Description
different types of depository receipts, ADR issuing procedure. It also includes ADRs issued by Indian companies, ADR pricing guidlines in India
International Corporate Finance
?
Introduction
? ADR/GDR
? Why? ? Types
?
ADRs : India
? ADRs by Indian Companies
? Regulations
?
Arbitrage in ADRs
? Analysis of Arbitrage in IT, Banking Sector
? Reasons for Arbitrage
?
ADR vs GDR
?
?
?
The capital flow into India is highly restricted India still does not allow capital account convertibility. In such a scenario, the most viable source of raising funds from international markets are:
? Foreign Currency Convertible Bonds
? External Commercial Borrowings
? Depository Receipts
?
?
?
?
?
A stock that trades in the United States Represents a specified number of shares in a foreign corporation Introduced to the financial markets in 1927 Issued/sponsored in the U.S. by a bank or broker. The depository bank sets the ratio of U.S. ADRs per home-country share
?
? ?
?
A bank certificate issued in more than one country for shares in a foreign company Shares are held by a foreign branch of an international bank Shares trade as domestic shares, but are offered for sale globally through the various bank branches Facilitate trade of shares and are commonly used to invest in companies in the developing or emerging markets
For issuers: ? Creates, broadens or diversifies investor base to include investors in other capital markets. ? Enhances visibility and global presence among investors, consumers and customers. ? Increases liquidity by tapping new investors. ? Develops and increases research coverage of your company. ? Improves communication with shareholders globally. ? Enables price parity with global peers. ? Offers a new venue for raising equity capital. ? Facilitates merger and acquisition activity by creating a desirable stock-swap “acquisition currency”
For investors: ? Easy to purchase and hold. ? Trades and settles in the same manner as any other security available in the investor’s home market. ? Facilitates global / sector diversification by providing access to new companies. ? Enables comparison with other investments due to accessible price information. ? Eliminates or reduces global custody safekeeping charges. ? Pays dividends and delivers corporate action notifications in the investor’s home currency and language
Sponsored
Unsponsored
Types of ADRs
?
Sponsored ADRs
? An American depositary receipt (ADR) that is issued in co-
operation with the underlying foreign company whose equity shares will underly the ADR shares. With the corporation's sponsorship, the ADRs created in the issue usually afford their owners the same rights normally given to stockholders, such as voting rights
?
Unsponsored ADRs
? An American depositary receipt (ADR) that is issued
without the involvement of the foreign company whose stock underlies the ADR. Shareholder benefits, voting rights and other attached rights may not be extended to the holders of these particular securities
?
Level I - Filing of an F-6 registration statement is involved in initiation of Level 1 ADR program by the issuer. It permits for exemption from full SEC accounting disclosure requirements
Level II - Mandatory for this program to align with the SEC's full registration and accounting disclosure requirements. Apart from that, issuer has to submit its annual report in compliance with US GAAP Level III – Same as Level II but requires the issuer to submit an additional Form F-1 which allow public offering in US stock exchanges
?
?
?
?
? ?
