Depository Receipts (GDRs and ADRs) Global Depositary Receipts mean any instrument in the form of a depositary receipt

or certificate (by whatever name it is called) created by the Overseas Depositary Bank outside India and issued to non-resident investors against the issue of ordinary shares or Foreign Currency Convertible Bonds of issuing company. A GDR issued in America is an American Depositary Receipt (ADR). Issue of equity in the form of GDR/ADR is possible only for the few top notch corporates of the country. Among the Indian companies, Reliance Industries Limited was the first company to raise funds through a GDR issue. Salient Features of a GDR These are special instruments which are created from ordinary shares to generate funds abroad The shares of a company are deposited with a bank which will issue GDRs and ADRs of equivalent value in a foreign currency (normally dollars) The holder of a GDR does not have voting rights The proceeds are collected in foreign currency thus enabling the issuer to utilize the same for meeting the foreign exchange component of project cost, repayment of foreign currency loans, meeting overseas commitments and for similar other purposes. Dividends are paid in Indian rupees due to which the foreign exchange risk or currency risk is placed totally on the investor It has less exchange risk as compared to foreign currency borrowings or foreign currency bonds. The GDRs are usually listed at the Luxembourg Stock Exchange as also traded at two other places besides the place of listing e.g. on the OTC market in London and on the private placement market in USA. An investor who wants to cancel his GDR may do so by advising the depositary to request the custodian to release his underlying shares and relinquishing his GDRs in lieu of shares held by the Custodian. The GDR can be canceled only after a cooling-period of 45 days. The depositary will instruct the custodian about cancellation of the GDR and to release the corresponding shares, collect the sales proceeds and remit the same abroad. Marketing of the GDR issue is done by the investment banks that manage the road shows, which are presentations made to potential investors. During the road shows, an indication of the investor response is obtained. The issuer fixes the range of the issue price and finally decides on the issue price after assessing the investor response at the road shows. Cost of floating an ADR or GDR issue is quite high and is only justifiable if the amount of finance to be raised is quite large

Sponsored ADR Sponsored ADR is an ADR created by a non-US company working directly with a depositary bank. An unsponsored ADR is usually the one created by a bank without the participation or consent of the non-US company. Unsponsored ADR can trade only in the over-the-counter market.

Levels of ADRs There are three levels of ADRs depending on their adherence to Generally Accepted Accounting Principes For a Level I ADR program the receipts issued in the US are registered with the SEC, but the underlying shares are held in the depositary bank are not registered with the SEC. They must partially adhere to Generally Accepted Accounting Principles (GAAP) used in the USA. Level II ADRs are those in which both the ADRs and the underlying shares (that already trade in the foreign companys domestic market) are registered with the SEC. They must also partially adhere to the Generally Accepted Accounting Principles. Level III ADRs must adhere fully to the GAAP and the underlying shares held at the Depositary Bank are typically new shares not those already trading in the foreign companys domestic currency.

Indian GDR
THE COMPREHENSIVE GDR LISTING
# euro convertible bond **adjusted for bonus

GDR Companies

Industry Segregation

Date Of GDR Issue 03-Feb-94 20-Mar-95 27-Oct-94 27-May-94 16-Nov-93 04-Mar-96 21-Sep-94 14-Apr-94 21-Jun-94 02-Jul-96 19-May-94 18-Jul-94 07-Oct-94 07-Jul-94 19-Jul-94 30-Nov-95

Size Shares GDR Of GDR per Issue Issue GDR Price **(US$) US $ Mill 125.00 137.77 110.00 35.00 50.00 125.00 100.00 125.00 70.00 50.00 25.00 48.00 40.00 40.00 55.00 30.00 1.0 3.0 1.0 1.0 1.0 3.0 2.0 1.0 1.0 1.0 5.0 1.0 1.0 1.0 1.0 2.0 9.78 12.79 16.89 8.77 9.20 14.40 254.00 10.67 12.60 7.56 13.55 11.16m 9.30 8.39 16.60 8.05

