Raising equity capital through ADR & GDR
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This document discusses raising equity capital through American Depository Receipts (ADRs) and Global Depository Receipts (GDRs). It defines ADRs and GDRs as negotiable instruments that allow investors to hold shares in foreign companies. The document then covers who can issue ADRs/GDRs, the different types of ADR programs, the process for issuance, how pricing works, advantages and disadvantages, and examples of Indian companies that have issued ADRs/GDRs.
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Raising equity capital through ADR & GDR
- 1. Raising Equity Capital Through ADRs & GDRs Prepared By Jaikishan Upasana Rahul Durgia Amit Singh Yogesh
- 2. Agenda • • • • • • • • ADRs/GDRs Who Can Issue ADR/GDRs Types Of ADRs What Is the Process How Does It Works Advantages Disadvantages Indian Companies In ADR/GDR Market.
- 3. What is Depository Receipts • Is a type of negotiable instrument (transferable) financial security. • It is issued by the Depository Participant of respective Country. • It allows investors to hold shares in equity of other countries.
- 4. ADRs & GDRs?? Domestic Stock Exchange Listing In U.S Stock Exchanges U.S Certificate ADRs Listing Globally GDRs 1. GDR is negotiable instrument all over the world but ADR is only negotiable in USA 2. GDR is compulsory for foreign company to access in any other country’s share market. But ADR is compulsory for Non–U.S companies to trade in stock market of U.S.A
- 5. Who Can Issue ADRs & GDRs?? • These instruments are issued by a Depository abroad and listed in the overseas stock exchanges like NASDAQ. • Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to issue its rupee denominated shares to a person resident outside India. • ADRs/GDRs are issued in accordance with Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government .
- 6. Types Of ADRs Unsponsored ADRs • Trades on Over-The-Counter Market. • Company has no formal agreement with a Depositary Bank. • Issued by more than one Depositary Bank.
- 7. Types Of ADRs Sponsored Level I ADRs • One designated depository who acts as its transfer agent. • Issuing Company has to comply with U.S SEC minimal requirements. • No need to issue quarterly or annual reports in compliance with U.S GAAP. • Issuing Company must have its security listed on one or more domestic stock exchange. • Company can upgrade to Level II & Level III ADR program for better exposure.
- 8. Types Of ADRs Sponsored Level II ADRs • Issuing Company must file a registration statement with the U.S. SEC and is now under SEC Regulations. • Company is required to issue quarterly or annual reports and has to follow U.S GAAP standards or IFRS. • Shares can be listed on U.S stock Exchange (NYSE, NASDAQ & AMEX). • Company must meet the exchange listing requirements.
- 9. Types Of ADRs Sponsored Level III ADRs • Issuing Company is required to follow stricter rules which are followed by U.S companies. • Company can do a public offer in U.S after filing Offering Prospectus. • Price Sensitive information which is disclosed in home market must be filed with U.S SEC too.
- 10. What Is the Process?? • Get an approval from the Ministry of Finance, Government of India to issue such ADRs/GDRs. • The ADR/GDR can be issued on the basis of the ratio worked out in consultation with the Lead Manager of the issue. • The Indian company will issue shares in the name of the Overseas Depository (BNY Mellon) & keep it in the custody of the domestic Custodian in India. • On the basis of the ratio worked out, the Depository (BNY Mellon) will issue ADRs/GDRs abroad.
- 11. How Does ADR/GDR Works?? For Example: INFOSYS LTD For Example: TATA MOTORS LTD 1 ADR = 1 Equity Share 1 ADR = 5 Equity Share CMP in India(NSE) = Rs. 3,028.25 CMP in India(NSE) = Rs. 335 Currency Exchange rate: Currency Exchange rate: 1$ = Rs.63.50 1$ = Rs.63.50 CMP in USA (NASDAQ) = CMP in USA (NASDAQ) = 3028.25÷63.50 (335*5)÷63.50 1 ADR = $48 1 ADR = $26.30
- 12. Advantages • Global Presence. • Money can be raised from all over the world. • Freely transferable by non-resident. • They can be redeemed by Overseas Depositary Bank. • Arbitrage Opportunity for Investors. • Diversification into foreign securities.
- 13. Disadvantages • Violating the Regulations & requirements of SEC leads to de-listing from U.S Stock exchange. • Issue cannot exceed more than 51% of the subscribed capital.
- 14. Indian Companies in the ADR/GDR Market Company CMP(US$) Dr. Reddy's (A) GAIL (G) Grasim Industries (G) ICICI Bank (A) Infosys Tech (A) ITC (G) L & T (G) Mahindra & Mah. (G) Ranbaxy Labs (G) Reliance (G) Satyam Computers (A) State Bank of India (G) Sterlite Industries (A) Tata Communications (A) Tata Motors (A) 35.74 29.30 39.90 30.71 47.97 5.23 13.18 13 7.12 27.44 2.64 51.76 6.22 4.50 26.11
- 15. Conclusion/Recommendations • Expansion in Overseas can be financed by issuing ADRs/DGRs in that country. • There is a huge scope for good performing Indian companies to raise funds through ADRs/GDRs. • In last 1 year, fund raising through ADR/GDR has declined to $50 million from $300 million. • Currently no Indian Companies are going for raising funds through ADR/GDR, because of instability in currency, interest rates and other macro factors.