Privately placed depositary receipts which are issued and traded in compliance with Rule 144(a) Issuing cost for these securities is also less than Level III ADRs Sale is made to "qualified institutional buyers" (QIBs) These securities can be traded through the NASDAQ's "PORTAL" system
Local Broker
• Buys shares from local market • Deposits shares with custodian • Takes custody of shares • Provides notification of local share setting
Local Depository Custodian
Depository Bank
• Issues DRs to the market
Investors
• Buys and sells DRs from markets
ADRs By Indian Companies
DR ISSUE
CAPITAL RAISED Y N Y Y N Y N Y Y Y Y N N Y N N Y Y
EXCH
RATIO DR:ORD 1:1 1:1 1:3 1:2 1:1 1:1 1:2 1:2 2:1 1:2 1:1 1:10 1:15 1:1 1:2 1:1 1:1 1:1
INDUSTRY
DEP. BANK
S/U
EFF. DATE
Dr. Reddy's Laboratories Grasim Industries HDFC Bank ICICI Bank Indian Hotels - Reg. S Infosys Technologies Mahanagar Telephone Nigam Patni Computer Systems Rediff.com Satyam Computer Services SIFY Silverline Technologies Steel Authority of - Reg. S Sterlite Industries Tata Communications Tata Motors Wipro WNS Holdings
NYSE OTC NYSE NYSE OTC NASDAQ NYSE NYSE NASDAQ NYSE NASDAQ OTC OTC NYSE NYSE NYSE NYSE NYSE
Pharma. & Biotech. Construct.&Materials Banks Banks Travel & Leisure Software&ComputerSvc Fixed Line Telecom. Software&ComputerSvc Software&ComputerSvc Software&ComputerSvc Software&ComputerSvc Software&ComputerSvc Indust.Metals&Mining Indust.Metals&Mining Fixed Line Telecom. Industrial Engineer. Software&ComputerSvc Support Services
JPMC CIT JPMC DB CIT DB BK BK CIT CIT CIT JPMC CIT CIT BK CIT JPMC DB
S S S S S S S S S S S S S S S S S S
24-Apr-01 29-Jul-99 25-Jul-01 31-Mar-00 5-May-95 16-Mar-99 28-Sep-01 7-Dec-05 19-Jun-00 18-May-01 22-Oct-99 27-Dec-07 14-Mar-96 22-Jun-07 15-Aug-00 27-Sep-04 24-Oct-00 25-Jul-06
Goal Gain New Shareholder
To Whom Retail Investors
Options Level I ADR
Consideration + Easy and Quick + Low Cost + No financial reporting +Limited SEC registration -Low visibility and reduced liquidity + Higher visibility and liquidity - Takes Longer time to establish -Requires SEC registration and financial reporting -More expensive than Level I
Possible Examples Grasim Ind., Indian Hotels, Silverline Tech, SAIL
Level II ADR
MTNL, Tata Comm., Tata Motors
Raise Capital
Institutional Investors
Rule 144A DR
+ Easy and Quick + Low Cost + No financial reporting + Limited SEC registration -Low visibility and reduced liquidity + Higher visibility and liquidity - Takes Longer time to establish -Requires SEC registration and financial reporting -More expensive to establish Dr. Reddy’s Laboratories , HDFC, ICICI, Infosys, Patni, Rediff, Satyam, SIFY, Sterlite
Retail Investors
Level III ADR
The pricing of ADR/GDR issues would be based on the stock prices prevailing in the domestic market in the past two weeks
Pricing should not be less than the higher of the following two averages: ? The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date ? The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two week preceding the relevant date
(Source: ADR/GDR’s Pricing Guidelines, 2008, Ministry of Finance)
?
?
One-way fungibility
Two-way fungibility
?
Benefits to issuer of two-way fungibility
? By means of two-way fungibility, there shall be 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 ? This can help issuer more flexibility in acquiring companies overseas, by means of increasing the stock component in cash and stock deal, thereby saving precious foreign exchange
?
Benefits to investor of two-way fungibility
? Higher float available on the DR stock and hence better
liquidity.
ADRs and Arbitrage
DRCompany
Stock Quote (INR)
ADR Quote (USD)
ADR Premium/Discount %
Dr. Reddys Labs
1335.95
28.89
1.04
HDFC Bank ICICI Bank Infosys MTNL Satyam
2086.8999 975.4 2779 64.85 85.65
158.56 41.23 59.05 2.77 4.73
15.5 -1.25 -0.93 -0.20 22.5
Tata Motors
Wipro Patni
1018.851
414.8 516.85
21.55
13.2 22.57
-1.38
32.75 1.99
?
