ADR And GDR

History of Depository Receipts

Came into existence since 1920

UK-based retail companySelfridge Provincial Stores
Ltd.decided to expand its shareholding base

US investors expressed their interest in buying the
companys shares

Process of transfer got complicated
2
Process of Transfer

Issue of
shares
US Investor
X
US Investor
Y
transfer
UK Based Company
Selfridge
Provincial Stores
Ltd.
Have to be
registered in
US and UK
3
First ADR Program

UK Based
Company
Selfridge
Provincial
Stores Ltd.

US Investor 1
Morgan
Guarantee
Trust
US branch
US Investor 2

US Investor 3

Issued
promissory
notes
Morgan
Guarantee Trust
UK
4
Depository Receipts
A Depository receipt a type of negotiable instrument
It is issued by a bank against the delivery of Local
Currency
A depositary typically requires a company to meet a stock
exchanges specific rules before listing its stock for sale
Represents one or more shares of a foreign stock or a
fraction of a share
For e.g. 1:1 ratio (one underlying share equals one
depositary share) ; 1:10

5
The Custodian Bank
Holds and manages a client's securities or other assets on
his/her behalf

The physical possession of the shares rests with the domestic
custodian although the ownership of the shares vests with the
DR investors

Communicates with depositary on corporate actions and
related issues

Transmits dividend payments


6
The Depository Bank

Overseas agent of the issuer company

Authorized by the issuer company to issue DRs

Assist with compliance with ADR registration requirements

Coordinate with lawyers, accountants and investment bankers
to ensure all program implementation steps are completed

Acts as the liaison between the issuer, the securities market
participants and the DR holders






7
Benefits OF DRS
For Issuer

Creates, broadens and
diversifies investor base
Enhances visibility and global
presence
Increases liquidity by tapping
new investors
A vehicle for employees of
foreign subsidiaries to invest
more easily in the parent
company



For Investors
Easy to purchase
Trades and settles in the same
manner as any other security
available in the investors home
market
Facilitates global / sector
diversification by providing
access to new companies
Familiar trade, clearance and
settlement procedures
Pays dividends in investors
home currency and delivers
corporate action notifications in
investors home language

8
Types of Depository Receipts
ADR
AMERICAN
DEPOSITORY
RECEIPTS
GDR
GLOBAL
DEPOSITORY
RECEIPTS

9
American Depository Receipts (ADR)
Introduced in 1920

ADR are DRs that are publicly available to investors in
the U.S.

Offer the issuing company access to the worlds largest
capital market.

Provide investors in the US with a convenient way to
directly invest in international companies.
10
ADRs are dollar-denominated securities that trade, clear
and settle like any other US security.

Represents ownership of shares in a non-US company.

Dividends realized in U.S. dollars.

ADRs do not eliminate the currency risks for the
underlying shares in another country.
11
Continued..
ADRs are listed on either the NYSE, AMEX or NASDAQ as
well as OTC.

Each ADR represents a certain number of a company's
ordinary shares.

Issued by a U.S. depository bank against the underlying
security held by a custodian bank.

12
Types of ADR

Unsponsored

An unsponsored ADR program is one that is established
by a depository bank without the participation or
consent of the issuer

The issuer is not party to the deposit agreement

Traded OTC



13
Types of ADR

Sponsored

Issued in co-operation with the underlying foreign
company
There is a direct involvement of foreign company
Issued with the knowledge and co-operation of the
company whose stock backs it
Sponsored ADRs are treated just like common stock,
complete with voting rights, only denominated in the
U.S. dollar
Sponsored ADRs are usually traded through major
exchanges like NYSE and AMEX

14
Levels of Sponsored ADR
Level 1
Level 2
Level 3
15
Sponsored ADR LEVEL I (OTC Facility)
Simplest and the fastest-growing segment to access the U.S. and non-U.S.
capital markets

Deposit agreement between company and selected depositary bank

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

Requires filling of F-6 registration statement but allows for exemption under
rule 12g3-2(b) from full SEC reporting requirements
Criteria to gain exemption under rule 12g3-2(b)
Shareholder information
Debt instruments or shares are not already registered under the Exchange
act
Listing on 1 or more jurisdiction outside the US



2-Oct-14 16
Three tiered OTC
marketplaces
O
T
C

OTCQX
Best marketplace
OTCQB
Venture stage marketplace
OTCPINK
Open marketplace
Current Information
Limited Information
No Information
17
Features of three tiered OTC market

18

OTCQX

OTCQB

OTCPINK

Investor focussed
companies
High Financial
standards
Compliance with US
securities laws
Current in their
reporting

