DRs represent sharesof an Indian company trading on a foreign stock exchange
The DR holders are part of foreign holding in a company but unlike FDI, investors in DRs do not enjoy voting rights
DRs of most Indian companies experienced a sharp fall due to market meltdown. However, recently the DRs have recovered and trading turnovers have improved.
DRs have become popular because of two-way fungibility
No prior approval of SEBI, RBI or government is required for issue of DRs
No restrictions on the use of proceeds except investment in real estate and the stock markets
Indian Companies can raise capital overseas by issue of: Note: Indian companies listing overseas must either before or simultaneously list on the Indian stock exchanges
Glossary… ADR means security issued by a bank or a depositary in USA against underlying rupee shares of a company incorporated in India. GDR means a security issued by a bank or a depository outside India against underlying rupee shares of a company incorporated in India. FCCB means a bond issued by a Indian Company expressed in foreign currency and the principal and interest in respect of which is payable in foreign currency. Investment banker means an investment banker registered with a securities and exchange commission in USA or the financial services authority in UK.
Authorities involved… SEC’s mission is to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation. IOSCO’s mission is the protection of investors, ensuring that markets are fair, efficient and transparent and finally the reduction of systematic risk.
American Depository Receipt - I
What are ADRs??? Introduced by JPMorgan in 1927 Prices in US Dollar Dividends in US Dollar Traded like shares of US-based company
Stock of non-US companies can trade on US financial markets.
Involved banks: depository bank and investment bank Represents fraction of a share, single share or multiple shares of foreign stock
Composite ADR Index... 450 companies 39 countries Listed on NYSE AMEX NASDAQ Subsets: 3 Regional Indexes 4 Market indexes 3 Sector indexes 8 Selected Indexes 39 Country Indexes New ADR are added quarterly Index is rebalanced quarterly
Types... a) Unsponsored DR Issued by one or more depositories Based on market demand Trade on the „over-the-counter“ market No formal agreement b) Sponsored DR Designated depository acting as ist transfer agency Deposit Agreement or service contract Control over facilities Three levels Two restricted programs
Types... Level I Traded in the „over the counter“ (OTC) market & some exchange outside US No full Securities and Exchange Commission (SEC) declosure No Generally Accepted Accounting Principles (GAAP) Security listed on one or more stock exchange in a foreign jurisdiction Only annual report on its homepage in English
Types... Level II (listed) Listed on U.S. exchange or quoted on NASDAQ Get higher visibility trading volume
To set up File a registration statement with the SEC
More under SEC regulation
File a form 20-F annually
Partial compliance with GAAP
Types... Level III (offering) Public offer on a US exchange market Able to raise capital Substantial visibility in the US financial markets „Put under microscope“
More requirements from SEC
File form 20-F annually
Complete compliance with GAAP
Addition: material information given to shareholder in home market, must be filed with the SEC through Form 8K
Restricted Programs... SEC Rule 144-A Issuance of shares as a private placement Restricted stock Only issued or traded by Qualified Institutional Buyers (QIB)
Avoid SEC registration
No regular shareholders
Less information for the public
Restricted Programs... SEC Regulation S Shares are not registered with any US securities regulation authority Registered and issued to offshore, non-US residents Can be merged into a Level I ADR
Create an ADR... Investor decide to invest in an non-U.S. company Contacts broker to make a purchase Broker purchase actual ordinary shares to depositary bank‘s custodian in the foreign country Broker convert U.S. Dollar received from the investor into the foreign currency On same day shares are delivered to custodian bank Custodian notifies the depository bank DR are issued and delivered to broker Broker delivers DR to investor
Backup 3 regional indices (Europe, Asia, and Latin America) 4 market indices (Developed Markets, Emerging Markets, Euroland, and Telebras) 3 sector indices (Latin Telecom, European Telecom, and European Oil & Gas) 10 select indices (International 100, Developed Markets 100, Europe 100, Asia 50, China Select, Emerging Markets 50, Latin America 35, International Telecom 35, Small Cap Select and BRIC Select) 36 country indices
American Depository Receipts - II
How an ADR works? Dividends are paid Custodian bank received it and witholds any foreign taxes Custodian bank changes currency into U.S. Dollar Custodian bank sends it to depositary bank Depositary bank sends this to investor
Level III ADR High Level II ADR Medium Program Visibility/ Liquidity Level II GDR and Level III GDR Level I ADR Level I GDR Low Low Medium High Disclosure Requirements Generally, Increased Disclosure Results in Increased Visibility
Advantages... Flexibility to list on national exchange in the US Ability to raise capital Increase awareness of company Diversify portfolio Save money by reducing administration costs & avoiding foreign taxes on each transaction Trade is clear and settle in US Dollar
Disadvantages... Only small selection of ADRs available for trading Long time to receive information Depository bank charge fees & expenses for converting currency Country specific risk Currency exchange risk For diversification: enough funds to split in over 15 ADR Political and economical risks
Global Depository Receipts - I
GDRs… It is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros.
Statutory Requirements… Indian companies (i) A company must not be barred from raising funds from the Indian capital market nor restrained from accessing the securities market by SEBI. (ii) The applicant company must be a listed company or be in the process of getting listed on any Indian stock exchange.
Statutory Requirements… Subscribers Overseas Corporate Bodies (OCBs) and other entities, which are not eligible to invest in India through portfolio route i.e. directly on the stock exchanges in India and entities which are prohibited to buy, sell or deal in securities by SEBI are prohibited from subscribing to GDR issues.
