euro issues & gdrs

8/3/2019 Euro Issues & Gdrs

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EURO ISSUES - GLOBAL DEPOSITORYRECEIPTS

INTRODUCTION

Many large companies in India require foreign exchange for importing vital

capital goods. In the early eighties, Indias rating in the international credit market

stood high. So, Indian companies with strong finances and which could offer

acceptable security could get foreign currency loans from international banks for

meeting their foreign exchange requirements. The acceptable security was a guarantee

given by a bank or a financial institution in India. In the early nineties, the foreign

exchange reserves of the country dwindled. The Indian economy was also weak. On

account of these, Indias credit rating fell below investment grade. At that time,Indian companies were finding it difficult to obtain loans from international banks.

Hence, many Indian companies had to approach the EXIM bank of India and other

financial institutions like ICICI who had foreign lines of credit from International

Finance Corporation or other international agencies, for foreign currency loans. By

middle of 1991, the liberalization of the Indian economy was set in motion. There was

an earnest attempt to integrate India with the global market. The emerging

transparency and decontrols attracted the attention of many foreign investors. The

foreign equity investors appreciated the liberal policies of the Indian Government andidentified huge stakes in the emerging Indian capital market. In February92, while

presenting the budget, the finance minister announced governments decision to allow

the FIIs to invest in the Indian capital market and to allow Indian companies with

good track record to float their stocks in foreign markets with a view to augmenting

the forex reserves of the country.

So far, Indian companies floating GDRs have been following the route of Rule

144A of SEC for issuance of GDRs. Primary reason for doing so is that by issuingsecurities under Rule 144A, there is no need for prior registration of securities with

SEC. Further, information requirements in the offer documents in case of private

placement is discretionary and is not very comprehensive. At the same time, liquidity

is not affected as the securities can be sold by one qualified institutional buyer (QIB)

to another. Further, a point to be noted is that such unregistered securities cannot be


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sold in the U.S. public market for at least 2 years unless the said securities are

registered with SEC. Majority of the companies list on the Luxembourg Stock

Exchange because it has minimum listing formalities and comparitively low listing

fees. The other option is to register the securities with SEC, based on exhaustive SEC

registation documents in which case individuals can subscribe to the securities offered

in the U.S. markets. Herein, detailed disclosure norms of U.S. GAAP have also to be

complied with. As per the estimates, the cost of preparing and filing the US GAAP

account ranges from $500,000 to $1,000,000 with the ongoing costs of $150,000 to

$200,000 per annum. The initial SEC registration fees, which are a percentage of the

issue size as well as blue sky registration costs (permitting the securities to be

offered in all states of the USA) would have to be met.

WHAT IS AGLOBAL DEPOSITORY RECEIPT

Companies making euro issues can issue two types of instruments, namely

Global Depository Receipts (GDRs) or Foreign Currency Convertible Bonds

(FCCBs).

A GDR is an instrument in the form of a depository receipt or a negotiable

certificate created by the overseas depository bank outside India and issued to non

resident investors against the issue of equity shares or foreign currency convertible

bonds of the issuing company outside India. A GDR usually represents one or more

shares or convertible bonds of the issuing company. A holder of a GDR is given an

option to convert it into number of shares/bonds that it represents after 45 days from

the date of allotment. GDR is an instrument denominated in dollars or in some other

freely convertible foreign currency. The shares or bonds which GDR is entitled to get

on conversion are denominated in Indian rupees. Once GDR is converted, the shares

issued on conversion are listed on any one or more of the Indian Stock Exchanges.

Till conversion, the GDR does not carry any voting right. There is no lock-in period

for GDRs. GDRs are issued by the Indian companies to an intermediary abroad called

Overseas Depository Bank. The equity shares/bonds representing the GDRs are

registered in the name of the Overseas Depository Bank and the relative Share

Certificates/Bond Certificates are delivered to another intermediary called the

Domestic Custodian Bank who acts as the agent of the Overseas Depository Bank in

India.


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ROLE of GDRs

For over 60 years GDRs have been used by international security houses to

facilitate settlement of securities across international borders. GDRs play an essential

role in international corporate finance. Increasingly, companies and governments areusing them in a variety of traditional and innovative ways to :

raise debt or equity capital

diversify their shareholder base

increased demand for their securities

create dollar denominated securities for tax efficient acquisitions

enhance their global image

The Government benefits indirectly since international funds means addition

to the country's forex reserves.

WHY INDIAN COMPANIES PREFER GDRs

Indian companies can collect a large volume of funds in US Dollars or PoundSterling or in any other foreign currency of their choice through GDRs. It is not

possible to collect large volume of funds in the domestic capital market.

Secondly, the companies get forex funds at low interest rates. This makes themmore competitive in the market which in turn ensurs a better clout in raising

finance for future products.

Till conversion GDRs do not carry any voting rights.

There is no exchange risk for the issuing company as shares underlying GDRs aredenominated in Indian Rupees, although the company receives funds in foreigncurrency.

A listing of GDRs on an international stock exchange could provide thecompanies substantial liquidity and also make the companys securities moreattractive to more buyers.

A GDR can raise the profile of the company. The company gains recognitionamong foreign investors which inflates its image among the domestic ones.

The issuing company is able to raise funds outside the ambit of the SEBI.

WHY FOREIGN INVESTORS PREFER GDRs


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Foreign investors who are generally institutional investors are interested mainly in thereturn on investment in the form of capital appreciation and dividend income. Theyare not interested in voting rights. The advantages with foreign investors are :-

Return on investment in shares in Indian companies is much higher compared toreturns available on many stock exchanges in the world.

The Arbitrage Advantage - According to market sources, foreign investors have been indulging in arbitrage to take advantage of the the discounted prices ofIndian GDRs overseas. Discounted prices of Indian GDRs as compared to whatare ranging on the Indian Stock Markets are considered unnatural.

They need not register themselves with SEBI.

They need not pay tax on capital gains made by them on the sale of GDRs abroad.

They need not appoint a custodian in India to look after their dealing in securities.

They need not get RBIs permission for investing in GDRs.

ELIGIBILITY FOR ISSUING GDR

Consistent track record of good performance (financial or otherwise) for aminimum period of three years.

Objectives of the issue should be either of the following :-

Financing capital goods imports

Financing domestic purchase / installation of plant, equipment andbuildings.

Pre-payment or scheduled repayment of earlier external borrowings.

A margin of 15% of the total proceeds of an issue for other generalcorporate restructuring uses.

