India is hot these days all major brokerages are of the opinion that India has a great long

g term potential, and that investors in India would reap handsome benefits in the next 10 years.With the current correction in the Indian stock market, the valuations have become even better. And the logic of investing in Indian equity market has become even more compelling. This is great for people living in India they can invest in various mutual funds (MFs), or can choose some great companies and invest in those. But what about Non Resident Indians (NRIs) and foreign nationals? Considering the many restrictions on NRIs and foreign nationals investing in India, how can they benefit from the potential that India offers? There are some very good proxies to investing directly in India and ADRs and GDRs are a great option. What is an ADR / GDR? ADR stands for American Depository Receipt. Similarly, GDR stands for Global Depository Receipt. Every publicly traded company issues shares and these shares are listed and traded on various stock exchanges. Thus, companies in India issue shares which are traded on Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE (National Stock Exchange), etc. These shares are sometimes also listed and traded on foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation).But to list on a foreign stock exchange, the company has to comply with the policies of those stock exchanges. Many times, the policies of these exchanges in US or Europe are much more stringent than the policies of the exchanges in India. This deters these companies from listing on foreign stock exchanges directly. But many good companies get listed on these stock exchanges indirectly using ADRs and GDRs. Process: The Company deposits a large number of its shares with a bank located in the country where it wants to list indirectly. The bank issues receipts against these shares, each receipt having a fixed number of shares as an underlying (Usually 2 or 4).These receipts are then sold to the people of this foreign country (and anyone who is allowed to buy shares in that country). These receipts are listed on the stock exchanges. They behave exactly like regular stocks their prices fluctuate depending on their demand and supply, and depending on the fundamentals of the underlying company. These receipts, which are traded like ordinary stocks, are called Depository Receipts. Each receipt amounts to a claim on the predefined number of shares of that company. The issuing bank acts as a depository for these shares that is, it stores the shares on behalf of the receipt holders. Difference between ADR and GDR Both ADR and GDR are depository receipts, and represent a claim on the underlying shares. The only difference is the location where they are traded. If the depository receipt is traded in the United States of America (USA), it is called an American Depository Receipt, or an ADR. If the depository receipt is traded in a country other than USA, it is called a Global Depository Receipt, or a GDR.

Use of an ADR / GDR ADRs and GDRs are not for investors in India they can invest directly in the shares of various Indian companies. But the ADRs and GDRs are an excellent means of investment for NRIs and foreign nationals wanting to invest in India. By buying these, they can invest directly in Indian companies without going through the hassle of understanding the rules and working of the Indian financial market since ADRs and GDRs are traded like any other stock, NRIs and foreigners can buy these using their regular equity trading accounts!

Which Indian companies have ADRs and / or GDRs? Some of the best Indian companies have issued ADRs and / or GDRs. Below is a partial list. Company Bajaj Auto Dr. Reddys HDFC Bank Hindalco ICICI Bank Infosys Technologies ITC L&T MTNL Patni Computers Ranbaxy Laboratories Tata Motors State Bank of India ADR No Yes Yes No Yes Yes No No Yes Yes No Yes No GDR Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes No Yes

VSNL WIPRO

Yes Yes

Yes Yes

Depository Receipts: Depository Receipts are a type of negotiable (transferable) financial security, representing a security, usually in the form of equity, issued by a foreign publicly-listed company. However, DRs are traded on a local stock exchange though the foreign public listed company is not traded on the local exchange.

Thus, the DRs are physical certificates, which allow investors to hold shares in equity of other countries. . This type of instruments first started in USA in late 1920s and are commonly known as American depository receipt (ADR). Later on these have become popular in other parts of the world also in the form of Global Depository Receipts (GDRs). Some other common type of DRs are European DRs and International DRs.

In nut shell we can say ADRs are typically traded on a US national stock exchange, such as the New York Stock Exchange (NYSE) or the American Stock Exchange, while GDRs are commonly listed on European stock exchanges such as the London Stock Exchange. Both ADRs and GDRs are usually denominated in US dollars, but these can also be denominated in Euros.

How do Depository Receipts Created?

When a foreign company wants to list its securities on another countrys stock exchange, it can do so through Depository Receipts (DR) mode. . To allow creation of DRs, the shares of the foreign company, which the DRs represent, are first of all delivered and deposited with the custodian bank of the depository through which they intend to create the DR. On receipt of the delivery of shares, the custodial bank creates DRs and issues the same to investors in the country where the DRs are intended to be listed. These DRs are then listed and traded in the local stock exchanges of that country.

How do Depository Receipts Created?

When a foreign company wants to list its securities on another countrys stock exchange, it can do so through Depository Receipts (DR) mode. . To allow creation of DRs, the shares of the foreign company, which the DRs represent, are first of all delivered and deposited with the custodian bank of the depository through which they intend to create the DR. On receipt of the delivery of shares, the custodial bank creates DRs and issues the same to investors in the country where the DRs are intended to be listed. These DRs are then listed and traded in the local stock exchanges of that country.

