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EURO ISSUES - GLOBAL DEPOSITORY RECEIPTS

INTRODUCTION Many large companies in India require foreign exchange for importing vital capital goods. In the early eighties, Indias rating in the international credit market stood high. So, Indian companies with strong finances and which could offer acceptable security could get foreign currency loans from international banks for meeting their foreign exchange requirements. The acceptable security was a guarantee given by a bank or a financial institution in India. In the early nineties, the foreign exchange reserves of the country dwindled. The Indian economy was also weak. On account of these, Indias credit rating fell below investment grade. At that time, Indian companies were finding it difficult to obtain loans from international banks. Hence, many Indian companies had to approach the EXIM bank of India and other financial institutions like ICICI who had foreign lines of credit from International Finance Corporation or other international agencies, for foreign currency loans. By middle of 1991, the liberalization of the Indian economy was set in motion. There was an earnest attempt to integrate India with the global market. The emerging transparency and decontrols attracted the attention of many foreign investors. The foreign equity investors appreciated the liberal policies of the Indian Government and identified huge stakes in the emerging Indian capital market. In February92, while presenting the budget, the finance minister announced governments decision to allow the FIIs to invest in the Indian capital market and to allow Indian companies with good track record to float their stocks in foreign markets with a view to augmenting the forex reserves of the country. So far, Indian companies floating GDRs have been following the route of Rule 144A of SEC for issuance of GDRs. Primary reason for doing so is that by issuing securities under Rule 144A, there is no need for prior registration of securities with SEC. Further, information requirements in the offer documents in case of private placement is discretionary and is not very comprehensive. At the same time, liquidity is not affected as the securities can be sold by one qualified institutional buyer (QIB) to another. Further, a point to be noted is that such unregistered securities cannot be

sold in the U.S. public market for at least 2 years unless the said securities are registered with SEC. Majority of the companies list on the Luxembourg Stock Exchange because it has minimum listing formalities and comparitively low listing fees. The other option is to register the securities with SEC, based on exhaustive SEC registation documents in which case individuals can subscribe to the securities offered in the U.S. markets. Herein, detailed disclosure norms of U.S. GAAP have also to be complied with. As per the estimates, the cost of preparing and filing the US GAAP account ranges from $500,000 to $1,000,000 with the ongoing costs of $150,000 to $200,000 per annum. The initial SEC registration fees, which are a percentage of the issue size as well as blue sky registration costs (permitting the securities to be offered in all states of the USA) would have to be met. WHAT IS A GLOBAL DEPOSITORY RECEIPT Companies making euro issues can issue two types of instruments, namely Global Depository Receipts (GDRs) or Foreign Currency Convertible Bonds (FCCBs). A GDR is an instrument in the form of a depository receipt or a negotiable certificate created by the overseas depository bank outside India and issued to non resident investors against the issue of equity shares or foreign currency convertible bonds of the issuing company outside India. A GDR usually represents one or more shares or convertible bonds of the issuing company. A holder of a GDR is given an option to convert it into number of shares/bonds that it represents after 45 days from the date of allotment. GDR is an instrument denominated in dollars or in some other freely convertible foreign currency. The shares or bonds which GDR is entitled to get on conversion are denominated in Indian rupees. Once GDR is converted, the shares issued on conversion are listed on any one or more of the Indian Stock Exchanges. Till conversion, the GDR does not carry any voting right. There is no lock-in period for GDRs. GDRs are issued by the Indian companies to an intermediary abroad called Overseas Depository Bank. The equity shares/bonds representing the GDRs are registered in the name of the Overseas Depository Bank and the relative Share Certificates/Bond Certificates are delivered to another intermediary called the Domestic Custodian Bank who acts as the agent of the Overseas Depository Bank in India.

ROLE of GDRs For over 60 years GDRs have been used by international security houses to facilitate settlement of securities across international borders. GDRs play an essential role in international corporate finance. Increasingly, companies and governments are using them in a variety of traditional and innovative ways to : raise debt or equity capital diversify their shareholder base increased demand for their securities create dollar denominated securities for tax efficient acquisitions enhance their global image The Government benefits indirectly since international funds means addition to the country's forex reserves. WHY INDIAN COMPANIES PREFER GDRs Indian companies can collect a large volume of funds in US Dollars or Pound Sterling or in any other foreign currency of their choice through GDRs. It is not possible to collect large volume of funds in the domestic capital market. Secondly, the companies get forex funds at low interest rates. This makes them more competitive in the market which in turn ensurs a better clout in raising finance for future products. Till conversion GDRs do not carry any voting rights. There is no exchange risk for the issuing company as shares underlying GDRs are denominated in Indian Rupees, although the company receives funds in foreign currency. A listing of GDRs on an international stock exchange could provide the companies substantial liquidity and also make the companys securities more attractive to more buyers. A GDR can raise the profile of the company. The company gains recognition among foreign investors which inflates its image among the domestic ones. The issuing company is able to raise funds outside the ambit of the SEBI.

WHY FOREIGN INVESTORS PREFER GDRs

Foreign investors who are generally institutional investors are interested mainly in the return on investment in the form of capital appreciation and dividend income. They are not interested in voting rights. The advantages with foreign investors are : Return on investment in shares in Indian companies is much higher compared to returns available on many stock exchanges in the world. The Arbitrage Advantage - According to market sources, foreign investors have been indulging in arbitrage to take advantage of the the discounted prices of Indian GDRs overseas. Discounted prices of Indian GDRs as compared to what are ranging on the Indian Stock Markets are considered unnatural. They need not register themselves with SEBI. They need not pay tax on capital gains made by them on the sale of GDRs abroad. They need not appoint a custodian in India to look after their dealing in securities. They need not get RBIs permission for investing in GDRs.

ELIGIBILITY FOR ISSUING GDR Consistent track record of good performance (financial or otherwise) for a minimum period of three years. Objectives of the issue should be either of the following : Financing capital goods imports Financing domestic purchase / installation of plant, equipment and buildings. Pre-payment or scheduled repayment of earlier external borrowings. A margin of 15% of the total proceeds of an issue for other general corporate restructuring uses. Making investments abroad where these have been approved by competent authorities.