Making investments abroad where these have been approved by competent

authorities.

The company has not come out with any other Euro Issue during the year.

The group has not come out with more than one Euro Issue within the year.

The main objective of these guidelines has been to restrict the number of

companies tapping the Euro market and also controlling and monitoring end-use offunds. The spate of Euro-issues in the past has created a lot of liquidity which is also

one of the reasons for inflationary pressures in the economy. Moreover, an overdoseof Indian paper could have an adverse impact with the market being saturated too

soon.


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These guidelines have significant implications for all companies planning totap the Euro market. Stipulations of a minimum gap of 12 months between 2 issueswill have an impact on corporates having an ambitious expansion plan, particularly

projects entailing substantial imports. In the past, Reliance industries floated 3 issues

in close succession spread over a period of 3 years. It will also inhibit companies fromavailing of favorable interest rates.

By preventing a group of companies from floating more than 2 issues during asingle financial year, the government has perhaps aimed at ensuring a good responseto issues placed in the Euro market. Simultaneously placed issues by two companiesof the same group, or even from the same industry poses a threat to the success ofthese issues, as the investors are in 'either-or' situation when dividing their portfolios.This is what happened when MTNL announced an issue around the same time asVSNL - investors chose one of the two and thus got divided.

Retention of issue proceeds abroad has been permitted selectively in the pastlike in the case of SCICI, which finances imports of ships. The new guidelines furtherspecify that retention would be permitted on specific applications for import of capital

goods, retiring debts in foreignh currency and financing joint ventures abroad. By permitting issuers to retain funds outside the country, increase in internal moneysupply and consequent inflationary pressures are sought to be controlled.

It is the end-use of Euro funds which has raised a lot of questions. The newguidelines are aimed at ensuring that money, which is raised has some specific useand is not rasised merely because cheap money is available. While in the past theimage of India as an emerging market was responsible for the flow of funds, with thedebacle of VSNL, investors were forced to scrutinize how the funds were really beingused. Even in the case of as big an issue as VSNL's, it was believed that the fundswere in fact being raised for use by DoT.

ISSUE STRUCTURE

The GDR may be issued for one or more underlying shares or bonds held withthe domestic custodian bank. The company should decide in consultation with thelead managers the following aspects about the issue :-

1. Public or Private Placement.

2. Number of GDRs to be issued.

3. Issue Price.

4. Conversion price, coupon rate and the pricing of the conversion options of theFCCBs.

The company desirous of making a GDR issue has to make an application tothe Department of Economic Affairs (DoEA), furnishing the terms of the issue, theissue size, price range and other particulars stated in the issue of FCCB and ordinaryshares through Depository Receipt Mechanism Scheme, 1993, and obtain the in-

principle approval. The in-principle approval is valid for only three months from the


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date of its issue. The company should finalize the issue structure and again approachthe DoEA within three months from the date of in-principle approval and get finalapproval for the issue. GDRs are treated by government as direct foreign investment.Accordingly, a company contained in Annexure III of the New Industrial Policy91

whose direct foreign investment after the proposed GDR issue is likely to exceed 51%or which is implementing projects not predominantly contained in Annexure III

should obtain clearance for investment from the FIPB before final approval for theGDR issue is given by the finance ministry.

CEILING ON GDRs

The shares and FCCBs issued against GDRs are treated as DFI in the issuingcompany. The aggregate of the foreign investment made either directly or indirectlythrough a GDR issue should not exceed 51% of the issued and subscribed capital ofthe issuing company. The term DFI includes investment by foreign collaborators butexcludes investment through offshore funds or by FIIs.

LISTING OF GDRs

GDRs issued under the scheme may be listed on any of the overseas stockexchanges or over the counter exchanges or through book entry transfer system

prevalent abroad. GDRs may be purchased and sold by any non-resident as defined inFERA.

OPERATING MECHANISM OF GDRs

In a GDR issue, the issuing company issues ordinary shares as per the schemeand delivers the ordinary shares to the domestic custodian bank (DCB), which will interms of the agreement, instruct the overseas depository bank (ODB) to issue global

depository receipt or certificate to the non-resident investor against the shares held bythe DCB. GDR is normally issued in negotiable form and may be listed on anyinternational Stock Exchange for trading outside India. Most companies list GDRs inLuxembourg or Dublin Stock Exchanges. The shares underlying the GDRs will beregistered in the name of the ODB, which will be the holder on the books of thecompany.

Holders of GDRs will have no voting rights or other direct rights of ashareholder with respect to the shares underlying such GDRs. Some offering circulars

provide that the ODB shall vote as directed by some other group company of theissuing company. Registered holders of shares withdrawn from the depositoryarrangement will be entitled to vote and exercise other direct shareholders rights in

accordance with the Indian law. Withdrawn shares cannot be redeposited. Thesewithdrawn shares will be listed on the Indian Stock exchanges, just as other shares ofthe company.

Holders of GDRs will be entitled to receive dividends paid on the underlyingshares, subject to the terms of the issue. So long as the GDRs are not withdrawn, therelevant ODB will, in connection with such outstanding shares, convert Rupeedividend into dollars.


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TRANSFERAND REDEMPTION OF GDRs

1. A non-resident holder of GDRs may transfer those receipts or may ask theOverseas Depository Bank (ODB) to redeem these receipts. In the case ofredemption, the ODB shall request the Domestic Custodian Bank (DCB) to get thecorresponding underlying shares released in favor of the non-resident, for being

sold directly on behalf of the non-resident, or being transferred in the books ofaccount of the issuing company in the name of the non-resident.

2. In case of redemption of the GDRs into underlying shares, a request for the samewill be transmitted by the ODB to the DCB in India with a copy of the same

being sent to the issuing company for information and record.

3. On redemption, the cost of acquisition of the shares underlying the GDR shall bereckoned as the cost on the date on which the ODB advises the DCB forredemption. The price of the ordinary shares of the issuing company prevailing inthe BSE or the NSE on the date of the advice of redemption shall be taken as thecost of acquisition of the underlying ordinary shares.

4. For the purpose of conversion of FCCBs, the cost of acquisition in the hands of thenon-resident investors would be the conversion price determined on the basis of the

price of the shares at the BSE or the NSE on the date of conversion of FCCBs intoshares.

