History And Definition Of Depository Receipts Finance Essay

History And comment Of sediment knows Finance EssayA DR is a fiber of negotiable ( murderable) pecuniary protective cover traded on a local contrast supersede but represents a aegis, usually in the variation of equity, shortend by a overseas, cosmosly- numerateed caller-up. The DR, which is a physical certificate, sign up ons investors to hold sh ars in equity of discrepancyer(a) countries. One of the well-nigh(prenominal) common types of DRs is the Ameri buttocks down payment communicate (ADR), which has been offering companies, investors and traders global investment opportunities since the 1920s.Since then, DRs wee-wee spread to former(a) regions of the creation in the form of global shore deposit receipts (GDRs). The wise(prenominal) most common type of DRs argon European DRs and International DRs. ADRs argon typically traded on a US national banal step in, such(prenominal)(prenominal) as the New York Stock deputize (NYSE) or the Ameri bottom Sto ck switch over, small-arm GDRs atomic number 18 commonly listed on European spr come out win overs such as the London Stock Exchange. Both ADRs and GDRs argon usually denominated in US dollars, but commode alike be denominated in Euros.History of Depository RecieptsAmeri move Depositary pass have been introduced to the financial commercialise places as early as April 29, 1927, when the investment bank J. P. Morgan launched the first-ever ADR syllabus for the UKs Selfridges Provincial Stores Limited (now known as Selfridges plc.), a famous British retailer.Its creation was a response to a fairness passed in Britain, which prohibited British companies from registering shargons oerseas without a British- ground transfer agent, and thus UK sh ars were non geted physically to leave the UK.2The ADR was listed on the New York lead Exchange (p floridecessor to the American Stock Exchange.)The regulation of ADR changed its form in 1955, when the U.S. Securities and Exchange C ommission (SEC) established the From S-12, necessary to register all depositary receipt programs. The hit S-12 was replaced by Form F-6 later, but the principles remained the comparable till today.Crucial novelties brought the refreshful(a) regulatory framework introduced by the SEC in 1985, which led to outlet of range of DR instruments, as we know it nowadays. Then the three polar ADR programs were created, the take I, II and III ADRs. This change was one of the impulses for revival of activity on the otherwise stagnant ADR grocery store.In April 1990, a late instrument, referred to as regularize 144A was adopted, which gave rise to private position depositary receipts, which were available only to qualified institutional buyers (QIBs). This type of DR programs gained its popularity quickly and it is very frequently employed today.The ADRs were originally constructed completely for the needs of American investors, who wanted to invest easily in non-US companies. by an d by they had become popular in the United States, they extended gradually to other parts of the world (in the form of GDR, EDR or IDR). The greatest cultivation of DRs has been save since 1989.In December 1990, Citibank introduced the first Global Depositary response. Samsung Corporation, a Korean craft club, wanted to arouse equity capital of the United States in the United States done and by means of a private placement, but also had a strong European investor base that it wanted to include in the offering. The GDRs allowed Samsung to dress down capital in the US and Europe by one security smotherd simultaneously into both(prenominal) grocerys.In 1993, Swedish LM Ericsson snarfd capital through and through a rights offering in which ADDs were offered to both holders of cut-and-dried sh ars and DR holders. The Ericsson ADDs represented subordinated debentures that are similar into ordinary shares or DRs. German D determinationler Benz AG became the first Europea n partnership to establish a Singapore depositary receipts program (SDRs) in whitethorn 1994.Types of Depositary utilityAmerican Depositary receipts (ADR)Companies have a choice of foursome types of Depositary acknowledge facilities unsponsored and three levels of sponsored Depositary receipt. Unsponsored Depositary pass on are coped by one or to a greater extent depositaries in response to merchandise demand, but without a testicle agreement with the play along. Today, unsponsored Depositary Receipts are considered obsolete and, under most circumstances, are no longer established collec tabularize to lack of control over the facility and its hidden cost. Sponsored Depositary Receipts are way outd by one depositary nominate by the company under a Deposit Agreement or service contract. Sponsored Depositary Receipts offer control over the facility, the flexibility to list on a national exchange in the U.S. and the ability to ensnare capital.Sponsored take I Depositar y ReceiptsA sponsored put I Depositary Receipt program is the simplest method for companies to access the U.S. and non-U.S. capital markets. Level I Depositary Receipts are traded in the U.S. over-the-counter (OTC) market and on some exchanges exterior the