ADR and GDR : corporate financing

ADR and GDR:
types, needs etc

1. ADR & GDR Group – 5

2. Flow of Presentation DR - Depository Receipts Origin Issuance of a Depository Receipt Benefits to the issuer company and the investors Types of Depository Receipts ADR – American Depository Receipts What is ADR Structure/ Types of ADR Ratio of ADR Pricing of ADR Process of issuing ADR Approval required for issuing depository receipts 2 Cancellations of ADR’s Fungibility Head Room Risks Associated with ADR Trading of ADR’s Arbitrage Opportunities GDR – Global Depository Receipts What is GDR Difference between ADR & GDR IDR- Indian Depository Receipts Standard Chartered case Study FCCB’s Difference between FCCB’s & GDR Case Study – Infosys

3. Introduction Companies around the world like to raise capital abroad. Objectives being: Cross border acquisitions Undertaking new projects abroad Expansion and Modernization of Existing Projects abroad Funding JVs & Subsidiaries abroad 3

4. Depositary Receipt A depositary receipt (DR) is a type of negotiable (transferable) financial security that is traded on a local stock exchange but represents a security, in the form of equity , that is issued by a foreign publicly listed company. 4

5. Origin of DR’s In 1920’s in USA The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges on the New York Curb Exchange, the American Stock Exchange 's precursor Investor’s demand of diversifying their financial resources internationally Difficulty & Risk of investing in original foreign securities by American investors & brokers Tap International Equity of Foreign Firms through an organized mechanism ADR Created in 1927 by JP Morgan (Depository) in USA for a British Retailer Selfridges & Co (Issuer) 5

6. Depositary Receipt A depository receipt trades on a local stock exchange, but a custodian bank in the foreign country holds the actual shares. The DR, is a physical certificate, allows investors to hold shares in equity of other countries. One of the most common types of DRs is the American depositary receipt 6

7. How Does the DR Work? The DR is created when a foreign company wishes to list its already publicly traded shares or debt securities on a foreign stock exchange Before it can be listed to a particular stock exchange, the company in question will first have to meet certain requirements put forth by the exchange. Initial public offerings , can also issue a DR. DRs can be traded publicly or over-the-counter 7

8. Basic Mechanism

9. Benefits Issuer Creates , broadens or diversifies investor base Enhances visibility and global presence Increases liquidity Develops and increases research coverage of your company Access capital in International Markets Investor Easy to purchase & hold Trades & settles in the same manner as any other security in the investor’s home market Global / sector diversification Eliminates or reduces global custody safekeeping charges Pays dividends & delivers corporate action notifications in the investor’s home currency & language 9

10. Types of DRs 10

11. American Depository Receipts

12. American Depository Receipts (ADR) ADR’s are a negotiable instrument that represents ownership of shares (ADSs) in a non-US company. An ADR is a Stock of a foreign company which is listed on the following stock exchanges in US New York Stock Exchange (NYSE), American Stock Exchange (AMEX), NASDAQ ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies. ADRs are dollar-denominated securities that trade, clear and settle like any other US security Avoids inconvenience of Cross border & Cross Currency Transactions 12

13. American Depository Receipts (ADR) ADRs do not eliminate the currency and economic risks Securities of a foreign company that are represented by an ADR are called American depositary shares (ADSs). For an ADR issue to become listed and trade on a major U.S. exchange, it must be sponsored by the underlying corporation. If not, the ADR issue is likely to be traded over the counter. 13

14. Types of ADR/ Structure of ADR 14 Types of ADR Sponsored ADRs Unsponsored ADRs Privately Placed Rule 144A Level II Level III Level I Offshore Reg S Restricted Programs

15. Unsponsored Depositary Receipts An American depositary receipt (ADR) issued by a depositary bank without the involvement or participation - or even the consent - of the foreign issuer whose stock underlies the ADR. U sually established by depositary banks in response to investor demand. G enerally trade over-the-counter (OTC) rather than on United States exchanges. Considered less favorable to issuers and investors due to lack of control by issuers Multiple programmes : It is possible that competing depositary banks will create multiple unsponsored ADR programs for the same issuer 15

16. Unsponsored Depositary Receipts No additional reporting/requirements (i.e. no SOX, no 20-F, etc.) Exemption under Section 12 (g) Creates a r oadblock to the Issuer Shareholder benefits and voting rights may not be extended to the holders of these particular securities 16

17. Sponsored ADR An American depositary receipt (ADR) issued by a bank on behalf of the foreign company whose equity serves as the underlying asset. Unsponsored ADRs can only trade on the over-the-counter market, while sponsored ADRs can be listed on major exchanges. There is a direct involvement of foreign company T reated just like common stock, with complete voting rights, and only denominated in the U.S. dollar. Usually traded through major exchanges like NYSE and AMEX or OTC 17

