Global depository receipts/ American depository receipts Abstract: The study aims to analyze the salient features of Depository

receipts and their role in bringing more efficiency in the financial markets. As a part of pro-liberalization policies government of Indian introduced several financial instruments that aimed to bring better integration of Indian capital markets with the global financial markets. We will present some of the issues that have been observed with respect to GDRs/ADRs and what changes the government is contemplating in bringing to these instruments to make them more attractive. Introduction: Depository receipts are negotiable instruments denominated in US dollars representing a non US Companys publicly traded local currency equity shares. They are used when local currency shares of an Indian company are delivered to Overseas Depository Banks (ODBs), domestic custodian bank against which Depository receipts in US dollars are issued. Indian companies can access foreign money through these instruments. Depository receipts can be American Depository receipts (ADR) when listed on American stock exchanges or can be Global depository receipts when listed on European or other markets. Depository receipts are an efficient and cost-effective means of implementing a cross-border capital-raising transaction A depository is a bank which acts as overseas agent of the company to issue GDR/ADR in lieu of actual shares of the company. The physical shares of the company are kept with a local (in this case Indian bank) who is called a custodian. The issue of GDR/ ADR is carried according to foreign currency convertible bonds and ordinary shares scheme 1993 and periodic guidelines of Central government. In India, a two way fungibility of depository receipts is allowed i.e., conversion of DRs to shares and vice versa. The company is free to use the money it earns through raising such receipts except in the case when this money is used to make acquisitions in overseas market. In this study, we aim to study the regulations pertaining to GDRs/ADRs, some of the important issues that are raised with respect to these instruments, and what are the planned future regulations the government is considering in these instruments. Regulations The main regulations that rule the issue of GDR/ADR in India areThe issue of ADR/GDR by India Inc. is governed by following legal provisions of Foreign Exchange Management Act (FEMA), 1999. It has following provisions: An Indian corporate can raise foreign currency resources abroad through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). Regulation 4 of Schedule I of FEMA

Notification no. 20 allows an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing Global Depository Receipts (GDRs) and/ or American Depository Receipts (ADRs), subject to the conditions that: ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government. The Indian company issuing such shares has to take approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/GDRs There are no end-use restrictions on GDR/ADR issue proceeds, except for an investment in real estate and stock markets. There is no limit up to which an Indian company can raise ADRs/GDRs. However, the Indian company has to be otherwise eligible to raise foreign equity under the extant FDI policy

A listed Indian company, that is not eligible to raise funds from the domestic Capital Market or a company which has been restrained by the Securities and Exchange Board of India (SEBI) from accessing the securities market will not be eligible to issue ADRs/GDRs Also there is no limit of borrowing up to which such ADRs/GDRs can be issued. Some famous issue of GDRs/ADRs by Indian companies Since 1993, many Indian companies have used GDRs/ ADRs to meet their monetary requirements. Some of the famous issues are Infosys Technologies became the first Indian company to list its shares on a stock exchange in the US in 1999 by issuing 1.8 million American Depository receipts. The Infosys issue was very successful and was oversubscribed 10 to 15 times In 1999, government owned VSNL issued 17.4 million GDRs with a green shoe option of 2.6 million GDRs. The government of India was able to raise $161 million from this issue with issue being oversubscribed by 2.18 times. Recently in May 2012, Videocon Industries issued GDRs worth $51.02 million

Some important features of GDRs/ADRs Two way fungibility scheme A registered broker in India can purchase shares of an Indian company on behalf of a person resident outside India for the purpose of converting the same so purchased into ADRs/GDRs. The amount of shares that can be convertible to ADRs/GDRs and then reconverted should be the same. It is only a limited two-way fungibility wherein the headroom available for fresh purchase of shares from domestic market is restricted to the number of converted shares sold in the domestic market by non-resident investors. Pricing issue in ADRs/GDRs

