TABLE OF CONTENTS

S.R.NO

CONTENT
INTRODUCTION

1
DEFINITION: GLOBAL DEPOSITORY RECEIPT
2

(GDR)
PROCEDURE FOR ISSUE OF GDR IN A COMPANY

3
ADVANTAGES OF GDR TO ISSUING COMPANY
4
GDR MARKET
5
LEGAL FRAMEWORK: INDIA
6
SEBI GUIDELINES
7
8

AMOUNT RAISED THROUGH GDRS

CONCLUSION

INTRODUCTION

In an era of rapid globalisation, investors are looking beyond the boundaries of their countries for
investment opportunities. This has given rise to opportunities for companies looking to expand
into new markets, tap new customers, get hold of a new investor base and raise more capital.
There was a great demand for foreign capital in some of the lesser developed countries. At the
same time, supply of capital was in excess in the countries like U.S.A. and England. There was a
need to bridge this gap and make a channel to enable the flow of funds from these countries to
the ones that required the funds. Investing without such a channel was a challenge not just
financially but also administratively. The transactions were complicated and settlement of the
transactions in was very difficult owing to currency values. I n an effort to bridge this gap, JP
Morgan introduced a system of depositary receipts in 1927. JP Morgan intended to provide a
channel that allows for easier flow of funds from U.S.A. to other countries by offering them
investment options abroad. Hence, the depositary receipts program was intended as both an
investment vehicle as well as an investment option. Currently, there are two major depositary
receipt programs the American Depositary Receipts and the global Depositary Receipts.
American Depositary Receipts (adrs) enable companies to tap into the worlds largest and most
active capital market the American market. Global depositary Receipts (gdrs) give the
companies access to European markets besides the American market.

Definition: Global Depository Receipt (GDR)

Global Depository Receipt (GDR) is a negotiable certificate issued by the international bank to
a company against a certain number of shares which are traded on international stock exchange.
Simply, they are derivative equities which are traded in foreign markets, giving rights to
shareholders for respective amount of local securities. In such case, shareholders are entitled to
all dividends and capital gains. Thus, GDR allow investors in any country to purchase shares of
company in any other country without losing the income or trading flexibility. GDR is also called
as International Depository Receipt or Euro Depository Receipt.
GDR is a financial instrument used by private markets to raise capital denominated in either U.S.
dollars or euros. GDR facilitates trade of shares importantly in emerging market

1. Foreign investment: Global Depository Receipts (GDRs) is a mechanism which allows one
to buy and sell shares of a foreign company without having to bother about opening a foreign
brokerage account. Simply put, a GDR allows investors of any country to purchase and sell
shares of a company in any other country, entitling the shareholders to partake in the dividend
and capital gains of that foreign company. GDRs, thus, offer investors a way to diversify their
portfolios.
2. How does the GDR work? A GDR is set up when a company from one country intends to list
its publically-traded shares in another country. These need not be shares alone; they could also be
debt securities. Before this is allowed by a foreign countrys stock exchange, stiff conditions
have to be met like the backing of a depository bank, and so on.

3. Depository banks: GDRs are usually backed by depository banks that provide companies,
investors and traders opportunities to make global investments. These are banks whose primary
task is to hold shares of companies based in another country. Such banks essentially sell the
GDRs. They also ensure that investors receive their dividends and capital gains. Depository
banks also handle all tax-related issues in the companys home country. Since all GDR
transactions have to go through a depository bank, investments made in them are safe. However,
their valuations are always associated with normal market risks.
4. So why should you invest in GDRs? Foreign companies can help diversify your portfolio.
However, it is not easy to invest in foreign shares. Currently, only ICICI Direct allows Indian
investors to invest abroad. GDRs can help you go around this. Moreover, they help you invest in
other countries when stocks in your country are under-performing. However, not many GDRs are
listed in India. It is most often used by foreign investors looking to invest in India or other
emerging markets like China or Brazil.
5. Diversification: Instead of being stuck up with fewer investment opportunities in a domestic
market, especially at a time when the business cycle is on a downturn, GDRs can create a space
for diversifying the investment portfolio. Owning shares in a foreign company can increase
returns on account of favorable currency conversions for dividends or bonus share issues
declared from time to time by the company.
6. Risks associated with GDRs: Not all GDRs are safe investments. Countrys prone to political
unrest or geopolitical conflicts can severely impact the valuations of a company, resulting in
GDR valuations losses for an investor who may have been betting on that particular company.

