DEPOSITARY RECEIPTS

A depositary receipt is a negotiable financial instrument issued by a bank to represent a foreign

company's publicly traded securities. The depositary receipt trades on a local stock exchange.

DR listed and traded in the US economy are known as American Depositary Receipts.

Depositary receipts make it easier to buy shares in foreign companies because the shares of the

company do not have to leave the home state.

When the depositary bank is in the U.S., the instruments are known as American Depositary

Receipts (ADRs). European banks issue European depository receipts (EDRs), and other banks

issue global depository receipts (GDRs).[1]

How it works[edit]

A depositary receipt typically requires a company to meet a stock exchange’s specific rules

before listing its stock for sale. For example, a company must transfer shares to a brokerage

house in its home country. Upon receipt, the brokerage uses a custodian connected to the

international stock exchange for selling the depositary receipts. This connection ensures that the

shares of stock actually exist and no manipulation occurs between the foreign company and the

international brokerage house.

A typical ADR goes through the following steps before it is issued:[2]

The issuing bank in the US studies the financials of the foreign company in detail to assess

the strength of its stock.

The bank buys shares of the foreign company.

The shares are grouped into packets.

Each packet is issued as an ADR through an American stock exchange.

The ADR is priced in dollars, and the dividends are paid out in dollars as well, making it as

simple for an American investor to buy as the stock of a US-based company.

Types[edit]

American Depositary Receipt

European Depositary Receipt

Luxembourg Depositary Receipt

Global Depositary Receipt

Indian Depository Receipt

Additionally, CREST Depositary Interests (CDIs) in the United Kingdom function similarly, but not

identically to depositary receipts.

What are Global Depositary Receipts?

Global Depositary Receipts (GDRs) are transferable securities issued by

depositary banks. They represent ownership of a given number of a foreign

company’s shares that can be listed and traded independently from the

underlying shares.

GDRs have risen to prominence in recent years as the favoured instrument by

which companies from emerging markets such as Russia, India and China

choose to raise capital on western stock exchanges.

How GDRs are created

GDRs are effectively created when a broker purchases a foreign company’s

shares on its home stock market and delivers the shares to the depositary’s

local custodian bank (which verifies the receipt of the shares and holds them on

behalf of the depositary), and then instructs the depositary bank to issue GDRs

to the stipulated amount and to update the register.

In this way, a Russian share can effectively be made to trade as an English

security, a US common stock or perhaps as an Australian share. The depositary

bank can issue GDRs into any jurisdiction for which there is sufficient investor

demand and will tailor the terms and conditions of the GDRs to accommodate

the particular legal jurisdiction concerned.

Reducing obstacles to international investment

GDRs have a relatively established and respectable history, and for years have

served to reduce obstacles to investment between one market jurisdiction and

another. In effect they convert, for example, a UK share into a US share and,

although the same share is governed by two very different regulatory regimes,

it will trade comfortably in both regimes.

Importantly, too, the prices of that same share trading in the US and the UK –

albeit in different currencies – remain linked.

GDRs effectively facilitate domestic investor purchases of foreign securities and,

at the same time, allow foreign companies to have their stock trade in the

investor’s domestic market by reducing or eliminating various hurdles, such as:

• settlement delays

• high transaction costs (including costly currency conversions)

• uncertain custody services

• poor information flow

• unfamiliar market practices

• confusing tax conventions

• other potential inconveniences and negatives associated with international

securities trading.

Aiding global diversification

The increasing demand for GDRs in recent years has largely been driven by the

desire of individual and institutional investors to diversify their portfolios, reduce

investment risk and invest internationally in the most efficient manner available.

However, while many investors acknowledge the benefits of global

diversification, they also understand the challenges faced when investing

directly into foreign trading markets. GDRs overcome many of the inherent

operational and custodial hurdles of international investing and offer certain cost

benefits and conveniences, which we highlight in this article.

Using familiar procedures

The objective of a GDR, therefore, is to enable investors in developed markets,

who would not necessarily feel comfortable buying emerging market securities

directly in the securities’ home market, to gain economic exposure to the

intended company and, indeed, to the emerging economy using the procedures

in their own developed markets with which they are familiar.

The GDR functions as a means to increase global trade, which in turn can help

increase not only trade volumes on local and foreign markets but also the

exchange of information, technology and regulatory procedures as well

as market transparency.

Therefore, instead of being faced with impediments to foreign investment, as is

often the case in many emerging markets, the GDR investor and company can

both benefit from investment abroad.

GDRs also overcome limits on restrictions on foreign ownership or the

movement of capital that may be imposed by the country of the corporate

issuer.

Benefits of GDRs to a company

The establishment of a Depositary Receipt programme, through which GDRs can

be issued, offers several advantages to foreign companies. These may include:

• expanded market share through broadened and more diversified investor

exposure with potentially greater liquidity for the underlying shares, which

may increase or stabilise the share price

• enhanced visibility and image for the company’s products, services and

financial instruments in a marketplace outside its home country and also

greater prestige in its home market

• a flexible mechanism for raising capital and a vehicle or currency for

mergers and acquisitions

• the ability to encourage investment from abroad without having to worry

about barriers to entry that a foreign investor might face

• the opportunity for employees of domestic subsidiaries of foreign companies

to invest more easily in the parent company

• the encouragement and promotion of an international shareholder base.

Benefits of GDRs to an investor

As mentioned earlier, investors are increasingly aiming to diversify their

portfolios on an international scale. However, the various hurdles associated

with international securities trading, as highlighted above, may discourage

institutions and private investors from venturing outside their local market by

purchasing ordinary shares in the foreign company’s home market.

With that in mind, the advantages of purchasing GDRs instead may, from the

investor’s perspective, include:

• quotation in the GDR currency and payment of dividends or interest in the

GDR currency, which is usually US dollars, pounds sterling or euros

• diversification without many of the obstacles that mutual funds, pension

funds and other institutions may have in purchasing and holding securities

outside of their local market

• the ability to reap the benefits of these usually higher-risk, higher-return

equities in emerging markets, without having to endure the added risks of going directly into such foreign markets, which may pose a lack of

transparency or instability resulting from changing regulatory procedures

• familiar and certain trade, clearance and settlement procedures

• competitive GDR currency/foreign exchange rate conversions (as against

most foreign currencies) for dividends and other cash distributions

• the ability to acquire the underlying securities directly upon cancellation.

How GDRs trade

A GDR holder can sell in two ways:

• The GDR can be sold to another investor in the market in which the GDR

trades. This is known as an intra-market transaction, and will be settled in

the same way as any other security purchase in that market.

• The GDR can be cancelled and the underlying shares can be sold to a foreign

investor through a cross-border transaction. In this case, the GDR certificate

would be surrendered to the depositary bank. The shares held with the local

custodian bank would be released back into the home market of the

company whose shares are being released, and sold to a broker there.

Furthermore, the GDR holder would be able to request delivery of the actual

shares at any time. This exchange facility – i.e. the ability to exchange the

GDRs for the shares they represent in their home market – is important because

it ensures a price linkage between the two markets.

Price differentials between the two markets do occur, but the exchange facility

provides a channel whereby some price equilibrium can be reintroduced

between the two markets, and the continuous buying and selling of GDRs in

either market tends to keep the price differential between the two markets to a

minimum.

London and Luxembourg

The two stock exchanges that have become most associated with GDRs in

recent years are Luxembourg and London.

When GDRs were first used (in the late 1980s), Luxembourg was viewed as the

logical listing venue because of its historic role in the Eurobond market and its

direct communications with Euroclear and Clearstream, the prime settlement

providers of this market. These organisations are experienced at handling securities transactions in a number of foreign securities and in dealing with the

complexities of corporate actions originating from economies that do not

necessarily have the same traditions of corporate reporting and shareholders’

rights.

Some years later, the London Stock Exchange (LSE) was successful in

establishing a niche in the GDR business by applying a light-touch regulatory

approach to listing and by providing secondary market liquidity through the

International Order Book (IOB), a trading platform operated by the LSE.

As a result, a large proportion of listed GDRs have chosen London as their listing

and trading venue, while the settlement of bargains in GDRs continues to be

directed through Euroclear and Clearstream.

Conclusion

GDRs offer investors the opportunity to add the benefits of foreign investment

to their portfolio while bypassing the unnecessary risks of investing outside their

own borders.

Furthermore, from a company’s perspective, GDRs offer the opportunity for the

company to obtain greater exposure and to raise capital in the world markets

from among a broader, international shareholder base.

CITI BANK

Citi® Depositary Receipt Services

Citi’s Depositary Receipt Services is a leader in bringing quality issuers to global capital markets and in promoting Depositary Receipts (DRs) as an effective capital markets tool. Citi began offering DRs in 1928 and today is widely recognized for providing companies with access to the powerful global platform Citi has to offer.