18. Sponsored ADR LEVEL I (‘OTC Facility’) Traded in the U.S. over-the-counter (OTC) market with prices published in the Pink Sheets Not listed on any US securities exchange such as the New York Stock Exchange or NASDAQ Available for Retail Investors Bid & Ask Prices Expansion of Current Market base 18

19. Sponsored ADR LEVEL I (‘OTC Facility’) No reporting of accounts under U.S. GAAP or provide full SEC disclosure Maintain home market accounting and disclosure standards. Easiest and less expensive Control over the ADR’s – Depository Agreement The company is not required to issue quarterly or annual reports in compliance with U.S. GAAP 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. 19

20. Over The Counter (OTC) OTC stocks are generally unlisted stocks Inability to meet the listing requirements Traded over the Counter Bulletin Board (OTCBB) or on the pink sheets Decentralized 20

21. OTC Market Securities are organised into 3 market places OTC QX - The Best Marketplace with Qualified Companies OTC QB - The Venture Stage Marketplace with Current U.S. Reporting Companies OTC Pink - The Open Marketplace with Variable Reporting Companies 21

22. Pink Sheets The "Pink Sheets" is an electronic quotation system that displays quotes from broker & dealers for many over-the-counter (OTC) securities Bid and ask quotation prices A daily publication compiled by the National Quotation Bureau, Market makers and brokers Published by Pink Sheets LLC Stock symbol; “.PK” Categorized into Current Information Limited Information - No Information - 22

23. Sponsored ADR LEVEL I (‘OTC Facility’) To establish a Level 1 sponsored ADR program , the following three principal steps are required: File Form F-6 with SEC, register the DR’s with SEC Sign a deposit agreement Qualify for a Rule 12g3-2(b) exemption; 23

24. Form F– 6 Basic registration of DRs with the SEC for Level I, II and III ADRs ADRs may be registered under the Securities Act on Form F-6 if four conditions are satisfied : The deposited securities are those of a foreign issuer;   T he holder of the ADR has the right to withdraw the deposited securities at any time, subject to temporary delays, payment of fees and compliance with legal requirements;   T he deposited securities are exempt from Securities Act registration and freely tradable in the United States (for example, they are not restricted securities under Securities Act Rule 144) or are separately registered under the Securities Act; and   A s of the filing date of the Form F-6, the foreign company is reporting under the periodic reporting requirements of Section 13(a) or 15(d) of the Exchange Act or exempt from registration under Exchange Act Rule 12g3-2(b). 24

25. Sponsored ADR LEVEL I (‘OTC Facility’) ADVANTAGES OF LEVEL I ADR Same financial information & disclosures as per home market Lowest cost to enter market Simple to execute DISADVANTAGES OF LEVEL I ADR Limited visibility in US as it trades in OTC market Not listed in NYSE, AMEX, NASDAQ Cannot be used to offer public equity capital in the US 25

26. Sponsored Depositary Receipt LEVEL II (‘Listing Facility’) Enables companies to list their ADRs on NASDAQ, AMEX, NYSE Created from deposits of Ordinary shares in the issuers Home Market foreign company wants to set up a Level 2 program, it must file a registration statement with the SEC and is under SEC regulation Higher visibility, More active trading; greater liquidity Requires full registration with SEC Can be Promoted & Advertised 26

27. Sponsored Depositary Receipt LEVEL II (‘Listing Facility’) Level II ADR programs must comply with the full registration and reporting requirements of the SEC's Exchange Act, which entails the following: Form F-6 Annual reports and any interim financial Form 20-F Form 6-K, Interim financial statements and current developments 27

28. Sponsored Depositary Receipt LEVEL II (‘Listing Facility’) ADVANTAGES OF LEVEL II ADR Provides higher visibility Greater opportunity to diversify issuer’s US investor base Enhances company’s status & profile DISADVANTAGES OF LEVEL II ADR Substantial disclosures to SEC in accordance to US laws & US GAAP Many legal, accounting & corporate obligations to fulfill Takes longer time as compared to level 1 & unsponsored program 28

29. Sponsored depositary receipt LEVEL III (‘Offering Facility’) Enables companies to list their ADRs on NASDAQ, the Amex, NYSE It allows the issuer to raise capital Expansion of Current Market Base Leads to much greater visibility in the U.S. market Highest Level, Adhere stricter rules, Most expensive to establish Can be actively Promoted & Advertised 29

30. Sponsored depositary receipt LEVEL III (‘Offering Facility’) Level III ADR programs must comply with various SEC rules, including the full registration and reporting requirements of the SEC's Exchange Act. Form F-6 registration statement, to register the ADRs Form F-1, including a prospectus, the offering price for the securities and the plan for distributing the shares Form 20-F 30

