influence of adr prices on stock prices

8/7/2019 Influence of ADR Prices on Stock Prices

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INFLUENCE OF ADR PRICES ON UNDERLYING STOCK

PRICES A STUDY OF INDIAN MARKETA dissertation submitted in partial fulfillment of the requirement for the

award of M.B.A Degree of Bangalore University.

By

Venkatesh V

03XQCM6116

Under the guidance of

Dr. T V Narasimha Rao

Professor MPBIM

M P Birla Institute of Management

Associate Bharatiya Vidya Bhavan

#43, Race Courese road,

Bangalore-01.


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DECLARATION

I hereby declare that the research work embodied in this dissertation titled

INFLUENCE OF ADR PRICES ON UNDERLYING STOCK

PRICES A STUDY OF INDIAN MARKET has been carried outby me under the guidance and of Dr. T V Narasimha Rao, Finance

Professor, M P Birla Institute of Management, Bangalore.

I also declare that this dissertation has not been submitted to any

University/Institution for the award of any diploma or degree.

Bangalore

Date: [VENKATESH V]


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GUIDES CERTIFICATE

I hereby certify that the research work embodied in this dissertation is

entitled INFLUENCE OF ADR PRICES ON UNDERLYING

STOCK PRICES A STUDY OF INDIAN MARKET has beenundertaken and completed by Mr. VENKATESH V under my guidance.

I also certify that he has fulfilled all the requirements under the covenants

governing the submission of dissertation to the Bangalore University for theaward of M.B.A. degree.

Bangalore

Date [Dr. T V NARASIMHA RAO]

Professor M P BIM


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PRINCIPALS CERTIFICATE

I hereby certify that the research work embodied in this dissertation is

entitled INFLUENCE OF ADR PRICES ON UNDERLYING

STOCK PRICES A STUDY OF INDIAN MARKET has beenundertaken and completed by Mr. VENKATESH V under the guidance of

Dr. T V NARASIMHA RAO.

Bangalore

Date [Dr. NAGESH S MALAVALLI]

Principal M P BIM


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ACKNOWLEDGEMENT

I take this opportunity to thank Mr. Nagesh S Malavalli, Principal, M P Birla

Institute of Management for having provided me this wonderful opportunity

and support to conduct this research.

I thank Dr. T V Narasimha Rao, Professor M P BIM for guiding me through

the entire process of the research and for the moral and technical support he

extended.

I am grateful to my parents and friends for the help they extended whenever

I was in need of and for their moral support.

Last but not the least I thank the Almighty for bringing me where I am now.

Yours truly,

[VENKATESH V]


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CONTENTS

S.NO PARTICULARS PAGE

1 Research Extract 1

2 Introduction 4

2.1 What is a Depository Receipt? 5

2.2 How does Depository Receipt work? 5

2.3 Benefits of Depository Receipt 7

2.4 Sponsored and Un-sponsored ADR 9

2.5 Risks in Depository Receipts 11

2.6 Research gap, objectives, hypothesis and researchlimitations 14

3 Literature Review 17

4 Research Methodology 34

5 Analysis and Interpretation 39

6 Results 51

7 Conclusion 53

8 Bibliography and References 55


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LIST OF TABLES

S.No. Particular Page

1 ADR/GDR performance for the Year 2000 24

2 Ranking of countries which have issued ADRs 29

3 How ADR/GDRs of Indian companies faired 29

4 Performance of sponsored Receipt program by countries 32

5 Percentage of public DR offering by country 32

6 Companies taken for research 38

7 The stock symbol 38

8 Auto Correlation for Adr Prices And Nse Stock Prices 40

9 Cross Correlation Between Nifty And Adr And Cross

Correlation Between Adr And The Nse Stock 42


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EXECUTIVE SUMMARY 1


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Executive Summary

Globalization has opened the door for the investors to avail various investment

avenues across the globe. American Depository Receipt (ADR) is one suchopportunity to the investing community. The ADR is a proxy for the Indian shares

to enable them to be traded in the American stock exchanges. Various studies

conducted on Depository Receipts (DRs) have shown that the trading on the DRs

in the foreign market has its influence in the home countrys stock in terms of

price, volatility and volume. This interested me and this project is concerned

about studying Whether the price fluctuations of ADR affect the corresponding

Indian share prices?

After the liberalisation of the economy in 1991, the corporatist started sourcing

their capital from both domestic and foreign markets. The Indian shares cannot be

directly listed in the American stock exchanges. ADRs have been very helpful in

this purpose. So a custodian bank receives the shares as deposit and issues

receipt to the market. These receipts are issued in appropriate ratio to the shares

deposited with the depository. The market players in the stock exchanges trade

these receipts.

Though the shares are traded in different markets, they have the common

fundamental factors like companys performance, management of the company

and the financial structure of the company that influence the share prices. At the

same time there are few factors that are not same for two markets. These are

market forces like interest rates, inflation, and overall performance of the

economy. Due to this a difference in price is found between the ADRs and the

corresponding share in the home country.


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Therefore the main focus of the research is to study whether the price fluctuations

of ADR affect the corresponding Indian share prices and also to know if it affects

does it act as leading or lagging indicator to the corresponding share price in the

Indian market. The study has been done by finding the correlation on the returnon the ADR prices and the corresponding share prices in the Indian stock market

and also the ADR returns with the NIFTY index.

The study shows that the ADR price fluctuations has correlation to the Indian

stock market and act either as leading or lagging indicator. They provide

information, to an extent, how the prices and stock index will move in the future.


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INTRODUCTION

2


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Introduction

A depository 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 that is issued by a foreign publicly-listed company. The DR, whichis 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

opportunities for investment 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 DR--European DRs (EDRs), and International DRs

(IDRs).

How Does the DR Work?

The DR is created when a foreign company wishes to list its already publicly-

traded shares or debt securities on a foreign stock exchange. Before it can be listed

to a particular stock exchange, the company in question will first have to meet

certain requirements put forth by the exchange. Initial public offerings (IPOs),

however, can also issue a DR as well. DRs can be traded publicly or over-the-

counter. Let us look at an example of how an ADR is created and traded:ExampleSay a gas company in Russia has fulfilled the requirements for DR listing and now

wants to list its publicly-traded shares on the NYSE in the form of an ADR.

Before the gas company' s shares are traded freely on the exchange, a US broker,

through an international office or a local brokerage house in Russia, would

purchase the domestic shares from the Russian market and then have them

delivered to the local (Russian) custodian bank of the depository bank. Thedepository bank is the American institution that issues the ADRs in America. In

this example, the depository bank is Bank of New York. Once the Bank of New


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York' s local custodian bank inRussia receives the shares, this custodian bank

verifies the delivery of the shares by informing the Bank of New York that shares

can now be issued in the US. The Bank of New York then delivers the ADRs to

the broker who initially purchased them.

Based on a determined ADR ratio, each ADR may be issued as representing one

or more of the Russian local shares, and the price of each ADR would be issued in

US dollars converted from the equivalent Russian price of the shares being held by

the depository bank. The ADRs now represent the local Russian shares held by the

depository, and can now be freely traded equity on the NYSE.

After the process whereby the new ADR of the Russian gas company is issued, the

ADR can be traded freely among investors and transferred from the buyer to the

seller on the NYSE, through a procedure known as intra-market trading. All ADR

transactions of the Russian gas company will now take place in US dollars and are

settled like any other US transaction on the NYSE. The ADR investor holds

privileges like those granted to shareholders of ordinary shares, such as voting

rights, and cash dividends. The rights of the ADR holder are stated on the ADR

certificate.