For early stage and
developing companies
No financial standards
other than 0.01$ bid
test
Current in their
reporting
annual verification and
mgmt. certification
process
Companies in default
and in distress
Current information-
IRS or alternative
reporting standards
Limited information-
limited financial
information not older
than 6 months
No information-not
able to or willing to
provide information

19
20
Must comply with the SEC's full registration and reporting
requirements.
Along with F-6,filing of SEC form 20-F required
Compliance with Sarbanes-Oxley Act - Certifications by
management regarding the accuracy of financial reporting
and disclosure controls
Enables companies to list their ADRs on NASDAQ, AMEX,
NYSE
Higher visibility, More active trading, greater liquidity
Company cannot raise capital

21
Sponsored depositary receipt LEVEL II
(Listing Facility)

Similar to level II ADR

Leads to much greater visibility in the U.S. market

It allows the issuer to raise capital

Fully complies with SEC reporting requirements

Requires the issuer to submit a Form F-1 registration
statement to the SEC
22
Sponsored depositary receipt LEVEL III
(Offering Facility)
Listed Indian ADR
23
Rule 144A (Privately placed ADRs)
Rule 144A programs provide for raising capital through the private
placement of Depositary Receipts with large institutional investors
(QIBs) in the U.S.
Does not require full SEC registration
QIBs - At least $100 million in securities
- If the institution is a bank or savings & loans thrift they must
have a net worth of at least $25 million.
Will be quoted on PORTAL in the U.S.
Not accessible to the general public
It allows the issuer company to raise capital in the U.S. without adhering
to the strict regulations required by Level 3 ADRs
24
Regulation S (Offshore ADRs)
Regulation S programs provide for raising capital
through the placement of Depositary Receipts
offshore to non-U.S. investors in reliance on
Regulation S.

Traded in USD

Traded on London or Luxembourg stock exchange
25
Types of Program
SEC filing
requirement
Trading
Raising
Capital
Level l sponsored
F-6
12g3-2(b)
OTC NO
Level ll Sponsored
F-6
20F
NYSE
AMEX
NASDAQ
NO
Level lll Sponsored
F-6
20F
F-l
NYSE
AMEX
NASDAQ
YES
Rule 144a NA PORTAL YES
Comparison of all types of
ADRs
26
Major Indian Companies On The US
Exchanges
27
Process for Issuance of ADR
Approval
Requirements
Appointment of
Intermediaries
Documentation
Selection of
Syndicate
Members
Task force for
due diligence
Listing
Offering
Circular
Pre- marketing Roadshows
Book Building
Process &
Pricing
Closing of Issue
& Allotment
Post Issue
Support
28
Approval
Requirements
Appointment of
Intermediaries
Documentati
on
Selection of
Syndicate
Members
o Approvals of Board of Directors
A Board meeting is held for approving the proposal to raise money
from US.
A resolution should be passed.
Shareholder consensus.





29
Approval
Requirements
Appointment
of
Intermediaries
Documentation
Selection of
Syndicate
Members
o Approvals of RBI
To obtain permissions for making an international offering of rupee
dominated equity shares.
ADR/GDR issue shall be treated as FDI.
Aggregate Foreign Investment would need to conform to existing FDI
Policy .
The issue related expenses for public issue shall be subject to a ceiling of
4% in the case of GDRs and 7% in the case of ADRs and 2% in case of
private placements of ADRs/GDRs.
Issue expenses beyond the ceiling would need the approval of RBI.
Company has to furnish to RBI , full details of such issue within 30 days
from the date of closing of issue.

Amount raised through ADRs / GDRs .
Number of ADRs / GDRs issued
Underlying shares offered
Details of repatriation, etc


30
Approval
Requirements
Appointment
of
Intermediaries
Documentation
Selection of
Syndicate
Members
o Approvals of Foreign Investment Promotion Board (FIPB)
Investment within the specific sectoral cap- No approval required i.e.
automatic route of foreign investment .
Exceeds sectoral cap- Approval required .

However in some cases ,even though foreign investment within sectoral cap
and falls under automatic route FIPB approval required .

Indian company is being established with foreign investment and is
controlled or owned by 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.


