Description
the overview of depository receipts, different types of depository receipts, depository issuance process, pricing of depository receipts and benefits of depository receipts to issuer and investor
An Analysis of...
Agenda
Overview of depository receipts Overview of two way fungibility Issuance and cancellation Pricing of issues
Depository receipts – the Indian experience
Depository receipts – final word
Page 2
What is a Depository Receipt…?
A Depositary Receipt is a negotiable security that represents an ownership interest in securities of a foreign issuer typically trading outside its home market.
While depositary receipt programs can be structured in a variety of ways, there are two basic options:
American Depositary Receipt (ADR)
Give Non-U.S. companies access to the US capital markets, and
Global Depositary Receipt (GDR)
Provide exposure to the global markets (except U.S.) outside the issuer’s home market and the institutional investor market in the U.S. LSE is most frequently utilized by GDR issuers. Other exchanges which list GDRs include Luxembourg, Dubai International Financial Exchange (DIFX), or the Singapore Stock Exchange.
Page 3
Levels of DR
Issuer
Existing Shares Only (Non-Capital Raising Transactions)
Selling New Shares
(Capital Raising Transactions)
Over-the-Counter (OTC) Traded
Level I ADR
Level I GDR
Unlisted
Level III ADR
U.S. Listed
Level II ADR
U.S. Listed Internationally Listed
Level III GDR
Internationally Listed
Level II GDR
Reg S Type Depositary Receipts - GDR can be traded from any kind of investor to any kind of investor.
Pairing Type - combination of the Reg S type GDR and a Rule 144A ADR. Rule 144A ADR - privately placed through Qualified Institutional Buyers in the U.S.
Page 4
Types of Depository Receipts
Types of DRs
Sponsored DRs
Unsponsored DRs
Issued by one depository appointed by the company under a Deposit Agreement or service contract
May be issued in different levels (level I, II or III) Company bears all expenses New capital may also be raised under this option
Set up at the request of 3rd party without any formal agreement with company
Issued by one or more depositories in response to market demand 3rd party pays all set up and maintenance expenses No new capital is raised
Page 5
Agenda
Overview of depository receipts Overview of two way fungibility Issuance and cancellation Pricing of issues
Depository receipts – the Indian experience
Depository receipts – final word
Page 6
What is a two way fungibility…?
Two Way Fungibility – Depository Receipts can be converted into underlying shares and Underlying shares can be converted into Depository Receipts
Before – Investors could only cancel DRs and avail of the underlying shares or
take back the proceeds by selling the underlying shares After - Investors can purchase shares from the Indian stock market, through a registered broker and submit them for conversion into Depository Receipts Advantage - Increases the available float in the international markets for investors.
Page 7
Details of reissuances
Take into consideration sectoral cap restrictions and available headroom Headroom - Head Room = Number of ADRs / GDRs originally issued minus number of GDRs / ADRs outstanding further adjusted for ADRs / GDRs redeemed into underlying shares and registered in the name of non-resident investor(s). Further at any time the company can reissue only upto the original issued number of DRs Who can make reissuances ? Company with an existing DR programme Company listed in India
Page 8
Agenda
Overview of depository receipts Overview of two way fungibility Issuance and cancellation Pricing of issues
Depository receipts – the Indian experience
Depository receipts – final word
Page 9
DR Issuance Process
1 Investor contacts broker and requests the purchase of shares of a DR issuer company. If existing DRs of that company are not available, the issuance process begins. 2 To issue new DRs, the broker contacts a local broker in the issuer’s home market. 3 The local broker purchases ordinary shares on an exchange in the local market. 4 Ordinary shares are deposited with a local custodian. 5 The local custodian instructs the depositary to issue DRs that represent the shares received. 6
Investor
7
1
DR Broker
2
Local Broker
3
Local Stock Market
4
6 The depositary issues DRs
7 The broker delivers DRs to the investor or credits the investor’s account. 5
Depository
Local Custodian
Page 10
DR Cancellation Process
1 The investor instructs the broker to cancel DRs. 2 The broker delivers the DRs to the depositary for cancellation. 3 The depositary cancels the DRs and instructs the local custodian to release and deliver the underlying shares to the seller’s broker in the issuer’s home market. 4 The local custodian delivers the underlying ordinary shares as instructed to the local broker. The local broker safekeeps the ordinary shares or delivers them to or on behalf of the new investor.
