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Influence of ADR on Underlying Stock Prices


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Globalization has opened the door for the investors to avail various investment avenues across the globe. American Depository Receipt (ADR) is one such opportunity to the investing community. The ADR is a proxy for the Indian shares to enable them to be traded in the American stock exchanges. Various studies conducted on Depository Receipts (DRs) have shown that the trading on the DR sin the foreign market has its influence in the home country’s stock in terms of price, volatility and volume. This interested me and this project is concerned about studying “Whether the price fluctuations of ADR affect the corresponding Indian share prices?”
After the liberalization of the economy in 1991, the corporatist started sourcing their capital from both domestic and foreign markets. The Indian shares cannot be directly listed in the American stock exchanges. ADRs have been very helpful in this purpose. So a custodian bank receives the shares as deposit and issues receipt to the market. These receipts are issued in appropriate ratio to the shares deposited with the depository. The market players in the stock exchanges trade these receipts.

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Influence of ADR on Underlying Stock Prices

  1. 1. Visit for more information 1.1 Executive Summary Globalization has opened the door for the investors to avail various investment avenues across the globe. American Depository Receipt (ADR) is one such opportunity to the investing community. The ADR is a proxy for the Indian shares to enable them to be traded in the American stock exchanges. Various studies conducted on Depository Receipts (DRs) have shown that the trading on the DR sin the foreign market has its influence in the home country’s stock in terms of price, volatility and volume. This interested me and this project is concerned about studying “Whether the price fluctuations of ADR affect the corresponding Indian share prices?” After the liberalization of the economy in 1991, the corporatist started sourcing their capital from both domestic and foreign markets. The Indian shares cannot be directly listed in the American stock exchanges. ADRs have been very helpful in this purpose. So a custodian bank receives the shares as deposit and issues receipt to the market. These receipts are issued in appropriate ratio to the shares deposited with the depository. The market players in the stock exchanges trade these receipts. Though the shares are traded in different markets, they have the common fundamental factors like company’s performance, management of the company and the financial structure of the company that influence the share prices. At the same time there are few factors that are not same for two markets. These are market forces like interest rates, inflation, and overall performance of the economy. Due to this a difference in price is found between the ADRs and the corresponding share in the home country. 1.2 Problem statement 1 | P a g e
  2. 2. 1. The price of Indian companies’ shares traded both in Indian stock exchange and foreign stock exchanges are not the same, they are different. 2.Does the price in the foreign stock exchange provide information indicating movement of that share’s price in India? 1.3 Objective of the study: • To find is there an effect on the prices of Indian securities when they are traded outside India. • To find whether they act as Leading or Lagging Indicator. 1.4 Scope of the study A study may be viewed as exploratory or formal. The essential distinction between these two is the degree of structure and the immediate objective of the study. This research is a quantitative study, since it involves analyzing of numbers to a great numbers. 1.5 Research methodology:  Sampling Design The Sampling design constitutes the blueprint for the collection, measurement and analysis of data. It aids the scientist in the allocation of his limited resources by posing crucial choices. Research design is the plan and structure of investigation so conceived as to obtain answers to research questions. The plan is the overall scheme or program of the research. It includes what the investigator will do from writing hypotheses and their operational implications to the final analysis of data. The design is a plan for selecting the sources and types of information used to answer the research question. It is a framework for specifying the relationships among the study’s variables. It is a blueprint that outlines each procedure from the hypotheses to the analysis of data.  Sample Size 2 | P a g e
  3. 3. The sampling technique used to take the sample for the research is convenient sampling technique. The companies whose stock are taken for the research purpose are selected based on the following criteria · Should be considered in NIFTY index calculation · Μarket capitalization in NSE and · Availability of share price in the American stock exchanges. Companies taken for research: COMPANTY DATE OF ISSUING ADR Dr Reddy’s Lab 11/04/2004 HDFC Bank Ltd 20/07/2004 ICICI Bank Ltd 28/03/2003 Infosys Technologies Ltd 11/03/2002 Satyam Computers Ltd 15/05/2003 Tata Motors Ltd 24/10/2007 VSNL 15/08/2003 The Stock Symbol Of These In NSE And Domestic 3 | P a g e
  4. 4. COMPANY ADR SYMBOL NSE SYMBOL Dr Reddy’s Lab RDY DRREDDY HDFC Bank Ltd HDB HDFCBANK ICICI Bank Ltd IBN ICICIBANK Infosys Technologies Ltd INFY INFOSYSTCH Satyam Computers Ltd SAY SATYAMCOMP Tata Motors Ltd TTM TATA MOTORS VSNL VSL VSNL  Data collection 4 | P a g e
  5. 5. The data collected for the research purpose are secondary data. The ADR prices were collected through YAHOO! FINANCE and through DATASTREAM website. The corresponding share prices were closing prices of the National stock Exchange (NSE), India and these share prices were collected through Bangalore Stock Exchange Financial Ltd. The share prices are adjusted to Bonus Issues and dividend payments. The return is found from the share prices. The return is calculated as follows. Return= P1/P0 The return thus found is a relative return. The natural logarithm is then found for the return. The correlation of the returns on ADR and the corresponding Indian shares are found using the following formulae Karl Pearson’s coefficient of correlation Where., N = Number of values Sigma X = Summation of ADR returns Sigma Y = Summation of corresponding Indian share price return Sigma XY = Summation of product of ADR returns and corresponding share price returns Sigma x2 = Summation of square of ADR returns  Cross correlation 5 | P a g e
  6. 6. Cross correlation is a standard method of estimating the degree to which two series are correlated. Consider two series x(i) and y(i) where i=0,1,2...N-1. The cross correlation r at delay d is defined as Where m x and m y are the means of the corresponding series. If the above is computed for all delays d=0,1,2,...N-1 then it results in a cross correlation series of twice the length as the original series. There is the issue of what to do when the index into the series is less than 0 or greater than or equal to the number of points. (i-d < 0 or i-d >= N) The most common approaches are to either ignore these points or assuming the series x and y are zero for i < 0 and i >= N. In many signal processing applications the series is assumed to be circular in which case the out of range indexes are "wrapped" back within range, ie: x(-1) = x(N-1), x(N+5) = x(5) etc. 6 | P a g e
  7. 7. 1.6 Limitations of the Study: · The research is limited to impact of ADRs on Indian shares. · The research is confined only to the study of ADR prices and its impact on Indian shares and not on the American stock market. · The study is limited to shares of seven companies and their ADRs due to the problem in availability of data. · The study is limited by time constraints. 7 | P a g e
  8. 8. LITERATURE REVIEW The literature review section examines recent research studies, company data, or industry reports that act as a bass for the proposed study. Related literature and secondary data gives comprehensive perspective. Earlier references will be helpful if the problem has a historical background. Always the literature survey reference should be to the original source. The literature applies to the study you are proposing. The literature review may also explain the need for the proposed work to appraise the shortcomings and informational gaps in secondary data sources. The first step in a research is a search of the secondary literature. Studies made by others for their own purposes represent secondary data. Within secondary data exploration, a researcher should start first with an organization’s own data archives. Reports of prior research studies often reveal an extensive amount of historical data or decision-making patterns. By reviewing prior studies, you can identify methodologies that proved successful and unsuccessful. The source of secondary data is published documents prepared by authors outside the sponsor organization. A search of secondary sources provides an excellent background and will supply many good leads if one is creative. 2.0 Background of the study: A Depository Receipt (DR) is a type of negotiable (transferable) financial security that is traded on a local stock exchange but represents a security, usually in the form of equity that is issued by a foreign publicly-listed company. The DR, which is a physical certificate, allows investors to hold shares in equity of other countries. One of the most of DRs is the American depository receipt(ADR),which has been offering companies, investors and traders global opportunities for investment since the 1920s. Since then, DRs have spread to other parts of the globe in the form of global depository receipts (GDRs)— the other most common type of DR--European DRs (EDRs), and International DRs (IDRs). 8 | P a g e
  9. 9. 2.1 How Does the Depository Receipt Work? The DR is created when a foreign company wishes to list its already publicly-traded shares or debt securities on a foreign stock exchange. Before it can be listed to a particular stock exchange, the company in question will first have to meet certain requirements put forth by the exchange. Initial public offerings (IPOs) ,however, can also issue a DR as well. DRs can be traded publicly or over-the-counter. Let us look at an example of how an ADR is created and traded: Example Say a gas company in Russia has fulfilled the requirements for DR listing and now wants to list its publicly-traded shares on the NYSE in the form of an ADR. Before the gas company's shares are traded freely on the exchange, a US broker, through an international office or a local brokerage house in Russia, would purchase the domestic shares from the Russian market and then have them delivered to the localh(Russian) custodian bank of the depository bank. The depository bank is the American institution that issues the ADRs in America. In this example, the depository bank is Bank of Newyork. Once the Bank of Newyork’s local custodian bank in Russia receives the shares this custodian verifies the delivery of the shares by informing the Bank of Newyork that shares can now be issued in the U.S. The Bank of New York then delivers the ADR’s to the broker who initially purchased them. Based on a determined ADR ratio, each ADR may be issued as representing one or more of the Russian local shares, and the price of each ADR would be issued in US dollars converted from the equivalent Russian price of the shares being held by the depository bank. The ADRs now represent the local Russian shares held by the depository, and can now be freely traded equity on the NYSE. After the process whereby the new ADR of the Russian gas company is issued, the ADR can be traded freely among investors and transferred from the buyer to the seller on the NYSE, through a procedure known as intra-market trading. All ADR transactions of the Russian gas company will now take place in US dollars and are settled like any other US transaction on the NYSE. The ADR investor holds privileges like those granted to shareholders of ordinary shares, such as voting rights, and cash dividends. The rights of the ADR holder are stated on the ADR certificate. When any DR is traded, the broker will aim to find the best price of the share in question. 9 | P a g e
