Depository Receipt ADR - American Depositary Receipt AnADR represents ownership in the shares of a non-U.S. company and trades in U.S. financial markets. Advanced Financial Management 2
GDR - Global Depositary Receipt GDRis a certificate issued by a depository bank, which purchases shares of foreign companies. Advanced Financial Management 3
ISSUER INVESTORAttractive pricing DiversificationNo foreign exchange Negotiable instrument freefluctuations from investment restrictionsGranting ESOPs Investment opportunities & Less obstaclesLess monitoring Trading information and researchEnhances image of company Prompt dividend paymentglobally. in dollars
ADR GDR Centre – NYSE Centre – LSE Disclosure – Requires Disclosure – Only Detailed Comprehensive Disclosure. Information Required. GAAP – Company accounts GAAP – Satisfied with must be reconciled to US Statement of difference GAAP. between the A/c Standards. Cost – Comparatively Cost – Comparatively lower. higher. Retail – Only QIBs allowed Retail – US retail market in US. can be accessed. Liability – Comparatively Liability – Legal liability is less than ADR. more. Advanced Financial Management 5
5 Company issues Ordinary Shares Kept with Domestic CustodianTransferred to the Overseas Depository Bank ADR’s /GDR’s are issued by ODBReceipts given to the foreign investors
Appoint Listing Agent / Lead manger Due Diligence Positioning Required financial Valuation statements Deal StructurePrepare prospectus Presentation material and Q & A practice Apply for listing & regulatory approval Analyst Meetingthrough listing agent Premarketing to Institutions Road shows & marketing to investors List on Eurolist , Start trading
Types of ADRsUnsponsored Sponsored Level I Level II Level III Private placement
Created in response of investors, brokers - dealers and depository. Exempted from reporting requirements of the SEC. Not Listed on any exchange.Advantages: Disadvantages: Inexpensive. No control over the Expands investors base. activity. Minimal SEC compliance and Conversion reporting requirements. becomes costly.
Initiated by Issuer. Established jointly by an Issuer and Depository. Agreement between Issuer and Depository. Depository provides shareholders communication and other information to ADR holders. Through Depository ADR holders can exercise voting rights.
Level I Level II Level III MostLeast Expensive More Expensive ExpensiveMinimal SEC Full SEC SEC reportingregistration registration & is more&reporting reporting detailed thanrequirements. requirements. Level II. Listed onCannot be listed on Listed on National NationalNational exchange of exchange of US. exchange ofUS. US. Capital can beCapital Raising is not Capital Raising is raised throughpermitted. not permitted. Public offering.
Capital can be raised by placing Depositary Receipts with large institutional investors. Do not have to conform full SEC reporting and registration requirements. Cheaper means of raising equity capital. Can only be sold to QIBs.
Fungibility = Interchangeability of any securityOne way Two way
Improvement in Liquidity Elimination of Arbitrage.
Dividend will be taxed @10 % All transactions of trading of the GDRs outside India, among non-resident investors, will be free from any liability of income tax in India. Capital gains arising on the redemption of shares will be liable to income tax Section 115AC. Long-term capital gains tax @ 10 % Short-term capital gains tax@ 15 % (Section 195 and 196 of IT Act). Advanced Financial Management 17
Eligibility of the issuer Eligibility of the subscriberApproval of Board of Approval of shareholdersDirectorsListing requirements Approval of FIPBPricing Reporting requirements of RBIIssue expenses Companies Act
Private Sector Banking 74% Drugs & Pharmaceuticals 100%Non-Banking Financial 100% Road and highways, Ports and 100%Companies harboursInsurance 26% Hotel & Tourism 100%Telecommunications 74% Mining 74-Services 100%Petroleum Refining- 100% Advertising 100%Private SectorHousing and Real Estate 100% Films 100%Trading 51-100% Airports 74%Coal & Lignite 50-100% Mass Rapid Transport 100% SystemsPower 100% Pollution Control & Mng. 100%Air transport Services 100% -NRIs, Special Economic Zones 100%(no foreign airlines) 49% others