ADR and GDR.ppt (Size: 525 KB / Downloads: 170)
Global Depository Receipts(GDR) / American Deposit Receipts (ADR)
What is an ADR / GDR?
ADR stands for American Depository Receipt. GDR stands for Global Depository Receipt.
Every publicly traded company issues shares – and these shares are listed and traded on various stock exchanges.
These shares are sometimes also listed and traded on foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation).
But to list on a foreign stock exchange, the company has to comply with the policies of those stock exchanges. Many times, the policies of these exchanges in US or Europe are much more stringent than the policies of the exchanges in India. This deters these companies from listing on foreign stock exchanges directly.
But many good companies get listed on these stock exchanges indirectly – using ADRs and GDRs.
This is what happens: The company deposits a large number of its shares with a bank located in the country where it wants to list indirectly. The bank issues receipts against these shares, each receipt having a fixed number of shares as an underlying (Usually 2 or 4).
These receipts are then sold to the people of this foreign country (and anyone who is allowed to buy shares in that country). These receipts are listed on the stock exchanges. They behave exactly like regular stocks – their prices fluctuate depending on their demand and supply, and depending on the fundamentals of the underlying company.
These receipts, which are traded like ordinary stocks, are called Depository Receipts. Each receipt amounts to a claim on the predefined number of shares of that company. The issuing bank acts as a depository for these shares – that is, it stores the shares on behalf of the receipt holders.
Depositary Receipts (DRs) are thus negotiable securities issued outside India by a Depository Bank, on behalf of an Indian company, which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian Bank in India. DRs are traded in Stock Exchanges in the US, Singapore, Luxembourg etc. DRs listed and traded in the US markets are known as American Depository Receipts (ADRs) and those listed and traded elsewhere are known as Global Depository Receipts (GDRs). In the Indian context, DRs are treated as FDI.
Indian companies can raise foreign currency resources abroad through the issue of ADRs/GDRs, in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government thereunder from time to time.
The company can issue ADRs/GDRs if it is eligible to issue shares to persons resident outside India under the FDI Scheme. However, an Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue ADRs/GDRs.
Ordinary shares of issuing company should be in Indian currency
The issued ordinary shares or bonds should be delivered to DCB(Domestic custodian bank)
DCB instructs ODB(Overseas depository Bank) to issue GDR/ADR certificates to non- resident investors against the shares in DCB
GDR may be listed on any international stock exchange for trading outside India.
Conditions to be fulfilled by issuing domestic company
Prior permission from Department of Economic affairs, Ministry of finance, GOI
Indian companies are allowed to raise equity capital in the international market through the issue of GDR/ADRs/FCCBs. These are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of 3 years
Issue of GDRs/ADRs by IT software /services companies
Eligible to offer to non residents/resident permanent employees including overseas working directors against the issue of ordinary shares.
Atleast 80% of its turnover is from software related activities.
Annual export earning of 100 crore from such company.
The shares issued against ADR/ GDR ahould be treated as direct foreign investment in the issuing company.
It can not exceed more than 51% of the subscribed capital.
Advantages of ADR/GDR
1. Can be listed on any of the overseas stock exchanges/OTC/Book entry transfer system
2.Freely transferable by non resident
3.They can be redeemed by ODB
4.The ODB should request DCB to get the corresponding underlying shares released in favour of non resident investors.(Share holder of issuing company)
local custodian bank is a bank in a country outside the United States that holds the corresponding amount of shares of stock trading on the home stock market represented by an ADR trading in the U.S, with each multiple representing some multiple of the underlying foreign share. This multiple allows the ADRs to possess a price per share conventional for the US market (typically between $20 and $50 per share) even if the price of the foreign share is unconventional when converted to US dollars directly. This bank acts as custodian bank for the company that issues the ADRs in the U.S. stock.