  10. 10. He or she will therefore compare the US dollar price of the ADR with the US dollar equivalent price of the local share on the domestic market. If the ADR of the Russian gas company is trading at USD 12 per share and the share trading on the Russian market is trading at USD 11 per share (converted from rubles to dollars), a broker would aim to buy more local shares from Russia and issue ADR s on the US market. This action then causes the local Russian price and the price of the ADR to reach parity. The continual buying and selling in both markets, however, usually keeps the prices of the ADR and the security on the home market in close rage of one another. Because of this minimal price differential, most ADR s are traded by means of intra-market trading. A US broker may also sell ADR’s back into the local Russian market. This is known as cross-border trading. When this happens, an amount of ADR’s is cancelled by the depository and the local shares are released from the custodian bank and delivered back to the Russian broker who bought them. The Russian broker pays for them in rubles, which are converted into dollars by the US broker. A depositary is a bank that provides stock transfer services in connection with a depositary receipt program, including issuing and canceling ADR’s, maintaining the register of holders, distributing dividends in U.S. dollars, providing annual meeting services and executing corporate actions. Investor receives annual reports and proxy materials in English. ADR’s listed on U.S. exchanges provide holders with the same level of information as any other U.S. security. Trading information is readily available, financials are reconciled to U.S. Generally Accepted Accounting Principles (GAAP) and the SEC regulate the Company's disclosure to investor. Information on OTC ADR’s is more limited as trading data is not well publicized, company financials do not conform to U.S .standards and the SEC does not require companies to communicate with share holders on a regular basis. 10 | P a g e
  11. 11. 2.2 Benefits of DR issue The DR functions as a means to increase global trade, which in turn can help increase not only volumes on local and foreign markets but also the exchange of information, technology, regulatory procedures, and market transparency. Thus, instead of being faced with impediments to foreign investment, as is often the casein many emerging markets, the DR investor and company can both benefit from investment abroad.  For the company A company may opt to issue a DR to obtain greater exposure and raise capital in the world market. Issuing DR s has the added benefit of increasing the share's liquidity while boosting the company's prestige on its local market ("the company is traded internationally"). Depository receipts encourage an international shareholder base, and provide expatriates living abroad with an easier opportunity to invest in their home countries. Moreover, in many countries, especially those with emerging markets, obstacles often prevent foreign investors from entering the local market. For more on emerging market economies (EME s), see the article "What Is an Emerging Market Economy?" which focuses on what EME s are and why they are drawing the attention of foreign investors. By issuing a DR, a company can still encourage investment from abroad without having to worry ,about barriers that a foreign investor might face. company can still encourage investment from abroad without having to worry about barriers that a foreign investor might face.  For the investor Buying into a DR immediately turns an investors' portfolio into a global one .Investor's gain the benefits of diversification, while trading in their own market under familiar settlement and clearance conditions. More importantly, DR investors will be able to reap the benefits of these usually higher-risk, higher-return equities, without having to endure the added risks of going directly into foreign markets, which may pose lack of transparency or instability resulting from changing regulatory procedures. It is important to remember that an investor will still bear some risk due to foreign exchange rate conversions, stemming from uncertainties in emerging economies and societies. On the 11 | P a g e
  12. 12. other hand, however, the investor can also benefit from competitive rates the US dollar and euro have to most foreign currencies. Investing in any security involves a certain amount of risk - along with reward. However, risks specific to ADRs might include country risk, as ADRs are backed by non-U.S. securities, and currency risk. 2.3 Sponsored v/s. Un-Sponsored ADRs Sponsored ADRs offer the easiest method for foreign companies to issue securities in the United States; they are tradable on the New York Stock Exchange or the over-the-counter market. The underlying companies usually supply fundamental information on their business, just like most American companies. Also, exchanged listed companies must provide better financial information than un-sponsored ADRs and non-exchange listed ADRs. To qualify for listing, foreign companies must complete extensive filings with United States governing bodies and provide financial reports similar to those of domestic companies. On the other hand, un-sponsored ADRs are created without the consent of the underlying foreign company, and at one time commanded the majority of available ADRs. Now they are becoming less and less popular because the foreign companies do not report their financial information to the United States, making research more difficult for investors. These securities may be handled by more than one bank and are not listed on American exchanges. 2.4 What is the difference between registered holder and Beneficial ADR holder? A registered holder is one whose name appears on the books of the depositary. The registered holder is considered the owner of record. A beneficial holder is one whose holdings are registered in a name other than their own, such as in the name of a broker, bank or nominee. Introduced to the financial markets in 1927, an American Depository Receipt (ADR) is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. ADRs are bought and sold on American markets just like regular stocks, and are issued/sponsored in the U.S. by a bank or brokerage. 12 | P a g e
  13. 13. ADRs were introduced as a result of the complexities involved in buying shares in foreign countries. Primarily the difficulties associated with trading at different prices and currency values. For this reason, U.S. banks simply purchase a bulk lot of shares from the company, bundle the shares into groups, and reissues them on the NYSE, AMEX, or NASDAQ. The depository bank sets the ratio of U.S. ADRs per home country share. This ratio can be anything less than or greater than one. The reason they do this is because they wish to price the ADR high enough as to show substantial value, yet low enough, so that the individual investors can purchase these shares. Most investors try to avoid investing in penny stocks, and many would shy away from a company trading for 50 Russian Rubles per share, which equates to $1.50 US per share. As a result, the majority of ADRs range between $10 and $100 per share. If, in the home country, the shares were worth considerably less, then each ADR would represent several real shares. 2.5 There are three different types of ADR issues: 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 ADR s are found on the OTC market and are an easy and inexpensive way to gauge interest for its securities in North America. Level- 1 ADR s 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 ADR s are able to raise capital and gain substantial visibility in the U.S financial markets. The advantages of ADRs are twofold. For individuals, ADRs are an easy and cost effective way to buy shares in a foreign company. They save considerable money by reducing administration costs and avoiding foreign taxes on each transaction. Foreign entities like ADRs because they get more U.S. exposure and allow them to tap into the wealthy North American equity markets. In return, the foreign company must provide detailed financial information to the sponsor bank. 13 | P a g e
  14. 14. 2.6 How ADR Prices are determined? Now, let's use an example to give you a better idea about how the ADR process works. The recent boom in "Bloody Marys" has increased the prospects for the vodka industry. Russian Vodka Inc. wants to list shares on the NYSE to gain exposure to the U.S. citizens and to tap into the lush Bloody Mary market .Russian Vodka already trades on the Russian Stock Exchange at 127 Russian Rubles ($4.58 US). Let's say that a U.S. bank purchases 30 million shares from Russian Vodka Inc. and issues them in the U.S. at a ratio of 10:1. This means each ADR share you purchase is worth 10 shares on the Russian Stock Exchange. A quick calculation tells us that the new ADR should have an issue price of around $45.80. How is the performance determined? It floats on supply and demand just as normal stocks do. But, if the U.S. price varies too far from the Russian price after taking into account the currency exchange rate and the ratio of ADRs to home country shares then an arbitrage opportunity will exist. ADRs do tend to follow the general trend of the home country shares, but this is not always the case. 2.7 What are the risks associated with ADR prices? There are several factors that determine the value of the ADR beyond the performance of the company. Analyzing these foreign companies involves further scrutiny than merely looking at the fundamentals. Here are some other risks that investors should consider  Political Risk Ask yourself if you think the government in the home country of the ADR is stable? For example, you might be wary of Russian Vodka Inc. because of the past history in Russian politics.  Exchange Rate Risk Is the currency of the home country stable? Remember the ADR shares track the shares in the home country, and if their currency is devalued, it trickles down to your ADR. This can result in a big loss even if the company had been performing well. 14 | P a g e
  15. 15.  Inflationary Risk This is an extension of the exchange rate risk. Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently purchasing power is falling Inflation can be a big blow to business, the currency of a country with high inflation becomes less and less valuable each day. 2.8 Indian Companies Listed in New York Stock Exchange (NYSE) 1. Dr. Reddy's Laboratories Limited 2. HDFC Bank Limited 3. ICICI Bank Ltd. 4. ICICI Limited 5. Satyam Computer Services Ltd. 6. Silverline Technologies Ltd 7. Silverline Technologies Ltd 8. Videsh Sanchar Nigam Limited 9. Wipro Limited 2.9 Indian Companies Listed in NASDAQ 1. Infosys Technologies Limited 2. India Limited 3. Satyam Info way Limited (SIFY) - Listed: 19/10/1999 2.10 Indian Companies Listed in the London Stock Exchange 1. APTECH 2. Ashok Leyland 3. Bajaj Auto 4. BSES 5. CESC 6. Crompton Greaves 7. EID-Parry (India) 8. EIH 9. Gas Authority of India 15 | P a g e
  16. 16. 10. Himachal Futuristic Communications 11. Indian Hotel Companies 12. J.K.CORP 13. Mahanagar Telephone Nigam 14. Raymond 15. SIEL 16. SSI 17. State Bank of India 18. Steel Authority of India 19. Tata Tea - Listed: 5/06/2000 2.11 Study conducted by Kate rina Holica of Chezclovakia The literature on the ADRs is scant. There have been quite few studies regarding the effect of fluctuation of global Depository Receipts on the corresponding domestic shares in the home country. These research works were mainly on focused on studying the change in the volatility and volume of trade of these shares in the domestic market; due to the fluctuations in the American market In this regard the study conducted by Kate rina Holica of Chezclovakia is important. In her study, Kate rina Holica studied  3 Czech, 3 Hungarian and 3 Polish stocks, to which DRs have been issued  Found that the prices of depositary receipts and their underlying shares are very closely correlated.  Found that for all Czech and Hungarian shares the correlation coefficient was above 0.99 and  For two of the Polish shares lower values. Dr Kate rinaHolic ká in her research sample included 19 DR issues by Central European companies - from Chezklovakia Republic, Poland and Hungary. The research findings were as follows I. Liquidity effects Cross listing may enhance liquidity of the actual shares on the local market: 16 | P a g e