Investor
1
DR Broker
2
Depository
3
Local Custodian
4
Local Broker
Page 11
Agenda
Overview of depository receipts Overview of two way fungibility Issuance and cancellation Pricing of issues
Depository receipts – the Indian experience
Depository receipts – final word
Page 12
Pricing of DRs
ADR/GDR prices based on underlying local shares Prices calculated based on DR ratio DR ratio indicates the number of shares underlying a DR DR ratio in general kept at a level to insure a listing value of more then $10 per ADR
Once ADR/GDR is listed, its prices are determined by demand and supply
Addition of new DRs and cancellation of old DRs adds to liquidity Arbitrage opportunities ensure efficient pricing
Page 13
180 160 140 120 100 80 60 40
140
190
40 19/Aug/09 02/Sep/09 16/Sep/09 30/Sep/09 14/Oct/09 28/Oct/09 19/Aug/09 02/Sep/09 16/Sep/09 30/Sep/09 14/Oct/09 28/Oct/09 11/Nov/09 25/Nov/09 09/Dec/09 23/Dec/09 06/Jan/10 20/Jan/10 03/Feb/10 17/Feb/10 03/Mar/10 17/Mar/10 31/Mar/10 14/Apr/10 28/Apr/10 12/May/10 26/May/10 09/Jun/10 23/Jun/10 07/Jul/10 21/Jul/10 04/Aug/10
Pricing of DRs… continued
90
11/Nov/09
25/Nov/09 09/Dec/09 23/Dec/09 06/Jan/10 20/Jan/10 03/Feb/10
17/Feb/10
03/Mar/10 17/Mar/10 31/Mar/10 14/Apr/10 28/Apr/10 12/May/10 26/May/10 09/Jun/10 23/Jun/10 07/Jul/10 21/Jul/10 04/Aug/10
Sterlite industries
Patni computers
ADR Stock
ADR Stock
Page 14
140
240
290
190
40 19/Aug/09 02/Sep/09 16/Sep/09 30/Sep/09 14/Oct/09 28/Oct/09 11/Nov/09 25/Nov/09 09/Dec/09 23/Dec/09 06/Jan/10 20/Jan/10 03/Feb/10 17/Feb/10 03/Mar/10 17/Mar/10 31/Mar/10 14/Apr/10 28/Apr/10 12/May/10 26/May/10 09/Jun/10 23/Jun/10 07/Jul/10 21/Jul/10 04/Aug/10
90
Pricing of DRs… continued
Tata motors
ADR Stock
Page 15
Agenda
Overview of depository receipts Overview of two way fungibility Issuance and cancellation Pricing of DRs
Depository receipts – the Indian experience
Depository receipts – final word
Page 16
Top 15 Indian GDRs
Page 17
Top 15 Indian ADRs
Page 18
Agenda
Overview of depository receipts Overview of two way fungibility Issuance and cancellation Pricing of DRs
Depository receipts – the Indian experience
Depository receipts – final word
Page 19
Benefits of two way fungibility – To issuer
Ability to increase the number of outstanding depository receipts to the original amount
Increased liquidity in the international investor market due to more number of depository receipts available
Increased stock price of the depository receipts due to increase in demand
More flexibility in acquiring companies overseas, as the stock component can be increased in a cash and stock deal, thereby saving precious foreign exchange
Page 20
Benefits of two way fungibility – To investor
Non residents can avail of the tax benefits under Section 115 AC of the Income Tax Act 1961 which is applicable to non resident investors in ADRs / GDRs offered against issue of fresh underlying shares
Higher float available on the DR stock and hence better liquidity.
Page 21
Benefits of Depository Receipts To Issuer
Offer a new avenue for raising equity capital outside the issuer’s home market
Broaden and diversify a company’s investor base Enhance a company’s visibility, status and profile internationally among institutional investors Develop and/or increase research coverage outside the home market
Get an international valuation as the Company is valued alongside its peer group
Facilitate M&A activity through use as acquisition currency
Expand opportunity to increase local share price as a result of global demand/trading
Page 22
Benefits of Depository Receipts To Investors
Facilitate diversification into securities of foreign issuers
Represent a way to provide international exposure for institutional investors (mutual funds, pension funds) despite restrictions against investing in certain countries or in foreign investment instruments
Easier to purchase and to hold than the issuer’s underlying ordinary shares
Trade easily and conveniently in US dollars and settle through established clearinghouses
Create accessibility of price, trading information and research
Page 23
Page 24
doc_468842099.pptx
the overview of depository receipts, different types of depository receipts, depository issuance process, pricing of depository receipts and benefits of depository receipts to issuer and investor
An Analysis of...