31. Sponsored depositary receipt LEVEL III (‘Offering Facility’) ADVANTAGES OF LEVEL III ADR Provides higher visibility Greater opportunity to diversify issuer’s US investor base Enhances company’s status & profile Highest measure of visibility & publicity DISADVANTAGES OF LEVEL III ADR Substantial disclosures to SEC in accordance to US laws & US GAAP Takes longer time to establish & Most expensive 31

32. Restricted Programs Foreign companies that want their stock to be limited to being traded by only certain individuals may set up a restricted program. There are two SEC rules that allow this type of issuance of shares Rule 144-A Regulation S ADR programs operating under these 2 rules make up approximately 30% of all issued ADRs. 32

33. Rule 144A ( Privately placed ADRs ) Rule 144A programs provide for raising capital through the private placement of Depositary Receipts with large institutional investors (QIBs) in the U.S. Does not require full SEC registration Privately placed with QIBs under the rule 144A market Quoted on PORTAL Not accessible to the general public It allows the issuer company to raise capital in the U.S. without adhering to the strict regulations required by Level 3 ADRs At least two years from the last deposit of shares in the Rule 144A ADR facility, the ADRs issued under the Rule 144 program may be eligible to be merged into an unrestricted ADR facility. 33

34. ADVANTAGES OF Rule 144A Easy and quick to establish No financial reporting Low cost to establish Limited SEC registration DISADVANTAGES OF Rule 144A Low visibility & Limited Liquidity Rule 144A ( Privately placed ADRs ) 34

35. Regulation S ( Offshore   ADRs ) Regulation S (Reg S) DRs allow issuers to raise capital in markets outside the United States. Listed on the London or Luxembourg stock exchanges Euro market clearing system SEC Regulation S – Restricts US person to trade A Level I program can be established in addition to a Rule 144A program, and a Regulation S program may be merged into a Level I program after the restricted period has expired 35

36. 36 Reg S only(non US) 144 only (US) Objective Raise equity in the International Market outside the US Develop and broaden investor base Raise equity in the US among QIB’s Develop and broaden investor base Disclosure Depends on International market selected Home Market (unless the investor ask for the US GAAP) Legal documents and Exemption Depository Agreement Prospectus prepare as per the requirement of International Exchange Depository Agreement Exempted from registration under security Act 1934, as amended, pursuant to 12g3-2(b) Reporting requirement Depends on exchange and/ or regulator Under Rule 12g3-2(b),English language versions of home country disclosure must be furnish to the SEC or pasted on the countries Website

37. Choosing the Right Structure Goal Where? Who? Options Gain new shareholders USA Retail Investors Level I ADR Level II ADR Outside the USA Institutional and Retail Investors Reg S Raise Capital USA Institutional Investors Rule 144A DR Retail Investors Level III ADR Outside USA Institutional and Retail Investors Reg S 37

38. ADR Program Description 38

39. Setting the Ratio Depository bank sets ratio of US ADR’s per home country share Ratio can be less than, greater than or equal to 1 The issuer should consider : Industry peers Exchange options Investor appeal 39

40. RATIO OF ADRs 40 Basis Ratio Single One ADR issued for 1 Share 1:1 Multiple One ADR issued for 3 shares 1:3 Fraction Two ADR’s issued for 1 Share 2:1

41. Process for Issuance of ADR 41 Selection of Syndicate Members Documentation Appointment of Intermediaries Approval Requirements Pre- Marketing Roadshows Book Building Process & Pricing Offering Circular Listing Task force for due diligence Closing of Issue & Allotment Post – Issue Support

42. 42 Approvals of Board of Directors Board Resolution Shareholders consensus Approvals of RBI ADR/GDR issue shall be treated as FDI Aggregate Foreign Investment would need to be limited to existing FDI Policy Furnishing of Information In principle consent of Stock Exchanges for listing of underlying shares Request for listing of underlying shares Treatment after cancellation

43. Lead Manager Overseas Depository Bank Domestic Custodian Banks Legal Advisors Auditors Underwriters Listing Agent 43

44. Roles & Responsibilities Custodian Depository Issuer Investment banks /Underwriters Provide depositary with notices of stockholder meetings Provides custodian and depositary with notices of annual and special / extraordinary stockholder, dividends and rights offerings On-going compliance with any applicable stock exchange and SEC regulations ( in coordination with legal counsel and accountants) Executes US-focused investor relations (non-US-focused in the case of Regulation S GDRs) plan that may include management visits to targeted US investors, the development of sell-side research, and on-going shareholder communications .