1.6 1.8
1.4 2
1.2
0.2
0.6
0.4
0.8
0
1
09/03/2006
09/05/2006
09/07/2006 09/09/2006 09/11/2006 09/01/2007 09/03/2007 09/05/2007 09/07/2007 09/09/2007 09/11/2007 09/01/2008 09/03/2008
IT Sector
09/05/2008
09/07/2008 09/09/2008 09/11/2008 09/01/2009 09/03/2009 09/05/2009 09/07/2009 09/09/2009 09/11/2009 09/01/2010 09/03/2010 09/05/2010
09/07/2010
PTI Ratio
Infy Ratio
WIT Ratio
?
Banking Sector
1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 09/03/2006 HDFC Ratio ICICI Ratio
09/03/2007
09/03/2008
09/03/2009
09/03/2010
?
Tata Motors
TTM Ratio
2.5 2
1.5 TTM Ratio 1
0.5
0 09/03/2006
09/03/2007
09/03/2008
09/03/2009
09/03/2010
?
Institutional Framework
? Limited Two-way Fungibility
?
?
Market Irrationality
Premium
? Liquidity Premium
? Currency Risk Premium
GDR issues by Indian companies: 500+ ADR issues by Indian companies: 18
Reasons: ? Flexibility ? Stringent SEC Norms ? Costs ? Legal Requirements
Publications/ Reports:
? ? ? ? ?
ADR/GDR’s Pricing Guidelines, 2008, Ministry of Finance Premia in the Indian ADR market: An analysis of trends and causes, 2006, Shivanket Saxena Small trades and ADR premiums: A case of Indian ADRs, Palani Rajan and Umesh Kumar Arbitrage opportunity between Indian company stocks and their ADRS, Investing in India - Report by Vanguard Group
Books
?
International Financial Management 5Th/Ed. by PG Apte
WebSites:
? ? ? ? ?
www.adrbnymellon.com www.adr.com www.finmin.nic.in- Ministry of Finance in .finance.yahoo.com- Yahoo Finance www.bseindia.com- BSE India
Questions???
Thank You
doc_631185788.pptx
different types of depository receipts, ADR issuing procedure. It also includes ADRs issued by Indian companies, ADR pricing guidlines in India
International Corporate Finance
?
Introduction
? ADR/GDR
? Why? ? Types
?
ADRs : India
? ADRs by Indian Companies
? Regulations
?
Arbitrage in ADRs
? Analysis of Arbitrage in IT, Banking Sector
? Reasons for Arbitrage
?
ADR vs GDR
?
?
?
The capital flow into India is highly restricted India still does not allow capital account convertibility. In such a scenario, the most viable source of raising funds from international markets are:
? Foreign Currency Convertible Bonds
? External Commercial Borrowings
? Depository Receipts
?
?
?
?
?
A stock that trades in the United States Represents a specified number of shares in a foreign corporation Introduced to the financial markets in 1927 Issued/sponsored in the U.S. by a bank or broker. The depository bank sets the ratio of U.S. ADRs per home-country share
?
? ?
?
A bank certificate issued in more than one country for shares in a foreign company Shares are held by a foreign branch of an international bank Shares trade as domestic shares, but are offered for sale globally through the various bank branches Facilitate trade of shares and are commonly used to invest in companies in the developing or emerging markets
For issuers: ? Creates, broadens or diversifies investor base to include investors in other capital markets. ? Enhances visibility and global presence among investors, consumers and customers. ? Increases liquidity by tapping new investors. ? Develops and increases research coverage of your company. ? Improves communication with shareholders globally. ? Enables price parity with global peers. ? Offers a new venue for raising equity capital. ? Facilitates merger and acquisition activity by creating a desirable stock-swap “acquisition currency”
For investors: ? Easy to purchase and hold. ? Trades and settles in the same manner as any other security available in the investor’s home market. ? Facilitates global / sector diversification by providing access to new companies. ? Enables comparison with other investments due to accessible price information. ? Eliminates or reduces global custody safekeeping charges. ? Pays dividends and delivers corporate action notifications in the investor’s home currency and language
Sponsored
Unsponsored
Types of ADRs
?
