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January 23, 2011



Depository Receipts :

Depository Receipts are a type of negotiable (transferable) financial security, representing a security, usually in the form of equity, issued by a foreign publicly-listed company. However, DRs are traded on a local stock exchange though the foreign public listed company is not traded on the local exchange.

Thus, the DRs are physical certificates, which allow investors to hold shares in equity of other countries. . This type of instruments first started in USA in late 1920s and are commonly known as American depository receipt (ADR). Later on these have become popular in other parts of the world also in the form of Global Depository Receipts (GDRs). Some other common type of DRs are European DRs and International DRs.

In nut shell we can say ADRs are typically traded on a US national stock exchange, such as the New York Stock Exchange (NYSE) or the American Stock Exchange, while GDRs are commonly listed on European stock exchanges such as the London Stock Exchange. Both ADRs and GDRs are usually denominated in US dollars, but these can also be denominated in Euros.

How do Depository Receipts Created?

When a foreign company wants to list its securities on another country’s stock exchange, it can do so through Depository Receipts (DR) mode. . To allow creation of DRs, the shares of the foreign company, which the DRs represent, are first of all delivered and deposited with the custodian bank of the depository through which they intend to create the DR. On receipt of the delivery of shares, the custodial bank creates DRs and issues the same to investors in the country where the DRs are intended to be listed. These DRs are then listed and traded in the local stock exchanges of that country.

What are ADRs :

American Depository Receipts popularly known as ADRs were introduced in the American market in 1927. ADR is a security issued by a company outside the U.S. which physically remains in the country of issue, usually in the custody of a bank, but is traded on U.S. stock exchanges. In other words, ADR is a stock that trades in the United States but represents a specified number of shares in a foreign corporation.

Thus, we can say ADRs are one or more units of a foreign security traded in American market. They are traded just like regular stocks of other corporate but are issued / sponsored in the U.S. by a bank or brokerage.

ADRs were introduced with a view to simplify the physical handling and legal technicalities governing foreign securities as a result of the complexities involved in buying shares in foreign countries. Trading in foreign securities is prone to number of difficulties like different prices and in different currency values, which keep in changing almost on daily basis. In view of such problems, U.S. banks found a simple methodology wherein they purchase a bulk lot of shares from foreign company and then bundle these shares into groups, and reissue them and get these quoted on American stock markets.

For the American public ADRs simplify investing. So when Americans purchase Infy (the Infosys Technologies ADR) stocks listed on Nasdaq, they do so directly in dollars, without converting them from rupees. Such companies are required to declqare financial results according to a standard accounting principle, thus, making their earnings more transparent. An American investor holding an ADR does not have voting rights in the company.

The above indicates that ADRs are issued to offer investment routes that avoid the expensive and cumbersome laws that apply sometimes to non-citizens buying shares on local exchanges. ADRs are listed on the NYSE, AMEX, or NASDAQ.

Global Depository Receipt (GDR): These are similar to the ADR but are usually listed on exchanges outside the U.S., such as Luxembourg or London. Dividends are usually paid in U.S. dollars. The first GDR was issued in 1990.


There are many advantages of ADRs. For individuals, ADRs are an easy and cost effective way to buy shares of a foreign company. The individuals are able to save considerable money and energy by trading in ADRs, as it reduces administrative costs and avoids foreign taxes on each transaction. Foreign entities prefer ADRs, because they get more U.S. exposure and it allows them to tap the American equity markets. .

The shares represented by ADRs are without voting rights. However, any foreigner can purchase these securities whereas shares in India can be purchased on Indian Stock Exchanges only by NRIs or PIOs or FIIs. The purchaser has a theoretical right to exchange the receipt without voting rights for the shares with voting rights (RBI permission required) but in practice, no one appears to be interested in exercising this right.

How ADR Operates

Indian companies have direct access to raise funds from Indian public by way of issuing Shares, Debentures etc. However Indian companies cannot do so, in such a direct manner, when it comes to raising funds from American people. That would entail the Indian companies to adopt US Accounting Norms which is also called as GAAP, maintain accounting practices as per American Financial Year (Which starts in January and ends in December of any particular year), as also follow variety of stringent standards as per American norms. Effectively, it would mean that the Indian company would have to follow two different set of rules simultaneously, one to comply with the laws of Indian Companies Act, and the other to comply with the American Laws.