  17. 17. · Increased visibility of the company · Reduction in the information asymmetry (better analysts’ coverage) · Possibility of cross-border trading. II. Spill over effect on the local stock market · International cross-listing can alter incentives of companies and individuals to participate in the market and can that way contribute to transformation of a segmented local equity market with low liquidity to an integrated market with high liquidity and capitalization. • On the other hand, concerns are frequently expressed that migration of major share of market capitalization and value traded from small emerging stock exchanges to leading financial centers has adverse consequences on the overall quality of the local market. · The whole market activity development is thus tightly connected with the behavior of the two shares. We can therefore not easily differentiate between the market wide and stock-specific influences. 2.12 Based on the above findings she concluded her study as follows · The DR and underlying share’s prices of CE companies turned out to be almost perfectly correlated; hence there don’t seem to be many opportunities for profitable arbitrage. Such a result supports the hypothesis of markets integration · It is usually expected that a DR issue lowers cost of capital to the company; lower cost of capital implies higher shareholder value, which is reflected in the DR Price. · A range of different DR types has evolved to satisfy the needs of all investors and issuers. The most frequently chosen approach by the CE companies was a simultaneous offering to institutional investors in the US and in London. A research paper was submitted by Dr. Mahu Kalimpali and Dr. Latha Ramachand to the National stock Exchange (NSE) of India. In their paper Dr Mahu Kalimpali and Dr Latha Ramachand studied 49 firms’ equity issues. Dr Mahu Kalimpali and Dr Latha Ramachand examined volatility of returns, volumes and price range measures for a 17 | P a g e
  18. 18. sample of Indian firms that raise equity capital on foreign markets. They found that · On average there is a decline in returns, volatility of daily high/low price range of the firm’s equity on the local market subsequent to the foreign capital raising event. · Volatility of the underlying returns is higher after the equity issue. · Exposure to a foreign capital market via equity issue and listing does not result in a significant improvement in liquidity on the home market compared to firms that do not have this foreign exposure. · Given the firms that raise capital abroad are generally larger firms issuing significantly greater amounts of equity, the results suggest that foreign exposure via listing or issue may not be an available option to small firms. 2.13 Based on a study of 113 ADRs from eight countries over the 1980-1994 periods, Jiang (1998) reports three findings. 1. The ADRs outperform their respective local market indices. 2. The ADRs are influenced by their respective market index portfolios, while, for countries with co-integrated ADRs and market portfolios, the effect of the ADRs on local market portfolios is significant. 3. Third, although the ADR returns are significantly correlated with US returns, they are also affected by local market conditions and exchange rates, indicating diversification benefits of the ADR’s through two sources: a country diversification and a currency. They conclude that the ADR’s, especially those in emerging markets, offer significant international diversification benefits to US investors. 2.14 Mr. Khutan and Zhou find the following in their study. 1. Underlying, local, and host markets all are important predictors of the ADRs returns. 2. In terms of the conditional volatility, we find that only underlying markets have a significant impact on the volatility of the ADRs. 18 | P a g e
  19. 19. 3. US shocks have no significant impact on the conditional volatility (risk) of the ADRs To profit out of that price fluctuation one need to consider the foreign exchange rate fluctuations too. In Germany two people conducted a study to find out where the price discovery occurs during the overlapping trading hours of NYSE and FRANKFURT stock exchanges. In their study they found that 1. The price discovery occurs largely in the domestic market to even out the arbitrage opportunity. 2. Multinational firms would have more room for international price discovery than that are essentially operating in the home market alone. 3. Home markets largely determining the random walk component of the international value of the firm along with an independent role for exchange rate shocks to affect prices in the derivatives market. On 31-December-2009, in The Business Line newspaper the following newsprint appeared. During the year 2009, the price movements of American Depository Shares and Global Depository Receipts listed in the overseas markets appear to have generally mirrored the movements in prices of underlying securities at the local markets. On an average, while the price decline in the case of ADRs and GDRs was 24.8 per cent, the prices of underlying securities fell by around 25.7 per cent. However, the average masks a number of cases in which divergent price trends were evident. On top of the list are GDRs such as Flex Industries, Ballarpur Industries, Garden Silk, EID Parry, SI Viscose and Ispat Industries. These GDRs out-performed the price movements in the underlying stocks. Bottom of the pile are GDRs/ADRs such as EIH, Bombay Dyeing, Finolex Cables, ITC and Gas Authority. In the case of these stocks, the ADRs/GDRs under-performed the price movement in the underlying stocks. These price movements have tended to realign the premium/discount at which these instruments trade overseas noticeably. GDR/ADR PERFORMANCE DURING YEAR 2009 19 | P a g e
  20. 20. Price Change In Year 2009 Price Change In Year 2009 Stock GDR/ADR Stock GDR/ADR Flex Industries 225.0 74.8 India Cement -41.7 -30.2 Garden Silk 217.5 -34.7 FINOLEX Cables -42.3 -2.7 EID Parry 112.0 -43.4 Century Tiles -44.4 -28.9 Ballapur Industries 93.3 4.9 GNFC -45.3 -43.2 HFCL 78.4 81.9 INDO RAMA -46.0 -35.1 GE Shipping 52.1 76.4 Core Parenterals -48.0 -63.7 Raymond 45.0 69.6 Jain Irrigation -48.0 -62.4 TATA Power 14.6 26.2 Crompton Greaves -48.0 -41.8 Reliance 14.5 45.4 GRASIM -48.1 -29.9 Indian Aluminum 8.5 27.5 Indo gulf -48.5 -32.3 BSES 5.5 4.7 Indian Hotels -48.8 -25.8 HDC 0.0 -65.9 SAIL -50.0 -46.5 JK Corp 0.0 -42.3 VSNL -51.3 -50.4 Oriental Hotel 0.0 -35.9 Tube Investments -52.2 -46.2 ITC -2.6 36.0 Kesoram Industries -55.8 -43.0 Gujarat Ambuja -6.2 -2.1 United Phosphorous -56.0 -45.8 SI Viscose -13.3 -61.6 IPCL -57.0 -41.4 Bombay Dieing -14.5 40.5 SIEL - 57.1 -51.2 Dr Reddy’s -15.9 -9.8 Arvind Mills -59.1 -42.1 Ispat Industries -19.2 -54.4 DCW -61.2 -56.8 Hindalco -23.2 -9.1 JCT -62.5 -54.5 ICICI ADR -24.2 -1.7 Telco -64.0 -56.9 ICICI -25.5 -1.7 Gas Authority -64.1 -27.7 Ranbaxy labs -25.9 -27.3 Ashok Leyland -64.4 -61.5 CESC -26.7 -30.6 SPIC -65.6 -60.3 MTNL -29.4 -8.1 Infosys ADR -71.4 -23.3 Videocon Intl -30.0 -30.3 M&M -72.4 -65.2 Indian Rayon -30.0 -20.1 L&T -74.2 -64.9 SBI -3308 -16.5 EIH -75.6 9.7 Sanghi Polyester -35.0 -64.8 Pentamedia Graphics -82.2 -78.3 BAJAJ Auto -38.7 -32.0 SATYAM -85.2 NA INFOWAY Fresh GDR Or ADR Offers (In %) 20 | P a g e
  21. 21. Price Change after Offer GDR OR ADR STOCK WIPRO 20.5 0.6 VSNL 13.1 23.7 ICICI BANK -43.7 -44.6 APTECH 46.3 -39.2 TATA TEA -51.9 -48.7 SILVERLINE -60.0 -50.1 REDIFF.COM -77.1 NA SSI -79.7 -74.5 The difference in the performance of VSNL and WIPRO over the other fresh offers has a direct correlation with the timing of the offers. WIPRO and VSNL made their offers at the fag end of the year when the prices in the local markets were already at more realistic levels and, as such, further declines in price compared to the offer price have been averted. The other ADR/GDR offering were made in the earlier part of the year. Their prices were linked to the domestic market price even at the time of the offer, with the price fixed in the region of 10 per cent above or below the domestic price. And, not surprisingly, just as their prices crashed at the domestic markets, the prices of the ADRs and GDRs also tumbled. 2.15 Mr. Ajay Sharma in his research says the following. We have preponderant evidence, and conceptual arguments, in favor of large- scale ownership of local firms by foreign shareholders. For example, it makes great sense for Indian investors to buy shares of foreign companies: doing so would yield improved diversification and hence low risk for Indian investors. By the same coin, Indian equity risk is uncorrelated with global portfolios, so foreign investors require a lower rate of return from Indian equities. Thus, foreign ownership of Indian equity reduces the cost of capital in India, and makes more investment projects viable How can foreign investment into Indian equities be implemented? Broadly, there are two strategies: either foreign investors can buy Indian shares in India, or Indian firms can list their shares abroad in order to make these shares available to foreigners. Foreign investors buying shares in India has traditionally been limited by two Problems: 21 | P a g e
  22. 22. 1. The first problem faced is poor market design on the Indian equity market. When foreign investors first appeared in India, in the early 1990s, they were horrified at the equity markets that they saw. The Indian equity market imposed extremely large transactions costs upon investors (i.e., it was highly illiquid). This was an obvious motivation for GDRs and ADRs: Indian firms saw these as a way to bypass the incompetent Indian equity market mechanisms and instead jump to the well-functioning equity markets found abroad. When Indian firms issued shares on the GDR or ADR markets, their shares commanded a higher price owing to a liquidity premium. 2. The second problem faced is restrictions on equity ownership by foreigners. Only "foreign institutional investors" can buy shares in India, while anyone can buy GDRs or ADRs. FIIs face restrictions on the fraction of a firm that can be purchased. This imposes ceilings on foreign ownership. In contrast, participation in the GDR or ADR market is unencumbered, and hence GDRs or ADRs generally enjoy a premium. From 1994 onwards, with the rise of electronic trading, clearing corporation and depository, the first order mistakes in market design in India have been addressed. The Indian equity market has obtained a quantum leap in liquidity. We are still inferior to international standards in a few respects, such as the rolling settlement, The presence of leveraged trading on the spot market, and the limited access to derivatives. However, the picture on liquidity has turned around completely. It is easy to examine the `market by price' on NSE, and compare it with the bid/offer spreads seen for GDRs or ADRs: we see sharply higher liquidity on NSE. From1996 onwards, there has been no liquidity premium argument which favors offshore listing. This superiority of liquidity in India is not accidental. The liquidity of the stock market is ultimately driven by retail investors and speculators, who are found in the home country, in Indian standard time. Hence, no foreign market can ever harness the liquidity which is found in India. Indeed, a firm which issues ADRs or GDRs actually suffers an opportunity cost by listing abroad: if it had (instead) issued shares domestically, it would have improved local liquidity and obtained a liquidity premium. Instead, issuance abroad fragments the order flow and yields no improvement to local liquidity. In this conceptual framework, what is the optimal policy for a firm which operates under 22 | P a g e
