american deposit receipt (adr) final
TRANSCRIPT
American Deposit Receipts (ADRs)
GVSMKSK Pavankumar (09927856)Manikumar Myla (09927913)
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What is ADR?• ADR is a stock that trades in the United States but
represents a specified number of shares in a foreign corporation.
• To reduce the complexities involved in buying the foreign shares, U.S. banks simply purchase a bulk lot of shares from the company, bundle the shares into groups, and reissues them on the stock exchange which are called American depositary receipts (ADR)
• Denominated in U.S. dollars, with the underlying security held by a Custodian bank overseas.
American Depositary
Receipt
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Flow of ADRs
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What is ADR ? (Cont)• ADRs help to reduce
administration and duty costs that would otherwise be levied on each transaction
• Once an ADR is priced and sold on the market, its price is determined by supply and demand, just like an ordinary stock
• The underlying shares are called ADSs (American Depositary Shares)
• To buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars
•ADRs do not eliminate the currency and economic risks for the underlying shares in another country
•Will bundle them to show more substantial value
•The depository bank sets the ratio of U.S. ADRs per home-country share (can be less than 1)
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What for an Investor ?
Benefits
• Diversification• Invest in High-
growth economies• Lower transaction
costs• Less complexities
Risks
• Currency exchange risk
• Political risk• Inflationary risk
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Broadening and diversifying a company’s US huge investor base
Enhancing a company’s visibility, status and profile in the US and internationally, among investors.
Offers a new avenue for raising equity capital, often at highly competitive rates.
Commission on the trade, just like any other trade.
Deduct their fees from dividends that investors are to receive
Pass on expenses related to currency conversion to investors
Benefits for a Company Benefits for a CompanyBenefits for Depositary Bank
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Types of ADRs Unsponsored Level I Level II Level III
Description Unlisted Unlisted Listing US listing and public offering
Objective
Develop/broaden US
investor base with existing
shares
Develop/broaden US
investor base with existing
shares
Develop/broaden US
investor base with existing
shares
Raise equity in US/broaden
US investor base
Accounting Company’s Home market
Minimal requirements by
SECUS GAAP US GAAP
US Reporting requirements Exempt Exempt Form 20-F Form F-1 &
Form 20-F
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How to price the ADR
• Say an Indian company share is traded at Rs.47 ($1 ),• The Bank buys 1million shares and issues at a ratio of 10:1. • Implies 1 ADR is worth 10 shares of the company on the
Indian stock exchange equals $10. • After selling on the exchange, the price is determined by the
supply - demand rule
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Arbitrage in ADR
The Process
1. Buy American Deposit Receipts2. Sell local stock in India3. Convert shares from DR to local shares4. Deliver shares to stock exchange in India
The Costs
5. Foreign brokerage6. Local brokerage7. Custodian charge for conversion (local and global)8. Charges for transfer
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ADR price Vs. Actual stock price• Determined by supply and demand, but the price will not
deviate too much from the equivalent value of the underlying stock.
• If the ADR is trading at a higher price than the equivalent foreign shares of the company, then more shares of the company will be bought and held in the custodian bank, and more ADRs will be created.
• If the ADR trades below the equivalent price, then some ADRs will be cancelled, and the corresponding shares of the company will be released by the custodian bank.
• This maintains parity between the price of the ADR and the foreign shares, after accounting for the currency exchange rate.
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Dividends
• The custodian bank receives it • Withholds any foreign taxes• Exchanges it for U.S. dollars• Sends it to the depositary bank• Sends it to the investors• The largest United States depositary banks are the Bank of
New York, J.P. Morgan, and Citibank• If the dollar appreciates, for instance, then the amount of
dividend in U.S. dollars will be reduced, and the market price of the ADR will drop
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Bonus ADRs• Just like the Companies give the Bonus shares, the Depositary bank gives the Bonus ADRs
Example:• Wipro approved 2 bonus shares per every 3 shares held• To effect the bonus issue for the ADR program, • ADR holders will receive 2 additional ADRs for every 3 ADRs held• Fractional shares resulting from the bonus issue will be sold and the net proceeds, if any, will
