3.gdrs-akm

Indian Institute of Management, LucknowApril 8, 2023

Accessing International Markets – Choice of Instruments


DR CONCEPT

•Depository Receipt means any instrument in the form of a Depository receipt or certificate (by whatever name it is called) created by the Overseas Depository Bank outside India and issued to non-resident investors against the issue of ordinary shares or Foreign Currency Convertible Bonds of issuing company.”

Bajaj Auto issued Global Depository Receipts (GDRs) in 1994 and the underlying shares against each GDR were issued in the name of the overseas depository - the Bankers Trust Company (whose name changed to Deutsche Bank Trust Company Americas from 15 April 2002).

Bajaj Auto issued Global Depository Receipts (GDRs) in 1994 and the underlying shares against each GDR were issued in the name of the overseas depository - the Bankers Trust Company (whose name changed to Deutsche Bank Trust Company Americas from 15 April 2002).


Negotiable instrument in form of certificate denominated in US$ Created from ordinary shares to generate funds abroad Bajaj Auto issued GDRs in 1994 against 4342676 underlying shares against each of the GDRsBajaj Auto issued GDRs in 1994 against 4342676 underlying shares against each of the GDRs

DR CONCEPT


As on 31 March 2007, 1, 805,071 GDRs were outstanding, and represented an equal number of underlying equity shares.

As on 31 March 2007, 1, 805,071 GDRs were outstanding, and represented an equal number of underlying equity shares.

•It is a non voting equity holding with all other benefits accrued.

•Depository bank exercises the voting rights on behalf of investors

DR CONCEPT


GENERALLY ONE GDR IS EQUIVALENT TO ONE OR MORE (RUPEE DENOMINATED) SHARES (DR RATIO) FOR e.g. A GDR OF $ 30 MAY COMPRISE TWO EQUITY SHARES OF $ 15 EACH

EQUIVALENT TO Rs 450 EACH, AT THE RATE OF EXCHANGE PREVAILING AT THE TIME OF ISSUE

Number of factors responsible If software peer group companies are selling at $10 a share, Indian company A selling at

Rs 2000 a share in local market or $ 50 (with ex rate Rs 40 per $), may come with 5 ADRs for 1 sh if it wants to list at $10 a share OR

A wants to do a split or ratio change later may see other Indian software companies or SAP Oracle or IBM as the peer group OR

Stock has gone upto $ 360 & peers are in $30 to $ 40, A should do a ratio change in order to make it more accessible in smaller lots to investors.

GDR/ADR Ratio


CASE ANALYSIS

S.EXPORTS PRPOSES TO EXPAND ITS OPERATION FOR WHICH IT REQUIRES FUNDS OF $3.75 MILLION, NET OF ISSUE EXP WHICH AMT TO 2.5% OF THE ISSUE SIZE

IT PROPOSES TO RAISE FUNDS THROUGH GDR

IT CONSIDERS FOLLOWING FACTORS IN PRICING EXPECTED DOMESTIC MKT PRICE OF SH IS Rs 250 4 SHs UNDELIE EACH GDR UNDERLYING SHs PRICED AT 15% DISCT TO THE MKT PRICE EXPECTED EX RATE IS Rs 40/$

COMPUTE No. OF GDRs TO BE ISSUED


CASE ANALYSIS

COMPUTE No. OF GDRs TO BE ISSUED

SHs PRICED AT 15% DISCT TO MKT PRICE DOMESTIC MKT PRICE= Rs 250 15% DISCT TO MKT PRICE = 212.50 PRICE OF EACH GDR = 212.5 X 4 = Rs 850 PRICE OF GDR IN $ = 850/40 = $ 21.25 FUND REQUIREMENT = $ 3.75 m FLOATATION COST (1-f) = 0.975 TOTAL AMT TO BE RAISED THROUGH GDR ISSUE……………

= $ 3.75m/0.975 = $ 3.85 m No. OF GDRs TO BE ISSUD = $ 3.85m/21.25 = 1.81,200


COST

Cost of floating an ADR or GDR issue is quite high and is only justifiable if the amount of finance to be raised is quite large

ADR Vs GDR : Indicative Issue Expenses (Issue size: US$150mm)

GDR/ADR issue is possible only for the few top notch corporate of the country.


ADRs or GDRs

ADRs & GDRs IDENTICAL IN TERMS OF LEGAL, OPERATIONAL, TECHNICAL & ADMINISTRATIVE

REQUIREMENTS REQUIRE SAME SERVICE FROM DEPOSITORY BANK UTILISE SAME FORM OF DEPOSIT AGREEMENT DENOMINATED IN US $ PAY DIVIDEND IN US $ CO. CHOOSES GDR FOR MORE GLOBAL IMAGE & ANTICIPATES

SIGNIFICANT AMT OF TRADING OUTSIDE US

Choice depends on related disclosure, reporting standards, potential demand from investors, objectives of the offering and, if the securities are to be listed, on the requirements of the stock exchange


Levels of ADRs

Unlisted and traded in OTC market

No compliance with U.S. GAAP or full SEC disclosure.

