾ Authorization by the Board of Directors

Board of Directors of the Issuer is required to pass a Board Resolution

approving the proposed GDR/ADR/ FCCB issue.

¾ Legal and Accounting Due Diligence on the Issuer

Legal and accounting due diligence on the Issuer to be carried out by a team
consisting of legal, technical, and financial key persons from the Lead Manager,
Co- Managers, Underwriters, Legal Advisors and Auditors.
 Procedural Aspects contd…

¾ Authorization by Shareholders

The Shareholders to approve the proposed foreign issues of GDR/ADRs/ FCCB

by a Special Resolution passed at the General Meeting according to the
provisions of Section 81 (1A) of the Companies Act, 1956.

Approvals should be also taken from the Issuer's Shareholders with regard to
Section 94 (increase in Authorized Share Capital), Section 16 (alteration of
Capital Clause of the Memorandum of Association for change in Authorised
Share Capital) and Section 31 (alteration of Share capital Clause in Articles of
Association) of the Companies Act, 1956, if required.

¾ U.S. GAAP

In case of an ADR issue, the Issuer has to get its Balance Sheet verified or
overhauled by an internationally recognized firm of Chartered Accountants.

Companies planning an issue of securities in the U.S. would have to ensure that
their Accounts for at least past three (3) years are reconciled with U.S. GAAP.
 Regulatory Mechanism

¾ Foreign Investment Promotion Board (‘FIPB’), Ministry of Finance

- Foreign Investment in the Issuer Company within specified Sectoral Cap - No

approval from FIPB i.e. Automatic Route of Foreign Investment.

- Foreign Investment exceeds specified sectoral cap, - FIPB approval required

• However, in the following cases, even though Foreign Investment is within the
specified sectoral cap and falls under the authomatic route, FIPB approval is
required:

- Indian Company is being established with foreign investment and is owned or

controlled by a non-resident entity or

- The control/ ownership of an existing Indian company, currently owned or

controlled by resident Indian citizens/ Indian companies, will be/is being
transferred to a non-resident entity due to amalgamation, merger, acquisition
etc. or
 Regulatory Mechanism Contd..

¾ Filings with SEBI

Issue of shares requires the filing of an Offering Circular with SEBI for its
information and records.

¾ Stock Exchanges Approval

In principal approval from the Stock Exchanges in India where the shares of the
Company are listed, is required to be obtained prior to listing on the Overseas
Exchange.

¾ Other Approvals

Issuer must obtain the consent of the financial institutions/banks if it has

obtained any financial facilities (term loans, guarantees etc.).
 Pricing of the Receipts

The pricing of Global Depositary Receipt and Foreign

Currency Convertible Bond issues to be made at a price
not less than the Average of the weekly high and low of
the closing prices of the related shares quoted on a Stock
Exchange during the two (2) weeks preceding the relevant
date.

The “relevant date” means the date of the meeting in which

the board of the company or the committee of directors, duly
authorised by the board of the company, decides to open the
proposed issue.
 Reporting requirements after issuing ADRs/ GDRs
The Issuer to furnish the following information to RBI within 30 days of the close of
issue :

¾ Details of the purpose for which the GDRs/ADRs have been raised. If funds are
deployed for overseas investment, details thereof;

¾ Details about the Depository, Lead Manager, Sub-Mangers to the Issue, Indian
Custodian;

¾ Details of the FIPB Approval or the relevant NIC Code in case of automatic route;

¾ Details of Authorized, Issued and paid up capital before and after the issue;

¾ In case of private placement, details of investors and ADRs/GDRs issued to each

of them:

¾ Number of GDRs/ADRs issued, their ratio to the underlying shares

¾ Details of Issue related expenses
¾ Details of listing arrangements
¾ Amount raised and the amount repatriated

Further, a quarterly return in a specified form to be sent to RBI within 15 days of

the close of the quarter.
 MISCELLANEOUS PROVISIONS

¾ Two way fungibility in ADRs / GDRs is permitted and operative guidelines issued for the
same.

Two way fungibility implies that an investor who holds ADRs/GDRs can cancel them with
the Depository and sell the underlying shares in the market. The Issuer Company can then
issue fresh DRs to the extent of shares sold in the market.

Earlier, after initial conversion of the ADRs/GDRs into the underlying shares, the re-
conversion of the shares into ADRs/GDRs was not permitted.

¾ Issue related expenses subject to a ceiling of 4% in case of GDRs and FCCBs & 7% in
case of ADRs.

¾ End uses of the proceeds include:

- financing capital goods imports;
- capital expenditure;
- prepayment or scheduled repayment of earlier external borrowings;
- equity investments in JVs/ WoSs in India.