Sponsored ADRs
? An American depositary receipt (ADR) that is issued in co-
operation with the underlying foreign company whose equity shares will underly the ADR shares. With the corporation's sponsorship, the ADRs created in the issue usually afford their owners the same rights normally given to stockholders, such as voting rights
?
Unsponsored ADRs
? An American depositary receipt (ADR) that is issued
without the involvement of the foreign company whose stock underlies the ADR. Shareholder benefits, voting rights and other attached rights may not be extended to the holders of these particular securities
?
Level I - Filing of an F-6 registration statement is involved in initiation of Level 1 ADR program by the issuer. It permits for exemption from full SEC accounting disclosure requirements
Level II - Mandatory for this program to align with the SEC's full registration and accounting disclosure requirements. Apart from that, issuer has to submit its annual report in compliance with US GAAP Level III – Same as Level II but requires the issuer to submit an additional Form F-1 which allow public offering in US stock exchanges
?
?
?
?
? ?
Privately placed depositary receipts which are issued and traded in compliance with Rule 144(a) Issuing cost for these securities is also less than Level III ADRs Sale is made to "qualified institutional buyers" (QIBs) These securities can be traded through the NASDAQ's "PORTAL" system
Local Broker
• Buys shares from local market • Deposits shares with custodian • Takes custody of shares • Provides notification of local share setting
Local Depository Custodian
Depository Bank
• Issues DRs to the market
Investors
• Buys and sells DRs from markets
ADRs By Indian Companies
DR ISSUE
CAPITAL RAISED Y N Y Y N Y N Y Y Y Y N N Y N N Y Y
EXCH
RATIO DR:ORD 1:1 1:1 1:3 1:2 1:1 1:1 1:2 1:2 2:1 1:2 1:1 1:10 1:15 1:1 1:2 1:1 1:1 1:1
INDUSTRY
DEP. BANK
S/U
EFF. DATE
Dr. Reddy's Laboratories Grasim Industries HDFC Bank ICICI Bank Indian Hotels - Reg. S Infosys Technologies Mahanagar Telephone Nigam Patni Computer Systems Rediff.com Satyam Computer Services SIFY Silverline Technologies Steel Authority of - Reg. S Sterlite Industries Tata Communications Tata Motors Wipro WNS Holdings
NYSE OTC NYSE NYSE OTC NASDAQ NYSE NYSE NASDAQ NYSE NASDAQ OTC OTC NYSE NYSE NYSE NYSE NYSE
Pharma. & Biotech. Construct.&Materials Banks Banks Travel & Leisure Software&ComputerSvc Fixed Line Telecom. Software&ComputerSvc Software&ComputerSvc Software&ComputerSvc Software&ComputerSvc Software&ComputerSvc Indust.Metals&Mining Indust.Metals&Mining Fixed Line Telecom. Industrial Engineer. Software&ComputerSvc Support Services
JPMC CIT JPMC DB CIT DB BK BK CIT CIT CIT JPMC CIT CIT BK CIT JPMC DB
S S S S S S S S S S S S S S S S S S
24-Apr-01 29-Jul-99 25-Jul-01 31-Mar-00 5-May-95 16-Mar-99 28-Sep-01 7-Dec-05 19-Jun-00 18-May-01 22-Oct-99 27-Dec-07 14-Mar-96 22-Jun-07 15-Aug-00 27-Sep-04 24-Oct-00 25-Jul-06
Goal Gain New Shareholder
To Whom Retail Investors
Options Level I ADR
Consideration + Easy and Quick + Low Cost + No financial reporting +Limited SEC registration -Low visibility and reduced liquidity + Higher visibility and liquidity - Takes Longer time to establish -Requires SEC registration and financial reporting -More expensive than Level I
Possible Examples Grasim Ind., Indian Hotels, Silverline Tech, SAIL
Level II ADR
MTNL, Tata Comm., Tata Motors
Raise Capital
Institutional Investors
Rule 144A DR
+ Easy and Quick + Low Cost + No financial reporting + Limited SEC registration -Low visibility and reduced liquidity + Higher visibility and liquidity - Takes Longer time to establish -Requires SEC registration and financial reporting -More expensive to establish Dr. Reddy’s Laboratories , HDFC, ICICI, Infosys, Patni, Rediff, Satyam, SIFY, Sterlite
Retail Investors
Level III ADR
The pricing of ADR/GDR issues would be based on the stock prices prevailing in the domestic market in the past two weeks
Pricing should not be less than the higher of the following two averages: ? The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date ? The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two week preceding the relevant date
(Source: ADR/GDR’s Pricing Guidelines, 2008, Ministry of Finance)
?