Allows companies to enjoy the benefits of a publicly traded security without changing its current reporting process

•Used when company do not wish to raise funds i.e. just acquire listing

•For Level II issue the issuing firm converts some of its existing stock into ADRs.

Full compliance with U.S. GAAP standards

Used when funds are to be raised.

•Capital raised in private placement market

•No SEC Registration,

•Resale of sects to QIBs

•Faster & Cost effective

•Reliance, Suzlon Energy, DLF, Power Finance, Axis Bank


Eligibility Criteria


Not subject to any ceilings on investment

No restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year.

Indian companies permitted to issue GDRs/ADRs in the case of Bonus or Rights issue of shares, or on genuine business reorganisations duly approved by the High Court.

Foreign investment through GDR/ADR treated as FDI

FIIs can invest in a company under the portfolio investment route upto 24 per cent of the paid-up capital of the company

If the FDI of a firm exceeds 51% after a new issue, the firm needs to obtain clearance from the FIPB (and the MoF)

Eligibility Criteria


PROCESS Sponsorship of GDRs/ADRs requires the approval of the shareholders HOLD BOARD MEETING TO DECIDE EURO ISSUE PASS RESOLUTION U/S 81 (A) IN SH. HOLDER MEETING FOR APPROVING EURO

ISSUE

MARKETS & SIZE OF ISSUE DEPENDS ON NEEDS OF COMPANY & ANTICIPATED DEMAND OF COMPANY M. BANKERS ADVISE ONLY 60-70% OF DEMAND TO BE ACCEPTED TO ENSURE

PRICE STABILITY AV. SIZE OF INDIAN EURO HAS BEEN AROUND $ 80 MILLION

GOVERNMENT APPROVALS MINISTRY OF FINANCE DEPARTMENT OF COMPANY AFFAIRS RESERVE BANK OF INDIA

APPROVAL OF STOCK EXCHANGE/DCA/RBI


INTERMEDAIRIES

APPOINT OVERSEAS I. BANKERS WHO SELECT OVERSEAS DEPOSITORY ISSUE GDRs TO UNDERWRITERS WHO ARRANGE TO

PLACE TO ULTIMATE INVESTORS OVERSEAS UNDERWRITER TO MARKET THE ISSUE LEAD MGRS TO ISSUE WHO DECIDES

ISSUE STRUCTURE, ADR Vs GDR, RISK FACTOR, PRICING NO. OF GDRs TO BE ISSUED, PUBLIC OR PRIVATE PLACEMENT

DOMESTIC CUSTODIAN TO LISTING AGENTS FOR MAKING AN APPLICATION TO STOCK EXCHANGE CONCERNED

FOR LISTING TRUSTEES, AGENTS ARE PAYING AGENTS IN DIFFERENT FINCL CENTERS, WHO WILL

ARRANGE PAYMY OF INT & PRINCIPAL DUE TO INVESTORS UNDER THE TERMS OF ISSUE

LAWYERS & AUDITORS ; PRINTERS; BANKERS


Mechanism

BAJAJ AUTO ICICI Bank

Banker’s Trust Company

POSSESSION OF EQ SHs ENTRUSTED TO CUSTODIAN

POSSESSION OF EQ SHs ENTRUSTED TO CUSTODIAN

AUTHORISED BY ISSUER TO ISSUES DOLLAR DENOMINATED GDRs TO INVESTORS AGAINST THE ISSUE OF ORDINARY SHARES

AUTHORISED BY ISSUER TO ISSUES DOLLAR DENOMINATED GDRs TO INVESTORS AGAINST THE ISSUE OF ORDINARY SHARES

Hold GDR and Register it in the Name of DTC

SHs ISSUED & EXPORTED IN NAME OF DEPOSITORY WHICH IS EXPECTED TO VOTE WITH MGT

SHs ISSUED & EXPORTED IN NAME OF DEPOSITORY WHICH IS EXPECTED TO VOTE WITH MGT

Settlement of GDRs

Monies Dividend

Seeks to enhance liquidity & expand & diversify investors


Key Component of Typical DR Programme

Price range decided on basis of investors response by I Bankers


TIMING

TIMING OF ISSUE DECIDED AFTER ASSESSING

I. WHEN POTENTIAL GROWTH FOR INDUSTRY IN BOTH DOMESTIC & INTL MKT HIGH

A REASONABLE GAP BETWEEN EURO ISSUES MAINTAINED

II. RESPONSE TO ROADSHOW CO. CAN ASSESS THE ISSUE SIZE THE MKT CAN ABSORB ISSUE MAY BE MADE TO THE FULL EXTENT OF DEMAND ISSUE CAN ALSO BE MADE TO THE EXTENT OF 60-70% OF THE

DEMAND ONLY TO ENSURE GREATER STABILITY IN GDR PRICES AFTER THE ISSUE


Pricing of GDR/FCCB should not be less than the higher of the average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date. The “relevant date” means 30 days prior to the meeting of the

general body of shareholders, in terms of section 81 (IA) of the Companies Act, 1956, to consider the proposed issue.