45. Roles & Responsibilities Custodian Depository Issuer Investment banks /Underwriters Advise the depositary for complete delivery instructions Registers the shares in the depositary’s account as necessary with the issuer’s transfer agent / registrar Confirms release of local shares upon cancellation Notifies the depositary of corporate actions announced in issuer’s home market Provide depositary with copies of notices of shareholders’ meetings, annual reports Remits dividend payments Maintains and communicates up-to-date local market information on tax withholding, reclaim, regulatory and settlement issues Provides statements of share balances for reconciliation by depositary.

46. Roles & Responsibilities Provide advice/perspective on type of program, exchange or market on which to list or quote Advise on ratio Appoint custodian File Form F-6 if Level One, Two or Three program Review draft registration statement or offering memorandum, depending upon type of program to be established Coordinate with all partners to complete program implementation Provides stock transfer and registration services & handles depositary receipt holder services Detailed reporting to issuer with information on DR holders, the markets, trends and developments Custodian Depository Issuer Investment banks /Underwriters

47. Roles & Responsibilities Coordinate with legal counsel on Deposit Agreement and securities law matters Prepare and issue certificates Solicit market makers (Level I ADR only ) Announce DR program to market Dividend Payment Produces tax withholding documents (for ADRs), if applicable. Promotes benefit of investment in depositary receipts to market Serves in M&A transactions as exchange agent or cash depositary Custodian Depository Issuer Investment banks /Underwriters

48. Roles & Responsibilities (Level II/III/Rule 144A /Regulation S ADRs only) 1 . Advise on type of program to launch and exchange or market on which to list or quote 2. Advise on ratio 3. Cover issuer through research reports/promote DRs to investors 4 . Advise on roadshows, investor meetings, investors to target 5 . Advise on capital market issues 6. Where applicable, advise on potential merger/ acquisition candidates, and other matters such as rights offerings, stock distributions, etc. Custodian Depository Issuer Investment banks /Underwriters

49. Roles & Responsibilities (Level II/III/Rule 144A /Regulation S ADRs only) 7. If concurrent public offering: Advise on size, pricing and marketing of offering 8. Act as placement agent or underwriter in offering 9 . Conduct roadshows with management / introduce issuer to institutional and other investors 10. Line up selected dealers and co-underwriters for offering Custodian Depository Issuer Investment banks /Underwriters

50. Roles & Responsibilities 1. Prepare draft deposit agreement (depositary bank’s counsel) and file required registration statements with the SEC 2. Manage compliance with US securities laws, rules and regulations and perfect any securities law exemptions (if Rule 144A/Reg S program)(issuer counsel) Legal Counsel (Depositary’s and Issuer’s ) Investor Relations Advisor/firm Accountants (Level 2/3 ADR’s only

51. Roles & Responsibilities 1. Develop long-term plan to raise awareness of issuer’s program in the US 2. Develop communications plan and information materials for launch activities (roadshow and presentations to investors, launch day promotion, meetings with financial media) 3. Coordinate with issuer’s advertising and public relations teams on specific program plans to support and develop company image in the US Legal Counsel (depositary’s and issuer’s) Investor Relations Advisor/firm Accountants (Level 2/3 ADR’s only

52. Roles & Responsibilities 1. Prepare issuer’s financial statements in accordance with, or reconcile to, US GAAP 2. Review registration statement or offering circular Legal Counsel (depositary’s and issuer’s) Investor Relations Advisor/firm Accountants (Level 2/3 ADR’s only

53. Process A careful analysis of the orders would be conducted Identify investors who are critical to the transaction The ultimate price level would be set at a level where it seeks to maximize proceeds while ensuring appropriate investor allocations and a healthy aftermarket 53

54. Syndicate Underwriting Syndicate Syndicate Members Syndicate Manager Responsibilities Maximize demand Optimize the sustainable offer price Facilitate orderly marketing Attract key “anchor” investors 54

55. Duties of team of legal, technical & financial experts : Understanding the issuer’s business Identifying potential risks Analyzing of financial statement Analyzing future prospects of the company Obtaining information to draft the Prospectus (Offering Circular) 55

56. Form F-6 A short document to be filed to register ADRs Registration Statement (Form F-1) Filed to US Securities Act of 1933 with the SEC Form 8-A A document to be filed so that the securities can be listed on the exchange 56

57. NYSE 1mn shares worth $100 mn or more Earned $10 mn over the last 3 years NASDAQ 1.25 mn shares worth $70mn or more $11mn over the last 3 years London Stock Exchange Market cap – 7 lac pounds 3 years audited financial statements 57 Listing Requirements