  23. 23. existing Indian regulations and laws, and seeks to obtain the highest possible valuation? We can propose a few ingredients: · As far as possible, it is better for a firm to issue shares in India, and obtain good liquidity by building up market capitalization and retail investors in India. · Foreign investors would always be willing to pay higher prices for Indian shares, so it is important to woo FIIs. The companies with the largest fraction of foreign ownership would obtain the highest P/Es and the lowest cost of capital. Towards this goal, the company should pass the special resolution which raises the limit upon FII shareholding from 24% to 40%. · When the company hits the limit of 40% FII shareholding, it makes sense to use ADRs or GDRs as a way of further improving foreign shareholding. The benefits here (of greater foreign ownership giving an improved valuation) are diminished to the extent that GDRs and ADRs are extremely illiquid. The two--way fungibility, announced in the budget speech, will help improve the liquidity of ADRs or GDRs, but there is no possibility of an ADR or GDR being as liquid as NSE. · Conversely, there is no real argument in favor of GDR or ADR issuance for an Indian firm which has not yet hit the 40% limit. The above recipe is appropriate for a firm in India which faces existing economic policies. Suppose we could change these economic policies, and try to find the economic policy strategy which would yield the lowest possible cost of capital for the firms of India. What would we undertake? · Foreign investment brings capital into India, and reduces the cost of capital for a firm. From the perspective of economic freedom, the shareholders of a firm should be free to choose whom they sell shares to. The sale of a share is a private action between one investor and another. This budget has made a step in the right direction by allowing shareholders to increase the limit on FII shareholding from 30% to 40%. However, this limit should be raised to 100%. A firm should be free to sell shares to anyone it wants; the Government of India should not have a say in this matter. · The definition of "FII" should be steadily broadened, so as to improve the investor base that all Indian companies can access. This would eliminate the incentive that Indian firms 23 | P a g e
  24. 24. are given, to suffer poor liquidity in offshore markets, in order to obtain a wider foreign investor base. Ranking of countries which have issued ADRs by Mr. James M Donald, Lazard Asset Management Company 24 | P a g e
  25. 25. How the GDRs/ADRs of Indian Companies Fared (Sunday, October 29, 2009) Current Current RETURNS OVER Company GDR Premium/ offer price the Week Price Discount $Terms $Terms E 35 15 I(Rs 53 (%) .) SBI D 1 14 1 Silverline ADR P 17 G E Shipping 6 80 a 0 5 Ashok Leyland r 11r 3 SPIC y 7 60 5 25 | P a g e
  26. 26. (%) (76) ( (%) 25 17 (73) 7 33 21 (51) 9 (34) (87) ) 31 20 26 | P a g e
  27. 27. Arvind Mills 16 74 (96) 17 Ranbaxy Laboratories 859 21 94 13 Grasim Industries 252 24 (58) 10 L & T 164 4 (57) 8 ITC 861 14 146 7 United Phosphorous 69 19 (93) 7 Tube Investments 73 5 (76) 7 East India Hotels 218 10 (49) 6 Reliance Industries 310 2 66 5 SSI 2519 9 (62) 5 G A I L 50 11 N.A. 5 Rediff ADR 97 N.A (65) 5 M T N L 137 (0) (50) 4 Bajaj Auto 344 29 (56) 4 Indian Hotels 202 3 (73) 4 Gujarat Ambuja 149 13 118 3 Bombay Dyeing 128 10 (70) 2 Infosys Technologies ADR 11839 64 660 2 Mahindra & Mah. 149 12 IPCL 61 21 Hindalco 737 (2) Tata Tea 183 6 SIV Industries 23 484
  28. 28. (27) (59) 2 0 (71) (97) 1 0 1 1
  29. 29. Wockhardt 893 142 36 0 T E L C O 80 11 (88) 0 Sanghi 5 (7) (95) 0 Usha Beltron 64 38 (87) 0 Raymond Woollen 103 1 (58) 0 SAIL 7 37 (83) 0 NEPC Micon 11 450 (92) 0 Oriental Hotels 115 43 (80) 0 SIEL 8 61 (95) 0 Kesoram Industries 39 119 (47) 0 Flex Industries 23 21 (88) 0 Finolex Cables 229 5 (40) 0 GNFC 23 3 (80) 0 H D C 11 179 (88) 0 Garden Silk Mills 10 28 (96) 0 DCW 8 122 (94) 0 CESC 23 24 (95) 0 Ballarpur Industries 115 52 (71) 0 Century Textiles 34 22 (94) 0 Crompton Greaves 34 46 (90) 0 Core Healthcare 23 100 (96) 0 India Cements 39 11 (80) 0 Indo Gulf Fertilizers 46 31 (78) 0
  30. 30. Indian Rayon 69 3 (90) 0 J K Corp 27 118 (93) 0 ICICI ADR 179 141 99 0 Jain Irrigation 23 192 (95) 0 JCT 6 53 (93) 0 Ispat Industries 9 154 (91) (0) Aptech 394 (9) (40) (1) ICICI 78 5 (26) (1) Dr.Reddy's 1420 1 178 (3) Himachal Futuristic 1122 (5) 954 (4) Videocon International 55 33 (85) (4) Indian Aluminium 110 20 (65) (4) VSNL 719 11 (44) (6) Tata Power 62 (9) (81) (7) BSES 183 3 (17) (8) Satyam Infoway ADR 352 N.A. 71 (14) ICICI Bank ADR 115 (0) (55) (15) Sterlite 160 2 (80) (85)
  31. 31. According to Bank of NewYork the following chart has been found.
  32. 32. PROFILE OF COMPANY 3.0 INDUSTRY SCENARIOS 3.1 INTRODUCTION: Basically, Securities markets provide a channel for allocation of savings by an individual or an organization to those who have a productive need for them. So, a security market can be said a location where the savers meet the real investors who need the fund. The savers and investors are constrained by the economy’s abilities to invest and save respectively which thus helps market in enhancing savings and investment in the economy. Stock Market is therefore affected by the dynamics of the economic, political, cultural and environmental activities within the country and rest of the world. A stock market is a public market for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The size of the world stock market was estimated at about $36.6 trillion US at the beginning of October 2008. [1] The total world derivatives market has been estimated at about $791 trillion face or nominal value, [2] 11 times the size of the entire world economy. [3] The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring.). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price. 3.2 BRIEF HISTORY: Indian Share Market is the oldest Asian stock market incorporated in 1875. The name of the first share trading association in India was Native Share and Stock Broker's Association which later came to be known as Bombay Stock Exchange. This association started with 318 members. The Bombay Stock Exchange is known as the oldest exchange in Asia. It traces its history to the 1850s, when stockbrokers would gather under banyan trees in front of Mumbai's Town
  33. 33. Hall. The location of these meetings changed many times, as the number of brokers constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as 'The Native Share & Stock Brokers Association'. In 1956, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act. The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure overall performance of the exchange. In 2000 the BSE used this index to open its derivatives market, trading Sensex futures contracts. The development of Sensex options along with equity derivatives followed in 2001 and 2002, expanding the BSE's trading platform. Today, BSE is the world's number 1 exchange in terms of the number of listed companies and the world's 5th in transaction numbers. The market capitalization as on December 31, 2007 stood at USD 1.79 trillion . An investor can choose from more than 4,700 listed companies, which for easy reference, are classified into A, B, S, T and Z groups. The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic stature, and is tracked worldwide. It is an index of 30 stocks representing 12 major sectors. The SENSEX is constructed on a 'free-float' methodology, and is sensitive to market sentiments and market realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indices. Three segments of the NSE trading platform were established one after another. The Wholesale Debt Market (WDM) commenced operations in June 1994 and the Capital Market (CM) segment was opened at the end of 1994. Finally, the Futures and Options segment began operating in 2000. Today the NSE takes the 14th position in the top 40 futures exchanges in the world. In 1996, the National Stock Exchange of India launched S&P CNX Nifty and CNX Junior Indices that make up 100 most liquid stocks in India. CNX Nifty is a diversified index of 50 stocks from 25 different economy sectors. The Indices are owned and managed by India Index Services and Products Ltd (IISL) that has a consulting and licensing agreement with Standard & Poor's.
  34. 34. In 1998, the National Stock Exchange of India launched its web-site and was the first exchange in India that started trading stock on the Internet in 2000. The NSE has also proved its leadership in the Indian financial market by gaining many awards such as 'Best IT Usage Award' by Computer Society in India (in 1996 and 1997) and CHIP Web Award by CHIP magazine (1999). The past decade has been quite remarkable for the Securities market in India with the boom in the economy fuelled by better banking system. It has grown exponentially and the market has also witnessed fundamental institutional changes. There have also been significant improvements in efficiency, transparency and safety. However global economic activity decelerated towards the end of the calendar year resulting in investment concerns on account of the sub-prime crisis in the US and other developed nations. Naturally the effects of this slowdown spilled over into developing economies also and we are looking ahead with some degree of concern over the prospects in the near future. In recent days economic collapsed in variation of the foreign investors fund main effect of the Indian economy in 2008-2009 the Bombay Stock Exchange (BSE) the sensex was 13,400 in the month of 8th July 2009. In other side National Stock Exchange (NSE) 3,974 is in the same month of 2009. Since the markets has taken up word moment from 9th July 2009 from the low of 3,974 to 4,578 on 24th July 2009 due to the Sharpe recovery in global economy as well as the 1st quarter Results of all major company which has been announced better than expectations, Hence Indian markets are one of the fastest emerging markets in world and attracted by many Foreign institutional investors, 3.3 THE REGULATORY AUTHORITY: SEBI The rise in number of investors was also leading to an increase in malpractices on part of the companies, brokers, merchant bankers, investment consultants and various other agencies involved in new issues. This led to erosion of investor confidence. The Government and the stock exchanges Realizing this, Securities Exchange Board of India (SEBI) was constituted were helpless as the existing legal framework was just not enough. by the Government of India in 1992
  35. 35.  THE MAJOR FUNCTIONS OF SEBI: 1. To promote fair dealings by the issuers of securities and ensure a market place where funds can be raised at relatively low costs. 2. To provide protection to the investors and safeguard their rights and interests such that there is steady flow of savings into the market. 3. To regulate and develop a code of conduct and fair practices by the intermediaries involved in the stock market etc.  Outlook 2009- 10 The Indian markets traded in a very narrow range during April amidst mixed cues coming from global and domestic markets. While the markets were hurt by the sovereign debt default concerns of Greece and SECs allegations against Goldman Sachs, it found some comfort from good set of FY 2009-2010earnings numbers declared by India Inc... India’s industrial output, as measured by the Index of Industrial Production (IIP), grew by 15.1% as against an annual gain of 16.7% in January 2010, and17.6% in December 2009. Industrial production grew by a mere 0.2% in the same month last year. Manufacturing output rose by 16% as against a mere 0.2% in February 2009, while Mining production was at 12.2% versus (-) 0.2% in the year-ago period. Electricity sector output expanded by 6.7%compared to just 0.7% in the same month a year Consumer Durables production expanded by 29.9%in February 2010 as against 6% in the same period in 2009. Output in Capital Goods grew by 44.4% in February 2010 as against 11.8% for the same month of 2009. The growth rate in Basic Goods category stood at 8.4% versus a contraction of 0.1% in the year-ago period. Intermediate Goods' output rose by15.6% in the month under review versus (-) 3% in the year-ago period. As many as 14 out of the 17 industry groups showed a positive growth during February 2010 compared to the corresponding month of the previous year. .