TAXATION

Interest on the bonds (until conversion) is subject to TDS @ 10 percent. Taxon dividend on converted portion of the bond has been removed. Transfer of GDRsmade outside India by one non-resident to another non-resident shall not give rise to

capital gains liable to tax in India. Long term capital gains arising out of the transferof shares (after redemption of GDRs) will be taxed @ 10 per cent and it is liable to bewithheld at source.

The holding of GDRs by non-residents and the holding of underlying sharesby the ODB is in a fiduciary capacity and the transfer of GDRs between non-residentinvestors are exempt from wealth tax and gift tax.

PROCEDURE FOR GDR ISSUE

Euro Issue management needs an extremely well-planned time bound activity.The issuing company has to comply with various enactments, rules, regulations, stock

exchange requirements etc. It also calls for team work and the team comprises of allthe intermediaries involved in the issue. It is the collective involvement of all whichgets the desired results. A company which desires to make a euro issue has to study itsrequirements of foreign exchange component in its project(s) or diversification ormodernization plans. It has to check up the following aspects :-

1. Whether the size of its issue is more than the economic size of a euro issue.According to the internal guidelines finalized by the DoEA on 20.4.1993, the sizeof the issue should not be less than 20 million Dollars and more than 100 million


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Dollars. In the case of power sector and shipping, the limit is higher at 500 millionDollars. The funds to be raised will be restricted to 50 per cent of the post-issuemarket capitalization. Companies can make only one euro issue in a financial year.There should be a gap of 12 months between two euro issues. Group companies

cannot come out with more than two issues in a financial year. The expressiongroup companies is to be interpreted on the basis of the definition of same

group as provided in section 372(11) of the Companies Act,1956.

2. The company has to first find out whether the existing authorized capital issufficient for the purpose of Euro issue. If not, the company has to take steps to getits authorised capital increased. If the company has taken term loans fromFIs/Banks or issued debentures it has to check out the loan agreements/debenturetrust deeds and find out whether permission of the lenders/trustees is to be obtainedfor making the proposed issue. Most of the FIs stipulate a condition in the loanagreement/trust deed that the borrower company should take their permission forincreasing its capital.

3. Also the company should check up with the foreign stock exchange where it

proposes to list its GDRs whether the issue satisfies its listing requirements throughthe listing agent which is usually a bank approved by the overseas stock exchange.Most companies list the GDRs in Luxembourg or Dublin stock exchanges. If thesize of the issue is big, companies may list the GDRs on the London StockExchange.

OTHER POINTS TO BE NOTED

1. The funds should be utilised within 12 months from the date of issue.

2. Companies should submit quarterly statement of utilisation of funds duly certified

by auditors to the DoEA.

3. Government does not encourage financial companies to float Euroissues.

RELEVANT ACTS/RULES/CIRCULARS/GUIDELINES

Companies Act, 1956.

Foreign Exchange Regulation Act, 1973.

Securities Contract (Regulation).

Income-tax Act, 1961.

Listing Agreements - Indian and all the foreign exchanges where GDRs areproposed to be listed.

Internal guidelines of Central Government finalised on April 20, 1993.

Central Government Guidelines dated 12-11-1993 vide G.S.R. No. 700 (E).


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Central Government Guidelines vide Press Note S-11 (25)/CCI-II/89/NRI dated11-5-1994.

Laws of the country in which the Depository Receipts are being issued.

The checklist of activities for GDR issue (backed by shares) is briefly indicated

below :-

1. Arrange to convene a board meeting to decide on the Euro issue, pass a suitableresolution for making the Euroissue, and for approving the draft notice of theExtraordinary General Meeting at which the special resolution for makingEuroissue will be considered. The exact amount to be raised by the Euroissue neednot be stated in the resolution to be passed by the shareholders of the company, butthe upper ceiling may be specified to give the company some flexibility. TheExplanatory Statement as required under section 173 of the Companies Act, 1956,to be appended to the notice of extraordinary general meeting should be approved

by the Board.

2. Issue the notice for extraordinary general meeting together with an explanatorystatement giving 21 days clear notice to the shareholders.

3. Hold the general meeting of shareholders, pass a special resolution under section81(1A) of the Companies Act approving the proposed Euroissue and file the samewith Registrar of Companies in Form No. 23, within 30 days from the date of themeeting.

4. Make an application to the Department of Economic Affairs (Ministry of Finance)seeking permission for the Euroissue, giving details about the quantum and theterms of the issue, the price range, the track record of the company and the objects

of the issue. The application should contain the additional information prescribedin the guidelines for the GDR issues by the Department of Economic Affairs in thenotification mentioned above. The DoEA will consider the application and give anin-principle approval, if it is satisfied with the proposal. The in-principle approvalwill be valid for 3 months from the date of issue of approval.

5. ON getting in-principle approval from the DoEA, select merchant bankers (LeadManagers) and underwriters for the issue. Lead managers should have exposure toEuroissues made by Indian companies. Hence, reputed merchant bankers in foreigncountries are given the assignment. Discuss he issue proposal with the LeadManagers and give him the balance sheet and all other particulars about thecompany. He will study the proposal and suggest how to market the issue. He will

prepare due diligence report which will establish that the companys audit andcompliance system are in order. Lead Managers charge a fee of 3 per cent of theissue, as fees fo managing or underwriting a Euro issue.

6. Discuss with Lead Mangers and select the overseas depository bank for the issue(Depository Banks charge 5 per cent of the issue price for rendering their services).

7. Select, in consultation with the overseas depository bank, the custodian bank inIndia.


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8. Select, in consultation with the Lead Managers the solicitors and bankers abroadfor the issue. Select the Listing Agent (normally a bank in a place where theoverseas Stock Exchange functions is appointed as the Listing Agent. The ListingAgent should have the approval of the Stock Exchange concerned to act as such).

Make the listing application to the Overseas Stock Exchange in advance for listingthe GDRs. Make an application to the NASDAQ in London for inclusion of the

companys GDRs for dealing in their PORTAL system.

9. The price band for the GDRs should be decided in consultation with the LeadManagers, taking into consideration the following :

(a) future earnings for the next 3 years;

(b) current price of the shares on the stock exchanges;

(c) fundamental analysis of the company and the industry.

10. After finalizing the issue structure and after appointing the intermediaries for theissue, make another application to the DoEA, and get the in-principle approvalconverted into final approval. While giving the final approval, the DoEA

prescribes a 45-day cooling-period during which the market-makers, who areusually the managers to the Euroissue, are obliged to give two-way quotations forthe GDRs to stabilize. The final approval is valid only for 3 months. So, the issueshould be made within 3 months from the date of issue of final approval.

