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Ruchi Mehrotra
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MINIMISE
COST OF CAPITAL
Introduction
Post liberalization 1992- Indian corporates to have access to global capital markets through FCCB & GDR/ADR mechanism Vision was to given them international edge Minimum track record of good performance of 3yrs were allowed
Depository receipts
These are certificates that represent an ownership interest in the ordinary shares of the stock of the company, but are marketed outside of the company's home country. Structured to resemble typical stocks on the stock exchanges that they trade so that foreigners can buy an interest in the company without worrying about the differences in currency, a/c practices, language barriers, and risks of investing in foreign stocks directly.
Depository receipts
Its a negotiable certificate denominated in US$ that represents a non US companys publicly traded equity or debt DRS are created when the local currency shares of an Indian company are delivered to the depositorys local custodian bank ,against which the depository bank issues DRs in US dollars . These are traded freely in overseas market like any $ denominated security on stock exchange/OTC or restructured group like QIBs.
Creation of DRs
When a broker purchases the company's shares on the home stock market Delivers them to the depositorys local custodian bank Which then instructs the depository bank to issue the depository receipts They are quoted & traded in the currency of the country in which they trade & are governed by the governed by the trading & settlement procedures of that market where they trade
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Creation of DRs
Here Depository bank acts as agent for the issuer & provides all stock transfer (reregistration) and agency services in connection with the DR program These include the custodial arrangement for the safe keeping of ordinary shares, issuance & collection of receipts, maintenance of register of holders etc etc
Features of DRs
They may trade freely just like any other security either on exchanges or OTC market can be used to raise capital So is the way non-Us shares will trade in Newyork called as ADRs American depository receipts Most common DRs are ADRs & GDRs Reliance Industry was 1st company to raise funds through GDR issue. IDRs & EDRs are rare forms of DRs Most GDRs regardless of geographic market, are denominated in US $ although some trade in Euros & 9 British sterling
Depository receipts
These are traded freely in overseas market like any $ denominated security on stock exchange/OTC for restructured group like QIBs. There are more than 900GDRs listed on stock exchanges worldwide, with more than 2100 issuers from 80 countries
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Raise capital in foreign markets Increase consumer interest in their products by strengthening name recognition in foreign markets Increase liquidity of shares by broadening their shareholder base (DRs facilitate cross border trade) Gain visibility for possible mergers & acquisitions Allow employees outside the home market to participate in the parent company
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Features of ADRs
Most liquid market & largest market Size of ADR can expand or contract depending on the demand factor The issuing bank can withdraw or issue further corresponding shares in the local market Small companies DRs remain thinly traded and sometimes get ignored in the market Generally recommended that the ADRs should be made for above $300m.
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It is a stock that trades in US but represents a specified number of shares of foreign corporation. They are bought & sold in American markets just like regular stocks They are issued / sponsored in the US by a bank or a brokerage firm. The reason to introduce them was due to the complexity involved in buying shares in foreign countries. Only problem arises is with the trading at different prices & different currency values. 15
US banks simply purchase a lot of shares from the company, bundle the shares into groups & re-issue them on the NYSE / NASDAQ The depository bank sets the ratio of US ADRs per the home country share the reason for this is as they wish to price the ADR high enough so as to show substantial value, yet still trying to show low enough so that individual investors can also purchase it. Majority range b/w 10$ to 100$ per share. If in a home country the shares were worth considerably less, then each would represent several real shares.
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Types of ADRs
5 types depending on the type of requirement of the issuer Unsponsored ADR program Sponsored program Level 1 Level 2 Level 3
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Types of sponsored (agreement with depository & signs registration statement) ADRs
Level 1 - This is the most basic type of ADR where foreign companies either don't qualify or don't wish to have their ADR listed on an exchange. Level 1 ADRs are found on the over-thecounter market and are an easy and inexpensive way to gauge interest for its securities in North America. Level 1 ADRs also have the loosest requirements from the SEC. Level 2 - This type of ADR is listed on an exchange or quoted on Nasdaq. Level 2 ADRs have slightly more requirements from the SEC, but they also get higher visibility trading volume. Level 3 - The most prestigious of the three, this is when an issuer floats a public offering of ADRs on a U.S. exchange. Level 3 ADRs are able to raise capital and gain substantial visibility in the U.S. financial markets.
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Transaction cost savings Settlement Custody Transparency Legal restrictions Research coverage Liquidity Dividends, corporate action SEC compliances Price translation & fungibililty Trading hours & foreign exchange
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