  36. 36. 3.5 COMPANY PROFILE Company History & Background Asit C. Mehta Investment Intermediates Ltd. (ACMIIL) was established in the year 1986 with a view to offer a one stop solution to Indian entities for their needs in financial services. Over the last two decades it has achieved the distinction of being amongst the most trusted and reputed brokerage houses in India. It provides a complete bouquet of products in equity, debt, commodities, forex, depository, derivatives and allied services in India. Asit C. Mehta Investment Interrmediates Ltd. (ACMIIL) is the most trusted and reputed brokerage house for providing investment-related services in the capital market and money market and depository services in India. The company is jointly promoted by noted stock market professionals, Mr. Asit C. Mehta and Mrs. Deena A. Mehta, and is a part of the Mumbai-based Nucleus Group of Companies. The other group companies are engaged in IT and IT related services such as development of databases, back-office applications for banks, corporate document management solutions and geographical information systems (GIS). ACMIIL has pan-India presence through its branches, business associates, and marketing agents. You can also become a part of this growing business and assist us in increasing investor base, spreading investor education, and providing capital market services to clients. 3.6 VISION, MISSION & QUALITY: Envisioned to be the “Trusted Financial Intermediary”, the group has etched out a very specific corporate purpose – “To reach appropriate financial products, services and solutions to every Indian entity.” 3.7 PURPOSE To reach appropriate financial products, services and solutions to every Indian entity 3.8 Our Belief
  37. 37.  That every household can, should, and will need to participate in the financial markets directly or indirectly to protect their financial interests  That regulatory/legal compliance ensures economic sustainability.  That transparency and fairness are the cornerstones of all dealings.  That knowledge rather than capital is the key driver of this business.  That product, process, and technology led innovations are necessary preconditions for continuously adding value for all our constituents. 3.9 The first to our credit:  First limited liability Company to acquire membership on Bombay Stock Exchange.  First multiple seat holder and multiple exchange members.  First to achieve the ISO quality certification for business processes.  First to receive a CRISIL grading for quality of operations and services.  Company Managing Director Mrs. Deena Mehta was the first lady to be elected to the governing board of the Stock Exchange Mumbai and first and only lady to be the President of Stock Exchange, Mumbai. 3.10 Values, Relationship…..core to our business We are currently expanding our business in the retail and institutional segments on the domestic and overseas (NRI/FII) fronts. We have select positions open for marketing, sales, research, back office operations, and business development activities. At Asit C. Mehta, we aim to select a candidate whose goals are aligned with ours. Knowledge about the product, a conceptual understanding of the financial markets, a thirst to innovate, desire to grow within the company, meticulousness towards the task on hand, an ability to design and follow process are all qualities valued in the company. We foster a culture that rewards talent, initiative, hard work, and accountability and nurtures teamwork. 3.11 Shareholders
  38. 38. Asit C Mehta Investment Interrmediates Ltd.(ACMIIL) is incorporated as a publicly held limited liability company in India under the Indian Companies Act, 1956. The company was incorporated in the year 1993 under the new enabling provisions for limited liability stock broking companies framed by the Government to encourage limited liability company in this area. ACMIIL was first such company on the Bombay Stock Exchange. Currently, the company is mostly held by its founder shareholders as follows:  Mr.Asit C Mehta  Mrs.Deena Asit Mehta  Mr.Kirit H Vora  Nucleus Netsoft & GIS (India) Ltd. 3.12 SERVICE STANDARDS & COMPLIANCE: In order to institutionalize business processes, our company has moved to a documented customer-centric quality management system. This has ensured that the entire organization is driven by the common objective of delivering quality brokerage services that would create a unique brand and top-of-the-mind recall. We are the first brokerage house to be certified under ISO 9001:2000 for the Equity and Debt segments. We are also first stock brokerage house to be graded under the Broker Grading service by Credit Rating & Information Services of India Ltd. (CRISIL) for our quality of operations and services provided to clients. 3.13 MANAGEMENT: Chief Executive Officer Whole-time Director : : Mrs. Deena Asit Mehta Mr. Kirit H Vora
  39. 39. 3.14 ORGANIZATION STRUCTURE DESIGNATION NAME Chairman and Managing Director Mr. Asit C. Mehta Chief Executive Officer Mrs. Deena Asit Mehta Whole-Time Director Mr. Kirit H Vohra Chief Operating Officer Mr. Kirit H Vohra Chief Technological Officer Mr. Kamal Goel Chief Officer Wealth centre Mr. T .S Netrajan Chief Manager Co-operative commodities Mr. Vidia Chief Financial Manager Mr. Veerendra Thakur Chief Officer Human Resources Mr. V. Vishvanath Senior Vp Operation Mr. T .S Netrajan Branch Manager Mr. Kapadia Unit Manager Mr. B.P Shanthish 3.15 ORGANISATION STRUCTURE:
  40. 40. 3.16 MEMBERSHIP: • Cash Market: BSE, NSE • Derivatives: BSE, NSE • Debt: NSE • Foreign Exchange: Accredited by FEDAI • PMS under SEBI License • Merchant Banking: Approved by SEBI under Category I • Commodities: NCDEX MCX, DGCX, EAST INDIA Clearing Bank: State Bank of India Reach and Access (as on July 01, 2009) Investment Centers 665 (branches, franchisee, etc.) States & UT covered 26 Employees 1002 3.17 PRODUCTS AND SERVICES:
  41. 41. · Equity – Initial Public Offering (IPO) · Equity – Secondary trading (cash and derivative) · Equity – PMS · Equity – Online Trading · Equity – Depository Services · Equity – Investment Advisory (fundamental and technical) · Equity – Mutual Fund · Equity - Arbitrage · Commodity - Derivatives · Debt – Government Securities · Debt – Primary Placements · Debt – Advisory · Debt – Mutual Funds · Debt – Relief bonds, etc. · Forex – Interbank broking · Merchant Banking – Amalgamation & Mergers · Merchant Banking – Private Equity Merchant Banking – Public Offering. 3.18 OUR SERVICES:  Equity and Derivatives Trading:
  42. 42. Equity trading is offered to retail clients through different channels in the Bombay Stock Exchange (BSE) & the National Stock Exchange of India (NSE), for the cash and the derivatives segments. Investors are serviced through a PAN India network of over 650 associates / locations comprising of 585 franchisee and 65 company branches. (as on July 2009)  Online Trading: is our trading portal that offers online trading to retail investors in the BSE and NSE cash and derivatives segments. The investors can do their own trading through a browser-based interface as well as a streamer-based solution called Live exchange. This service is also available through an Interactive Voice Response (IVR) facility for those clients who are unable to access the Internet service at any time. The company has tied up with leading nationalized, private and co-operative banks to offer share trading services to the banks' customers. A seamless gateway has been established between the banking and depository software of the bank.  Institutional Desk: Equity trade execution services are provided to institutional investors both domestic and FII by our institutional desk. Research and market.  Investment Banking: ACMIIL has been granted a Category I Merchant Banking license by SEBI. It offers services in mergers, amalgamations, private equity, public offerings and a full gamut of investment banking services.  Commodity Trading Service are Provided Through Our Associate: Asit C. Mehta Commodity Services Pvt. Ltd. The company is member of India’s premier commodity exchanges, namely, the Multi Commodity Exchange of India Ltd. (MCX), the National Commodity & Derivatives Exchange, India (NCDEX) and the East India Cotton Exchange Association (EICA). The online trading portal also provides facility to trade on NCDEX. One of the group company is a member of Dubai Gold & Commodity Exchange (DGCX).  Inter-Bank FOREX Desk:
  43. 43. Our associate company, Asit C Mehta FOREX Pvt. Ltd., undertakes inter-bank forex order execution. Accredited by the Foreign Exchange Dealers’ Association of India (FEDAI), the company is empanelled with approximately 60 banks and has a reasonable presence in the market. 3.19 SUPPORT SERVICES  Research: Investors are provided with extensive information on markets and companies through hourly market reviews, periodic market commentary and recommendations, which enable them to make informed decisions. The company firmly believes that providing continuous and accurate decision making tools can add substantial value to its investors.  Advisory Services: Advisory services are provided as a value-added service to all retail and institutional clients. This service is delivered through the hourly, daily, weekly, fortnightly and monthly publication of fundamental and technical research. Calls are made through broadcast services on our private VSAT network, SMS and e-mail.  Accounts Information: Accounts information to the retail clients is provided through access on our website. This assists clients in knowing details about their trading accounts and their resultant obligations through various reports like Bill, Contract, Financial Ledger, Transaction Register, Stock Register, Portfolio Tracker, Stock holding position, etc. E-contracts are generated for investors giving trade details. 3.20 OTHER SERVICES:  Price Ticker
  44. 44. ACMIIL, in association with Capital Market Publications, presents the equity/derivative/commodity price ticker for easy desktop access to capital market information. The prices reflected are generally delayed by five minutes, and any additional delay (if any) depends on the user’s connectivity and computer system configuration. You can customize the ticker as per your individual needs.  Alertz As our registered client, provides you with ‘Alertz’ facility on your email SMS and assists you in your investment decision, thus enriching your capital market investment experience through us.’s Alertz service keeps you informed about stock prices through email and SMS. You may activate the Email Alertz service and track your selected stocks/indices without monitoring the trading terminal during market hours. It is now very easy to track the prices of your selected stocks without deviating from normal activities .The SMS Alertz service is available for trade confirmation, fund pay-in and pay-out, market views/calls, etc, to clients who actively use our trade execution services. As general information, does not guarantee any accuracy of generation, databases, and delivery timings, and does not make any claims of any nature in this matter The critical components to avail the Alertz service are: a) Internet connectivity / bandwidth speed at your end, b) Information feed available from the exchange, c) Computing speed of the Alertz, and d) Speed of your Internet Service provider (ISP) and/or domain provider and/or Telecom service provider (TSP).  Advice Me To service general retail investor and assistance them in systematic creation of wealth, we could try to provide you with some basic / brief investment idea on stock of your interest. You could ask us an investment question related to a particular stock or sector and we would
  45. 45. see that brief research (fundamental / technical) input could be provided on that stock or sector. Whatever may be our research input on your inquiry, still the final investment decision would need to be taken by you as you know your investment profile & habits, risk appetite, income – cash flow, person / family / social obligation, etc. 3.21 Potential Growth Areas: India is amongst the least affected countries in the 2008 global meltdown. May 2009 general election in the country provided a fairly stable government. We see great potential for the country in general and financial market in particular in the years to come. Investor participation, product innovations, volume growth is likely to be in exponential proportion. Our company is well poised to build a great institution in India to service the Indian and global investors for their financial services needs The company has created a strong organization driven by processes to handle multifold volume growth.  Do not disturb: To service our clients and aide them in wealth creation process, we at Asit C Mehta Investment Intermediates Ltd. keep on sending information about our products and services, information related to capital market investment, etc. This information might be sent / conveyed to you via letter, newsletter, email, phone; SMS, etc. based on our assumption that you would need this information and benefit you in your wealth creation process. But, at times, you might need privacy and wish us not to contact you for such information. We would take the precaution and see not to disturb you by excluding your contact details from our marketing list. Kindly provide your details so as to not disturb you.  Message Board: Welcome to our new website! We are pleased to announce some exciting new features, an improved user-friendly design and services to benefit our esteemed customers. We have also taken steps to ensure faster loading of pages.  User-friendly design:
  46. 46. No part of the website is more than three clicks away. This ensures speedy access to whatever information you may need.  Easy Trading: We have two options for trading: Quick Trade and Regular Trade. Quick Trade enables you to transact in any share quickly by presenting only the most relevant information. Regular Trade gives you full information about the share, enabling you to take an informed decision.  New features: We've added some exciting new features like Advise Me and Online Purchase of Mutual Funds and IPOs.  Knowledge Center: Investor Education and Empowerment is essential for inculcating correct investment habits. We undertake various initiatives to educate investors and enable them to make informed investment decisions based on their investment profiles, risk appetites, and return expectations. Three important parts of our Investor Education and Awareness Program are: Market Wisdom series, Video broadcasts of Investment Education Topics, and the Nucleus Investments newsletter. We also conduct activities such as seminars, exhibitions, etc. Market Wisdom This is an Investor Empowerment series comprising material prepared to assist investors as they just step into the capital market or when they are in the middle of various curves in the wealth creation process.