Arvind Mills Ashok Leyland Bajaj Auto Ballarpur Ind.# Bombay Dye BSES Ltd Century Textiles CESC Core Parent Crompton Greaves DCW Dr. Reddy's E. I. Hotels EID Parry Finolex Cab Flex Industries

Textiles Autos Autos Paper Textiles Power Diversified Power Pharma Electrical Diversified Pharma Hotels Fertiliser Cables Packaging

G.E. Shipping G.N.F.C GAIL Garden Silk Grasim (1st) Grasim (2nd) Guj Ambuja # Himachal Futuri Hindalco (1st) Hindalco (2nd) Hindustan Dev. India Cements Indian Alum. Indian Hotels Indian Rayon Indo Gulf Indo Rama ICICI ICICI (ADR) Infosys IPCL ITC J.K. Corp Jain Irrig JCT Ltd. Kesoram Ind L & T (1st) L & T (2nd) Mah & Mah MTNL NEPC Micon Nippon Denro# Oriental Hotels Ranbaxy Labs Raymond Woolen Reliance Reliance (2nd) Reliance Petroleum

Shipping Fertiliser Oil & Refineries Textiles Diversified Diversified Cement Telecomm. Aluminium Aluminium Diversified Cement Aluminium Hotels Diversified Fertiliser Textiles Finance Finance IT Petrochemicals Cigarettes Diversified Plastics Textiles Diversified Diversified Diversified Autos Telecom Diversified Steel Hotels Pharma Textile Diversified Diversified Diversified

17-Feb-94 06-Oct-94 04-Nov-99 04-Mar-94 25-Nov-92 09-Jun-94 26-Nov-93 02-Aug-95 22-Jul-93 08-Jul-94 21-Sep-94 11-Oct-94 22-Feb-94 28-Apr-95 25-Jan-94 18-Jan-94 21-Mar-96 02-Aug-96 22-Sep-99 11-Mar-99 08-Dec-94 13-Oct-93 17-Oct-94 25-Feb-94 29-Jul-94 31-Jul-96V 18-Nov-94 01-Mar-96 30-Nov-93 04-Dec-97 07-Nov-94 03-Mar-94 14-Dec-94 29-Jun-94 09-Nov-94 27-May-92 15-Feb-94 18-Oct-99

100.00 61.11 22.50 45.00 90.00 100.00 80.00 50.00 72.00 100.00 76.00 90.00 60.00 86.25 125.00 100.00 50.00 230.00 315 70.38 85.00 68.85 55.00 30.00 45.00 30.00 150.00 135.00 74.75 418.53 47.70 125.00 30.00 100.00 60.00 150.00 300.00 100

5.0 5.0 6.0 5.0 1.0 1.0 1.0 4.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 10.0 5.0 5.0 0.5 3.0 1.0 1.0 1.0 10.0 1.0 2.0 2.0 1.0 2.0 1.0 10.0 1.5 1.0 2.0 2.0 2.0 15.0

15.94 12.75 9.67 26.28 12.98 20.50 5.95 9.30 10.73 16.00 2.05 4.23 6.77 16.60 15.01 4.51 11.37 11.50 9.80 34 13.87 7.65 8.00 11.13 16.96 1.60 16.70 15.35 4.46 11.958 3.18 21.36 12.75 19.38 10.61 16.35 23.50 23.0

S.A.I.L. Satyam Infoway S.I.E.L. Sanghi Poly SIV Ind SPIC SBI Sterlite India# Tata Electric Telco (1st) Telco (2nd) Tube Invest United Phos. Usha Beltron Videocon Int. VSNL Wockhardt

Steel IT Diversified Textiles Textiles Fertiliser Banking Diversified Power Autos Autos Cycles & Acc. Pesticides Cables Electronics Telecomm. Pharma

07-Mar-96 19-Oct-99 14-Oct-94 28-Jul-94 01-Aug-94 28-Sep-93 03-Oct-96 22-Dec-93 22-Feb-94 15-Jul-94 06-Aug-96 20-May-94 25-Feb-94 06-Oct-94 26-Jan-94 24-Mar-97 25-Feb-94