GDRs are prone to the same risks as domestic investments like credit issues, currency risks or
inflation.
7. Since 1927: GDRs evolved and came to be accepted as a safe way of making global
investments after the success of American Depositary Receipts (ADRs), which first made their
appearance in the US market in 1927. This was the time when the US stock market had slumped
and was heading for the Great Wall Street Crash of 1929.

Procedure for issue of GDR in a company

Advantages of GDR to issuing company

Accessibility to foreign capital markets

Increase in visibility of the issuing company

Rise in the capital because of foreign investors

Advantages of GDR to investor

Helps in diversification, hence reducing risk

More transparency since competitors securities can be compared

Prompt dividend and capital gain payments

GDR Market

As derivatives, depositary receipts can be created or canceled depending on supply and demand.
When shares are created, more corporate stock of the issuer is purchased and placed in the
custodian bank in the account of the depositary bank, which then issues new GDRs based on the
newly acquired shares. When shares are canceled, the investor turns in the shares to the
depositary bank, which then cancels the GDRs and instructs the custodian bank to transfer the
shares to the GDR investor. The ability to create or cancel depositary shares keeps the depositary
share price in line with the corporate stock price, since any differences will be eliminated
through arbitrage. The price of a GDR primarily depends on its depositary ratio are certificates that
represent an ownership interest in the ordinary shares of stock of a company, but that are
marketed outside of the companys home country to increase its visibility in the world market
and to access a greater amount of investment capital in other countries. Depositary receipts are
structured to resemble typical stocks on the exchanges that they trade so that foreigners can buy
an interest in the company without worrying about differences in currency, accounting practices,
or language barriers, or be concerned about the other risks in investing in foreign stock directly.
India entered the GDR market soon after the opening up of the economy in1991. It entered the
market with the Reliance issue in May 1992. Relianceraised $150 million through this issue. This
was followed by the Grasim issuethrough which the company raised $90 million. Thereafter,
there was a lull inthe GDR market until the end of 1993. This was because of the securities

scamthat haunted the Indian stock markets during 1992 93.The number of companies that have
raised funds through the issue of GDRs isfar greater than the number of companies that have
raised funds through ADRs.Despite this, the total amount raised through GDRs is $7.2 billion
Majority of the funds raised by these companies was post 1993. The securitiesscam not only
shattered investor confidence in India, but also the confidence of the global investors who had
invested or were considering an investment inIndian stocks. The 1994-95 season was the peak.
Most of these companies gotthemselves listed during this time.Videsh Sanchar Nigam Limited
(VSNL) raised the largest amount of fundsthrough the issue of GDRs. It has raised $527 million
in this market. Thecompanies closest to VSNL in terms of funds raised are Reliance, whove
raised$450 million and Mahanagar Telecom Nigam Limited (MTNL) who raised$419 million.
From amongst the rest of the companies, SBI has raised $370million while Tata Motors have
raised $319 million. There are a handful of companies that have raised between $100 - $200
million. Then theres a biggroup of companies who have raised a capital of less than $100
million

GDR Overview
A Global Depositary Receipt is a security that is traded in the Europeanmarkets. A GDR and an
ADR are essentially the same. The only difference isthat the GDR is traded either on the
Luxembourg Stock Exchange or theLondon Stock Exchange.Just as in the case of ADRs,
companies wishing to issue GDRs have to sign aDeposit Agreement with a sponsor bank /
brokerage in Europe. GDR holders donot enjoy any voting rights.