The method to circumvent the American norms, but still raise funds from American people is available by way of ADR or American Depository Receipts. In this system, the Indian company deposits certain amount of its Indian shares with designated American Banks. The banks, in turn, issues receipts that are equivalent in values (And also based on the intrinsic value the Indian Company’s shares would fetch in the American market) to the Indian Company. These receipts essentially would be in number of receipts. Then these Indian Companies can trade these ADRs or American Depository Receipts with the American public. These ADRs can be purchased and traded freely without any encumbrances in the American Stocks and Shares Market. This way the Indian company is able to enter into the American Stocks and Shares market, and raise funds from the American public.

The role of the American bank which has issued these receipts is very crucial, since it is they who stand guarantee to the issued receipts. Hence they do exhaustive study of the Indian company from all perspectives, and only then issue the ADR to the Indian company.

Some Major ADRs issued by Indian Companies :

Among the Indian ADRs listed on the US markets, are Infy (the Infosys Technologies ADR), WIT (the Wipro ADR), Rdy(the Dr Reddy’s Lab ADR), and Say (the Satyam Computer ADS)

What are Indian Depository Receipts (IDR) :

Recently SEBI has issued guidelines for foreign companies who wish to raise capital in India by issuing Indian Depository Receipts. Thus, IDRs will be transferable securities to be listed on Indian stock exchanges in the form of depository receipts. Such IDRs will be created by a Domestic Depositories in India against the underlying equity shares of the issuing company which is incorporated outside India.

Though IDRs will be freely priced., yet in the prospectus the issue price has to be justified. Each IDR will represent a certain number of shares of the foreign company. The shares will not be listed in India , but have to be listed in the home country.

The IDRs will allow the Indian investors to tap the opportunities in stocks of foreign companies and that too without the risk of investing directly which may not be too friendly. Thus, now Indian investors will have easy access to international capital market.

Normally, the DR are allowed to be exchanged for the underlying shares held by the custodian and sold in the home country and vice-versa. However, in the case of IDRs, automatic fungibility is not permitted.

SEBI has issued guidelines for issuance of IDRs in April, 2006, Some of the major norms for issuance of IDRs are as follows. SEBI has set Rs 50 crore as the lower limit for the IDRs to be issued by the Indian companies. Moreover, the minimum investment required in the IDR issue by the investors has been fixed at Rs two lakh. Non-Resident Indians and Foreign Institutional Investors (FIIs) have not been allowed to purchase or possess IDRs without special permission from the Reserve Bank of India (RBI). Also, the IDR issuing company should have good track record with respect to securities market regulations and companies not meeting the criteria will not be allowed to raise funds from the domestic market If the IDR issuer fails to receive minimum 90 per cent subscription on the date of closure of the issue, or the subscription level later falls below 90 per cent due to cheques not being honoured or withdrawal of applications, the company has to refund the entire subscription amount received, SEBI said. Also, in case of delay beyond eight days after the company becomes liable to pay the amount, the company shall pay interest at the rate of 15 per cent per annum for the period of delay.


It is understood that in case of issue of DRs, as a business arrangement, domesticcustodian bank exercises the voting rights on the shares underlying such DRs, asper the instructions of the Overseas Depository Bank which in turn is governed bythe terms of the depositary agreement / terms of issue of the DRs. Such terms ofagreement / issue of DRs vary from issuer to issuer with respect to the right of DRHolders to instruct the custodian on exercise of voting rights.

The “terms of issue” in some of the recent GDR / ADR issues in India as well as in some foreign jurisdictions were perused. It was observed that in some of thecases, the right to give instructions to the custodian bank for exercise of votingrights is vested with the Board of Directors of the issuer company. In certain othercases, the said right is vested with the DR holders. In some cases, a combinationof the above is also used, viz. in the first instance the right to instruct is providedto the holders of DRs and in the event of their failure to exercise the said right, itis deemed to have been vested with the Board of Directors of the issuer company.It is also noted that invariably it is stated that the Depositary will not exercise any voting rights in respect of the underlying shares unless required to do so by law.