United States. The company does not have to comply with U.S. Generally judge Accounting Principles (GAAP) or full Securities and Exchange Commission (SEC) disclosure. Essentially, a Sponsored Level I Depositary Receipt program allows companies to enjoy the benefits of a existencely traded security without changing its current reporting process.The Sponsored Level I Depositary Receipt market is the fastest growing segment of the Depositary Receipt personal credit line. Of the more than 1,600 Depositary Receipt programs soon handicraft, the vast majority of the sponsored programs are Level I facilities. In addition, because of the benefits investors put on by investing in Depositary Receipts, it is not unusual for a company with a Level I program to obtain 5% to 15% of its shareholder base in Depositary Receipt form. some(prenominal) well-known multinational companies have established such programs including Roche Holding, ANZ Bank, South African Brewery, Guinness, Cemex, Jardine Matheson Holding, Dresdner Bank, Mannesmann, RWE, CS Holding, Shiseido, Nestle, Rolls Royce, and Volkswagen to agnomen a few. In addition, numerous companies such as RTZ, Elf Aquitaine, Glaxo Wellcome, western sandwich Mining, Hanson, Medeva, Bank of Ireland, Astra, Telebrs and Ashanti Gold Fields Company Ltd. started with a Level I program and have upgraded to a Level II (Listing) or Level III (Offering) program.Sponsored Level II And III Depositary ReceiptsCompanies that gaze to either list their securities on an exchange in the U.S. or heighten capital use sponsored Level II or III Depositary Receipts respectively. These types of Depositary Receipts can also be listed on some exchanges away the United States. from e ach one level requires different SEC registration and reporting, incontrovertible adherence to U.S. GAAP. The companies must also receive the listing requirements of the national exchange (New York Stock Exchange, American Stock Exchange) or NASDAQ, whichever it chooses.Each high level of Depositary Receipt program generally increases the visibility and attractiveness of the Depositary Receipt.Private localization (144A) Depositary ReceiptIn addition to the three levels of sponsored Depositary Receipt programs that trade publicly, a company can also access the U.S. and other markets extraneous the U.S. through a private placement of sponsored Depositary Receipts. Through the private placement of Depositary Receipts, a company can raise capital by placing Depositary Receipts with big institutional investors in the United States, avoiding SEC registration and to non-U.S. investors in trustingness on Regulation S. A Level I program can be established alongside a 144A program.Glo bal Depositary Receipts (GDR)GDRs are securities available in one or more markets orthogonal the companys floor country. (ADR is actually a type of GDR issued in the US, but because ADRs were developed overmuch earlier than GDRs, they kept their denotation.) The basic advantage of the GDRs, compared to the ADRs, is that they allow the issuer to raise capital on two or more markets simultaneously, which increases his shareholder base. They gained popularity also due to the flexibility of their structure.GDR represents one or more (or fewer) shares in a company. The shares are held by the custody of the depositary bank in the home country. A GDR investor holds the same rights as the shareholders of ordinary shares, but typically without take rights. Some metres voting rights can be the executed by the depositary bank on behalf of the GDR holders. utensil DR TradeA Depositary Receipt is a negotiable security which represents the central securities (generally equity shares) of a n on-U.S. company. Depositary Receipts further U.S. investor purchases of non-U.S. securities and allow non-U.S. companies to have their stock trade in the United States by reducing or eliminating declaration delays, high transaction cost, and other capability inconveniences associated with transnational securities trading. Depositary Receipts are treated in the same manner as other U.S. securities for maneuver, settlement, transfer, and possession purposes. Depositary Receipts can also represent debt securities or preferred stock.The Depositary Receipt is issued by a U.S. depositary bank, such as The Bank of New York, when the be shares are deposited in a local custodian bank, usually by a broke who has purchased the shares in the open market.Once issued, these certificates whitethorn be freely traded in the U.S. over-the-counter market or, upon compliance with U.S. SEC regulations, on a national stock exchange.When the Depositary Receipt holder sells, the Depositary Receipt can either be sold to another U.S. investor or it can be canceled and the vestigial shares can be sold to a non-U.S. investor.In the last mentioned case, the Depositary Receipt certificate would be surrendered and the shares held with the local custodian bank would be released back into the home market and sold to a broker there.Additionally, the Depositary Receipt holder would be able to betoken delivery of the actual shares at any time. The Depositary Receipt certificate states the responsibilities of the depositary