With a host of companies now rushing to raise funds abroad, the government also put curbs on the pricing front.

Earlier, companies had the freedom to price their shares as per their whims and fancies. As many companies overpriced their GDRs in the 1990s, foreign investors lost money in several Indian companies.

The move is aimed at aligning the pricing mechanism with SEBI rules

PRICING


LISTING

Usually listed at the Luxembourg Stock Exchange as also traded on the OTC market in London and on private placement market in USA.

Comply with overseas listing reqrmt Quoted & traded in US$ among intl investors Traded freely like any other security, either on an exchange or in the otc mkt Trading takes place between professional mkt makers


Listing Listed & Traded in International market, Inter Exchange

Transfer AllowedBajaj Auto’s Global Depository Receipts (GDRs) listed on the LSE. GDRs of the company have been transferred from the Main Market to the Professional Securities Market of the London Stock Exchange, with effect from 10 March 2007. With this transfer, the company can continue to present its financial statements under Indian GAAP.

Bajaj Auto’s Global Depository Receipts (GDRs) listed on the LSE. GDRs of the company have been transferred from the Main Market to the Professional Securities Market of the London Stock Exchange, with effect from 10 March 2007. With this transfer, the company can continue to present its financial statements under Indian GAAP.


No end-use restrictions on GDR/ADR issue proceeds,

Ban on investment in real estate and stock markets.

Can use 100% for acquisition of foreign companies and for investment in overseas joint ventures

May acquire shares of foreign companies engaged in the same area of core activity up to an amount of US $ 100 million or an amount equivalent to ten times of their exports in a year

Can use for financing capital goods imports, capital expenditure, prepayment or scheduled repayment of earlier external borrowings

Permission to retain foreign depository receipt proceeds for future foreign exchange requirements

End Use


INVESTOR’S RIGHTS

ENTITLED TO BONUS & RIGHTS IN US $ THROUGH DEPOSITORY

NO VOTING RIGHTS ENTITLED TO DIVIDENDS IN US $ ON VALUE OF

UNDERLYING SHs OF THE GDR NET DIVIDENDS (AFTER DEDUCTING TAX AT SOURCE @ 10%) ARE

PAID BY COMPANY TO DEPOSITORY CUSTODIAN BANK IN RUPEES

DEPOSITORY CONVERTS THE DIVIDENDS FROM RUPEES TO FOREIGN CURRENCY

DEPOSITORY PAYS THE CONVERTED AMT TO INVESTORS AFTER DEDUCTING WITHOLDING TAX OF 10% ON DIVIDEND

Foreign ex or currency risk is placed totally on investors


DR Broker

Local Broker

Depository

Local

Custodian

Investor

2

3

4

The investor after depositing instructs broker to cancel DRs.

Broker delivers the DRs to the depositary for cancellation.

Depositary cancels DRs and instructs the local custodian to release and deliver the underlying shares to the seller’s broker in the issuer’s home market.

Local custodian delivers the underlying ordinary shares as instructed to the local broker. The local broker safekeeps the ordinary shares or delivers them to or on behalf of the new investor.

1

2

3

4

1

DR Cancellation Process

canceled only after a cooling-period of 45 days.


Transference

Transference of shares (on conversion of GDR/ADRs into shares) in favor of residents Non-resident holder approach Overseas Depository bank with a

request to the Domestic Custodian bank to get the corresponding underlying shares released in favour of the non-resident investor for being sold by the non-resident or for being transferred in the books of the issuing company in the name of the non-resident.

Reserve Bank has granted general exemption vide its Notification No.F.E.R.A.185/98-RB dated 19th August 1998, permitting transfer of shares from non-residents to residents.


Two Way Fungibility

Two-way fungibility in ADR/GDR issues, subject to sectoral caps, wherever applicable. (RBI Circular Feb 13,02)

Stock brokers in India may now purchase shares and deposit these with the Indian Custodian for issue of ADRs/GDRs by the overseas depository to the extent of the ADRs/GDRs that have been converted into underlying shares.