When any DR is traded, the broker will aim to find the best price of the share in

question. He or she will therefore compare the US dollar price of the ADR with

the US dollar equivalent price of the local share on the domestic market. If the

ADR of the Russian gas company is trading at USD 12 per share and the share

trading on the Russian market is trading at USD 11 per share (converted from

rubles to dollars), a broker would aim to buy more local shares from Russia and

issue ADRs on the US market. This action then causes the local Russian price and

the price of the ADR to reach parity. The continual buying and selling in both

markets, however, usually keeps the prices of the ADR and the security on the


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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"). Depository 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. For more on emerging market economies (EMEs), see the article

"What Is an Emerging Market Economy?" which focuses on what EMEs are and

why they are drawing the attention of foreign investors. By issuing a DR, a

company can still encourage investment from abroad without having to worry

about barriers that a foreign investor might face.

For the investor

Buying into a DR immediately turns an investors' portfolio into a global one.

Investor' s 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 risk due to foreign exchange rate conversions, stemming from

uncertainties in emerging economies and societies. On the other hand, however,

the investor can also benefit from competitive rates the US dollar and euro have to

most foreign currencies. Investing in any security involves a certain amount of

risk - along with reward. However, risks specific to ADRs might include country

risk, as ADRs are backed by non-U.S. securities, and currency risk.


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Sponsored vs. Un-Sponsored ADRs

Sponsored ADRs offer the easiest method for foreign companies to issue

securities in the United States; they are tradable on the New York Stock Exchange

or the over-the-counter market. The underlying companies usually supplyfundamental information on their business, just like most American companies.

Also, exchanged listed companies must provide better financial information than

un-sponsored ADRs and non-exchange listed ADRs. To qualify for listing,

foreign companies must complete extensive filings with United States governing

bodies and provide financial reports similar to those of domestic companies.

On the other hand, un-sponsored ADRs are created without the consent of

the underlying foreign company, and at one time commanded the majority of

available ADRs. Now they are becoming less and less popular because the foreign

companies do not report their financial information to the United States, making

research more difficult for investors. These securities may be handled by more

than one bank and are not listed on American exchanges.

What is the difference between a Registered holder and a Beneficial ADR

holder?

A registered holder is one whose name appears on the books of the depositary.

The registered holder is considered the owner of record. A beneficial holder is one

whose holdings are registered in a name other than their own, such as in the name

of a broker, bank or nominee.

Introduced to the financial markets in 1927, an American Depository Receipt

(ADR) is a stock that trades in the United States but represents a specified number

of shares in a foreign corporation. ADRs are bought and sold on American

markets just like regular stocks, and are issued/sponsored in the U.S. by a bank or

brokerage.


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ADRs were introduced as a result of the complexities involved in buying shares in

foreign countries. Primarily the difficulties associated with trading at different

prices and currency values. For this reason, U.S. banks simply purchase a bulk lot

of shares from the company, bundle the shares into groups, and reissues them onthe NYSE, AMEX, or NASDAQ. The depository bank sets the ratio of U.S. ADRs

per home country share. This ratio can be anything less than or greater than 1. The

reason they do this is because they wish to price the ADR high enough as to show

substantial value, yet low enough, so that the individual investors can purchase

these shares. Most investors try to avoid investing in penny stocks, and many

would shy away from a company trading for 50 Russian Rubles per share, which

equates to $1.50 US per share. As a result, the majority of ADRs range between$10 and $100 per share. If, in the home country, the shares were worth

considerably less, then each ADR would represent several real shares. There are

three different types of ADR issues:

Level 1 - This is the most basic type of ADR where foreign companies

either don' t qualify or don' t wish to have their ADR listed on an exchange.

Level 1 ADRs are found on the OTC market and are an easy andinexpensive way to gauge interest for its securities in North America. Level

1 ADRs also have the loosest requirements from the SEC.

Level 2 - This type of ADR is listed on an exchange or quoted on

NASDAQ. Level 2 ADRs have slightly more requirements from the SEC

but they also get higher visibility trading volume.

Level 3 - The most prestigious of the three, this is when an issuer floats a

public offering of ADRs on a U.S. exchange. Level 3 ADRs are able to

raise capital and gain substantial visibility in the U.S. financial markets.


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The advantages of ADRs are twofold. For individuals, ADRs are an easy and cost

effective way to buy shares in a foreign company. They save considerable money

by reducing administration costs and avoiding foreign taxes on each transaction.

Foreign entities like ADRs because they get more U.S. exposure and allow themto tap into the wealthy North American equity markets. In return, the foreign

company must provide detailed financial information to the sponsor bank.

How ADR Prices are determined?

Now, let' s use an example to give you a better idea about how the ADR process

works. The recent boom in "Bloody Marys" has increased the prospects for the

vodka industry. Russian Vodka Inc. wants to list shares on the NYSE to gain

exposure to the U.S. citizens and to tap into the lush Bloody Mary market.

Russian Vodka already trades on the Russian Stock Exchange at 127 Russian

Rubles ($4.58 US). Let' s say that a U.S. bank purchases 30 million shares from

Russian Vodka Inc. and issues them in the U.S. at a ratio of 10:1. This means each

ADR share you purchase is worth 10 shares on the Russian Stock Exchange. A

quick calculation tells us that the new ADR should have an issue price of around

$45.80.

How is the performance determined? It floats on supply and demand just as

normal stocks do. But, if the U.S. price varies too far from the Russian price after

taking into account the currency exchange rate and the ratio of ADRs to home

country shares then an arbitrage opportunity will exist. ADRs do tend to follow the

general trend of the home country shares, but this is not always the case.

What are the risks associated with ADR prices?

There are several factors that determine the value of the ADR beyond the

performance of the company. Analyzing these foreign companies involves further


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scrutiny than merely looking at the fundamentals. Here are some other risks that

investors should consider:

Political Risk - Ask yourself if you think the government in the home

country of the ADR is stable? For example, you might be wary of Russian

Vodka Inc. because of the past history in Russian politics.

Exchange Rate Risk - Is the currency of the home country stable?

Remember the ADR shares track the shares in the home country, and if

their currency is devalued, it trickles down to your ADR. This can result in

a big loss even if the company had been performing well.

Inflationary Risk - This is an extension of the exchange rate risk. Inflation

is the rate at which the general level of prices for goods and services is

rising, and subsequently, purchasing power is falling.

Inflation can be a big blow to business, the currency of a country with high

inflation becomes less and less valuable each day.


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Indian Companies Listed in Major Global Stock Exchanges

Indian Companies Listed in New York Stock Exchange (NYSE)

1. Dr. Reddy' s Laboratories Limited

2. HDFC Bank Limited

3. ICICI Bank Ltd.

4. ICICI Limited

5. Satyam Computer Services Ltd.

6. Silverline Technologies Ltd

7. Silverline Technologies Ltd

8. Videsh Sanchar Nigam Limited

9. Wipro Limited

Indian Companies Listed in NASDAQ

1. Infosys Technologies Limited

2. Rediff.com India Limited

3. Satyam Infoway Limited (SIFY) - Listed: 19/10/1999

Indian Companies Listed in the London Stock Exchange

1. Aptech

2. Ashok Leyland

3. Bajaj Auto

4. BSES

5. CESC

6. Crompton Greaves

7. EID-Parry (India)

8. EIH

9. Gas Authority of India

10. Himachal Futuristic Communications

11. Indian Hotel Companies


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12. J.K.Corp

13. Mahanagar Telephone Nigam

14. Raymond

15. SIEL16. SSI

17. State Bank of India

18. Steel Authority of India

19. Tata Tea - Listed: 5/06/2000


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Research gap, objectives, hypothesis and research limitations

Research gap

Since various political and macro-economic factors and companys performance

come into play, there exist a price difference in share price in the foreign market

and price in the home country. Does this price difference influence the share price

at the home stock exchanges? This is really an interesting question. If it is

answered we might get some insight into the details of how it influences, whether

it acts as a leading or lagging indicator? What are the reasons for the influences?