125.00 75.00 40.00 50.00 45.00 65.00 369.95 100.00 65.00 115.00 200.00 45.60 55.00 35.00 90.00 527.00 75.00

15.0 1.0 3.0 5.0 1.0 5.0 2.0 1.0 100.0 1.0 1.0 1.0 1.0 1.0 1.0 0.5 1.0

12.97 18.0 14.64 9.56 6.37 11.15 14.15 17.86 710.00 8.75 14.25 6.58 20.50 10.70 8.10 13.93 14.35

Global Depository Receipts(GDR) / American Deposit Receipts (ADR) / Foreign Currency Convertible Bonds (FCCB) Foreign Investment through ADRs/GDRs, Foreign Currency Convertible Bonds (FCCBs) is treated as Foreign Direct Investment. Indian companies are allowed to raise equity capital in the international market through the issue of GDR/ADRs/FCCBs. These are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition can be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads. There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. There is no such restriction because a company engaged in the manufacture of items covered under Automatic Route is likely to exceed the percentage limits under Automatic Route, whose direct foreign investment after a proposed GDRs/ADRs/FCCBs is likely to exceed 50 per cent/51 per cent/74 per cent as the case may be. There are no end-use restrictions on GDRs/ADRs issue proceeds, except for an express ban on investment in real estate and stock markets. The FCCB issue proceeds need to conform to external commercial borrowing end use requirements. In addition, 25 per cent of the FCCB proceeds can be used for general corporate restructuring.

ADR, GDR norms further relaxed Indian bidders allowed to raise funds through ADRs, GDRs and external commercial borrowings (ECBs) for acquiring shares of PSEs in the first stage and buying shares from the market during the open offer in the second stage. Conversion and reconversion (a.k.a. two-way conversion or fungibility) of shares of Indian companies into depository receipts listed in foreign bourses, while extending tax incentives to non-resident investors, allowed. The re-coversion of ADRs/GDRs would, however, be governed by the Foreign Exchange Management Act notified by the Reserve Bank of India in March 2001. Permission to retain ADR/GDR proceeds abroad for future foreign exchange requirements, removal of the existing limit of $20,000 for remittance under the employees stock option scheme (ESOP) and permitting remittance up to $ 1 million from proceeds of sales of assets here. Companies have been allowed to invest 100 per cent of the proceeds of ADR/GDR issues (as against the earlier ceiling of 50%) for acquisitions of foreign companies and direct investments in joint ventures and wholly-owned subsidiaries overseas. Any Indian company which has issued ADRs/GDRs may acquire shares of foreign companies engaged in the same area of core activity upto $100 million or an amount equivalent to ten times of their exports in a year, whichever is higher. Earlier, this facility was available only to Indian companies in certain sectors. FIIs can invest in a company under the portfolio investment route upto 24 per cent of the paid-up capital of the company. It can be increased to 40% with approval of general body of the shareholders by a special resolution. This limit has now been increased to 49% from the present 40%. Two way fungibility in ADR/GDR issues of Indian companies has been introduced subject to sectoral caps wherever applicable. Stock brokers in India can now purchase shares and deposit these with the Indian custodian for issue of ADRs/GDRs by the overseas depository to the extent of the ADRs/GDRs that have been converted into underlying shares. On Fungibility Two-way fungibility of ADRs/GDRs issued by Indian Companies was permitted by the Government of India and the RBI. The RBI has now, vide APDIR Circular No: 21 dated February 13th 2002, issued operative guidelines for the 2 way fungibility of ADR / GDR. Earlier, once a company issued ADR / GDR, and if the holder wanted to obtain the underlying equity shares of the Indian Company, then, such ADR / GDR would be converted into shares of the Indian Company. Once such conversion took place, it was not possible to reconvert the equity shares into ADR / GDR. The present rules of the RBI make such reconversion possible, to the extent of ADR / GDR which have been converted into equity shares and sold in the local market. This would take place in the following manner:

