American Depository Receipts And Global Depository Receipts Finance Essay

Trade and commercialism has been an of import facet of globalisation. Since the nineteenth century, when the colonial epoch was at its extremum, foreign markets were the ground for colonial wars since the importance of foreign markets were realized. However, towards the terminal of the colonial epoch, when freshly independent states began to construct their economic systems from abrasion they started clamping down on foreign investing and merely decennaries subsequently, easy began to open up their markets after centuries of development.

Corporate entities, in order to guarantee larger capital started looking for foreign investors. For an investor, puting in a foreign corporation would intend unneeded fuss since it would include traveling through a batch of proficient processs. In order to work out the jobs of both the investors and corporations seeking foreign investing, the constructs of American depositary grosss and planetary depositary grosss were introduced.

Introduced to the fiscal markets in 1927, an American Depository Receipt ( ADR ) is a stock that trades in the United States but represents a specified figure of portions in a foreign corporation. ADRs are bought and sold on American markets merely like regular stocks, and are issued/sponsored in the U.S. by a bank or securities firm.[ 1 ]The ADR monetary value is set to accommodate the American market, where the face value of portion monetary values is typically higher – possibly $ 20-100 or more. At these degrees, each ADR normally represents several foreign portions, instead than merely one.[ 2 ]

In order to guarantee that investors from different states and non one state entirely may put in a corporate entity, it was indispensable to do available such stocks on an international degree. A Global depositary reception ( GDR ) is when [ a ] bank certification issued in more than one state for portions in a foreign company. The portions are held by a foreign subdivision of an international subdivision. The portions trade as domestic portions, but are offered for sale globally through the assorted bank subdivisions[ 3 ]. Indian companies are permitted to raise equity capital in the international market through the issue of Global Depository Receipt. GDRs are designated in dollars and are non capable to any upper bound on investing.[ 4 ]

Such machinery came to be used in India much subsequently and was introduced foremost in the 1990s. This system was brought approximately by the liberalisation procedure of the economic system which started during that clip. The usage of ADRs and GDRs has steadily gained popularity in India with corporations looking towards planetary markets and pulling foreign investings. Numerous Indian package companies have taken advantage of these strategies[ 5 ]and a battalion of other strategies specifically related to information engineering companies have been brought about to promote the issue of ADRs and GDRs by such companies. In merely a few decennaries, India will be one of the largest economic systems in the universe. To make that point, companies in India will hold to put colossal amounts in developing their concerns.

The usage of American Depository Receipts and Global Depository Receipts have become platitude and in India they are regulated by the Securities and Exchange Board of India. The usage of ADRs and GDRs has simplified the procedure of puting in a foreign corporation doing stock trading in international companies every bit simple as puting in a domestic company

The paper shall explicate the construct of ADRs and GDRS and the high spot their importance to the Indian economic system with the aid of corporate illustrations. It is indispensable to modulate such liberalized mechanisms and hence, the research worker shall look into the SEBI strategies, regulations and guidelines and besides the RBI handbills.

Chapter I


American depositary grosss are fundamentally stocks of companies located outside of the US that are traded on US stock exchanges.[ 6 ]Although the construct appears to be instead one-dimensional, there originate several complications in the ordinance and trading of such stock. ADRs were introduced as a consequence of the complexnesss involved in purchasing portions in foreign states. Primarily the troubles associated with trading at different monetary values and currency values. For this ground, U.S. Bankss merely buy a majority batch of portions from the company, roll up the portions into groups, and reissues them on either the NYSE, AMEX, or Nasdaq.[ 7 ]The construct of American and planetary depositary grosss were introduced and permitted in India through the Cardinal Government strategy, the Issue of Foreign Currency Convertible Bonds and Ordinary Shares ( Through Depository Receipt Mechanism ) Scheme, 1993[ 8 ]. This strategy has laid down definitions, regulations and processs with respect to ADRs and GDRs. This strategy was deemed to hold come into consequence from the first twenty-four hours of April, 1992.


In order to understand the constructs and the working of the ADR system, it is indispensable to cognize certain definitions connected with the processs of this system. ADRs are traded by depositaries through a certain ordinance. A “ depositary ” means a company formed and registered under the Companies Act, 1956 ( 1 of 1956 ) and which has been granted a certification of enrollment under sub-section ( 1A ) of subdivision 12 of the Securities and Exchange Board of India Act, 1992 ( 15 of 1992 ) .[ 9 ]However, in order to be able to publish both ADRs and GDRs, enrollment with the Securities and Exchange Board of India[ 10 ]is non sufficient.