31
Approval
Requirements
Appointment of
Intermediaries
Documentati
on
Selection of
Syndicate
Members

o Consent of Stock Exchanges for listing of underlying
shares
To make a request for listing of underlying shares which shall be
lying in the custody of domestic custodian.
After cancellation of ADRs, these shares will be traded in the stock
exchanges like any other equity shares




32
o Lead Manager
o Co-Lead/ Co- Manager
o Overseas Depository Bank
o Domestic Custodian Banks
o Legal Advisors
o Auditors
o Underwriters
o Listing Agent
Approval
Requirements
Appointment of
Intermediaries
Documentation
Selection of
Syndicate
Members
33
o Depository Agreement (for depositary shares)
Outlines the terms under which the depository holds the shares issued
by a foreign corporation and against which the depository issues ADRs to
investors

o Custodian Agreement
A custodian works in co-ordination with the depository & has to observe
all the obligations imposed on it including those mentioned in the
depository agreement.

o Underwriters Agreement
An agreement among the underwriters and the issuer.
Contains terms and conditions under which the underwriters will
purchase and reoffer the securities

Approval
Requirements
Appointment
of
Intermediaries
Documentation
Selection of
Syndicate
Members
34
o Auditors Comfort Letter
Issued by independent auditors to the underwriters and
directors of the issuer
Conformity of financial information contained in the
Registration Statement and prospectus to US GAAP.
Absence of any material and adverse changes since the date of
the financial statements and Performance of special procedure.

o Listing Application and Listing Agreement
An application submitted to the exchange to list the securities
An agreement between the exchange and the issuer which set-
forth the issuers obligations after the securities have been
accepted for listing

Approval
Requirements
Appointment
of
Intermediaries
Documentation
Selection of
Syndicate
Members
35

Syndication forms an integral part of the selling effort of an IPO

An effective syndicate, which consists of a strong group of
underwriters, would motivate performance and maximize aftermarket
support

Motivate participants and maximize demand
Optimize the sustainable offer price
Facilitate orderly marketing
Effectively communicate the investment story
Attract key anchor investors

Approval
Requirements
Appointment of
Intermediaries
Documentation
Selection of
Syndicate Members
36
A team of legal, technical & financial experts of the lead managers
performs:
Understand the issuers business in detail (SWOT analysis of the business)
Identify potential risks that investors should be aware of.
Analysis financial statement of the issuer company.
Analysis investment pattern and future prospects of the company
Obtain information to draft the Prospectus (Offering Circular)
Task force for due
diligence
Listing
Offering
Circular
Pre- marketing
37
Prepare & submit the relevant documents to the SEC
o Registration Statement (Form F-1)
Filed to US Securities Act of 1933 with the SEC
o Form 8-A
A document to be filed so that the securities can be listed on the
exchange
o Form F-6 (for depositary shares)
A short document to be filed to register ADRs


Task force for
due diligence
Listing Offering Circular Pre- marketing
38
Background of the company & its promoters, date of
establishment, Past performance
Capital Structure (existing & future)
Financial Data
Description of shares
Deployment of issue proceeds
Economic & regulatory policies of Govt. of India
Terms & Condition of ADR
Market price of securities
Status of approvals required to be obtained from Govt. of India
Report of statutory auditors
Tax aspects
Details of Indian security market including Stock exchange, listing
requirements


Task force for
due diligence
Listing
Offering Circular/
Prospectus
Pre-
marketing
39
o Objectives
Introduce the offering to investors
Address key investor concerns
Familiarize investors with the investment story
Gauge current investors appetite towards the shares
To evaluate prospects of issue
Helps in making certain important decisions like timing, size & price of the
issue.
o Process
Key investors would be contacted by research analysts and sales force
Research analysts meet with key institutional accounts to present the
companys compelling investment story and establish pricing parameters
Sales force collect feedback and indications of interest
from targeted investors
Determine target investors for road show
Task force for due
diligence
Listing
Offering Circular/
Prospectus
Pre- marketing
40
o It represents meetings of issuers, analysts & potential
investors.
A series of group presentations to potential institutional investors
One-on-one meetings with key anchor accounts
Generate maximum demand from investors to help create pricing
leverage
o Details about the company is presented
History, Organization Structure
Principle Objects
Business Lines
Position of the Company (Domestic & international)
Past performance & Future plans
Competitors (Domestic & international)
Financial Results & operating profits
Valuation of Shares
Review of Local stock market & economic situations
Road shows
Book Building Process
& Pricing
Closing of
Issue &
Allotment
Post
Issue
Support
41
Investors willingness to buy a particular quantity at particular price.
Their willingness is booked. Hence the process is known as book
building.
o PROCESS :
Begins during the pre-marketing period and accelerates towards
the end of road show.
Establish price talk.
Investors submit indications of interest.
o Pricing depends on:
Near future, Earning potentials, Fundamentals of industry/
Economic state of the country , Credit rating of the country
Investors sentiments, Behavior towards particular country
Interest rate.
Availability of exit route.
Road shows
Book Building Process
& Pricing
Closing of Issue
& Allotment
Post Issue
Support
42
o Process
A careful analysis of the quality of the orders would be conducted
Identify investors who are critical to the transaction
The ultimate price level would be set at a level where it seeks to
maximize proceeds while ensuring appropriate investor allocations
and a healthy aftermarket