Working of GDR
GDRs can be bought and sold just like any other security. They are listedusually on the London
Stock Exchange or the Luxembourg Stock Exchange.Similar to ADR program, the sponsor
bank / brokerage sets a ratio of number of shares in every GDR. One more significant difference
between ADRs andGDRs is that in case of GDRs, a lot of companies have a ratio of one share
per GDR. This is something that is not found in ADRs. Once the GDRs are listed,they are traded
just like shares on the exchange.An important point in this regard is that the investors who pick
the shares fromLondon or Luxembourg could be investors from other countries. For example,an
investor from Japan can buy GDRs of an Indian company listed on theLondon Stock Exchange.
Later on he can sell these GDRs to another investor from Brazil. This makes the program truly
global in the sense that funds can beraised from different countries at one single point. This is the
primary reason for
these depositary receipts being christened Global Depositary Receipts and notBritish Depositary
Receipts.The GDRs are traded in Europe on one the Euromarket clearing systems Euroclear
and Clearstream. These clearing systems are similar to the American National Association of
Securities Dealers Automated Quotation System(NASDAQ). These systems offer investors the
benefits of real time prices andonline instant transactions among many other benefits.

STRUCTURE
The most significant difference between the ADR and GDR lies in their structures. There are two
types of GDRs The Reg S Depositary Receipts andthe pairing type.2.3.3.1 Reg S Type
Depositary ReceiptsThe Reg S Type Depositary Receipt is the equivalent of the ADR. It is issued
tothe public through a sponsor bank / brokerage. Once issued, this GDR is listedon either the
Luxembourg Stock Exchange or the London Stock Exchange.This type of a GDR is open for
every kind of investor. Unlike ADRs, whereeach type of ADR determines the investors that can
trade it, the Reg S typeGDR can be traded from any kind of investor to any kind of
investor.2.3.3.2 Pairing TypeThis GDR is a combination of the Reg S type GDR and a Rule
144A ADR. Sowhen one such GDR is sold, it essentially implies the sale of a Reg S type
GDR along with a Rule 144A ADR
he Reg S type GDR may be listed either in London or Luxembourg. Theholders of these GDRs
will be regular investors. However, the Rule 144AADRs are privately placed through Qualified
Institutional Buyers in the U.S.The biggest reason for such a program being subscribed to is the
fact that such a program enables the issuing company to raise funds not just from the U.S. andnot
just from Europe, but from both markets simultaneously.

Legal Framework: India

In India, GDRs are governed by the same notification issued for ADRs. Notification No.
F.E.R.A. 214 /2000-RBThe Reserve Bank of India issued this notification on 20th
January, 2000. Itallows the issue of GDRs. The following points highlight the essence of
thisnotification:
All companies governed by the Indian Companies Act, 1956, are permittedto raise funds
through the issue of GDRs

The permission, however, shall stand to be cancelled if the company raisingfunds violates any
norms or exceeds any limits laid down by the ForeignInvestment Promotion Board (FIPB) or the
Secretariat for IndustrialAssistance (SIA).

The company has to get approval from the Ministry of Finance, Governmentof India, to make
such an issue he company is permitted to enter into any agreement / sign any contractwith
foreign agencies provided that such a contract is essential for the issueof GDRs.

The companies are allowed to make payments to the relevant authorities andthe sponsor bank /
brokerage towards their fees.

The companies are permitted to make any payments to concernedgovernment towards any tax
liability incurred as a result of issue of GDRs

The companies are allowed to maintain bank accounts abroad to deposit themoney collected
through such an issue.

The companies are also permitted to maintain a register of foreign membersif the company feels
it necessary.This notification cleared a lot of ambiguities that existed in the ForeignExchange
Regulation Act in the absence of any concrete provision regardsGDRs.

INDIAN SCENARIO
In July 1991, the Indian government announced the New Industrial Policy (NIP) to liberalize its
economy. The Securities and Exchange Board of India (SEBI) was created with statutory
authority to oversee Indias capital markets in 1992 and it introduced changes in several areas of
the Indian capital market. In September 1992, the government permitted Foreign Institutional
Investors (FIIs) to invest in Indian securities under specific guidelines issued by the Reserve
Bank of India (RBI) and the SEBI. Other sources of foreign investment include Non-resident
Indians (NRIs), Overseas Corporate Bodies (OCBs), DRs and Euro convertible bonds. In April
1992, the Indian government also permitted Indian firms to raise funds from the international
markets by their DRs.
Indian DRs can be denominated in any freely convertible currency and may be listed on any
international stock exchange. In February 2001, the Indian government allowed two-way
fungibility in Indian DRs. In effect, foreign investors owning Indian DRs and Indian companies
could convert their GDRs into shared tradable at Indian stock exchanges and vice-versa. There
are no end-use restrictions on GDR issue proceeds, except restrictions on investment in stock
markets and real estate. Earlier, the approval of the Ministry of Finance was necessary for issuing
DRs. Now companies can raise money through DRs under an automatic route without the prior
approval of the Ministry of Finance. However, they have to fulfill the mandatory approval
requirements under FDI policy and the provisions of FERA/FEMA prior to the overseas issue.
A foreign investor, interested in investing in Indian equities, primarily has two avenues of doing
so. One is to register officially as an FII and buy and sell equities in the Indian stock market and
the other is to buy GDRs of Indian firms in overseas markets. Both these investments carry their