Under the FCCB Scheme, 1993, a company eligible to publish ADRs and GDRs are known as an publishing company. An “ issuing company ” means an Indian company permitted to publish Foreign Currency Convertible Bonds[ 11 ]or ordinary portions of that company against Global Depository Receipts[ 12 ]in order to be eligible to publish Foreign Currency Convertible Bonds[ 13 ]or ordinary portions for the intents of raising foreign financess, an issuing company necessitate to obtain anterior permission of the Department of Economic Affairs, Ministry of Finance, Government of India.[ 14 ]These issues need to conform to the regulations sing Foreign Direct Investment and the related policies and other compulsory statutory commissariats.[ 15 ]

1.2: Regulation OF ADRs IN USA

In the United States of America, ADRs are regulated by the Securities and Exchange Commission, ( working under the Internal Revenue Services ) through regulations and other ordinances. An ADR certification is traded as stock and represents the implicit in foreign portions, which can be obtained upon demand. The holder of an ADR is entitled to demand bringing of the implicit in portions. The American bank converts dividends, involvement, and principal from the foreign security into United States dollars. Once issued, an ADR certification may be freely traded in United States dollars in the United States on the nonprescription market. If certain SEC filings are made, it may be listed and traded on a national exchange. Taxpayer represents that any portions of domestic or foreign stock and any ADRs contributed are traded on an established securities market either within or without the United States.[ 16 ]

1.3: Indian ADRs

The system of ADRs allow the companies which have obtained permission to publish ADRs/GDRs to name the company in any of the stock exchanges viz. the NASDAQ, NYSE or Dow Jones. The Indian companies have to follow with such ordinances that have been specified by the Internal Revenue Service. Apart from these ordinances, the investors can straight merchandise in Indian ADRs.

The companies trading in ADRs include Infosys Technologies, Satyam, Dr.Reddy Laboratories Ltd, Silverline, Ltd. , State Bank of India Ltd. etc. The tendency of Indian ADRs has been instead unpredictable. Although most of the Indian companies have maintained extremely satisfactory returns in the American markets, there have been certain turbulences in the market. The information engineering roar was ephemeral and when the tech roar had subsided, so did the craving to purchase IT stocks. However, in malice of such defects, the figure of Indian companies with ADR issues contributed to about 80 per cent in the addition on the figure of Asiatic ADR issues.[ 17 ]Besides, Infosys Technologies have seen their portion monetary values trebling in the American market.

Indian ADRs have, in all been instead successful in the US markets in malice of several restrictions and are turning exponentially.

Chapter II


Global depositary grosss, means any instrument in the signifier of a depositary reception or certification ( by whatever name it is called ) created by the Overseas Depository Bank outside India and issued to non-resident investors against the issue of ordinary portions or Foreign Currency Convertible Bonds of publishing company.[ 18 ]GDRs were besides facilitated in India by the Issue of Foreign Currency Convertible Bonds and Ordinary Shares ( Through Depository Receipt Mechanism ) Scheme, 1993. GDRs are one of the most convenient methods of obtaining Foreign Direct Investment and are progressively being used by a big figure of Indian companies.


GDRs can be issued by companies with the needed permission from the Department of Economic Affairs, Ministry of Finance, Government of India[ 20 ]. The issue GDRs has to be done by a Domestic Custodian Bank.[ 21 ]The system requires the publishing company to lodge ordinary portions or bonds with the Domestic Custodian Bank and in conformity with the footings of understanding, they instruct the Overseas Depository Bank[ 22 ]to publish Global Depository Receipt or certifications in stead of the portions deposited to the Domestic Custodian Bank. GDRs may be issued in any negotiable signifier and listed on any international stock exchanges for trade outside India. The FCCB Scheme, 1993 provides that GDRs may be listed in any Overseas Stock Exchanged, or Over the Counter Exchanges or though Book Entry Transfer Systems prevailing abroad.[ 23 ]


GDRs can be listed in any international stock exchange. Most of the GDRs are nevertheless listed in either Luxembourg or the London Stock Exchange and are traded from these exchanges. Indian issuers get entree to all European, Asian and US investors with an involvement in their portions. US investors are able freely to buy GDRs listed on the London Stock Exchange through freedoms to US securities Torahs covering professional investors.[ 24 ]

Listing in international stock exchanges gives the right to the company to hold foreign investor, nevertheless, the regulations of that stock exchange with respect to GDRs and foreign investing has to be complied with. The London Stock Exchange has specific guidelines which have to be complied with by any foreign corporation seeking to be listed under the LSE.


