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ISSUES IN INDIAN COMMERCE 1. 2. 3. 4. AMERICAN DEPOSITORY RECEIPTS GLOBAL DEPOSITORY RECEIPTS RBI REGULATIONS FOR ISSUANCE OF ADRs AND GDRs INDIAN DEPOSITORY RECEIPTS
AMERICAN DEPOSITORY RECEIPT � An ADR is a negotiable certificate that evidences an ownership interest in American depository shares which , in turn, represented an interest in the shares of a non U. S company that have been deposited with a U. S bank. The ADR was created in 1927 by by U. S bank to allow U. S investors to invest in shares of a British department store.
TYPES OF ADR 1. Unsponsored ADRs : An unsponsored ADR is the set up without the cooperation of the non- U. S company and may be initiated by a broker dealer wishing to establish a U. S trading market. 2. Sponsored ADRs : Sponsored ADRs are those in which the non- U. S company enters into an agreement directly with the U. S depositary bank to arrange for record keeping , forwarding of shareholders communications, payment of dividends meeting and other information about the foreign private issuer so that ADR holders may exercise their voting rights through the depository.
LEVELS OF ADR � LEVEL 1 ADR programs establish a trading presence but may not be used to raise capital. � LEVEL 2 ADR programs establish a trading � LEVEL 3 ADR programs may be used not presence on a national securities exchange but may not be used to raise capital. only to establish a trading presence, but also to raise capital for the foreign issuer.
advantages: � ACCESS TO GROWTH � BENEFIT FROM CURRENCY FLUCTUATIONS � IT IS A CONVENIENT WAY TO INVEST
DISADVANTAGES: � FOREIGN EXCHANGE RISK � SELECTION CHOICE � ILLIQUIDITY � WITHHOLDING AND OTHER TAXES � ADDITIONAL FEES
GLOBAL DEPOSITORY RECEIPT GDRs are negotiable certificates issued by depository banks which represent ownership of a given no. a company’s shares which can be listed and traded independently from the underlying shares.
Advantages of gdr to issuers Creates investor base. � Enhance visibility among investors , consumers and customers. � Increase liquidity. � Increase research coverage. � Improves communication. � Enables price parity with global peers. � Offers a new venue for raising equity capital. � Facilitates mergers and acquisition activity. �
Disadvantages to investors � Creates investor base � Enhances visibility � Increases liquidity � East to purchase and hold � Improves communication � Enables price parity � Facilitates merger and acquisition activity � Reduces global custody safekeeping charges.
Rbi regulations for issuance of adr and gdr Indian co. can raise foreign currency through issue if ADR/GDR in accordance to the scheme of FCCB and OSS, 1993. � A company can issue ADR/GDR if it is eligible to issue shares to persons resident outside India under FDI scheme. � After the issue of ADR/GDR the company has to file a return in form DR as indicated by RBI. � There are no end use restriction on issue of ADR/GDR except for an express ban on investment on real estate and stock market. �
ADR/GDR should be made at a price determined under FCCB and OSS, 1993 and guidelines given by RBI and government of India. � A registered broker in Indian can purchase shares of an Indian company on behalf of a person resident outside India in order to convert the shares so purchased into ADR/GDR. � The Indian company issuing ADR/GDR has to furnish to RBI full details of such issue within 30 days from the date of closing of the issue. �
Indian depository receipts are financial instruments that allow foreign companies to mobilize funds from Indian market by offering equity and getting listed in Indian stock exchanges. It was in 2004 that the IDR rules were formed. IRDs would get listed in recognized stock exchanges in India and would be freely transferable.
Eligibility for issue of idr Its pre-issue paid up capital and free reserves should be at least 100 million $ and has an average turnover of 500 million $ during 3 financial years. � It has been earning a profit for at least 5 years preceding the issue and has been declaring a dividend of not less that 10%. � Its pre-issue debt to equity ratio should not be more that 2: 1. � It shall fulfill the eligibility criteria laid down by SEBI. �
PROCEDURE FOR MAKING AN ISSUE OF IDR No issuing co. shall raise funds in India by issuing IDRs unless it has obtained a prior permission from SEBI. � An application seeking permission under clause ‘a’ shall be made to SEBI at least 90 days prior to the opening date of issue. � The SEBI on receipt of an application seeking permission call for further information and explanations for disposal of such application. � The issuing co. shall obtain the necessary approvals of exemptions from the appropriate authorities. �
The issuing co. shall appoint an overseas custodian bank , a domestic depository and a merchant banker. � The issuing co. shall deliver the shares to an overseas custodian bank and the said bank shall authorize the domestic depository to issue IDR. � The issuing co. shall file through a , merchant banker a due diligence report with the registrar and with SEBI in the form specified. �
Amendments Pre issue paid up capital and free reserves of US $50 million and minimum average capitalization during the last 3 years. � A continuous trading record of at least 3 years in the stock exchanges of the parent country. � A track record of distribution of profits in the 3 out of 5 years. � The underlying shares shall not exceed 25% of the post issue no. of equity shares of the company. �
Significance of amendments They are relatively more market friendly in contrast to the prior rules. With these changes the Indian market has become more investor friendly and have liberalized the norms of foreign companies to issue IDRs.