?
One-way fungibility
Two-way fungibility
?
Benefits to issuer of two-way fungibility
? By means of two-way fungibility, there shall be 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 ? This can help issuer more flexibility in acquiring companies overseas, by means of increasing the stock component in cash and stock deal, thereby saving precious foreign exchange
?
Benefits to investor of two-way fungibility
? Higher float available on the DR stock and hence better
liquidity.
ADRs and Arbitrage
DRCompany
Stock Quote (INR)
ADR Quote (USD)
ADR Premium/Discount %
Dr. Reddys Labs
1335.95
28.89
1.04
HDFC Bank ICICI Bank Infosys MTNL Satyam
2086.8999 975.4 2779 64.85 85.65
158.56 41.23 59.05 2.77 4.73
15.5 -1.25 -0.93 -0.20 22.5
Tata Motors
Wipro Patni
1018.851
414.8 516.85
21.55
13.2 22.57
-1.38
32.75 1.99
?
1.6 1.8
1.4 2
1.2
0.2
0.6
0.4
0.8
0
1
09/03/2006
09/05/2006
09/07/2006 09/09/2006 09/11/2006 09/01/2007 09/03/2007 09/05/2007 09/07/2007 09/09/2007 09/11/2007 09/01/2008 09/03/2008
IT Sector
09/05/2008
09/07/2008 09/09/2008 09/11/2008 09/01/2009 09/03/2009 09/05/2009 09/07/2009 09/09/2009 09/11/2009 09/01/2010 09/03/2010 09/05/2010
09/07/2010
PTI Ratio
Infy Ratio
WIT Ratio
?
Banking Sector
1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 09/03/2006 HDFC Ratio ICICI Ratio
09/03/2007
09/03/2008
09/03/2009
09/03/2010
?
Tata Motors
TTM Ratio
2.5 2
1.5 TTM Ratio 1
0.5
0 09/03/2006
09/03/2007
09/03/2008
09/03/2009
09/03/2010
?
Institutional Framework
? Limited Two-way Fungibility
?
?
Market Irrationality
Premium
? Liquidity Premium
? Currency Risk Premium
GDR issues by Indian companies: 500+ ADR issues by Indian companies: 18
Reasons: ? Flexibility ? Stringent SEC Norms ? Costs ? Legal Requirements
Publications/ Reports:
? ? ? ? ?
ADR/GDR’s Pricing Guidelines, 2008, Ministry of Finance Premia in the Indian ADR market: An analysis of trends and causes, 2006, Shivanket Saxena Small trades and ADR premiums: A case of Indian ADRs, Palani Rajan and Umesh Kumar Arbitrage opportunity between Indian company stocks and their ADRS, Investing in India - Report by Vanguard Group
Books
?
International Financial Management 5Th/Ed. by PG Apte
WebSites:
? ? ? ? ?
www.adrbnymellon.com www.adr.com www.finmin.nic.in- Ministry of Finance in .finance.yahoo.com- Yahoo Finance www.bseindia.com- BSE India
Questions???
Thank You
doc_631185788.pptx