Research Objective

To find is there an effect on the prices of Indian securities when they are tradedoutside India.

To find whether they act as Leading or Lagging Indicator

Problem statement

The price of Indian companies shares traded both in Indian stock exchange and

foreign stock exchanges are not the same, they are different. Does the price in the

foreign stock exchange provide information indicating movement of that shares

price in India?

Research Questions

A research question is the choice hypothesis that best states the objective of the

research study. It is a more specific question, which must be answered. It may be

more than one question or just one.

Does the trading of Indian securities outside India really provide

information of movement prices of that stock in India?

If so, does it act as a leading indicator or lagging indicator?


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Hypothesis

A proposal formed for empirical testing is a hypothesis. As a declarative

statement a hypothesis is of a tentative and conjectural nature. Hypotheses have

also been described as statements in which we assign variables to cases. Thehypotheses can be a descriptive hypothesis or relational hypotheses.

The form of hypothesis in this research is correlation hypothesis.

H0: There is NO relation between ADR price fluctuations and the price

fluctuations of corresponding Indian shares in Indian stock exchanges.

HA: There is relation between ADR price fluctuations and the price

fluctuations of corresponding Indian shares in Indian stock exchanges.

Research Limitations

The research is limited to impact of ADRs on Indian shares.

The research is confined only to the study of ADR prices and its impact on

Indian shares and not on the American stock market.

The study is limited to shares of seven companies and their ADRs due to

the problem in availability of data.

The study is limited by time constraints.


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LITERATURE SURVEY3


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Literature Survey

The literature review section examines recent research studies, company data, or

industry reports that act as a bass for the proposed study. Related literature and

secondary data gives comprehensive perspective. Earlier references will be

helpful if the problem has a historical background. Always the literature survey

reference should be to the original source. The literature applies to the study you

are proposing. The literature review may also explain the need for the proposed

work to appraise the shortcomings and informational gaps in secondary data

sources.

The first step in a research is a search of the secondary literature. Studies made by

others for their own purposes represent secondary data. Within secondary data

exploration, a researcher should start first with an organisations own data

archives. Reports of prior research studies often reveal an extensive amount of

historical data or decision-making patterns. By reviewing prior studies, you can

identify methodologies that proved successful and unsuccessful. The source of

secondary data is published documents prepared by authors outside the sponsor

organisation. A search of secondary sources provides an excellent background

and will supply many good leads if one is creative.

The literature on the ADRs is scant. There have been quite few studies regarding

the effect of fluctuation of global Depository Receipts on the corresponding

domestic shares in the home country. These research works were mainly on

focused on studying the change in the volatility and volume of trade of these

shares in the domestic market, due to the fluctuations in the American market.


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,QWKLVUHJDUGWKHVWXG\FRQGXFWHGE\'U.DWH LQD+ROLFNiRI&KH]NORYDNLDLV

important.

,QKHUVWXG\.DWHLQD+ROLFNiVWXGLHG

3 Czech, 3 Hungarian and 3 Polish stocks, to which DRs have been issued

Found that the prices of depositary receipts and their underlying shares are

very closely correlated.

Found that for all Czech and Hungarian shares the correlation coefficient

was above 0.99 and

For two of the Polish shares lower values.

'U.DWH LQD+ROLF k in her research sample included 19 DR issues by Central

European companies - from Chezklovakia Republic, Poland and Hungary. The

research findings were as follows

I Liquidity effects

Cross listing may enhance liquidity of the actual shares on the local market:

increased visibility of the company

reduction in the information asymmetry (better analysts coverage)

Possibility of cross-border trading.

II Spill over effect on the local stock market

International cross-listing can alter incentives of companies and individuals

to participate in the market and can that way contribute to transformation of

a segmented local equity market with low liquidity to an integrated market

with high liquidity and capitalization.

On the other hand, concerns are frequently expressed that migration of

major share of market capitalization and value traded from small emerging


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stock exchanges to leading financial centres has adverse consequences on

the overall quality of the local market.

The whole market activity development is thus tightly connected with the

behaviour of the two shares. We can therefore not easily differentiatebetween the market wide and stock-specific influences.

Based on the above findings she concluded her study as follows

The DR and underlying shares pri ces of CE companies turned out to be

almost perfectly correlated; hence there dont seem to be many

opportunities for profitable arbitrage. Such a result supports the hypothesis

of markets integration

It is usually expected that a DR issue lowers cost of capital to the company;

lower cost of capital implies higher shareholder value, which is reflected in

the DR Price.

A range of different DR types has evolved to satisfy the needs of all

investors and issuers. The most frequently chosen approach by the CE

companies was a simultaneous offering to institutional investors in the US

and in London.

A research paper was submitted by Dr. Mahu Kalimpali and Dr. Latha Ramachand

to the National stock Exchange (NSE) of India. In their paper Dr Mahu Kalimpali

and Dr Latha Ramachand studied 49 firms equity issues. Dr Mahu Kalimpali and

Dr Latha Ramachand examined volatility of returns, volumes and price range

measures for a sample of Indian firms that raise equity capital on foreign markets.

They found that

On average there is a decline in returns, volatility of daily high/low price

range of the firmsequity on the local market subsequent to the foreign

capital raising event.

Volatility of the underlying returns is higher after the equity issue.


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Exposure to a foreign capital market via equity issue and listing does not

result in a significant improvement in liquidity on the home market

compared to firms that do not have this foreign exposure.

Given the firms that raise capital abroad are generally larger firms issuingsignificantly greater amounts of equity, the results suggest that foreign

exposure via listing or issue may not be an available option to small firms.

Based on a study of 113 ADRs from eight countries over the 1980-1994 periods,

Jiang (1998) reports three findings.1

1. The ADRs outperform their respective local market indices.

2. the ADRs are influenced by their respective market index portfolios, while,

for countries with co-integrated ADRs and market portfolios, the effect of

the ADRs on local market portfolios is significant.

3. Third, although the ADR returns are significantly correlated with US

returns, they are also affected by local market conditions and exchange

rates, indicating diversification benefits of the ADRs through two sources:

a country diversification and a currency.

They conclude that the ADRs, especially those in emerging markets, offer

significant international diversification benefits to US investors.

Mr. Khutan and Zhou find the following in their study.

1. Underlying, local, and host markets all are important predictors of the

ADRs returns.

2. In terms of the conditional volatility, we find that only underlying markets

have a significant impact on the volatility of the ADRs.

3. US shocks have no significant impact on the conditional volatility (risk) of

the ADRs

1Determinants of Returns and Volatility of Chinese ADRs at NYSE, Ali M. Kutan, Southern Illinois University

Edwardsville, Emerging Markets Group, London.


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To profit out of that price fluctuation one need to consider the foreign exchange

rate fluctuations too. In Germany two people conducted a study to find out where

the price discovery occurs during the overlapping trading hours of NYSE and

FRANKFURT stock exchanges.

2

In their study they found that1. The price discovery occurs largely in the domestic market to even out the

arbitrage opportunity.

2. Multinational firms would have more room for international price

discovery than that are essentially operating in the home market alone.

3. Home markets largely determining the random walk component of the

international value of the firm along with an independent role for exchange

rate shocks to affect prices in the derivatives market.