bank with respect to actions such as payment of dividends, voting at shareholder meetings, and handling of rights offerings.Depositary Receipts (DRs) in American or Global form (ADRs and GDRs, respectively) are employ to facilitate cross-border trading and to raise capital in global equity offerings or for mergers and acquisitions to U.S. and non-U.S. investors.Demand For Depositary ReceiptsThe demand by investors for Depositary Receipts has been growing in the mi dst of 30 to 40 percent annually, driven in wide part by the increasing desire of retail and institutional investors to diversify their portfolios globally. Many of these investors typically do not, or cannot for motley agents, invest directly away(p) of the U.S. and, as a result, utilize Depositary Receipts as a agency to diversify their portfolios. Many investors who do have the capabilities to invest outside the U.S. may prefer to utilize Depositary Receipts because of the convenience, enhanced liquidity and cost persuasiveness Depositary Receipts offer as compared to purchasing and safekeeping ordinary shares in the home country. In umpteen cases, a Depositary Receipt investment can save an investor up to 10-40 basis points annually as compared to all of the costs associated with trading and holding ordinary shares outside the United States.IssuanceDepositary Receipts are issued or created when investors decide to invest in a non-U.S. company and contact their brokers to make a purchase.Brokers purchase the underlying ordinary shares and request that the shares be delivered to the depositary banks custodian in that country.The broker who initiated the transaction exit substitute the U.S. dollars real from the investor into the corresponding abroad currency and pay the local broker for the shares purchased.The shares are delivered to the custodian bank on the same day, the custodian notifies the depositary bank.Upon such notification, Depositary Receipts are issued and delivered to the initiating broker, who then delivers the Depositary Receipts evidencing the shares to the investor. withdraw (Intra-Market Trading)Once Depositary Receipts are issued, they are tradable in the United States and like other U.S. securities, they can be freely sold to other investors. Depositary Receipts may be sold to subsequent U.S. investors by simply transferring them from the breathing Depositary Receipt holder (seller) to another Depositary Receipt holder (bu yer) this is known as an intra-market transaction. An intra-market transaction is colonised in the same manner as any other U.S. security purchase. checkly, the most important role of a depositary bank is that of Stock Transfer Agent and Registrar. It is wherefore critical that the depositary bank maintain sophisticated stock transfer systems and operating capabilities.What are Indian Depository Receipts (IDRs)?IDRs are transferable securities to be listed on Indian stock exchanges in the form of depository receipts created by a Domestic Depository in India against the underlying equity shares of the issuing company which is incorporated outside India.As per the definition given in the Companies (Issue of Indian Depository Receipts) Rules, 2004, IDR is an instrument in the form of a Depository Receipt created by the Indian depository in India against the underlying equity shares of the issuing company. In an IDR, international companies would issue shares, to an Indian Depositor y (say National Security Depository Limited NSDL), which would in turn issue depository receipts to investors in India. The actual shares underlying the IDRs would be held by an Overseas Custodian, which shall authorise the Indian Depository to issue the IDRs. The IDRs would have following featuresOverseas Custodian Foreign bank having branches in India and requires approval from Finance Ministry for acting as custodian and Indian depository has to be registered with SEBI.Approvals for issue of IDRs IDR issue ordain require approval from SEBI and act can be make for this purpose 90 days ahead the issue opening date.Listing These IDRs would be listed on stock exchanges in India and would be freely transferable.Eligibility conditions for afield companies to issue IDRsCapital The overseas company intending to issue IDRs should have paid up capital and free coyness of atleast $ vitamin C gazillion.Sales turnover It should have an average turnover of $ ergocalciferol million du ring the last three days.Profits/dividend Such company should also have earned profits in the last 5 socio-economic classs and should have declared dividend of at least 10% each year during this period.Debt equity ratio The pre-issue debt equity ratio of such company should not be more than 21.Extent of issue The issue during a particular year should not exceed 15% of the paid up capital plus free reserves.Redemption IDRs would not be recoverable into underlying equity shares before one year from date of issue. appellative IDRs would be denominated in Indian rupees, irrespective of the denomination of underlying shares.Benefits In addition to other avenues, IDR is an additional investment opportunity for Indian investors for overseas investment.Taxation issues for