Two Way Fungibility


Fungibility - CASE

Tata Engineering signed an agreement with Citibank N.Y, Depository for GDR holders for Two-way Fungibility

Presently, out of 40.32 million GDRs issued, about 24.02 million GDRs have been redeemed/cancelled.

With the execution of the Agreement, Ordinary Shares can now be converted into GDRs such that the total number of GDRs outstanding at any point of time do not exceed 40.32 million.

Company believes that this step will increase liquidity of GDRs and Ordinary Shares.


Fungibility - CASE

In 1994, GE Shipping had issued 6.27mn GDRs with an entitlement to convert into 5 equity shares for each GDR issued.

After RBI‘s, Company converted 20,700 equity shares into 4,140 GDRs.

This however, in no manner requires issue of additional share capital by the Company.


ADRs

A negotiable certificate issued by a U.S. bank representing a specific number of shares of a foreign stock traded on a U.S. stock exchange.

NYSE, AMEX, NASDAQ, OTC Listing Requires U.S. GAAP and SEC disclosure requirements ADR’s make it easier for Americans to invest in foreign

companies, due to the widespread availability of dollar-denominated price information, lower transaction costs, and timely dividend distributions.


Levels of ADRs


Levels of ADRs

Sponsored ADS (American depository shares) Converting existing listed eq sh in India into ADRs in US mkt Realize the proceeds net of issue cost Price discovery done through road show by global underwriters to the offer Conditions

Such issue do not lead to addtl issue of eq sh No money accrues to company out of this issue

Advantages Improves liquidity in US mkt. (Infosys second ADS offering rose ADS % from 3.3 to 7.9%) Helps in removing arbitrage in trading between eq in India & ADS Greater global brand visibility to Indian co as number of ADS goes up

Infosys $ 1 bn second sponsored ADS

Satyam $ 360 mln


Levels of ADRs

Sponsored ADS (American depository shares) CASE of SATYAM Sponsored (ADSs) issue against the existing equity shares of the company, with a size of

issue not exceeding 30 million equity shares of the company, including green shoe option, if any.

The increased ADSs float will facilitate to attract increased attention of global/ technology investors and help eliminate the perception of low float stock.

ADS price has been consistently quoting with premium over the domestic price and currently the premium is about 30 per cent.

The issue would enable the Indian shareholders, to tender their Indian stock and realise premium on conversion and sale of the same as ADSs in US market.

The issue has been sized keeping in view the need to preserve the domestic liquidity while transferring stock into ADSs market.


GDR MARKET STRATEGIESMANY OF THEM TRYING TO CONVERT THEIR GDRs INTO ADRs EXAMPLE

RELAINCE INDUSTRIES VSNL CONVERTED GDR INTO ADR IN 1:1 RATIO MTNL TAT A 1:1

RATIONALE GIVEN ADR MORE OF A RETAIL INSTRUMENT THAN GDRs CONVERSION TO ENSURE LOT OF LIQUIDITY IN MARKET BETTER GLOBAL VISIBILITY TELECOM STOCKS HELD IN HIGH ESTEEM BY AMERICANS ADR LISTING NORMS DEMAND STRICT FINANCIAL DISCIPLINE WILL AUTOMATICALLY BRING FINANCIAL DISCIPLINE WITHIN THE

ORGANISATION ALSO (IMPROVES COMPANY IMAGE)


Levels of ADRs

Level II Listing on NYSE, AMEX, NASDAQ Disclosure but not meeting U.S. standards Used when company do not wish to raise funds i.e. just acquire listing

For Level II issue the issuing firm converts some of its existing stock into ADRs.

Tata Motors' executive director, Pravin Kadle said the company would list its outstanding global depository receipts (GDRs) on the New York Stock Exchange in the form of American Depository Receipts (ADR).

"This is intended to be a Level-II listing without any concurrent fund raising and is expected to be completed later this fiscal," he added.


TRADING ISSUES

WHY WOULD GDR/ADR PRICE DIFFERENT FROM HOME MKT? Essentially correlation between underlying shares & ADR/GDR prices

Co. A shares traded locally Rs 2000 = 40 Rs a $ = $ 50 If ADR Ratio is 1:1 then ADR should trade at $50 But it sells at $52, 54 or more or possibly less

WHY????????? If limitations as to what % of o/s capital is in the listed ADRs. If lt reached no ADRs

can be issued. It is possible ADRs would trade at premium

ADRs may be less liquid, local mkt more liquid ADR may sell at disct

Arbitrageurs will step in Buy cheaper security, sell security in other home market It’s another capital mkt activity where active mkt participnts look for such opportunity

Mkt sets the price based on supply & demand in the mkt


WHY INTERNATIONAL MARKETS ?

3.gdrs-akm

Documents

issuing firm

american depository

level ii issue

overseas depository

stock exchange

existing stock

underlying

raise funds