Agenda
Overview of depository receipts Overview of two way fungibility Issuance and cancellation Pricing of issues
Depository receipts – the Indian experience
Depository receipts – final word
Page 2
What is a Depository Receipt…?
A Depositary Receipt is a negotiable security that represents an ownership interest in securities of a foreign issuer typically trading outside its home market.
While depositary receipt programs can be structured in a variety of ways, there are two basic options:
American Depositary Receipt (ADR)
Give Non-U.S. companies access to the US capital markets, and
Global Depositary Receipt (GDR)
Provide exposure to the global markets (except U.S.) outside the issuer’s home market and the institutional investor market in the U.S. LSE is most frequently utilized by GDR issuers. Other exchanges which list GDRs include Luxembourg, Dubai International Financial Exchange (DIFX), or the Singapore Stock Exchange.
Page 3
Levels of DR
Issuer
Existing Shares Only (Non-Capital Raising Transactions)
Selling New Shares
(Capital Raising Transactions)
Over-the-Counter (OTC) Traded
Level I ADR
Level I GDR
Unlisted
Level III ADR
U.S. Listed
Level II ADR
U.S. Listed Internationally Listed
Level III GDR
Internationally Listed
Level II GDR
Reg S Type Depositary Receipts - GDR can be traded from any kind of investor to any kind of investor.
Pairing Type - combination of the Reg S type GDR and a Rule 144A ADR. Rule 144A ADR - privately placed through Qualified Institutional Buyers in the U.S.
Page 4
Types of Depository Receipts
Types of DRs
Sponsored DRs
Unsponsored DRs
Issued by one depository appointed by the company under a Deposit Agreement or service contract
May be issued in different levels (level I, II or III) Company bears all expenses New capital may also be raised under this option
Set up at the request of 3rd party without any formal agreement with company
Issued by one or more depositories in response to market demand 3rd party pays all set up and maintenance expenses No new capital is raised
Page 5
Agenda
Overview of depository receipts Overview of two way fungibility Issuance and cancellation Pricing of issues
Depository receipts – the Indian experience
Depository receipts – final word
Page 6
What is a two way fungibility…?
Two Way Fungibility – Depository Receipts can be converted into underlying shares and Underlying shares can be converted into Depository Receipts
Before – Investors could only cancel DRs and avail of the underlying shares or
take back the proceeds by selling the underlying shares After - Investors can purchase shares from the Indian stock market, through a registered broker and submit them for conversion into Depository Receipts Advantage - Increases the available float in the international markets for investors.
Page 7
Details of reissuances
Take into consideration sectoral cap restrictions and available headroom Headroom - Head Room = Number of ADRs / GDRs originally issued minus number of GDRs / ADRs outstanding further adjusted for ADRs / GDRs redeemed into underlying shares and registered in the name of non-resident investor(s). Further at any time the company can reissue only upto the original issued number of DRs Who can make reissuances ? Company with an existing DR programme Company listed in India
Page 8
Agenda
Overview of depository receipts Overview of two way fungibility Issuance and cancellation Pricing of issues
Depository receipts – the Indian experience
Depository receipts – final word
Page 9
DR Issuance Process
1 Investor contacts broker and requests the purchase of shares of a DR issuer company. If existing DRs of that company are not available, the issuance process begins. 2 To issue new DRs, the broker contacts a local broker in the issuer’s home market. 3 The local broker purchases ordinary shares on an exchange in the local market. 4 Ordinary shares are deposited with a local custodian. 5 The local custodian instructs the depositary to issue DRs that represent the shares received. 6
Investor
7
1
DR Broker
2
Local Broker
3
Local Stock Market
4
6 The depositary issues DRs
7 The broker delivers DRs to the investor or credits the investor’s account. 5
Depository
Local Custodian
Page 10
DR Cancellation Process
1 The investor instructs the broker to cancel DRs. 2 The broker delivers the DRs to the depositary for cancellation. 3 The depositary cancels the DRs and instructs the local custodian to release and deliver the underlying shares to the seller’s broker in the issuer’s home market. 4 The local custodian delivers the underlying ordinary shares as instructed to the local broker. The local broker safekeeps the ordinary shares or delivers them to or on behalf of the new investor.