On 31-December-2000, in The Business Line newspaper the following newsprint

appeared.

During the year 2000, the price movements of American Depository Shares and

Global Depository Receipts listed in the overseas markets appear to have generally

mirrored the movements in prices of underlying securities at the local markets.

On an average, while the price decline in the case of ADRs and GDRs was 24.8

per cent, the prices of underlying securities fell by around 25.7 per cent.

However, the average masks a number of cases in which divergent price trends

were evident. On top of the list are GDRs such as Flex Industries, Ballarpur

Industries, Garden Silk, EID Parry, SI Viscose and Ispat Industries. These GDRs

out-performed the price movements in the underlying stocks. Bottom of the pile

are GDRs/ADRs such as EIH, Bombay Dyeing, Finolex Cables, ITC and Gas

Authority. In the case of these stocks, the ADRs/GDRs under-performed the price

2Internationally cross listed stock prices during overlapping trading hours: Price discovery and exchange

rate effects. By Joachim Grammig, Michael Melvin and Christian schlag.


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movement in the underlying stocks. These price movements have tended to realign

the premium/discount at which these instruments trade overseas noticeably.


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The difference in the performance of VSNL and Wipro over the other fresh offers

has a direct correlation with the timing of the offers. Wipro and VSNL made their

offers at the fag end of the year when the prices in the local markets were already

at more realistic levels and, as such, further declines in price compared to the offerprice have been averted. The other ADR/GDR offering were made in the earlier

part of the year. Their prices were linked to the domestic market price even at the

time of the offer, with the price fixed in the region of 10 per cent above or below

the domestic price. And, not surprisingly, just as their prices crashed at the

domestic markets, the prices of the ADRs and GDRs also tumbled.

Mr. Ajay Sharma in his research says the following.

We have preponderant evidence, and conceptual arguments, in favour of large-

scale ownership of local firms by foreign shareholders. For example, it makes

great sense for Indian investors to buy shares of foreign companies: doing so

would yield improved diversification and hence low risk for Indian investors. By

the same coin, Indian equity risk is uncorrelated with global portfolios, so foreign

investors require a lower rate of return from Indian equities. Thus, foreign

ownership of Indian equity reduces the cost of capital in India, and makes more

investment projects viable.

How can foreign investment into Indian equities be implemented? Broadly, there

are two strategies: either foreign investors can buy Indian shares in India, or Indian

firms can list their shares abroad in order to make these shares available to

foreigners.


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Foreign investors buying shares in India has traditionally been limited by two

problems:

1. The first problem faced is poor market design on the Indian equity market.

When foreign investors first appeared in India, in the early 1990s, they

were horrified at the equity markets that they saw. The Indian equity market

imposed extremely large transactions costs upon investors (i.e., it was

highly illiquid). This was an obvious motivation for GDRs and ADRs:

Indian firms saw these as a way to bypass the incompetent Indian equity

market mechanisms and instead jump to the well-functioning equity

markets found abroad. When Indian firms issued shares on the GDR or

ADR markets, their shares commanded a higher price owing to a liquidity

premium.

2. The second problem faced is restrictions on equity ownership by foreigners.

Only "foreign institutional investors" can buy shares in India, while anyone

can buy GDRs or ADRs. FIIs face restrictions on the fraction of a firm that

can be purchased. This imposes ceilings on foreign ownership. In contrast,

participation in the GDR or ADR market is unencumbered, and henceGDRs or ADRs generally enjoy a premium.

From 1994 onwards, with the rise of electronic trading, clearing corporation and

depository, the first order mistakes in market design in India have been addressed.

The Indian equity market has obtained a quantum leap in liquidity. We are still

inferior to international standards in a few respects, such as the rolling settlement,

the presence of leveraged trading on the spot market, and the limited access to

derivatives. However, the picture on liquidity has turned around completely. It is

easy to examine the ` market by price' on NSE, and compare it with the bid/offer

spreads seen for GDRs or ADRs: we see sharply higher liquidity on NSE. From


34/64

1996 onwards, there has been no liquidity premium argument which favours

offshore listing.

This superiority of liquidity in India is not accidental. The liquidity of the stock

market is ultimately driven by retail investors and speculators, who are found in

the home country, in Indian standard time. Hence, no foreign market can ever

harness the liquidity which is found in India. Indeed, a firm which issues ADRs or

GDRs actually suffers an opportunity cost by listing abroad: if it had (instead)

issued shares domestically, it would have improved local liquidity and obtained a

liquidity premium. Instead, issuance abroad fragments the order flow and yields

no improvement to local liquidity.

In this conceptual framework, what is the optimal policy for a firm which operates

under existing Indian regulations and laws, and seeks to obtain the highest

possible valuation? We can propose a few ingredients:

As far as possible, it is better for a firm to issue shares in India, and obtain

good liquidity by building up market capitalisation and retail investors in

India.

Foreign investors would always be willing to pay higher prices for Indian

shares, so it is important to woo FIIs. The companies with the largest

fraction of foreign ownership would obtain the highest P/Es and the lowest

cost of capital. Towards this goal, the company should pass the special

resolution which raises the limit upon FII shareholding from 24% to 40%.

When the company hits the limit of 40% FII shareholding, it makes sense to

use ADRs or GDRs as a way of further improving foreign shareholding.

The benefits here (of greater foreign ownership giving an improved

valuation) are diminished to the extent that GDRs and ADRs are extremely

illiquid. The two--way fungibility, announced in the budget speech, will


35/64

help improve the liquidity of ADRs or GDRs, but there is no possibility of

an ADR or GDR being as liquid as NSE.

Conversely, there is no real argument in favour of GDR or ADR issuance

for an Indian firm which has not yet hit the 40% limit.

The above recipe is appropriate for a firm in India which faces existing economic

policies. Suppose we could change these economic policies, and try to find the

economic policy strategy which would yield the lowest possible cost of capital for

the firms of India. What would we undertake?

Foreign investment brings capital into India, and reduces the cost of capital

for a firm. From the perspective of economic freedom, the shareholders of a

firm should be free to choose whom they sell shares to. The sale of a share

is a private action between one investor and another. This budget has made

a step in the right direction by allowing shareholders to increase the limit

on FII shareholding from 30% to 40%. However, this limit should be raised

to 100%. A firm should be free to sell shares to anyone it wants; the

Government of India should not have a say in this matter.

The definition of "FII" should be steadily broadened, so as to improve the

investor base that all Indian companies can access. This would eliminate

the incentive that Indian firms are given, to suffer poor liquidity in offshore

markets, in order to obtain a wider foreign investor base.

