Introduction

In recent years, the internationalization of securities markets has accelerated its pace and broadened in scope as it has become easier to trade securities around the world. A growing number of countries- both developed and developing - are opening their stock markets to foreign investors and abolishing laws restricting their citizens from investing abroad. Companies that previously had to raise capital in the domestic market can now tap foreign sources of capital that demand lower rates of return. In order to do so, companies may list their stocks on foreign stock exchanges while investors may trade overseas. Globalization of the principal securities markets has become a reality with which capital markets have learned to cope since the beginning of the decade. Market participants have been following a clear trend toward increased interaction between markets that were once considered isolated. To illustrate, take the example of the European Economic Community, where the free movement of capital and financial services, harmonized by a single body of securities law, is indispensable to the realization of a single, international market for the exchange of goods and services. The walls of domestic capital markets that once made regulatory compliance a difficult task for foreign issuers are falling rapidly, and Indian security markets are taking an active role in this metamorphosis. Markets and investors are directly affected by this trend. Hundreds of American securities are traded on foreign stock exchanges by the larger U.S., Japanese, and European broker-dealers that have established trading desks at the major securities exchanges around the world. At the same time, a growing number of foreign securities are traded in various markets, especially through the use of American Depository Receipts (ADRs). The internationalization of securities markets thus entails deeper integration between markets. This has been a key factor for the success of Depository Receipts. JPMorgan introduced the first American Depository Receipt (ADR) in 1927 to allow Americans invest in the British retailer Selfridges. They were introduced in response to a law passed in Britain, which prohibited British companies from registering shares overseas without a British-based transfer agent. UK shares were not allowed physically to leave the UK, and so, to accommodate US investor demand, a US instrument had to be created; this was called an American Depositary Receipt. ADRs assumed their present form in 1955, when
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the Securities and Exchange Commission (SEC) established its Form S-12 for registering all depositary receipt programs. Form S-12 was later replaced by Form F-6, which is still in use today. Since then, the ADR market has evolved in sophistication and in importance to become an instrument used widely by companies to trade their shares in equity markets of more developed countries. Managers of the larger, growing companies in emerging nations perceived tremendous strategic, financial, political, marketing and operational benefits to listing shares overseas ADRs are US dollar denominated negotiable instruments issued in the US by a depositary bank (e.g. Deutsche Bank), representing ownership in non-US securities, usually referred to as the underlying ordinary shares. ADRs enable US investors to acquire and trade non-US securities denominated in US dollars without concern for the differing settlement timetables and the problems typically associated with overseas markets. They also provide non-US companies with access to the US capital markets, the largest domestic investor base in the world. Depositary receipts hold special appeal for investors because they make investing in a company beyond the investors home borders easy and convenient. That eases fuels investor appetite, which in turn has driven explosive growth in the depositary receipt market. Companies from more than 80 countries have gained new investors outside their home markets. More than 2,100 issuers have issued depositary receipts. 500 depositary receipt programs are listed on US exchanges, providing the issuing company with important access to new capital. More than 900 GDR programs are listed on stock exchanges, typically in London or Luxembourg Depositary receipts account for 16% of the entire US equity market

DR capital raisings totaled $12.4 billion dominated by activity in Russia and Mexico.
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U.S. investment in non-U.S. equities as of Q3 2012 was $4.5 trillion, up 7% from same period in 2011

Through October 2012, world equity funds witnessed inflow of $11.0 billion. DR trading volumes were down by 23.2 billion shares in 2012 to 139.9 billion shares, versus 163.2 billion in 2011. Since JPMorgan established the first depositary receipt program in 1927, depositary receipts have gained widespread popularity as both an investment vehicle and investment option. In particular, investors appreciate how depositary receipts mitigate the concerns that normally accompany cross-border investments, such as expensive and complicated transactions and settlement. The Indian economy is the second fastest growing economy in the world after China with a growth rate of around 6%. India seems to have become an investors haven with high returns on investments. Indian companies are recording higher profits and are gaining global recognition because of operations in several countries. However, for international presence, Indian companies need funds from time to time to expand their business. Companies either raise funds from the domestic market or through international market. For international funding, the most popular source amongst the Indian companies in the recent times has been American Depository Receipts (ADR) and Global Depository Receipts (GDR).

Depository Receipts (DR)

Meaning & Background Historically, American Depositary Receipts (ADRs) were the first type of depositary receipt to evolve. They were introduced in 1927 in response to a law passed in Britain, which prohibited British companies from registering shares overseas without a British-based transfer agent. UK shares were not allowed physically to leave the UK, and so, to accommodate US investor demand, a US instrument had to be created; this was called an American Depositary Receipt. ADRs assumed their present form in 1955, when the Securities and Exchange Commission (SEC) established its Form S-12 for registering all depositary receipt programs. Form S-12 was later replaced by Form F-6, which is still in use today. A depositary receipt is a negotiable instrument denominated in US dollars or Euro (or in a currency other than the domestic currency of the issuer company), which is issued to the investors in one or more foreign countries. DRs are issued by the overseas depositary bank (henceforth also referred to as depositary) to the international investors either against the issuers local currency shares registered in depositarys name in the shareholder books of the company or against the physical delivery of local currency shares of the issuer company to the depositary or, more commonly, to a domestic custodian bank appointed by the depositary. The depositary in respect of a DR program is located in a foreign country, whereas the custodian is located in a home country of the issuer company (henceforth also referred to as issuer). While depositary receipt programs can be structured in a variety of ways, there are two basic options: American Depositary Receipt (ADRs) programs, which give companies outside of the US access to the US capital markets, and Global Depositary Receipt (GDRs) programs, which provide exposure to the global markets outside the issuers home market.

Typical Structure of a DR Program

Each DR represents a certain number of underlying local currency equity shares of the issuer traded in the home market of the issuer. The depositary sets the ratio of a single DR to per local currency equity share of the issuer. This ratio can be less than, equal to or greater than 1 based on the market value of the local currency shares of the issuer and is decided in a manner so as to make the price of a single DR trade in a range comfortable to the foreign investors.

Depository Capital raising Volumes

Depository receipts Investment Snapshot

Asia Pacific market snap shot

EMEA 53% LATAM 25% APAC 22%

China 52% India- 11% Taiwan 9% Australia 9% Japan 8%

Others 11%-

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. There are several obstacles in investing directly investing in foreign markets. These are: Poor market design of the equity market in India Restrictions on equity ownership by foreign investors FIIs face restrictions of ceilings or stakes in Indian companies Legal and institutional restrictions Inconsistent settlements Costly currency conversions Unreliable custody services Poor information flow Confusing tax conventions

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Importance of Depository Receipts:1. Privatization The privatization of state-owned assets is an important undertaking for governments worldwide as they seek to restructure their economies and reduce fiscal deficits. Infrastructure and service enterprises such as telecommunications, utilities, airlines and petrochemicals are among those initially targeted for privatization. DRs have been used successfully by governments seeking to privatize state-owned enterprises. Privatizations require a successful offering of securities to investors, and DRs provide an effective mechanism both to increase private ownership and to raise capital overseas.

2. Mergers and Acquisitions Depositary Receipts can enhance the ease of trading and settlement related to cross border Mergers and Acquisitions (M&A transactions), and they also can facilitate the execution of corporate actions such as payment of dividends, structuring of rights offerings and solicitation of votes. DRs enable issuers to address investor demands without the need to build an independent U.S. shareholder support infrastructure or to modify the equity issuance and trading patterns of the home market. Types of M&A transactions that have made successful use of DRs include spin-offs of Non-U.S. subsidiaries, equity-based acquisitions of U.S. business entities and equity-based acquisitions of Non-U.S. business entities.

Cost Benefits of DR investing Depositary Receipt Conversion (Issue/Cancel) Fee Depositary Receipt Custodian Safekeeping Fee DTC Holding Fee Brokerage Commissions

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Costs associated with ordinary share investing Custodian Safekeeping Fee Custodian Settlement Fee Stamp Duty Tax FX Conversion Fee Miscellaneous Service Charges Indirect Expenses Broker Commission

Advantages to the Investor Quoted and traded in U.S. Dollars:DRs make it easy to purchase and hold a non-US issuers securities. DRs trade easily and conveniently in dollars and settle through US/ international clearing houses Convenient means of holding shares:DRs eliminate the need for cross border custody of shares Easy access to markets that have some of the world`s best companies and/or better valuation than home market. This is because when high quality companies from nations, which have low disclosure norms go for foreign listing in nations, having high disclosure norms send out a signal to the investors that their operations are transparent and of high quality. ADRs offer lower trading and custody costs when compared with shares bought directly in the foreign market. This is because depository banks like Bank of New York provide custody services, thereby eliminating the costs. Investors can choose ADRs from over 2,000 companies and from more than 75 countries
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Facilitating diversification into Non-U.S. securities. Benefits of higher-risk, higher-return equities, without having to endure the added risks of going directly into foreign markets.