The company has not come out with any other Euro Issue during the year. The group has not come out with more than one Euro Issue within the year.

The main objective of these guidelines has been to restrict the number of companies tapping the Euro market and also controlling and monitoring end-use of funds. The spate of Euro-issues in the past has created a lot of liquidity which is also one of the reasons for inflationary pressures in the economy. Moreover, an overdose of Indian paper could have an adverse impact with the market being saturated too soon.

These guidelines have significant implications for all companies planning to tap the Euro market. Stipulations of a minimum gap of 12 months between 2 issues will have an impact on corporates having an ambitious expansion plan, particularly projects entailing substantial imports. In the past, Reliance industries floated 3 issues in close succession spread over a period of 3 years. It will also inhibit companies from availing of favorable interest rates. By preventing a group of companies from floating more than 2 issues during a single financial year, the government has perhaps aimed at ensuring a good response to issues placed in the Euro market. Simultaneously placed issues by two companies of the same group, or even from the same industry poses a threat to the success of these issues, as the investors are in 'either-or' situation when dividing their portfolios. This is what happened when MTNL announced an issue around the same time as VSNL - investors chose one of the two and thus got divided. Retention of issue proceeds abroad has been permitted selectively in the past like in the case of SCICI, which finances imports of ships. The new guidelines further specify that retention would be permitted on specific applications for import of capital goods, retiring debts in foreignh currency and financing joint ventures abroad. By permitting issuers to retain funds outside the country, increase in internal money supply and consequent inflationary pressures are sought to be controlled. It is the end-use of Euro funds which has raised a lot of questions. The new guidelines are aimed at ensuring that money, which is raised has some specific use and is not rasised merely because cheap money is available. While in the past the image of India as an emerging market was responsible for the flow of funds, with the debacle of VSNL, investors were forced to scrutinize how the funds were really being used. Even in the case of as big an issue as VSNL's, it was believed that the funds were in fact being raised for use by DoT. ISSUE STRUCTURE The GDR may be issued for one or more underlying shares or bonds held with the domestic custodian bank. The company should decide in consultation with the lead managers the following aspects about the issue :1. Public or Private Placement. 2. Number of GDRs to be issued. 3. Issue Price. 4. Conversion price, coupon rate and the pricing of the conversion options of the FCCBs. The company desirous of making a GDR issue has to make an application to the Department of Economic Affairs (DoEA), furnishing the terms of the issue, the issue size, price range and other particulars stated in the issue of FCCB and ordinary shares through Depository Receipt Mechanism Scheme, 1993, and obtain the inprinciple approval. The in-principle approval is valid for only three months from the

date of its issue. The company should finalize the issue structure and again approach the DoEA within three months from the date of in-principle approval and get final approval for the issue. GDRs are treated by government as direct foreign investment. Accordingly, a company contained in Annexure III of the New Industrial Policy91 whose direct foreign investment after the proposed GDR issue is likely to exceed 51% or which is implementing projects not predominantly contained in Annexure III should obtain clearance for investment from the FIPB before final approval for the GDR issue is given by the finance ministry. CEILING ON GDRs The shares and FCCBs issued against GDRs are treated as DFI in the issuing company. The aggregate of the foreign investment made either directly or indirectly through a GDR issue should not exceed 51% of the issued and subscribed capital of the issuing company. The term DFI includes investment by foreign collaborators but excludes investment through offshore funds or by FIIs. LISTING OF GDRs GDRs issued under the scheme may be listed on any of the overseas stock exchanges or over the counter exchanges or through book entry transfer system prevalent abroad. GDRs may be purchased and sold by any non-resident as defined in FERA. OPERATING MECHANISM OF GDRs In a GDR issue, the issuing company issues ordinary shares as per the scheme and delivers the ordinary shares to the domestic custodian bank (DCB), which will in terms of the agreement, instruct the overseas depository bank (ODB) to issue global depository receipt or certificate to the non-resident investor against the shares held by the DCB. GDR is normally issued in negotiable form and may be listed on any international Stock Exchange for trading outside India. Most companies list GDRs in Luxembourg or Dublin Stock Exchanges. The shares underlying the GDRs will be registered in the name of the ODB, which will be the holder on the books of the company. Holders of GDRs will have no voting rights or other direct rights of a shareholder with respect to the shares underlying such GDRs. Some offering circulars provide that the ODB shall vote as directed by some other group company of the issuing company. Registered holders of shares withdrawn from the depository arrangement will be entitled to vote and exercise other direct shareholders rights in accordance with the Indian law. Withdrawn shares cannot be redeposited. These withdrawn shares will be listed on the Indian Stock exchanges, just as other shares of the company. Holders of GDRs will be entitled to receive dividends paid on the underlying shares, subject to the terms of the issue. So long as the GDRs are not withdrawn, the relevant ODB will, in connection with such outstanding shares, convert Rupee dividend into dollars.

TRANSFER AND REDEMPTION OF GDRs 1. A non-resident holder of GDRs may transfer those receipts or may ask the Overseas Depository Bank (ODB) to redeem these receipts. In the case of redemption, the ODB shall request the Domestic Custodian Bank (DCB) to get the corresponding underlying shares released in favor of the non-resident, for being sold directly on behalf of the non-resident, or being transferred in the books of account of the issuing company in the name of the non-resident. 2. In case of redemption of the GDRs into underlying shares, a request for the same will be transmitted by the ODB to the DCB in India with a copy of the same being sent to the issuing company for information and record. 3. On redemption, the cost of acquisition of the shares underlying the GDR shall be reckoned as the cost on the date on which the ODB advises the DCB for redemption. The price of the ordinary shares of the issuing company prevailing in the BSE or the NSE on the date of the advice of redemption shall be taken as the cost of acquisition of the underlying ordinary shares. 4. For the purpose of conversion of FCCBs, the cost of acquisition in the hands of the non-resident investors would be the conversion price determined on the basis of the price of the shares at the BSE or the NSE on the date of conversion of FCCBs into shares. TAXATION Interest on the bonds (until conversion) is subject to TDS @ 10 percent. Tax on dividend on converted portion of the bond has been removed. Transfer of GDRs made outside India by one non-resident to another non-resident shall not give rise to capital gains liable to tax in India. Long term capital gains arising out of the transfer of shares (after redemption of GDRs) will be taxed @ 10 per cent and it is liable to be withheld at source. The holding of GDRs by non-residents and the holding of underlying shares by the ODB is in a fiduciary capacity and the transfer of GDRs between non-resident investors are exempt from wealth tax and gift tax. PROCEDURE FOR GDR ISSUE Euro Issue management needs an extremely well-planned time bound activity. The issuing company has to comply with various enactments, rules, regulations, stock exchange requirements etc. It also calls for team work and the team comprises of all the intermediaries involved in the issue. It is the collective involvement of all which gets the desired results. A company which desires to make a euro issue has to study its requirements of foreign exchange component in its project(s) or diversification or modernization plans. It has to check up the following aspects :1. Whether the size of its issue is more than the economic size of a euro issue. According to the internal guidelines finalized by the DoEA on 20.4.1993, the size of the issue should not be less than 20 million Dollars and more than 100 million