Guidelines for ADR/GDR issues by the Indian Companies -Disinvestment of shares by the Indian companies in theOverseas market through issue of ADRs/GDRs

(i) Divestment by shareholders of their holdings of Indian companies, in the overseas markets would be allowed through the mechanism of Sponsored ADR/GDR issuein respect of:-

(a) Divestment by shareholders of their holdings of Indian companies listed in India;

(b) Divestment by shareholders of their holdings of Indian companies not listed in India but which are listed overseas.

(ii) The process of divestment would be initiated by such Indian companies whose shares are being offered for divestment in the overseas market by sponsoringADR/GDR issues against the block of existing shares offered by the shareholdersunder the provisions of these guidelines.

(iii) Such a facility would be available pari-passu to all categories of shareholders, ofthe company whose shares are being sold in the ADR/GDR markets overseas.This would ensure that no class of shareholders gets a special dispensation.

(iv) The sponsoring company, whose shareholders propose to divest existing shares in the overseas market through issue of ADRs/GDRs will give an option to all itsshareholders indicating the number of shares to be divested and the mechanismhow the price will be determined under the ADR/GDR norms. If the sharesoffered for divestment are more than the pre-specified number to be divested,shares would be accepted for divestment in proportion to existing holdings.

(v) The proposal for divestment of the existing shares in the ADR/GDR market would have to be approved by a special resolution of the company whose shares are beingdivested.

(vi) The proceeds of the ADR/GDR issue raised abroad shall be repatriated into India within a period of one month of the closure of the issue.

(vii) Such ADR/GDR issues against existing shares arising out of the divestment would also come within the purview of the existing SEBI Takeover Code if theADRs/GDRs are cancelled and the underlying shares are to be registered with thecompany as shareholders.

(viii) Divestment of existing shares of Indian companies in the overseas markets for issue of ADRs/GDRs would be reckoned as FDI. Such proposals would requireFIPB approval as also other approvals, if any, under the FDI policy.

(ix) Such divestment inducting foreign equity would also need to conform to the FDI sectoral policy and the prescribed sectoral cap as applicable. Accordingly thefacility would not be available where the company whose shares are to be divestedis engaged in an activity where FDI is not permitted.

(x) Each case would require the approval of FIPB for foreign equity induction through offer of existing shares under the ADR/GDR route.

(xi) Other mandatory approvals such as those under the Companies Act, etc. as applicable would have to be obtained by the company prior to the ADR/GDRissue.

(xii) The issue related expenses (covering both fixed expenses like underwriting commissions, leadmanagers charges, legal expenses and reimbursable expenses) for public issue shall be subject to a ceiling of 4% in the case of GDRs and 7% inthe case of ADRs and 2% in case of private placements of ADRs/GDRs. Issue expenses beyond the ceiling would need the approval of RBI. The issue expensesshall be passed onto the shareholders participating in the sponsored issue on a prorate basis.

(xiii) The shares earmarked for the sponsored ADR/GDR issue may be kept in an escrow account created for this purpose and in any case, the retention of shares insuch escrow account shall not exceed 3 months.

(xiv) If the issues of ADR/GDR are made in more than one tranche, each tranche would have to be treated as a separate transaction.

(xv) After completing the transactions, the companies would need to furnish full particulars thereof including amount raised through ADRs/GDRs, number ofADRs/GDRs issued and the underlying shares offered, percentage of foreignequity level in the Indian company on account of issue of ADRs/GDRs, details ofissue parameters, details of repatriation, and other details to the Exchange ControlDepartment of the Reserve Bank of India, Central Office, Mumbai within 30 daysof completion of such transactions.

(xvi) The tax provision under Section 115 AC of the Income Tax Act 1961, which is applicable to non-resident investors for ADR/GDR offering against issue of freshunderlying shares would extend to non-resident investors investing in foreignexchange in ADRs/GDRs issued against disinvested existing shares, in terms of therelevant provisions of the Income Tax Act, 1961

(xvii) Resident shareholders divesting their holdings will be subject to Capital Gain tax provisions applicable under the Income Tax Act 1961 i.e. Section 115 AC applicable for non-residents would not extend to them.

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