Operative Dimensions of ADR And GDR


Depository receipt is one of the important concepts to understand while pursuing company law. In the new aspects of company law, the aspects of depository receipts are clearly determined, and moreover, Section 41 of the Companies Act, 2013 describes Global Depository Receipt (GDR). In this blog, we will see certain aspects of the same such as mechanism, reasons of the same, how it is different from shares and how it is similar to the same, etc. ADRs are a means to trade non-US stocks on the New York Stock Exchange. Indian firms who want to raise cash from the United States can use ADRs to accomplish so by issuing shares on the American Stock Exchange. The issuing of ADRs, on the other hand, is controlled by the SEC‘s laws and regulations One ADR is made up of a certain number of shares in an Indian firm and these ADRs are traded on the stock exchange in US dollars.

American Depository Receipts are a means to trade non-US stocks on the New York Stock Exchange. Indian firms who want raising cash from the United States can use ADRs by issuing shares on the American Stock Exchange. The issuing of ADRs is controlled by the laws and regulations of the Securities and Exchange Commission. Indian firms are unable to list their equity shares on a global stock market immediately. The firms raise money by selling ADRs on the American stock exchange. These ADRs are traded on major US stock exchanges such as NASDAQ.

GDRs are identical to ADRs, except that they are listed on a stock exchange outside of the United States and allow the issuer to raise funds in several markets at the same time, i.e., they allow international companies to trade on a stock exchange outside of their home country. A foreign bank holds these shares on behalf of the firms, in exchange for which the banks issues depository receipts to the companies.

Working of ADR and GDR

We understand ADR and GDR by taking an example of an Indian company willing to raise funds overseas and not willing to issue equity within India wanting foreign subscribers/investors. This is the main objective to be fulfilled. However, it’s not happening directly from the foreign investors across the world subscribing to these shares in the Indian capital market. This will happen through the Depository Receipt system. The investors cannot directly buy Indian shares and need the involvement of an intermediary. The first intermediary between the Indian companies and the investors located in the US is Overseas Depository Bank/ODB. The term overseas is used in the context of this Indian company. What is the role of this depository bank being played? There is a substantial role played by this bank in the issuance of ADRs.

The Indian company will issue the shares to this depository bank in the US and this bank, after receiving its shares on the backing of these shares, will issue certificates or receipts or instruments known as depository receipts conveying the same that the banks have the shares in their custody and now, the investors may trade with the depository receipts as good as they are the shares of the particular company. The share will lie with the depository bank and then go to the investors called depository receipts. There is one more intermediary called Domestic Custodian. The word ‘domestic’ is used again, from the viewpoint of the Indian company. The Domestic Custodian is located in India as it is the agent of the depository bank located in the US. It means that the ODB as its agent would have appointed a domestic custodian in India. What is the role of this custodian?

The Indian company will be depositing those shares with the custodian. The entity is called custodian is because it holds the shares issued by the Indian company in its custody. This is the agent of ODB. The moment of the custodian gets the receipt of shares, it will acknowledge the share deposits to its main head, ODB. Based on the backing of those shares with the custodian, the depository bank will issue ADRs or American depository receipts and the same will be purchased by the investors in the USA. On one hand, ADRs are ready to issue lying in the hands of the depository bank, on other hand; the investment will be made in dollars.

These investors will subscribe to these ADRs by depositing the money to the depository bank and in turn, they will be issued, ADRs. The same is marketable instruments since the ADRs are issued by the bank and then held by the investors buying/selling the same. With the fluctuation of the shares’ price of the Indian company, the value of ADR will also fluctuate as ADR is deriving its value from the price movement of the shares of the Indian company. The money is lying with the ODB and the objective is to pass it on to the Indian company deducting ODB will deduct certain charges for the arrangement of the whole thing along with the issue expenses relating to ADR and will be deducted out of the dollar investment and the remaining money will be transferred to the Indian company. And thus, ADRs are with the investors and the money of the investors is in the hands of the Indian company.

ADR is a certificate or a receipt representing shares of a foreign company and the same is issued in accordance with provisions stipulated by the Securities Exchange Commission of the USA. The certificates are traded on one of the three major US equity markets i.e. New York Stock Exchange, AMEX, or NASDAQ.

In the Indian context, the features of ADRs are that they are traded in the same way as they are the securities of US-based companies. The holder of the ADR is entitled to the same set of rights as they are the owners of the shares in India. It thoroughly reveals the ownership in the shares of the Indian company so that it is traded in the US Stock Exchange. And as mentioned earlier, the value of the ADR fluctuates in relation to the fluctuating price movements of the underlying shares of the Indian company.

An example of ADR issuance continued in the context of the Indian company.

Example – CompanyX which is in India requires a raising of $100000 through ADR. Taking in view that the exchange rate at present is $1= Rs.70

1 share of CompanyX is currently is Rs. 1400. So the equivalent value of one share of X is 1400/70 = $20.

Now assuming that for each ADR, the number of underlying shares will be 5 shares.

Then 5 shares of CompanyX underlying each ADR is 5×20= $100.