Investor
1
DR Broker
2
Depository
3
Local Custodian
4
Local Broker
Page 11
Agenda
Overview of depository receipts Overview of two way fungibility Issuance and cancellation Pricing of issues
Depository receipts – the Indian experience
Depository receipts – final word
Page 12
Pricing of DRs
ADR/GDR prices based on underlying local shares Prices calculated based on DR ratio DR ratio indicates the number of shares underlying a DR DR ratio in general kept at a level to insure a listing value of more then $10 per ADR
Once ADR/GDR is listed, its prices are determined by demand and supply
Addition of new DRs and cancellation of old DRs adds to liquidity Arbitrage opportunities ensure efficient pricing
Page 13
180 160 140 120 100 80 60 40
140
190
40 19/Aug/09 02/Sep/09 16/Sep/09 30/Sep/09 14/Oct/09 28/Oct/09 19/Aug/09 02/Sep/09 16/Sep/09 30/Sep/09 14/Oct/09 28/Oct/09 11/Nov/09 25/Nov/09 09/Dec/09 23/Dec/09 06/Jan/10 20/Jan/10 03/Feb/10 17/Feb/10 03/Mar/10 17/Mar/10 31/Mar/10 14/Apr/10 28/Apr/10 12/May/10 26/May/10 09/Jun/10 23/Jun/10 07/Jul/10 21/Jul/10 04/Aug/10
Pricing of DRs… continued
90
11/Nov/09
25/Nov/09 09/Dec/09 23/Dec/09 06/Jan/10 20/Jan/10 03/Feb/10
17/Feb/10
03/Mar/10 17/Mar/10 31/Mar/10 14/Apr/10 28/Apr/10 12/May/10 26/May/10 09/Jun/10 23/Jun/10 07/Jul/10 21/Jul/10 04/Aug/10
Sterlite industries
Patni computers
ADR Stock
ADR Stock
Page 14
140
240
290
190
40 19/Aug/09 02/Sep/09 16/Sep/09 30/Sep/09 14/Oct/09 28/Oct/09 11/Nov/09 25/Nov/09 09/Dec/09 23/Dec/09 06/Jan/10 20/Jan/10 03/Feb/10 17/Feb/10 03/Mar/10 17/Mar/10 31/Mar/10 14/Apr/10 28/Apr/10 12/May/10 26/May/10 09/Jun/10 23/Jun/10 07/Jul/10 21/Jul/10 04/Aug/10
90
Pricing of DRs… continued
Tata motors
ADR Stock
Page 15
Agenda
Overview of depository receipts Overview of two way fungibility Issuance and cancellation Pricing of DRs
Depository receipts – the Indian experience
Depository receipts – final word
Page 16
Top 15 Indian GDRs
Page 17
Top 15 Indian ADRs
Page 18
Agenda
Overview of depository receipts Overview of two way fungibility Issuance and cancellation Pricing of DRs
Depository receipts – the Indian experience
Depository receipts – final word
Page 19
Benefits of two way fungibility – To issuer
Ability to increase the number of outstanding depository receipts to the original amount
Increased liquidity in the international investor market due to more number of depository receipts available
Increased stock price of the depository receipts due to increase in demand
More flexibility in acquiring companies overseas, as the stock component can be increased in a cash and stock deal, thereby saving precious foreign exchange
Page 20
Benefits of two way fungibility – To investor
Non residents can avail of the tax benefits under Section 115 AC of the Income Tax Act 1961 which is applicable to non resident investors in ADRs / GDRs offered against issue of fresh underlying shares
Higher float available on the DR stock and hence better liquidity.
Page 21
Benefits of Depository Receipts To Issuer
Offer a new avenue for raising equity capital outside the issuer’s home market
Broaden and diversify a company’s investor base Enhance a company’s visibility, status and profile internationally among institutional investors Develop and/or increase research coverage outside the home market
Get an international valuation as the Company is valued alongside its peer group
Facilitate M&A activity through use as acquisition currency
Expand opportunity to increase local share price as a result of global demand/trading
Page 22
Benefits of Depository Receipts To Investors
Facilitate diversification into securities of foreign issuers
Represent a way to provide international exposure for institutional investors (mutual funds, pension funds) despite restrictions against investing in certain countries or in foreign investment instruments
Easier to purchase and to hold than the issuer’s underlying ordinary shares
Trade easily and conveniently in US dollars and settle through established clearinghouses
Create accessibility of price, trading information and research
Page 23
Page 24
doc_468842099.pptx