A Depositary Receipt program can serve a variety of purposes. Whether you are looking to raise capital, build international visibility or diversify your shareholder base, Citi is aligned to help you achieve your goals. When supporting a Depositary Receipt program, Citi provides issuers with access to the following value-added resources:

Experienced in-house global Investor Relations team—providing advice, strategic insight and practical counsel directly to issuers

Unparalleled global sales and distribution network—consisting of large & mid-tier institutional investors and retail clients

Dedicated Account Management team—enabling a single point of contact for comprehensive support

Specialized Structuring and Implementation team—ensuring the efficient execution of transactions

Innovative Product Management team—developing resourceful solutions for enhanced access to markets and investors

Citi Appointed Depositary Bank for Innocoll’s ADR Program

Citi’s Issuer Services business, acting through Citibank N.A., has been appointed by Innocoll AG (“Innocoll”),

a global collagen-based pharmaceutical company, as the depositary bank for their sponsored Level 3

American Depositary Receipt (ADR) program. Innocoll’s shares trade only in the U.S. through ADRs listed on

the NASDAQ Global Market, under the symbol “INNL”.

“Citi is delighted to be appointed by Innocoll as depositary bank for their Level 3 ADR program,” said Dirk

Jones, Global Head of Issuer Services. “Citi’s investor relations expertise for newly listed companies and

unmatched global equity distribution network will be a powerful platform for Innocoll to manage their ADR

program going forward”.

Citi is a leading provider of depositary receipt services. With Depositary Receipt programs in 55 markets, Citi

leverages its global network to help companies connect to new markets and raise capital worldwide.

A registration statement relating to Innocoll's securities was declared effective by the U.S. Securities and Exchange

Commission on July 24, 2014. This press release shall not constitute an offer to sell or the solicitation of an offer to buy

any of the offered securities, nor shall there be any sale of these securities in any state or jurisdiction in which such offer,

solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or

jurisdiction

The Role of Depositary Receipts

For Corporate and Institutional Clients

History And Definition Of Depository Receipts Finance EssayA DR is a type of negotiable (transferable) financial security traded on a local stock exchange but represents a security, usually in the form of equity, issued by a foreign, publicly-listed company. The DR, which 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 depository receipt (ADR), which has been offering companies, investors and traders global investment opportunities since the 1920s.Since then, DRs have spread to other parts of the globe in the form of global depository receipts (GDRs). The other most common type of DRs are European DRs and International DRs. ADRs are typically traded on a US national stock exchange, such as the New York Stock Exchange (NYSE) or the American Stock Exchange, while GDRs are commonly listed on European stock exchanges such as the London Stock Exchange. Both ADRs and GDRs are usually denominated in US dollars, but can also be denominated in Euros.History of Depository RecieptsAmerican Depositary Receipts have been introduced to the financial markets as early as April 29, 1927, when the investment bank J. P. Morgan launched the first-ever ADR program for the UK’s Selfridges Provincial Stores Limited (now known as Selfridges plc.), a famous British retailer.Its creation was a response to a law passed in Britain, which prohibited British companies from registering shares overseas without a British-based transfer agent, and thus UK shares were not allowed physically to leave the UK.2The ADR was listed on the New York Curb Exchange (predecessor to the American Stock Exchange.)The regulation of ADR changed its form in 1955, when the U.S. Securities and Exchange Commission (SEC) established the From S-12, necessary to register all depositary receipt programs. The Form S-12 was replaced by Form F-6 later, but the principles remained the same till today.Crucial novelties brought the new regulatory framework introduced by the SEC in 1985, which led to emergence of range of DR instruments, as we know it nowadays. Then the three different ADR programs were created, the Level I, II and III ADRs. This change was one of the impulses for revival of activity on the otherwise stagnant ADR market.In April 1990, a new instrument, referred to as Rule 144A was adopted, which gave rise to private placement depositary receipts, which were available only to qualified institutional buyers (QIBs). This type of DR

programs gained its popularity quickly and it is very frequently employed today.The ADRs were originally constructed solely for the needs of American investors, who wanted to invest easily in non-US companies. After they had become popular in the United States, they extended gradually to other parts of the world (in the form of GDR, EDR or IDR). The greatest development of DRs has been recorded since 1989.In December 1990, Citibank introduced the first Global Depositary Receipt. Samsung Corporation, a Korean trading company, wanted to raise equity capital in the United States through a private placement, but also had a strong European investor base that it wanted to include in the offering. The GDRs allowed Samsung to raise capital in the US and Europe through one security issued simultaneously into both markets.

Types of Depositary ReceiptsAmerican Depositary Receipts (ADR)Companies have a choice of four types of Depositary Receipt facilities: unsponsored and three levels of sponsored Depositary Receipts. Unsponsored Depositary Receipts are issued by one or more depositaries in response to market demand, but without a formal agreement with the company. Today, unsponsored Depositary Receipts are considered obsolete and, under most circumstances, are no longer established due to lack of control over the facility and its hidden costs. Sponsored Depositary Receipts are issued by one depositary appointed by the company under a Deposit Agreement or service contract. Sponsored Depositary Receipts offer control over the facility, the flexibility to list on a national exchange in the U.S. and the ability to raise capital.Sponsored Level I Depositary ReceiptsA sponsored Level I Depositary Receipt program is the simplest method for companies to access the U.S. and non-U.S. capital markets. Level I Depositary Receipts are traded in the U.S. over-the-counter ("OTC") market and on some exchanges outside the United States. The company does not have to comply with U.S. Generally Accepted Accounting Principles ("GAAP") or full Securities and Exchange Commission ("SEC") disclosure. Essentially, a Sponsored Level I Depositary Receipt program allows companies to enjoy the benefits of a publicly traded security without changing its current reporting process.The Sponsored Level I Depositary Receipt market is the fastest growing segment of the Depositary Receipt business. Of the more than 1,600 Depositary Receipt programs currently trading, the vast majority of the sponsored programs are Level I facilities. In addition, because of the benefits investors receive by investing in Depositary Receipts, it is not unusual for a company with a Level I program to obtain 5% to 15% of its shareholder base in Depositary Receipt form. Many well-known

multinational companies have established such programs including: Roche Holding, ANZ Bank, South African Brewery, Guinness, Cemex, Jardine Matheson Holding, Dresdner Bank, Mannesmann, RWE, CS Holding, Shiseido, Nestle, Rolls Royce, and Volkswagen to name a few. In addition, numerous companies such as RTZ, Elf Aquitaine, Glaxo Wellcome, Western Mining, Hanson, Medeva, Bank of Ireland, Astra, Telebrás and Ashanti Gold Fields Company Ltd. started with a Level I program and have upgraded to a Level II (Listing) or Level III (Offering) program.Sponsored Level II And III Depositary ReceiptsCompanies that wish to either list their securities on an exchange in the U.S. or raise capital use sponsored Level II or III Depositary Receipts respectively. These types of Depositary Receipts can also be listed on some exchanges outside the United States. Each level requires different SEC registration and reporting, plus adherence to U.S. GAAP. The companies must also meet the listing requirements of the national exchange (New York Stock Exchange, American Stock Exchange) or NASDAQ, whichever it chooses.Each higher level of Depositary Receipt program generally increases the visibility and attractiveness of the Depositary Receipt.

Private Placement (144A) Depositary ReceiptIn addition to the three levels of sponsored Depositary Receipt programs that trade publicly, a company can also access the U.S. and other markets outside the U.S. through a private placement of sponsored Depositary Receipts. Through the private placement of Depositary Receipts, a company can raise capital by placing Depositary Receipts with large institutional investors in the United States, avoiding SEC registration and to non-U.S. investors in reliance on Regulation S. A Level I program can be established alongside a 144A program.Global Depositary Receipts (GDR)GDRs are securities available in one or more markets outside the company’s home country. (ADR is actually a type of GDR issued in the US, but because ADRs were developed much earlier than GDRs, they kept their denotation.) 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. They gained popularity also due to the flexibility of their structure.GDR represents one or more (or fewer) shares in a company. The shares are held by the custody of the depositary bank in the home country. A GDR investor holds the same rights as the shareholders of ordinary shares, but typically without voting rights. Sometimes voting rights can be the executed by the depositary bank on behalf of the GDR holders.

Mechanism – DR TradeA Depositary Receipt is a negotiable security which represents the underlying securities (generally equity shares) of a non-U.S. company. Depositary Receipts facilitate U.S. investor purchases of non-U.S. securities and allow non-U.S. companies to have their stock trade in the United States by reducing or eliminating settlement delays, high transaction costs, and other potential inconveniences associated with international securities trading. Depositary Receipts are treated in the same manner as other U.S. securities for clearance, settlement, transfer, and ownership purposes. Depositary Receipts can also represent debt securities or preferred stock.The Depositary Receipt is issued by a U.S. depositary bank, such as The Bank of New York, when the underlying shares are deposited in a local custodian bank, usually by a broker who has purchased the shares in the open market.Once issued, these certificates may be freely traded in the U.S. over-the-counter market or, upon compliance with U.S. SEC regulations, on a national stock exchange.When the Depositary Receipt holder sells, the Depositary Receipt can either be sold to another U.S. investor or it can be canceled and the underlying shares can be sold to a non-U.S. investor.In the latter case, the Depositary Receipt certificate would be surrendered and the shares held with the local custodian bank would be released back into the home market and sold to a broker there.Additionally, the Depositary Receipt holder would be able to request delivery of the actual shares at any time. The Depositary Receipt certificate states the responsibilities of the depositary bank with respect to actions such as payment of dividends, voting at shareholder meetings, and handling of rights offerings.Depositary Receipts (DRs) in American or Global form (ADRs and GDRs, respectively) are used to facilitate cross-border trading and to raise capital in global equity offerings or for mergers and acquisitions to U.S. and non-U.S. investors.