As the company is willing to raise it to one lakh, so, $100000/$100= 1000 ADRs will be issued.

Coming to Global Depository Receipt/GDR, it is the same as ADR at first instance. There are some minute distances regarding the same as in GDR, the company in India targets the investors not in the USA but in Europe or in London Market. So this time, the depository bank and investors are located in London. And this time, the depository receipt will not be titled as ADR but as GDR. GDRs can either be denominated in US Dollars or in Europe.

The primary difference between the two is in the market in which they’re issued and through Exchange in which they are listed, that is ADR is traded in US Stock Exchanges and GDR is traded in European Stock Exchange. Through ADR, funds can be raised in US Stock Market while using GDR; funds can be raised in any country except in the USA.

Legal Framework of Issuance of ADR/GDR Applicable on Indian Companies

Companies Act, 2013 – Company’s Act, 2013 describes that GDR is the receipt that is created by a foreign depository outside India and allowed to issue such depository receipts, giving Central Government an authority making regulations in regards to the issuing of DRs in a foreign country. The Income Tax Act, 1961 clarifies that providing of tax on the income Nonresident to whom is issued is in consonance to the interest on bonds of an Indian company. The Foreign Exchange Management, 1999 is one of the most important aspects to be considered for understanding the framework. The Foreign currency convertible bonds and ordinary shares (Depository Receipt Mechanism) scheme, 1933 and also SEBI Regulations, 2015 plays an important role.

Requisites for Issuance

The issuance needs to obtain prior permission from the department of economics, MOF, India. Any Indian company that has succumbed to prohibition from being granted the securities market by SEBI doesn’t stand eligible in the issuance of ordinary shares through ADR and GDR. Unlisted Indian companies that issue GDR shall be required to list on the stock exchange with the flow. The company should have a constant decent track record of good performance for a period of 3 years minimum. There are certain Indian companies registered in India are engaging in the given below sectors having 80 percent of the turnover is from the sectors of company business construing to three financial years previously considered and then they can offer ADR/GDR like Information technology and entertainment software, Pharmacy, Biotechnology and Any activities within the knowledge-based sector as notified by the government from time to time. The ordinary shares issued against the ADR/GDR shall be treated as foreign direct investment in the issuing company. The aggregate that is made by the FDI shall not exceed a bar of 51 percent of the capital issue to subscribe Rs. Overseas company issuer is listed in its own country. It should be not barred from issuing security from any regulatory authority. The company must have a clean previous record in regards to compliance with the securities market regulation.

RBI Regulatory Regime Issuing ADR And GDR

Indian companies may raise foreign funds overseas by issuing ADR GDR from Foreign Currency Convertible Bonds and Ordinary Shares Scheme, 1993. If a company is eligible to issue shares to a person resident outside India under the FDI scheme, it can issue. Unlisted companies which have not taken access to ADR GDR in order to make funds in the international market need a prior listed in the domestic custodian. Unlisted companies issuing ADR/GDR on the international market must list on the local market within three years after the offering if they made a profit. The corporation must file a DR form after receiving the certificate, as specified in RBI notification no. FEMA.20/2000-RB dated May 3, 2000, as revised from time to time. Except for an outright hurdle regarding the investment in the real estate and stock markets, there are no end-use limitations on ADR and GDR issue proceeds. Issues of ADRs and GDRs, including sponsored ADR GDRs, should be priced according to the scheme’s provisions, which were enacted in 1993.

Reporting of ADR/GDR Issues

The company that issues ADR and GDR has to notify the RBI of the issue’s detailed aspects in the form in Annex – 10 within 30 days from the date of the issuance. The company has to make a submission of quarterly returns in the form enclosed in Annex 11 to RBI within 15 days of the close calendar order. The quarterly return should acquire submission unless the funding rose through the issuing of ADR and GDR is returned to India.

Infosys’s Debut in Us

In 1999, Infosys was listed on the NASDAQ stock exchange. The Infosys stock exchange began trading at 37 dollars on the first day, and two ADRs were equal to one Indian share, resulting in a price of Rs. 2886, whereas the Infosys hike was quoted at Rs. 3201 on the Indian stock exchange. The initial public offering in the Us of 1.8 million ADRs represents 9,00,000 equity shares, each worth two ADRs.

India’s Sterlite Industries

The company raised $1.75 billion and ADS that have offered 130,440,000 ADS, the Offering price $13.44 per ADS. Underwriters of that company were Merril Lynch Fenner and Smith Inc, Morgan Stanley and co., and Citigroup global market. Depository for the ADS was Citibank.  The registration fee was 1 million dollars and the estimated legal fee was 2.5 million dollars.

Rule 144a GDRs (Private Placement)

Capitals can be raised by depository receipts with large institutional investors. They do not have to confirm SEC reporting and registration requirements. Non-US companies own ready access to the US equity private placement markets and have the chance to raise funds construing to the issue of rule 144A GDRs and it is not important to comply with the SEC registration and the requirements of reporting.

This article has been written by Mridul Sinha, 3rd year BA. LL.B (Hons.) student of Dharmashastra National Law University, Jabalpur, Madhya Pradesh.

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