  47. 47. The various market wisdom series for general investor education and awareness some of them are as follows: Why do we need financial planning? Investors guide to share markets Safety, liquidity and returns What is Stock market? Equity or Mutual funds? The first step How to select your broker? Why is the stock market not a gambling den? Do operators run the stock market? Why do prices go up and down in the stock market? A Lesson in Options and Futures Sensex 12000...12800...13000...What to do? Dividend: What does it mean to investor? Margins and investors Hedge funds Dabba trading Exchange-traded funds Basics of commodities futures market Settlement of trades.. Investor grievance redressal mechanism  Investor Education Topics We have been conducting the Investor Education and Awareness program via video broadcasts through our own network (branches and business associates), which is spread over 600 locations across 25 states and union territories in India. Speakers with industry expertise participate in video broadcasts from our head office in Mumbai, which is accessible from any of our branches across the country. The last session was on February 21, 2009; our expert in-house fundamental and technical research team conducted an investor education program on crude oil market outlook.  Nucleus Investmentz.
  48. 48. For the past seven years, we have been publishing a fortnightly newsletter, Nucleus Investmentz. It includes analyses of current financial topics, insights on investment-relevant topics, and performance score cards of various mutual funds. This is available in English, Hindi & Gujarati. 3.22 Benefits of Trading With Us:  Focus on wealth creation for the investors.  Client Level Risk Management.  Auto Pay-in / Pay-out of securities.  Transfer of payout directly to the designated customer bank account. .  Account & Portfolio information through Internet 24x7, 365 days.  Strong foundation of Technology, Compliance and Transparency First corporate member of the Bombay Stock Exchange Proven track record for the last 25 years in the stock broking industry First broking house to gain the ISO 9001:2000 certification Presence in 23 states and 650 locations. 3.23 ACHIEVEMENTS:  Having secured brokerage grading of BQ1 from CRISIL of India.(Top Most Grading given to any Good Broking House)It has been marked as a very good broking house as regards to all the criteria given by CRISIL of India. In previous year it was in the BQ2 grade, but looking at the workings and very good Risk management system of the company ,it has been upgraded to BQ1
  49. 49.  It is an ISO 2000-9001 company.  Making a very good turnover and giving directly and indirectly appointment for more than 2500 people in India. It has got more than 600 branches network all over India covering all most all states in India.
  50. 50. 3.24 SWOT ANALYSIS: SWOT analysis refers to, analyzing the strength, weakness, opportunity and threat of the organization SWOT is a compound of two factors namely external factors and Internal factors. Strengths and weaknesses are the internal factors controlled by the technical and personnel departments. Opportunities and threats are the external factors which cannot be controlled by the company . External factors may include political factors, Socio –Cultural factors, Technical factors, demography, Environmental factors.
  51. 51. STRENGTHS:  One of the fastest growing brokerage firms in India.  Rich experience of wealth creation.  Robust technology with online trading facility.  Swift response to market dynamics.  Customer first support team.  Handheld/mobile feeds and SMS updates. WEAKNESS:  Less number of branches in South India.  Unable to compete with the brokerage rates of their competitors.  Lack of efficient and effective strategies in attracting customers. OPPORTUNITIES:  Growing India economy opens up huge market for stock broking companies.  Increase the resource mobilization by mutual funds.  Introduction of new technologies leads to trapping new markets.  Company is committed to achieve profitable progress consistently.  Targeting rural and sub urban areas. THREAT:  Facing Increased level of competition.  Uncertainty in the market.  Changes in government polices and regulation.
  52. 52.
  53. 53. DATA ANALYSIS AND INTERPRETATION: AUTO CORRELATION FOR ADR PRICES AND NSE STOCK PRICES LAGS 1 2 3 4 5 6 COMPANY MARKET 6 -0.061 -0.031 0.001 -0.034 -0.023 -0.0041 Dr. Reddy's Lab ADR -(1.9) -(0.09) (0.03) -(1.06) -(0.71) -(1.28) 0.01 -0.062 -0.028 0.003 -0.009 -0.037 NSE (0.31) -(1.93) -(0.87) (0.09) -(0.28) -(1.16) -0.21 -0.063 -0.016 -0.009 0.017 -0.057 HDFC bank ADR -(0.63) -(1.9) -(0.48) -(0.27) (0.51) -(1.72) -0.139 -0.05 0.046 -0.029 -0.008 0.006 NSE (4.21*) -(1.51) (1.39) -(0.87) -(0.24) (0.242) -0.006 -0.034 0.069 0.015 -0.014 0.045 ICICI bank ADR -(0.18) -(1.06) (2.15*) (1.59) -(0.43) (1.4) NSE 0.055 -0.025 0.004 0.015 -0.017 0.008 (1.71) -(0.78) (0.12) (0.46) -(0.053) (0.25) ADR 0.061 -0.109 -0.037 -0.016 0.017 -0.027 INFOSYS TECH (1.9) (3.4*) -(1.15) (0.5) (0.53) -(0.84) NSE 0.02 -0.027 -0.01 -0.001 -0.04 -0.019 (0.62) -(0.84) -(0.31) -(0.03) -(1.25) -(0.59) ADR -0.008 -0.082 0.051 0.01 -0.032 -0.071 SATYAM COMP -(0.24) (2.48*) (1.59) (0.31) (0.31) -(1.) NSE -0.009 -0.036 0.03 0.003 -0.049 -0.092 -(0.27) -(1.09) (0.93) (0.09) -(1.53) (2.87*) TATA MOTORS ADR -0.011 0.1 -0.14 -0.41 -0.037 -0.019 -(0.12) (1.12) -(1.59) (0.46) -(0.42) -(0.21) NSE 0.037 0.103 -0.089 0.004 -0.041 0.098 -(0.41) (1.15) -(1.01) (0.04) -(0.46) (1.12) ADR 0.028 -0.064 0.046 0.077 -0.048 -0.011 VSNL (0.87) -(2.) (1.43) (2.4) (1.5) -(0.34) NSE 0.059 0.001 -0.015 0.014 -0.026 -0.017 (1.84) (0.03) -(0.46) (0.43) -(0.81) -(0.53) Values given in brackets represent ‘t’ values * refers to ‘t’ value significant at 5% level
  54. 54. LAGS COMPANY Dr. Reddy's Lab HDFC bank ICICI bank INFOSYS TECH SATYAM COMP TATA MOTORS VSNL 7 8 9 10 11 12 MARKET -0.019 0.049 0.007 0.01 -0.015 0.053 ADR -(0.59) (1.53) (0.02) (0.31) -(0.46) (1.65) -0.08 -0.0001 0.064 0.008 -0.015 -0.009 NSE (2.5*) -(0.03) (2.) (0.25) -(0.46) -(0.28) 0.026 -0.062 -0.025 0 0.083 -0.006 ADR (0.78) -(1.87) -(0.7) (0.) (2.51*) -(0.18) -0.024 -0.018 -0.016 0.02 -0.07 -0.004 NSE -(0.72) -(0.54) -(0.48) (0.6) (2.12*) -(0.12) -0.043 -0.083 -0.006 0.025 0.002 -0.028 ADR -(1.34) (2.59*) -(0.18) (0.78) (0.06) -(0.87) 0.032 0.015 0.009 -0.012 -0.045 -0.046 NSE -(1.) (0.46) (0.28) -(0.37) -(1.4) -(1.43) 0.023 0.02 -0.06 0.014 0.062 -0.013 ADR (0.71) (0.62) -(1.87) (0.43) (1.9) -(0.4) -0.003 0.003 -0.021 -0.016 0.015 0.011 NSE -(0.09) (0.09) -(0.65) -(0.5) (0.46) (0.34) 0.001 0.049 -0.037 0.019 0.063 0.009 ADR (2.21*) (0.03) -(1.15) (0.59) (1.96) (.28) 0.006 0.031 -0.047 0.013 0.01 0.034 NSE (0.18) (0.96) -(1.46) -(0.4) (0.31) (1.06) -0.034 0.184 -0.117 0.076 0.096 0.063 ADR -(0.39) (2.17*) -(1.36) (0.88) -(1.12) (0.74) -0.041 -0.144 -0.095 0.005 -0.008 0.048 NSE -(0.47) (1.6) -(1.1) (0.05) -(0.09) (0.56) -0.027 0.024 0.14 -0.039 -0.024 0.015 ADR -(0.84) -(0.75) (0.43) -(1.21) (0.75) (0.46) 0 -0.022 -0.069 -0.048 -0.011 0.01 NSE (0.) -(0.68) (2.15*) -(1.5) -(0.34) (0.31) Values given in brackets represent ‘t’ values * refers to ‘t’ value significant at 5% level