Demand For Depositary ReceiptsThe demand by investors for Depositary Receipts has been growing between 30 to 40 percent annually, driven in large part by the increasing desire of retail and institutional investors to diversify their portfolios globally. Many of these investors typically do not, or cannot for various reasons, invest directly outside of the U.S. and, as a result, utilize Depositary Receipts as a means to diversify their portfolios. Many investors who do have the capabilities to invest outside the U.S. may prefer to utilize Depositary Receipts because of the convenience, enhanced liquidity and cost effectiveness Depositary Receipts offer as compared to purchasing

and safekeeping ordinary shares in the home country. In many cases, a Depositary Receipt investment can save an investor up to 10-40 basis points annually as compared to all of the costs associated with trading and holding ordinary shares outside the United States.IssuanceDepositary Receipts are issued or created when investors decide to invest in a non-U.S. company and contact their brokers to make a purchase.Brokers purchase the underlying ordinary shares and request that the shares be delivered to the depositary bank's custodian in that country.The broker who initiated the transaction will convert the U.S. dollars received from the investor into the corresponding foreign currency and pay the local broker for the shares purchased.The shares are delivered to the custodian bank on the same day, the custodian notifies the depositary bank.Upon such notification, Depositary Receipts are issued and delivered to the initiating broker, who then delivers the Depositary Receipts evidencing the shares to the investor.Transfer - (Intra-Market Trading)Once Depositary Receipts are issued, they are tradable in the United States and like other U.S. securities, they can be freely sold to other investors. Depositary Receipts may be sold to subsequent U.S. investors by simply transferring them from the existing Depositary Receipt holder (seller) to another Depositary Receipt holder (buyer); this is known as an intra-market transaction. An intra-market transaction is settled in the same manner as any other U.S. security purchase. Accordingly, the most important role of a depositary bank is that of Stock Transfer Agent and Registrar. It is therefore critical that the depositary bank maintain sophisticated stock transfer systems and operating capabilities.What are Indian Depository Receipts (IDRs)?IDRs are transferable securities to be listed on Indian stock exchanges in the form of depository receipts created by a Domestic Depository in India against the underlying equity shares of the issuing company which is incorporated outside India.As per the definition given in the Companies (Issue of Indian Depository Receipts) Rules, 2004, IDR is an instrument in the form of a Depository Receipt created by the Indian depository in India against the underlying equity shares of the issuing company. In an IDR, foreign companies would issue shares, to an Indian Depository (say National Security Depository Limited – NSDL), which would in turn issue depository receipts to investors in India. The actual shares underlying the IDRs would be held by an Overseas Custodian, which shall authorise the Indian Depository to issue the IDRs. The IDRs would have following features:

Overseas Custodian: Foreign bank having branches in India and requires approval from Finance Ministry for acting as custodian and Indian depository has to be registered with SEBI.Approvals for issue of IDRs : IDR issue will require approval from SEBI and application can be made for this purpose 90 days before the issue opening date.Listing : These IDRs would be listed on stock exchanges in India and would be freely transferable.Eligibility conditions for overseas companies to issue IDRs:Capital: The overseas company intending to issue IDRs should have paid up capital and free reserve of atleast $ 100 million.Sales turnover: It should have an average turnover of $ 500 million during the last three years.Profits/dividend : Such company should also have earned profits in the last 5 years and should have declared dividend of at least 10% each year during this period.Debt equity ratio : The pre-issue debt equity ratio of such company should not be more than 2:1.Extent of issue : The issue during a particular year should not exceed 15% of the paid up capital plus free reserves.Redemption : IDRs would not be redeemable into underlying equity shares before one year from date of issue.Denomination : IDRs would be denominated in Indian rupees, irrespective of the denomination of underlying shares.Benefits : In addition to other avenues, IDR is an additional investment opportunity for Indian investors for overseas investment.Taxation issues for Indian Depository Receipts (IDRs)Standard Chartered Banks's Indian Depository Receipts (IDR) issue may raise concerns relating to tax treatment, the draft red herring prospectus (DRHP) filed by the bank with SEBI said. The UK-based bank's draft red herring prospectus was uploaded on the SEBI's website in end-March. "The Income Tax Act and other regulations do not specifically refer to the taxation of IDRs. IDRs may therefore be taxed differently from ordinary listed shares issued by other companies in India", the prospectus said. "In particular, income by way of capital gains may be subject to a higher rate of tax".The introduction of the Direct Tax Code from the next fiscal may also alter tax treatment of Indian Depository Receipts. "The tax treatment in future may also vary depending on the provisions of the proposed Direct Taxes Code which is currently due to take effect from April 1, 2011, and which is only in draft form at this time", Standard Chartered PLC has mentioned among the possible risk factors.Economic development and volatility in the securities markets in other countries may cause the price of the IDRs to decline, the prospectus said.

Any fluctuations that occur on the London Stock Exchange or the Hong Kong Stock Exchange that affect the price of the shares may affect the price and trading of the IDRs listed on the stock exchanges.Further, the draft red herring prospectus states to what extent IDRs are legal investments, whether they can be used as collateral for various types of borrowing, and whether there are other restrictions that apply to purchase or pledge of the Indian Depository Receipts.How are IDRs different from GDRs and ADRs?GDRs and ADRs are amongst the most common DRs. When the depository bank creating the depository receipt is in the US, the instruments are known as ADRs. Similarly, other depository receipts, based on the location of the depository bank creating them, have come into existence, such as the GDR, the European Depository Receipts, International Depository Receipts, etc. ADRs are traded on stock exchanges in the US, such as Nasdaq and NYSE, while GDRs are traded on the European exchanges, such as the London Stock Exchange.

How will the IDRs be priced, and will cross-border trading be allowed?IDRs will be freely priced. However, in the IDR prospectus, the issue price will have to be justified as is done in the case of domestic equity issues. Each IDR will represent a certain number of shares of the foreign company. The shares will be listed in the home country. Normally, the DR can be exchanged for the underlying shares held by the custodian and sold in the home country and vice-versa. However, in the case of IDRs, automatic fungibility i.e. the quality of being capable of exchange or interchange is not permitted.What are the benefits of issuing IDRs to companies?Currently, there are over 2,000 Depositary Receipt programs for companies from over 70 countries. The establishment of a Depositary Receipt program offers numerous advantages to non-U.S.companies. The primary reasons to establish a Depositary Receipt program can be divided into two broad considerations: capital and commercial.AdvantagesExpanded market share through broadened and more diversified investor exposure with potentially greater liquidity.Enhanced visibility and image for the company's products, services and financial instruments in a marketplace outside its home country.Flexible mechanism for raising capital and a vehicle or currency for mergers and acquisitions.Enables employees of U.S. subsidiaries of non-U.S. companies to invest more easily in the parent company.Quotation in U.S. dollars and payment of dividends or interest in U.S. dollars.

Diversification without many of the obstacles that mutual funds, pension funds and other institutions may have in purchasing and holding securities outside of their local market.Elimination of global custodian safekeeping charges, potentially saving Depositary Receipt investors up to 10 to 40 basis points annually.Familiar trade, clearance and settlement procedures.Competitive U.S. dollar/foreign exchange rate conversions for dividends and other cash distributions.Ability to acquire the underlying securities directly upon cancellation.Benefit for InvestorsThey allow global investing opportunities without the risk of investing in unfamiliar markets, ensure more information and transparency and improve the breadth and depth of the market. Increasingly, investors aim to diversify their portfolios internationally. However, obstacles such as undependable settlements, costly currency conversions, unreliable custody services, poor information flow, unfamiliar market practices, confusing tax conventions and internal investment policy may discourage institutions and private investors from venturing outside their local market.Why will foreign companies issue IDRs?Any foreign company listed in its home country and satisfying the eligibility criteria can issue IDRs. Typically, companies with signifi-cant business in India, or an India focus, may find the IDR route advantageous. Similarly, the foreign entities of Indian companies may find it easier to raise money through IDRs for their business requirements abroad.Besides IDR there are several other ways to raise money from foreign marketsAlternative AvailableForeign Currency Convertible Bonds (FCCBs): FCCBs are bonds issued by Indian companies and subscribed to by a non-resident in foreign currency. They carry a fixed interest or coupon rate and are convertible into a certain number of ordinary shares at a preferred price. This equity component in a FCCB is an attractive feature for investors. Till conversion, the company has to pay interest in dollars and if the conversion option in not exercised, the redemption is also made in dollars. These bonds are listed and traded abroad. The interest rate is low [1] but the exchange risk is more in FCCBs as interest is payable in foreign currency. Hence, only companies with low debt equity ratios and large forex earnings potential opt for FCCBs.

The scheme for issue of FCCBs was notified by the government in 1993 to allow companies easier access to foreign capital markets. Under the scheme, bonds up to $50 million are cleared automatically, those up to $100 million by the RBI and those above that by the finance ministry. The minimum maturity period for FCCBs is five years but there is no restriction on the time period for converting the FCCBs into shares.