58. Background of the company Capital Structure (existing & future) Financial Data Description of shares Deployment of issue proceeds Economic & regulatory policies of Govt. of India Terms & Condition of ADR Market price of securities Status of approvals Report of statutory auditors Tax aspects Details of Indian security market 58

59. Objectives Introduce the offering to investors Address key investor concerns Familiarize investors with the investment story To evaluate prospects of issue Helps in making certain important decisions like timing, size & price of the issue. Process Contacting key investors Meeting with institutional Investors Feedback Collection Determine target investors for road show 59

60. It represents meetings of issuers, analysts & potential investors A series of group presentations to potential institutional investors One-on-one meetings with key “anchor” accounts Details about the company is presented History, Organization Structure Principle Objects Business Lines Position of the Company (Domestic & international) Past performance & Future plans Competitors (Domestic & international) Financial Results & operating profits Valuation of Shares Review of Local stock market & economic situations 60

61. PROCESS : Establish price talk Investors submit indications of interest Analysis of demand at various price levels Pricing depends on : Near future, Earning potentials, Fundamentals governing industry Economic state of the country , Credit rating of the country Investors sentiments, Behavior towards particular country Interest rate Availability of exit route 61

62. Process A careful analysis of the orders would be conducted Identify investors who are critical to the transaction The ultimate price level would be set 62

63. Manage over-allotment option by Green shoe option Support investor relations Aftermarket stabilization 63

64. Corporate Governance rules: Sarbanes-Oxley Audit Committee requirements Audit Committee Financial report Certification of Financial Reports Management Assessment of Internal controls Improper influence of Audits Prohibition on loans to officers and directors CEO & CFO reimbursement of issuer relating to an accounting restatement Disclosure of Material off Balance sheet transactions Disclosure of Pro-forma, or non-GAAP financial information Correcting Adjustment disclosures Code of ethics for senior financial officers Materiality, anti-fraud and fair disclosure 64

65. Annual Dividend Payment Setting Record Date & Payment Date Announcing final local currency value Custodian receives dividend Depository converts dividend into US dollars 65

66. No. of companies issuing Drs - country-wise

67. Country-wise Amount of Capital Raised

68. Issuance of ADR 68 Investor (US) Local Custodian (India) Local Stock Market (India) Local Broker (India) Depositary (USA) DR Broker (US) 2 1 3 4 5 6 7

69. Cancellation of ADR 69 US Investor US Broker Depository (US) Custodian (India) Local Broker (India) Surrender ADRs Release Shares Sell in Home Country

70. Fungibility of ADR/GDR Fungibility - A good or asset's interchangeability with other individual goods/assets of the same type . Forward Fungibility Reverse Fungibility 70

71. One-Way Fungibility Existed in India prior to 2002 DR investors could convert DRs to underlying shares but could not reconvert back to DRs Affects liquidity in the DR market 71

72. Two-Way Fungibility Conversion of DRs into local shares and vice versa The GOI permitted two-way fungibility in the 2001-2002 union budget It is subject to availability of Headroom 72

73. Effect of one-way and two-way fungibility on the trading volume

74. Head Room The ADRs have only “limited two way fungibility ”. What this implies is that ADRs can be freely converted to equity shares, but equity shares in India can be converted to ADRs only to the extent of past conversion of ADRs in that company into shares. This is technically called “headroom”. Since every GDR/ADR has a given number of underlying shares backing it, the number of shares qualifying for re-conversion into GDRs/ADRs is limited to the number which were converted into local shares.

75. Head Room Example Say company X has an original issuance of 15m ADRs. The total number of cancellations (which takes place when the overseas investor sells back the DRs to the depository bank for converting them into local shares) is 5m. Head Room = 5 m

76. Head Room The reasoning is that when a company decides to float a GDR/ADR issue, it is subject to sectoral caps set for foreign shareholding in the company and the overseas equity issue has been floated only after being vetted by regulatory agencies and the Foreign Investment Promotion Board (FIPB ). Allowing a free flow of conversions between GDRs/ADRs and domestic shares has been constrained by the want of regulatory for overseas equity issues

77. The Depository bank provides a daily update on the availability of Head Room on its website Head room available for re-issuance is monitored by the custodian of the underlying shares in coordination with the depository bank If Headroom is not available and ADR is trading at a premium then no possibility of Arbitrage opportunity

78. Trading of ADR/GDR 78 US Investor Indian Broker to Buys Shares US Broker Custodian (India) Overseas Depository

79. Role of the Custodian P rovide a certificate to the RBI and the SEBI stating that the sectoral caps for foreign investment in the relevant company have not been breached M onitor the total number of ADRs that have been converted into underlying shares by non-resident investors L iaise with the issuer company to ensure that the foreign investment restrictions, if any, are not being breached F ile a monthly report about the ADR transactions under the two-way fungibility arrangement with the RBI and the SEBI