Road shows
Book Building
Process &
Pricing
Closing of Issue &
Allotment
Post Issue
Support
43
o Aftermarket stabilization
Provide liquidity

o Commit trading capital
Manage over-allotment option by Green shoe option.

o Support investor relations
Dispatch accurate information and management assessment of the
macro environment, the industry, company performance and
business strategy on a regular basis.

Road shows
Book
Building
Process &
Pricing
Closing of
Issue &
Allotment
Post Issue
Support
44
45
Setting the Ratio
Determining the ratio of underlying shares to Depositary
Shares (DSs)

DSs are established as a multiple or fraction of the underlying
shares and the ratio can influence the price trading range

Point for Consideration:
Industry peers
Exchange Options
Investor Appeal

Example: HDFC Bank Ltd.
7.5 Million ADRs = 22.5 Million equity shares
Therefore, the ratio is:
1:3 of ADRs to equity shares

46
Setting the Ratio (Contd)
3 Share
=

1 ADR
47
Factors for Determining Price

Ratio Determination

Supply & Demand

Trend of Home Country
Fungibility
Fungiblity is defined as convertibility of one class of securities
into another and is interchangeable in nature.

Types of fungiblity :













FUNGIBILITY
ONE - FUNGIBLITY
48
TWO - FUNGIBLITY
Fungiblity Process
Issuer
Company
Local Stock
Exchange
(BSE)
Depository Depository
Stock
Exchange
(NYSE)
1 Way
Fungibility
2 Way
Fungibility
49
One way Fungibility
Conversion of depository receipts into local shares

The ADRs/GDRs converted into domestic shares are redeemed by
the depository

Price volatility

Liquidity problem

50
Two - way Fungibility
Conversion of depository receipts into local shares and vice versa

It is the conversion of the already converted ADR/GDR stock back to
depository receipts

It is subject to availability of Headroom. India follows Limited Two
Way Fungibility

In 2001, the GOI allowed twoway fungibility of ADRs (subject to
headroom or the availability of shares for re-conversion)

The first ever two- way fungibility was concluded in the shares of
Chennai based India Cements Ltd.
51
Benefits of Two way Fungibility
Liquidity in market

Re-align prices
Narrow the difference between the price of ADR and Local
Shares of the company
Eg. Infosys ; icici bank.

Corporates: greater reach & access to larger market

Banks: provide host of advisory & payment services

Brokers: good business opportunity

Investors: realistic price discovery mechanism

52
Advantages of Two-way fungiblity

Advantages of Two-way Fungibility for the Investor
Investors can take advantage of the arbitrage opportunities through
continuous Cancellations and Re- Issuances
Before this, the investors could only cancel the DRs and sell the shares in
the Local Market
There are no tax implications in India at the time of purchase of shares for
conversion into DRs
Advantages of Two-way Fungibility for the Company
Provides tremendous liquidity to Companys local stock
The DR program of the Company stays alive as otherwise cancellations
continuously reduces the outstanding DRs
Induces Active Trading of DRs in the Overseas Markets
Better Research Coverage by analysts on liquid DRs
53
Head Room

Limited two way fungibility
The number of domestic shares of an issuer, which are available for
re-conversion into ADRs/ GDRs







Head Room :
Number of ADRs/ GDRs originally
issued at the time of initial offering.
+ subsequent offering
+ Any other offering resulting in
distribution of DR to DR investor.
- No of Depository Receipt
outstanding.
- No of shares formerly represented
by DRs cancelled but have not been
sold in the local market.
54
Head room
Illustration

Original Issuance (a) 15 mn DRs
Cancellations (b) 5 mn DRs
Outstanding (a-b) = (c) 10 mn DRs
Cancelled but shares not sold (d) 1 mn DRs
Head Room = (a-c-d) 15-10-1 = 4 mn DRs

Where no Head Room is available on the date of application, the
said application will be valid for a period of 5 working days and will
be first in queue

In case of non renewal on the 5th working day, a fresh application
will have to be made which will be considered on a FIFO basis