External Commercial Borrowings (ECBs): Indian corporate are permitted to raise finance through ECBs (or simply foreign loans) within the framework of the policies and procedures prescribed by the Government for financing infrastructure projects. ECBs include commercial bank loans; buyers’/suppliers’ credit; borrowing from foreign collaborators, foreign equity holders; securitized instruments such as Floating Rate Notes (FRNs) and Fixed Rate Bonds (FRBs); credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial institutions such as the IFC, ADB and so on. While the ECB policy provides flexibility in borrowings consistent with maintenance of prudential limits for total external borrowings, its guiding principles are to keep borrowing maturities long, costs low and encourage infrastructure/core and export sectors financing, which are crucial for overall growth of the economySince 1993, many of the firms have chosen to use the offshore primary market instead of the domestic primary market for raising resources. The factors that can be attributed to this behaviour are as follows.(i) The time involved in the entire public issue on the offshore primary market is shorter and the issue costs are also low as the book building procedure is adopted.(ii) FIIs prefer Euro issues as they do not have to register with the SEBI nor do they have to pay any capital gains tax on GDRs traded in the foreign exchanges. Moreover, arbitrage opportunities exist as GDRs are priced at a discount compared with their domestic price.(iii) Indian companies can collect a large volume of funds in foreign exchange from international markets than through domestic market.(iv) Projections of the GDP growth are very strong and consistent which have created a strong appetite for Indian paper in the overseas market.(v) An overseas issuance allows the company to get exposure to international investors, thereby increasing the visibility of Indian companies in the overseas market.Money Raising Instruments in IndiaQualified institutions placement (QIP): A designation of a securities issue given by the SEBI that allows an Indian-listed company to raise capital from its domestic markets without the need to submit any pre-issue filings to market regulators, which is lengthy and cumbersome affair. SEBI has issued guidelines for this relatively new Indian financing avenue on May 8, 2006. Prior to the innovation of the qualified institutional placement, there was concern from Indian market regulators and authorities that Indian companies were accessing international funding via issuing securities, such as American depository receipts (ADRs), in outside markets. This was seen as an undesirable export of the domestic equity market, so the QIP guidelines were introduced to encourage Indian companies to raise funds domestically instead of tapping overseas markets.

QIP has emerged as a new fund raising investment for listed companies in India. The issue process is not only simple but can be completed speedily. QIP issue can be offered to a wider set of investors including Indian mutual funds, banks, insurance companies and FIIs. A company sells its shares to qualified institutional buyers (QIBs) on a discretionary basis with the two-week average price being the floor. In a QIP, unlike an IPO or PE investment, the window is shorter (four weeks) and money can be raised quickly. This rule came into being after SEBI changed the pricing formulae. Earlier, the pricing was based on the higher of the six-month or two-week average share price This turned out to be a dampener in a volatile marketHowever, merchant bankers gave the feedback that the two-week average price often worked out to be higher than the current market price. As such, many investors were reluctant to take a mark-to-market loss on their books right from the start.Rights issues: In other words, it is the issue of new shares in which existing shareholders are given preemptive rights to subscribe to the new issue on a pro-rata basis. Such an issue is arranged by an investment bank or broker, which usually makes a commitment to take up its own books any rights that are not sold as part of the issue. The right is given in the form of an offer to existing shareholders to subscribe to a proportionate number of fresh, extra shares at a pre-determined price.In India rights market has been a favoured capital mobilizing route for the corporate sector. However, this market has shrunk significantly in India over the years. This is due to an absence of a trading platform for the post issue trading rights.Private placement: The direct sale of securities by a company to some select people or to institutional investors (financial institutions, corporates, banks, and high net worth individuals) is called private placement. In other words, private placement refers to the direct sale of newly issued securities by the issuer to a small number of investors through merchant bankers. Company law defined privately placed issue to be the one seeking subscription from 50 members. No prospectus is issued in private placement. Private placement covers equity shares, preference shares, and debentures [2] . It offers access to capital more quickly than the public issue and is quite inexpensive on account of the absence of various issue expenses.In recent years resource mobilization through private placement route has subdued. The reason is stricter regulations introduced by RBI and SEBI starting from early 2000s on private placements. When RBI found that banks and institutions had larger exposure in the private placement market, it has issued guidelines to banks and financial institutions for investment in such cases. [3] 

Comparison ADR/GDR Vs. QIPThe First Wave of Indian Fundraising: QIPsUnitech set the QIP ball rolling on what is really the first major wave of India's recent fund-raising jamboree. Indian companies raised US$24 billion in the April-June quarter of 2009, according to data from Delhi-based research firm Prime Database. Of this, 56% was raised in the last week of June, an indicator of the increasing tempo of action.

According to Prime Database chairman Prithvi Haldea "QIPs cornered over 96% of the total money mobilized" during that quarter. Ten QIPs were issued, totaling US$22.5 billion. The leading issuers includedUnitech (US$900 million)Indiabulls Real Estate (US$530 million)HDIL (US$330 million)Sobha Developers (US$100 million)Shree Renuka Sugars (US$100 million)PTC (US$100 million).Hong Kong-based Finance Asia magazine said in its headline that India has gone QIP crazyBut as other instruments started gaining favor the QIP wave appeared to be weakening. The QIBs don't see a huge bargain any longer. When companies were relatively desperate for funds, they were offering prices that left a lot on the table for buyers. Unitech is a case in point. The first issue gave returns of 100% plus. A record Rs 34,100 crore were raised by the 51 QIPs made during the year 2009According to a study by rating agency Crisil, most QIPs in 2009 were actually making losses for investors. The study used the prices on July 10, although the markets have improved since then. Still, says Crisil, as of that date, if you leave out the first Unitech issue, the total return on all QIPs was a negative 12%.As per head of equities at CRISIL "We expect raising capital through the QIP route may slow down significantly," He further explains that the significant run up in stock prices before the Union Budget made QIP deals unattractive. The reason being that shrewd investors made their decisions based on company fundamentals and there was no reason to believe that the inherent fundamentals of most companies which queued up for QIPs have changed materially.Not all QIPs have been successful. GMR Infrastructure received its shareholders' permission to raise up to US$1 billion through this route. According to merchant bankers, it came to the market with an offering of US$500 million, then reduced both the size of the offering and the price in the face of a tepid response, and finally withdrew altogether.However, according to Haldea, several more QIPs -- including Hindalco, Cairn Energy, GVK Power, HDFC, JSW Steel, Essar Oil, Parsvanath and

Omaxe -- are waiting in the wings, looking to raise more than US$12 billion. QIPs could become attractive again if the market falls or if companies start offering large discounts, investment experts say.Increased Activity for ADR/GDRThe slowdown in the QIP wave does not mean that foreign investors -- who, as in the Unitech issue, were the principal buyers -- have lost interest in India. In fact, the reverse could be true. Indian fundraising has now embarked on its second wave -- through American Depository Receipts (ADRs) and Global Depository Receipts (GDRs). (ADRs are foreign stock stand-ins traded in U.S. exchanges but not counted as foreign stock holdings. A U.S. bank buys the shares on a foreign market and trades a claim on those shares. Many U.S. investors are attracted to ADRs because these securities may meet accounting and reporting standards that are more stringent than those in many other countries. GDRs are similar instruments traded in markets outside of the U.S.)

At a July 11 meeting, Sterlite Industries, part of the London-based Vedanta group, received shareholder approval for a QIP and issuance of ADRs, GDRs and FCCBs. On July 16, it raised US$1.5 billion through an ADS (American Depository Share; there is a small technical difference with an ADR) issue. Parent Vedanta picked up US$500 million of this, which will increase its stake in its Indian subsidiary to 57.5%.A couple of days later, Tata Steel raised US$500 million in a GDR issue in London. This is the biggest issue on the London Stock Exchange (LSE) so far this year and, in fact, exceeds the total raised through all new issues in the first six months on the London bourse.The very next day, another Tata major -- Tata Power -- took the opportunity to tap the same market: The company raised US$335 million in a GDR offering. The target was US$250 million, although the company had shareholder approval to go up to US$500 million. The reason Tata Power choose the GDR route instead of a QIP was because it felt the GDR caters to a broader range of investors compared to the [QIP] platform, and were advised that it may be a better approach to takeAnother company which has taken this route is wind-power player Suzlon Energy. The company has raised US$108 million in GDRs (which will be listed in Luxembourg) and US$90 million in FCCBs. In 2007, Suzlon had raised US$500 million through a QIP.Fundamental advantages of QIP over ADR/GDRQIP provides a better opportunity for small cap especially in the time when market valuations are down. It provides an opportunity to buy non-locking shares and as such is an easy mechanism if corporate governance and other required parameters are in place

Many merchant bankers are of the view that the mid-cap definition could be extended and even say a company with Rs 1,000 crore-1,500 crore market cap can look at this route.Cost-efficientQIPs are also the most cost-efficient route to raise money. The cost differential vis-à-vis a GDR or FCCB in terms of legal fees, is huge. Then there is the entire process of listing overseas, the fees involved. It is easier to be listed on the BSE/NSE vis-à-vis seeking a say Luxembourg or a Singapore listing.A QIP would mean that a company would only have to pay incremental fees to the exchange.Accounting StandardsAdditionally in the case of a GDR, you would have to convert your accounts to IFRS (International financial reporting standards) . For a QIP, your audited results are more than enough,Also in the case of a GDR, investors invariably seek fungibility over a period of time to sell off in the domestic market.No. of InvestorsADRs and GDRs can be issued only to foreign investors and Indian institutions are left out from the benefits of the issue whereas a QIP is primarily issued to Indian institutions.Another reason is that not more than 50 per cent of the equity can go to one investor. As such mutual funds who are increasingly becoming as large an investor base as FIIs, will now be able to participate in these issuances, thereby, creating a more level playing field.

