ALL About ADR'S N GDR'S

ADRs / GDRs

1.1       Introduction

One of the ways in which Indian Companies can raise foreign currency funds  is by the issue of ADRs/ GDRS. ADRs/ GDRs are one segment of capital instruments of which one hears and reads about a great deal. Several Indian corporates have issued or have lined up plans to issue ADRs/ GDRs.  Let us examine what these instruments are and how do they operate.

1.2       Meaning

An ADR means an American Depository Receipt, whereas a GDR means a Global Depository Receipt. ADRs (also known as American Depository Shares or ADS) are listed on an American stock exchange. The issue process of an ADR is governed by the rules and regulations laid down by the Securities and Exchange Commission or SEC (the capital markets regulator in the USA).

1.3       GDRs on the other hand are listed on a stock exchange outside the USA, normally on the Luxembourg or London stock exchange or even on newer exchanges such as Singapore, etc.

1.4       ADRs/ GDRs allow companies to tap foreign investors and thereby have a wider shareholding leading to better valuations and stakeholder value creation. Several companies prefer the GDR route compared to an ADR because the disclosure, accounting and compliance requirements in the USA are far more stringent and onerous as compared to those in the case of a GDR issue, say in Luxembourg. Concerns of compliance and costs also prevail in the case of ADRs. But yet many companies prefer the ADR route.

1.5       Necessity

Indian companies cannot directly issuing rupee denominated securities which can be listed abroad on foreign stock exchanges. Thus, the equity shares of an Indian company cannot be directly listed on, say, the New York Stock Exchange. To overcome this problem, Indian companies adopt the ADR/ GDR route. 

1.6       Instrument

An ADR is quoted in US dollars and one ADR represents a certain number of equity shares in the Indian company. The foreign investors can then directly buy and sell the ADRs as if they were the shares of a foreign corporation. If the investor wants he can convert the ADR into the equivalent number of underlying equity shares.  The ADR would then be cancelled as it would be converted into the equity shares.  

1.7       Process

The broad commercial steps involved in an ADR issue (or a GDR issue) is as follows: 

(a)     The Indian company would issue rupee-denominated equity shares to a depository. 

(b)     An Indian custodian would keep these shares in its custody.

(c)     The depository would issue dollar-denominated receipts or shares to foreign investors, known as ADRs/ ADSs. It would also set the ratio between the ADRs and the equity shares, i.e., one ADR is equal to how many equity shares. It could be one, more or less than one equity share. It all depends upon the pricing of the share in the Indian market. The objective is to so price the ADR that it does not become very expensive and out of reach for the retail foreign investors.

(d)     A public issue would be made of the ADRs in USA and elsewhere. The investment bankers would organise road shows and try and market the issue to institutional and retail foreign investors.  The book building method is used for the issue.

(e)     The ADRs would be listed on a US stock exchange, e.g., Nasdaq or New York Stock Exchange.

(f)      Foreign exchange fluctuation risk or gain is to the account of the foreign investors.

(g)     For the company there is no burden of repayment or interest.

(h)     The company would pay dividend to the depository in rupee terms but the depository would distribute this dividend to the ADR holders in dollars.

(i)      For the investors their point of contact would be the depository.

(j)      The Indian company would need to comply with the SEC requirements in terms of compliance and accounting norms, such as US GAAP.

(k)     The ADR holders may exercise their right to vote through the overseas depository bank.

II.        Two-way Fungibility

2.1       The two-way fungibility in ADRs/ GDRs has spruced up the ADR/ GDR market. Two-way fungibility was introduced by the RBI in 2001. Earlier, the ADRs/ GDRs could be converted into ordinary Indian shares by the foreign investors however, the converse was not possible. Now a registered broker can purchase shares of an Indian company which has issued ADRs/ GDRs, on behalf of a non-resident, for converting the shares purchased into ADRs/ GDRs. The shares have to be purchased on a stock exchange only. 

III.       Sponsored ADR  Programmes

3.1       Several companies are now going in for a Sponsored ADR Programme rather than a fresh issue. The company can sponsor an ADR against the existing shares held by its shareholders at a price that may be arrived at by the Lead Book Running Managers.

3.2       If a company sponsors an ADR programme, then even Indian investors can convert their rupee-denominated equity shares into ADRs/ GDRs of the company. Such a programme is known as a Sponsored ADR programme. Once the pricing of the ADRs are determined the shares tendered by the local investors would be delivered to the custodian and in return for the same, the depository would issue ADRs to foreign investors. The purchase price paid by the foreign investors to the local investors net of expenses, would be the sales consideration for the local investors. Companies such as Infosys have successfully launched Sponsored ADR programmes.