Dollars. In the case of power sector and shipping, the limit is higher at 500 million Dollars. The funds to be raised will be restricted to 50 per cent of the post-issue market capitalization. Companies can make only one euro issue in a financial year. There should be a gap of 12 months between two euro issues. Group companies cannot come out with more than two issues in a financial year. The expression group companies is to be interpreted on the basis of the definition of same group as provided in section 372(11) of the Companies Act,1956. 2. The company has to first find out whether the existing authorized capital is sufficient for the purpose of Euro issue. If not, the company has to take steps to get its authorised capital increased. If the company has taken term loans from FIs/Banks or issued debentures it has to check out the loan agreements/debenture trust deeds and find out whether permission of the lenders/trustees is to be obtained for making the proposed issue. Most of the FIs stipulate a condition in the loan agreement/trust deed that the borrower company should take their permission for increasing its capital. 3. Also the company should check up with the foreign stock exchange where it proposes to list its GDRs whether the issue satisfies its listing requirements through the listing agent which is usually a bank approved by the overseas stock exchange. Most companies list the GDRs in Luxembourg or Dublin stock exchanges. If the size of the issue is big, companies may list the GDRs on the London Stock Exchange. OTHER POINTS TO BE NOTED 1. The funds should be utilised within 12 months from the date of issue. 2. Companies should submit quarterly statement of utilisation of funds duly certified by auditors to the DoEA. 3. Government does not encourage financial companies to float Euroissues. RELEVANT ACTS/RULES/CIRCULARS/GUIDELINES Companies Act, 1956. Foreign Exchange Regulation Act, 1973. Securities Contract (Regulation). Income-tax Act, 1961. Listing Agreements - Indian and all the foreign exchanges where GDRs are proposed to be listed. Internal guidelines of Central Government finalised on April 20, 1993. Central Government Guidelines dated 12-11-1993 vide G.S.R. No. 700 (E).

Central Government Guidelines vide Press Note S-11 (25)/CCI-II/89/NRI dated 11-5-1994. Laws of the country in which the Depository Receipts are being issued.

The checklist of activities for GDR issue (backed by shares) is briefly indicated below :1. Arrange to convene a board meeting to decide on the Euro issue, pass a suitable resolution for making the Euroissue, and for approving the draft notice of the Extraordinary General Meeting at which the special resolution for making Euroissue will be considered. The exact amount to be raised by the Euroissue need not be stated in the resolution to be passed by the shareholders of the company, but the upper ceiling may be specified to give the company some flexibility. The Explanatory Statement as required under section 173 of the Companies Act, 1956, to be appended to the notice of extraordinary general meeting should be approved by the Board. 2. Issue the notice for extraordinary general meeting together with an explanatory statement giving 21 days clear notice to the shareholders.

3. Hold the general meeting of shareholders, pass a special resolution under section 81(1A) of the Companies Act approving the proposed Euroissue and file the same with Registrar of Companies in Form No. 23, within 30 days from the date of the meeting. 4. Make an application to the Department of Economic Affairs (Ministry of Finance) seeking permission for the Euroissue, giving details about the quantum and the terms of the issue, the price range, the track record of the company and the objects of the issue. The application should contain the additional information prescribed in the guidelines for the GDR issues by the Department of Economic Affairs in the notification mentioned above. The DoEA will consider the application and give an in-principle approval, if it is satisfied with the proposal. The in-principle approval will be valid for 3 months from the date of issue of approval. 5. ON getting in-principle approval from the DoEA, select merchant bankers (Lead Managers) and underwriters for the issue. Lead managers should have exposure to Euroissues made by Indian companies. Hence, reputed merchant bankers in foreign countries are given the assignment. Discuss he issue proposal with the Lead Managers and give him the balance sheet and all other particulars about the company. He will study the proposal and suggest how to market the issue. He will prepare due diligence report which will establish that the companys audit and compliance system are in order. Lead Managers charge a fee of 3 per cent of the issue, as fees fo managing or underwriting a Euro issue. 6. Discuss with Lead Mangers and select the overseas depository bank for the issue (Depository Banks charge 5 per cent of the issue price for rendering their services). 7. Select, in consultation with the overseas depository bank, the custodian bank in India.

8. Select, in consultation with the Lead Managers the solicitors and bankers abroad for the issue. Select the Listing Agent (normally a bank in a place where the overseas Stock Exchange functions is appointed as the Listing Agent. The Listing Agent should have the approval of the Stock Exchange concerned to act as such). Make the listing application to the Overseas Stock Exchange in advance for listing the GDRs. Make an application to the NASDAQ in London for inclusion of the companys GDRs for dealing in their PORTAL system. 9. The price band for the GDRs should be decided in consultation with the Lead Managers, taking into consideration the following :

(a) future earnings for the next 3 years; (b) current price of the shares on the stock exchanges; (c) fundamental analysis of the company and the industry. 10. After finalizing the issue structure and after appointing the intermediaries for the issue, make another application to the DoEA, and get the in-principle approval converted into final approval. While giving the final approval, the DoEA prescribes a 45-day cooling-period during which the market-makers, who are usually the managers to the Euroissue, are obliged to give two-way quotations for the GDRs to stabilize. The final approval is valid only for 3 months. So, the issue should be made within 3 months from the date of issue of final approval. 11. Arrange for drafting of the offering circular by the solicitors and merchant bankers keeping in view the international disclosure standards. Before drafting the offering circular, which is equivalent to prospectus, make necessary changes in the audited accounts to conform to the international accounting standards by regrouping the items in the profit and loss account and balance sheet and if necessary get the revised accounts audited by the auditors of the company. State in the offering circular the following : (a) The quantum of over-subscription in percentage terms which the company proposes to retain. (b) Standstill period - the period during which the company will not make further issue of shares, with a view to protecting the value of shares represented by GDRs. (c) The cooling period. (d) Procedure for transfer of GDRs. (e) A statement that any FII can apply for GDRs representing not more than 5 % of the companys issued and subscribed capital. (f) GDR holders have no voting rights. (g) Whether depository can exercise voting rights and if so, how it can exercise the rights.