Better ValuationRetail investors are not allowed to participate in QIPs unlike follow-on issues and, hence, the valuations of the issue in QIP are better. QIPs will over a period of time make an institutional investor more powerful. Companies will have to be a lot more competent and goal oriented,Thus QIPs has provided an opportunity for companies to raise funds domestically, instead of exploring the private placement route out of India through overseas issuances.

DEPOSITARY RECEIPTS IN INDIA

Depositories came into being in India only after the enactment of Depositories Act 1996. The

act paved the way for establishment of NSDL (National Securities Depositories Limited), the

first depository in India. NSE joined hands with leading financial institutions to establish the

NSDL, with the objective of enhancing the efficiency in settlement systems and also to

reduce the menace of fake, forged and stolen securities. The second depository in the country,

CDSL (Central Depositories of Securities Limited), promoted by BSE and a few commercial

banks, was granted certificate of commencement of business in February 1999. This ushered

in an era of dematerialized trading and settlement of securities. SEBI has made

dematerialized settlement mandatory in an ever-increasing number of securities in a phased

manner, thus bringing about an increase in the proportion of shares delivered in

dematerialized form. Today, more than 99% of settlement of securities takes place in

dematerialized form. In the depository system, securities are held in depository accounts

which are more or less similar to holding funds in bank accounts. Transfer of ownership of

securities is done through simple account transfers.

This method does away with all the risks and hassles normally associated with paperwork.

Consequently, the cost of transacting in a depository environment is considerably lower as

compared to transacting in certificates. The introduction of depository system has brought a

revolutionary change in the way the market operates. Trading for investors, both institutional

and individuals has become very convenient and hassle free. The capital market reforms have

also made the market lucrative for public companies to raise capital. But still a lot needs to be

done if we want our markets to become efficient and investor friendly.

Depository 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, usually in the form of equity, which is issued by a foreign publicly listed

company. The DR, which 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 (ADR), which has been offering companies,

investors and traders global investment opportunities since the 1920s. Since then, DRs have spread to other

parts of the globe in the form of global depositary receipts (GDRs) (the other most common type of DR),

European DRs and international DRs. ADRs are typically traded on a U.S. national stock exchange, such as the

New York Stock Exchange (NYSE) or the American Stock Exchange, while GDRs are commonly listed on

European stock exchanges such as the London Stock Exchange. Both ADRs and GDRs are usually

denominated in U.S. dollars, but can also be denominated in Euros3.

How does it 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, however, can also issue a

DR. DRs can be traded publicly or over-the-counter4.

The Benefits of Depositary Receipts:

The DR functions as a means to increase global trade, which in turn can help increase not only volumes on local

and foreign markets but also the exchange of information, technology, regulatory procedures as well as market

transparency. Thus, instead of being faced with impediments to foreign investment, as is often the case in many

emerging markets, the DR investor and company can both benefit from investment abroad5.

For the Company:

A company may opt to issue a DR to obtain greater exposure and raise capital in the world market. Issuing DRs

has the added benefit of increasing the share’s liquidity while boosting the company’s prestige on its local market

(“the company is traded internationally”). Depositary receipts encourage an international shareholder base, and

provide expatriates living abroad with an easier opportunity to invest in their home countries. Moreover, in many

countries, especially those with emerging markets, obstacles often prevent foreign investors from entering the

local market. By issuing a DR, a company can still encourage investment from abroad without having to worry

about barriers to entry that a foreign investor might face6.

For the Investor:

Buying into a DR immediately turns an investors’ portfolio into a global one. Investors gain the benefits of

diversification while trading in their own market under familiar settlement and clearance conditions. More

importantly, DR investors will be able to reap the benefits of these usually higher risk, higher return equities,

without having to endure the added risks of going directly into foreign markets, which may pose lack of

transparency or instability resulting from changing regulatory procedures. It is important to remember that an

investor will still bear some foreign-exchange risk, stemming from uncertainties in emerging economies and

societies. On the other hand, the investor can also benefit from competitive rates the U.S. dollar and euro have to

most foreign currencies7.

Types of DRs:

- ADR (American Depository Receipt),

- GDR (Global Depository Receipt),

- IDR (Indian Depository Receipt),

- LDR (Luxembourg Depository Receipt),

- EDR (European Depository Receipt).

In United Kingdom, CREST Depositary Interests (CDIs) function similarly, but not identically to depositary

receipts8.

An overview of ADR and GDR:

An integration of world financial market has been the distinct feature of the recent global development. The last

two decades has witnessed acceleration in financial globalization represented by an increase in cross-country

foreign assets. Technological progress and the liberalization of capital flows have fostered considerable

competition among global stock exchanges for equity listings and trades. Cross-border listings have gained in

importance over the past few decades as many companies have become more international in their orientation.

The reason why so many firms recently list their shares for trading on more than one stock exchange is a

segmentation of capital markets. It is usually expected that a Depository Receipts (DR) listing improves liquidity

of the company’s stock, as the potential investors’ base is extended, the visibility of the company both in DR and

local markets is enhanced, and cross border trading is enabled. International listings provide firms with improved

access to global capital, reduced risk exposure, enhanced visibility, liquidity and investor base9.

If the depository receipt is traded in the United States of America (USA), it is called an American Depository

Receipt, or an ADR. If the depository receipt is traded in a country other than USA, it is called a Global

Depository Receipt, or a GDR. It represents a certain number of underlying equity share. ADRs and GDRs are

not for investors in India—They can invest directly in the shares of various Indian companies. But the ADRs and

GDRs are an excellent means of investment for NRIs and foreign nationals wanting to invest in India. By buying

these, they can invest directly in Indian companies without going through the hassle of understanding the rules

and working of the Indian financial market—since ADRs and GDRs are traded like any other stock. NRIs and

foreigners can buy these using their regular equity trading accounts. Though the GDR is quoted and traded in

dollar terms, the underlying equity shares are denominated in rupees. GDR is issued through the under writers,

who arrange to sell the GDR to the investors. After the final issue, a depository is chosen, and the company

registers the equivalent equity shares of GDR issue in the name of this depository. Though the shares are

registered in the name of ythis depository, the physical possession of the shares is with the local custodian, who

acts as the trustee of the depository. The depository subsequently issues the GDR to the under-writer who

distributes these negotiable instruments to the investors. So it is evident that the Indian capital market has

remarkably changed through the issue of GDRs and able to mobilize considerable foreign investment. The

capital market has become very active, and Financial Institutions (FIs), FIIs, Asset management companies have

shown increasing interest in investing in India. With a view to achieve the goal, Euro-issue is taken as one of the

viable alternatives. GDR is envisaged as an innovative and easily accessible route to reach the international

capital market by Indian corporate sector. The response of foreign investment flows to reforms was to a great

extent encouraging. It clearly shows that the sizes of euro-issues have grown tremendously just after new

economy policy measures announced. A GDR is a dollar denominated instrument listed and traded on foreign

stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers

Automated Quotation) both. The Reliance Industries Ltd, in May 1992, made the first GDR issue of $150 million.

The first Indian GDR issues made by Reliance Industries and Grasim Industries were at a premium. There are 22

ADR issues from India between 2004 and 200910. Since ADRs are traded in the U.S. market they have been

considered as an alternative to such cross-border investments while ensuring a higher diversification benefits11.

Conversion:

GDRs can be converted into ADRs by existing GDRs and depositing the underlying equity shares with the ADR

depository in exchange for ADRs. The company has to comply has to comply with the SEC (Securities and

Exchange Commission of U.S.) requirements to materialise this exchange offer process. However, the company

does not get any funds from this conversion. The trend is towards the conversion of GDRs into ADRs as ADRs

are more liquid and cover a wider market12.

Genesis of Depository Receipts – Indian Experience:

Starting with the maiden issue of the Reliance Industries in May 1992, around 81- odd Indian companies have so

far tapped the global market with a cumulative mobilization of Rs 37,417.35 crore by the end of 2001-02 through

115 issues. Indeed, India has the distinction of issuing the maximum number of DRs among the emerging

economies. The genesis of Indian multinational corporations (MNCs) with not only international operations, but

also a global ownership is a logical fallout of this process. While bunching of DR issues took place in the early

1990s possibly in view of the pent-up overseas demand for Indian papers, it seemed to have been primarily

motivated by the existing costly procedure of floatation in the domestic market. Initially GDR was the preferred

mode with the majority of listings in the Luxembourg or the London Stock Exchange in view of their less stringent

disclosure requirements vis-a-vis the requirements under the US GAAP (Generally Accepted Accounting

Principle). Besides, a majority of the Indian GDRs were issued pursuant to the US Rule 144A and/or Regulation

S of the Securities Exchange Commission, which enabled their trading in the US market too mainly through the

PORTAL system. Nevertheless, A DR has since emerged as the star attraction thanks to its higher global

visibility, particularly for the new-economy stocks, with nine issues listed in NYSE and three issues in Nasdaq so

far. While the ownership pattern of Indian GDR/ADR is not clear, both individual and foreign ownerships were in

general found to be higher in London than in the US as per the Paris-based World Federation of Exchanges

(FIBV) Survey (1999). Initially, companies seeking to float DRs were required to obtain prior permission from the

department of economic affairs, ministry of finance, the government of India (GoI). To be eligible, companies

should have a consistent track record of good performance for a minimum period of three years. The

infrastructure companies were exempted from the latter requirement in June 1996. The restrictions on number of

DR issues were also removed in June 1996. The Euro issue proceeds were subject to a number of end-use

restrictions modified from time to time before their withdrawal in May 1998. However, such proceeds were not to

be invested in stock market and real estate. In December 1999 Indian software companies, in March 2000 other

knowledge-based companies, and in April 2001 all types of companies were permitted to undertake overseas

business acquisition through ADR/GDR stock swap. In January 2000, companies were made free to access the

GDR/ADR market through an automatic route operated by the RBI, without the prior approval of the GoI or the

track record condition13.