Ranking of countries which have issued ADRs by Mr. James M Donald, Lazard

Asset Management Company


36/64

How the GDRs/ADRs of Indian

Companies Fared

(Sunday, October 29, 2000)Current Current RETURNSOVERGDR Premium/offer price the WeekPrice Discount $Terms $TermsCompany(Rs.) (%) (%) (%)

SBI 160 1 (51) 33Silverline ADR 375 17 (34) 31G E Shipping 35 5 (76) 25Ashok Leyland 53 11 (73) 21SPIC 14 60 (87) 20EID Parry 80 15 (79) 17


37/64

Arvind Mills 16 74 (96) 17Ranbaxy Laboratories 859 21 94 13Grasim Industries 252 24 (58) 10L & T 164 4 (57) 8ITC 861 14 146 7United Phosphorous 69 19 (93) 7Tube Investments 73 5 (76) 7East India Hotels 218 10 (49) 6Reliance Industries 310 2 66 5SSI 2519 9 (62) 5G A I L 50 11 N.A. 5Rediff ADR 97 N.A (65) 5M T N L 137 (0) (50) 4Bajaj Auto 344 29 (56) 4Indian Hotels 202 3 (73) 4Gujarat Ambuja 149 13 118 3Bombay Dyeing 128 10 (70) 2Infosys Technologies ADR 11839 64 660 2Mahindra & Mah. 149 12 (27) 2IPCL 61 21 (71) 1Hindalco 737 (2) 1 1Tata Tea 183 6 (59) 0SIV Industries 23 484 (97) 0


38/64

Wockhardt 893 142 36 0T E L C O 80 11 (88) 0Sanghi 5 (7) (95) 0Usha Beltron 64 38 (87) 0Raymond Woollen 103 1 (58) 0SAIL 7 37 (83) 0NEPC Micon 11 450 (92) 0Oriental Hotels 115 43 (80) 0SIEL 8 61 (95) 0Kesoram Industries 39 119 (47) 0Flex Industries 23 21 (88) 0Finolex Cables 229 5 (40) 0GNFC 23 3 (80) 0H D C 11 179 (88) 0Garden Silk Mills 10 28 (96) 0DCW 8 122 (94) 0CESC 23 24 (95) 0Ballarpur Industries 115 52 (71) 0Century Textiles 34 22 (94) 0Crompton Greaves 34 46 (90) 0Core Healthcare 23 100 (96) 0India Cements 39 11 (80) 0Indo Gulf Fertilizers 46 31 (78) 0


39/64

Indian Rayon 69 3 (90) 0J K Corp 27 118 (93) 0ICICI ADR 179 141 99 0Jain Irrigation 23 192 (95) 0JCT 6 53 (93) 0Ispat Industries 9 154 (91) (0)Aptech 394 (9) (40) (1)ICICI 78 5 (26) (1)Dr.Reddy's 1420 1 178 (3)Himachal Futuristic 1122 (5) 954 (4)Videocon International 55 33 (85) (4)Indian Aluminium 110 20 (65) (4)VSNL 719 11 (44) (6)Tata Power 62 (9) (81) (7)BSES 183 3 (17) (8)Satyam Infoway ADR 352 N.A. 71 (14)ICICI Bank ADR 115 (0) (55) (15)Sterlite 160 2 (80) (85)


40/64

According to Bank of NewYork the following chart has been found.


41/64


42/64

RESEARCH METHODOLOGY4


43/64

Research methodology

Research Design

The research design constitutes the blueprint for the collection, measurement and

analysis of data. It aids the scientist in the allocation of his limited resources by

posing crucial choices. Research design is the plan and structure of investigation

so conceived as to obtain answers to research questions. The plan is the overall

scheme or program of the research. It includes what the investigator will do from

writing hypotheses and their operational implications to the final analysis of data.

The design is a plan for selecting the sources and types of information used to

answer the research question. It is a framework for specifying the relationships

among the studys variables. It is a blueprint that outlines each procedure from the

hypotheses to the analysis of data.

Type of study

A study may be viewed as exploratory or formal. The essential distinction

between these two is the degree of structure and the immediate objective of the

study. This research is a quantitative study, since it involves analysing of numbers

to a great numbers.

Sample size

The sampling technique used to take the sample for the research is convenient

sampling technique. The companies whose stock are taken for the research

purpose are selected based on the following criteria

Should be considered in NIFTY index calculation

market capitalisation in NSE and

availability of share price in the American stock exchanges.


44/64

Companies taken for research are given below.

Company Date of issuing ADR

Dr. Reddys Lab 11/04/2001HDFC Bank Ltd. 20/07/2001

ICICI Bank Ltd. 28/03/2000

Infosys Technologies Ltd. 11/03/1999

Satyam Computers Ltd. 15/05/2001

TATA Motors ltd. 24/10/2004

VSNL 15/08/2000

Table 6

The stock symbol of these in domestic and NSE

Company ADR Symbol NSE Symbol

Dr. Reddys Lab RDY DRREDDY

HDFC Bank Ltd. HDB HDFCBANK

ICICI Bank Ltd. IBN ICICIBANK

Infosys Technologies Ltd. INFY INFOSYSTCH

Satyam Computers Ltd. SAY SATYAMCOMP

TATA Motors ltd. TTM TATAMOTORS

VSNL VSL VSNL

Table 7

Data collection

The data collected for the research purpose are secondary data. The ADR prices

were collected through YAHOO! FINANCE and through DATASTREAM

website. The corresponding share prices were closing prices of the National stock


45/64

Exchange (NSE), India and these share prices were collected through Bangalore

Stock Exchange Financial Ltd.

The share prices are adjusted to Bonus Issues and dividend payments. The return

is found from the share prices. The return is calculated as follows.

Return= P1/P0

The return thus found is a relative return. The natural logarithm is then found for

the return.

The correlation of the returns on ADR and the corresponding Indian shares are

found using the following formulae

Karl Pearsons coefficient of correlation

R= N;


46/64

Cross correlation

Cross correlation is a standard method of estimating the degree to which two

series are correlated. Consider two series x(i) and y(i) where i=0,1,2...N-1. The

cross correlation r at delay d is defined as

Where mx and my are the means of the corresponding series. If the above is

computed for all delays d=0,1,2,...N-1 then it results in a cross correlation series of

twice the length as the original series.

There is the issue of what to do when the index into the series is less than 0 or

greater than or equal to the number of points. (i-d < 0 or i-d >= N) The most

common approaches are to either ignore these points or assuming the series x and

y are zero for i < 0 and i >= N. In many signal processing applications the series is

assumed to be circular in which case the out of range indexes are "wrapped" back

within range, ie: x(-1) = x(N-1), x(N+5) = x(5) etc.


47/64

Analysis and Interpretation5


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TABLE 8

AUTO CORRELATION FOR ADR PRICES AND NSE STOCK PRICES

LAGS 1 2 3 4 5 6

COMPANY MARKET

ADR -0.061-(1.9) -0.031-(0.09) 0.001(0.03) -0.034-(1.06) -0.023-(0.71) -0.0041-(1.28)Dr. Reddy's Lab

NSE0.01

(0.31)-0.062-(1.93)

-0.028-(0.87)

0.003(0.09)

-0.009-(0.28)

-0.037-(1.16)

ADR-0.21

-(0.63)-0.063-(1.9)

-0.016-(0.48)

-0.009-(0.27)

0.017(0.51)

-0.057-(1.72)HDFC bank

NSE-0.139(4.21*)

-0.05-(1.51)

0.046(1.39)

-0.029-(0.87)

-0.008-(0.24)

0.006(0.242)

ADR-0.006-(0.18)

-0.034-(1.06)

0.069(2.15*)

0.015(1.59)

-0.014-(0.43)

0.045(1.4)ICICI bank

NSE

0.055

(1.71)

-0.025

-(0.78)

0.004

(0.12)

0.015

(0.46)

-0.017

-(0.053)

0.008

(0.25)

ADR0.061(1.9)

-0.109(3.4*)

-0.037-(1.15)

-0.016(0.5)

0.017(0.53)

-0.027-(0.84)INFOSYS TECH

NSE0.02

(0.62)-0.027-(0.84)

-0.01-(0.31)

-0.001-(0.03)

-0.04-(1.25)

-0.019-(0.59)

ADR-0.008-(0.24)

-0.082(2.48*)

0.051(1.59)

0.01(0.31)

-0.032(0.31)

-0.071-(1.)SATYAM COMP

NSE-0.009-(0.27)

-0.036-(1.09)

0.03(0.93)

0.003(0.09)

-0.049-(1.53)

-0.092(2.87*)

ADR-0.011-(0.12)

0.1(1.12)

-0.14-(1.59)

-0.41(0.46)

-0.037-(0.42)

-0.019-(0.21)

TATA MOTORS

NSE0.037

-(0.41)0.103(1.15)

-0.089-(1.01)

0.004(0.04)

-0.041-(0.46)

0.098(1.12)

ADR0.028(0.87)

-0.064-(2.)