80. Arbitrage Strategy Arbitrage opportunity involves simultaneous buying and selling of equivalent assets in two separate markets in order to profit from discrepancies in their price relationship ADR/GDR trading at premium Sell in International Market Buy in domestic market ADR/GDR trading at discount Sell in Domestic Buy in International m arket 80

81. Example of Potential Arbitrage Process Assumptions : ADR Price: $10.06 (ADR at a premium) ORD Price (in USD): $10.00 Depositary Fee to Issue: 3c per ADR 81 Step Action Result 1. Identify Opportunity 2. Borrow ADR and sell it short for $10.06 ADR borrowed and sold for $10.06 3. Buy ORD for $10.00 (implied FX rate included) $ $10.06 - $10.00 = $0.06 and one ORD 4. Exchange ORD for ADR at Depositary and pay 3c per ADR $0.06 - $0.03 = $0.03 and one ADR 5. Return borrowed ADR and close position Return ADR to Lender and profit 3c

82. Reasons for difference in prices of ADR & Local Shares When there is heightened buy/sell demand in one market over the other, the ADR/Local share will trade at a relative premium/discount as the case maybe. Differences in liquidity between the two markets Restriction on the number of shares that can be owned by foreigners

83. Limitations to Arbitrage Opportunities Non-synchronous trading session Indian market regulation Transaction costs Direct Trading Costs: I ncludes the commissions, taxes , foreign exchange rate commission and fees involved with buying and selling in each market (including brokerage) Global Custodian and Safe Keeping Fees: The arbitrageur has to deposit the shares with a global custodian and pay a fixed one time settlement fee $115 per trade and pay a separate global safe keeping fee DR Conversion Fees: The arbitrageur has to instruct the global custodian to convert the shares to GDRs by giving instructions to the depository bank which charges a maximum of $0.05 per DR issuance fee 83

84. Risks Involved Political Risk Exchange Rate Risk Inflationary Risk 84

85. Specimen of ADR Certificate

86. 86 Major Indian Companies On The US Exchanges NYSE NASDAQ

87. Global Depository Receipts

88. GDRs Beyond the  ADR , there is a second category of DR. A Global Depositary Receipt ( GDR ) represents a bank certificate issued in more than one country for shares in a foreign company The term GDR is used throughout the globe and designates any foreign firm that trades on an exchange outside its home country The basic advantage of the GDRs, compared to the ADRs, is that they allow the issuer to raise capital on two or more markets simultaneously, which increases his shareholder base

89. About GDRs Listed on London Stock Exchange Luxemburg Stock Exchange Frankfurt Stock Exchange London Stock Exchange dominates Other exchanges which will list GDRs include Dubai International Financial Exchange (DIFX), Singapore Stock Exchange Hong Kong Stock Exchange 89

90. About GDRs They are also known as: European Depository Receipts International Depository Receipts Either issued in US Currency or in the currency of the country the GDR is listed in. Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York 90

91. Structure  The most significant difference between the ADR and GDR lies in their structures There are two types of GDRs – The Reg  S Depositary Receipts T he pairing type

92. Reg S Type Depositary Receipts The Reg S Type Depositary Receipt is the equivalent of the ADR. It is issued to the public through a sponsor bank/ brokerage Once issued, this GDR is listed on either the Luxembourg Stock Exchange or the London Stock Exchange This type of a GDR is open for every kind of investor Unlike ADRs, where each type of ADR determines the investors that can trade it, the Reg S type GDR can be traded from any kind of investor to any kind of investor

93. Pairing Type This GDR is a combination of the Reg S type GDR and a Rule 144A ADR. So when one such GDR is sold, it essentially implies the sale of a  Reg S type GDR along with a Rule 144A ADR The Reg S type GDR may be listed either in London or Luxembourg. The holders of these GDRs will be regular investors However , the Rule 144A ADRs are privately placed through Qualified Institutional Buyers in the  U.S The biggest reason for such a program being subscribed to is the fact that such a program enables the issuing company to raise funds not just from the U.S. and not just from Europe , but from both markets simultaneously

94. Arbitrage Example A bid order comes to the EGX demanding 2000 shares at EGP196 equivalent to $35.13 ($/ EGP 5.58) a second later in LSE there is a demand on 2000 shares of the GDR for an ask of $ 35.59 An active arbitrageur can buy 2000 shares of the underpriced stock on the EGX and short sell 2000 share of the overpriced GDR making a gross profit of $ 920

95. Difference between ADR & GDR 95 ADR GDR Most Commonly listed on NYSE LSE Issuing Company Access the US Market Global access To Raise Capital Within US Within US & Outside US using different structure combinations

96. Foreign Currency Convertible Bond A foreign currency convertible bond (FCCB) is a type of corporate bond issued by an Indian listed company in an overseas market and hence, in a currency different from that of the issuer. The highlight of the FCCB, however, is the option of converting the bonds into equity at a price determined at the time the bond is issued.  It also has the benefits of a debt instrument as it includes guaranteed returns or yields which are payable in foreign currency. For companies, FCCBs gave them access to funds at cheaper rates, given the fact that many of these were zero coupon bonds with a yield-to-maturity structure , meaning the company would have to make large-scale payments only when the bonds were redeemed. Also, the interest rates were much lower than that of normal debt. 