What are ADRs : American Depository Receipts popularly known as ADRs were introduced in the American market in 1927. ADR is a security issued by a company outside the U.S. which physically remains in the country of issue, usually in the custody of a bank, but is traded on U.S. stock exchanges. In other words, ADR is a stock that trades in the United States but represents a specified number of shares in a foreign corporation.

Thus, we can say ADRs are one or more units of a foreign security traded in American market. They are traded just like regular stocks of other corporate but are issued / sponsored in the U.S. by a bank or brokerage.

ADRs were introduced with a view to simplify the physical handling and legal technicalities governing foreign securities as a result of the complexities involved in buying shares in foreign countries. Trading in foreign securities is prone to number of difficulties like different prices and in different currency values, which keep in changing almost on daily basis. In view of such problems, U.S. banks found a simple methodology wherein they purchase a bulk lot of shares from foreign company and then bundle these shares into groups, and reissue them and get these quoted on American stock markets.

For the American public ADRs simplify investing. So when Americans purchase Infy (the Infosys Technologies ADR) stocks listed on Nasdaq, they do so directly in dollars, without converting them from rupees. Such companies are required to declqare financial results according to a standard accounting principle, thus, making their earnings more transparent. An American investor holding an ADR does not have voting rights in the company.

The above indicates that ADRs are issued to offer investment routes that avoid the expensive and cumbersome laws that apply sometimes to non-citizens buying shares on local exchanges. ADRs are listed on the NYSE, AMEX, or NASDAQ.

Global Depository Receipt (GDR): These are similar to the ADR but are usually listed on exchanges outside the U.S., such as Luxembourg or London. Dividends are usually paid in U.S. dollars. The first GDR was issued in 1990.

ADVANTAGES OF ADRs:

There are many advantages of ADRs. For individuals, ADRs are an easy and cost effective way to buy shares of a foreign company. The individuals are able to save considerable money and energy by trading in ADRs, as it reduces administrative costs and avoids foreign taxes on each transaction. Foreign entities prefer ADRs, because they get more U.S. exposure and it allows them to tap the American equity markets.

The shares represented by ADRs are without voting rights. However, any foreigner can purchase these securities whereas shares in India can be purchased on Indian Stock Exchanges only by NRIs or PIOs or FIIs. The purchaser has a theoretical right to exchange the receipt without voting rights for the shares with voting rights (RBI permission required) but in practice, no one appears to be interested in exercising this right.

Some Major ADRs issued by Indian Companies : Among the Indian ADRs listed on the US markets, are Infy (the Infosys Technologies ADR), WIT (the Wipro ADR), Rdy(the Dr Reddys Lab ADR), and Say (the Satyam Computer ADS)

What are Indian Depository Receipts (IDR) : Recently SEBI has issued guidelines for foreign companies who wish to raise capital in India by issuing Indian Depository Receipts. Thus, IDRs will be transferable securities to be listed on Indian stock exchanges in the form of depository receipts. Such IDRs will be created by a Domestic Depositories in India against the underlying equity shares of the issuing company which is incorporated outside India.

Though IDRs will be freely priced., yet in the prospectus the issue price has to be justified. Each IDR will represent a certain number of shares of the foreign company. The shares will not be listed in India , but have to be listed in the home country. The IDRs will allow the Indian investors to tap the opportunities in stocks of foreign companies and that too without the risk of investing directly which may not be too friendly. Thus, now Indian investors will have easy access to international capital market. Normally, the DR are allowed to be exchanged for the underlying shares held by the custodian and sold in the home country and vice-versa. However, in the case of IDRs, automatic fungibility is not permitted. SEBI has issued guidelines for issuance of IDRs in April, 2006, Some of the major norms for issuance of IDRs are as follows. SEBI has set Rs 50 crore as the lower limit for the IDRs to be issued by the Indian companies. Moreover, the minimum investment required in the IDR issue by the investors has been fixed at Rs two lakh. Non-Resident Indians and Foreign Institutional Investors (FIIs) have not been allowed to purchase or possess IDRs without special permission from the Reserve Bank of India (RBI). Also, the IDR issuing company should have good track record with respect to securities market regulations and companies not meeting the criteria will not be allowed to raise funds from the domestic market If the IDR issuer fails to receive minimum 90 per cent subscription on the date of closure of the issue, or the subscription level later falls below 90 per cent due to cheques not being honoured or withdrawal of applications, the company has to refund the entire subscription amount received, SEBI said. Also, in case of delay beyond eight days after the company becomes liable to pay the amount, the company shall pay interest at the rate of 15 per cent per annum for the period of delay