Indian Depository Receipts (IDRs)Standard Chartered Bankss Indian Depository Receipts (IDR) issue may raise concerns relating to assess treatment, the outline red herring prospectus (DRHP) filed by the bank wi th SEBI said. The UK-based banks draft red herring prospectus was uploaded on the SEBIs website in end-March. The Income Tax Act and other regulations do not specifically refer to the taxation of IDRs. IDRs may therefore be taxed differently from ordinary listed shares issued by other companies in India, the prospectus said. In particular, income by way of capital gains may be issue to a higher rate of tax.The introduction of the Direct Tax encipher from the next fiscal may also alter tax treatment of Indian Depository Receipts. The tax treatment in future may also vary depending on the provisions of the proposed Direct Taxes Code which is before long due to take effect from April 1, 2011, and which is only in draft form at this time, Standard Chartered PLC has mentioned among the possible risk factors.Economic development and volatility in the securities markets in other countries may cause the harm of the IDRs to decline, the prospectus said. Any fluctuations that occur on the London Stock Exchange or the Hong Kong Stock Exchange that push the price of the shares may affect the price and trading of the IDRs listed on the stock exchanges.Further, the draft red herring prospectus states to what extent IDRs are legal investments, whether they can be used as collateral for various types of borrowing, and whether there are other restrictions that kick in to purchase or pledge of the Indian Depository Receipts.How are IDRs different from GDRs and ADRs?GDRs and ADRs are amongst the most common DRs. When the depository bank creating the depository receipt is in the US, the instruments are known as ADRs. Similarly, other depository receipts, based on the location of the depository bank creating them, have come into existence, such as the GDR, the European Depository Receipts, International Depository Receipts, etc. ADRs are traded on stock exchanges in the US, such as Nasdaq and NYSE, while GDRs are traded on the European exchanges, such as the London Stock Exc hange.How will the IDRs be priced, and will cross-border trading be allowed?IDRs will be freely priced. However, in the IDR prospectus, the issue price will have to be warrant as is done in the case of national equity issues. Each IDR will represent a certain number of shares of the foreign company. The shares will be listed in the home country. Normally, the DR can 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 i.e. the quality of being capable of exchange or interchange is not permitted.What are the benefits of issuing IDRs to companies?Currently, there are over 2,000 Depositary Receipt programs for companies from over 70 countries. The establishment of a Depositary Receipt program offers numerous advantages to non-U.S.companies. The primary reasons to establish a Depositary Receipt program can be divided into two broad considerations capital and commercial.Advantagesex pand market share through broadened and more diversified investor scene with potentially greater liquidity.Enhanced visibility and image for the companys products, services and financial instruments in a marketplace outside its home country.Flexible mechanism for aggrandisement capital and a vehicle or currency for mergers and acquisitions.Enables employees of U.S. subsidiaries of non-U.S. companies to invest more easily in the parent company.Quotation in U.S. dollars and payment of dividends or interest in U.S. dollars.Diversification without many of the obstacles that mutual bullion, pension funds and other institutions may have in purchasing and holding securities outside of their local market.Elimination of global custodian safekeeping charges, potentially obstetrical delivery Depositary Receipt investors up to 10 to 40 basis points annually.Familiar trade, clearance and settlement physical processs.Competitive U.S. dollar/foreign exchange rate conversions for dividends and other cash distributions.Ability to acquire the underlying securities directly upon cancellation.Benefit for InvestorsThey allow global investing opportunities without the risk of investing in unfamiliar markets, examine more information and transparency and improve the breadth and depth of the market. Increasingly, investors aim to diversify their portfolios internationally. However, obstacles such as undependable settlements, costly currency conversions, undependable custody services, poor information flow, unfamiliar market practices, confusing tax conventions and internal investment policy may discourage institutions and private investors from venturing outside their local market.Why will foreign companies issue IDRs?Any foreign company listed in its home country and satisfying the eligibility criteria can issue IDRs. Typically, companies with signifi-cant business in India, or an India focus, may find the IDR route advantageous. Similarly, the foreign entities of Indian comp anies may find it easier to raise cash through IDRs for their business requirements abroad.Besides IDR there are several other ways