97. Difference between FCCB & GDR FCCB Issues bonds denominated in foreign currency Mix between a debt and equity instrument Convertible in nature Conversion to Equity Liability of the company GDR Company deposits its shares to a depository Company gets proportionate amount of GDRs GDRs are then issued to investors in the foreign market Company’s own fund

98. Guidelines for ADR/GDR issues by the Indian Companies Divestment by shareholders of their holdings of Indian companies, in the overseas markets would be allowed through the mechanism of Sponsored ADR/GDR issue in respect of:- Divestment by shareholders of their holdings of Indian companies listed in India; Divestment by shareholders of their holdings of Indian companies not listed in India but which are listed overseas. Such a facility would be available pari-passu to all categories of shareholders, of the company whose shares are being sold in the ADR/GDR markets overseas. This would ensure that no class of shareholders gets a special dispensation The sponsoring company, whose shareholders propose to divest existing shares in the overseas market through issue of ADRs/GDRs will give an option to all its shareholders indicating the number of shares to be divested and the mechanism how the price will be determined under the ADR/GDR norms. If the shares offered for divestment are more than the pre-specified number to be divested, shares would be accepted for divestment in proportion to existing holdings

99. Guidelines for ADR/GDR issues by the Indian Companies The proposal for divestment of the existing shares in the ADR/GDR market would have to be approved by a special resolution of the company whose shares are being divested. The proceeds of the ADR/GDR issue raised abroad shall be repatriated into India within a period of one month of the closure of the issue. Such ADR/GDR issues against existing shares arising out of the divestment would also come within the purview of the existing SEBI Takeover Code if the ADRs/GDRs are cancelled and the underlying shares are to be registered with the company as shareholders Divestment of existing shares of Indian companies in the overseas markets for issue of ADRs/GDRs would be reckoned as FDI. Such proposals would require FIPB approval as also other approvals, if any, under the FDI policy Such divestment inducting foreign equity would also need to conform to the FDI sectoral policy and the prescribed sectoral cap as applicable. Accordingly the facility would not be available where the company whose shares are to be divested is engaged in an activity where FDI is not permitted Each case would require the approval of FIPB for foreign equity induction through offer of existing shares under the ADR/GDR route.

100. Guidelines for ADR/GDR issues by the Indian Companies Other mandatory approvals such as those under the Companies Act, etc. as applicable would have to be obtained by the company prior to the ADR/GDR issue The issue related expenses (covering both fixed expenses like underwriting commissions, lead managers charges, legal expenses and reimbursable expenses) for public issue shall be subject to a ceiling of 4% in the case of GDRs and 7% in the case of ADRs and 2% in case of private placements of ADRs/GDRs. Issue expenses beyond the ceiling would need the approval of RBI. The issue expenses shall be passed onto the shareholders participating in the sponsored issue on a prorata basis. The shares earmarked for the sponsored ADR/GDR issue may be kept in an escrow account created for this purpose and in any case, the retention of shares in such escrow account shall not exceed 3 months If the issues of ADR/GDR are made in more than one tranche, each tranche would have to be treated as a separate transaction After completing the transactions, the companies would need to furnish full particulars thereof including amount raised through ADRs/GDRs, number of ADRs/GDRs issued and the underlying shares offered, percentage of foreign equity level in the Indian company on account of issue of ADRs/GDRs, details of issue parameters, details of repatriation, and other details to the Exchange Control Department of the Reserve Bank of India, Central Office, Mumbai within 30 days of completion of such transactions

101. CASE STUDY

102. About Infosys Started in 1981 Global leader in consulting, technology and outsourcing solutions Operations in more than 30 countries The underwriters, NationsBanc Montgomery Securities LLC, BancBoston Roberston Stephens, BT Alex Brown and Thomas Weisel Partners LLC.