11. Arrange for drafting of the offering circular by the solicitors and merchantbankers keeping in view the international disclosure standards. Before drafting theoffering circular, which is equivalent to prospectus, make necessary changes in theaudited accounts to conform to the international accounting standards by

regrouping the items in the profit and loss account and balance sheet and ifnecessary get the revised accounts audited by the auditors of the company. State inthe offering circular the following :

(a) The quantum of over-subscription in percentage terms which the companyproposes to retain.

(b) Standstill period - the period during which the company will not make furtherissue of shares, with a view to protecting the value of shares represented by GDRs.

(c) The cooling period.

(d) Procedure for transfer of GDRs.

(e) A statement that any FII can apply for GDRs representing not more than 5 % ofthe companys issued and subscribed capital.

(f) GDR holders have no voting rights.

(g) Whether depository can exercise voting rights and if so, how it can exercise therights.


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(h) Procedure for redemption/ conversion of GDRs into shares.

(i) Overseas Stock Exchange in which the GDRs will be listed.

(j) The rate at which income tax at source will be deducted from dividend (the rate oftax deduction is 10 % at present).

(k) Owners of the GDRs will be entitled to receive from the depository an amountequal to the net amount (after Indian withholding tax and other expenses ofdepository, if any) of the rupee dividend per share which the depository receivesfrom the company, converted into US dollars.

(l) Details of GoIs approvals.

(m) Share Price Data.

(n) Shareholding Pattern composition of shareholders).

(o) Dividend paid in the last five years.

(p) Brief history of the company and details of business activities.

(q) Use of funds collected by the GDRs issue.

(r) Directors and management.

(s) General information about the business in which the company is engaged.

(t) The law which governs the Depository Agreement.

(u) how Indian securities market operates.

(v) Where and how documents can be inspected by prospective investors.

(w) A summary of information contained in the offering circular.

(x) Any notice to be given by the company to the holders of GDRs should be published in a daily newspaper of general circulation in the city where theOverseas Stock Exchange in which GDRs are listed, is located. It would beadvisable to state in the offering circular, the name of the newspaper in whichnotices to GDR holders will be published.

(y) Reformatted Financial Statements and Auditors Report and unaudited financial

results, if any.

(z) Table of contents for easy reference.

12. Arrange to keep ready all the original and copies of material contracts anddocuments mentioned in the offering circular for filing the same with the Registrarof Companies.


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13. Get the offering circular approved by the Board. File the offering circular with theRegistrar of Companies and the stock exchange where GDRs will be listed for the

purpose of record.

14. Arrange for printing the offering circular and application forms with the printersabroad selected for the Lead Managers so that distribution of the application form

and offering circular is easy.

15. Settle the draft of the depository agreement with the issuing company and theoverseas depository bank in accordance with international law in consultation withthe solicitors and execute the same.

16. finalize the draft of the custodian agreement between the overseas depositorybank and the domestic custodian bank in consultation with the solicitors and LeadManagers and arrange to execute the same.

17. Finalize the draft of the subscription agreement between the investors and theOverseas Depository Bank in consultation with the solicitors and Lead Managers.

18. Decide the marketing strategy to be adopted for the issue in consultation with theLead Managers and underwriters.

19. Make an application to RBI in Form ISD seeking approval for making theEuroissue. Application has to be submitted to Central Office of RBI. Obtain thecentral banks in-principle approval before making the issue.

20. Make an apppication to the Reserve Bank for release of foreign exchange formeeting :-

The travel requirement of the companys executive to visit different ocuntries forholding the roadshows.

Roadshow expenses.

Listing fee payable to Overseas Stock Exchange.

For payment of brokerage, underwriting commission etc.

Expenses for printing prospectus and application forms and for distributing thesame.

After getting RBIs approval and foreign exchange release from the bank, thecompanys executives can visit different countries for holding roadshows. Makeanother application to the Reserve Bank seeking their permission for opening a bankaccount abroad with the bankers to the issue and get their permission before the issueopens.

21. Arrange to hold roadshows in different countries 4 to 5 weeks before the issueopens to ascertain the response of foreign/ non-resident investors. Roadshows areheld in different countries to build demand for the GDR issue. In the roadshows,


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the chairman or the chief executive of the commpany will brief the activities andhighlight the various aspects of the Euro Issue. A video presentation will be made.These conferences are generally attended by institutional investors who ask more

pointed questions. The chairman or the chief executive has to answer these

queries. Normally, roadshows are held in big hotels. Roadshows may go on for 15to 30 days before the launch of the issue.

22. Settle well in advance the format of GDR to be issued by Overseas DepositoryBank in consultation with the solicitors and Lead Managers.

23. Decide on the timing of the issue and issue price after assessing the response tothe roadshows and keeping in view thw prices of the securities on the BSE for 10days prior to the date of issue. Priicing is to be done very carefully. Issue should

be attractively and not aggressively priced. Euro market investors scoff at premia.So, premium should be fixed properly.

24. Make an application to the State Government for paymenty of consolidatedstamp duty on the share certificates proposed to be issued and get the necessary

order.

25. Make an application to the Stock Exchange abroad (where listing is proposed)for listing the GDRs.

26. Announce the opening of the issue and the price of GDRs. Actual issue price isdetermined just a day prior to the launch of the issue on the basis of the feedbackreceived by the company from its uinderwriters. The price of a GDR is generallythe lower of the average of the prices for the last week and of the last day, on theBSE, prior to the date of launch. Sometimes the pice is fixed at an appropriatediscount. Companies generally fix the issue opening and the closing time

according to New York time. Timing the issue is very important. See that no otherEuro Issue from India simultaneously opens.

27. scertain the response of the issue from the underwriters/ bankers to the issue. Ifthe issue is oversubscribed, decide the quantum of oversubscription to be retained.Announce the closure of the issue in consultation with the Lead Manager.

28. Make an application to Reserve Bank in form ISD and request Reserve Bank toconvert its earlier in-principleapproval into final approval for making theallotment of shares and for issuing the GDRs.

29. Hold a board meeting for approving the draft Depository Agreement with

Overseas Depository Bank. After the Board approves the same, execute theagreement with the Depository Bank.

30. Hold a Board meeting allotment committee meeting (if the Board has formed anallotment committee) and allot shares in favour of the Overseas Depository Bankas provided in the depository agreement.