(h) Procedure for redemption/ conversion of GDRs into shares. (i) Overseas Stock Exchange in which the GDRs will be listed. (j) The rate at which income tax at source will be deducted from dividend (the rate of tax deduction is 10 % at present). (k) Owners of the GDRs will be entitled to receive from the depository an amount equal to the net amount (after Indian withholding tax and other expenses of depository, if any) of the rupee dividend per share which the depository receives from the company, converted into US dollars. (l) Details of GoIs approvals. (m) Share Price Data. (n) Shareholding Pattern composition of shareholders). (o) Dividend paid in the last five years. (p) Brief history of the company and details of business activities. (q) Use of funds collected by the GDRs issue. (r) Directors and management. (s) General information about the business in which the company is engaged. (t) The law which governs the Depository Agreement. (u) how Indian securities market operates. (v) Where and how documents can be inspected by prospective investors. (w) A summary of information contained in the offering circular. (x) Any notice to be given by the company to the holders of GDRs should be published in a daily newspaper of general circulation in the city where the Overseas Stock Exchange in which GDRs are listed, is located. It would be advisable to state in the offering circular, the name of the newspaper in which notices to GDR holders will be published. (y) Reformatted Financial Statements and Auditors Report and unaudited financial results, if any. (z) Table of contents for easy reference. 12. Arrange to keep ready all the original and copies of material contracts and documents mentioned in the offering circular for filing the same with the Registrar of Companies.

13. Get the offering circular approved by the Board. File the offering circular with the Registrar of Companies and the stock exchange where GDRs will be listed for the purpose of record. 14. Arrange for printing the offering circular and application forms with the printers abroad selected for the Lead Managers so that distribution of the application form and offering circular is easy. 15. Settle the draft of the depository agreement with the issuing company and the overseas depository bank in accordance with international law in consultation with the solicitors and execute the same. 16. finalize the draft of the custodian agreement between the overseas depository bank and the domestic custodian bank in consultation with the solicitors and Lead Managers and arrange to execute the same. 17. Finalize the draft of the subscription agreement between the investors and the Overseas Depository Bank in consultation with the solicitors and Lead Managers. 18. Decide the marketing strategy to be adopted for the issue in consultation with the Lead Managers and underwriters. 19. Make an application to RBI in Form ISD seeking approval for making the Euroissue. Application has to be submitted to Central Office of RBI. Obtain the central banks in-principle approval before making the issue. 20. Make an apppication to the Reserve Bank for release of foreign exchange for meeting : The travel requirement of the companys executive to visit different ocuntries for holding the roadshows. Roadshow expenses. Listing fee payable to Overseas Stock Exchange. For payment of brokerage, underwriting commission etc. Expenses for printing prospectus and application forms and for distributing the same.

After getting RBIs approval and foreign exchange release from the bank, the companys executives can visit different countries for holding roadshows. Make another application to the Reserve Bank seeking their permission for opening a bank account abroad with the bankers to the issue and get their permission before the issue opens. 21. Arrange to hold roadshows in different countries 4 to 5 weeks before the issue opens to ascertain the response of foreign/ non-resident investors. Roadshows are held in different countries to build demand for the GDR issue. In the roadshows,

the chairman or the chief executive of the commpany will brief the activities and highlight the various aspects of the Euro Issue. A video presentation will be made. These conferences are generally attended by institutional investors who ask more pointed questions. The chairman or the chief executive has to answer these queries. Normally, roadshows are held in big hotels. Roadshows may go on for 15 to 30 days before the launch of the issue. 22. Settle well in advance the format of GDR to be issued by Overseas Depository Bank in consultation with the solicitors and Lead Managers. 23. Decide on the timing of the issue and issue price after assessing the response to the roadshows and keeping in view thw prices of the securities on the BSE for 10 days prior to the date of issue. Priicing is to be done very carefully. Issue should be attractively and not aggressively priced. Euro market investors scoff at premia. So, premium should be fixed properly. 24. Make an application to the State Government for paymenty of consolidated stamp duty on the share certificates proposed to be issued and get the necessary order.

25. Make an application to the Stock Exchange abroad (where listing is proposed) for listing the GDRs. 26. Announce the opening of the issue and the price of GDRs. Actual issue price is determined just a day prior to the launch of the issue on the basis of the feedback received by the company from its uinderwriters. The price of a GDR is generally the lower of the average of the prices for the last week and of the last day, on the BSE, prior to the date of launch. Sometimes the pice is fixed at an appropriate discount. Companies generally fix the issue opening and the closing time according to New York time. Timing the issue is very important. See that no other Euro Issue from India simultaneously opens. 27. scertain the response of the issue from the underwriters/ bankers to the issue. If the issue is oversubscribed, decide the quantum of oversubscription to be retained. Announce the closure of the issue in consultation with the Lead Manager. 28. Make an application to Reserve Bank in form ISD and request Reserve Bank to convert its earlier in-principleapproval into final approval for making the allotment of shares and for issuing the GDRs. 29. Hold a board meeting for approving the draft Depository Agreement with Overseas Depository Bank. After the Board approves the same, execute the agreement with the Depository Bank.