0.046(1.43)

0.077(2.4)

-0.048(1.5)

-0.011-(0.34)VSNL

NSE0.059(1.84)

0.001(0.03)

-0.015-(0.46)

0.014(0.43)

-0.026-(0.81)

-0.017-(0.53)

Values given in brackets represent t values

* refers to t value significant at 5% level


49/64

LAGS 7 8 9 10 11 12

COMPANY MARKET

ADR-0.019-(0.59)

0.049(1.53)

0.007(0.02)

0.01(0.31)

-0.015-(0.46)

0.053(1.65)Dr. Reddy's

LabNSE

-0.08(2.5*)

-0.0001-(0.03)

0.064(2.)

0.008(0.25)

-0.015-(0.46)

-0.009-(0.28)

ADR0.026(0.78)

-0.062-(1.87)

-0.025-(0.7)

0(0.)

0.083(2.51*)

-0.006-(0.18)HDFC bank

NSE-0.024-(0.72)

-0.018-(0.54)

-0.016-(0.48)

0.02(0.6)

-0.07(2.12*)

-0.004-(0.12)

ADR-0.043-(1.34)

-0.083(2.59*)

-0.006-(0.18)

0.025(0.78)

0.002(0.06)

-0.028-(0.87)ICICI bank

NSE0.032

-(1.)0.015(0.46)

0.009(0.28)

-0.012-(0.37)

-0.045-(1.4)

-0.046-(1.43)

ADR

0.023

(0.71)

0.02

(0.62)

-0.06

-(1.87)

0.014

(0.43)

0.062

(1.9)

-0.013

-(0.4)INFOSYSTECH

NSE-0.003-(0.09)

0.003(0.09)

-0.021-(0.65)

-0.016-(0.5)

0.015(0.46)

0.011(0.34)

ADR0.001

(2.21*)0.049(0.03)

-0.037-(1.15)

0.019(0.59)

0.063(1.96)

0.009(.28)SATYAM

COMP

NSE0.006(0.18)

0.031(0.96)

-0.047-(1.46)

0.013-(0.4)

0.01(0.31)

0.034(1.06)

ADR-0.034-(0.39)

0.184(2.17*)

-0.117-(1.36)

0.076(0.88)

0.096-(1.12)

0.063(0.74)TATA

MOTORS

NSE-0.041-(0.47)

-0.144(1.6)

-0.095-(1.1)

0.005(0.05)

-0.008-(0.09)

0.048(0.56)

ADR -0.027-(0.84) 0.024-(0.75) 0.14(0.43) -0.039-(1.21) -0.024(0.75) 0.015(0.46)VSNL

NSE0

(0.)-0.022-(0.68)

-0.069(2.15*)

-0.048-(1.5)

-0.011-(0.34)

0.01(0.31)




50/64

LAGS 13 14 15 16

COMPANY MARKET

ADR0.013(0.4)

-0.016-(0.5)

-0.044-(1.37)

-0.037-(1.15)Dr. Reddy's

LabNSE

-0.014-(0.43)

0.056(1.75)

0.016(0.5)

0.023(1.)

ADR-0.034-(1.03)

-0.031-(0.93)

-0.024-(0.72)

-0.061-(1.84)HDFC bank

NSE-0.034-(1.03)

-0.045-(1.36)

0.009(0.27)

0.035(1.06)

ADR-0.041-(1.28)

0.031(0.96)

0.006-(0.18)

0.004-(0.12)ICICI bank

NSE-0.009-(0.28)

-0.032-(1.)

-0.027-(0.84)

-0.032-(1.)

ADR

-0.029

(0.9)

-0.03

-(9.37)

-0.029

-(0.9)

0

(0.)INFOSYSTECH

NSE0.008(0.25)

-0.017-(0.53)

-0.017-(0.53)

0.003(0.09)

ADR-0.04

-(1.25)-0.026-(.81)

0.021(.65)

-0.015-(.46)SATYAM

COMP

NSE-0.022-(0.68)

-0.016-(0.5)

-0.036-(1.12)

0.03-(0.93)

ADR-0.047-(0.55)

0.029-(0.34)

-0.088-(1.04)

-0.044(0.53)TATA

MOTORS

NSE-0.053-(0.62)

0.038(0.45)

-0.117-(1.39)

0.036(0.43)

ADR 0.03(0.93) -0.041-(1.28) -0.03-(0.93) -0.005-(0.15)VSNL

NSE0.041(1.28)

0.004-(0.12)

-0.53(1.65)

0.029(0.9)


refers to t value significant at 5% level


51/64

TABLE 8

CROSS CORRELATION BETWEEN NIFTY AND ADR AND CROSS

CORRELATION BETWEEN ADR AND THE NSE STOCK

LAGS -10 -9 -8 -7 -6 -5

COMPANY MARKET

N-A0.017(0.53)

0.005(0.16)

0.01(0.31)

-0.026(0.81)

-0.004-(0.13)

0.049(1.53)Dr. Reddy's

Lab

A-S0.043(1.34)

-0.036(1.13)

0.038(1.19)

-0.029(0.91)

-0.015(0.47)

-0.026(0.81)

N-A0.024(0.71)

-0.018-(0.53)

-0.083(2.52*)

-0.011-(0.33)

-0.015-(0.45)

-0.043-(1.3)HDFC bank

A-S0.025(0.74)

-0.068-(2.)

0.008(0.24)

-0.025-(0.76)

-0.007-(0.21)

0.015(0.45)

N-A0.01

(0.31)0.004(0.13)

0.008(0.25)

0.007(0.22)

-0.018-(0.56)


A-S-0.011-(0.34)

0.009(0.28)

-0.01-(0.31)

-0.013-(0.41)

0.063(1.97)

-0.025-(0.78)

N-A-0.004-(0.13)

0.001(0.03)

-0.008(2.5*)

-0.042-(1.31)

0.054(1.69)

0.052(1.63)INFOSYS

TECH

A-S0.032

(1.)-0.03

-(0.94)0.012(0.38)

-0.011-(0.34)

0.006(0.19)

-0.049-(1.53)

N-A0.047(1.47)

-0.044-(1.33)

-0.04-(1.21)

0.007(0.21)

-0.012-(0.36)

-0.011-(0.34)SATYAM

COMP

A-S0.02

(0.61)-0.049-(1.48)

0.05(1.52)

0.008(0.24)

-0.036-(1.09)

-0.053-(1.61)

N-A0.016(0.17)

0.035(0.37)

0.06(0.65)

-0.106-(1.14)

-0.112-(1.22)

-0.013-(0.14)TATA

MOTORS

A-S -0.014-(0.15) -0.096-(1.02) 0.138(1.48) -0.05-(0.54) 0.064(0.7) -0.013-(0.14)

N-A-0.031-(0.97)

-0.021-(0.66)

0.007(0.22)

0(0.)

0.125(3.91*)

0.084(2.63*)VSNL

A-S-0.035-(1.09)

-0.108(3.38*)

-0.022-(0.69)

0.042(1.31)

-0.032-(1.)

0.013(0.41)




52/64

LAGS -4 -3 -2 -1 0

COMPANY MARKET

N-A-0.002-(0.06)

0.032(1.)