In an attempt to bring the ADR/GDR guidelines in alignment with SEBI guidelines on domestic capital issues, Government, vide Press Note dated August 31, 2005, amended the pricing guidelines for Indian listed companies issuing ADR/GDR. The original pricing clause, read as following: For Listed Companies The pricing should not be less than the higher of the following two averages: o 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 o 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

Proposed changes in the pricing guidelines In the normal circumstances the extant pricing norms provides protection from price manipulation by the Issuer in domestic market. Recently, due to a number of representations from companies regarding the extant pricing norms affecting them adversely in the falling markets, the Government is considering modifying the pricing guidelines for ADR/GDR issues. The proposal is to amend the parameter of the pricing norms to two months in place of six months. In addition the definition of the relevant date for such issues is also proposed to be modified as per SEBI (DIP) guidelines on preferential allotment and qualified institutions placements (QIP). Voting Rights of depository issue holders According to original provisions of the Act, voting rights on shares issued under the Scheme were as per the provisions of Companies Act, 1956 and any restrictions on voting rights for ADR/GDR issues that were consistent with the Company Law provisions In September 2009, the Securities and Exchange Board of India (Sebi) announced an amendment to the Takeover Regulations to provide whereby GDR/ADR holders are entitled to exercise voting rights on the shares underlying GDRs/ADRs by virtue of clauses in the depository agreement. Earlier the voting rights of depository holders were controlled by the companys management by diktat or by default. SEBI wants to change this unfavorable situation for depository holders. RBI in 2007 also issued circulars to all the custodian banks to reveal any changes in depository agreements between custodian and depository that can affect the voting rights of the holders of the depository receipts. Market Manipulation through GDR/ADR In Sep 2011, SEBI issued order against several companies that were using GDRs to manipulate markets. These companies issued GDRs to FIIs which converted these instruments to underlying equity and sold it further various stock brokers. Hence this equity ended up trading in the hands of Indian investors itself. By doing this the companies were in a way issuing new shares like FPO or private placements but were able to avoid all of the stringent rules that need to be followed in case of further issue of equity in Indian market.

Cases of market manipulation in GDRs/ADRs In Oct 2010, Ramesh Goenka was fined $9.62 million as he was found guilty of ramping up the global depositary receipts (GDRs) of Reliance Industries on the London Stock Exchange. Financial Services Authority (FSA) of the UK imposed the single biggest fine against an individual. Reliance Industries floated GDRs in two tranches in June 1992 and March 2004. In March 2010, it had outstanding GDRs worth 3.73 per cent of RIL's share capital that were backed by 121.96 million shares held in a depositary. The accused placed an order of 800,000 Reliance GDRs at $48.71 apiece in a desperate attempt to ensure that the security closed above $48.65. This price was a pre-determined knock-in price ' and allowed him to break even on his three-year-old deal and collect $10 million. In the last phase of trading he bought 193,500 GDRs to further cover his losses. Tax implications There have been cases where companies have issued GDRs at inflated prices and then converted the same to shares at lower prices. When such shares become part of Indian stick market they reduce price per share due to increased float hence reducing capital gains tax for the company. Due to such practices SEBI issued regulations to companies to take prior approval before issuing depository receipts rather than notifying SEBI after such transactions. Conclusion Depository receipts are an important instrument when it comes to efficient integration of Indian markets with global markets. In light of recent controversies of market manipulation and tax avoidance using ADRs/GDRs, there is a greater need for bringing stringent rules pertaining to depository receipts issue. RBI and SEBI can take a cue from efficient guidelines in terms of international cross-border capital movement regulations of SEC. A critical problem is the existence of tax havens outside India which are an easy route to convert black money into legitimate money, eg. Hawala, etc. NRIs do take advantage of depository receipts instruments to illegally transfer money into and out of country. Also with issuing of Indian depository receipts, there is a greater need for closer monitoring of investments by foreign companies in Indian capital markets. Although a suggestion of bringing stringent reforms in this sphere hint at protectionist measures but ensuring fair play in capital markets so as to retain investor confidence is much more important for the long term success of Indian capital markets. References Ministry of finance Ministry of overseas Indian affairs rbi.org.in sebi.gov.in