to raise money from foreign marketsAlternative AvailableForeign Currency interchangeable Bonds (FCCBs) FCCBs are bonds issued by Indian companies and subscribed to by a non-resident in foreign currency. They carry a fixed interest or coupon rate and are convertible into a certain number of ordinary shares at a preferred price. This equity component in a FCCB is an attractive feature for investors. Till conversion, the company has to pay interest in dollars and if the conversion option in not exercised, the redemption is also made in dollars. These bonds are listed and traded abroad. The interest rate is low1but the exchange risk is more in FCCBs as interest is payable in foreign currency. Hence, only companies with low debt equity ratios and large forex earnings potential opt for FCCBs.The scheme for issue of FCCBs was notified by the government in 1 993 to allow companies easier access to foreign capital markets. Under the scheme, bonds up to $50 million are cleared automatically, those up to $100 million by the run batted in and those above that by the finance ministry. The minimum maturity period for FCCBs is tailfin years but there is no restriction on the time period for converting the FCCBs into shares.External Commercial Borrowings (ECBs) Indian corporate are permitted to raise finance through ECBs (or simply foreign loans) within the framework of the policies and procedures official by the Government for financing infrastructure projects. ECBs include commercial bank loans buyers/suppliers credit borrowing from foreign collaborators, foreign equity holders securitized instruments such as Floating Rate Notes (FRNs) and Fixed Rate Bonds (FRBs) credit from official exporting credit agencies and commercial borrowings from the private sector window of multilateral financial institutions such as the IFC, ADB and so on. While the ECB policy provides flexibility in borrowings consonant with maintenance of prudential limits for total external borrowings, its guiding principles are to keep borrowing maturities long, costs low and encourage infrastructure/ content and export sectors financing, which are crucial for overall growth of the economySince 1993, many of the firms have chosen to use the offshore primary market alternatively of the domestic primary market for raising resources. The factors that can be attributed to this behaviour are as follows.(i) The time involved in the entire public issue on the offshore primary market is shorter and the issue costs are also low as the book building procedure is adopted.(ii) FIIs prefer Euro issues as they do not have to register with the SEBI nor do they have to pay any capital gains tax on GDRs traded in the foreign exchanges. Moreover, arbitrage opportunities exist as GDRs are priced at a discount compared with their domestic price.(iii) Indian companies ca n collect a large volume of funds in foreign exchange from international markets than through domestic market.(iv) Projections of the GDP growth are very strong and consistent which have created a strong appetite for Indian paper in the overseas market.(v) An overseas issuance allows the company to get exposure to international investors, thereby increasing the visibility of Indian companies in the overseas market.money Raising Instruments in IndiaQualified institutions placement (QIP) A designation of a securities issue given by the SEBI that allows an Indian-listed company to raise capital from its domestic markets without the need to submit any pre-issue filings to market regulators, which is lengthy and cumbersome affair. SEBI has issued guidelines for this comparatively new Indian financing avenue on May 8, 2006. anterior to the innovation of the qualified institutional placement, there was concern from Indian market regulators and authorities that Indian companies were access ing international funding via issuing securities, such as American depository receipts (ADRs), in outside markets. This was seen as an unenviable export of the domestic equity market, so the QIP guidelines were introduced to encourage Indian companies to raise funds domestically instead of tapping overseas markets.QIP has emerged as a new fund raising investment for listed companies in India. The issue process is not only simple but can be completed speedily. QIP issue can be offered to a wider set of investors including Indian mutual funds, banks, restitution companies and FIIs. A company sells its shares to qualified institutional buyers (QIBs) on a arbitrary basis with the two-week average price being the floor. In a QIP, contrasted an IPO or PE investment, the window is shorter (four weeks) and money can be raise quickly. This rule came into being after SEBI changed the pricing formulae. Earlier, the pricing was based on the higher of the six-month or two-week average share price This turned out to be a dampener in a volatile marketHowever, merchant bankers gave the feedback that the two-week average price often worked out to be higher than the current market price. As such, many investors were reluctant to take a mark-to-market loss on their books right from the start.Rights issues In other words, it is the issue of new shares in which