From May 1992 onwards, Indian companies have been publishing Global Depository Receipts and Foreign Currency Convertible Bonds/Euro Currency Bonds ( FCCBs/ECBs ) on the Euro market on a big graduated table. Upto December 1995, Indian houses raised US $ 5,180 million through 64 issues of GDRs & A ; FCCBs. During 1995-96, seven Euro issues, all in the signifier of GDR were made which together raised $ 652 million. To day of the month, 47 GDR issues have taken topographic point, which raised $ 3,856 million, and 11 ECB issues which raised $ 998 million.[ 25 ]

GDRs have proved to be a instead efficient manner for pulling foreign investing. Numerous companies runing from Infosys to State Bank of India have started publishing GDRs in order to spread out their portion capital base. It is rather notable that all such companies have received extraordinary response and have fared more than satisfactorily. There are now 20 Indian companies listed in London, runing from big capitalization companies such as GAIL and State Bank of India to smaller engineering and services companies. Another 15 Indian companies have listed elsewhere in Europe but – in the absence of any trading in the location where they listed – have been admitted to trading on the London Stock Exchange.[ 26 ]The recent inclusion in the London Stock Exchange are the UTI Bank, which raised over $ 250 million in March 2005, and Srei Infrastructure Finance, which came to the market with a $ 35 million offering in April 2005.[ 27 ]Vedanta Resources have till day of the month been the most successful company trading in GDRs which raised US $ 1 billion in 2003 by an initial public offer.

Amongst the latest companies meaning to publish GDRs, Bharat Forge has come up with a proposal in April 2005. Bharat Forge will raise $ 100 million through Global Depository Receipts and $ 120 million through Foreign Currency Convertible Bonds ( FCCBs ) . The GDRs represent one equity portion of the paid-up value of Rs. 10 and were priced at $ 27.50 each, the company informed the Bombay Stock Exchange.[ 28 ]


The negotiations between the Bharti Airtel Group and MTN are really important from the position of GDRs since some important developments in this instrument were witnessed in the background of the proposed amalgamation.

The trade was structured in a mode such that the Bharti Group would get 49 % of MTN while MTN would keep 36 % of Bharti. MTN itself would get a 25 % interest in Bharti with its stockholders straight geting the staying 11 % . The 36 % entire acquired by MTN would be in the signifier of GDRs with voting rights.

The primary issue in the proposed amalgamation was whether the acquisition of 36 % of the portions of the Bharti Group in the signifier of GDRs with vote rights would trip assorted duties under the SEBI ( Significant Acquisition of Shares and Takeovers ) Regulations, 1997.[ 29 ]On July 7, 2009 SEBI published its informal counsel in the affair refering to the proposed amalgamation and addressed these issues. The Takeover Regulations lay two primary duties upon the acquirer ; ( I ) to do an unfastened offer to the other stockholders when the acquisition exceeds 15 % of the sum, and ( two ) to do certain revelations when the acquisition crosses certain threshold bounds that have been predefined, e.g. 5 % , 14 % etc. MTN was scheduled to get 36 % of Bharti non in the signifier of portions but in the signifier of GDRs with voting rights.

SEBI opined that GDR holders would be required to do an unfastened offer merely when they converted their GDRs with voting rights into portions thereby transcending their retention beyond 15 % . There was accordingly no demand for an automatic clear offer upon purchase of GDRs with voting rights in surplus of 15 % of the entire equity of the company. SEBI quoted Reg. 3 ( 2 ) of the Takeover Regulations to back up its instance which read:

Nothing contained in Chapter III of the ordinances shall use to the acquisition of Global Depository Receipts or American Depository Receipts so long as they are non converted into portions transporting voting rights.

Equally far as revelations were concerned nevertheless, SEBI quoted Chapter II of the Regulations to deduce that the freedom that applies to an unfastened offer does non use. Furthermore, Reg. 2 ( K ) of the Takeover Regulations includes any security which would entitle the holder to have portions with voting rights. SEBI believed that since GDRs can be converted into portions with voting rights, they would besides fall within the scope of this definition. SEBI therefore concluded that all revelation demands that apply to portions would be applicable to GDRs every bit good.

However, SEBI amended the Takeover Regulations on September 22, 2009 and brought ADRs/GDRs on par with domestic portions. If an entity holds 15 % of a company through GDRs, so he is required to do a compulsory unfastened offer to purchase an extra 20 % equity in the company.

Chapter III


The Cardinal Government, in 1993 foremost introduced these systems in India. In all states which allow issue of ADRs/GDRs have some kind of ordinance mechanism in topographic point. In India, the Securities and Exchange Board of India and the Reserve Bank of India chiefly through strategies, policies, regulations and guidelines regulate ADRs and GDRs. FCCBs issued against GDRs are treated as foreign direct investing in the issue company.[ 30 ]


The issue companies have to move within certain parametric quantities set by the cardinal authorities. These restrictions restrict the range within which companies have to move ; nevertheless, these guidelines are instead liberally constructed. In order to acquire an appropriate permission for publishing GDRs/FCCBs, companies shall necessitate holding a good path record for a period of three old ages.[ 31 ]However, this path record demand was dispensed with later.[ 32 ]The cumulative of foreign investing in an issue company, both direct and indirect, can non transcend 51 % of the issued and subscribed capital of the company.[ 33 ]Investings in stock markets and existent estate are nevertheless, non acceptable.