30. Hold a Board meeting allotment committee meeting (if the Board has formed an allotment committee) and allot shares in favour of the Overseas Depository Bank as provided in the depository agreement. 31. Memorandum and articles of association of the company, bye-laws of the depository, copy of depository agreement, a legal notice relating to the issuance of

the GDRs are to be deposited prior to the listing, with the Chief Registrar of the District Court of Luxembourg (if listing is to be made in the Luxembourg Stock Exchange). All these documents should also be deposited with Listing Agent who should make them avilable for the inspection of investors. Get the GDRs listed on the Ovberseas Stock Exchange mentioned in the offering circular. 32. Arrange for transfer of the subscription in foreign exchange collectedby the bankers to the issue to he companys bank account in India. Governmetn has stipulated that companies making Euro Issues should remit the entire foreign currency raised to India within 2 weeks from the date of closure of the issue unless the Government has permitted the company to retain the same abroad for specified purposes, while granting approval for making the Euro Issue.

33. Arrange to execute the custodian agreement betweeen the Overseas Depository Bank and the Custodian Bank in India. 34. After the Board meeting is over, file tehreturn of allotment in Form No. 2 with the ROC and issue the Share Certificates to the Custodian Bank in India by complying with the Companies (Isuse of Share Certificates), Rules, 1960. 35. Ask the custodian bank in India to intimate the Overseas Depository Bank that the company has lodged with it the Share Certificates underlying the GDRs. 36. See that the Global Depository Receipts are issued by the Overseas Depository Bank to the underwriters who will place the same with the investors. 37. Pay the fees to the Lead Managers/ co-managers/ advisers to the issue, pay commission to the unedrwriters, pay fees to custodian bank, Overseas Depository Bank, Listing Agent, etc. pay brokerage to the brokers who have procured subscription for the issue, etc.

38. Send quarterly reports about utilization of funds duly certified by Auditors to the Department of Company Affairs, Ministry of Finance. Please see that the funds are utilized within 21 months from the date of issue. 39. If the issue is oversubscribed or and if any application is rejected or allotment is made for lesser number than applied for, make refund of the application money by cheque or pay order or demand draft. 40. Send copies of companys annual reports and half-yearly results to the listing agent so that he can make them available to the investors for their inspection. 41. Dividend for the shares pertaining to GDRs is to be paid in rupees to the Overseas Depository Bank after deduction of 10 per cent income tax at source. The depository has to convert the dividend received from the company into dollars and pay it to the holders of the GDRs.

Misuse

The liquidity brought about by Euro-Issues is being used to invest in lucrative avenues like money-market instruments, ICDs, Real Estate and even Shares in the primary market. Essentially arbitraging, the companies stand to gain returns on investments which will bring the interest cover ration to less depressing levels. PRICING When Indian corporates first entered the GDR market, they were willing to sell their equity overseas at substantial discounts to domestic share prices. Once, the demand for Indian GDRs boomed, these corporates tried to ensure fat premiums. The selection of the investment banker(s) also depends on the indicative price offered. The pricing also depends on the demand and supply for Indian paper. Even a blue chip company may not get a good price if its equity is priced incorrectly in relation to its scrip's ruling price, and its current and potential earnings. A premium is possible only if investors expect the money to translate into higher earnings and growth. Hence, an issue should be attractively, and not aggressively, priced. Bad pricing was one of the major factors that lead to the VSNL fiasco in 1994. The moral of the story is - Price carefully, or pay the price. Criteria for Pricing of GDRs (SEBI guidelines, 1995) Various criteria to be considered for pricing of GDR issue are given below :1. Prospective earnings - The prospective earnings for the next three years is one of the most important criteria for pricing of GDR. Since the investment in GDRs is made with prospect of long term appreciation, future earning potential is more important than past earnings. 2. Market Price - The current market price of the share is taken as benchmark for pricing of the issue. The average price for the company's securities on the BSE for the ten days prior to the GDR is relevant for this purpose. The GDR is usually issued at a discount of 10-20% to the market price of the share. A discount in excess of 20% could result in arbitrage trading in the securities. 3. Price-Earnings Ratio - A P/E ratio of between 15 to 20 is considered optimal for emerging markets. PE ratios of some of the developing markets are - Malaysia 20, Thailand 17, S.Korea 17, Mexico 15. The price of the GDR is worked out by applying a PE ratio of 18 to the expected earnings for the current year subject to a discount of 10-15% of the average market price for the 10 days prior to the opening of the issue. A ratio of the PE to the normalized earnings over a period of 3-5 years of less than or equal to 0.7 is considered healthy. Alternatively, a company with PE ratio of 20 should be able to project earnings growth of 40% per annum. This ratio ranges between 0.7-1.2% worldwide. 4. Turnover and Market Capitalization - Though there is no hard and fast rule for turnover and market capitalization, a minimum turnover of Rs.500 crores and market capitalization of Rs. 1200-1500 crores are the basic eligibility criteria for attracting investors. The floatation cost would also not be economical for smaller companies.

5. Fundamental Analysis - The fundamental analysis of the company and the industry is a prerequisite for launching a GDR issue. The short-term and long-term prospects of the industry in which the company is operating, the track record of the company, quality of technology, marketing strategy and price competitiveness of the company are key factors in assessment of a companies fundamentals. Other important factors are market image, labor costs and market share. Profitability is measured as a ratio of capital employed and is compared with that of similar companies worldwide. Low geared companies with a debt-equity ratio of less than 1:1 are preferred to high geared companies. 6. Size of the issue - The size of the issue is linked to the demand for the securities. Once the roadshows are complete, a company is in a position to assess the issue size that the market can absorb. The issue may be made to the full extent of the demand. Alternatively, the issue may be made to the extent of 60-70% of the demand only to ensure greater stability in GDR prices after the issue. In addition, the market sentiment at the time of issue is a factor of paramount importance. This is gauged through the roadshows held prior to the issue. Generally, the pricing of a GDR is decided on the basis of the lower averages of the share prices for the last one week and that of the last day prior to pricing. But, Indian companies initially issued them at a premium in order to take advantage of the buoyant market, since FIIs bought Indian scrips at high rates. Locals too buy up the domestic shares as soon as the intention to launch Euroissues is announced by the company. The pricing for the Euro-issue is then done at a premium. As soon as investors have bought the deal, the locals sell the domestic shares. While this is okay when the index climbs suitably, in normal conditions, investors become suspicious about the workings of the price mechanism. COMPANY FUNDAMENTALS A GDR is nothing but an equity offering. Hence, fundamentals of the company floating a GDR should be sound enough in the eyes of the foreign investor. Sunrise industries and high growth potential companies are quickly lapped up by foreign investors, that too at a premium over the domestic share price. After the initial rush, when supply of Indian paper was less than demand, investors have now turned choosy. LEAD MANAGERS The past few years have seen a number of Euro issues. While the good performance of these issues is proof of positive outlook of foreign investors towards the liberalised Indian economy, the behind the scenes operators - the lead managers have often not got the credit they deserve. Lead Managers have an important role to play in promoting a company's issue. They prepare the due diligence report, which establishes that the company's audit and compliance systems are in place. After the research is done, a prospectus is prepared