31. Memorandum and articles of association of the company, bye-laws of thedepository, copy of depository agreement, a legal notice relating to the issuance of


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the GDRs are to be deposited prior to the listing, with the Chief Registrar of theDistrict Court of Luxembourg (if listing is to be made in the Luxembourg StockExchange). All these documents should also be deposited with Listing Agent whoshould make them avilable for the inspection of investors. Get the GDRs listed on

the Ovberseas Stock Exchange mentioned in the offering circular.

32. Arrange for transfer of the subscription in foreign exchange collectedby the bankers to the issue to he companys bank account in India. Governmetn hasstipulated that companies making Euro Issues should remit the entire foreigncurrency raised to India within 2 weeks from the date of closure of the issueunless the Government has permitted the company to retain the same abroad forspecified purposes, while granting approval for making the Euro Issue.

33. Arrange to execute the custodian agreement betweeen the Overseas DepositoryBank and the Custodian Bank in India.

34. After the Board meeting is over, file tehreturn of allotment in Form No. 2 withthe ROC and issue the Share Certificates to the Custodian Bank in India by

complying with the Companies (Isuse of Share Certificates), Rules, 1960.

35. Ask the custodian bank in India to intimate the Overseas Depository Bank thatthe company has lodged with it the Share Certificates underlying the GDRs.

36. See that the Global Depository Receipts are issued by the Overseas DepositoryBank to the underwriters who will place the same with the investors.

37. Pay the fees to the Lead Managers/ co-managers/ advisers to the issue, paycommission to the unedrwriters, pay fees to custodian bank, Overseas DepositoryBank, Listing Agent, etc. pay brokerage to the brokers who have procured

subscription for the issue, etc.

38. Send quarterly reports about utilization of funds duly certified by Auditors to theDepartment of Company Affairs, Ministry of Finance. Please see that the fundsare utilized within 21 months from the date of issue.

39. If the issue is oversubscribed or and if any application is rejected or allotment ismade for lesser number than applied for, make refund of the application money bycheque or pay order or demand draft.

40. Send copies of companys annual reports and half-yearly results to the listingagent so that he can make them available to the investors for their inspection.

41. Dividend for the shares pertaining to GDRs is to be paid in rupees to theOverseas Depository Bank after deduction of 10 per cent income tax at source.The depository has to convert the dividend received from the company into dollarsand pay it to the holders of the GDRs.

Misuse


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The liquidity brought about by Euro-Issues is being used to invest in lucrativeavenues like money-market instruments, ICDs, Real Estate and even Shares in the

primary market. Essentially arbitraging, the companies stand to gain returns oninvestments which will bring the interest cover ration to less depressing levels.

PRICING

When Indian corporates first entered the GDR market, they were willing tosell their equity overseas at substantial discounts to domestic share prices. Once, thedemand for Indian GDRs boomed, these corporates tried to ensure fat premiums. Theselection of the investment banker(s) also depends on the indicative price offered. The

pricing also depends on the demand and supply for Indian paper.

Even a blue chip company may not get a good price if its equity is pricedincorrectly in relation to its scrip's ruling price, and its current and potential earnings.A premium is possible only if investors expect the money to translate into higherearnings and growth. Hence, an issue should be attractively, and not aggressively,

priced. Bad pricing was one of the major factors that lead to the VSNL fiasco in 1994.

The moral of the story is - Price carefully, or pay the price.

Criteria for Pricing of GDRs (SEBI guidelines, 1995)

Various criteria to be considered for pricing of GDR issue are given below :-

1. Prospective earnings - The prospective earnings for the next three years is one ofthe most important criteria for pricing of GDR. Since the investment in GDRs is madewith prospect of long term appreciation, future earning potential is more importantthan past earnings.

2. Market Price - The current market price of the share is taken as benchmark forpricing of the issue. The average price for the company's securities on the BSE for theten days prior to the GDR is relevant for this purpose. The GDR is usually issued at adiscount of 10-20% to the market price of the share. A discount in excess of 20%could result in arbitrage trading in the securities.

3. Price-Earnings Ratio - A P/E ratio of between 15 to 20 is considered optimal foremerging markets. PE ratios of some of the developing markets are - Malaysia 20,Thailand 17, S.Korea 17, Mexico 15. The price of the GDR is worked out by applyinga PE ratio of 18 to the expected earnings for the current year subject to a discount of10-15% of the average market price for the 10 days prior to the opening of the issue.

A ratio of the PE to the normalized earnings over a period of 3-5 years of lessthan or equal to 0.7 is considered healthy. Alternatively, a company with PE ratio of20 should be able to project earnings growth of 40% per annum. This ratio ranges

between 0.7-1.2% worldwide.

4. Turnover and Market Capitalization - Though there is no hard and fast rule forturnover and market capitalization, a minimum turnover of Rs.500 crores and marketcapitalization of Rs. 1200-1500 crores are the basic eligibility criteria for attractinginvestors. The floatation cost would also not be economical for smaller companies.


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5. Fundamental Analysis - The fundamental analysis of the company and theindustry is a prerequisite for launching a GDR issue. The short-term and long-term

prospects of the industry in which the company is operating, the track record of thecompany, quality of technology, marketing strategy and price competitiveness of the

company are key factors in assessment of a companies fundamentals. Other importantfactors are market image, labor costs and market share.

Profitability is measured as a ratio of capital employed and is compared withthat of similar companies worldwide. Low geared companies with a debt-equity ratioof less than 1:1 are preferred to high geared companies.

6. Size of the issue - The size of the issue is linked to the demand for the securities.Once the roadshows are complete, a company is in a position to assess the issue sizethat the market can absorb. The issue may be made to the full extent of the demand.Alternatively, the issue may be made to the extent of 60-70% of the demand only toensure greater stability in GDR prices after the issue.

In addition, the market sentiment at the time of issue is a factor of paramount

importance. This is gauged through the roadshows held prior to the issue.

Generally, the pricing of a GDR is decided on the basis of the lower averagesof the share prices for the last one week and that of the last day prior to pricing. But,Indian companies initially issued them at a premium in order to take advantage of the

buoyant market, since FIIs bought Indian scrips at high rates.

Locals too buy up the domestic shares as soon as the intention to launch Euro-issues is announced by the company. The pricing for the Euro-issue is then done at a

premium. As soon as investors have bought the deal, the locals sell the domesticshares. While this is okay when the index climbs suitably, in normal conditions,

investors become suspicious about the workings of the price mechanism.