Allowing easy comparison to securities of similar companies trading in the investors home market.

Publicly traded DRs are registered with the international regulators. For e.g.Level II and Level III ADRs may be registered with the US Securities and Exchange Commission (SEC).

Simplified Trading and settlement of foreign equities:Trade, clear and settle within the same systems and time periods as exist for other U.S. securities that trade in U.S. markets

Advantages to the Issuer Gain access to U.S. investors that are unable to invest overseas Access capital outside issuers home market. Build companys visibility in US & internationally Broaden and diversify shareholder base. Increase liquidity of company shares Expand opportunity to increase local share price as a result of global

demand/trading Facilitate merger and acquisition activity through use as acquisition currency

A DR program can stimulate investor interest, enhance a companys visibility, broaden its shareholder base, and increase liquidity. By enabling a company to tap international equity markets (for e.g. the US markets through the ADR route), the DR offers a new avenue for raising capital, often at highly competitive costs. Further, for companies with a desire to build a stronger presence in the US, an ADR program can help finance US initiatives or facilitate
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US acquisitions. DRs can provide enhanced communications with global investors and shareholders. ADRs provide an easy way for US employees of non-US companies to invest in their companies employee stock purchase plans. DR ratios can be adjusted to help ensure that an issuers DRs trade in a comparable range with those of its peers in the international market.

Disadvantages of DR Highly fluctuating currency values Foreign Tax liability Lower liability

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Types of Depository Receipt Programs

Issuer Company has the option of issuing one or more types of the available choices ofDR programs. A broader classification of DR programs is on the basis of the countrieswhere DR programs are issued and or listed. While American Depositary Receipts(ADRs) are issued and or listed only in the US markets, Global Depositary Receipts(GDRs) are simultaneously issued and or listed in the more than one market, typicallyin the European and US markets. DR programs can also be classified into the followingfour categories based on the regulatory complexity of the issuance process, purpose andthe post issuance reporting requirements of the program (Table 1).

1. Unsponsored American Depositary Receipts. 2. Sponsored American Depositary Receipts. 3. Privately Placed Depositary Receipts. 4. Global Depositary Receipts and Its Variants.

1. Unsponsored American Depositary Receipts These are issued by one or moredepositaries in response to market demand but without a formal agreement with theissuer company. Unsponsored DRs are created in order to satisfy the investors demandfor the securities of a particular foreign company. When investors show their buyinginterest in the shares of a particular foreign company, broker(s) purchase those shareslisted on the company's home market and request the delivery of the shares to thedepositary banks custodian operating in that country. The broker then converts the USdollars or Euro received from the investor into the corresponding foreign currency inorder to make payment for the purchased shares from the companys home market. Onthe same day custodian notifies the depositary bank that the delivery of the shares hasbeen received. Upon such notification, DRs are issued and delivered to the initiatingbroker(s), who then delivers
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the DRs to the investor. If the DR facility is establishedwithout the active participation of the issuer company, then the fee payable to thedepositary bank is borne by the holders of unsponsored DRs.

Table 1 Types of Depository Receipt Programs

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The depositary bank assumes the issuers responsibility to file a registration documents with the SEC and is required to sign Form F-6 on behalf of issuer. However, the depositary and its officers remain shielded from any liability arising from the content of the registration document. The filing of Form F-6 is obligatory even in case of the sponsored DR programs. However, the issuer is a party to the depositary agreement of the sponsored programs, and hence is liable for any liability arising from the content of the registration document. Unsponsored ADR programs are exempted from the Securities Exchange Commission (SEC) reporting requirements and can only be traded on the over-the-counter market and listed in the pink sheets. Unsponsored ADR programs have several advantages over the sponsored ADR programs. First, they are relatively inexpensive and easier way for expanding the investor base in the US. Second all costs associated with establishment of an unsponsored ADR program are borne by the investor. Third, SEC registration and reporting requirements are minimal. Fourth, the issuer is not a party to the depository agreement, or a registration applicant and therefore is not subject to any US liability arising in connection with the ADR program. However, unsponsored DR programs have become a rarity in the recent years. Foreign companies, which are popular amongst the investors, most willingly sponsor their DR program(s). The main reasons for the gradual obsolescence of unsponsored DR programs in the recent years are: (i) the issuer being not a party to the depository agreement has little control over the unsponsored DR program; (ii) the unsponsored programs can easily be duplicated by other depository banks as there is no need of any consent from the issuer company; (iii) conversion of a unsponsored DR program into a sponsored DR program is very expensive for the issuer as it requires a payment of the cancellation fees for the outstanding unsponsored DRs; and (iv) unsponsored DRs have low liquidity, as they are restricted from trading on the regular stock exchanges.

2. Sponsored American Depositary Receipts Issuer takes the initiative of launching a sponsored DR program by appointing the depositary and other intermediaries involved in a DR program. Sponsored DR programs offer several advantages to the issuer. First, issuer has complete control over the sponsored DR facility.
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Second, issuer can choose from the several types of sponsored DR programs, some of which can be used for raising the fresh capital and for listing on the foreign stock exchange(s). Sponsored DRs to be issued in the US markets must be registered with SEC using the Form F-6. The filing in the Form-6 is made pursuant to provisions of the Securities Act 1933. It incorporates by reference various provisions of the depositary agreement. Typically, the Form F-6 for a sponsored DR program is executed by the depository bank, but must also be signed by a majority of the issuers board of directors, who undertake, if necessary, to make the required future disclosures.

(d) Global Depositary Receipts and Its Variants During 1990s, the surge in capital raised through DR programs prompted the emerging markets issuers to create several innovative DR programs. Emerging markets issuers realized that there are numerous advantages of floating DR programs on the less stringent European markets or elsewhere. Floating a GDR program on the European market is easier and faster than floating an ADR program on the US market. Issuer does not have to fulfill the onerous regulatory requirements of SEC. This prompted the development of GDR programs and their several variants, for example, Euro Depositary Receipt (EDR), Retail DepositaryReceipt (RDR) and Singapore Depositary Receipt (SDR) programs. Citibank introduced the first GDR program in December 1990 for the Samsung International, a Korean company. GDRs
have been explained in details in later part of the report.

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American Depositary Receipt (ADR) Stock Prices of Indian Companies.

ADR is a list of all the Indian Companies listed on New York Stock Exchange under the American Depository Receipts (ADR) category.

Company

CMP(US$)

Volume(Nos)

Tata Motors Ltd Wipro Ltd Sify Technologies Ltd Rediff.com India Ltd Infosys Ltd HDFC Bank Ltd ICICI Bank Ltd Dr Reddys Laboratories Ltd Silverline Technologies Ltd Mahanagar Telephone Nigam Ltd Tata Communications Ltd

23.61 9.13 1.76 2.39 47.61 30.10 27.68 33.00 5.41 0.30 4.50

1271097 894069 52226 47005 1428687 1132302 2192568 204629 2237261 13030 0

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Indian Scenario
The Indian stock market remained largely outside the global integration process until the early 1990s. In line with the global trend, reform of the Indian stock market began with the establishment of the Securities and Exchange Board of India (SEBI) in 1988 and the process gained momentum after the widespread economic reforms in 1991.Among the other significant measures of global financial integration, the structural reforms received a major impetus in 1991, when the Indian corporate sector was allowed to go global with depository receipts issues to foreign investors. While Indian companies have issued ADRs since the early 1990s, most of these earlier issues were privately placed. Exchange-traded ADRs of Indian origin have been a relatively recent phenomenon, being issued since 1999. Currently there are several active Depository Receipts of Indian origin that are listed either on American exchanges like the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automatic Quotation (NASDAQ) or on European/Asian stock exchanges (like Luxembourg, London, Dubai, Singapore).

Background of ADR in India Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme (1993) issued Consistent track record of good performance for a minimum period of three years Obtain prior permission of the Department of Economic Affairs, Ministry of Finance

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Ordinary shares issued against the Global Depository Receipts were to be treated as direct foreign investment in the issuing company

Till 1995:- foreign listings through private placement 1996-97:- SBI and ICICI:-

Indian government gave a boost to the financial services companies and banks and the collective amount raised by SBI and ICICI through private placements was $ 600 million 3yr track record relaxed for infrastructure companies which encouraged companies like MTNL, VSNL to go for foreign listing of their shares. 1998-99:- Infosys as 1st exchange traded ADR 2002:- Two-way Fungibility introduced 2005-06:-Major revision to guidelines for unlisted companies in the Monetary Policy Unlisted Indian companies were allowed to sponsor an issue of ADRs orGDRs with an overseas depository against the shares held by its shareholders. Further, the facility of sponsored ADR/GDR offering by unlisted companies was to be made available to all categories of shareholders of the company whose shares are being sold in the ADR/ GDR market overseas. The huge increase in 2005-06 was also attributable to the booming Indian stock markets that offered the corporate sector the opportunity to issue equities abroad.The boom in the Indian industry is being translated into growing domestic production and exports, along with companies setting up new capacities. Indian companies have raised a record level of capital in 2005-06 both from the domestic capital markets and foreign capital markets. Some companies went in for simultaneous offerings in domestic and foreign markets. The expansion spree of the Indian corporate sector coupled with easing of ADR/GDR norms by the Ministry of Finance resulted in a commensurate rise in the amounts raised through ADR/GDR issues in 2005-06. In fact, Indian companies also began to enter new markets like the Singapore stock exchange and the Dubai stock exchange to enlarge their investor base even further.

