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Came into existence since 1920


UK-based Retail Company Selfridge Provincial stores Ltd. decided to

expand its shareholding base

iii. US investors expressed their interest in buying the companys


Process of transfer got complicated


1) A Depository receipt a type of negotiable instrument
2) It is issued by a bank against the delivery of Local Currency
3) A depositary typically requires a company to meet a stock exchanges
specific rules before listing its stock for sale
4) Represent one or more shares of a foreign stock or a fraction of a share
5) For e.g.: 1:1 ratio (one underlying share equals one depositary
share) ; 1:10

a) Depository stocks are within processing mechanisms for foreign
securities. Depository receipt agreements serve various advantages
investors like transfer and exchanging dividends paid over



money currencies to their currency.


Also, depository receipts are used in privatization, mergers, foreign

governments Dept, imports and employment financing
c) Mostly, foreign securities are written for the bearer. For this reason, the
lists of securities cannot be pursued. Depository receipts try to minimize
the problems of promissory notes written for the bearer. It makes having
information about the foreign company easier.
d) Foreign companies having relationships with investors are restricted with
law. Depositor or its division can learn the information and declarations
send by the foreign importer. Even though the securities are written
for the bearer, depository Bank has the best conditions to get this


If an investor wishes to purchase shares in a foreign company, he can either
buy the foreign shares 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 (e.g. Deutsche
Bank) to issue new ones.
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.

In some exceptional cases there may be restrictions on the issuance of new DRs
under existing programs (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.

1. DRs certify that a stated number of underlying shares have been deposited
with the depositary's custodian in the foreign country.
2. 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.
3. 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 Euro clear and Clear stream for EDRs and through all three (and
possibly other clearing systems) in the case of GDRs, depending on which
markets they access.
4. 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.
5. 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.


1. US investors have become increasingly interested in overseas markets as a

result of their higher yields compared to the US equity market over recent
2. International investors are also eager to diversify their portfolios, both
geographically and by industry sector, in order to increase their returns
while spreading their risk.
3. They have long been active in the debt markets, as evidenced by the vast
size of the Euromarkets, and sophisticated international clearing systems
have been developed to handle Euro instruments.

Until recently, however, cross-border equity investments have involved all

the currency, settlement and linguistic problems which occur when dealing
with overseas equity markets.

Building on the concept of the ADR, investment banks developed the

ADR/GDR to solve these problems for international investors.

Liquidity and investor demand

Liquidity is enhanced when there are a significant number of depositary receipts
eligible for trading in the United States. In a US public offering, retail and
institutional investors are more likely to buy depositary receipts that are
perceived to be liquid and fairly priced.
A useful structuring tool
While DRs are generally used to make equity more widely available or to raise
capital outside the issuer's domestic market, they can also be used as part of
many other financing structures. The concept of a receipt trading in one market,
which represents an instrument held in custody in a different market, can be
adapted to a wide variety of transactions.


The origin of depository receipt is USA. It started in 1920s. In this period, it
was difficult and risky to invest on the originals of foreign securities by
American investors and brokers. The risks in this condition have been causing
delays and some kind of extra expenses. In order to avoid the practical
problems, they should have looked for solutions. In the solution produced, it was
aimed at constituting a system that will be able to eliminate those handicaps. In
those times, financial and economical system was national. For the system
started to function badly, the investors and brokers were not able to transit to
international market in the investment and financial activities they have been
carried out. They were as if trapped inside a no end box and it was impossible
for them to open global market. Something was clearer than anything else. The
key was as if climbing up a hill in the desert under the sun in 70 C in vein, and it
was time consuming.
The distance between American and European stock exchange markets was
high, for this reason, what is to be was to reach the international arena in world
of stock exchange market. For the reason of investors demand of diversifying
their financial resources internationally, American Depository Receipts revealed.

How does DR work?