be allocated and paid in cash• Source: http://www.wipro.com/corporate/investors/pdf-files/adr-bonus-announcement.pdf
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Regulations for Indian companies
• An Indian Company, which is not eligible to raise funds from the Indian Capital Market will not be eligible to issue ADRs
• The guidelines allow an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing ADRS
• The ADRs 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 there under from time to time
• There are no end-use restrictions on ADR issue proceeds, except for an express ban on investment in real estate and stock markets
• The issue related expenses beyond the ceiling would need the approval of RBI. • The issue expenses shall be passed onto the shareholders participating in the
sponsored issue on a pro-rata basis
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Indian ADRsCOMPANY ADR PRICE
(US$)ISSUE PRICE
(US$)Domestic MKTCAP
(US$ m) NO OFADRs (m) ADR MKT CAP (US$ m)
DRREDDY(RDY) 28.3 10 4,792.00 76.5 2,161.70
HDFCBANK(HDB) 165.8 59.4 22,008.40 94.5 15,669.10
ICICIBANK(IBN) 42.5 11 23,758.10 368.4 15,668.10
INFOSYSTECH.(INFY) 59.9 17 34,078.00 270.6 16,199.10MTNL(MTE) 2.8 7.5 873.3 315 878.9
PATNICOMPUTERS(PTI) 22.8 20.3 1,574.40 68.9 1,570.90
REDIFF.COM(REDF) 2.1 12 NM 51.3 105.2
SATYAMCOMP(SAY) 4.6 9.7 1,237.90 157.3 717.3
SATYAMINFOWAY(SIFY) 1.3 0.4 NM 141.5 189.6
STERLITE IND.(SLT) 13.6 13.4 11,531.20 708.5 9,635.50
TATA COMM.(TCL) 14.7 0 2,106.80 142.5 2,090.50
TATAMOTORS(TTM) 22.7 0 9,797.90 353 8,006.00WIPRO(WIT) 13.4 41.2 21,602.60 703.6 9,392.70
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India and China (YTD)Security Name Last Value (Mn$) Volume
ICICI BANK LTD [IBN] 41.24 15,280.70 39,25,50,419
STERLITE INDUSTRIES
INDIA LTD [SLT]12.93 4,107.77 25,88,57,337
INFOSYS TECHNOLOGIES
LTD [INFY]57.64 14,823.81 25,30,98,844
TATA MOTORS LTD [TTM] 21.25 4,094.05 22,62,80,142
SATYAM COMPUTER
SERVICES LTD [SAY]
4.52 855.14 16,46,51,673
WIPRO LTD [WIT] 13.03 1,449.20 11,02,01,022
DR REDDYS LABORATORIES
LTD [RDY]28.62 2,290.17 8,19,49,496
HDFC BANK LTD [HDB] 160.68 6,598.48 4,72,23,458
MAHANAGAR TELEPHONE
NIGAM [MTE]2.65 53.12 1,70,10,180
TATA COMMUNICATIO
NS LTD [TCL]14.13 175.71 1,38,55,182
Total 49,728 1,56,56,77,753
Security Name Last Value (Mn$) Volume
BAIDU INC [BIDU] 77.32 1,58,845.10 2,60,40,64,267
JA SOLAR HOLDINGS CO
LTD [JASO]5.9 7,915.52 1,44,07,60,014
YINGLI GREEN ENERGY HOLDING
CO LTD [YGE]10.83 9,451.84 78,17,27,967
SUNTECH POWER HOLDINGS CO
LTD [STP]7.72 7,986.66 64,88,83,970
TRINA SOLAR LTD [TSL] 24.86 14,207.29 64,36,20,033
LDK SOLAR CO LTD [LDK] 6.81 3,524.81 52,22,61,904
CHINA UNICOM LTD [CHU] 13.69 5,035.45 41,32,50,005
SOLARFUN POWER
HOLDINGS CO LTD [SOLF]
10.47 3,327.19 39,61,47,126
CTRIP.COM INTERNATIONAL
LTD [CTRP]41.51 14,536.53 38,88,56,162
RENESOLA LTD [SOL] 8.58 2,015.28 31,92,59,566
Total 2,26,846 8,15,88,31,014
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SOX
• Sarbanes-Oxley or Public Company Accounting Reform and Investor Protection Act or SOX
• US Federal law enacted in response to a number of major corporate and accounting scandals
• To increase the investor confidence• Applies new standards for all U.S. public company boards,
management and public accounting firms• Does not apply to privately held companies • Act contains 11 Titles/Sections and requires the SEC to
implement rulings on requirements to comply with the new law
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11 Titles/Sections in SOX• Public Company Accounting Oversight Board (PCAOB)• Auditor Independence• Corporate Responsibility• Enhanced Financial Disclosures• Analyst Conflicts of Interest• Commission Resources and Authority• Studies and Reports• Corporate and Criminal Fraud Accountability• White Collar Crime Penalty Enhancement• Corporate Tax Returns• Corporate Fraud Accountability
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Sox - ADRs
• Level-1 ADRs do not need to comply with Sox• Level-2 and Level-3 must comply• Can be costly for a company beginning a U.S. ADR
Program• Intangible cost: Diversion of senior management
timeEffects:• Smaller companies move to other markets• Increase in Level-1 ADRs
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GDR
• A GDR is very similar to an American Depositary Receipt.
• A Bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank.
• The shares trade as domestic shares, but are offered for sale globally
• These instruments are called EDRs when private markets are attempting to obtain Euros.
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IDR
• Indian Depositary Receipts• 1st IDR: Standard chartered
• Expected more IDRs in future due to increase in potential of the Indian capital markets
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References• http://www.equitymaster.com/stockquotes/adr.asp• http://economictimes.indiatimes.com/articleshow/5970646.cms• http://www.adr.com/MarketOverview/MarketOverview.aspx• http://www.investopedia.com/terms/a/adr.asp• http://en.wikipedia.org/wiki/American_Depositary_Receipt
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