In March 2001, the government allowed two-way fungibility for Indian GDRs/ADRs by which converted local

shares should be reconverted into GDRs/ADRs subject to sectoral caps. With this, the reverse fungibility of ADRs

and GDRs has gathered momentum. With the reconversions, there was no headroom in case of the ICICI bank’s

counter in September 2002. Headroom denotes the number of domestic shares which are available for

reconversion into ADRs or GDRs14. The Private non-financial companies mobilised Rs 11,352 crore from the

international markets during 2005-06 which was 238.7 per cent higher than the previous year. Out of these, Rs

9779 crore was mobilised though GDRs, Rs 1,573 crore through ADRs and Rs 6 crore through ECCBs15.

Indian Companies prefer ADRs:

ADRs are accessible to only good companies with high transparency and good governance practices which also

benefit the local investor; this gets reflected in a higher P/E ratio. Companies are attracted towards raising ADRs

as they are free to decide the deployment of funds either in the US or in India. Companies can also make their

presence felt in the global arena which would result in increased liquidity of the company’s stock. This would also

further broaden the mergers and amalgamation financing capabilities of the company. Moreover, an ADR issue

creates a currency for issue of dollar-denominated stock option to employees, thereby enabling the company to

hire and retain the best human resources16.

What is an Indian Depository Receipt?

According to Companies (Issue of Indian Depository Receipts) Rules, 2004, IDR is an instrument in the form of a

Depository Receipt created by the Indian depository in India against the underlying equity shares of the issuing

company. Just as Indian companies tap foreign capital markets to raise funds, similarly, foreign companies can

now issue their shares to nationals in India. To enable Indian investors to diversify risk and as a step towards

integration of the Indian capital market with the international capital markets, foreign companies are allowed to

access the Indian capital market by issuing Indian depository receipts (IDRs). In 2002, the Companies Act was

amended to allow the foreign companies to offer shares in the form of depository receipts in India17. In an IDR,

foreign companies would issue shares, to an Indian Depository (say National Security Depository Limited –

NSDL), which would in turn issue depository receipts to investors in India. The actual shares underlying the IDRs

would be held by an Overseas Custodian, which shall authorise the Indian Depository to issue the IDRs18. A

foreign company issues and deposits new shares with an Indian depository (say, National Securities Depository

Ltd (NSDL) or Central Depository Service Ltd or CDSL), such a depository then, in turn, issues equivalent shares

in rupees to investors in India. This is exactly the same way Indian companies like Infosys, Reliance and ICICI

Bank raised money through Global Depository Receipts (GDRs) or American Depository Receipts (ADRs) in the

past from global markets. India is just replicating this model to provide a window to global corporations to raise

money from India and list on the domestic bourses19.

Legal and regulatory framework:

The Ministry of Corporate Affairs, in exercise of powers available with it under section 642 read with section 605A

had prescribed the “Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules)” vide notification

number GSR 131(E) dated February 23, 2004. These Companies rules provide for (a) Eligibility for issue of IDRs

(b) Procedure for making an issue of IDRs (c) Other conditions for the issue of IDRs (d) Registration of

documents (e) Conditions for the issue of prospectus and application (f) Listing of Indian Depository Receipts (g)

Procedure for transfer and redemption (h) Continuous Disclosure Requirements (i) Distribution of corporate

benefits20.

These rules were operationalised by the Securities and Exchange Board of India (SEBI)—the Indian markets

regulator in 2006. Operation instructions under the Foreign Exchange Management Act were issued by the

Reserve Bank of India on July 22, 2009. The SEBI has been notifying amendments to these guidelines from time

to time21.

Eligibility of companies to issue IDRs:

The regulations relating to the issue of IDRs are contained within “Securities and Exchange Board of India (Issue

of Capital and Disclosure Requirements) Regulations, 2009”, which get revised from time to time. The regulations

were lastly updated till Oct.12, 2012. According to Clause 26 in Chapter III (“Provisions as to public issue”), the

following are required of any company intending to make a public issue in India:

It has net tangible assets of at least Indian Rupee three crore in each of the preceding three full years (of

twelve months each), of which not more than fifty per cent are held in monetary assets Provided that if

more than fifty percent of the net tangible assets are held in monetary assets, the issuer has made firm

commitments to utilise such excess monetary assets in its business or project; Provided further that the limit

of fifty percent on monetary assets shall not be applicable in case the public offer is made entirely through

an offer for sale.

It has a minimum average pre-tax operating profit of rupees fifteen crore, calculated on a restated and

consolidated basis, during the three most profitable years out of the immediately preceding five years.

it has a net worth of at least INR one crore in each of the preceding three full years (of twelve months

each);

the aggregate of the proposed issue and all previous issues made in the same financial year in terms of

issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the

preceding financial year;

if it has changed its name within the last one year, at least fifty per cent. of the revenue for the preceding

one full year has been earned by it from the activity indicated by the new name.

Chapter X of the regulations deals with issue of IDRs. Under the chapter there is Clause 96 to 106. Clause

97 provides for additional requirements from a foreign company intending to make an issue of IDRs:

“An issuing company making an issue of IDR shall also satisfy the following:

the issuing company is listed in its home country;

the issuing company is not prohibited to issue securities by any regulatory body;

the issuing company has track record of compliance with securities market regulations in its home country.

Explanation: For the purpose of this regulation, the term ‘home country’ means the country where the issuing

company is incorporated and listed.”

IDRs issue process

According to SEBI guidelines, IDRs will be issued to Indian residents in the same way as domestic shares are

issued. The issuer company will make a public offer in India, and residents can bid in exactly the same format

and method as they bid for Indian shares. The issue process is exactly the same: the company will file a draft red

herring prospectus (DRHP), which will be examined by SEBI. The general body of investors will get a chance to

read and review the DRHP as it is a public document, available on the websites of SEBI and the book running

lead managers. After SEBI gives its clearance, the company sets the issue dates and files the document with the

Registrar of Companies. In the next step, after getting the Registrar’s registration ticket, the company can go

ahead with marketing the issue. The issue will be kept open for a fixed number of days, and investors can submit

their application forms at the bidding centers. The investors will bid within the price band and the final price will

be decided post the closure of the Issue. The receipts will be allotted to the investors in their demat account as is

done for equity shares in any public issue. On 256th October 2010, SEBI notified the framework for rights issue

of Indian Depository Receipts (IDRs). Disclosure requirement for IDR rights would more or less be in line with the

reduced requirement applicable for domestic rights issue22.

Why Will They Come to India?

It’s a good way for foreign companies to raise capital in India, as more investors flock to the equity markets on

the back of an economy that is likely to grow at over eight per cent. A listing here not only strengthens its brand

presence, but also shows its commitment to India23.

What’s for the Investors?

It’s an opportunity for Indian investors to take advantage of the growth opportunity in a global corporation. The

shares can be bought and sold like any other on the Indian markets but come without voting rights. Investors can

claim dividends and capital appreciation24.

Does It Make Sense to Invest?

Not for small investors, as any investment in an overseas company requires research on its parent company and

operations elsewhere. For instance, Standard Chartered’s Indian operation reported profits of $1 billion in 2009,

but this accounts for just 20 per cent of its global profit. In addition, investors also have to track the prices of the

parent’s share on global bourses where they are listed or in their home country25.

Listing a company’s stock abroad should have no impact on its price when domestic and foreign equity markets

are fully integrated. If barriers exist, however, a firm’s share value may be affected by the cross-listing

announcement26.

Fungibility:

A term called “Fungibility” is used for these IDR’s, now what does this means & how it relates to IDR/ADRs? The

actual meaning of the word fungible is the ability to substitute one unit of a financial instrument for another unit of

the same financial instrument. However, in trading, fungibility usually implies the ability to buy or sell the same

financial instrument on a different market with the same end result.

Its a financial instrument (i.e. individual stock, futures contract, options contract, etc.) is considered fungible if it

can be bought or sold on one market or exchange, and then sold or bought on another market or exchange. For

example, if one hundred shares of an individual stock can be bought on the NASDAQ in the US, and the same

one hundred shares of the same individual stock can be sold on the London Stock Exchange in the UK, with the

result being zero shares, the individual stock would be considered fungible. There are many fungible financial

instruments, with most popular being individual stocks, some commodities (e.g. gold, silver, etc.), and

currencies27.