COMPANY FUNDAMENTALS

A GDR is nothing but an equity offering. Hence, fundamentals of thecompany floating a GDR should be sound enough in the eyes of the foreign investor.Sunrise industries and high growth potential companies are quickly lapped up byforeign investors, that too at a premium over the domestic share price. After the initialrush, when supply of Indian paper was less than demand, investors have now turnedchoosy.

LEAD MANAGERS

The past few years have seen a number of Euro issues. While the goodperformance of these issues is proof of positive outlook of foreign investors towardsthe liberalised Indian economy, the behind the scenes operators - the lead managers -have often not got the credit they deserve.

Lead Managers have an important role to play in promoting a company's issue.They prepare the due diligence report, which establishes that the company's audit andcompliance systems are in place. After the research is done, a prospectus is prepared


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and government permission is sought. Further, lead managers analyse theperformance of the company, decide the instrument of offer, size of the issue, price ofthe issue and the timing of the issue. They organise and conduct roadshows whereby

providing an opportunity to international investors to interact with the company's

management.

Lead manager(s) are typically selected eight to ten months before a GDR isissued. It is very important that that the lead managers understand the client and his

business, and they have a track record of managing similar issues. Moreover, the leadmanager's reputation must be impeccable.

A GDR is usually lead managed by more than one lead manager. Leadmanagers have to give presentations to the company issuing the GDR. Based on these,and other factors such as the size of the issue, one or more lead managers are selected.Lead managers aggressively compete for getting the mandate for GDRs, especially

prestigious issues. This can lead to problems created by those lead managers who failto get the mandate. They can retaliate by dumping large number of shares of theissuing company, hence depressing its share price. This will lead to lower realisation

from the GDR issue. The VSNL GDR issue debacle is a real-life example of this.

TIMING

Timing is very important for a GDR issue to get the best possible terms. Theaborted VSNL GDR issue is a case in point. There was a demand for VSNL GDRs.But, the price, given the market conditions, was not right. Had the issue beenlaunched one or two months earlier, it could have commanded the desired price.

The Euromarkets determine the pace at which GDRs are absorbed. The timinghas to be such that due diligence, documentation and roadshows are completed at a

time when conflict with competing issues is avoided. It should be kept in mind thatthe foreign investor has a variety of options to choose from, including convertiblebonds and other forms of debt issues.

MARKETING

As other financial instruments, GDRs have also to be marketed with savvy.Among the themes most frequently utilised by Indian corporates for this purpose areliberalisation, effect of derugulation on it, its market, its earnings and growth potentialand its future.

Roadshows, held over the three weeks prior to an issue, ae very important.

Particularly crucial is the first roadshow, when prospective investors get their firstlook at a management. And successful roadshows help the lead manager(s) to bargainfor better terms. This is because the response during the roadshows gives an idea ofinvestor demand, which determines the quantum of premium to be had.

A roadshow typically lasts for one to two days at a particular location. Itcomprises of both group presentations and one-on-one meetings. Among the popularlocations for conducting roadshows are London, Paris, Geneva, Hong Kong,Singapore, Los Angeles, New York, Boston, Edinburgh and West Asia.


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ISSUE SIZING

What should be the optimum size of a GDR issue ? The answer to thisquestion is not straight forward. It depends on whether the GDR market has theapetite for the amount of paper in question. Besides, the optimum size is directlyrelated to a firm's fundamentals. If demand for Indian paper is sluggish at the

moment, companies can go in for smaller issues in two or more tranches rather thanmega issues. Then there are the government guidelines which may issue caps for thenumber of issues and more importantly, for the amounts that can be raised.

PACKAGING

When the market is flooded with GDRs and other instruments, companies arecompelled to come out with innovations to differentiate their offerings. Plain GDRscan be garnished with warrants. Warrants allow investors a leveraged exposure that isappealing in a volatile market. Thus, innovative instruments are a way of developinglong-term relationships with investors.

END USE OF FUNDS

As far as end use of funds raised by a GDR is concerned, openness is the bestpolicy. Indian firms have a bad track record of indulging in vagueness when it comesto disclosing the deployment of funds raised. Gone are the days when corporatescould tap the Euromarkets, and divert the funds into, say capital markets. Now,corporates have to explicitly state, and adhere to, the objectives for which they areraising money. Clearly, disclosure norms may not sell an issue, but they can easily dothe reverse.

SECONDARY MARKET

Fund managers are unanimous in their view that Indian corporates do nothingto ensure a reasonable after-market. That is a major mistake, since the performance ofa GDR in the secondary market affects both the investors and the issuer. For this, theGDR should be sponsored by an investment bank that is prepared to provide itliquidity. As part of this, firms must keep investors informed about themselves,through research data and updated reports, long after the issue has been completed.This will help the firm in case it has to again access the market sometime in thefuture. The performance of the previous issue will be evaluated by all potentialinvestors before they put in any money.

EFFECT OF GLOBAL CHANGES

As corporate India integrates itself with the global equity market, trackingglobal trends has become essential for Eurosuccess. Information is money in theEuromarkets. As interest rates vary in the world's major financial markets, the tremorscan very well affect the prices of Indian GDRs. Smart corporates must spot wheninterest rates will rise, especially in the US, which will lead to the reallocations of

portfolios of institutional investors. This will enable them to take advantage offorthcoming developments, instead of merely reacting to them.


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FUTURE SCENARIO

Western investment bankers are anxious to kickstart a market that has provided them with lucrative underwriting and advisory fees. Following thesuccessful international equity launch members of the underwriting syndicate canexpect the equivalent of 3% of the total value of the shares underwritten in fees. This

means about $30 million from the VSNL issue had it been successful. Westernbankers optimism about the future of the GDR market is underpinned by the growingdepth and sophistication of the dedicated emerging fund markets industry. Thesefunds which often have obligations to invest in a specific market or region aregrowing at breakneck speed.

Interest in India has blossomed only recently. There were 16 India funds inexistence by the end of March 1994. About $2.6 billion had been raised by thesefunds to invest specifically in Indian markets. Of these, 7 were launched prior to1993. 10 funds from heavy weights like Raymond James, Eaton Vance, Lloyd Georgeand Lazard Brothers were in the pipeline. Such funds usually publish strict self-imposed guidelines as to what they will invest in. Most invest only in company equity

although some turn to money market instruments such as short term government debtand floating rate notes when poor fund performance calls for more defensivestrategies.