 Stock Brokers in India have been authorized to purchase shares of Indian Companies for reconversion The Domestic Custodian would coordinate with the Overseas Depository and the Indian Company to verify the quantum of reconversion which is possible and also to ensure that the sectoral cap is not breached. The Domestic Custodian would then inform the Overseas Depository to issue ADR / GDR to the overseas Investor. Re-issue of ADRs/GDRs would be permitted to the extent of ADRs/GDRs that have been redeemed and the underlying shares sold in the domestic market. Two-way fungibility implies that an investor who holds ADRs/GDRs can cancel them with the depository and sell the underlying shares in the market. The company can then issue fresh ADRs to the extent of shares cancelled. No specific permission of the RBI will be required for the re-conversion. Besides, investments under foreign currency convertible bonds and ordinary shares will be treated as direct foreign investment. Accordingly, the re-conversion of shares into ADRs/GDRs will be distinct from portfolio investments by foreign institutional investors (FIIs). The RBI guidelines state that the transactions will be demand-driven and would not require company involvement or fresh permissions. The custodian would monitor the re-issuance of ADRs/GDRs within the sectoral cap fixed by the Government. Each purchase transaction will be only against delivery and payment received in foreign exchange through banking channels. For this purpose, all SEBI registered brokers will be able to act as intermediaries in the two-way fungibility of ADRs/GDRs. The RBI has already given general permission to brokers (not banks, but SEBI registered stockbrokers. RBI has conveyed general permission through a Notification No.FEMA.41/2001-RB dated 2nd March 2001, for these brokers to buy shares on behalf of the overseas investor) to buy shares on behalf of overseas investors (this include both foreign investors as well as domestic shareholders). As secondary market operations, the acquisition of shares on behalf of the overseas investors through the intermediary would fall within the regulatory purview of Securities and Exchange Board of India (SEBI). The Central bank has said that since the demand for re-conversion of shares into ADRs/GDRs would be from overseas investors and not the company, the expenses would be borne by the investor. The transactions will be governed by the Income-Tax Act. Benefits of fungibility The key benefits that could accrue to investors (ADR/GDR holders and domestic investors) and companies from two-way fungibility are: improvement in liquidity and elimination of arbitrage. The conventional definition of liquidity is the ease with which an asset (in this case, ADRs/GDRs) can be bought or sold quickly with relatively small price changes. This essentially means that a liquid market for a security must have depth and breadth, and aid speedy price discovery. A liquid market is said to have depth if buy and sell orders exist

both above and below the prices (at which a stock or ADR/GDR) is transacting. Similarly, the market is said to have breadth if buy and sell orders exist in good volume. In the one-way fungible regime, ADRs/GDRs suffered from price volatility and liquidity problems, basically for two reasons. The first reason was the low ADR issue size that accounted for low free-float in the US market and, thereby, low trading volumes in the security. Second, the GDR market had been largely dormant (with the exception of a few highprofile stocks) for the past couple of years. This affected the depth, breadth and pricediscovery process of GDRs in these markets. Two-way fungibility may at least revive some market interest in these stocks. Reduction/elimination of arbitrage In an efficient market, two assets with identical attributes must sell for the same price, and so should an identical asset trading in two different markets. If the prices of such an asset differ, a profitable opportunity arises to sell the asset where it is overpriced and buy it back where it is under priced. Obviously, arbitrageurs (speculators aiming to exploit these riskless opportunities) can step in and exploit this profit opportunity. Under the one-way fungibility regime, though identical assets (namely stocks in the domestic market and ADRs/GDRs in the overseas markets) traded at different prices (at a discount/premium), the arbitrage opportunities went a begging because of restrictions on the capital account. By introducing two-way fungibility, market forces may trigger a realignment of prices, minimising the widely divergent premium/discount levels prevailing between ADR/GDR prices and the domestic stock prices.