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Approval required for issue of DRs:

Approval as per Companies Act: The Company should pass a Board resolution for taking a decision for issue of ADR/GDR The Company has to get permission from its shareholder for the issue

Approval as per Ministry of Finance / RBI: ADR/GDR issue shall be treated as FDI Aggregate Foreign Investment would need to conform to existing FDI Policy Issue Related Expenses 4% in the case of GDRs 7% in the case of ADRs 2% in case of Private Placement Furnishing of Information Within 30 days of completion of transaction company would furnish following to Exchange Control Department of the RBI Amount raised through ADRs / GDRs Number of ADRs / GDRs issued Underlying shares offered % of foreign equity level in the Indian Company on account of issue of ADRs/GDRs Details of repatriation, etc.

As per the Stock Exchange

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 Indian companies first required to list equity share in recognized Indian stock exchanges, and then in overseas exchange Approval before Issue and allotment Final Listing and Trading approval after allotment Allotment and upload of Credit to Domestic Custodian

Recent developments American Depositary Debentures (ADDs) A debt based facility allowing the issuance of a security similar in style to an equity depositary receipt but backed by debt securities placed into trust in the issuers home market. Exchangeable Bonds or Notes An exchangeable bond gives the holder the option to exchange the bond for the stock of a company other than the issuer (usually a subsidiary) at some future date and under prescribed conditions. This is different from a convertible bond, which gives the holder the option to exchange the bond for other securities (usually stock) offered by the issuer American Depositary Warrants (ADWs) Embedded Restricted Securities (ERS) N Shares Global Registered Shares (GRSs American Depositary Notes (ADNs)

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Concept of American Depository Receipts (ADRs) American Depository Receipts

American Depositary Receipts offer the issuing company access to the worlds largest and most active capital market. Correspondingly, ADRs provide investors in the US with a convenient way to directlyinvest in international companies while avoiding the risks traditionally associated with securities held inother countries. An American Depositary Receipt (or ADR) represents ownership in the shares of a foreign company trading on US financial markets. The stock of many non-US companies trades on US exchanges through the use of ADRs. ADRs enable US investors to buy shares in foreign companies without undertaking cross-border transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies. Each ADR is issued by a US depositary bank and can represent a fraction of a share, a single share, or multiple shares of foreign stock. An owner of an ADR has the right to obtain the foreign stock it represents, but US investors usually find it more convenient simply to own the ADR. The price of an ADR is often close to the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares. Depositary banks have numerous responsibilities to an ADR holder and to the non-US company the ADR represents. The first ADR was introduced by J P Morgan in 1927, for the British retailer Selfridges & Co. The largest depositary bank is the Bank of New York. Individual shares of a foreign corporation represented by an ADR are called American Depositary Shares (ADS).

Concept of ADS An American Depositary Share ("ADS") is a vehicle for foreign corporations to list their ordinary equity on an American stock exchange, such as the New York Stock Exchange or the NASDAQ.

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Foreign corporations listed in other markets are not permitted to make direct secondary listings in the United States markets, thus this form of indirect ownership has been devised. ADSs are U.S. dollar denominated and each share represents one or more underlying shares in the subject. These ADSs confer full rights of ownership (including dividends, voting rights) to these underlying shares, which are held on deposit by a custodian bank in the company's home country or territory

TRADING OF DEPOSITORY RECEIPTS

Where the DRs are traded? Deposit Receipts certify that a stated number of underlying shares have been deposited with the depositary's custodian in the foreign country. Depository receipts are traded publicly i.e. on major stock exchanges or in the over-thecounter (OTC) market. In addition, DRs can be created or cancelled to satisfy investor demand in either the U.S. or local trading market. ADR(American Depository Receipt) is one of the most eminent depository receipts in US that offers American investors and companies an opportunity to make global investment. ADRs are traded on New York Stock Exchange(NYSE) and American Stock Exchange. Depository receipts are also available under the name of GDR(Global Depository Receipts). GDRs are bank certificates issued for shares of a foreign company. GDRs are usually listed on European stock exchanges like London Stock Exchange. The DRs may be bought or sold through investors' own brokers, and they clear and settle through the Depository Trust Company (DTC) for ADRs, through Euroclear and Clearstream

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for EDRs and through all three (and possibly other clearing systems) in the case of GDRs, depending on which markets they access. Shareholder information such as annual reports, notices of general meetings and corporate actions, and official news releases are provided by the issuer to the depositary and to the receipt holders, either direct or through the local custodian. The investor is thus spared the costs and difficulties often encountered when direct investment is made in local markets, where currency, settlement, and linguistic problems may be compounded by an excessive number of intermediaries.

LISTING Where to List One of the more important decisions facing a prospective issuer of DRs is determining where tolist them. Listing on a recognised stock exchange is important partly because many institutional investors are required to limit their investment in unlisted securities. Critical factors such as share liquidity, visibility, listing costs and funding requirements must be carefully evaluatedbefore the exchange which best suits the issuer's needs can be selected. In order to ensure that the correct decision is reached, the prospective issuer should hold indepth discussions with the major exchanges.

Secondary trading on listed and unlisted markets in the US The NYSE and Amex are auction markets, while NASDAQ and OTC are dealer markets.Level II and Level III issuers must choose an exchange on which to list their securities. Each exchange has particular listing requirements which must be met by the issuer. The type of DR program desired will determine what listing options are available. The principal US listed markets are The New York Stock Exchange (NYSE) and NASDAQ Stock Market (NASDAQ) and The American Stock Exchange (Amex).
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Agent and Principal Markets The NYSE and Amex are auction-based physical markets where transactions take place as buyers and sellers come together through brokerage firms that act as agents. NASDAQ is a dealer market. With no physical trading floor, it operates over a computerized network. Dealers act as principals buying and selling from their own inventories of stocks and profit from spreads, or the difference between the prices at which they will buy and sell shares.

US LISTINGS OTC Traded DRs Level l DRs trade in the U.S. in the Over-the-Counter (OTC) market and are not listed on an exchange. Brokers wishing to trade in these securities access information through the Pink Sheets and or the OTC Bulletin Board.

The Over-The-Counter (OTC) Market The OTC market is not an organized marketplace or exchange, but rather it is a network of securities dealers that make markets in many different securities. OTC securities may be issued by companies that choose not to list or are unable to comply with the standards for listing on a U.S. exchange or on Nasdaq.

This is a centralized quotation service that collects and publishes market maker quotes for OTC securities in real time. Pink Sheets is neither a SEC registered stock exchange nor a broker-dealer. Issuers are not required to register securities with the SEC or be current in their reporting requirements to be quoted on the Pink Sheets. National Quotation Bureau for brokers and dealers (the market maker community) daily publishes and distributes the pink sheets (named for their color) to the brokers and dealers. These sheets provide the detailed informationabout the prices and the market makers for the
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OTC stocks. The pink sheets are not available to the general public. The system displays realtime, bid-and-ask quotation prices and is used by brokers and market makers.

The OTC Bulletin Board Shares of several thousand US public companies that dont meet NASDAQs financial requirementsyet are registered with the SEC and are subject to periodic reporting requirementstrade on the OTC Bulletin Board, a NASD-operated over-the-counter market that displays real-time pricing electronically. This board is a regulated transaction and quotation service that displays real time quotes and last sale prices for U.S. securities not listed on Nasdaq or on a national securities exchange. Indications of interest are displayed in Non-U.S. securities and DRs that are not listed in the U.S. market (e.g., Level I programs). This quotation service is dealer driven. Market makers not the issuer companycan apply to include a security on the OTC Bulletin Board. There are no listing and maintenance fees paid by issuers in this market.

EXCHANGE LISTING Exchange Traded DRs Issuers of Level II or III sponsored ADRs will benefit in several ways from a listing on any one of the three national exchanges. The increased visibility to the US investment community, which a listing provides, together with access to the automated trading and efficient market pricing available on the national exchanges, should lead to a significant expansion of the issuer's investor base. Importantly, listing fees for ADRs are generally less expensive than those forordinary shares in the US. A description of the three exchanges follows:NASDAQ (National Association of Securities Dealers Automated Quotation) NASDAQ National Market:
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NASDAQ Capital Market: AMEX (American Stock Exchange) NYSE (New York Stock Exchange) .