0.024(0.75)

0.031(0.99)

-0.024-(0.75)Dr. Reddy's

LabA-S

-0.032-(1.)

0.017(0.53)

-0.018-(0.56)

-0.001-(0.03)

0.274(8.56*)

N-A0.062(1.88)

0.072(2.18*)

-0.081-(2.45*)

0.088(2.67*)

0.338(10.24*)HDFC bank

A-S-0.006-(0.18)

0.042(1.27)

0.045(1.36)

0.017(0.52)

0.317(9.61*)

N-A0.088

(2.75*)0.052(1.63)

-0.062-(1.94)

0.1(3.13*)

0.336(10.5*)ICICI bank

A-S0.021(0.66)

0.056(1.75)

0.037(1.16)

0.001(0.03)

0.069(2.16*)

N-A0.052(1.63)

-0.043-(1.34)

-0.064-(2.)

0.188(5.88*)

0.317(9.91*)INFOSYS

TECHA-S

0.002(0.06)

0.028(0.88)

0.007(0.22)

-0.017-(0.53)

0.317(9.91)

N-A2

(2.)0.099

(3.)0.022(0.67)

0.13(3.94*)

0.466(14.12*)SATYAM

COMP

A-S-0.02

-(0.61)0.055(1.67)

-0.019-(0.58)

0.015(0.45)

0.622(18.85*)

N-A0.203

(2.21*)-0.142-(0.14)

0.049(0.54)

0.196(2.15*)

0.616(6.84*)TATA

MOTORS

A-S-0.025-(0.27)

-0.042-(0.46)

0.071(0.78)

0.088(0.97)

0.796(8.84*)

N-A

-0.029

-(.91)

0.106

(3.31

*)

0.336

(10.5

*)

-0.015

-(.47)

-0.062

-(1.94)VSNL

A-S0.117

(3.66*)-0.009-(0.28)

-0.018-(0.56)

0.043(1.34)

0.5(15.63*)




53/64

LAGS 1 2 3 4 5

COMPANY MARKET

N-A0.033(1.03)

-0.002-(0.06)

-0.65(20.31*)

0.044(1.38)

0.06(1.88)Dr. Reddy's

LabA-S

0.234(0.73)

-0.023-(0.72)

-0.042-(1.31)

0.039(1.22)

0.016(0.5)

N-A0.041(1.24)

-0.038-(1.15)

0.047(1.42)

0.065(1.97)

-0.006-(0.18)HDFC bank

A-S0.146

(4.42*)-0.089-(2.7*)

0.023(0.7)

-0.009-(0.27)

0.038(1.15)

N-A0.037(1.16)

0.003(0.09)

0.046(1.44)

0.015(0.47)


A-S0.517

(16.16*)0.151

(4.72*)-0.001-(0.03)

1(1.)

0.056(1.75)

N-A0.01

(0.31)-0.015-(0.47)

0.014(0.44)

-0.015-(0.47)

-0.051-(1.59)INFOSYS

TECHA-S

0.167(5.22*)

-0.051-(1.59)

-0.026-(0.81)

1.25(1.25)

0.002(0.06)

N-A-0.016-(0.48)

-0.034-(1.03)

0.024(0.73)

0.024(0.73)

-0.04-(1.21)SATYAM

COMP

A-S0.125

(3.79*)-0.023-(0.7)

0.077(2.33*)

0.01(0.3)

-0.057-(1.73)

N-A0.066(0.73)

0.066(0.73)

-0.05-(0.55)

0.12(0.13)

-0.106-(1.15)TATA

MOTORS

A-S0.083(0.91)

0.0991(1.09)

-0.144-(1.58)

0.025(0.27)

-0.543-(0.54)

N-A0.065

(2.03*)0.053

(2.53*)-2.125

-(2.13*)-0.032-(0.03)

0.036(1.13)VSNL

A-S0.24

(7.5*)0.001(0.03)

0.049(1.53)

0.026(0.81)

-0.02-(0.63)




54/64

LAGS 6 7 8 9 10

COMPANY MARKET

N-A-0.055-(1.72)

0.038(1.19)

0(0.)

0.071(2.22*)

-0.018-(0.56)Dr. Reddy's

LabA-S

-0.03-(0.94)

-0.016-(0.5)

0.045(1.41)

0.019(0.59)

0.027(0.84)

N-A-0.084

-(2.55*)0.059(1.79)

0.026(0.79)

-0.02-(0.59)

0.002(0.06)HDFC bank

A-S-0.012-(0.36)

0.007(0.21)

-0.0833-(2.52*)

0.006(0.18)

0.017(0.5)

N-A-0.011-(0.34)

0.015(0.47)

-0.001-(0.03)

0.006(0.19)


A-S0.047(1.47)

0.02(0.06)

0.001(0.03)

-0.021-(0.66)

0.001(0.03)

N-A-0.029-(0.91)

0.027(0.84)

0.036(1.13)

0.029(0.91)

0.22(6.88)INFOSYS

TECHA-S

-0.03-(0.94)

-0.005-(0.16)

0.038(1.19)

-0.011-(0.34)

0.016(0.5)

N-A-0.047-(1.42)

-0.008-(0.24)

0.077(2.33*)

-0.01-(0.3)

0.019(0.58)SATYAM

COMP

A-S-0.08

-(2.42*)-0.012-(0.36)

0.052(1.58)

-0.034-(1.03)

0.016(0.48)

N-A-0.021-(0.23)

-0.028-(0.3)

0.046(0.49)

0.003(0.03)

-0.137-(1.46)TATA

MOTORS

A-S0.042(0.46)

0.024(0.26)

0.155(1.67)

-0.101-(1.07)

0.027(0.29)

N-A0.017(0.53)

0.023(0.72)

0.029(0.91)

-0.028-(0.88)

0.039(1.22)VSNL

A-S0.125

(0.125)-0.009

-(0.281)-0.017

-(0.531)-0.039

-(1.219)-0.005

-(0.156)




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Analysis and Interpretations

Cross correlation

Cross correlation is run for seven companies in the following ways.

1. Between S&P CNX NIFTY returns and the ADR returns for eachcompany (this shows how much the NIFTY and ADR prices are

correlated. This is mainly due to the industry, economic and political

factors.),

2. Between ADR returns and the returns of the corresponding shares in the

domestic market (this shows how much the ADR and the NSE quote are

correlated and how well they move in tandem. This is mainly due to the

factors that are specific to the company and the industry.) and

3. The cross correlation is run at lag of 10 days.

T-value is computed for the correlation values at various lags by dividing the

correlation value with the standard error.

The significance in positive lag of the NIFTY-ADR will imply that ADR price

fluctuation is a LEADING indicator and of the ADR-NSE quote will imply that

ADR price fluctuation is a LAGGING indicator. The significance in negative lag

of the NIFTY-ADR will imply that ADR price fluctuation is a LAGGING

indicator and of the ADR-NSE quote will imply that ADR price fluctuation is a

LEADING indicator. This can be summarised as follows.

LEADING LAGGING

LAGGING LEADING

NIFTY-ADR

ADR-NSE

+ VE LAG -VE LAG


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From the results we find the following in each company.

Dr. Reddys Lab : The T-values at the 0th

lag, 3rd

lag and 9th

lag are greater than

two, i.e., the correlation is significant at 9th

lag. This means that the price change

of NIFTY index, of National Stock Exchange of India, on Day 1 will be reflectedon the 9

thday in the Dr. Reddys Lab ADR price. So in this case ADR price is a

LEADING indicator to NIFTY. At the same time the T-value at lag zero is 8.23 in

the case of ADR-NSE quote and therefore highly significant in case of the ADR-

NSE share price relationship. This means that any fluctuation in the prices of Dr.