Fungible financial instruments are often used in arbitrage trades, because the difference in the price (the

arbitrage part) often comes from a difference in location (the fungible part). For example, if the Euro to US Dollar

exchange rate was 1.2500 in the US and 1.2505 in the UK, an arbitrage trader could buy Euros in the US, and

then immediately sell Euros in the UK, making a profit of 0.0005 per Euro (or $5 per €10,000), because Euros are

a fungible financial instrument. Similarly it implies to Stocks IDRs etc.28

Legal framework for fungibility:

Rule 10 of Companies (Issue of Indian Depository Receipts) Rules, 2004:-

“Procedure for Transfer and redemption of IDRs:-

A holder of IDRs may transfer the IDRs or may ask the Domestic Depository to

redeem these IDRs, subject to the provisions of the Foreign Exchange Management

Act, 1999 and other laws for the time being in force.”

RBI’s circular dated July 22, 2009:-

“Fungibility:-

Automatic fungibility of IDRs is not permitted.

Period of redemption:-

IDRs shall not be redeemable into underlying equity shares before the expiry of one year period from the date of

issue of IDRs.”

Regulation 100 of Chapter X of SEBI (ICDR) Regulations, 2009:-

“IDRs shall not be automatically fungible into underlying equity shares of issuing company.”

Provision of Two-way fungibility

With the objective of encouraging greater foreign participation in Indian capital market, in the Budget-2012, the

Finance Minster Pranab Mukherjee allowed two-way fungibility of Indian Depositary Receipts29. This would

enable more foreign firms to list and issue their shares in India. Accordingly, RBI and SEBI, by circulars dated

28th August, 2012, have approved partial conversion of IDRs into equity shares late in August, while capping the

funds to be raised through IDRs at USD 5 billion. As per the SEBI Circular:

“… to retain the domestic liquidity, it is decided to allow partial fungibility of IDRs (i.e. redemption/ conversion of

IDRs into underlying equity shares) in a financial year to the extent of 25 per cent of the IDRs originally issued,”

By a Ministry of Corporate Affairs (MCA) notification (dated Oct. 1, 2012) in official gazette, Government has

amended the Companies (Issue of Indian Depository Receipts) Rules, 2004 to permit part-conversion of

securities into equity shares by investors.

As per the Ministry of Corporate Affairs notification, “A holder of IDRs may transfer the IDRs, may ask the

domestic depository to redeem them or, any person may seek re-issuance of IDRs by conversion of underlying

equity shares,” subject to the provisions of Foreign Exchange Management Act and SEBI rules at the time.

The two-way fungibility allowed for IDRs is similar to the limited two-way flexibility allowed for ADRs and GDRs

issued by domestic companies in foreign markets. This would enable Indian shareholders to convert their

depository receipts into equity shares of the issuer company and vice versa. The restrictions on fungibility was

seen as one of the major factors for foreign entities keeping away from listing their IDRs. So far, only foreign

company, UK-based banking major Standard Chartered, has listed its IDRs in India. SEBI had said it decided to

prescribe a frame work for two-way fungibility of IDRs to improve the attractiveness and long-term sustainability

of such instruments30.

Taxation Implications:

The good news is that IDR does not come under the purview of Securities Transaction Tax. But the IDR holder

will have to pay tax on the dividend income earned. It is not yet clear whether the tax payable would be equal to

the Dividend Distribution Tax which for the current fiscal stands at 16.61%. So tax seems sure but the rate is yet

unsure. Currently, Long term gains made from Indian Stock Exchanges (stock held for more than 12 months) is

completely exempted from tax while Short term capital gains tax (held less than 12 months) stands at 15%. But

the IDRs does not fall under the STT, so maybe it will not enjoy the same benefits as the shares listed on the

Indian Exchanges enjoys. So this means that IDR’s will be taxed like any other asset –long term tax- held for

over 36 months would be around 20%. Short term tax, when asset is held for less than a year, will be like regular

income earned, at 30.9%31.

Indian investors need to consider the tax implications of investment in the IDRs. While Section 605A of the

Companies Act, 1956 (the “Companies Act”) discusses IDRs, there are no specific provisions regarding capital

gains taxation of IDRs in the Companies Act or in the Income Tax Act, 1961. Therefore, the general rules relating

to capital gains taxation apply and no benefits for long term holders of IDRs (i.e. if the Securities Transaction Tax

is paid, there is no capital gains tax on long term holders of listed securities) are available. It is possible that the

upcoming “Direct Tax Code” may clarify the issue but as of now the capital gains tax treatment of IDRs is not

favourable32.

“Standard-Chartered” – first foreign Company to Issue IDRs:

Standard Chartered is the first and currently, the only company with depository receipts in India, where 10 IDRs

equalled one share in the London-based Standard Chartered bank. Even though Standard Chartered Plc was

successful in raising nearly Rs. 25bn IDR sales in May 2010, the buyers of the IDR were not as lucky as the

receipts have traded at a tremendous discount to their underlying shares. Experts believe that foreign players

would only be keen on issuing IDRs when Standard Chartered IDRs trade at par with their foreign shares33. But,

as the limited two-way fungibility has been allowed, situation has changed, which is evident with the

announcement of Interim Dividend by Standard Chartered on its IDRs34.

Conclusion:

Generally, depository receipt is one of the ways for the investor to buy shares in a foreign company and also it is

also beneficiary for the company because it doesn’t have to leave its home state. ADRs and GDRs have proved

it well. Also, the Indian companies are not behind in utilising the DRs. But IDR has failed to make an ideal market

for itself, which is evident from the fact that till now, only one foreign company has issued IDRs. Besides

Standard Chartered, no company has come forward to raise capital through IDRs. This is due to, previous

absence of two-way fungibility, prohibition on insurance companies from investing in IDRs and lack of clear and

specific tax implications.

As the two-way fungibility is allowed, it is an indicator that we are on the path of allowing full convertibility.

Regarding taxation, the implications are hope to made cleared by Government the wake of the changing scenario

or by the Direct tax Code.

So, it is clear that the market of the IDRs is not fully developed and if we want to develop it, if we want to

encourage the shareholder base, there is a strong need to modify the framework to facilitate the issue of IDRs.

INDIAN DEPOSITORY RECEIPT: LIMITED TWO-WAY FUNGIBILITY ALLOWED

I N T R O D U C T I O N

The Reserve Bank of India (RBI), the Indian central bank and the Securities and Exchange Board of India

(SEBI), the Indian securities market regulator, have vide their respective circulars1 each dated August 28, 2012,

paved the way for limited two-way fungibility for Indian depository receipt (IDR). Fungibility in this context refers

to the ability of the holder of an IDR to convert such IDR into the underlying equity security and vice versa.

Until now, the erstwhile regulations did not allow holders of underlying equity shares to convert such equity share

into an IDR. However, redemption of an IDR into underlying equity shares was permissible subject to fulfilling

certain conditions, such as, a minimum holding period of one year from the date of issue of IDRs and such IDR

qualifying as an infrequently traded security on the stock exchange(s) in India. This regulatory position has now

being modified by SEBI and RBI to provide for limited two-way fungibility for IDRs, similar to the fungibility

available in case of an american depository receipt (ADR) or global depository receipt (GDR).

B A C K G R O U N D

An IDR is basically a security listed on an Indian stock exchange, with its underlying being a listed security of a

foreign incorporated and listed entity. The introduction of an IDR in the Indian securities market and the legal

framework governing them was put in place with an objective to facilitate capital raising by foreign investors from

domestic market, at the same time providing domestic investors an opportunity to make investments in securities

of well-recognised multinational companies listed on developed markets. Till date, there is only one foreign

company namely Standard Chartered Bank, Plc whose IDRs have been listed on an Indian stock exchange.

The regulatory position with respect to IDRs has been evolving ever since the regulatory framework governing

IDR was introduced by the Ministry of Corporate Affairs (MCA) in the year 2004. The following figure traces the

series of regulatory changes with respect to redemption of IDR:

Figure 1: Evolution of regulatory framework governing fungibility of IDR

The erstwhile Indian regulatory framework allowed only redemption / conversion of IDR into the underlying

foreign security after fulfilling the prescribed conditions. The regulatory change would now enable even

conversion of equity shares of a foreign issuer into IDR, to the extent of IDRs that have been redeemed /

converted into underlying shares and sold.

K E Y C H A N G E S I N T R O D U C E D

The regulatory development allowing limited two-way fungibility flows from the announcement made by the then

finance minister in his budget speech earlier this year. The following are some of the key highlights of this

regulatory development:

1. Redemption / conversion of IDRs into equity shares

Redemption capped to the extent of 25% of originally issued IDR in a financial year

The circulars have now put in place a cap of 25% of the originally issued IDR as a maximum limit for

redemption/conversion in a given financial year. This limit means that in any given financial year not more than

25% of the originally issued IDR may be redeemed/ converted into underlying equity shares of the foreign issuer

whose IDRs are listed, subject to the requirement of holding such IDRs for a period of atleast one year from their

issuance. Prior to this regulatory change, there was no ceiling on the number of IDRs that could be redeemed /

converted into equity shares subject to fulfillment of eligibility criteria (discussed below). Introduction of this

ceiling in light of allowing limited two-way fungibility appears to be logical so that the IDR market is not adversely

impacted due to substantial redemptions.