Non-US listing standards The non-US listing standards are designed to provide flexibility to major foreign corporations seeking to list their shares on the NYSE. The principal criteria focus on worldwide rather than US share distribution and financial results.

The Trading Mechanism Step1: An offering of depository receipts usually starts with the appointment of a financial adviser a financial institution such as an international investmentbankto manage the process. The adviser sets the number of shares to be represented by one depository receiptthat is, the depository receipt ratio.The ratio is set so that the price of a depository receipt is comparable to that ofsimilar securities in international markets. The adviser also appoints a depository bank in the host market and a custodian bank in the country of the issuer. The depository bank has responsibilities relating to shareholder rights (such as payment of dividends and voting at shareholder meetings), which are stated in the depository receipt certificate, and must also maintain a share register of depository receipt owners. Step 2: An American broker, through an international office or a local brokerage house in India purchases domestic shares from the Indian market and delivers them to the local custodian bank of the depository banksay Bank of New York.
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Step 3: The local Indian custodian bank verifies the delivery of the shares by informingthe Bank of New York that the shares can now be issued in the United States andthe Bank of New York delivers the ADRs to the broker who initially purchased them. Based on the determined ADR ratio, each ADR is issued as representing one or more of the Indian local shares and the company determines the number of shares to be sold in the international market and delivers the shares to the custodian bank. Step 4: The custodian registers these shares in the name of the depository bank, which issues the appropriate number of depository receipts and delivers them to the members of the underwriting syndicate. These ADRs represent the local Indian shares held by the depository, and can be traded on the NYSE, likeother US securities. Trading then begins. Although depository receipts are traded exclusively in the host market, continuous arbitrage between the host market and the issuers home market tends to minimize the price differential between the two markets. Depository receipt issues are usually marketed through a book-building route, an offering method that leads to efficient price discovery. Typically the lead manager, or book runner, builds the order book by forming a syndicate that fans out on a marketing run among institutional investors. The price and size of the issue are determined on the basis of both an in-house valuation of the issuing companys intrinsic worth and the bids received. Since depository receipts trade mainly among large institutional investors, shares can be sold in bulk and thus quickly and cheaply.

Buying of DRs If an investor wishes to purchase shares in a foreign company, he can either buy the foreignshares in the local market through a broker in that country or, providing the foreign company in question has a DR program, the investor can request his broker to buy DRs. The broker may either purchase existing DRs or, if none are available, he may arrange for a depositary bank to issue new ones.
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The process for issuing new DRs is very simple. The investor's broker contacts a broker in the issuing company's home market and acquires shares in that company. These shares are then deposited with the depositary bank's local custodian. Upon confirmation that the custodian has received the shares, the depositary issues the requisite number of DRs to the investor via the broker.

Selling of DRs In some exceptional cases there may be restrictions on the issuance of new DRs under existingprograms (e.g. Indian GDR programs) because of local regulations. DRs can be sold in DR form, in which case they trade and settle like other US or Euro securities. They can also, however, be cancelled. In this case the broker acting on behalf of the owner of the DRs will request the depositary bank to cancel the DRs and release the underlying shares to a domestic broker in the issuing company's home market. The domestic broker will then sell the shares locally and the proceeds will be remitted to the investor who cancelled those DRs.

Issuance of Depository Receipts Depositary receipts are normally created when shares currently trading in a foreign market, or newly issued shares resulting from an offering of securities, are deposited with the depositarys custodian bank in the issuers home market. The depositary then issues depositary receipts representing those shares. Based upon availability and market conditions, an investor may acquire a DR by either purchasing existing DRs or purchasing shares in an issuers home market and arranging for the creation of new DRs. New DRs are created once the underlying shares are deposited with the depositarys custodian in the issuers home market. The depositary then issues DRs, which represent the shares on deposit, to the investor or to the investorsbroker. This is referred to as an issuance of DRs.
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DR Issuance Process 1. Investor contacts broker and requests the purchase of a DR issuer companys shares. If existing DRs of that company are not available, the issuance process begins. 2. To issue new DRs, the broker contacts a local broker in the issuers home market. 3. The local broker purchases ordinary shares on an exchange in the local market. 4. Ordinary shares are deposited with a local custodian. 5. The local custodian instructs the depositary to issue DRs that represent the shares received.
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6. The depositary issues DRs and delivers them in physical form or book entry form through DTC/Euroclear/Clearstream (as applicable). 7. The broker delivers DRs to the investor or credits the investors account.

Intra-Market Trading Suppose an investor who is holding Depository Receipts wishes to sell them. The investor has to first notify his broker. The broker can either sell the Depository Receipts in the US market through an intra-market transaction where the Depository Receipts are sold to subsequent US investors by transferring them from the existing holder (who is now the seller) to the new holder (who is thebuyer). Intra-market trading accounts for approximately 95% of all Depository Receipt trading. An intra-market transaction is settled in the same manner as any other U.S. security purchase: in U.S. dollars on the third business day after the trade date and typically through The Depository Trust Company (DTC). Intra-market trading accounts for approximately 95 percent of all Depositary Receipt trading in the market today. Accordingly, the most important role of a depositary bank is that of Stock Transfer Agent and Registrar. It is therefore critical that the depositary bank maintain sophisticated stock transfer systems and operating capabilities.

Cross-border Transaction The investor can also sell the shares back into the home market through a cross-border transaction. In this case, the US broker surrenders the Depository Receipts to the depository bank, so as to deliver the shares to a buyer in the home market. The depository bank cancels the Depository Receipt and instructs the custodian to release the underlying shares and delivers them to the local broker. The Indian broker pays for them in equivalent Rupees that are converted into dollars by the US broker.

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DRs also may play a critical role in different types of cross border transactions such as privatizations and mergers and acquisitions.

Cancellation of Depository Receipts Based upon demand and market conditions, an investor may sell a DR in the market in which it trades, or the investor may cancel the DR and sell the ordinary share in its home market. When the demand for shares in the home market is higher than the demand for depositary receipts, the depositary receipts can be cancelled, and the shares are released back into the home market. Upon receipt of investor instructions to cancel DRs, the broker delivers DRs to the depositary for cancellation and instructs the depositary to deliver the ordinary shares to a local custody account. The depositary cancels the DRs andinstructs the local custodian to release and deliver the underlying shares to the sellers broker in the issuers home market. The broker may then, either safe keep or sells the ordinary shares in the local market.

Investor demand is driven by following factors: 1. Company fundamentals and track record, market conditions and sector performance 2. Relative valuations and analyst recommendations 3. NYSE/Amex specialist or NASDAQ market maker commitment to supply liquidity of the stock

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4. Liquidity of shares in the local market and visibility of the company internationally

DR Cancellation Process 1. The investor instructs the broker to cancel DRs. 2. The broker delivers the DRs to the depositary for cancellation and instructs the depositary to deliver the ordinary shares to a local custody account. 3. The depositary cancels the DRs and instructs the local custodian to release and deliver the underlying shares to the sellers broker in the issuers home market.

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4. The local custodian delivers the underlying ordinary shares as instructed to the local broker. The local broker safe-keeps the ordinary shares or delivers them to or on behalf of the new investor. The choice between DRs and underlying shares Institutional investors may choose to hold either DRs or underlying shares at any particular point in time.While they may have the infrastructure in place to efficiently manage foreign exchange and global custody challenges, several complex factors influence their purchase decisions:

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DR Premium The DR Premium is the differential between the ordinary share price in the local currency and the price of the DR, which is quoted and traded in $US. Historically, when the U.S. market outperforms the Non-U.S. market, the premium grows. When the local market outperforms the U.S. market, the premium shrinks.
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The limited two-way market promotes cross border liquidity up to a point, but does not significantly reduce the size of the DR premium compared to a one-way market. Under a free two-way market, the effect of the higher performing market on the size of the DR premium is minimized. International investors will sometimes buy at a premium because Non-U.S. ownership of ordinary shares is limited, and DRs are the only way to own a particular security.

Where do ADRs trade? You can find ADRs on the Big Board as well as on Nasdaq-Amex. In addition ADRs trade Over the Counter (OTC). Brokers can access information about these OTC securities through the National Quotation Bureaus (NQB) Pink Sheets or the OTC Bulletin Board. Trading is conducted through market makers in that particular security.

Three ways to buy ADRs Traditional Brokers Purchase ADRs through brokerage firms, just as you would U.S. Securities. Gain advice and benefits of in-depth research from experts in the business. Choose to invest from an extensive list of issuers.

On-line Brokers Purchase ADRs through on-line brokerage services, just as you would US Securities Benefit from convenience of 24 hour/7 day a week access to your accounts combined with on demand research and other investment tools.