existing shareholders are given preemptive rights to subscribe to the new issue on a pro-rata basis. Such an issue is arranged by an investment bank or broker, which usually makes a commitment to take up its own books any rights that are not sold as part of the issue. The right is given in the form of an offer to existing shareholders to subscribe to a proportionate number of fresh, extra shares at a pre-determined price.In India rights market has been a favoured capital mobilizing route for the corporate sector. However, this market has shrunk significantly in India over the years. This is due to an absence of a tradi ng platform for the post issue trading rights.Private placement The direct sale of securities by a company to some select raft or to institutional investors (financial institutions, corporates, banks, and high net worth individuals) is called private placement. In other words, private placement refers to the direct sale of newly issued securities by the issuer to a small number of investors through merchant bankers. Company law defined privately placed issue to be the one seek subscription from 50 members. No prospectus is issued in private placement. Private placement covers equity shares, preference shares, and debentures2. It offers access to capital more quickly than the public issue and is quite inexpensive on account of the absence of various issue expenses.In recent years resource mobilization through private placement route has subdued. The reason is stricter regulations introduced by RBI and SEBI starting line from early 2000s on private placements. When RBI found that b anks and institutions had larger exposure in the private placement market, it has issued guidelines to banks and financial institutions for investment in such cases.3Comparison ADR/GDR Vs. QIPThe First Wave of Indian Fundraising QIPsUnitech set the QIP ball coil on what is really the first major jar of Indias recent fund-raising jamboree. Indian companies raised US$24 billion in the April-June quarter of 2009, harmonize to data from Delhi-based research firm crest Database. Of this, 56% was raised in the last week of June, an indicator of the increasing tempo of action.According to Prime Database chairman Prithvi Haldea QIPs cornered over 96% of the total money mobilized during that quarter. Ten QIPs were issued, totaling US$22.5 billion. The leading issuers includedUnitech (US$900 million)Indiabulls Real Estate (US$530 million)HDIL (US$330 million)Sobha Developers (US$100 million)Shree Renuka Sugars (US$100 million)PTC (US$100 million).Hong Kong-based Finance Asia magazine said in its publicize that India has gone QIP crazyBut as other instruments started gaining favor the QIP wave appeared to be weakening. The QIBs dont see a huge bargain any longer. When companies were comparatively desperate for funds, they were offering prices that left a lot on the table for buyers. Unitech is a case in point. The first issue gave fall downs of 100% plus. A record Rs 34,100 crore were raised by the 51 QIPs made during the year 2009According to a study by rating agency Crisil, most QIPs in 2009 were actually making losses for investors. The study used the prices on July 10, although the markets have improved since then. Still, says Crisil, as of that date, if you leave out the first Unitech issue, the total return on all QIPs was a negative 12%.As per head of equities at CRISIL We expect raising capital through the QIP route may slow down significantly, He further explains that the significant run up in stock prices before the Union Budget made QIP deals unattractive . The reason being that shrewd investors made their decisions based on company basic principle and there was no reason to believe that the inherent fundamentals of most companies which queued up for QIPs have changed materially.Not all QIPs have been successful. GMR Infrastructure received its shareholders permission to raise up to US$1 billion through this route. According to merchant bankers, it came to the market with an offering of US$500 million, then reduced both the size of the offering and the price in the spirit of a tepid response, and finally withdrew altogether.However, according to Haldea, several more QIPs including Hindalco, cairn Energy, GVK Power, HDFC, JSW Steel, Essar Oil, Parsvanath and Omaxe are waiting in the wings, looking to raise more than US$12 billion. QIPs could become attractive again if the market falls or if companies start offering large discounts, investment experts say.Increased Activity for ADR/GDRThe slowing in the QIP wave does not mean tha t foreign investors who, as in the Unitech issue, were the principal buyers have lost interest in India. In fact, the overrule could be true. Indian fundraising has now embarked on its second wave through American Depository Receipts (ADRs) and Global Depository Receipts (GDRs). (ADRs are foreign stock stand-ins traded in U.S. exchanges but not counted as foreign stock holdings. A U.S. bank buys the shares on a foreign market and trades a claim on those shares. Many U.S. investors are attracted to ADRs because these securities may meet accounting and reporting standards that are more stringent than