However end use of the proceeds is not permitted for:

- on-lending or investment in capital market or acquiring a company (or a part thereof) in

India by a corporate,

- real estate,

- working capital, general corporate purpose and repayment of existing Rupee loans.
 FCCBs – Salient Features
• Issuer Company to have a minimum 3 years consistent track record of good
performance (financial or otherwise).

• Maximum amount to be raised by issue of FCCBs is US$ 500 Million in a

Financial Year.

• FCCB issues have a ‘Call’ and ‘Put’ option. A call option entitles the issuer to
“Call” the loan and make an early redemption. A put option entitles the lender to
exercise the option to convert the FCCB into equity.

• The interest on FCCBs is generally 30 - 40 % less than on normal debt paper or

foreign currency loans or ECBs. This translates to cost saving of approx 2-3%
p.a.

• The coupon rate on bonds can also be zero as in case of Zero Coupon Bonds
(ZCB) in view of attractiveness of options attached to them. In case of ZCB, the
holder is basically interested in either conversion of the bonds in equity or capital
appreciation.

• The redemption of FCCBs can be made at a premium or at par or even at a

discount.
 FCCBs – Salient Features contd….
• FCCBs are generally issued by Corporates, which have high promoter shareholding and
hence do not perceive any risk of losing management control even after exercise of
conversion option.

• The conversion price of the FCCBs is generally between 30 – 70 % premium over the
Current Market Price.

• The issuance of FCCBs invariably requires the approval of existing consortium of lenders.

• FCCBs can be secured as well as unsecured. Most of the FCCB issued by Indian
Companies are generally unsecured.

• Credit rating of Bonds is not mandatory, however rating definitely helps to price the FCCBs
competitively.

• Funds received through FCCBs should be parked abroad till the actual requirements arises
in India.

¾ Maturity Period and total cost

• Minimum average maturity of FCCB shall be 3 years for borrowing up to US$ 20 million and
5 years in case it exceeds US$ 20 million.

• The maximum total cost to be incurred on FCCB cannot exceed:

- Average maturity of 3-5 years 300 bps over 6 months LIBOR.
- Average maturity exceeding 5 years 500 bps for over 6 months LIBOR.
 FCCBs: Current Scenario & Case Studies
¾ Liquidity crunch & market meltdown have hit the FCCB market.

¾ Cos. with their FCCBs maturing in a year’s time, face double edged sword –
1. with the share prices falling below the conversion prices, the exercise of
conversion option by the Bond holders is virtually ruled out.
Eg. TATA Motors : FCCBs worth 11,760 million yen maturing in March 2011 were issued
at a conversion price of Rs.1001. This seems unattractive now in view of its current
stock price of Rs.143.
2. with the Bond holders not exercising the conversion option, Cos. forced to payout the
liabilities.

¾ In current cash crunch scenario, challenging for Cos. to meet this debt obligation, which
may be a further drag on their profits.
Eg. FCCB holders of Coimbatore based Shanti Gears exercised the redemption option
in November 2008, following which the Co. had to redeem outstanding FCCBs worth
$5.3 MN (Rs. 25 Crore)

¾ Even if conversion price lowered by Cos. instead of taking on this burden, it would imply
a higher equity dilution than planned.

¾ Cos. whose FCCBs mature two-three years from now, can expect a market rebound.
However, Cos. like Wockhardt, whose FCCBs worth $110mn (Rs. 517 Crore) mature in
October, 2009 do not have the luxury of time. Wockhardt’s shares now trading at Rs. 82
as against FCCB conversion price of Rs.486, ruling out the conversion.
 FCCBs: Current Scenario & Case Studies contd…
¾ Realising the tough situation of the Cos., RBI, in November 2008 permitted
buyback of FCCBs on satisfaction of certain conditions through their forex
resources/ new External Commercial Borrowings. Later RBI permitted buyback
from Rupee resources of Cos., provided the buyback amount limited to $50 mn
and the resources were from the Cos.’ internal resources.

¾ Reliance Communications, which had issued zero coupon FCCBs in February

2007 for $1 billion (Rs. 4700 Crore) at a conversion price of Rs. 661 is the first
Co. to avail of this buyback facility.

¾ Other Cos. following suit in this regard:

GTL Infrastructure, pharmaceutical major Jubilant Organosys, Moser Baer, Tulip
Communication.
¾ Buyback reduces the unsecured debt of the Cos. when they buyback the FCCBs
at a discount to the face value of the Bond.

¾ However, only Cos. with sufficient surplus cash would be in a position to do so.