The DR is created when a foreign company wishes to list its already publicly
traded shares or debt securities on a foreign stock exchange. Before it can be
listed to a particular stock exchange, the company in question will first have to
meet certain requirements put forth by the exchange. Initial public offerings,
however, can also issue a DR. DRs can be traded publicly or over-the- counter.
Let us look at an example of how an ADR is created and traded.

Benefits OF DRS

For Issuer

Creates, broadens and

diversifies investor base
Enhances visibility and global
Increases liquidity by tapping
new investors
A vehicle for employees of
foreign subsidiaries to invest
more easily in the parent

For Investors

Easy to purchase
Trades and settles in the same
manner as any other security
available in the investors home
Facilitates global /
sector diversification by
providing access to new
Familiar trade, clearance and
settlement procedures
Pays dividends in investors
home currency and delivers
corporate action notifications in
investors home language


A Level I sponsored ADR program is the easiest and least expensive means for a
company to provide for issuance of its shares in ADR form in the US. A Level I
program is initiated by the issuer and involves the filing of an F-6 registration
statement, but allows for exemption under Rule12g 3-2(b) from full SEC
reporting requirements. The issuer has a certain amount of control over the
ADRs issued under a sponsored Level I program, since a depositary agreement
is executed between the issuer and one selected depositary bank. Level I ADRs
can however only be traded over-the-counter and cannot be listed on a national
exchange in the US.

Advantages of a Level I ADR program:

It avoids full compliance with the SEC's reporting requirements. By working with
a single depositary bank, the issuer has greater control over its ADR program than
would be the case with an unsponsored program.
The depositary acts as a channel of communication between the issuer and
its US shareholder base. Dividend payments, financial statements and details of
corporate actions will be passed on to US investors via the depositary.
The depositary bank maintains accurate shareholder records for the issuer and can,
if requested, monitor large stock transactions and report them to the issuer.
Set-up costs are minimal and all transaction costs are absorbed by the ADR
It is easy and relatively inexpensive to upgrade the program to Level II or III as
the issuer and depositary bank do not have to negotiate cancellation of
unsponsored ADRs with several depositaries, as would be the case if upgrading an
unsponsored program.

Disadvantages of a Level I ADR program

It cannot be listed on any of the national exchanges in the US. As a result,
investor interest might be somewhat restricted which may limit the issuer's ability
to enhance its name recognition in the US.
Capital raising is not permitted under a Level I program.


A sponsored Level II ADR must comply with the SEC's full registration and
reporting requirements. In addition to filing an F-6 registration statement, the
issuer is also required to file SEC Form 20-F and to comply with the SEC's other
disclosure rules, including submission of its annual report which must be
prepared in accordance with US Generally Accepted Accounting Principles
(GAAP). Registration allows the issuer to list its ADRs on one of the three
major national stock exchanges, namely the New York Stock Exchange (NYSE),
the American Stock Exchange (AMEX), or the National Association of
Securities Dealers Automated Quotation (NASDAQ) Stock Market, each of
which has reporting and disclosure requirements. Level II sponsored programs
are initiated by non-US companies to give US investors access to their stocks in
the US. As with a Level I program, a depositary agreement is signed between the
issuer and a depositary bank. The agreement defines the responsibilities of the
depositary, which usually include responding to investor enquiries, mailing
annual reports and other important material to shareholders and maintaining
shareholder records.

Advantages of a Level II ADR program:

1. It is more attractive to US investors than a Level I program because the
ADRs may be listed on one of the major US exchanges. This raises the
profile of the ADR program to investors, thus increasing the liquidity and
marketability of the securities.
2. Listing and registration also enhance the issuer's name recognition in the
3. US disclosure regulations for large investors enable the issuer to monitor
the ownership of its shares in the US.

Disadvantages of a Level II ADR program

1. More detailed SEC disclosure is required than for a Level I program. For
example, the issuer's financial statements must conform to US Generally
Accepted Accounting Principles (GAAP), or else a detailed summary of
the differences in financial reporting between the home country and the US
must be submitted.
2. SEC regulations do not permit a public offering of ADRs under a Level II
3. It is more expensive and time-consuming to set up and maintain a Level II
program than a Level I program because of the more stringent reporting
requirements and higher legal, accounting and listing costs.



