HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
ADR & GDRHARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
WHAT IS ADRADR - American Depositary Receipts • A negotiable certificate issued by a U.S. bank • Represents a specified number of shares of a foreign company • ADRs are denominated in U.S. dollars. HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
HOW DOES ADR/GDR WORK ?• Let us take Infosys example – trades on the Indian stock at around Rs.2000/-• This is equivalent to US$ 40 – assume for simplicity• Now a US bank purchases 10000 shares of Infosys and issues them in US in the ratio of 10:1• This means each ADR purchased is worth 10 Infosys shares.• Quick calculation means 1 ADR = US $400• Once ADR are priced and sold, its subsequent price is determined by supply and demand factors, like any ordinary shares. HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
ADR RATIO• Single 1 ADR = 1 SHARE ADR Ratio = 1:1• Multiple 1 ADR = 5 SHARES ADR Ratio = 1:5• Fraction 1 ADR = ½ SHARE ADR Ratio = 2:1 HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
SPECIMEN COPY OF ADRHARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
ADR TYPES of ADR: ADR listing: Unsponsored ADR NASDAQ Sponsored ADR AMEX Level 1 NYSE Level 2 Level 3HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
ADVANTAGES OF ADR• It is an easy and cost effective way to buy shares of a foreign company• Reduces administrative costs and avoids foreign taxes on every transaction• Helps companies which are listed to tap the American equity markets• Any foreigner can purchase these securities• The purchaser has a theoretical right to exchange shares (non- voting right shares for voting rights) HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
GDR - GLOBAL DEPOSITARY RECEIPTS • A bank certificate issued in more than one country for shares in a foreign company • Offered for sale globally through the various bank branches • Shares trade as domestic sharesHARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
GDR - CUSTODIAN BANK/DEPOSITORY BANK • Custodian Bank located in same country • Works with the Depository Bank and follows instructions from the depository bank. • Collects, remits dividends and forwards notices received from the depository bank. HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
GDR MARKET• GDRs can be created or cancelled depending on demand and supply.• When shares are created, more corporate stock is placed in the custodian bank in the depositary bank account. The depositary bank then issues the new GDRs• Factors governing GDR prices are company track record, analysts recommendations, relative valuations, market conditions and also international status of the company HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
GDR LISTING• London Stock Exchange• Luxembourg Stock Exchange• Singapore Exchange• Hong Kong Exchange HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
GDR- ADVANTAGES & DISADVANTAGES• GDRs allow investors to invest in foreign companies without worrying about foreign trading practices, laws• Easier trading, payments of dividends are in the GDR currency• GDRs are liquid because they are based on demand and supply which is regulated by creating or cancelling shares• GDR issuance provides the company with visibility, more larger and diverse shareholder base and the ability to raise more capital in international markets• However, they have foreign exchange risk i.e. currency of issuer is different from currency of GDR HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
I N SI M PLE TERM S ADR / GDR I SSUE COMPANY SHARE DEPOSITARY BANK INVESTORHARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
DI FFERENCE - ADR & GDR• Both ADR and GDR are depository receipts, and represent a claim on the underlying shares. The only difference is the location where they are traded.• Depositary receipts traded in USA – ADR• Depositary receipts traded in a country other than USA - GDR HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
I NDI A - ADR & GDR• ADRs and GDRs are an excellent means of investment for NRIs and foreign nationals wanting to invest in India• By buying these, they can invest directly in Indian companies without going through the hassle of understanding the rules and working of the Indian financial market – since ADRs and GDRs are traded like any other stock• NRIs and foreigners can buy these using their regular equity trading accounts HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
INDIAN COM PAN IES USIN G ADR/ GDR COMPANY ADR GDR Bajaj Auto No Yes Dr. Reddys Yes Yes HDFC Bank Yes Yes Hindalco No Yes ICICI Bank Yes Yes Infosys Technologies Yes Yes ITC No Yes L&T No Yes MTNL Yes Yes Patni Computers Yes No Ranbaxy Laboratories No Yes Tata Motors Yes No State Bank of India No Yes VSNL Yes Yes WIPRO Yes YesHARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
ECBHARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
ECB• The ECB is the central bank for Europes single currency, the euro.• The ECB’s main task is to maintain the euros purchasing power and thus price stability in the euro area.• The euro area comprises the 17 European Union countries that have introduced the euro since 1999.
ECB - TASKSThe tasks of the ESCB and of the Eurosystem are laid down inthe Treaty establishing the European Community. They arespecified in the Statute of the European System of Central Banks(ESCB) and of the European Central Bank (ECB). The Statute is aprotocol attached to the Treaty.The Treaty text refers to the ‘ESCB rather than to the Eurosystem.It was drawn up on the premise that eventually all EU MemberStates will adopt the euro. Until then, the Eurosystem will carry outthe tasks.
ECB – OBJECTI VES"The primary objective of the ESCB shall be to maintain pricestability".and:"without prejudice to the objective of price stability, the ESCBshall support the general economic policies in the Communitywith a view to contributing to the achievement of the objectivesof the Community as laid down in Article 2." (Treaty article 105.1)The objectives of the Union (Article 2 of the Treaty on EuropeanUnion) are a high level of employment and sustainable and non-inflationary growth.
ECB – BASI C TASKSAccording to the Treaty establishing the European Community(Article 105.2), the basic tasks are the definition andimplementation of monetary policy for the euro area;• the conduct of foreign exchange operations;• the holding and management of the official foreign reserves of the euro area countries (portfolio management).• the promotion of the smooth operation of payment systems.
SWAPHARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
SWAP• Swap is an agreement between two parties, called counterparties to trade cash flows over a period of time.• Swaps are flexible and are useful in many financial situations• There are 2 types of swap: Currency swap Interest- rate swap HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
SWAP• Specifically, the two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap.• The swap agreement defines the dates when the cash flows are to be paid and the way they are calculated.• Usually at the time when the contract is initiated at least one of these series of cash flows is determined by a random or uncertain variable such as an interest rate, foreign exchange rate, equity price or commodity price. HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011
SWAP• These two swaps can be combined when interest on loans in two currencies are swapped.• The interest rate and currency swap markets enable firms to arbitrage the difference between capital markets.• For example, in the case of a swap involving two bonds, the benefits in question can be the periodic interest (or coupon) payments associated with the bonds. HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011