Direct Investment Plans

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Purchase participating exchange-listed NYRS/DRs directly from a depository bank. Reinvest dividends through Dividend Reinvestment Programs (DRPs) and purchase additional shares at nominal costs.

Roles and Responsibilities: In order to establish a DR program, the issuer develops a team of advisors that typically includes investment bankers, lawyers and accountants. The issuer also selects a depositary bank,a key partner that enlists the services of a custodian to handle the implementation of the program.The issuer and the depositary execute a Deposit Agreement that sets forth the terms of the DR program. Based upon this contract the depositary performs certain specified services on behalf of the issuer and the DR holders. Many of these same parties play key roles in the long-term development and day-to-day management of the issuers DR program. The depositary bank remains a critical liaison between the issuer and brokers and custodians, while the function of lawyers and accountants becomes focused on periodic reporting. Generally, investment bankers are not involved with the ongoing management of a DR program unless the issuer is going back to the market.

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Brokers

Investment

Depository

ISSUER

Lawyers

Custodian

Accountant

DR holders (Investors) fall into one of two categories: registered holders or beneficial holders.

Registered holders They are listed directly with the depositary bank or transfer agent and are typically individual investors who have physical possession of their DR certificates or hold their securities through the direct registration system of the depositary. Beneficial holders Such holders include both individual and institutional investors whose depositary shares are heldby third-party broker dealers or custodian banks. These shares are typically held in The Depository Trust Company (DTC), the centralized clearing system in the United States. These two groups are handled differently during corporate actions. Registered holders provide voting instructions whereas DTC delegates the proxy voting authority on all depositary shares held in its nominee name (i.e. for beneficial holders of DRs) to DTCs participant banks, brokers and custodial institutions. The expense incurred by DTC participants to forward voting materials to their customers is borne by theissuer.
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ADR Certificate Rights and Privileges DR holders are entitled to all the dividends payable on the underlying foreign shares and, furthermore, to have these paid in the currency in which the DRs are denominated usually US dollars. Like equity holders, ADS holders get voting rights and are entitled to dividends and bonus shares. Dividend is declared in Indian rupees, but ADS holders will receive it in dollars, converted at the prevailing exchange rate. Without capital account convertibility, CAC defined it as the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. In simple language what this means is that CAC allows anyone to freely move from local currency into foreign currency and back

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Key Roles in Establishment of a DR Program Brokers Submit required forms to become a market maker in a security (for Level l programs), as needed Make securities available to investors Depositary Advise on DR facility structure Appoint custodian Assist with DR registration requirements Coordinate with lawyers and investment bankers to ensure that all implementation steps are completed Prepare and issue DRs Enlist market makers, if applicable Announce program establishment to brokers and traders Custodian Receive underlying shares Confirm deposit of underlying shares Issuer Determine financial objectives Appoint depositary, lawyers, investment bank and accountants Determine program type Obtain approval from board of directors, shareholders and regulators, as needed Provide financial information to accountants

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Develop investor relations plan

Investment Bankers Lead underwriting process Establish syndicate of participating banks Advise on capital structure Advise on type of DR structure Conduct due diligence Draft prospectus Obtain CUSIP number Obtain DTC, Euroclear and Clearstream eligibility, as needed Coordinate road show Organize book-building and line up market makers Price and launch securities

Lawyers Advise on facility structure Negotiate Deposit Agreement Prepare appropriate registration statements or establish exemptions with SEC, as applicable Prepare listing agreements to list on U.S. exchanges (Level II and Level III DR facilities) Draft offering circular/prospectus
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Accountants Prepare financial statements in accordance with (or reconciled to) U.S. Generally Accepted Accounting Principles (U.S. GAAP) for Securities Act registered securities (Level II and Level III DR facilities)

Fungibility
Fungibility, in general terms, means interchangeability of any security of a class. They could be bearer instruments, securities and goods which are substitutable. Fungibility makes depository receipts homogenous and convertible into shares underlying them. By making this possible the foreign investors is given a two way exit route i.e. the exit can be either through the sale of the ADR in the American market or through the sales of the underlying shares in the underlying market Fungibility can be classified into One way Fungibility Two way Fungibility

One way Fungibility Under the one-way Fungibility, once a company issued ADR/GDR, the holder could convert the ADR/GDR into shares of the Indian Company, but it was not possible to reconvert the equity shares into ADR/GDR. No re-issuance of Depository receipts was permitted investors could only cancel the depository receipts and avail of the underlying shares or take back the proceeds by selling the underlying shares. Hence over a period of time, the outstanding balance of depository receipts would decline, thereby reducing the liquidity of
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depository receipts for the international investors. The result was, every time a conversion took place, companies had to seek government permission to reissue the depositories. An investor in depository receipts intending to use the Fungibility route for exit has to approach the global depository directly or trough or foreign broker for the cancellation of

the depository receipts. The depositary then directs the domestic custodian in India to release the share to the counter party broker in India .the custodian then informs the issuer company, which in turn would instruct the STA to release the share. if the share have been issued in dematerialized mode in India , suitable instruction have to be passed to the domestic

depository (NSDL or CDSL) by the STA. the counter part broker receives the credit of the share in its DP account which are then sold in the secondary market. The proceeds received in rupees are remitted in foreign exchange to the foreign broker to the Indian broker. The foreign broker pays off the investor upon the receipts of the proceeds. The net effect of the truncation would be that the total stock of the depository receipt get reduce by the amount by the amount that have been converted in to share . It also means that the stock of tradable shares of the company in the domestic market in India goes up by the same extent. Therefore the property of the Fungibility of the depository receipt could lead to the change of the in the respective floating stock of the company tradable equity in domestic and foreign bourses

Two way Fungibility India started their ADR programmers as one-way programs and converted toLimited twoway programs in 2002, whereby the re-issuance of ADRs once cancelled is restricted by the initial offering size. In India, with limited two-way Fungibility, a foreign investor is now permitted to placean order with an Indian stock broker to buy local shares, with an intention to convertthem into depository receipts. The stock broker has to apply to the domestic custodianBank for verification and approval of the order. Once the approval is granted, theBroker purchases local shares on the Indian stock market and delivers the shares to the domestic custodian for further credit to the overseas depository. The overseasDepository issues proportional Depository Receipts to the foreign investor. ThisConversion of the domestic share into ADR

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is subject to the extent of the originalIssue of the ADRs. Consequently, the foreign investor can engage in secondaryMarket trading on the American stock exchange or cancel the ADR. Under the limited two ways FungibilityRBI came with the separate guidelines throughtwo distinct methods: 1. A) Re-issue of ADR in the overseas market through market purchase of shares in India 2. b) through a sponsored ADR issue where by Indian investors can hope to encash some of the gains of a higher price in the overseas market overseas market through secondary

Sponsored ADR Issue The RBI has allowed a company to sponsored a ADR issued based on the underlying domestic shares through an appointed lead manager , the domestic custodian and a

overseas depository . The price for buy back of the domestic share for the purchase of the sponsored issues would be determined by the lead manager based on the head room

availability. suppose the ADR of the company is currently quoted at the equivalent of Rs 8000 in the overseas market and the underlying shares in India is quoting at Rs 6000 , the lead manger would be able to make a offer of a price ranging between these two

price . the lead manager buys from the local market at a price slightly higher than the prevailing market price and sell them at a slightly lower price in the overseas market than the prevalent ADR price.

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ADR Ratio & Pricing

Each ADR can represent one, more than one, or a fraction of underlying shares. The relationship between the ADR and the ordinary share is referred to as the ratio. While many ADR programs are established with a 1:1 ratio (one underlying share equals one depositary share), current ADR programs have ratios ranging from 100,000:1 to 1:100.

Setting the Ratio A primary step in establishing a DR program is determining the ratio of underlying shares to Depositary Shares (DSs), the securities represented by a DR. DSs are established as a multiple or fraction of the underlying shares and the ratio can influence the price trading range. In setting the ratio, the issuer should consider: Industry peers: To the extent that securities of companies in the issuers industry generally trade in a certainprice range, the issuer may want to conform to industry norms in the market where the DR will be listed; Exchange options: Each exchange has average price ranges for the shares listed and, generally speaking, issuers may want to conform to that range; Investor appeal: U.S. institutional and retail investors are more likely to buy shares which they perceive as well priced and valued fairly. While many DR programs are established with a 1:1 ratio (one underlying share equals one DS), current DR programs have ratios ranging from 100,000:1 to 1:100. The depositary will work with issuers to determine the most appropriate ratio at the inception of the DR program. The ratio can be adjusted at a future date to address changes in market conditions.

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Pricing 1) For listed companies The price of ADR/GDR should not be less than higher of the following two averages: (i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; (ii) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date.

2) For unlisted companies As per the recent changes, the applicant company is required to be a listed company or a simultaneous listing of shares should be done. Therefore, the earlierrequirement that pricing should be in accordance with the regulations notified under FEMA is not applicable any more.