Level III sponsored ADRs are similar to Level II ADRs in that the issuer initiates
the program, deals with one depositary bank, lists on one of the major US
exchanges, and files Form F-6 and 20-F registration statements with the SEC. The
major difference is that a Level III program allows the issuer to raise capital
through a public offering of ADRs in the US and this requires the issuer to submit
a Form F-1

Advantages of a Level III ADR program

It permits public offerings of ADRs in the US which can be used for a variety of
purposes, for example the raising of capital to finance acquisitions or
the establishment of an Employee Stock Ownership Plan (ESOP) for the issuer's
US subsidiary.
Disadvantages of a Level III ADR program
1. SEC reporting is more onerous than for Level I or II programs.
2. The costs of setting up and maintaining a Level III program can be high. Setupcosts, which would include listing, legal, accounting, investor relations
and "road show" costs, might amount to approximately US$ 300,000 to US$

American Depository Receipts (ADR)

Introduced in 1920
ADR are DRs that are publicly available to investors in the U.S. Offer the
issuing company access to the worlds largest capital market. Provide
investors in the US with a convenient way to directly invest in international


ADRs are dollar-denominated securities that trade, clear

and settle like any other US security.
Represents ownership of shares in a non-US company.
Dividends realized in U.S. dollars.
ADRs do not eliminate the currency risks for theunderlying shares in another

ADRs are listed on either the NYSE, AMEX or NASDAQ as well as OTC.
Each ADR represents a certain number of a company's ordinary shares.
Issued by a U.S. depository bank against the underlying security held by a
custodian bank.


An unsponsored ADR program is one that is established by a depository bank
without the participation or consent of the issuer. The issuer is not party to the
deposit agreement
Traded OTC
Issued in co-operation with the underlying foreign company
There is a direct involvement of foreign company Issued with the knowledge and
co-operation of the company whose stock backs it Sponsored ADRs are treated
just like common stock, complete with voting rights, only denominated in the
U.S. dollar Sponsored ADRs are usually traded through major exchanges like

Levels of Sponsored ADR

Level 1
Level I ADRs are the simplest method for companies to access the US capital
markets. Level I ADRs are traded in the over-the-counter (OTC) market, with
bid and ask prices published daily and distributed by the National Daily
Quotation Bureau in the pink sheets. The issuing company does not have to
comply with US Generally Accepted Accounting Principles (GAAP) or provide
US Securities and Exchange Commission (SEC) disclosure.
Level I ADRs essentially enable a company to obtain the benefits of a US
publicly traded security without altering their current reporting process.
Level I DRs account for more than 60% of the US ADRs. Companies that have
Level I ADR programs can migrate to a Level II or Level III ADR program if
they desire to trade on the New York Stock Exchange, the American Stock
Exchange, Nasdaq or the OTC Bulletin Board, or if the company desires to raise
capital directly in the United States.
Level I ADR programs currently require minimal SEC registration: The issuer
seeks exemption from the SEC's traditional reporting requirements under Rule
12g3-2(b). With that exemption, the company agrees to send to the SEC
summaries or copies of any public reporting documents required in its home
market (including documents for regulatory agencies, stock exchanges, Or direct
shareholder communications). The depositary bank, working with the issuer, also
files the
Form F-6 registration statement with the SEC in order to establish the program.