55
The Depository bank provides a daily update on the availability
of Head Room on its website

Head room available for re-issuance is monitored by the custodian
of the underlying shares in coordination with the depository bank,
company secretary and NSDL/CDSL

If Headroom is not available and ADR is trading at a premium then
no possibility of Arbitrage opportunity
56
Trading of ADR/GDR
57
Non-Resident
Investor
Brokers
Buys Shares
Domestic
Broker
Domestic
Custodian
Earmarks
Against
Available
Headroom
Overseas
Depository
Risks Involved
The risks are in principle the same as the risks attached to the
underlying shares

Political Risk

Exchange Rate Risk

Inflationary Risk


58
Arbitrage Opportunities
ADRs can sometimes trade at a big difference to the stock in its
home market

Violation of the Law of One Price

Indian ADRs can be traded at a premium to the stock due to:
Excess demand for Indian high growth companies
Limited supply of ADR: 3%-6% of the market capitalization of stock

59
60
Reasons for difference in prices of ADR
& Local Shares
Are ADRs and local shares the same assets?

Sponsored vs. Unsponsored ADR program, different levels of
ADRs

Government regulations and investor restrictions

Correlation to stock index between ADRs and local shares

Spread behaviour in times of crisis


61
Restrictions in Arbitrage trade
Non-synchronous data

There is an impossibility of real time arbitrage between Indian stocks
and their ADRs due to 10+ hours difference between U.S. and Indian
time zones


START TIME END TIME
BSE in India IST 09:00AM IST 03:30PM
NYSE/NASDAQ in the
U.S
IST 08:00PM IST 02:30AM
of the next day.

Indian market regulation

The lack of full fungibility for ADRs
Stock investment restrictions for both local and foreign investors
Limitations on Indian resident
Limitations on Foreign investor

62

Operational issue
Time zones
Public information about the companies
Bid and ask spreads
Arbitrage of spread lies between bid and ask prices of the local stock, the
ADR, and the currency exchange rate.
High transaction cost
Transaction costs
Major inhibitors of arbitrage opportunities
Included in the cost of stock
no-arbitrage band = stock price + transaction costs + bid-ask spreads
Vary widely among countries




63
Specimen ADR certificate

64
Global depository receipts
Global Depositary Receipts (GDRs) are negotiable
certificates issued by depositary banks which
represent ownership of a given number of a
companys shares which can be listed and traded
independently from the underlying shares.

First GDR was issued in 1990.

Global depositary receipts are certificates held in
depository banks used to purchase shares of foreign
companies; these receipts represent the number of
shares owned in a particular company.
Give issuers exposure to the global markets outside their
home market
1990: Citibank issued the first GDR
Samsung Corporation
Simultaneous access to European & U.S. Markets

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

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



66
GDR structure
Regulation S
Unitary Structure Bifurcated Structure
67
Unitary Structures
A single class of DRs is offered both to QIBs in the US
and to offshore purchasers outside the issuer's domestic
market, in accordance with Regulation S.

Bifurcated Structure
Under Rule 144(a) ADRs are offered to QIBs in the US
and Regulation S DRs are offered to offshore investors
outside. The 2 classes of DRs are offered using 2 separate
DR facilities and 2 separate deposit Agreements. The
Regulation S DRs - not restricted securities, and can
therefore be deposited into a "side-by-side" Level I DR
program, and are not normally subject to restrictions on
deposits, withdrawals or transfers.


68
Indian Guidelines for issuing ADRs/GDRs
Section 6 (3) (b) of FEMA, 1999 reads as follows: Capital
account transactions

Subject to the provisions of sub-section (2), any person
may sell or draw foreign exchange to or from an
authorized person for a capital account transaction

The Reserve Bank may, in consultation with the Central
Government, specify-

Any class or classes of capital account transactions which
are permissible;


69
The limit up to which foreign exchange shall be
admissible for such transactions: Provided that the
Reserve Bank shall not impose any restriction on the
drawl of foreign exchange for payments due on account
of amortization of loans or for depreciation of direct
investments in the ordinary courts of business.

Without prejudice to the generality of the provisions of
sub-section (2), the Reserve Bank may, by regulations,
prohibit, restrict or regulate the following-
Transfer or issue of any foreign security by a person
resident in India;
Transfer or issue of any security by a person resident
outside India

70
Difference between ADR & GDR
71
ADR GDR
Most
Commonly
listed on
NYSE LSE
GAAP
Reconcile their accounts to US
GAAP
Depends on International Exchange
selected for listing
Investor
Profile
Access the US Retail Market Issued only to QIBs
To Raise
Capital
Within US
Within US & Outside US using
different structure combinations
Cost Expensive for the issuer
Comparatively Inexpensive for the
issuer
72
73
Case Study: Infosys Technologies Ltd.