Euro Issues by Indian Companies Earlier, Indian Companies required approval of the Government of India before issue of Foreign Currency Convertible Bonds (FCCBs). The RBI, has vide FEMA Notification No : 55 dated March 7th 2002, liberalised these rules. Accordingly: Indian Companies seeking to raise FCCBs are permitted to raise them under the Automatic Route upto US 50 Million Dollars per financial year without any approval. The FCCBs raised shall be subject to the sectoral limits* prescribed by the Government of India. Maturity period for the FCCBs shall be at least 5 years and the "all in cost" at least 100 basis points less than that prescribed for External Commercial Borrowings. Some restrictions had been imposed previously on the number of issues that could be floated by an individual company or a group of companies during a financial year. There will henceforth be no restrictions on the number of Euro-Issues to be floated by a company or a group of companies in a financial year.

GDR end-uses will include: financing capital goods imports; capital expenditure including domestic purchase/installation of plant, equipment and buildings and investments in software development; prepayment or scheduled repayment of earlier external borrowings; investments abroad where these have been approved by competent authorities; equity investment in JVs/WOSs in India. However, investments in stock markets and real estate will not be permitted. Up to a maximum of 25 per cent of the total proceeds may be used for general corporate restructuring, including working capital requirements of the company raising the GDR. Currently, companies are permitted to access foreign capital market through Foreign Currency Convertible Bonds for restructuring of external debt that helps to lengthen maturity and soften terms, and for end-use of funds which conform to the norms prescribed for the Government for External Commercial Borrowings (ECB) from time to time. In addition to these, not more than 25 per cent of FCCB issue proceeds may be used for general corporate restructuring including working capital requirements. FCCBs are available and accessible more freely as compared to external debt, and the expectation of the Government is that FCCBs should have a substantially finer spread than ECBs. Accordingly, the all-in costs for FCCBs should be significantly better than the corresponding debt instruments (ECBs). Companies will not be permitted to issue warrants along with their Euro-issue. The policy and guidelines for Euro-issues will be subject to review periodically. Sectoral Caps As per the Foreign Investment guidelines issued by the Government of India, Ministry of Industry, foreign investment (equity/preference shares) upto certain specified limits would be permitted by Reserve Bank under Automatic Route as under: In relaxation of earlier guidelines, GDR end - uses will include : Foreign investment (equity/preference) upto 50% in respect of Mining activities; Foreign investment (equity/preference) upto 51% in (i) industries/items included in part 'B' of Annexure III to Ministry of Industry's Press Note No.14 (1997 series) dated 8th October 1997** and (ii) a trading company primarily engaged in export activity; in software development Foreign investment (equity/preference) upto 74% in industries/items included in part 'C' of Annexure III to Ministry of Industry's Press Note No.14 (1997 series) dated 8th October 1997** Foreign Investment upto 100% in industries/items included in Part 'D' of Annexure III, to Ministry of Industry's Press Note No.14 (1997 Series)** as amended from time to time provided the foreign investment in a project does not exceed Rs.1500 crores.

NOTE & DISCLAMER: The above report is compiled from newspaper reports appearing from time to time. It is not guaranteed for accuracy or completeness. No obligation is undertaken for updating this information on an ongoing basis. If any mistake or lapse is dedected, please do lwt us know by writing to us at mail@kshitij.com. We shall make the necessary corrections and changes. Thank you for your time and for using our services.

GDR Prices Index INSTANEX SKINDIA DR INDEX AND CONSTITUENTS

Company Instanex Skindia DR Index Bajaj Auto (G) Dr. Reddy's (A) HDFC Bank (A) Hindalco (G) ICICI Bank (A) Infosys Tech (A) ITC (G) L & T (G) MTNL (A) Ranbaxy Labs (G) Reliance (G) Satyam Computers (A) State Bank of India (G) VSNL (A) Wipro (A) Weight Price ($) 27-Feb-2007 100.00% 2.14% 3.29% 5.73% 2.96% 19.88% 15.84% 4.37% 4.74% 1.32% 1.72% 12.86% 10.57% 9.08% 3.57% 1.94% 2,192.19 -124.03 62.5 15.18 63.2 3.29 36.54 53.51 3.75 35.4 6.07 8.05 62.88 21.8 60.16 16.4 16.1 -1.20 -0.72 -4.22 -0.06 -4.44 -3.70 -0.10 -0.60 -0.37 -0.05 -1.08 -0.88 -0.84 -1.50 -1.04 -5.35% -1.88% -4.53% -6.26% -1.79% -10.83% -6.47% -2.60% -1.67% -5.75% -0.62% -1.69% -3.88% -1.38% -8.38% -6.07% Change % Change Prem/Disc EPS to Local ($) P/E