  55. 55. LAGS COMPANY Dr. Reddy's Lab HDFC bank ICICI bank INFOSYS TECH SATYAM COMP TATA MOTORS VSNL 13 14 15 16 MARKET 0.013 -0.016 -0.044 -0.037 ADR (0.4) -(0.5) -(1.37) -(1.15) -0.014 0.056 0.016 0.023 NSE -(0.43) (1.75) (0.5) (1.) -0.034 -0.031 -0.024 -0.061 ADR -(1.03) -(0.93) -(0.72) -(1.84) -0.034 -0.045 0.009 0.035 NSE -(1.03) -(1.36) (0.27) (1.06) -0.041 0.031 0.006 0.004 ADR -(1.28) (0.96) -(0.18) -(0.12) -0.009 -0.032 -0.027 -0.032 NSE -(0.28) -(1.) -(0.84) -(1.) -0.029 -0.03 -0.029 0 ADR (0.9) -(9.37) -(0.9) (0.) 0.008 -0.017 -0.017 0.003 NSE (0.25) -(0.53) -(0.53) (0.09) -0.04 -0.026 0.021 -0.015 ADR -(1.25) -(.81) (.65) -(.46) -0.022 -0.016 -0.036 0.03 NSE -(0.68) -(0.5) -(1.12) -(0.93) -0.047 0.029 -0.088 -0.044 ADR -(0.55) -(0.34) -(1.04) (0.53) -0.053 0.038 -0.117 0.036 NSE -(0.62) (0.45) -(1.39) (0.43) 0.03 -0.041 -0.03 -0.005 ADR (0.93) -(1.28) -(0.93) -(0.15) 0.041 0.004 -0.53 0.029 NSE (1.28) -(0.12) (1.65) (0.9) Values given in brackets represent ‘t’ values · refers to ‘t’ value significant at 5% level
  56. 56. CROSS CORRELATION BETWEEN NIFTY AND ADR AND CROSS CORRELATION BETWEEN ADR AND THE NSE STOCK LAGS COMPANY Dr. Reddy's Lab HDFC bank ICICI bank INFOSYS TECH SATYAM COMP TATA MOTORS VSNL -10 -9 -8 -7 -6 -5 MARKET 0.017 0.005 0.01 -0.026 -0.004 0.049 N-A (0.53) (0.16) (0.31) (0.81) -(0.13) (1.53) 0.043 -0.036 0.038 -0.029 -0.015 -0.026 A-S (1.34) (1.13) (1.19) (0.91) (0.47) (0.81) 0.024 -0.018 -0.083 -0.011 -0.015 -0.043 N-A (0.71) -(0.53) (2.52*) -(0.33) -(0.45) -(1.3) 0.025 -0.068 0.008 -0.025 -0.007 0.015 A-S (0.74) -(2.) (0.24) -(0.76) -(0.21) (0.45) 0.01 0.004 0.008 0.007 -0.018 0.011 N-A (0.31) (0.13) (0.25) (0.22) -(0.56) (0.34) -0.011 0.009 -0.01 -0.013 0.063 -0.025 A-S -(0.34) (0.28) -(0.31) -(0.41) (1.97) -(0.78) -0.004 0.001 -0.008 -0.042 0.054 0.052 N-A -(0.13) (0.03) (2.5*) -(1.31) (1.69) (1.63) 0.032 -0.03 0.012 -0.011 0.006 -0.049 A-S (1.) -(0.94) (0.38) -(0.34) (0.19) -(1.53) 0.047 -0.044 -0.04 0.007 -0.012 -0.011 N-A (1.47) -(1.33) -(1.21) (0.21) -(0.36) -(0.34) 0.02 -0.049 0.05 0.008 -0.036 -0.053 A-S (0.61) -(1.48) (1.52) (0.24) -(1.09) -(1.61) 0.016 0.035 0.06 -0.106 -0.112 -0.013 N-A (0.17) (0.37) (0.65) -(1.14) -(1.22) -(0.14) -0.014 -0.096 0.138 -0.05 0.064 -0.013 A-S -(0.15) -(1.02) (1.48) -(0.54) (0.7) -(0.14) -0.031 -0.021 0.007 0 0.125 0.084 N-A -(0.97) -(0.66) (0.22) (0.) (3.91*) (2.63*) -0.035 -0.108 -0.022 0.042 -0.032 0.013 A-S -(1.09) (3.38*) -(0.69) (1.31) -(1.) (0.41) Values given in brackets represent ‘t’ values * refers to ‘t’ value significant at 5% level
  57. 57. LAGS COMPANY Dr. Reddy's Lab HDFC bank ICICI bank INFOSYS TECH SATYAM COMP TATA MOTORS VSNL -4 -3 -2 -1 0 MARKET -0.002 0.032 0.024 0.031 -0.024 N-A -(0.06) (1.) (0.75) (0.99) -(0.75) -0.032 0.017 -0.018 -0.001 0.274 A-S -(1.) (0.53) -(0.56) -(0.03) (8.56*) 0.062 0.072 -0.081 0.088 0.338 N-A (1.88) (2.18*) -(2.45*) (2.67*) (10.24*) -0.006 0.042 0.045 0.017 0.317 A-S -(0.18) (1.27) (1.36) (0.52) (9.61*) 0.088 0.052 -0.062 0.1 0.336 N-A (2.75*) (1.63) -(1.94) (3.13*) (10.5*) 0.021 0.056 0.037 0.001 0.069 A-S (0.66) (1.75) (1.16) (0.03) (2.16*) 0.052 -0.043 -0.064 0.188 0.317 N-A (1.63) -(1.34) -(2.) (5.88*) (9.91*) 0.002 0.028 0.007 -0.017 0.317 A-S (0.06) (0.88) (0.22) -(0.53) (9.91) 2 0.099 0.022 0.13 0.466 N-A (2.) (3.) (0.67) (3.94*) (14.12*) A-S -0.02 0.055 -0.019 0.015 0.622 -(0.61) (1.67) -(0.58) (0.45) (18.85*) 0.203 -0.142 0.049 0.196 0.616 N-A (2.21*) -(0.14) (0.54) (2.15*) (6.84*) -0.025 -0.042 0.071 0.088 0.796 A-S -(0.27) -(0.46) (0.78) (0.97) (8.84*) -0.029 0.106 0.336 -0.015 -0.062 N-A -(.91) (3.31*) (10.5*) -(.47) -(1.94) A-S 0.117 -0.009 -0.018 0.043 0.5 (3.66*) -(0.28) -(0.56) (1.34) (15.63*) Values given in brackets represent ‘t’ values * refers to ‘t’ value significant at 5% level
  58. 58. LAGS COMPANY Dr. Reddy's Lab HDFC bank ICICI bank INFOSYS TECH SATYAM COMP TATA MOTORS VSNL 1 2 3 4 5 MARKET 0.033 -0.002 -0.65 0.044 0.06 N-A (1.03) -(0.06) (20.31*) (1.38) (1.88) 0.234 -0.023 -0.042 0.039 0.016 A-S (0.73) -(0.72) -(1.31) (1.22) (0.5) 0.041 -0.038 0.047 0.065 -0.006 N-A (1.24) -(1.15) (1.42) (1.97) -(0.18) 0.146 -0.089 0.023 -0.009 0.038 A-S (4.42*) -(2.7*) (0.7) -(0.27) (1.15) 0.037 0.003 0.046 0.015 0.001 N-A (1.16) (0.09) (1.44) (0.47) (0.03) 0.517 0.151 -0.001 1 0.056 A-S (16.16*) (4.72*) -(0.03) (1.) (1.75) 0.01 -0.015 0.014 -0.015 -0.051 N-A (0.31) -(0.47) (0.44) -(0.47) -(1.59) 0.167 -0.051 -0.026 1.25 0.002 A-S (5.22*) -(1.59) -(0.81) (1.25) (0.06) -0.016 -0.034 0.024 0.024 -0.04 N-A -(0.48) -(1.03) (0.73) (0.73) -(1.21) 0.125 -0.023 0.077 0.01 -0.057 A-S (3.79*) -(0.7) (2.33*) (0.3) -(1.73) 0.066 0.066 -0.05 0.12 -0.106 N-A (0.73) (0.73) -(0.55) (0.13) -(1.15) 0.083 0.0991 -0.144 0.025 -0.543 A-S (0.91) (1.09) -(1.58) (0.27) -(0.54) 0.065 0.053 -2.125 -0.032 0.036 N-A (2.03*) (2.53*) -(2.13*) -(0.03) (1.13) 0.24 0.001 0.049 0.026 -0.02 A-S (7.5*) (0.03) (1.53) (0.81) -(0.63) Values given in brackets represent ‘t’ values * refers to ‘t’ value significant at 5% level
  59. 59. LAGS COMPANY Dr. Reddy's Lab HDFC bank ICICI bank INFOSYS TECH SATYAM COMP TATA MOTORS VSNL 6 7 8 9 10 MARKET -0.055 0.038 0 0.071 -0.018 N-A -(1.72) (1.19) (0.) (2.22*) -(0.56) -0.03 -0.016 0.045 0.019 0.027 A-S -(0.94) -(0.5) (1.41) (0.59) (0.84) -0.084 0.059 0.026 -0.02 0.002 N-A -(2.55*) (1.79) (0.79) -(0.59) (0.06) -0.012 0.007 -0.0833 0.006 0.017 A-S -(0.36) (0.21) -(2.52*) (0.18) (0.5) -0.011 0.015 -0.001 0.006 0.053 N-A -(0.34) (0.47) -(0.03) (0.19) (1.66) 0.047 0.02 0.001 -0.021 0.001 A-S (1.47) (0.06) (0.03) -(0.66) (0.03) -0.029 0.027 0.036 0.029 0.22 N-A -(0.91) (0.84) (1.13) (0.91) (6.88) -0.03 -0.005 0.038 -0.011 0.016 A-S -(0.94) -(0.16) (1.19) -(0.34) (0.5) -0.047 -0.008 0.077 -0.01 0.019 N-A -(1.42) -(0.24) (2.33*) -(0.3) (0.58) -0.08 -0.012 0.052 -0.034 0.016 A-S -(2.42*) -(0.36) (1.58) -(1.03) (0.48) N-A -0.021 -0.028 0.046 0.003 -0.137 -(0.23) -(0.3) (0.49) (0.03) -(1.46) 0.042 0.024 0.155 -0.101 0.027 A-S (0.46) (0.26) (1.67) -(1.07) (0.29) 0.017 0.023 0.029 -0.028 0.039 N-A (0.53) (0.72) (0.91) -(0.88) (1.22) 0.125 -0.009 -0.017 -0.039 -0.005 A-S (0.125) -(0.281) -(0.531) -(1.219) -(0.156) Values given in brackets represent ‘t’ values * refers to ‘t’ value significant at 5% level
  60. 60. 4. ANALYSIS AND INTERPRETATION: 4.1 Cross correlation Cross correlation is run for seven companies in the following ways. 1. Between S&P CNX NIFTY returns and the ADR returns for each company (this shows how much the NIFTY and ADR prices are correlated. This is mainly due to the industry, economic and political factors.), 2. Between ADR returns and the returns of the corresponding shares in the domestic market (this shows how much the ADR and the NSE quote are correlated and how well they move in tandem. This is mainly due to the factors that are specific to the company and the industry.) and 3. The cross correlation is run at lag of 10 days. T-value is computed for the correlation values at various lags by dividing the correlation value with the standard error. The significance in positive lag of the NIFTY-ADR will imply that ADR price fluctuation is a LEADING indicator and of the ADR-NSE quote will imply that ADR price fluctuation is a LAGGING indicator. The significance in negative lag of the NIFTY-ADR will imply that ADR price fluctuation is a LAGGING indicator and of the ADR-NSE quote will imply that ADR price fluctuation is a LEADING indicator. This can be summarized as follows. + VE LAG - VE LAG LEADING LAGGING NIFTY ADR LAGGING LEADING ADR NSE From the results we find the following in each company.