The importance of the Indian GDR market to these funds cannot beoverestimated. GDRs have been and will continue to prove to be an attractivealternative to domestically listed stock. They trade on an internationally recognisedexchange in Luxembourg and on SEAQ, the London Stock Exchange's screeen basedshared trading system for international equities. Moreover, trades are cleared throughEuroclear, a well-used and efficient system better known for handling the multi-trillion dollar yearly turnover in the Eurobond markets. Investor interest in India fundsis now been driven by forces too powerful to be badly affected by the failure of onealbeit important deal like VSNL.

While NRIs hold significant share holdings in these funds, it is the largeinstitutional investors who are set to fuel growth in the industry. Such investors - hugeUS pension and Mutual Funds, and their more conservative counterparts in Europe -look to country funds like those being set up to invest in Indian securities to managethe internationally diversified elements of their portfolios. Some may wish to invest inthe emerging markets for short term gains. Judging by the massive sell-offs in theemerging debt and equity marjets that have occurred since the Federal Reservesignalled a rise in US interest rates in February 1994, the scale of this type of activityhas been underestimated.

Arguments that a rise in US interest rates are the root cause of the sell-offs inemerging markets equity may for this very reason prove to be untrue. The interest rateoutlook in the US does not warrant the sort of price movements witnessedinternationally. Orthodox thinking would have us believe that a sharp rise in UStresury bond yields will attract funds away from the higher yielding emerging markets

back home to the US. Although economic growth is accelerating, inflationarypressures in the US economy remain subdued. A further tightening in monetary policyis inevitable, but will almost certainly be gradual, protracted and well ordered.


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In the long term, prevalent thinking in portfolio theory puts forth severalconcrete reasons why FIIs should diversify into emerging market equities and debtholdings. Institutional investors are strongly influenced by statistical arguments basedon risk and return : international diversification acros markets which havelow

correlation with each other can reduce volatility for a given rate of return. Manyinstitutional investors believe that a medium term goal of 15% exposure to overseas

equity markets is a sensible target to aim at. Some of the advantages cited forinstitutional investors for investing in Indian GDRs are :

These institutions may enter the Indian GDR market if it were to become largeand liquid enough. Foreign investors have welcomed moves from the Indianfinance ministry to adopt a more hands-on approach to the regulation of the GDRmarket. The government guidelines for certain selected purposes only.

Interest rates in the US may rise, but only marginally and over time.

Amrican and European pernsion funds are diversifying their portfolios to spreadrisk.

Industry specific funds are hungry for Indian GDRs in sunrise sectors.

Mutual Funds are impressed by the fundamentals of Indian companies.

The Indian GDRs market is becoming more mature and sophisticated.

Lucrative underwriting fees for selling Indian paper will ensure their sales.

Clearly, all the elements for growing foreign participation in the Indian Euro-issues are in place. They will continue to attract the interest of foreign investors in the

Euromarket in the medium and long term.

Offer Documents

The offer documents of various companies clearly state that the depositarywill not vote on shares underlying the GDRs and will also not give the power ofattorney to any person to vote on its behalf. Some companies however permit thedepositary to vote but dictate the circumstances and manner of voting by specifyingthat it should not exercise voting rights except under limited circumstances, whenrequired by law and permitted by the legal counsel of the company. Under sucjconditions, the depositary mmay be directed to give a proxy or power of attorneyfavouring a director of the company or to vote in the same manner as those

shareholders designated by the board of directors.

Voting rights can however be exercised once the GDR is converted into itsunderlying shares. This happens when, on request from a GDR holder for redemption,

the depositary directs the domestic custodian bank to release the shares in favour ofnon-resident investors. The released shares may be sold directly on behalf of such aninvestor in India or be registered in his name.


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On redemption of the GDR and release of ubderlying shares, the real ownerexercises voting rights like any other equity shareholder. A problem may arise whenan overseas 'raider' wishes to acquire substantial shareholding. With takeover threatslooming large, Euro-issues is considered to be takeover route. Once ownership of the

underlying shares os obtained, anything can happen. The raider may invest in as manyGDRs as he can lay his hands on and have them redeemed and underlying shares

released in his favour. To provide a safeguard against such an event, some issuershave provided for a 'right of first refusal' to the company, which allows the companyto offer the released shares to its own nominees first.

RECENT DEVELOPMENTS

TWO-WAY GDRs

After raising about four billion dollars in the international markets, IndianGDRs seem to have fallen from grace. In the secondary market the GDR prices havefallen after the foreign investors unloaded their holdings. Also, the Indian companieswanting to tap the American Depository Receipts (ADR) market first have to meet the

stringent disclosure norms reuired for the listing on New York Stock Exchange andNasdaq. Plus, two-way trade is a pre-requisite for trading on these exchanges.

This has made the Indian government start thinking about introducing limitedtrade in two-way GDRs. This pracice is already prevalent in 70 to 80 countries acrossthe world who have a GDR programme.

Concept - At present, foreign investors are allowed to redeem their dollardenominated GDRs with the global depositary bank, which in turn converts them intorupee denominated shares and sells them on the Indian stock markets. This operationresults in the 'loss' of GDR for good.

In the reverse operation foreign investors can buy shares and convert them intoGDRs. Under this operation, a local person of the stock market is notified and he buysthe shares and deposits them with the local custodian.

Two-way GDRs are not allowed in India because the government feels thatthere would be a sudden inflow of money into the market rather than into thecompany, which could lead to a flight in foreign capital. However, this will be

possible once the full-convertibility of the rupee takes place. Right now, thegovernment is contemplating on introducing this trade under certain guidelines withsome restrictions. Global investment bankers have requested the ministry to considera de facto capital account convertibility whereby the 'lost' GDRs could be recreated

through two-way trade.

This would mean that if a company has raised 50 million dollars and there hasbeen a 5 million dollar redemption, GDRs to the extent of 5 million dollars are lost.Foreign investors would be allowed to buy Indian shares and convert them into GDRsupto a ceiling of 5 million dollars.

There are varying perceptions about the long term effects of two-way GDRson companies and the economy.


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It will improve the image of the company in the world market and thus giveaccess to tap new sources.

Companies will have a split in holdings

If the economy cannot absorb the higher income coming in, GDR prices are likely

to tumble and take the company's image with it.

Preference to London Stock Exchange

In October 1994, LSE relaxed its listing norms for Indian companies planningto issue GDRs in the international market. They are no longer required to get theunderlying shares listed on LSC for the purpose of listing the GDRs. SInce hen, therehas been an increased preference for listing on the LSC rather than New York StockExchange or Nasdaq.