own tax and transactional implications. For individual investors, GDRs offer a more attractive
alternate avenue for investing in Indian equities as they have fewer legal and institutional
restrictions. There is no restriction on the number of GDRs to be floated by a company or a
group of companies in a financial year.
Initially Indian firms listed their DR programmes at the LxSE due to its mild securities
regulations and easy listing norms, and subsequently started listing on the LSE, NASDAQ and
NYSE. Listings on the US market require stringent disclosures and recasting of firms financial
statements, and in the early 90s, most of the Indian did not have the level of financial
transparency desired by the US GAAP and SEC. In the course of 1990s, Indian financial market
regulators introduced several reforms to improve the level of financial transparency of Indian
firms, which increased the capability of Indian firms to tap US markets.
The Reliance Industries Ltd in 1992 made the first issue of GDR and raised US $ 150 million
and it became the first Indian Company to access the international capital market. Even after the
Indian stock market opened to Foreign Institutional Investors (FIIs) in 1993, the GDR route
remained popular for various reasons. Till date almost 62 GDRs have been issued by the Indian
Companies covering a variety of industries with a range of valuations and premiums. Today
some issues of GDRs are being quoted at a discount to the issue price ranging from 50 to 80
percent.
Foreign listing activity by Indian firms regained momentum during 1999 with the successful
ADR issue by Infosys Technologies. During 2000, there was a spurt in the number of Indian
foreign listings because of the fresh policy initiatives by the Indian government, which simplified

approval mechanisms for software, information technology, telecommunication, biotechnology

and pharmaceutical firms for issuing DR programmes in foreign markets.
While most GDR listings were accomplished during 1994 and 1996 when the domestic market
was in a boom phase, ADR listings were accomplished during 2000 to 2001, when domestic
market was in a bearish phase. Overall, the conduct of Indian DR listings does not seem to be
consistent with the model of Lucas and McDonald, which predict that equity issues tend to
follow the general increases in the broader equity markets.
Each offshore instrument has positive as well as negative features. Smaller issues should
probably take the GDR route and large issue may take the ADR route. A company with large
issue may take the ADR route. A company with large equity base and reasonable debt to equity
ratio may like to opt for an External Commercial Borrowings (ECB) route. These are broad
guidelines and no blanket recommendations can be prescribed in this matter.
A comparison between ADR listing Indian firms and GDR listing Indian firms reveals that the
former tend to be young, innovative and operate in knowledge based industries like computers,
telecommunications and pharmaceuticals. This seems to be in consonance with Pagano et als
assertion that the industry characteristics of firms influence their choice of stock exchange(s) in
their DR listings. US exchanges are perceived to provide a better listing environment for firms
belonging to knowledge-based industries. Allen and Gale argued that the US equity markets are
comparatively more mature in evaluating the future growth and revenue prospects of innovative
firms. Indian firms listing their GDR programmes on the LSE and LxSE tend to be older, and
operate mostly in the traditional sectors of the economy.

The Details of a GDR Purchase by An Investor

An investor calls her broker to buy GDRs for a particular company.2.The broker fills the
order by either buying the GDRs on any of the exchanges that it trades, or by buying ordinary company
shares in the home market of the company by using a broker in the issuer's country. The foreign broker then
delivers the shares to the custodian bank.3.The investors broker notifies the depositary bank that
ordinary shares have been purchased in the issuer's market and will be delivered to the
custodian bank and requests depositary shares to be issued in the investors account.4.The custodian notifies
the depositary bank that the shares have been credited to the depositary banks account.5.The
depositary bank notifies the investors broker that the GDRs have been delivered.6.The broker
then debits the account of the investor for the GDR issuance fee.