Reddys Lab ADR is reflected on the NSE quote on the same day. Its influence is

immediate.

HDFC Bank : The T-values of lags -8, -3, -2, -1 and 0 are greater than two and

therefore they are significant. Since the significance is found in the minus lags, it

is to be understood that the influence of NIFTY index is more on the price of

HDFC Bank ADR. The fluctuation on NIFTY index today will influence the

HDFC Bank ADR within the next three days. Therefore the ADR is LAGGING

indicator to NIFTY. At the same it is found that at lag zero, lags 1 of the ADR-

NSE relationship the T-value is highly significant. This means that any price

fluctuation in the NSE will immediately influence the HDFC Banks ADR price

for the next two days. Here too the ADR is LAGGING indicator to ADR-NSE

quote for HDFC Banks stock.

ICICI Bank : The T-value is significant in -4,-1 and 0 lags in ADR-Nifty cross

correlation. The significance in the negative lags show that the NIFTY index

fluctuation today will influence the ICICI Banks ADR price four days later.

Since the significance in the zero lag is more, there are more chances that ADR

price fluctuation will immediately influence the NIFTY index. In this case the

ADR is a LAGGING indicator to NIFTY index. In case of ADR-NSE quote of

ICICI bank, the significance is high on 0, 1st

and 2nd

lags. This means that


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influence of fluctuation of NIFTY index is immediate on prices of ICICI Banks

ADR and is found for continuous two days. Here too ADR is a LAGGING

indicator to ADR-NSE quote to ICICI Banks stock.

INFOSYS Technology: The T-value is significant in -1 and 0 lags. The

significance in the negative lag and the zero lag points out that the ADR price

fluctuation of INFOSYS Technologys ADR influences the NIFTY index

immediately. The NIFTY index is very sensitive to the movement of price

fluctuations of INFOSYS ADR. In this case ADR is a LEADING indicator to

NIFTY index. The T-value for lag 0 and lag 1 is very high and is highly

significant, in the case ADR-NSE quote. This shows that the INFOSYS ADR

price movement influences the NSE quote for INFOSYS Technologys share on

the day of price fluctuation itself. Here too ADR is a LEADING indicator to

ADR-NSE quote for Infosys technologys stock.

SATYAM Computers: The T-value for the lags -4, -3, -1 and 0 are highly

significant since they are more than two. ADR is a LAGGING indicator to

NIFTY index. The significance in the negative lags implies that the NIFTY index

is being influences the SATYAM Computers ADR price. This influence will

occur in 3rd and 4th days after the fluctuation. The T-value for the lags 0 and 1

are very high, in the case of ADR-NSE quote. They are significant and ADR is a

LAGGING indicator here.

TATA Motors: The T-value for the lags -1 and 0 are significant. They are

LAGGING indicator to NIFTY index. The NIFTY fluctuation today will

influence the TATA MOTORS ADR tomorrow. The T-value for lag zero is

greater than 2 and significant, in the case of ADR-NSE quote. This means than

the price fluctuations of Tata motors is immediately reflected on the ADR price of

TATA motors.


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VSNL : The T-value for the lags -6, -5 -3 and 0 is greater than two. They are

highly significant. The ADR acts as LAGGING indicator to NIFTY index. The

price of VSNLs ADR is affected by the NIFTY index fluctuation. The T-valuefor ADR-NSE quote is greater than two and hence significant. This shows that

ADR is LAGGING indicator to the NSE quote of VSNLs stock.

Auto correlation

The T-value is significant, if T >=2. This means that the returns have got a pattern

within themselves and its not a random walk. It violates the rules of random

walk. If it is a random walk it means that the prices of the shares are determined

by the information available to the participants in the market.

In our result we find that the ADR returns of Dr.Reddys Lab, HDFC Bank,

Infosys Technology, Satyam computers and VSNL do not have any significant

value, i.e., all T-value are lesser than two. This means that the price fluctuations

of these ADRs are not auto correlated.

The T>2 in the 3rd

lag of ICICI BANK ADR and T>2 in the 8th

lag of TATA

Motors ADR, in their respective autocorrelation. These two ADRs have a pattern

in their price fluctuations and they are correlated to a significant level.

The T = 2 in the 9th lag of the Dr.Reddys Labs stock, which is traded in the

domestic market. The price movements in the domestic market trading of Dr.

Reddys Labs share are auto -correlated. The domestic shares of ICICI Bank do

not have auto correlation in their fluctuations.


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RESULTS6


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Findings

The following important points have been found

1. The null hypothesis, that, there is NO relation between ADR price

fluctuations and the price fluctuations of the underlying Indian shares inIndian stock exchanges, is rejected and the alternate hypothesis, that, there

is relation between ADR price fluctuations and the price fluctuations of

underlying Indian shares in Indian stock exchanges, is accepted.

2. The ADR being the leading and lagging indicator mainly depends on the

economy, industry and the stock in question.

3. ADR is LEADING indicator to NIFTY index most of the time.

4. The influence of ADR price fluctuations on the corresponding share in the

domestic market is immediate, in many cases. This is because of

development in the information technology. This can be observed from the

table that almost all zero lags T -value is significant.

5. The influence of ADR price fluctuations on the NIFTY index is relatively

to slow. This can be observed from the table that T-value being significant

at higher lags on the positive side or at lower lags at negative side.


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Conclusion7


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Conclusions

Any commodity which is traded in two different market trades in different prices.

This gives rise to arbitration and price discovery. In absence of arbitration

opportunities, it helps in understanding the movement of prices. The trading inADR in U.S. stock exchanges does this function very well. The ADR provides as

information about the movement of the share prices in India based on the economy

and other factors.

The ADR price fluctuations act either as LEADING or as LAGGING indicator.

This depends upon the industry and other political factors that are involved. The

investor community can use this to their best.


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Bibliography and References 9


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Bibliography.

1. Alexander, G.C., C. Eun and S. Janakiramanan, 1987, Asset Pricing and

Dual Listing on Foreign Capital Markets: A Note, Journal of Finance, 42,

151-158

2. Chowdhry, B and V. Nanda, 1991, Multi-market Trading and MarketLiquidity, Review of Financial Studies, 3, 483-5111

3. Karolyi, A., 1998, what happens to stocks that list shares abroad? A survey

of evidence and its managerial implications, NYU Salomon Brothers

Center Monograph series, Volume 7, #1.

4. .DWHLQD+ROLFNi$'5DQG*'5LQ&HQWUDO Europe.

5. Dr. Mahu Kalimpali and Dr. Latha Ramachand, Changes in Liquidity

Following Exposure to Foreign Shareholders: The effect of foreign listings

and issues of American Depositary Receipts by Indian firms.

6. Determinants of Returns and Volatility of Chinese ADRs at NYSE, Ali M.

Kutan, Southern Illinois University Edwards ville, Emerging Markets

Group, London.

7. Internationally cross listed stock prices during overlapping trading hours:

Price discovery and exchange rate effects. By Joachim Grammig, Michael

Melvin and Christian schlag.

8. Mr. Ajay Sharma, ADR and GDR price fluctuation.

9. Ranking of countries which have issued ADRs by Mr. James M Donald,

Lazard Asset Management Company.

10. Research methodology, Donald Cooper and Schindler.

Reference:

1. www.investopedia.com

2. www.blonnet.com

3. www.nseindia.com

4. www.bseindia.com

5. www.nyse.com

6. www.citicorp.com

7. www.bankofny.com

influence of adr prices on stock prices

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