And Now.
Who could have backed this group 25 years back?
BACKGROUND
Infosys Technologies Limited (Infosys) was the first
Indian company to get listed in the U.S. in March 1999
and obtain a listing on the Nasdaq Stock Market.

Two ADRs making up for one share of Infosys started
trading under the symbol `INFY'.

74
REASONS FOR GOING GLOBAL
To get listed, and to get that, you have to raise money,
because Indian government regulations did not allow a
secondary listing

The second was to develop brand equity in the US

The third was to create a currency for issuing dollar
denominated stock options to reward overseas
employees, and of course to attract more of them


75
PRICING OF ADRs
The Infosys American Depositary Receipt made a debut in
1999 at a price of $34.1.The conversion ratio is one ADR for
every two Indian equity shares.

The issue will also afford domestic investors the opportunity
to cash in on the premium available, between the local price
and the ADR price.

900,000 shares to raise an estimated $50 million. At the time
of the listing's arrangement, the indicated price for the ADRs
was $27.88. However, with the domestic price ruling way
above $27.88, the ADR Fetched a higher price on debut.

Ever since Infosys ADR was issued on March 11 at $ 34, it
has been quoting at a premium.
76
Reasons For High Premium
Infosys ADRs trade at a premium to the domestic price

Investors can buy shares in the domestic market, transfer
them into ADRs and then sell them on the NYSE for a
higher price

As more investors engage in such deals, the price of the
stock in the domestic market will go up, because of the
increase in demand.

Likewise, the price of ADRs on the NYSE will fall, as
more investors sell their holdings

77
Infosys ADR: 11th March 1999
Size of issue/No. of equity shares 1.8 mn ADS/ 0.9 mn equity shares
Number of ADS per equity share 2
Offer Price $27.88 per ADS/ $55.76 per share
Actual Price Obtained $34 per ADS/ $ 68 per share
Premium on the Offer Price 22% or $6.12 per ADS
Issue Amount $61.2 million
Green shoe Option 15% of $ 61.2mn = $ 9.18mn
Total Amount raised $ 70.38 million
BSE closing price Rs 3201/- as on 10 March, 1999

Infosys received net proceeds of US $ 70.38 million.
78
First Sponsored Secondary ADS: July 31,
2003
Size of issue/No. of equity shares 6mn ADSs/3mn Equity shares
Number of ADS per equity share
2 (After Infosys issued bonus
shares to ADS holders, the ADS
ratio became 1:1 )
Actual Price Obtained
At $49 per share(26% premium
over BSE closing price)
BSE Closing price Rs 3593.30
Total $ 294 million received through 6mn ADSs/3mn Equity shares
Infosys did not receive any of the proceeds
79
Second Sponsored Secondary Issue: May 2005
Size of issue/No. of equity shares
16 million shares, or 6% of its
BSE/NSE listed shares
Number of ADS per equity share 1
Actual Price Obtained
$67 per ADS (34% premium over
NSE price)
NSE closing price Rs 2171.20 as on May 25, 2005
Total US $ $294 million had received by Indian shareholders
Total issue increased the size of the US float to about 14% of its capital.
Infosys had not received any proceeds of this offering
80
Third Sponsored Secondary Issue: Nov 21,
2006
Size of issue/No. of equity shares 30 million local shares into ADS
Number of ADS per equity share 1
Actual Price Obtained $ 53.50 per ADS
BSE closing price
Rs.2,252 (34% premium over BSE
closing on November 7, 2006 )
Total $ 1.6 billion received by Indian shareholders
Total issue increased US market cap of Infosys to $ 5.91 billion.
Infosys did not received any proceeds of this offering
81
Indian Depository Receipts (IDR)
Indian Depository Receipts (IDR)
These are financial instruments that allow foreign
companies to mobilize funds from Indian Capital
Markets.