2.35% 83.33 26.31 1.45% -3.05% -4.57% 1.35% -7.74% 8.15% 0.38% -0.01% -3.38% 1.11% -1.04% 7.00% 24.46% -7.65% 17.63% 2.76 22.64 0.59 25.87 2.14 29.59 0.41 7.98 1.31 27.83 1.22 43.70 0.15 25.07 0.84 42.33 0.26 23.09 0.19 41.59 3.10 20.27 0.41 52.56 3.34 18.00 0.77 21.36 0.39 41.78

Usha Beltron $11.38million GDR issue fully subscribed

Our Corporate Bureau

Calcutta, Aug 25: Usha Beltron Ltd, the flagship of the Usha Martin group owned by the Jhawars, has completed the placement of 35,00,000 global depository receipts (GDRs) at a price of $3.25 each, according to a release of the Calcutta-based company.

The issue, lead-managed by Robert Flemings, United Kingdom, aggregates to $11.38 million which is equivalent to Rs 522 million approximately. Each global depository receipt is represented by one equity share of Rs 10 of the company. The issue is priced at a premium of approximately four per cent over the closing price of Rs 143.55 of the company's scrip on the stock exchange, Mumbai on August 14, 2000. Usha Beltron is a diversified engineering and technology corporation that makes jellyfilled telephone cables, steel, wire and wire ropes. Its knowledge-based business consists of United States-based Usha Communication Technology Ltd, Chennai-based Usha Martin Academy of Communication Technology and USOFT. The company's proposed hiving off of its knowledge-based business into a separate company - Usha Martin Infotech Ltd - is awaiting the approval of the Calcutta high court.

MphasiS BFL Plans ADR/GDR Issue

OUR EFE BUREAU
Posted online: Friday, April 23, 2004 at 0000 hours IST

MUMBAI: MphasiS BFL Ltd will hold an extra-ordinary general meeting on May 12, 2004, to seek members approval for increasing its authorised share capital to Rs 100 crore from Rs 40 crore. It is also planning to come up with American Depository Receipts (ADRs) and/or Global Depository Receipts (GDRs) with a view to raise additional funds to meet its capital expenditure and working capital requirements. According to the companys notice to the Bombay Stock Exchange (BSE), the proposed issue of GDRs/ADRs would be a combination of a sponsored issue of securities by the existing shareholders and a fresh issue of securities. The exact proportion and size will be decided based on the advice of consultants, investment bank-ers, advisors and managers to the issue, the company said. It is also likely to offer issue and allot from time to time in one or more tranches on a preferential allotment basis up to 17,63,281 equity shares of a nominal value of Rs 10 each. This could be done directly by it or its direct or indirect wholly-owned subsidiary. With the balance consideration of $13.20 million being paid by the company in cash to the selling share holders of Msource USA, the company will also seek approval for acquiring of shares by FIIs and non resident Indians. However, this is subject to a condition that the equity shareholding of a single FII or a subaccount of an FII in the company shall not at any time exceed 10 per cent of the paid-up equity share capital of the company or such other limit as may be permitted by law and approved by the board of directors of the company. They will also discuss offering issue and allot from time to time, in one or more tranches

on a preferential allotment basis up to 11,69,389 equity shares of a nominal value of Rs 10 each with the balance consideration of Rs 28,83,66,600 being paid by the company in cash to the remaining selling shareholders of Kshema Technologies Ltd, Bangalore. The notice added that for capitalisation of such of the free reserves of the company as on March 31, 2004 as may be considered necessary by the board for the purpose of issuance bonus shares of Rs 10 per cent each credited as fully paid to the holders of the existing equity shares of the company.

Why list offshore?

