HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011

ADR & GDR

HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011

WHAT IS ADR
ADR - American Depositary Receipts

A negotiable certificate issued by a U.S. bank Represents a specified number of shares of a foreign company ADRs are denominated in U.S. dollars.

HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011

HOW DOES ADR/GDR WORK ?

Let us take Infosys example trades on the Indian stock at around Rs.2000/ This is equivalent to US$ 40 assume for simplicity Now a US bank purchases 10000 shares of Infosys and issues them in US in the ratio of 10:1
This means each ADR purchased is worth 10 Infosys shares.

Quick calculation means 1 ADR = US $400 Once ADR are priced and sold, its subsequent price is determined by supply and demand factors, like any ordinary shares.

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ADR RATIO
Single 1 ADR = 1 SHARE ADR Ratio = 1:1
Multiple

1 ADR = 5 SHARES ADR Ratio = 1:5

Fraction

1 ADR = SHARE ADR Ratio = 2:1

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SPECIMEN COPY OF ADR

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ADR
TYPES of ADR: ADR listing:

Unsponsored ADR Sponsored ADR Level 1 Level 2 Level 3

NASDAQ AMEX NYSE

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ADVANTAGES OF ADR
It is an easy and cost effective way to buy shares of a foreign company Reduces administrative costs and avoids foreign taxes on every transaction Helps companies which are listed to tap the American equity markets Any foreigner can purchase these securities
The purchaser has a theoretical right to exchange shares (non- voting right shares for voting rights)

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GDR - GLOBAL DEPOSITARY RECEIPTS

A bank certificate issued in more than one country for shares in a foreign company Offered for sale globally through the various bank branches Shares trade as domestic shares

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GDR - CUSTODIAN BANK/DEPOSITORY BANK

Custodian Bank located in same country
Works with the Depository Bank and follows instructions from the depository bank. Collects, remits dividends and forwards notices

received from the depository bank.

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GDR MARKET
GDRs can be created or cancelled depending on demand and supply. When shares are created, more corporate stock is placed in the custodian bank in the depositary bank account. The depositary bank then issues the new GDRs
Factors governing GDR prices are company track record, analysts recommendations, relative valuations, market conditions and also international status of the company

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GDR LISTING
London Stock Exchange Luxembourg Stock Exchange Singapore Exchange
Hong Kong Exchange

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GDR- ADVANTAGES & DISADVANTAGES

GDRs allow investors to invest in foreign companies without worrying about foreign trading practices, laws Easier trading, payments of dividends are in the GDR currency
GDRs are liquid because they are based on demand and supply which is regulated by creating or cancelling shares GDR issuance provides the company with visibility, more larger and diverse shareholder base and the ability to raise more capital in international markets

However, they have foreign exchange risk i.e. currency of issuer is different from currency of GDR

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I N SI M PLE TERM S ADR / GDR I SSUE

COMPANY SHARE

DEPOSITARY BANK

INVESTOR

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DI FFERENCE - ADR & 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. Depositary receipts traded in USA ADR Depositary receipts traded in a country other than USA GDR

HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011

I NDI A - ADR & GDR

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

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INDIAN COM PAN IES USIN G ADR/ GDR

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 VSNL WIPRO ADR No Yes Yes No Yes Yes No No Yes Yes No Yes No Yes Yes GDR Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes No Yes Yes Yes

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ECB

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ECB
The ECB is the central bank for Europe's single currency, the euro. The ECBs main task is to maintain the euro's purchasing power and thus price stability in the euro area.
The euro area comprises the 17 European Union countries that have introduced the euro since 1999.

ECB - TASKS
The tasks of the ESCB and of the Eurosystem are laid down in the Treaty establishing the European Community. They are specified in the Statute of the European System of Central Banks (ESCB) and of the European Central Bank (ECB). The Statute is a protocol attached to the Treaty. The Treaty text refers to the ESCB' rather than to the 'Eurosystem'. It was drawn up on the premise that eventually all EU Member States will adopt the euro. Until then, the Eurosystem will carry out the tasks.

ECB OBJECTI VES

"The primary objective of the ESCB shall be to maintain price stability". and: "without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2." (Treaty article 105.1)

The objectives of the Union (Article 2 of the Treaty on European Union) are a high level of employment and sustainable and noninflationary growth.

ECB BASI C TASKS

According to the Treaty establishing the European Community (Article 105.2), the basic tasks are the definition and implementation of monetary policy for the euro area; the conduct of foreign exchange operations; the holding and management of the official foreign reserves of the euro area countries (portfolio management). the promotion of the smooth operation of payment systems.

SWAP

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SWAP
Swap is an agreement between two parties, called counterparties to trade cash flows over a period of time. Swaps are flexible and are useful in many financial situations There are 2 types of swap:
Currency swap

Interest- rate swap

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SWAP
Specifically, the two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap. The swap agreement defines the dates when the cash flows are to be paid and the way they are calculated. Usually at the time when the contract is initiated at least one of these series of cash flows is determined by a random or uncertain variable such as an interest rate, foreign exchange rate, equity price or commodity price.

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SWAP
These two swaps can be combined when interest on loans in two currencies are swapped. The interest rate and currency swap markets enable firms to arbitrage the difference between capital markets. For example, in the case of a swap involving two bonds, the benefits in question can be the periodic interest (or coupon) payments associated with the bonds.

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