FEMA guidelines in accordance with MoF Approval from MOF Not otherwise ineligible Issued in accordance with GDR schemes
Benefits To An Issuing Company Access to capital markets outside the home market. Enhancement of company visibility. Increase potential liquidity by enlarging the market for the company’s shares. It helps the issuing company to extend its research base to foreign countries.
Benefits to an Investor They facilitate diversification into foreign securities. Eliminate custody charges. Can be easily compared to securities of similar companies. Permit prompt dividend payments and corporate action notifications. GDRs offer most of the same corporate rights, especially voting rights, to the holders of GDRs.
Foreign Currency ConvertibleBonds - I
Definition by MoF… "Foreign Currency Convertible Bonds mean bonds issued in accordance with this scheme and subscribed by a non- resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments"
Eligibility… For listed companies: a) Eligibility of issuer: An Indian Company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue Foreign Currency Convertible Bonds through Global Depositary Receipts under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993. b) Eligibility of subscriber: Erstwhile Overseas Corporate Bodies (OCBs) who are not eligible to invest in India through the portfolio route and entities prohibited to buy, sell or deal in securities by SEBI will not be eligible to subscribe to Foreign Currency Convertible Bonds and Global Depositary Receipts under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993.
c) Pricing: The pricing of Global Depositary Receipt and Foreign Currency Convertible Bond issues should be made at a price not less than the higher of the following two averages: (i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; (ii) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date. The "relevant date" means the date thirty days prior to the date on which the meeting of the general body of shareholders is held, in terms of section 81 (IA) of the Companies Act, 1956, to consider the proposed issue.
Eligibility… B. For unlisted companies Unlisted companies, which have not yet accessed the Global Depositary Receipt / Foreign Currency Convertible Bond route for raising capital in the international market would require prior or simultaneous listing in the domestic market, while seeking to issue Foreign Currency Convertible Bonds and through Global Depositary Receipts under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993. It is clarified that unlisted companies, which have already issued Foreign Currency Convertible Bonds in the international market, would now require to list in the domestic market on making profit beginning financial year 2005-06 or within three years of such issue of Foreign Currency Convertible Bonds, whichever is earlier.
Foreign Currency Convertible Bonds - II
RBI Guidelines… FCCB can be raised under Automatic route . Minimum Average Maturity of FCCB shall be 3 years for borrowing up to US$ 20 million and 5 years in case it exceeds US$ 20 Million. Prepayment of FCCB is permitted upto US$ 200 Million subject to compliance of minimum average maturity period . For higher prepayment amount, RBI approval is needed. No Guarantee, Letter of Comfort, letter of Undertaking can be issued by Banks, FIIs or NBFC relating to FCCB .
Role of SEBI… An application for listing of the Bonds has to be made to the stock exchange of the country where the FCCBs are to be issued and traded . Approval has to be obtained from the Indian Stock exchange to list the shares issued upon conversion of bonds, when the bondholder exercises the convertibility option. Filing the Offer Documents with SEBI , RBI and stock exchanges prior to FCCB issue.
Company Law Requirements… FCCBs are bonds issued by an Indian company expressed in foreign currency to non-resident investors, which fall under Debentures . Prior intimation Notice should be given to listed Stock exchange, at least 7 days before the date of Board meeting in which the FCCB is to decided. Issuing Power of FCCBs is with the Board of Directors of the issuer Company . Convening a General Shareholders Meeting for procuring the shareholders consent with regard to the enhancement of borrowing powers of the Board .
Facts & Figures…
Benefits to Investors… Guaranteed returns on the bond in the form of coupon rates . Ability to take advantage of the price appreciation in the stock by means of warrants attached to the bonds, which are activated when the price of the stock reaches a certain point. Substantial yield-to-maturity (YTM) is guaranteed at maturity. Lower tax liability as compared to pure debt instruments due to the lower coupon rates.
Overseas Stock Markets… Choice of stock exchange depends upon: New York Stock Exchange (NYSE) NYSE has 11 Indian companies listed on NYSE. Positive: IFRS accounting norms permitted Negative:SOX compliance is very costly. Only very large companies therefore list on NYSE Depth of the Market Availability of Funds Regulatory Requirements
Overseas Stock Markets NASDAQ Listing is expensive 3 Indian companies listed London Stock Exchange (LSE) (Main Market) Caters to large companies Has been a favorite with large Indian companies Regulatory requirements are stringent Alternative Investment Market (AIM) Constituted in 1995, London’s AIM has been very successful in attracting overseas companies/funds lower entry barriers a lighter touch on regulation and compliance comparative flexibility
Overseas Stock Markets Luxembourg Stock Exchange (LuxSE) Traditional favourite Listing is expeditious Cost of raising funds at Luxembourg is lower, compared to NYSE or NASDAQ Compliance requirements are less stringent Singapore Stock Exchange (SGX) Listing is less expensive Has large appetite for certain sectors such as shipping Regional hub Hong Kong Stock Exchange (HKEx) Offers world-class listing platform Costs of listing and compliance are competitive
Overseas Stock Markets Dubai International Financial Exchange (DIFX) Set up in September 2005 Fast attracting attention especially of SMEs Expeditious listing Closer home and good liquidity Tokyo Stock Exchange (TSE) Japan is keen to promote TSE and Japanese Depository Receipts (“JDRs”) and attract foreign companies Asia Pacific Technology Exchange (APTEX) New Australian stock exchange with a focus on technology Plans to become fully operational by second half of 2008
Conclusion… Risks in foreign investments: Changes in currency exchange rates Dramatic changes in market value Political, economic and social events Lack of liquidity Less information Reliance on foreign legal remedies Different market operations