and government permission is sought. Further, lead managers analyse the performance of the company, decide the instrument of offer, size of the issue, price of the issue and the timing of the issue. They organise and conduct roadshows whereby providing an opportunity to international investors to interact with the company's management. Lead manager(s) are typically selected eight to ten months before a GDR is issued. It is very important that that the lead managers understand the client and his business, and they have a track record of managing similar issues. Moreover, the lead manager's reputation must be impeccable. A GDR is usually lead managed by more than one lead manager. Lead managers have to give presentations to the company issuing the GDR. Based on these, and other factors such as the size of the issue, one or more lead managers are selected. Lead managers aggressively compete for getting the mandate for GDRs, especially prestigious issues. This can lead to problems created by those lead managers who fail to get the mandate. They can retaliate by dumping large number of shares of the issuing company, hence depressing its share price. This will lead to lower realisation from the GDR issue. The VSNL GDR issue debacle is a real-life example of this. TIMING Timing is very important for a GDR issue to get the best possible terms. The aborted VSNL GDR issue is a case in point. There was a demand for VSNL GDRs. But, the price, given the market conditions, was not right. Had the issue been launched one or two months earlier, it could have commanded the desired price. The Euromarkets determine the pace at which GDRs are absorbed. The timing has to be such that due diligence, documentation and roadshows are completed at a time when conflict with competing issues is avoided. It should be kept in mind that the foreign investor has a variety of options to choose from, including convertible bonds and other forms of debt issues. MARKETING As other financial instruments, GDRs have also to be marketed with savvy. Among the themes most frequently utilised by Indian corporates for this purpose are liberalisation, effect of derugulation on it, its market, its earnings and growth potential and its future. Roadshows, held over the three weeks prior to an issue, ae very important. Particularly crucial is the first roadshow, when prospective investors get their first look at a management. And successful roadshows help the lead manager(s) to bargain for better terms. This is because the response during the roadshows gives an idea of investor demand, which determines the quantum of premium to be had. A roadshow typically lasts for one to two days at a particular location. It comprises of both group presentations and one-on-one meetings. Among the popular locations for conducting roadshows are London, Paris, Geneva, Hong Kong, Singapore, Los Angeles, New York, Boston, Edinburgh and West Asia.

ISSUE SIZING What should be the optimum size of a GDR issue ? The answer to this question is not straight forward. It depends on whether the GDR market has the apetite for the amount of paper in question. Besides, the optimum size is directly related to a firm's fundamentals. If demand for Indian paper is sluggish at the moment, companies can go in for smaller issues in two or more tranches rather than mega issues. Then there are the government guidelines which may issue caps for the number of issues and more importantly, for the amounts that can be raised. PACKAGING When the market is flooded with GDRs and other instruments, companies are compelled to come out with innovations to differentiate their offerings. Plain GDRs can be garnished with warrants. Warrants allow investors a leveraged exposure that is appealing in a volatile market. Thus, innovative instruments are a way of developing long-term relationships with investors. END USE OF FUNDS As far as end use of funds raised by a GDR is concerned, openness is the best policy. Indian firms have a bad track record of indulging in vagueness when it comes to disclosing the deployment of funds raised. Gone are the days when corporates could tap the Euromarkets, and divert the funds into, say capital markets. Now, corporates have to explicitly state, and adhere to, the objectives for which they are raising money. Clearly, disclosure norms may not sell an issue, but they can easily do the reverse. SECONDARY MARKET Fund managers are unanimous in their view that Indian corporates do nothing to ensure a reasonable after-market. That is a major mistake, since the performance of a GDR in the secondary market affects both the investors and the issuer. For this, the GDR should be sponsored by an investment bank that is prepared to provide it liquidity. As part of this, firms must keep investors informed about themselves, through research data and updated reports, long after the issue has been completed. This will help the firm in case it has to again access the market sometime in the future. The performance of the previous issue will be evaluated by all potential investors before they put in any money. EFFECT OF GLOBAL CHANGES As corporate India integrates itself with the global equity market, tracking global trends has become essential for Eurosuccess. Information is money in the Euromarkets. As interest rates vary in the world's major financial markets, the tremors can very well affect the prices of Indian GDRs. Smart corporates must spot when interest rates will rise, especially in the US, which will lead to the reallocations of portfolios of institutional investors. This will enable them to take advantage of forthcoming developments, instead of merely reacting to them.