However since GDRs/ADRs are equity instruments and there is no refund liability on the issue company. Unlike a commercial adoption or a foreign currency exchangeable bond which carries a refund liability on the company, GDRs/ADRs are full hazard equity. It has hence been decided that all end-use limitations on GDR/ADR issue returns be removed.[ 34 ]


The system of ADRs/GDRs in India are being invariably revised and reviewed. Certain proficient troubles have been restructured in order to guarantee maximal flexibleness in the system of such issue. Publishing companies have lesser limitations and are allowed to publish up to 100 per centum of their portion capital as ADRs/GDRs. However, foreign investors are still prohibited from puting in industries related to atomic energy, railroads, excavation, coal and weaponries and ammos.

Certain other ordinances that have been relaxed are as follows:

Indian bidders allowed to raise financess through ADRs, GDRs and external commercial adoptions ( ECBs ) for geting portions of PSEs in the first phase and purchasing portions from the market during the unfastened offer in the 2nd phase.

Conversion and reconversion ( a.k.a. bipartisan transition or exchangeability ) of portions of Indian companies into depositary grosss listed in foreign Bourses, while widening revenue enhancement inducements to non-resident investors, allowed. The re-coversion of ADRs/GDRs would, nevertheless, be governed by the Foreign Exchange Management Act notified by the Reserve Bank of India in March 2001.

Permission to retain ADR/GDR returns abroad for future foreign exchange demands, remotion of the bing bound of $ 20,000 for remittal under the employees stock option strategy ( ESOP ) and allowing remittal up to $ 1 million from returns of gross revenues of assets here.

Companies have been allowed to put 100 per cent of the returns of ADR/GDR issues ( as against the earlier ceiling of 50 % ) for acquisitions of foreign companies and direct investings in joint ventures and wholly-owned subordinates overseas.

Any Indian company which has issued ADRs/GDRs may get portions of foreign companies engaged in the same country of nucleus activity upto $ 100 million or an sum equivalent to ten times of their exports in a twelvemonth, whichever is higher. Earlier, this installation was available merely to Indian companies in certain sectors.

FIIs can put in a company under the portfolio investing path upto 24 per cent of the paid-up capital of the company. It can be increased to 40 % with blessing of general organic structure of the stockholders by a particular declaration. This bound has now been increased to 49 % from the present 40 % .

Two manner exchangeability in ADR/GDR issues of Indian companies has been introduced capable to sectoral caps wherever applicable. Stock agents in India can now buy portions and lodge these with the Indian keeper for issue of ADRs/GDRs by the abroad depositary to the extent of the ADRs/GDRs that have been converted into implicit in portions.[ 35 ]


The Indian economic system is one of the largest in the universe and its growing rate is one of the highest in the group of developing states, following merely to China. The economic jobs of India are multifaceted and emerge from several societal, political and regional considerations. The advancement made by the Indian economic system norms out to be much less that the existent empirical alteration since the overpowering population force per unit area lickings such economic advancement.

However, Indian industry and corporate gurus have taken India into the twenty-first Century with much to observe about. The procedure of liberalisation of the Indian economic system was acknowledged by the international community and India was immediately accepted as one of the important participants of the planetary markets. The gait at which the international concerns of many Indian companies are turning – in some instances, far outpacing growing in India – may intend for some companies that international operations can in future be financed more expeditiously if they are capitalised individually from the parent company in India.[ 36 ]

Yet, there still exist some internal mechanisms which need to be modified in order to guarantee a more hassle free dealing in the market. While India is opening up to foreign direct investing, persons and establishments still have to register as foreign investors with the Securities and Exchange Board before they can purchase stocks straight on India ‘s exchanges. Most persons will probably happen the ruddy tape excessively dashing to cut ; ex-pat Indians, nevertheless, have it easier because the authorities is promoting such repatriation of capital.[ 37 ]

Although India has faced strong unfavorable judgment from assorted states sing its internal policies and the complications in ordinances, the chance of puting in India is instead moneymaking and hence, Indian ADRs and GDRs globally have achieved a instead elevated position.

India, among the European investors, is believed to be a good investing despite political uncertainness, bureaucratic fusss, deficits of power and infrastructural lacks. India presents a huge potency for abroad investing and is actively promoting the entryway of foreign participants into the market. No company, of any size, draw a bead oning to be a planetary participant can, for long ignore this state which is expected to go one of the top three emerging economic systems.[ 38 ]