Eligibility criteria for redemption/conversion

a) Minimum period of holding: One of the pre-requisite for redemption of IDRs into underlying equity shares is

expiry of one year from the date of issue of IDRs (the “Lock-in Period”).2 The recent circulars have retained this

eligibility criterion of minimum holding period of at least one year from the date of issue of IDR as prescribed in

RBI circular3 to be eligible for redemption/conversion of IDR into underlying equity shares.

b) No requirement of IDR to be ‘infrequently traded’: SEBI vide its circular dated June 3, 2011 had prescribed an

additional requirement for IDRs to be ‘infrequently traded’4 on stock exchange(s) in addition to the requirement of

Lock-in Period for the IDRs to be eligible for redemption. This requirement for an IDR to be ‘infrequently traded’

has now been removed as SEBI has now rescinded its earlier circular dated June 3, 2011. This earlier SEBI

circular was discussed in detail in our hotline titled “SEBI takes a U-turn: Limited Opportunity for Redemption of

IDRs”.

In this regard, our firm on behalf of many investors had made representation to SEBI for removal of this

requirement which restricted the ability of IDR holders to freely redeem their IDRs into the underlying equity

shares even after the expiry of the statutory lock-in period of one year.

The removal of this requirement comes as a big relief to the investors looking to exit which were hitherto

restricted because of this requirement.

Implication : The regulatory change of allowing two-way fungibility is a welcome move in the right direction

towards increasing the viability of IDRs in the Indian markets. Additionally, the removal of requirement for an IDR

to be ‘infrequently traded’ would go a long way in providing the required impetus to the IDR market.

2. Conversion of equity shares of the foreign issuer into IDR allowed to a limited extent

The regulatory framework governing IDR now enable conversion of equity shares into IDR which was previously

not allowed. Such conversion would be limited to the pool of IDRs which were redeemed / converted into

underlying equity shares by the original holders of IDRs. This condition appears to have been borrowed from the

ADR/GDR guidelines which allow dual fungibility to the extent of headroom created through redemption of these

depositary receipts and thus creates a level playing field from a regulatory perspective between the ADRs/GDRs

and the IDRs.

3. USD 5 billion capital raising limit introduced for raising capital through IDR route

RBI has now put in place an overall limit of $5 billion for raising of capital through issuance of IDR. Although a

separate limit in itself, this limit is similar to the limit which exists for FIIs investing in debt securities. Adherence to

this limit will be monitored by SEBI.

Implication: Until now there was no cap on the overall amount that could have been raised under IDR issuances.

The now prescribed overall cap of USD 5 billion through the IDR route appears sufficient for the time being

considering that only one foreign issuer has used this route to raise capital till date from the Indian markets.

The rationale for introducing such a limit could be to cap the amount foreign companies may raise from domestic

market as well as to cap outflow of capital through IDR issuances and/or to address systematic risk. However,

such externally forced artificial limits are not efficiency-enhancing. Therefore, going forward this limit should

gradually be done away with or at least be continuously expanded in order to accommodate the capital raising

needs of businesses.

4. Implications on holders of underlying equity shares post redemption/conversion of IDR

It is important to note that the recent RBI circular continues with the requirement to comply with condition

enumerated in regulation 7 of the earlier circular dated July 22, 2009 which provides the guidelines for holding

underlying equity shares of the issuing company after redemption of IDRs by listed Indian companies, domestic

mutual funds and other persons resident in India.

T A X I M P L I C A T I O N S

Presently, there are no specific tax provisions under the Income-tax Act, 1961 with respect to tax implications at

the time of redemption of IDRs into underlying equity shares. While SEBI and RBI have provided for limited two

way fungibility, there exists no provision providing incentives under the tax laws to make the IDR regime

attractive, viz, (i) any gains arising on redemptions of IDR into the underlying equity shares if not specifically

exempt would lead to a situation of the holder being subjected to tax in the absence of any realised gains and

hence making a redemption unattractive (ii) dividends received would be subject to tax as income from other

sources and taxed at the regular tax rates applicable to the tax payer.

C O N C L U S I O N

The rise of global finance has removed geographic boundaries for companies enabling them to raise capital in

markets across the world. Issuance of depository receipts is an innovative mechanism especially for companies

who are targeting to raise capital from a market other than the market of their primary listing.

Depository receipts provide mutual benefits to issuers, investors as well as to the host market. Companies get to

raise capital from willing investors, diversify their investor base and fulfill strategic objective such as for e.g. brand

recognition. Investors get to invest in companies in which they otherwise could not have easily invested,

diversifying their portfolio in the process. Ultimately, markets tend to become more efficient as increased access

for investors through multiple listings enhances liquidity, and improves price-discovery.

The regulatory change brought about to allow limited two-way fungibility is a step in the right direction, and it

should make IDRs relatively more marketable. However, the results are more likely to be visible only when the

other challenges faced by the Indian capital market are addressed.

RBI GUIDELINES

Indian Depository Receipts (IDR)

Indian Depository Receipts (IDRs) can be issued by non resident companies in India

subject to and under the terms and conditions of Companies (Issue of Depository

Receipts) Rules, 2004 and subsequent amendment made thereto and the SEBI (ICDR)

Regulations, 2000, as amended from time to time. These IDRs can be issued in India

through Domestic Depository to residents in India as well as SEBI registered

FIIs/Registerd Foreign Portfolio Investors (RFPIs) and NRIs. In case of raising of funds

through issuances of IDRs by financial / banking companies having presence in India,

either through a branch or subsidiary, the approval of the sectoral regulator(s) should be

obtained before the issuance of IDRs.

a) The FEMA Regulations shall not be applicable to persons resident in India as defined

under Section 2(v) of FEMA,1999, for investing in IDRs and subsequent transfer arising

out of transaction on a recognized stock exchange in India.

b) RFPIs, Foreign Institutional Investors (FIIs) including SEBI approved sub-accounts of the

FIIs, registered with SEBI and Non-Resident Indians (NRIs) may invest, purchase, hold

and transfer IDRs of eligible companies resident outside India and issued in the Indian

capital market, subject to the Foreign Exchange Management (Transfer or Issue of

Security by a Person Resident Outside India) Regulations, 2000 notified vide Notification

No. FEMA 20 / 2000-RB dated May 3, 2000, as amended from time to time. Further,

NRIs are allowed to invest in the IDRs out of funds held in their NRE / FCNR(B)

account, maintained with an Authorised Dealer / Authorised bank.

c) A limited two way fungibility for IDRs (similar to the limited two way fungibility facility

available for ADRs/GDRs) has been introduced which would be subject to the certain

terms and conditions. Further, the issuance, redemption and fungibility of IDRs would

also be subject to the SEBI (Issue of Capital and Disclosure Requirements) Regulations,

2009, as amended from time to time as well as other relevant guidelines issued in this

regard by the Government, the SEBI and the RBI from time to time.

d) IDRs shall not be redeemable into underlying equity shares before the expiry of one year

period from the date of issue of the IDRs.

e) At the time of redemption / conversion of IDRs into underlying shares, the Indian holders

(persons resident in India) of IDRs shall comply with the provisions of the Foreign

Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004

notified vide Notification No. FEMA 120 / RB-2004 dated July 7 2004, as amended from

time to time. Accordingly, the following guidelines shall be followed, on redemption of

IDRs:

i. Listed Indian companies may either sell or continue to hold the underlying shares

subject to the terms and conditions as per Regulations 6B and 7 of Notification No.

FEMA 120/RB-2004 dated July 7, 2004, as amended from time to time.

ii. Indian Mutual Funds, registered with SEBI may either sell or continue to hold the

underlying shares subject to the terms and conditions as per Regulation 6C of

Notification No. FEMA 120/RB-2004 dated July 7, 2004, as amended from time to

time.

iii. Other persons resident in India including resident individuals are allowed to hold the

underlying shares only for the purpose of sale within a period of 30 days from the date

of conversion of the IDRs into underlying shares.

iv. The FEMA provisions shall not apply to the holding of the underlying shares, on

redemption of IDRs by the FIIs including SEBI approved sub-accounts of the FIIs,

RFPIs and NRIs.

f) The proceeds of the issue of IDRs shall be immediately repatriated outside India by the

eligible companies issuing such IDRs. The IDRs issued should be denominated in Indian

Rupees.

Reporting of ADR/GDR Issues

The Indian company issuing ADRs / GDRs has to furnish to the Reserve Bank, full

details of such issue in the Form enclosed in Annex -10, within 30 days from the date of

closing of the issue. The company should also furnish a quarterly return in the Form

enclosed in Annex - 11, to the Reserve Bank within 15 days of the close of the calendar

quarter. The quarterly return has to be submitted till the entire amount raised through ADR/GDR mechanism is either repatriated to India or utilized abroad as per the extant

Reserve Bank guidelines.

http://rbidocs.rbi.org.in/rdocs/notification/PDFs/15MCNFDI270613.pdf

Read more: http://www.ukessays.com/essays/finance/history-and-definition-of-depository-receipts-finance-essay.php#ixzz3B1gVAa7Y

http://www.tcii.co.uk/site/wp-content/uploads/2012/03/Global-depositary-receipts-investing-in-emerging-markets.pdf

http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/indian-depository-receipt-limited-two-way-fungibility-allowed.html

http://lex-warrier.in/2013/02/depository-receipts-in-india-with-a-special-reference-to-indian-depository-receipts/