  61. 61. 1. Dr. Reddy’s Lab : The T-values at the 0th lag, 3rd lag and 9th lag are greater than two, i.e., the correlation is significant at 9th lag. This means that the price change of NIFTY index, of National Stock Exchange of India, on Day 1 will be reflected on the 9th day in the Dr. Reddy’s Lab ADR price. So in this case ADR price is a LEADING indicator to NIFTY. At the same time the T-value at lag zero is 8.23 in the case of ADR-NSE quote and therefore highly significant in case of the ADR- NSE share price relationship. This means that any fluctuation in the prices of Dr. Reddy’s Lab ADR is reflected on the NSE quote on the same day. Its influence is immediate. 2. HDFC Bank: The T values of lags -8, -3, -2, -1 and 0 are greater than two and therefore they are significant. Since the significance is found in the minus lags, it is to be understood that the influence of NIFTY index is more on the price of HDFC Bank ADR . The fluctuation on NIFTY index today will influence the HDFC Bank ADR within the next three days. Therefore the ADR is LAGGING indicator to NIFTY. At the same it is found that at lag zero, lags 1 of the ADR- NSE relationship the T-value is highly significant. This means that any price fluctuation in the NSE will immediately influence the HDFC Bank’s ADR price for the next two days. Here too the ADR is LAGGING indicator to ADR-NSE quote for HDFC Bank’s stock. 3. ICICI Bank : The T-value is significant in -4,-1 and 0 lags in ADR-Nifty cross correlation. The significance in the negative lags show that the NIFTY index fluctuation today will influence the ICICI Bank’s ADR price four days later. Since the significance in the zero lag is more, there are more chances that ADR price fluctuation will immediately influence the NIFTY index. In case of ADR- NSE quote of ICICI Bank the significance is high on 0, 1st and 2nd lags. This means tha influence of fluctuation of NIFTY index is immediate on prices of ICICI Bank’s ADR and is found for continuous two days. Here too ADR is a LAGGING indicator to ADR-NSE quote to ICICI Bank’s stock. 4. INFOSYS TECHNOLOGY The T-value is significant in -1 and 0 lags. The significance in the negative lag and
  62. 62. the zero lag points out that the ADR price fluctuation of INFOSYS Technology’s ADR influences the NIFTY index immediately. The NIFTY index is very sensitive to the movement of price fluctuations of INFOSYS’ ADR. In this case ADR is a LEADING indicator to NIFTY index. The T-value for lag 0 and lag 1 is very high and is highly significant, in the case ADR-NSE quote. This shows that the INFOSYS’ ADR price movement influences the NSE quote for INFOSYS’ Technology’s share on the day of price fluctuation itself. Here too ADR is a LEADING indicator to ADR-NSE quote for Infosys technology’s stock. 5. SATYAM Computers: The T-value for the lags -4, -3, -1 and 0 are highly significant since they are more than two. ADR is a LAGGING indicator to NIFTY index. The significance in the negative lags implies that the NIFTY index is being influences the SATYAM Computer’s ADR price.This influence will occur in 3rd and 4th days after the fluctuation. The T-value for the lags 0 and 1are very high, in the case of ADR-NSE quote. They are significant and ADR is LAGGING indicator here 6. TATA Motors: The T-value for the lags -1 and 0 are significant. They are LAGGING indicator to NIFTY index. The NIFTY fluctuation today will influence the TATA MOTORS ADR tomorrow. The T-value for lag zero is greater than 2 and significant, in the case of ADR-NSE quote. This means than the price fluctuations of Tata motors is immediately reflected on the ADR price of TATA motors. 7. VSNL : The T value for the lags -6, -5, -3 and 0 is greater than two. They are highly significant. The ADR acts as LAGGING indicator to NIFTY index. The price of VSNL’s ADR is affected by the NIFTY index fluctuation. The T-value for ADR-NSE quote is greater than two and hence significant. This shows that ADR is LAGGING indicator to the NSE quote of VSNL’s stock. 4.2 Auto correlation The T-value is significant, if T >=2. This means that the returns have got a pattern within
  63. 63. themselves and it’s not a random walk. It violates the rules of random walk. If it is a random walk it means that the prices of the shares are determined by the information available to the participants in the market. In our result we find that the ADR returns of Dr.Reddy’s Lab, HDFC Bank, Infosys Technology, Satyam computers and VSNL do not have any significant value, i.e., all T- value are lesser than two. This means that the price fluctuations of these ADRs are not auto correlated. The T > 2 in the 3rd lag of ICICI BANK ADR and T > 2 in the 8th lag of TATA Motors ADR in their respective correlation. These two ADR’s have a pattern in their price fluctuations and they are correlated to a significant level. The T = 2 in the 9th lag of the Dr.Reddy’s Lab’s stock, which is traded in the domestic market. The price movements in the domestic market trading of Dr. Reddy’s Lab’s share are auto -correlated. The domestic shares of ICICI Bank do not have auto correlation in their fluctuations. 5. FINDINGS SUGGESTIONS AND CONCLUSIONS
  64. 64. 5.1 Findings The following important points have been found 1. The null hypothesis, that, there is NO relation between ADR price fluctuations and the price fluctuations of the underlying Indian shares in Indian stock exchanges, is rejected and the alternate hypothesis, that, there is relation between ADR price fluctuations and the price fluctuations of underlying Indian shares in Indian stock exchanges, is accepted. 2. The ADR being the leading and lagging indicator mainly depends on the economy, industry and the stock in question. 3. ADR is LEADING indicator to NIFTY index most of the time. 4. The influence of ADR price fluctuations on the corresponding share in the domestic market is immediate, in many cases. This is because of development in the information technology. This can be observed from the table that almost all zero lags’ T -value is significant. 5. The influence of ADR price fluctuations on the NIFTY index is relatively to slow. This can be observed from the table that T-value being significant at higher lags on the positive side or at lower lags at negative side.
  65. 65. 5.2 Suggestions: · Better analysis tools should be used to make better predictions. · The clients must be advised not to make their opinion while trading, as a wrong position can prove to be very risky. 5.3 Conclusion: Any commodity which is traded in two different market trades in different prices. This gives rise to arbitration and price discovery. In absence of arbitration opportunities, it helps in understanding the movement of prices. The trading in ADR in U.S. stock exchanges does this function very well. The ADR provides as information about the movement of the share prices in India based on the economy and other factors. The ADR price fluctuations act either as LEADING or as LAGGING indicator. This depends upon the industry and other political factors that are involved. The investor community can use this to their best.
  66. 66. Bibliography: Textbooks and Journals 1. Alexander, G.C., C. Eun and S. Janakiramanan, 1987, Asset Pricing and Dual Listing on Foreign Capital Markets: A Note, Journal of Finance, 42, 151-158 2. Chowdhry, B and V. Nanda, 1991, Multi-market Trading and Market Liquidity, Review of Financial Studies, 3, 483-5111 3. Karolyi, A., 1998, what happens to stocks that list shares abroad? A survey of evidence and its managerial implications, NYU Salomon Brothers Center Monograph series, Volume 7, #1. 4. Dr. Mahu Kalimpali and Dr. Latha Ramachand, Changes in Liquidity Following Exposure to Foreign Shareholders: The effect of foreign listings and issues of American Depositary Receipts by Indian firms. 5. Determinants of Returns and Volatility of Chinese ADRs at NYSE, Ali M. Kutan, Southern Illinois University Edwards ville, Emerging Markets Group, London. 6. Internationally cross listed stock prices during overlapping trading hours: Price discovery and exchange rate effects. By Joachim Grammig, Michael Melvin and Christian schlag. 7. Mr. Ajay Sharma, ADR and GDR price fluctuation. 8. Ranking of countries which have issued ADRs by Mr. James M Donald, Lazard Asset Management Company. 9. Research methodology, Donald Cooper and Schindler. Websites