Level II ADRs enable companies to list their ADRs on NASDAQ, the American
Stock Exchange, the New York Stock Exchange and the OTC Bulletin Board,
thereby offering higher visibility in the U.S. market, more active trading, and
greater liquidity.
Level II ADRs require full registration with the Securities and Exchange
Commission. Companies must also meet the listing requirements of the
appropriate stock exchange. Level II ADRs require a Form 20-F and Form F-6 to
be filed with the SEC, as well as meeting the listing requirements and filing a
listing application with the designated stock exchange. Upon F-6 effectiveness
and approval of the listing application, the ADRs begin trading.
Level II ADR programs must comply with the full registration and reporting
requirements of the
SEC's Exchange Act, which entails the following:
1) Form F-6 registration statement, to register the ADRs to be issued
2) Form 20-F registration statement, which contains detailed financial
disclosure about the issuer, including financial statements and a
reconciliation of those statements to U.S. GAAP, to register the listing of
the ADRs
3) Annual reports and any interim financial statements submitted on a regular,
timely basis to the SEC

Level III

Level III ADRs enable to companies to list their ADRs on NASDAQ, the
Amex, the New York Stock Exchange or the OTC Bulletin Board, and make a
simultaneous public offering of ADRs in the United States.
In the most high-profile form of sponsored ADR program, Level III, an issuer
floats a public offering of ADRs in the United States and lists the ADRs on one
of the U.S. exchanges or NASDAQ. The benefits of a Level III program are
substantial: It allows the issuer to raise capital and leads to much greater
visibility in the U.S. market.
Level III ADR programs must comply with various SEC rules, including the full
registration and reporting requirements of the SEC's Exchange Act. This entails
the following:
Form F-6 registration statement, to register the ADRs
Form 20-F registration statement, an annual filing that contains detailed
financial disclosure from the issuer, including Form F-1, to register the equity
securities underlying the ADRs that are offered publicly in the U.S. for the first
time, including a prospectus to inform potential investors about the company
and the risks inherent in its businesses, the offering price for the

Rule 144A (Privately placed ADRs)

Rule 144A programs provide for raising capital through the private placement of
Depositary Receipts with large institutional investors (QIBs) in the U.S.
Does not require full SEC registration
QIBs - At least $100 million in securities
If the institution is a bank or savings & loans thrift they must have a net worth of at
least $25 million. Will be quoted on PORTAL in the U.S.
Not accessible to the general public
It allows the issuer company to raise capital in the U.S. without adhering to the
strict regulations required by Level 3 ADRs

Regulation S (Offshore ADRs)

a) Regulation S programs provide for raising capital
b) Through the placement of Depositary Receipts offshore to non-U.S.
investors in reliance on Regulation S.
c) Traded in USD
d) Traded on London or Luxembourg stock exchange

Which companies have ADR AND GDR


Tata motors


The main advantage of buying an American Depositary Receipt rather than the
foreign stock itself is the ease of the transaction.
ADRs are a great way to invest abroad without having to convert U.S. dollars to
many different currencies. Another advantage offered by an ADR is that if the
foreign stock does pay dividends, the investment bank will convert the dividends
to U.S. dollars and remit the payment to you. In addition, if the dividend is
subject to foreign tax, the investment bank will withhold the tax so you don't have
to worry about it. Therefore, if exchange rates were to move against you, it
would hurt the value of your ADR. If you are considering investing in foreign
stocks, ADRs should be part of your investment decision; however, you should
become familiar with all the risks associated with foreign investing before
making an investment decision.
Advantages to Issuers Provides a simple means of diversifying a companys
shareholder base and accessing important U.S. market may increase the liquidity
of the underlying shares of the issuer ADRs can be used as an equity financing
tool in both M&A transactions and ESOPs for U.S. subsidiaries helps increase a
non-U.S. companys visibility and name recognition in the U.S. investor
community may raise capital in the U.S. market through some types of programs

Advantages to Investors

Offers a convenient means of holding foreign shares Simplifies the trading &
settlement of foreign securities; ADRs trade and settle just like U.S. securities o
Offers lower trading & custody costs when compared with shares bought directly
in the foreign market


Despite all the described advantages, the ADRs do represent the same asset as
local shares but may not be fully fungible in several countries (meaning they
cannot be seamless exchanged with its home market security). For example, until
2001 there was no two-way fungibility for Indian ADRs; in that environment,
investors could convert ADRs into local shares but they could not reconvert them
back to ADRs. This and other capital control regulations prevent risk less
arbitrage opportunities to exist between ADRs and the underlying stock and are
one of the reasons that premiums/discounts exist in the ADR market.