FUTURE SCENARIO Western investment bankers are anxious to kickstart a market that has provided them with lucrative underwriting and advisory fees. Following the successful international equity launch members of the underwriting syndicate can expect the equivalent of 3% of the total value of the shares underwritten in fees. This means about $30 million from the VSNL issue had it been successful. Western bankers optimism about the future of the GDR market is underpinned by the growing depth and sophistication of the dedicated emerging fund markets industry. These funds which often have obligations to invest in a specific market or region are growing at breakneck speed. Interest in India has blossomed only recently. There were 16 India funds in existence by the end of March 1994. About $2.6 billion had been raised by these funds to invest specifically in Indian markets. Of these, 7 were launched prior to 1993. 10 funds from heavy weights like Raymond James, Eaton Vance, Lloyd George and Lazard Brothers were in the pipeline. Such funds usually publish strict selfimposed guidelines as to what they will invest in. Most invest only in company equity although some turn to money market instruments such as short term government debt and floating rate notes when poor fund performance calls for more defensive strategies. The importance of the Indian GDR market to these funds cannot be overestimated. GDRs have been and will continue to prove to be an attractive alternative to domestically listed stock. They trade on an internationally recognised exchange in Luxembourg and on SEAQ, the London Stock Exchange's screeen based shared trading system for international equities. Moreover, trades are cleared through Euroclear, a well-used and efficient system better known for handling the multitrillion dollar yearly turnover in the Eurobond markets. Investor interest in India funds is now been driven by forces too powerful to be badly affected by the failure of one albeit important deal like VSNL. While NRIs hold significant share holdings in these funds, it is the large institutional investors who are set to fuel growth in the industry. Such investors - huge US pension and Mutual Funds, and their more conservative counterparts in Europe look to country funds like those being set up to invest in Indian securities to manage the internationally diversified elements of their portfolios. Some may wish to invest in the emerging markets for short term gains. Judging by the massive sell-offs in the emerging debt and equity marjets that have occurred since the Federal Reserve signalled a rise in US interest rates in February 1994, the scale of this type of activity has been underestimated. Arguments that a rise in US interest rates are the root cause of the sell-offs in emerging markets equity may for this very reason prove to be untrue. The interest rate outlook in the US does not warrant the sort of price movements witnessed internationally. Orthodox thinking would have us believe that a sharp rise in US tresury bond yields will attract funds away from the higher yielding emerging markets back home to the US. Although economic growth is accelerating, inflationary pressures in the US economy remain subdued. A further tightening in monetary policy is inevitable, but will almost certainly be gradual, protracted and well ordered.

In the long term, prevalent thinking in portfolio theory puts forth several concrete reasons why FIIs should diversify into emerging market equities and debt holdings. Institutional investors are strongly influenced by statistical arguments based on risk and return : international diversification acros markets which havelow correlation with each other can reduce volatility for a given rate of return. Many institutional investors believe that a medium term goal of 15% exposure to overseas equity markets is a sensible target to aim at. Some of the advantages cited for institutional investors for investing in Indian GDRs are : These institutions may enter the Indian GDR market if it were to become large and liquid enough. Foreign investors have welcomed moves from the Indian finance ministry to adopt a more hands-on approach to the regulation of the GDR market. The government guidelines for certain selected purposes only. Interest rates in the US may rise, but only marginally and over time. Amrican and European pernsion funds are diversifying their portfolios to spread risk. Industry specific funds are hungry for Indian GDRs in sunrise sectors. Mutual Funds are impressed by the fundamentals of Indian companies. The Indian GDRs market is becoming more mature and sophisticated. Lucrative underwriting fees for selling Indian paper will ensure their sales.

Clearly, all the elements for growing foreign participation in the Indian Euroissues are in place. They will continue to attract the interest of foreign investors in the Euromarket in the medium and long term. Offer Documents The offer documents of various companies clearly state that the depositary will not vote on shares underlying the GDRs and will also not give the power of attorney to any person to vote on its behalf. Some companies however permit the depositary to vote but dictate the circumstances and manner of voting by specifying that it should not exercise voting rights except under limited circumstances, when required by law and permitted by the legal counsel of the company. Under sucj conditions, the depositary mmay be directed to give a proxy or power of attorney favouring a director of the company or to vote in the same manner as those shareholders designated by the board of directors. Voting rights can however be exercised once the GDR is converted into its underlying shares. This happens when, on request from a GDR holder for redemption, the depositary directs the domestic custodian bank to release the shares in favour of non-resident investors. The released shares may be sold directly on behalf of such an investor in India or be registered in his name.

On redemption of the GDR and release of ubderlying shares, the real owner exercises voting rights like any other equity shareholder. A problem may arise when an overseas 'raider' wishes to acquire substantial shareholding. With takeover threats looming large, Euro-issues is considered to be takeover route. Once ownership of the underlying shares os obtained, anything can happen. The raider may invest in as many GDRs as he can lay his hands on and have them redeemed and underlying shares released in his favour. To provide a safeguard against such an event, some issuers have provided for a 'right of first refusal' to the company, which allows the company to offer the released shares to its own nominees first. RECENT DEVELOPMENTS TWO-WAY GDRs After raising about four billion dollars in the international markets, Indian GDRs seem to have fallen from grace. In the secondary market the GDR prices have fallen after the foreign investors unloaded their holdings. Also, the Indian companies wanting to tap the American Depository Receipts (ADR) market first have to meet the stringent disclosure norms reuired for the listing on New York Stock Exchange and Nasdaq. Plus, two-way trade is a pre-requisite for trading on these exchanges. This has made the Indian government start thinking about introducing limited trade in two-way GDRs. This pracice is already prevalent in 70 to 80 countries across the world who have a GDR programme. Concept - At present, foreign investors are allowed to redeem their dollar denominated GDRs with the global depositary bank, which in turn converts them into rupee denominated shares and sells them on the Indian stock markets. This operation results in the 'loss' of GDR for good. In the reverse operation foreign investors can buy shares and convert them into GDRs. Under this operation, a local person of the stock market is notified and he buys the shares and deposits them with the local custodian. Two-way GDRs are not allowed in India because the government feels that there would be a sudden inflow of money into the market rather than into the company, which could lead to a flight in foreign capital. However, this will be possible once the full-convertibility of the rupee takes place. Right now, the government is contemplating on introducing this trade under certain guidelines with some restrictions. Global investment bankers have requested the ministry to consider a de facto capital account convertibility whereby the 'lost' GDRs could be recreated through two-way trade. This would mean that if a company has raised 50 million dollars and there has been a 5 million dollar redemption, GDRs to the extent of 5 million dollars are lost. Foreign investors would be allowed to buy Indian shares and convert them into GDRs upto a ceiling of 5 million dollars. There are varying perceptions about the long term effects of two-way GDRs on companies and the economy.

It will improve the image of the company in the world market and thus give access to tap new sources. Companies will have a split in holdings If the economy cannot absorb the higher income coming in, GDR prices are likely to tumble and take the company's image with it.