Pricing Criteria The various criteria considered for pricing of ADR/GDR issues are prospective earnings, market price of the share, price earning ratio, turnover and market capitalization, fundamental analysis of the company and size of the issue. While PAT and EPS will be evaluated from the point of view of investors interest, the GDR is usually issued at a discount of 10-20 % to the market price and a discount in excess of 20% could result in arbitrage trading of securities. Cost of issue being high, companies should be large enough in terms of a turnover of Rs. 500 crores and market capitalization of 1500 crores to attract investors.

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Companies with lower Debt:Equity are preferred. Size of the issue is arrived after road shows. To ensure stability of the price after issue, the issue demand should be limited to two- thirds of the assessed demand

How to Determine Price of ADRs? Let's use an example to give you a better idea of how the ADR process works. Suppose a recent boom in the popularity of Bloody Mary drinks 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. market and to tap into the growing demand for vodka. Russian Vodka already trades on the Russian Stock Exchange at 127 Russian roubles, which, at this time, is equivalent to US$4.58. 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 US$45.80 each (10 times $4.58) Once an ADR is priced and sold on the market, its price is determined by supply and demand, just like an ordinary stock. However, if the U.S. price varies too far from the Russian price after taking the currency exchange rate and the ratio of ADRs to home country shares into account, an arbitrage opportunity may arise. ADRs tend to follow the general trend of the home country shares, but this is not always the case.

Risks involved There are several factors that determine the value of the ADR beyond the performance of the company. Analyzing these foreign companies involves further scrutiny than merely looking at the fundamentals. Here are some other risks that investors should consider:

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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 characteristic instability of the Russian government. Exchange Rate Risk - Is the currency of the home country stable? Remember the ADR shares track the shares in the home country. If a country's currency is devalued, it will trickle 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 because the currency of a country with high inflation becomes less and less valuable each day.

Reasons for Premium on Indian ADR: There has been a continuous existence of premium on Indian ADRs over the last 3-4 years and there are several reasons for the same. If any security, carrying the same risk-reward characteristics, trades at two different prices in different markets, the arbitrageurs will soon step in to take advantage of the situation, till the time the security trades at one price, across all markets. That has not happened in the case of these Indian ADRs. There are various possible sources of the premium: 1. Legal / Institutional: Laws regarding capital account transactions in India, including the rules and exact procedures for investment by foreign nationals in Indian securities market and repatriation of those funds. If the foreign nationals have limited or no access to Indian stock markets, it is probable that ADRs in the US markets are valued under different assumptions compared to the valuation of underlying equity in the Indian stock markets (which is, to an extent, same as saying that the two securities have two different bodies of investors, with different expectations and assumptions). 2. Liquidity: Measuring the relative liquidity of ADRs in the US to the underlying stock in India, this may be a partial cause of the premiums. In case the liquidity of ADRs is higher,

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the ADRS would carry certain liquidity premium vis--vis equity listed on the Indian stock markets. 3. Risk preferences: The investors may assign different risk-reward characteristics to Indian equities and Indian ADRs on account of currency risk, repatriation risk or risk of procedural delays in security transactions in India. This may also result in a premium on ADRs.

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Global Depository Receipts (GDRs) and European Depository Receipts (EDRs)

Introduction & Definition During 1990s, the surge in capital raised through Depository Receipt (DR) programs prompted the emerging markets issuers to create several innovative DR programs. Emerging markets issuers realized that there are numerous advantages of floating DR programs on the less stringent European markets or elsewhere. Floating a Global Depositary Receipts (GDRs) program on the European market is easier and faster than floating an ADR program on the US market. Issuer does not have to fulfill the onerous regulatory requirements of SEC. This prompted the development of GDR programs and their several variants, for example, Euro Depositary Receipt (EDR), Retail Depositary Receipt (RDR) and Singapore Depositary Receipt (SDR) programs. Citibank introduced the first GDR program in December 1990 for the Samsung International, a Korean company. Global Depositary Receipts (GDRs)are negotiable certificates that enabledomestic investors of a country to own shares inforeign companies.GDRs are issued by nonresident companies to residents of another countrythrough depositories situated in the country fromwhich a company intends to raise funds throughdepository receipts. Each unit of GDRrepresents a given number of a companys shares andcan be traded freely as any other security in the capitalmarket.The role of depositories in an issue ofGDR is very crucial, as depositories act ascustodians of the shares, against which theGDRs are issued. As the names suggest, ADRs are issued in American capital markets while GDRs areissued in all other countries. The European Depositary Receipts (EDRs) accesses the Euromarkets but not the US market.It settles and trades through the Euro market clearing systems, Euroclear and Clearstream, and may be listed on a EuropeanStock Exchange, normally London or Luxembourg.

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Global Depositary Receipts (GDRs) allow an issuer to raise capital simultaneously in two or more markets through a global offering. GDRs use a global settlement convention linking DTC with Euroclear and Clearstream to provide global clearing and settlement via the DTC/Euroclear/Clearstream Bridge. It accesses two markets and is often used for capital raising purposes, so the US element is generally either a Rule 144 (a) ADR or a level III ADR, depending on whether the issuer aims to tap the private placement or public US markets. Similarly, EDRs are designed to attract new capital and investors from within the Euro community. EDRs are priced in Euros and all distributions (dividends, stock splits, and rights issues) are made in Euros. The potential market for EDRs includes: institutional investors diversifying holdings from EU issuers into favorable global sectors; and individual investors adopting an equity culture, and seeking global renowned issuers. EDRs can be listed or traded on exchanges such as London, Luxembourg, Paris, Frankfurt, Brussels, Amsterdam and Vienna. EDRs and GDRs are generally denominated in US dollars, but may be denominated in anycurrency. They represent the underlying shares in exactly the same way as ADRs, and make itpossible for foreign investors to trade in the issuing company's stock without the problemsassociated with custody and settlement in foreign markets. The US component of a GDR is normally structured either as a Level III ADR with full disclosure and reporting to the SEC, or privately placed under Rule 144(a), in which case full compliance with the SEC's onerous reporting and registration requirements is avoided.

Benefits of GDRs/EDRs
The advantages of an EDR/GDR program are similar to those of an ADR program. An EDR program gives access to the vast pool of international capital, while a GDR combines this with access to the domestic US market. This allows capital raising on a scale, which could be difficult in some domestic markets, and in the case of an EDR avoids all the US SEC reporting and registration requirements associated with ADRs.

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Advantages to a non-US corporation of initiating an EDR/GDR program: It increases the issuer's visibility and name recognition in the international markets, which mayenhance knowledge of its products and ease the path of future capital raising exercises. GDRs/EDRs can be launched as part of a private or public offering. They allow a single fungible security to be placed in one or more international markets, thus giving access to a global investor base. They may allow the issuer to overcome local selling restrictions to foreign share ownership. GDRs are eligible for settlement through Clearstream, Euroclear and DTC.

Disadvantages of GDRs/EDRs If the US tranche of a GDR is structured as a Rule 144(a) private placement, the disadvantages of an RADR program will apply. If it is structured as a Level III program, the reporting and cost features of such programs will apply.

Two Different GDR Structures When GDRs are structured with a Rule 144(a) offering for the US and a "Regulation S" offering for non-US investors, there are two possible options for the structure. Unitary Structures Under a unitary structure, a single class of DRs is offered both to Qualified Institutional Buyers (QIBs) in the US and to offshore purchasers outside the issuer's domestic market, in accordance with Regulation S. All DRs are governed by one Deposit Agreement and all are subject to deposit, withdrawal and resale restrictions. Bifurcated Structure