Euroissue Norms Modified

In May 1995, the government modified the Euroissue guidelines regardingretention of funds abroad and permitting the issuing companies to retain the Euroissue

proceeds also as foreign currency deposits with banks and public financial institutionsin India. Thesecan be converted into Indian rupees only as and when expenditure forthe approved end uses are incurred. The interim use of funds retained abroad asforeign currency deposits has to conform to RBI approved norms.

RBI imposes 7.5% per cent CRR on proceeds from Euroissues

To check money supply and possible rupee appreciations, in August 1995,RBI imposed CRR of 7.5% on Euroissue proceeds parked in forex deposits with

banks. Further, these deposits are to be converted to Indian rupees at the ForeignExchange Dealers Association of India's indicative rate. The imposition of CRRmeans that there will be a holding cost to the banks. Over and above the deposit ratethat the bank will have to pay the keeper of the euro-issue proceeds, it will have toincur an additional cost of 7.5% and a further 15% the moment it converts the sameinto rupees.


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GLOSSARY

Global Depository Receipts (GDRs): GDR means any instrument in the form of a

depository receipt or certificate (by whatever name called) created by the Overseas

Depository Bank outside India and issued to non-resident investors against the issueof ordinary shares or foreign currency convertible bonds of issuing company.

Overseas Depository Bank (ODB) : ODB means a bank authorised by the issuingcompany to issue global depository receipts against issue of ordinary shares of theissuing company.

Domestic Custodian Bank (DCB) : DCB means a banking company which acts as a

custodian for the ordinary shares of an Indian company issued by it against GDRs orcertificates.

Related Party Transaction : Transactions specified in the Companies Act, 1956, as

related party transactions.

SEC : Securities and Exchange Commission (USA)

GAAP : Generally accepted accounting principles.

Stand-still period : No further equity share or interest in equity shares, for a specifiedtime period.

Red herring Prospectus : Prospectus duly approved by the Board and signed by thedirectors wherein the space for issue price of the GDR is kept blank.

Depository agreement : Agreement between the company and the overseasdepository bank.

Custodian agreement : Agreement with domestic custodian bank.

Subscription agreement : Agreement between the company and the managers,wherein the former agrees to issue the securities and the latter agrees to subscribe tothe same.

Green shoe option : It means additional amount in percentage terms which may beretained, if offered.

Invitation Telex : Telex sent by the lead managers to the financial institutionsformally inviting them to act as managers to the issue.

QIB : Qualified institutional buyers in USA which own and invest at least $100

million in eligible securities.


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TIME TABLE FOR GDRs OFFERING (COVERS ONLY IMPORTANTACTIVITIES)

Time-Frame

(days)1. Appoint Lead Manager, Legal Counsels (issuers, lead managers,

underwriters), Depository Bank and Custodian Bank.X (-) 90

2. Furnish to the Lead Manager with all necessary materials to

prepare the documents.

X (-) 60

3. Hold discussions with Legal Advisors/Auditors for drafting of

various agreements and Offering Circular.

X (-) 60

4. Hold Due Diligence meeting with the lead managers. X (-) 40

5. Obtain Board approval, shareholders approval and other approvalsfrom Government, RBI etc.

X (-) 40

6. Appoint other intermediaries in consultation with the Lead

Manager.

X (-) 20

7. Prepare and finalise draft Offering Memorandum and Circulate to

all parties.

X (-) 10

8. Finalise all documents including Depository Agreement,Subscription Agreement, Trust Deed, Paying and AgencyAgreement, Application for listing etc.

X (-) 10

9. Update all comments received in the Offering Memorandum andother agreements and give for printing.

X (-) 7

10. Commence Road shows. X (-) 7

11. Launch the issue. X

12. Price the issue. X (+) 3

13. Sign the document. X (+) 414. Close the issue. X (+) 14

GAAP DIFFERENCES

Summary of significant differences between Indian, U.K. and U.S. GAAP is givenbelow.

Indian GAAP U.K. GAAP U.S. GAAP

1. Revaluation of fixedassets is permitted.

Permitted. Not permitted.

2. Excess depreciation isallowed.

Not allowed. Not allowed.

3. Consolidation of

subsidiaries is notrequired.

Consolidation is

required.

Consolidation is

required.

4. Cash flow statement isnot required.

Required. Required.

5. Taxation is provided onestimated tax liability.

Deferred taxation ontiming differences

reversible.

Deferred taxation ontemporary timing

differences.

6. Goodwill is capitalisedand no requirement to

Required to capitaliseand amortise or adjust

Goodwill is capitalisedand amortised over a


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amortise. against reserves. period not exceeding 40years.

7. Information regardingEPS is not required to bedisclosed.

EPS data beforeExtraordinary items isdisclosed.

EPS data afterExtraordinary items isdisclosed.

8. Share issue expenses can

be deferred.

To be written off against

share premium.

Same as U.K. GAAP.

9. Capitalisation of intereston Fixed assets isrequired while assets areunder construction.

Permitted while FixedAssets are underconstruction.

Required as per IndianGAAP.

10. Distinction is not made between Fixed Assetsand Current Assetsinvestments. Allinvestments are carried

at cost; but market value

is disclosed.

Fixed Asset investmentsare carried at cost.Current Assetinvestments are carriedat the lower of cost and

net realisation value -

investments in associatedcompanies are accountedfor under the equity

method.

Equity method isgenerally used if theinvesting company caninfluence the financial

policies of the investee

company. Other

investments are valued atlower of cost or marketvalue.

11. Extraordinary items are

disclosed as additionalinformation without

adjustment for tax effectthereof.

Extraordinary items are

separately disclosed withincome-tax effect

thereon.

Extraordinary items are

reported.

12. Capitalisation of lease isnot required.

Financial leases are to becapitalised.

Same as U.K. GAAP.

13. Depreciation is on SLM

or WDV, as adopted.

Depreciation is on the

SLM with reference touseful economic life ofthe asset.

Same as U.K. GAAP.

14. Gains/Losses from

foreign exchangecurrency transactions

relating to assets andliabilities are adjusted inthe respective accounts.Other gains/losses aretaken to P & L account.

Gains/Losses from

foreign currencytransactions are taken to

P & L account and/orshareholders equity.

Same as U.K. GAAP.

15. R & D expenditure ischarged to P & Laccount exceptequipment, machinery,which are capitalised anddepreciated.

R & D is expensed asincurred.

R & D is expensed asincurred (except forcertain software R & D).

As per U.K. GAAP.

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