Preference to London Stock Exchange In October 1994, LSE relaxed its listing norms for Indian companies planning to issue GDRs in the international market. They are no longer required to get the underlying shares listed on LSC for the purpose of listing the GDRs. SInce hen, there has been an increased preference for listing on the LSC rather than New York Stock Exchange or Nasdaq. Euroissue Norms Modified In May 1995, the government modified the Euroissue guidelines regarding retention of funds abroad and permitting the issuing companies to retain the Euroissue proceeds also as foreign currency deposits with banks and public financial institutions in India. Thesecan be converted into Indian rupees only as and when expenditure for the approved end uses are incurred. The interim use of funds retained abroad as foreign currency deposits has to conform to RBI approved norms. RBI imposes 7.5% per cent CRR on proceeds from Euroissues To check money supply and possible rupee appreciations, in August 1995, RBI imposed CRR of 7.5% on Euroissue proceeds parked in forex deposits with banks. Further, these deposits are to be converted to Indian rupees at the Foreign Exchange Dealers Association of India's indicative rate. The imposition of CRR means that there will be a holding cost to the banks. Over and above the deposit rate that the bank will have to pay the keeper of the euro-issue proceeds, it will have to incur an additional cost of 7.5% and a further 15% the moment it converts the same into rupees.

GLOSSARY Global Depository Receipts (GDRs): GDR means any instrument in the form of a depository receipt or certificate (by whatever name called) created by the Overseas Depository Bank outside India and issued to non-resident investors against the issue of ordinary shares or foreign currency convertible bonds of issuing company. Overseas Depository Bank (ODB) : ODB means a bank authorised by the issuing company to issue global depository receipts against issue of ordinary shares of the issuing company. Domestic Custodian Bank (DCB) : DCB means a banking company which acts as a custodian for the ordinary shares of an Indian company issued by it against GDRs or certificates. Related Party Transaction : Transactions specified in the Companies Act, 1956, as related party transactions. SEC : Securities and Exchange Commission (USA) GAAP : Generally accepted accounting principles. Stand-still period : No further equity share or interest in equity shares, for a specified time period. Red herring Prospectus : Prospectus duly approved by the Board and signed by the directors wherein the space for issue price of the GDR is kept blank. Depository agreement : Agreement between the company and the overseas depository bank. Custodian agreement : Agreement with domestic custodian bank. Subscription agreement : Agreement between the company and the managers, wherein the former agrees to issue the securities and the latter agrees to subscribe to the same. Green shoe option : It means additional amount in percentage terms which may be retained, if offered. Invitation Telex : Telex sent by the lead managers to the financial institutions formally inviting them to act as managers to the issue. QIB : Qualified institutional buyers in USA which own and invest at least $100 million in eligible securities.

TIME TABLE FOR GDRs OFFERING (COVERS ONLY IMPORTANT ACTIVITIES) TimeFrame (days) 1. Appoint Lead Manager, Legal Counsels (issuers, lead managers, X (-) 90 underwriters), Depository Bank and Custodian Bank. 2. Furnish to the Lead Manager with all necessary materials to X (-) 60 prepare the documents. 3. Hold discussions with Legal Advisors/Auditors for drafting of X (-) 60 various agreements and Offering Circular. 4. Hold Due Diligence meeting with the lead managers. X (-) 40 5. Obtain Board approval, shareholders approval and other approvals X (-) 40 from Government, RBI etc. 6. Appoint other intermediaries in consultation with the Lead X (-) 20 Manager. 7. Prepare and finalise draft Offering Memorandum and Circulate to X (-) 10 all parties. 8. Finalise all documents including Depository Agreement, X (-) 10 Subscription Agreement, Trust Deed, Paying and Agency Agreement, Application for listing etc. 9. Update all comments received in the Offering Memorandum and X (-) 7 other agreements and give for printing. 10. Commence Road shows. X (-) 7 11. Launch the issue. X 12. Price the issue. X (+) 3 13. Sign the document. X (+) 4 14. Close the issue. X (+) 14 GAAP DIFFERENCES Summary of significant differences between Indian, U.K. and U.S. GAAP is given below. Indian GAAP U.K. GAAP U.S. GAAP 1. Revaluation of fixed Permitted. Not permitted. assets is permitted. 2. Excess depreciation is Not allowed. Not allowed. allowed. 3. Consolidation of Consolidation is Consolidation is subsidiaries is not required. required. required. 4. Cash flow statement is Required. Required. not required. 5. Taxation is provided on Deferred taxation on Deferred taxation on estimated tax liability. timing differences temporary timing reversible. differences. 6. Goodwill is capitalised Required to capitalise Goodwill is capitalised and no requirement to and amortise or adjust and amortised over a

amortise. 7. Information regarding EPS is not required to be disclosed. Share issue expenses can be deferred. Capitalisation of interest on Fixed assets is required while assets are under construction. Distinction is not made between Fixed Assets and Current Assets investments. All investments are carried at cost; but market value is disclosed.

against reserves.

8. 9.

period not exceeding 40 years. EPS data before EPS data after Extraordinary items is Extraordinary items is disclosed. disclosed. To be written off against Same as U.K. GAAP. share premium. Permitted while Fixed Required as per Indian Assets are under GAAP. construction. Fixed Asset investments are carried at cost. Current Asset investments are carried at the lower of cost and net realisation value investments in associated companies are accounted for under the equity method. Extraordinary items are separately disclosed with income-tax effect thereon. Equity method is generally used if the investing company can influence the financial policies of the investee company. Other investments are valued at lower of cost or market value. Extraordinary items are reported.

10.

11.

12. 13.

Extraordinary items are disclosed as additional information without adjustment for tax effect thereof. Capitalisation of lease is not required. Depreciation is on SLM or WDV, as adopted.

14.

15.

Gains/Losses from foreign exchange currency transactions relating to assets and liabilities are adjusted in the respective accounts. Other gains/losses are taken to P & L account. R & D expenditure is R & D is expensed as R & D is expensed as charged to P & L incurred. incurred (except for account except certain software R & D). equipment, machinery, which are capitalised and depreciated. As per U.K. GAAP.

Financial leases are to be Same as U.K. GAAP. capitalised. Depreciation is on the Same as U.K. GAAP. SLM with reference to useful economic life of the asset. Gains/Losses from Same as U.K. GAAP. foreign currency transactions are taken to P & L account and/or shareholders equity.

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