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Under a bifurcated structure, Rule 144(a) ADRs are offered to QIBs in the US and Regulation S DRs are offered to offshore investors outside the issuer's domestic market. The two classes of DRs are offered using two separate DR facilities and two separate Deposit Agreements. The Regulation S DRs are not restricted securities, and can therefore be deposited into a "side-by-side" Level I DR program, and are not normally subject to restrictions on deposits, withdrawals or transfers. However, they may be subject to temporary resale restrictions in the US. Regulation S was adopted to provide an exemption from registration under the Securities Act for offerings and sales of securities occurring outside the U.S. The exemption was intended to help U.S. and foreign companies raise capital overseas quickly and inexpensively without having to comply with the full-blown registration process mandated under Section 5 of the Securities Act. But there had been some amendments like lock in period for sales for upto one year. Regulation S provides two safe harbors from the Securities Act's registration requirements. One safe harbor is applicable to offers and sales by issuers, distributors and their respective affiliates, and the other is applicable to re-sales by other parties. An offer, sale or resale of securities meeting all of the requirements of the applicable Regulation S safe harbor is deemed to occur outside the U.S., and accordingly is not subject to the Securities Act's registration requirements. The availability of either safe harbor is subject to the satisfaction of two basic conditions (in addition to other requirements): first, the offer or sale of securities must take place in an "offshore transaction," meaning that (1) the offer is not made to a person in the U.S. and (2) the buyer is (or is reasonably believed by the seller to be) outside the U.S. at the time of the sale, or the sale is made through an established foreign securities exchange, or through the facilities of a designated foreign securities market, and the transaction is not pre-arranged with a U.S. buyer. Second, no "directed selling efforts" may be made in the U.S. in connection with the transaction. "Directed selling efforts" means any activity undertaken for the purpose of or that could be reasonably expected to result in, conditioning the U.S. market for the relevant securities (for example, advertising the offering in a widely circulated publication in the U.S.). Regulation S excludes certain types of advertisements and other activities from the definition of "directed selling efforts."
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Where to List One of the most important decisions facing a prospective issuer of DRs is determining where to list them. Listing on a recognised stock exchange is important partly because many institutional investors are required to limit their investment in unlisted securities. Critical factors such as share liquidity, visibility, listing costs and funding requirements must be carefully evaluated before the exchange which best suits the issuer's needs. In order to ensure that the correct decision is reached, the prospective issuer should hold in-depth discussions with the major exchanges.The type of DR program desired will determine what listing options are available. London and Luxembourg Most of the GDRs are listed on London or Luxembourg exchange as these are the traditional exchanges for listing euro-market instruments. A listing on a recognised stock exchange adds to the visibility of the issue and provides a widerpotential market; many institutional investors have limits on the number of unlisted securities, orsecurities which are not listed on certain specified exchanges, in which they can invest. Both the London and Luxembourg Stock Exchanges list GDRs, and since both are governed bythe same European Union directive, their listing requirements are broadly similar. Thedifferences lie mainly in the level of disclosure, the ease and speed with which listings can beobtained and the level of visibility afforded by the listing. Listings on the London Stock Exchange are generally arranged by the Lead Manager of the GDRissue acting as Listing Agent, while for Luxembourg the Listing Agent must be a Luxembourgbank with a seat on the Luxembourg Stock Exchange. This is not normally a service the LeadManager of the GDR issue can provide directly.
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A listing on the London Stock Exchange makes it easier for a GDR to be quoted on SEAQ (Stock Exchange Automated Quotation System) International, the exchange's electronic price quotation service, although such a listing is nota requirement for trading on SEAQ. It is the London Stock Exchanges service for mid-cap securities and the mostliquid AIM (Alternative Investment Market) securities. The service is based on two-way continuous quotes, offered by competingmarket makers.

Security Regulations and Requirements Issuers of Depositary Receipts must comply with the regulations of the markets in which their DRs are issued. Issue related expenses covering both fixed expenses like underwriting commissions, lead managers fee, legal expenses and other reimbursable expenses shall be subject to a ceiling of 4% of the issue size in the case of GDRs and 7% in the case of ADRs. For issue expenses to be incurred beyond the above ceiling, approval of the RBI would be necessary. A GDR may be listed in the negotiable form and may be listed on any international stock exchanges for trading outside India or OTC exchanges or through book entry transfer systems prevalent abroad and such receipts may be purchased, possessed and freely transferable by a person who is non-resident within the meaning of FEMA subject to the provisions of that Act. A GDR may be issued for one or more underlying shares or bonds held with the domestic custodian bank. The FCCBs and GDRs may be denominated in any freely convertible foreign currency. The ordinary shares underlying the GDRs and the shares issued upon conversion of the FCCBs will be denominated only in Indian currency. There would be no lock-in period for the GDRs/ADRs issued under the Government of India scheme.

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How do GDR work?

Key Participants in a GDR Offering A GDR Offering will typically involve the following parties: The Issuer The Issuer is typically a non U.S. or U.K. domiciled corporation, and is responsible for issuing,registering and depositing the GDRs with the Depositary Bank. The Issuer will also

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haveresponsibility for making cash and share dividends as well as other relevant distributions available to the Depositary Bank for payment to GDR holders. The End Investors These are the actual and ultimate purchasers and holders of the GDRs. The Depositary Bank The Depositary Bank issues the GDRs to End Investors and holds the underlying Shares backing the GDRs through the Local Custodian for the benefit of the GDR holders. Any payments received by the Depositary Bank from the Issuer on behalf of the End Investors are held in trust for the relevant holder until duly paid thereto. The Depositary Bank acts as the Registrar for the GDRs, maintaining a register of all record holders. The Depositary Bank is also responsible for passing information from the Annual General Meetings of the Issuer to the End Investors. The Depositary Bank is authorized and regulated by the Financial Services Authority (FSA) of the U.K. How do GDR trades settle? GDR trades are settled bilaterally by registered brokers on the LSE, without the use of a central counterparty such as the Central Securities Clearing System on the NSE. Electronic settlement and clearing takes place in an agreed location (typically the Euroclear bank or the Depositary Trust and Clearing Corporation, DTCC). However, counterparties may agree to an alternative settlement venue. Standard settlement period is T + 3 days.

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Indian Depository Receipts (IDRs)

Indian Depository Receipts (IDRs) are basically financial instruments that allow foreign companiesto mobilise funds from Indian markets by offering equity and getting listed on Indian stockexchanges. This instrument is similar to the GDRs and ADRs that allow foreign companies to raisefunds from European and American markets, respectively. In the year 2000, by the introductionof Section 605 A of the Companies Act, 1956, the first step to give foreign companies access toraise capital via the Indian stock market was taken.

The second step was taken in 2004 when the Indian Depository Receipt rules were framed. FinallySEBI has taken the third step on April 3rd 2006, in the back drop of the Indian stock exchangesboom, by the introduction of Chapter VIA in the Disclosure and Investor Protection Guidelines, byframing the eligibility criteria for foreign companies to raise capital on the Indian bourses byissuing IDRs against their underlying shares. The objective of introducing this provision seems tobe to provide Indian investors with one more alternative to acquire a share of the global pie as wellas to allow global companies to access funds at, presumably, cheaper cost.

Rules and Regulations for IDRs

IDRs can be understood as a mirror image of the familiar ADRs/GDRs. In an IDR, foreigncompanies issue shares to an Indian Depository, which would, in turn, issue Depository Receipts toinvestors in India. The Depository Receipts would be listed on stock exchanges in India and wouldbe freely transferable. The actual shares underlying the IDRs would be held by an Overseas Custodian, which shall authorize the Indian Depository to issue the IDRs. The Overseas Custodianis required to be a foreign bank having a place of business in India and needs approval from theFinance Ministry for acting as a custodian while the Indian Depository needs to be registered withSEBI. Issuers Eligibility Criteria

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Pre-issue paid up capital of and free reserves of US$50 million and minimum average capitalisation during the (last three years) of US$100 million

A track record of distribution of profits in three out of five years; A continuous trading record of at least three years in the stock exchange of the parent country;

The underlying shares shall not exceed 25 percent of the post issue number of equity shares of the company

Must be listed in its home country. Must not be prohibited by any regulatory body to issue securities Must comply with any additional criteria set by SEBI

Procedure for making an issue of IDRs (i) (a) No issuing company shall raise funds in India by issuing IDRs unless it has obtainedprior permission from the SEBI. (b) An application seeking permission under clause (a) shall be made to the SEBI atleast 90 days prior to the opening date of the issue, in such form furnishing suchinformation as may be notified from time to time with a non-refundable fee of US$10,000:

Provided that, on permission being granted, an applicant shall pay an issue fee of half apercent of the issue value subject to a minimum of Rs.10 lakhs where the issue is uptoRs.100 crore in Indian rupees: Provided further where the issue value exceeds Rs.100 crore, every additional value of issueshall be subject to a fee of 0.25 percent of the issue value.

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(c) The SEBI may, on receipt of an application, seeking permission under clause (a),call for such further information, and explanations, as may be necessary, for disposalof such application. (d) The issuing company shall obtain the necessary approvals or exemption from theappropriate authorities from the country of its incorporation under the relevant lawsrelating to issue of capital, where required. (e) The issuing company shall appoint an overseas custodian bank, a domesticdepository and a merchant banker for the purpose of issue of IDRs. (f) The issuing company shall deliver the underlying equity shares or cause them to bedelivered to an Overseas Custodian Bank and the said bank shall authorize thedomestic depository to issue IDRs. (g) The issuing company shall file through a merchant banker or the domesticdepository a due diligence report with the Registrar and with SEBI in the formspecified. (ii) (a) The issuing company shall, through a merchant Banker file a prospectus or letter ofoffer certified by two authorized signatories of the issuing company, one of whomshall be a wholetime director and other the Chief Accounts Officer, stating theparticulars of the resolution of the Board by which it was approved, with the SEBIand Registrar of Companies, New Delhi, before such issue. (b) The draft prospectus or draft letter of offer shall be filed with SEBI, through themerchant banker, at least 21 days prior to the filing under clause (a). Provided that if within 21 days from the date of submission of draft prospectus or letter ofoffer, SEBI specifies any changes to be made therein, the prospectus shall not be filed withthe SEBI/Registrar of Companies unless such changes have been incorporated therein. (iii) The issuing company, seeking permission under sub-rule (i) above, shall obtain inprinciplelisting permission from one or more stock exchanges having nation wide trading terminalsin India. (iv) The issuing company may appoint underwriters registered with SEBI to underwrite the issue of IDRs.
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Who can Invest?