The Details of a GDR Sale by an Investor

.An investor instructs his broker to sell his GDRs. The investor mustdeliver the shares within 3
business days if the shares are not in the streetname of the broker.2.The broker can either sell the shares on
the exchanges where the GDR trades, or the GDRs can be canceled, and converted into the ordinaryshares of
the issuing company.3.If the broker sells the shares on an exchange, then the broker uses theservices
of a broker in the issuer's market.4.If, instead, the shares are canceled, then the broker will deliver the
sharesto the depositary bank for cancellation and provide instructions for thedelivery of the ordinary shares of the
company issuer. The investor paysthe cancelation fees and any other applicable fees.5.The depositary bank
instructs the custodian bank to deliver the ordinaryshares to the investors broker, who then credits the
account of itscustomer.

Key Roles and Responsibilities

Key Roles and Responsibilities In order to establish a GDR program, the issuer first appoints a
team of advisors that typically includes investment bankers, lawyers and accountants. The issuer
also selects a depositary bank to manage the implementation of the program. The depositary
bank also performs the critical role of liaison among the various parties to the transaction, and
will remain integral to the long-term development of the GDR program. Generally, the functions
of the lawyers and accountants will eventually transition to periodic reporting and general legal
matters. Investment bankers will typically not be involved with the ongoing management of a
GDR program as well; however, the program will become an important consideration for
investment bankers if the issuer contemplates going to the capital markets in the future. The
depositary bank is the only party to GDR transactions that is engaged on an end-to-end basis.

Regulation S
Regulation S, which applies to GDRs, provides two types of safe harbor exemptions for
securities offered overseas without registration. One is the issuer safe harbor, which addresses
offers and sales by issuers, their affiliates, and securities professionals involved in the initial
offerings of securities. The second is the resale safe harbor, which addresses resales by securities
professionals such as brokers. Two general conditions must be satisfied to take advantage of
these safe harbors:
1) Any offer or sale must be made in an offshore transaction, and
2) No direct selling efforts may be made in the United States
Regulation S and Rule 144A are closely related (they are related, but not similar). The SEC has
maintained the position that foreign issuers may undertake private placements in the United
States (Rule 144A) at the same time they make an Offshore Regulation S offering without
violating that regulations prohibition against U.S. direct selling efforts. Substantial care must
nevertheless be taken to avoid spillover of such securities into the U.S. public markets.
In the 1990s, the SEC has identified abusive practices in Offshore Regulation S securities
transactions. Therefore, in 1998 the SEC adopted amendments to Regulation S to prevent further
abuses of the rule, but also to allow continued reliance on Regulation S in legitimate offshore
offerings. The amendments adopted included the following:

The classification of equity securities placed offshore by US issuers under Regulation S is

that of restricted securities within the meaning of Rule 144, so resales are under
restriction

The distribution compliance period (restricted period under Regulation S) for these
securities is one year (lengthened from forty-one days)

Issuers must change from Form 8-K reporting to quarterly reporting on Form 10-Q

The SEC indicated that to avoid undue interference with offshore offering practices of foreign
issuers, these amendments apply to equity securities of US issuers, but not to the equity
securities of foreign issuers.

SEBI GUIDELINES
Government of India has been permitting Indian company to issue Equity and Equity related
instruments to international investors in the form of Global Depository Receipts and Convertible
bonds. A detailed notification was also issued on November 12, 1993 outlining the scheme for
the issue of Foreign Currency Convertible Bonds (FCCBs) and ordinary shares (through
Depository Receipt Mechanism). Government have since reviewed the working of the scheme
and the following further guidelines have been formulated in this regard.
(a) For the present it is proposed to follow a restrictive policy towards FCCBs since such
bonds form part of the countrys external debt till their conversion into equity. However,
companies will be allowed on merits to issue FCCBs as part of a programme of
restructuring external debt, which helps to lengthen maturity and soften terms.
(b) Euro Issues will be treated as direct foreign investments. Accordingly, a company
contained in Annexure III of the New Industrial Policy of 1991 whose direct foreign
investment after a proposed Euro Issue is likely to exceed 51%, or which is implementing
projects not predominantly not contained in Annexure III, would need to obtain a prior
FIPB clearance before final approval for the Euro Issue is given by the Finance Ministry.
(c) For the purpose of ensuring that as many companies as possible avail of this scheme, only
one issue per company in a financial year will be permitted with a minimum gap of
twelve months between two issues by the same company and not more than two issues
will be permitted for any group of companies in a financial year.
(d) Both the in-principle and final approvals will be valid only for three months from the
dates of their respective issue.