1. Let us assume that Russian Vodka Ltd, trades on a Russian stock exchange
at 127 Russian roubles
2. This is equivalent to US$4.58 assume this for simplicity
3. Now, a US bank purchases 30 million shares of Russian Vodka Ltd. and reissues them in the US at a ratio of 10:1
4. This means that each ADR you purchase is worth 10 shares on the
Russian stock exchange

5. A quick calculation tells us that each ADR should have an issue price of
US$45.80 (US$4.58 per share X 10 shares) since 10 shares equal 1 ADR

6. Once an ADR is priced and sold, its subsequent price is determined by

supply and demand factors, like any ordinary share


Fungiblity is defined as convertibility of one class of securities into another

and is interchangeable in nature.

Types of fungiblity :




Conversion of depository receipts into local shares

The ADRs/GDRs converted into domestic shares are redeemed by the


Price volatility
Liquidity problem

Two - way Fungibility

1. Conversion of depository receipts into local shares and vice versa
2. It is the conversion of the already converted ADR/GDR stock back to
depository receipts
3. It is subject to availability of Headroom. India follows Limited Two
4. Way Fungibility

5. In 2001, the GOI allowed twoway fungibility of ADRs (subject to

headroom or the availability of shares for re-conversion)
6. The first ever two- way fungibility was concluded in the shares of
7. Chennai based India Cements Ltd.
Risks Involved
9. The risks are in principle the same as the risks attached to the
10.underlying shares
11.Political Risk
12.Exchange Rate Risk
13.Inflationary Risk

Global depository receipts

Global Depositary Receipts (GDRs) are negotiable certificates issued


depositary banks which represent ownership of a given number

of a

companys shares which can be listed and traded independently



underlying shares.
First GDR was issued in 1990.
Global depositary receipts are certificates held in depository banks used to
purchase shares of foreign companies; these receipts represent the

number of

shares owned in a particular company.

Give issuers exposure to the global markets outside their home market 1990:
Citibank issued the first GDR Samsung Corporation Simultaneous access to
European & U.S. Markets.
Either issued in US Currency or in the currency of the country the GDR is listed
in Several international banks issue GDRs, such as JPMorgan Chase, Citigroup,
Deutsche Bank, Bank of New York
Types of 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 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
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.

EDRs/GDRs 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.

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.


A company can issue ADR/GDR, if it is eligible to issue shares to person
resident outside India under the FDI Scheme.

An Indian listed company, which is not eligible to raise funds from the
Indian Capital Market including a company which has been restrained
from accessing the securities market by the Securities and Exchange
Board of India (SEBI) will not be eligible to issue ADRs/GDRs.

o Erstwhile OCBs who are not eligible to invest in India through the
portfolio route and entities prohibited to buy, sell or deal in securities by
SEBI will not be eligible to subscribe to ADRs / GDRs issued by Indian


No end-use restrictions except for a ban on deployment / investment of such funds
in Real Estate or the Stock Market.


There is no monetary limit up to which an Indian company can raise ADRs /


Voting rights on shares issued under the Scheme shall be as per the provisions of
Companies Act, 1956 and in a manner in which restrictions on voting rights
imposed on ADR/GDR issues shall be consistent with the Company Law
RBI regulations regarding voting rights in the case of banking companies will
continue to be applicable to all shareholders exercising voting rights.

The pricing of ADR / GDR issues should be made at a price not less than the
higher of the following two averages:

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;


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.

Most Commonly
listed on

Reconcile their accounts to US

Depends on International
selected for listing
Issued only to QIBs


Access the US Retail Market

To Raise

Within US

Within us and outside us

using different structure


Expensive for the issuer

Comparatively Inexpensive
for the issuer