103. Summary of Infosys ADR Issue day Stock exchange Amount mobilized Actual price per share ($) ADR: Domestic share 1.03.1999 NASDAQ $ 70.38 million 68 2:1 30.07.2003 NASDAQ $ 294 million 49 1:1 09.05.2005 NASDAQ $ 1.07 billion $ 67 1:1 21.11.2006 NASDAQ $ 1.6 billion 53.5 1:1

104. Reasons For Charging Premium Excess demand with limited supply of ADR’s. Few opportunities in the US to invest in companies that are growing at the 20–30% rates Official barriers prevent foreign investors from buying the shares trading in India ADR’s provides a value added layer – transparency, liquidity and greater coverage than the existing Indian stock

105. Details of ADR Issue, March 1999 Size of Issue 1.8 million ADS/ 0.9 million equity shares Number of ADS per equity share 2 Offer Price $ 27.88 per ADS/ $55.76 per share Actual Price Obtained $34 per ADS/ $ 68 per share Premium on the Offer Price 22% or $6.12 per ADS Issue Amount $61.2 million Green shoe Option 15% of $ 61.2mn = $ 9.18mn Total Amount raised $ 70.38 million BSE closing price Rs 3201/- as on 10 March, 1999

106. Sponsored Secondary ADR Program Conversion of existing domestic equity shares into ADRs Allows shareholders in India to convert and sell their equity shares in the US market and realize the proceeds, net of issue expenses There will be no additional issue of any equity shares by the company No money will accrue to the company out of this issue

107. First Sponsored Secondary ADS: July 2003 Issue cost $ 11.7 million (about 4% of Issue Size)

108. Second Sponsored Secondary ADR: May 2005 Net issue expense = 3.98% of the gross proceeds Infosys had not received any proceeds of this offering Total issue increased the size of US float to 14% of its capital

109. Third Sponsored Secondary ADR: November 2006 Issue expense 3.98% of the gross proceeds

110. Indian Depository Receipts (IDRs) These are financial instruments that allow foreign companies to mobilize funds from Indian Capital Markets. IDRs are depository receipts denominated in Indian Rupees issued by a Domestic Depository in India. IDRs represents interest in the shares of a Non-Indian company’s equity. IDRs provides a chance to the Indian investors to hold equity shares of foreign company. It is created by the Indian Depository in India against the underlying equity shares of the issuing foreign company to raise funds from the Indian markets. IDRs are issued in the Demat form. However, at the option of the IDRs holders these can be converted into physical form. Like equity shares, these are unsecured instruments and negotiable from one investor to another investor

111. Showing Issuance of IDRs Issuer (Outside India) Domestic Depository (In India) Custodian (Outside India) Holds shares for Domestic Depository Issuer of IDRs to Investors in India IDRs Demat IDRs listed on NSE/BSE IDR Holders – FIIs, NRIs, Retail, Non-Institutional Investors

112. Eligibility Criteria: As per the Companies IDR rules, as amended till date, the undernoted are the eligibility criteria for the issue of IDRs: Sl. No . Criteria Requirements 1 Capital The issuer company should have a pre-issue capital and free reserve of at least US $ 50 million (app. 225 crore ) 2 Market Capitalization The foreign issuing company should have a market capitalization of $ 100 million or more during last three years. 3 Operating History Continuous trading record or history on a stock exchange in its Parent Country for at least three immediately preceding years. 4 Profits A track record of distributable profits for at least three out of immediately preceding five years. 5 Other Requirements Fulfils such other eligibility criteria as may be laid down by SEBI from time to time in this behalf.

113. Other conditions: Sl. No. Criteria Requirements 1 Issue Size The size of an IDR issue shall not be less than Rs. 50 crore 2 Minimum application amount The minimum application amount shall be Rs. 20,000/- 3 Extent of issue The number of underlying equity shares offered in a financial year through IDRs offering shall not exceed 25% of the post- issue number of equity shares of the issuing company. 4 Allocation of shares/ Reservation of quota Retail individual investors 30% (including NRIs) Non-institutional investors 20% (including NRIs) Qualified institutional buyers 50% (Except Insurance Companies and Venture Capital funds)

114. The IDR issue Standard Chartered PLC   → the first global company to file for an issue of Indian depository receipts in India. Standard Chartered PLC listed on the London and Hong Kong stock Exchanges. Objective of the issue: To grow our market visibility and brand presence in India To List it on BSE and NSE End use of the fund proposed to be raised through the issue is to support growth across the business of the company internationally 114

115. IDR issued 115 Parties to the Issue: Details of the Issue: Issuing Company (Sponsor) Standard Chartered Plc Overseas Custodian Bank of New York Mellon Domestic Depository Standard Chartered Securities (India) Ltd R&T Agent Karvy Computershare Private Limited Listing Date Friday, June 11, 2010 Issue Size 240 million IDRs Listing price Rs 106 Ratio 10 IDRs to 1 underlying