From 1992 onwards, offshore listing has been an important vehicle through which firms in India have raised capital. Initially, the focus was on "global depository receipts" (GDRs), which trade in many European countries and particularly in London. In recent years, there has been sharp interest in "American depository receipts" (ADRs), which trade in the US. In this article, we think through the rationale for offshore listing and ask questions about the appropriate role for ADRs/GDRs in India's financial system. Let us start with the question about foreign ownership of Indian equity. 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. 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 hence GDRs 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 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 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 receipe 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.

If our policies are amended in these two directions, there will be no case for ADRs or GDRs by Indian firms. Instead, Indian firms will consolidate all their liquidity in India. Indian firms will then avoid fragmentation of their liquidity, and obtain the lowest possible cost of capital.

GDR/ADR fail to pay

Suresh Krishnamurthy INDIAN mutual funds were allowed to invest in global depository receipts and American depository receipts in 1999, and some proceeded to do so. When Wipro made its ADR offer, a few mutual funds participated in the offer. However, investment in ADRs\GDRs has failed to pay for these mutual funds. Even at that time, the investments of mutual funds appeared to defy logic. Wipro was offering its shares at a premium of 10 per cent to the then prevailing market price. Since shares were available at a cheaper price in the local market, it prima facie did not make sense to buy them. However, the ADRs would have paid off if the volatility in the overseas markets were low. In addition, any depreciation in the value of the rupee would also act as an offset to any decline in the value of the ADR while it will also add to any increase in the value of ADR. Such hopes, however, have been belied. In reality, investments in the GDR/ADR market appear to have significantly backfired. For example, the Wipro ADR. The ADR

price declined 52 per cent in the last six months. The rupee depreciation has not helped either. In rupee terms, the decline is around 51 per cent. During the same period, the Wipro stock price declined 34 per cent at the Bombay Stock Exchange. The same situation obtains in VSNL. Its ADR declined by 40 per cent in the last six months. In contrast, the VSNL stock price declined by 37 per cent over the same period. In many ways, investments in ADRs\GDRs were unchartered territory for investors. On this count alone, mutual funds appear to have taken a higher risk when investing in the ADRs of Indian companies. The risk does not appear to have paid off in terms of higher returns too. In some cases, the relative under-performance of such funds such as Pioneer ITI Infotech, compared to its peers, may also be partly due to their investments in the depository receipts of Indian companies. Mutual funds did not provide any explanation when they invested in the ADRs of Indian companies. There is a case for mutual funds to communicate the state of affairs to their investors and also how they are likely to deal with these issues in the future.

ADR/GDR Arbitrage

ARBITRAGE
Several Indian companies actively trade on the London and New York Stock Exchanges and due to the time differences, market news, sentiments etc. sometimes the prices of the DR(Depository receipt) trade at discounts or premiums to the underlying stock. This presents a knowledgeable fund manager an arbitrage opportunity, where he buys the DR abroad and sells the same stock in India at a higher price (the difference being the profit). Same DRs trade during India market hours offering a live arbitrage opportunity. As there is very little risk in such trades the gap between the DR and underlying stock is minimal. DRs which trades in the US markets offer better gaps, but there is the overnight risk to be factored in. Hence the fund manager must take into consideration the local market conditions before buying the stock in the US, as he must be confident of the selling off the stock the next morning in India at the profitable gap. Once the stock is bought, arrangements are made to deliver the stock in India, which involves several procedures (stock is borrowed at times for this). Once the stock is delivered in India the proceeds are allowed to be repatriated and the process repeated. There are some stocks which are also allowed to be bought in India and converted into the DR forms, which is attractive if the DR is trading at a premium to the Indian stock price.

The Process 1. 2. 3. 4. 5. 6. 7. Buy DR Sell local stock in India in cash market or futures market. Convert shares from DR to local. Deliver shares to stock exchange in India. Deposit proceeds in Indian bank account. Repatriate funds. Repeat process.

The Costs 1. Foreign brokerage. 2. Local brokerage. 3. Custodian charge for conversion (local and global). 4. Back charges for transfer. 5. Fund manager charge.