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

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

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


83
Issuance of IDRs

Issuer
(Outside India)
Domestic
Depository
(In India)
Custodian
(Outside India)
Holds
shares for
Domestic
Depository
Issuer of
IDRs to
Investors in
India
IDRs
Demat IDRs
listed on
NSE/BSE
IDR Holders FIIs,
NRIs, Retail, Non-
Institutional Investors
84
Case study
85
Parties to the Issue:





Details of the Issue:

Issuing Company (Sponsor) Standard Chartered Plc
Overseas Custodian
Bank of New York Mellon

Domestic Depository
Standard Chartered Securities
(India) Ltd
R&T Agent
Karvy Computershare Private
Limited
Listing Date Friday, June 11, 2010
Issue Size 240 million IDRs
Listing price Rs 106
Ratio 10 IDR : 1 SHARE 86
Legal Framework and Key Participants:
Issuance of IDRs will be governed by the following legislations:

The Companies (the issue of IDRs) Rules, 2004 notified by the
Ministry of Corporate affairs on 23
rd
Feb., 2004 and subsequent
amendments made thereto.

SEBI (Disclosure and Investor Protection) Guidelines, 2000 (DIP
guidelines) and subsequent amendments made thereto.

If issuer is a financial or banking companies having presence in
India, either through a branch/subsidiary, such entity has to obtain
prior approval from the Reserve Bank of India.

87
Eligibility Criteria
(As per Companies IDR Rules)
Criteria Requirements
Capital Pre-issue paid-up capital and free reserves are at least US$
50 million.

Market Capitalization Minimum average market capitalization (during the last 3
years) in its parent country of at least US$ 100 million.

Track Record of Distributable
Profits
Track record of distributable profits in terms of section 205
of the Companies Act, 1956, for at least 3 out of
immediately preceding 5 years.
Other Requirements Fulfills such other eligibility criteria as may be laid down by
SEBI from time to time in this behalf.
88
As per SEBI ICDR Regulations:
An issuing company has to fulfill the following
conditions:





Additional
Requirements for
IDR issue
Issuing company is listed in the home
country
The issuing company is not prohibited
to issue securities by any regulatory
body
It has a track record of compliance with
securities market regulations in its
home country
89
Other Conditions

Criteria Requirement
Issue size Issue size shall not be less than Rs50 crore.
Minimum application amount Minimum application amount shall be Rs20,000.
Allocation of the issue Retail individual investors 30%
Non-institutional investors 20%
Qualified institutional buyers 50%
Limits of investment Retail Individual Investors - Minimum of Rs 20,000 and
maximum of Rs2,00,000.
Non-institutional investors Above Rs200,000 and up
to the issue size.
Qualified Institutional Buyer Above Rs 200,000 and
up to the issue size.
Minimum subscription For non underwritten issues
For underwritten issues
90
Minimum Subscription
Non-Underwritten
Company shall refund entire
subscription amount if-
Received amount < 90% of
issued amount on date of
closure
Subscription Level < 90%
post issue closure due cheques
having being returned unpaid
or withdrawal of application
A delay beyond 15 days after the
company has to pay interest
Underwritten
Company shall refund entire
subscription amount received
if -
Received amount < 90% of
the net offer to the public
including devolvement of
underwriters with 60 days of
closure
A delay beyond 60 days after the
company has to pay interest
91
Taxation Issues
92
Taxation of IDRs and Indian Equity Shares
Sl. No. Particulars Equity Shares IDRs
1
Section Covering Taxation 10 (38) and 111A deals with
Taxation of Gain
No Specific provision contained in the IT
Act 1961 for the taxation of gain on transfer
of IDRs.
2
STT ( Security Transaction Tax) Applicable Not applicable
3
Capital Gain Taxation (In case of
Resident IDR holders)
Short term gain (Securities
held for less than one year)
Long term gain (Securities
held for one year or more
than one year)

-Taxable u/s 111A at a concessional
rate of 15%
-Exempted u/s 10 (38)

-At normal rate of Tax (plus applicable
surcharge and education cess)
-Taxable at 20% with cost indexation
benefits and at 10% without cost indexation
benefits.
4
DDT (Dividend Distributed Tax ) As the company distributing
dividend pay tax, the Dividend is
exempted in the hand of
shareholders.
As the company does not pay DDT, the IDR
holder are required to pay Income Tax at
normal applicable rate of taxation.
93
Redemption
SEBI, on 3
rd
June, 2011 has issued a circular which states as follows:

1. The regulation does not permit for automatic fungibility of IDRs into underlying
equity share of issuing company.

2. It is the issuer company that has to test the frequency of trading of IDRs on the
half yearly basis ending on June and Dec., every year.

3. Issuer Company has to make announcement in news papers within 7 days of the
closer of the half year ending on which the liquidity criteria is tested. Besides, the
company has to inform the stock exchange(s).