(e) Requests for retention of the Issue proceeds abroad will be considered on specific
application, for import of capital goods, retiring foreign debts, capitalizing Indian joint
ventures, etc., and projects abroad.
(f) GDR issues would be permitted only for the following end-use to be incurred within one
year from the date of issue:
a) Financing capital goods imports
b) Financing domestic purchase/installation of plant, equipment and buildings
c) Pre-payment or scheduled repayment of earlier external borrowing
d) Making investments abroad where these have been approved by competent
authorities
e) A margin of 15% of the total proceeds of an issue for other general corporate
restructuring uses
(g) Companies would be required to submit quarterly statement of utilization of funds duly
certified by their auditors
The policy and guidelines for Euro Issues will be subject to review every three months

Transfer and Redemption

(1) A non-resident holder of GDRs may transfer those receipts or may ask the Overseas
Depository Bank to redeem those receipts. In the case of redemption, Overseas Depository Bank
shall request the Domestic Custodian Bank to get the corresponding underlying shares released
in favor of the non-resident investor, for being sold directly on behalf of the non-resident, or
being transferred in the books of account of the issuing company in the name of the non-resident.

(2) In case of redemption of GDRs into underlying shares, a request for the same will be
transmitted by the Overseas Depository bank to the Domestic Custodian Bank in India, with a
copy of the same being sent to the issuing company for information and record.
(3) On redemption, the cost of acquisition of the shares underlying the GDRs shall be reckoned
as the cost on the date on which the Overseas Depository Bank advises the Domestic Custodian
bank for redemption. The price of the ordinary shares of the issuing company prevailing in the
BSE or the NSE on the date of the advice of redemption shall betaken as the cost of acquisition
of the underlying ordinary shares.
(4) For the purposes of conversions of FCCB, the cost of acquisition in the hands of the nonresident investors would be the conversion price determined on the basis of the price of the
shares at the BSE or the NSE on the date of FCCB into Bonds

AMOUNT RAISED THROUGH GDRS

The amount raised by the Indian Companies by issuing GDRs is as shown in the table below.
From the table we can see that since the time India had opened up her economy in 1991-92, the
maximum amount was raised in the period 1994-95

TABLE
Year

GDR (US $
million)

1992-1993

240

1993-1994

1597

1994-1995

2050

1995-1996

683

1996-1997

1366

1997-1998

645

1998-1999

270

1999-2000

768

2000-2001

831

2001-2002

477

2002-2003

600

2003-2004

459

CONCLUSION

As we conclude this project, we are filled with a sense of satisfaction of having achieved what
we set out to. This project is the result of all the efforts that weve been putting in over the last

year. The experience has left us better equipped in more than one way. We are now better
positioned to conduct a similar research on other topics. The project has enlightened us with
what it takes to actually achieve the goals that you set. Further, we are better prepared to work in
a team. We have fully understood the concept and the need for a depositary receipts program. We
have identified its significance in Indias growth. We have also got an insight into the functioning
of the American markets along with the European market. We have observed that the sudden
surge in GDR issues took place after the government put in place clearly defined rules. Similarly,
GDR issues kicked off immediately after the opening up of the economy. We hope that the RBI
can further relax the GDR guidelines to enable Indian companies to gain even greater access to
global markets. We also believe that Indian companies raising funds globally should attempt
to make this growth more inclusive. GDRs have proved to be quite a revolution. It wouldnt be
too daring to dream of a day when we can issue new shares in foreign markets without the
companys presence in the country.