1. Indian Companies 2. Qualified Institutional Buyers 3. NRIs and FIIs with permission of the Reserve Bank Of India.

The Issue

The minimum issue size is Rs. 50 crores, 90% of the issue must be subscribed. Automatic Fungibility is not permitted.

The following conditions would also apply:

In one financial year the market cap cannot exceed 15 % of the paid up capital and freereserves of the issuer

Redemption into underlying shares is prohibited for 1 year, beginning the issue date. Repatriation of proceeds is subject to Indian foreign exchange laws, prevailing at time ofrepatriation.

The issue must be in rupees. The issuer is subject to Clause 49 of the listing agreement. Legal Implications of IDR Rules An IDR issue needs to be approved by SEBI and an application in this regard has to be made aminimum of 90 days before the issue-opening date. The overseas company also has to file a duediligence report and a Prospectus or Letter of Offer with SEBI and the ROC. Further, the

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overseascompany will have to obtain in-principle permission for listing on stock exchanges in India. The overseas company undertaking the IDR issue needs to have a pre-issue paid-up capital and free reserve of at least $100 million and an average turnover of $500 million during the last three financial years. However, overseas companies also need to have earned profits in at least five years preceding the issue and should have declared dividends of at least 10 per cent each year during this period. Further, the pre-issue debt-equity ratio of such company should not be more than 2:1. It is interesting to note that while Indian unlisted companies coming out with an IPO also need to comply with certain criteria relating to net worth and profitability, there is no criteria relating to the dividend distribution track record and debt-equity ratio. Exchange Control Issues The IDR Rules specify that the repatriation of proceeds of the IDR issue would be subject to prevalent exchange control regulations. Further, although there would be no restriction on the purchase or transfer of the IDRs as the investors would be Indian residents as defined under FEMA, any acquisition of underlying shares would be subject to compliance with the FEMA provisions prevalent at that time.The IDR route is an addition to the options available to Indian investors for overseas investment.

Case study on Infosys

Overview Infosys, one of Indias leading information technology (IT) services companies, uses an extensive non-U.S. based (offshore) infrastructure to provide managed software solutions to clients world wide. Headquartered in Bangalore, India, Infosys has seventeen state-of-theartsoftware development facilities throughout India and one development center in Canada.

CASE INFORMATION:65

1. Infosys Technologies Limited (ITL) launched its American Depository Receipt (ADR) offering on NASDAQ with much fanfare on March 11, 1999. The company offered 2.07 million ADRs representing 1,035,000 equity shares of the company at an offer price of $34 each through its lead manager Nations Banc Montgomery Securities LLC. 2. Two ADRs could be exchanged for one equity share in Infosys (NASDAQ: INFY). The ADR opened at $37.375 at 10:45 AM and rose to a high of $50 before settling at $46.875 at 4 PM when the markets closed. NR Narayana Murthy, ITLs Chief Executive Officer, was ecstatic. The ADR had appreciated almost 40% on its first day of trading, beyond his expectations. The fact that the stock jumped to $50 on the first day amid volumes nearly twice the issue size itself is an indicator of the interest from individual investors," a dealer in London said. 3. Of the 7,543 trades on the first day, 7,530 were non-bloc trades, which mean there were these many retail trades as against institutional ones. Since the placement is thus in many hundreds of accounts, there is greater stability in this for the company, commented John Wall, President of NASDAQ International 4. Back in India, there was jubilation at the company headquarters as champagne bottles popped in celebration. On the Mumbai Stock Exchange (BSE), ITL shares hit an all time high of Rs. 3,457 (equivalent to an pre-bonus level of Rs. 6,914) before closing the day at Rs. 3,392 .

Major Reasons for Infosys Success 1. The ability to consistently attract and retain the best talent in the industry. Infosys does thiswith a series of policies that are aimed at ensuring all of their employees are empowered andcompensated at a level unheard of in the Indian software industry. 2. The unique corporate culture and management style at Infosys. This has allowed the company to maintain an environment that encourages the free flow of ideas and informationat all levels in the company.
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3. Maintaining a clear vision and strategy. To be a globally respected software company thatprovides best-of-breed software solutions delivered by best-in-class people. 4. The company maintains a distinct identity by doing some things differently than othercompanies in the same industry. 5. Infosys has diverse management talent with mutually exclusive yet complimentary skills.This ensures that every issue raised within the company has a champion who is an expert inthat area and a number of extremely intelligent people who can assist him/her in analyzingthat issue. 6. The company has responded with speed and imagination in ensuring that it maintains aleadership position in the industry. This has manifested itself in the company producing ahistory of firsts that were unheard of in Indian industry a few years ago. 7. Senior management has maintained an equitable mix between individual goals and corporategoals at all levels in the company. 8. The ability to accept that all problems that arise lie within the company and can be solvedgiven the right level of expertise and internal talent. 9. The ability to keep all issues transaction based and oriented. All employees have the right todissent and are welcome to fiercely debate any issue that is raised, but once a consensus isreached, they will work as a team in resolving the issue. 10. All members of the Infosys family must make value added contributions towards thecompany. If it is determined that any person is not contributing to the best interests of thecompany then that individual will no longer be accepted by the company, irrespective ofhis/her position within the company.

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First IDR listed in India - Standard Charted Bank

After 152 years of providing world class banking solutions to Indians, British bank, Standard Chartered Bank got its Indian depositary Receipts (IDRs) listed at Indian bourses on June 11, 2010. The StanChart IDRs were issued at the lower end of the price band, at Rs 104 The Asia-focused bank is also listed in London Stock Exchange and the Hong Kong Stock Exchange. IDRs represents ownership in shares of a foreign firm, which trades in domestic capital market, as foreign companies are disallowed to list shares directly in Asia's thirdlargest economy, and this was the first ever IDR issue in India. Each 10 IDR represent 1 share in Standard Chartered Plc, and buyers can earn bonuses or dividends. The lending major, raised about $530 million or Rs 2,490 crore, pricing the issue at the lower end of the spectrum, from 24 crore receipts, or 240 million IDRs, including 36 million shares set aside for anchor investors. The issue was oversubscribed 2.2 times, the response highlights the strength of Indian primary capital markets that invested in a foreign bank's depository receipts that was offered amid worried global markets over eurozone concerns

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Conclusion

The prime objective for a company to cross list its shares is the reduction of cost of fund. Unless there is significant financial benefit from cross listing, companies may not tap the foreign capital market as it involves certain other explicit cots in terms annual listing fees, costs associated with recasting the annual report as per the foreign country GAAP requirement, costs associated with abiding by the listings requirement foreign country stock exchanges.

But does cross listing really help companies in reducing cost of capital? Many research studies have tried to find out the impact of cross listing on companys cost of capital. In this section findings of few research studies have been reported, though many more studies have been undertaken to analyze different dimensions of cross listing and its benefit to the issuer.

It is found that as the cross listing specifically ADR issues increases the accounting disclosure quality. They find that cross listing firms experience a decrease in their cost of equity averaging over 0.2% per week. This decrease is not present in a matched group of similar companies, which do not crosslist.

Bakera et al ( 2002) study shows that international firms listing their shares on the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE) experience a significant increase in visibility, as proxied by analyst coverage and print media attention (The Wall Street Journal or Financial Times). The increase in analyst following is also associated with a decrease in the cost of equity capital. Their findings are stronger for NYSE listing firms than for LSE listing firms. This may partially compensate firms for the higher costs associated
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with NYSE listing (compared to LSE listing).

Bibliography
www.adr.db.com www.bankofny.com www.indlaw.com wwss.citissb.com www.gtb.db.com www.isas.nus.edu.sg Business Wire, Infosys Technologies Limited lists on the NASDAQ Stock Market; First Indian Registered Direct Listing on a US Market, March 11, 1999 ITL Infosys offer document for 1.8 million American Depository Receipts, March 11, 1999 The Economic Times, INFYs still firm on Nasdaq, hits record high at home, March 12, 1999 The Economic Times, Infosys did better than other entrants on Day 1: John Wall, March 12, 1999 The Times of India, Arbitrage opportunity in Infosys scrip? March 15, 1999 Infosys Technologies Limited Press Release, February 10, 1999 The Economic Times, Infosys net profit doubles to Rs. 1,352.7 million in FY 99,April 9, 1999 Highlights of Infosys conference call to announce results from the company website, April 9, 1999

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