Editor's Notes
- Global depository receipt (GDR) is compulsory for foreign company to access in any other country’s share market for dealing in stock. But American depository receipt (ADR) is compulsory for non –us companies to trade in stock market of usa .ADRs can get from level -1 to level –III. GDRs are already equal to high preference receipt of level –II and level –III.Indian companies prefer to get GDR due to its global use for getting foreign investment for own business projects.ADRs up to level –I need to accept only general condition of SEC of USA but GDRs can only be issued under rule 144 A after accepting strict rules of SEC of USA .GDR is negotiable instrument all over the world but ADR is only negotiable in USA .Many Indian Companies listed foreign stock market through foreign bank’s GDR.Names of these Indian Companies are following :- (A) Bajaj Auto (B) Hindalco (C) ITC ( D) L&T (E) Ranbaxy Laboratories (F) SBI Some of Indian Companies are listed in USA stock exchange only through ADRs :- (A) Patni Computers (B) Tata MotorsEven both GDR and ADR is the proxy way to sell shares in foreign market by India companies ADRs is not substitute of GDRs but GDRs can use on the place of ADRs .Investors of UK can buy GDRs from London stock exchange and luxemberg stock exchange and invest in Indian companies without any extra responsibilities . Investors of USA can buy ADRs from New york stock exchange (NYSE) or NASDAQ (National Association of Securities Dealers Automated Quotation).American investors typically use regular equity trading accounts for buying ADRs but not for GDRs .The US dollar rate paid to holders of ADRs is calculated by applying the exchange rate used to convert the foreign dividend payment (net of local withholding tax) to US dollars, and adjusting the result according to the ordinary share but GDRs is calculated on numbers of Shares . One GDR's Value may be on two or six shares
- Unsponsored ADRs[edit source | editbeta]Unsponsored shares trade on the over-the-counter (OTC) market. These shares are issued in accordance with market demand, and the foreign company has no formal agreement with a depositary bank. Unsponsored ADRs are often issued by more than one depositary bank. Each depositary services only the ADRs it has issued.
- Sponsored Level I ADRs ("OTC" facility)[edit source | editbeta]Level 1 depositary receipts are the lowest level of sponsored ADRs that can be issued. When a company issues sponsored ADRs, it has one designated depositary who also acts as its transfer agent.A majority of American depositary receipt programs currently trading are issued through a Level 1 program. This is the most convenient way for a foreign company to have its equity traded in the United States.Level 1 shares can only be traded on the OTC market and the company has minimal reporting requirements with the U.S. Securities and Exchange Commission (SEC). The company is not required to issue quarterly or annual reports in compliance with U.S. GAAP. However, the company must have a security listed on one or more stock exchange in a foreign jurisdiction and must publish in English on its website its annual report in the form required by the laws of the country of incorporation, organization or domicile.Companies with shares trading under a Level 1 program may decide to upgrade their program to a Level 2 or Level 3 program for better exposure in the United States markets.
- Sponsored Level II ADRs ("Listing" facility)[edit source | editbeta]Level 2 depositary receipt programs are more complicated for a foreign company. When a foreign company wants to set up a Level 2 program, it must file a registration statement with the U.S. SEC and is under SEC regulation. In addition, the company is required to file a Form 20-F annually. Form 20-F is the basic equivalent of an annual report (Form 10-K) for a U.S. company. In their filings, the company is required to follow U.S. GAAP standards or IFRS as published by the IASB.The advantage that the company has by upgrading their program to Level 2 is that the shares can be listed on a U.S. stock exchange. These exchanges include the New York Stock Exchange(NYSE), NASDAQ, and the American Stock Exchange (AMEX).While listed on these exchanges, the company must meet the exchange’s listing requirements. If it fails to do so, it may be delisted and forced to downgrade its ADR program.
- Sponsored Level III ADRs ("offering" facility)[edit source | editbeta]A Level 3 American Depositary Receipt program is the highest level a foreign company can sponsor. Because of this distinction, the company is required to adhere to stricter rules that are similar to those followed by U.S. companies.Setting up a Level 3 program means that the foreign company is not only taking steps to permit shares from its home market to be deposited into an ADR program and traded in the U.S.; it is actually issuing shares to raise capital. In accordance with this offering, the company is required to file a Form F-1, which is the format for an Offering Prospectus for the shares. They also must file a Form 20-F annually and must adhere to U.S. GAAP standards or IFRS as published by the IASB. In addition, any material information given to shareholders in the home market, must be filed with the SEC through Form 6K.Foreign companies with Level 3 programs will often issue materials that are more informative and are more accommodating to their U.S. shareholders because they rely on them for capital. Overall, foreign companies with a Level 3 program set up are the easiest on which to find information. Examples include the British telecommunications company Vodafone (VOD), the Brazilian oil company Petrobras (PBR), and the Chinese technology company China Information Technology, Inc. (CNIT).
- There are many depository banks that issue ADRs in the United States. The biggest one being the Bank of New York. These depository banks help with the setup and operation of a company's depository receipt program. These banks often will offer to provide these issuing services to companies for free. This raises the question, what benefit is the bank receiving for providing such a service?When a depository receipt is issued by a depository bank, the bank has actually purchased the equivalent amount of shares in the local market. Those shares are held by a local custodian bank for the depository bank. The depository receipts can then be traded normally in the American market as any other stock would trade. If for some reason a depository receipt is canceled, it is no longer traded in the American market. The ADRs are returned to the depository bank and the shares held by the local custodian are released back into the local market.Although the depository banks must do a lot to issue a new ADR, they receive no real benefit from the foreign company. The benefit the depository bank receives occurs whe the ADR is ultimately sold into the market. The depository bank receives acommission on the trade, just like any other trade. Often times depository banks will also deduct their fees from dividends that investors are to receive. They may also pass on expenses related to currency conversion to investors. It is through these fees and expenses that they charge to investors that depository banks benefit from issuing ADRs.BNY Mellon. The depositary bank plays a key role in the process of issuance and as cancellation of ADRs. It also maintains the ADR holder register and distributes the dividends in US dollars. For additional information, please visit BNY Mellon’s website atwww.adrbnymellon.com or contact the shareholder services departmentinvrelparis@cgg.com.