¾ Buyback , however, seems unlikely to become a trend owing to the size of the
issues and the current balance sheet positions of the cos.
 Comparison Sheet
Particulars ADR
Offering size Suitable for large-sized floats
(US$300 mm)
Investor Base ADR opens larger universe of
US buyers.
All US institutions /High net
worth individuals/ Retail
investors
Trading/Liquidity Largest and most liquid stock
markets in the world
Pricing/Valuation Typically priced at par or at a
nominal discount to prevailing
market price subject to SEBI
price floor
GDR
Suited for offering in
excess of US$200 mm)
Investor base of primarily
Qualified Institutional
Buyers (QIB)/MFs
-Relatively smaller and
less liquid market
-Typically priced at par or
at a nominal discount to
prevailing market price
subject to SEBI price floor
- The discount may be
marginally higher than an
ADR
FCCB
Flexibility on issue size
Institutions investors,
typically hedge funds
- Limited Liquidity
- Conversion mostly
during later part of the life
of the instrument
-Expected to be
favourable relative to pure
debt pricing
-Conversion price is
typically set at a premium
to prevailing market price
subject to SEBI price
floor.
 Comparison Sheet contd….

Particulars ADR GDR FCCB

Disclosure Stringent regulatory and filing -Limited filing requirement Limited disclosure requirement
Requirements & requirements; initial and on during listing and on
Corporate continual basis recurring basis
Governance
-Accounts as per US GAAP - Accounts as per IFRS
for 3 years only if listed on LSE main
board
-Stricter Corporate Governance
requirements-conformance to
Sarbanes Oxley Act

Issue Timeline 15-16 weeks 9 weeks 4 weeks to completion (pricing

can be done within 2 weeks on
an accelerated basis)

Corporate ADR Offering helps in Minimal impact on Lower visibility compared to

Visibility strengthening corporate corporate profile ADRs and GDRs
profile/image amongst
international investors
Structuring Minimal Minimal Can be structured as per the
Flexibility requirements of the issuer
 ADRs Issue in India – Statistics
Pricing Date Name of the Company Type Size (US$ mm)
17-July-2007 HDFC Bank ADR Secondary Offer 607.0
23-June-2007 ICICI Bank ADR Secondary Offer 2,460.0
18-June-2007 Sterlite Industries IPO 2016.0
21-Nov.-2006 Infosys Technologies Secondary Offer 1605.0
16-Nov.-2006 Dr. Reddy’s Laboratories Secondary Offer 228.8
7-Dec-2005 Patni computers Systems Ltd. IPO 160.8
6-Dec-2005 ICICI Bank Ltd. Secondary Offer 498.0
26-May-2005 Infosys Technologies Secondary Offer 1072.0

17-March-2005 ICICI Bank Ltd. Secondary Offer 436.7

10-May-2005 Satyam Computer Services Secondary Offer 322.5
30-July-2003 Infosys Technologies Secondary Offer 294.0
20-July-2001 HDFC Bank IPO 172.5
15-May-2001 Satyam Computer Services IPO 161.9
11-Apr-2001 Dr. Reddy’s Laboratories IPO 132.8
19-Oct-2000 Wipro IPO 130.8
20-Jun-2000 Silverline Technologies IPO 108.8
27-March-2000 ICICI Bank Ltd. IPO 175.0
 GDRs Issue in India – Statistics
Pricing Date Name of the Company Size (US$ mm) Price (US$)
04-Oct-2007 Financial Technologies 115 9.88
26-July-2007 UTI Bank 281 15.43
3-July-2007 Indiabulls Real Estate 400 10.32
9-May-2007 Indiabulls Financial Services 300 13.06
19-Apr-2006 Kotak Mahindra Bank 99 6.66
12-Apr-2006 Cipla 170 15.39
28-March-2006 Hindustan construction 100 3.71
27-Jan-2006 Bajaj Hindustan 136 8.12
31-Jan-2006 Balrampur chini 50 3.06
27-Jan-2006 Federal Bank Ltd. 80 3.97
25-Jan-2006 Gammon India Ltd. 87 9.47
14-Dec-2005 Nagarjuna Constructions 120 5.11
14-Dec-2005 IL&FS Investment 99 4.28
3-Aug-2005 Indiabulls Financial Services 150 5.42
16-March-2005 UTI Bank 257 5.91
19-Nov-2005 Amtek Auto Ltd. 69 7.32
26-Feb-2005 Indiabulls Financial Services 60 2.45
23-March-2005 Centurion Bank 80 4.80
 THANKS
Prepared by :

Bhavyaa Kedia
Monika Bansal
Rashmi Sharma
Amita Gola

Under the guidance of

Mr. Amit Jain