4. The IDRs holders who intends to exchange their instruments into underlying equity
shares of the Issuing Company has to submit application to domestic depository.
94
Redemption (Cont.)
5. The entire redemption process shall be completed within 30 days from the date of
receipt of application for the same.

6. After such redemption process, the domestic depository shall notify the revised
shareholding pattern of the issuer company to the concerned stock exchanges
within 7 days.

7. Person Resident in India (other than companies and mutual funds) are allowed to
hold underlying shares only for the purpose of sale within a period of 30 days from
the date of conversion of IDRs into equity shares.

The FEMA provisions shall not apply to the holding of the underlying shares on
redemption of IDRs by the FIIs including SEBI approved sub-accounts of FIIs and
NRIs.


95
Listing Procedure
Pre-listing
Drafting a plan for IDR issue with necessary Board and shareholder approval, as may be applicable
Formation of working group including auditors, legal counsel
Preparation of financial statements

Offering
Process
Appointment of merchant bankers, overseas custodian, domestic depository and registrar & transfer agent
Due diligence by the merchant bankers
Drafting of offering circulars
Eligibility
review and
public
offering
Application to SEBI for the purpose of listing IDRs along with the draft red herring prospectus
Approval by SEBI for prospectus
Submission of final prospectus to ROC.
Permission from the Stock Exchanges
Listing on
Stock
Exchange
Issue will be open for a fixed number of days
Investors to bid within the price band and final price to be decided at the closure of issue
IDRs to be allocated to the investors
96
FOREIGN CURRENCY
CONVERTIBLE BONDS(FCCB)
MEANING

Debt Instrument
Freely Convertible Currency
Raise money in foreign currency
Conversion to either Equity or Depository Receipts
Redeemed either at maturity or price assured by issuer
Redemption in the currency of issue at the then current
exchange ratio


98
Why FCCB???????

Most popular instrument with the Indian Cos
Low interest rate by Indian standards
Fixed Interest rate
Unsecured instrument
Option to convert to fixed number of Equity
Redemption in Dollars
No voting rights
99
ADVANTAGES

Attractive to issuer & investor

Safety of guaranteed payments

Reduces debt-financing cost.


100
DISADVANTAGES

Exchange risk is more in FCCBs as interest on bond would be
payable in foreign currency.

In case of convertible bond the interest rate is low (around 3 to
4%) but there is exchange risk on interest as well as principal if
the bonds are not converted in to equity.

It will remain as debt in the balance sheet until conversion.
101
DIFFERENCE BETWEEN FCCB AND GDR

FCCB GDR







1. FCCB means the company
issues bonds denominated in
foreign currency and these
bonds will be convertible in
nature i.e. they can be
converted into equity at a
future date.
2. Bonds are the liabilities of the
Company like debenture

1. In case of GDRs, the issuing
company deposits its shares to
a depository through a
custodian bank and in return
the company gets
proportionate amount of
GDRs.
These GDRs are then issued
to investors in the foreign
market which can be freely
traded in those stock
exchanges.
2. GDR is the Companys own
fund, as it is Share Capital of
the Company


102
What is the criteria for issuing FCCBs???

Any company who wish to raise the foreign funds by issuing
FCCB, require prior permission of the Department of Economic
Affairs, Ministry of Finance, Government of India.The company
issuing the FCCB should have the consistent track record for a
minimum period of three years.

The Foreign Currency Convertible Bonds shall be denominated
in any freely convertible foreign currency and the ordinary shares
of an issuing company shall be denominated in Indian rupees.

The issuing company should deliver the ordinary shares or bonds
to a Domestic Custodian Bank as per regulation.
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The custodian bank on the other hand instructs the
Overseas Depositary Bank to issue Global Depositary
Receipt or Certificate to non-resident investors against
the shares or bonds held by the Domestic Custodian
Bank.

The provisions of any law with regard to the issue of
capital by an Indian company will also be applicable the
issue of Foreign Currency Convertible Bonds or the
ordinary shares of an issuing company.

The company issuing FCCB, shall obtain the necessary
permission or exemption from the appropriate authority
under the relevant law relating to issue of capital.
104
Limits of foreign investment in the issuing company

The Ordinary shares and Foreign Currency Convertible Bonds
(FCCB)that are issued against the Global Depository Receipts
are treated as Foreign Direct Investment (FDI).

However total foreign investment made either directly or
indirectly shall not exceed 51% of the issued and subscribed
capital of the issuing company.

Taxation on Foreign Currency Convertible Bonds

Until the conversion option is exercised, all the interest payments
on the bonds, is subject to deduction of tax at source at the rate of
ten
105
CONCLUSION
106