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Global Depository Receipts (GDR)

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    GDR is a sort of bank certificate that is issued in more than one country for shares in foreign companies. It can be circulated worldwide in the capital markets. GDR’s are issued by banks. Th bank purchases shares of foreign companies and deposit it on the accounts. Thus facilitation of the trade of share is the main objective of GDR, especially those from emerging markets. The values of the related share and the prices of GDR’s are often close.

    Indian companies can raise equity capital in the international market by issuing the Global Depository Receipt (GDRs). GDRs are designated in dollars and there are no ceilings on investment. The requirement for issuing of GDR is that the company applying should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. For infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads this condition would be however relaxed.

    Use of GDRsGDR has many advantages. The government may use the proceed of the GDR to finance capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.

    A negotiable certificate held in the bank of one country representing a specific number of sharesof a stock traded on an exchange of another countryTo raise money in more than one market, some corporations use global depositary receipts(GDRs) to sell their stock on markets in countries other than the one where they have their headquarters. The GDRs are issued in the currency of the country where the stock is trading. For example, aMexican company might offer GDRs priced in pounds in London and in yen in Tokyo. Individual investors in the countries where the GDRs are issued buy them to diversify intointernational markets.

    GDRs let you do this without having to deal with currency conversion andother complications of overseas investing. The objective of a GDR is to enable investors indeveloped markets, who would not necessarily feel happy buying emerging market securitiesdirectly in the securities’ home market, to gain economic exposure to the intended company and,indeed, the overall emerging economy using the procedures with which they are familiar. Global Depository Receipt (GDR) – certificate issued by international bank, which can be subjectof worldwide circulation on capital markets.

    GDR’s are emitted by banks, which purchase sharesof foreign companies and deposit it on the accounts. Global Depository Receipt facilitates tradeof shares, especially those from emerging markets. Prices of GDR’s are often close to values of related shares. GDRs are securities available in one or more markets outside the company’s home country. The basic advantage of the GDRs, compared to the ADRs, is that they allow the issuer to raise capitalon two or more markets simultaneously, which increases his shareholder base. They gained popularity also due to the flexibility of their structure.

    GDRs are typically denominated in USD, but can also be denominated in Euros. GDRs arecommonly listed on European stock exchanges, such as the London Stock Exchange (LSE) or Luxembourg Stock Exchange, or quoted on SEAQ (Stock Exchange Automated Quotations)International, and traded at two other places besides the place of listing, e. g. on the OTC marketin London and on the private placement market in the US. Large part of the GDR programsconsists of a US tranche, which is privately placed and a non-US tranche that is sold to investorsoutside the United States, typically in the Euro markets.

    An overwhelming majority of DR programs by companies from Central and Eastern Europeancountries are established as GDRs, typically listed in London and traded by qualified institutionalinvestors in Euromarkets under regime of so called Regulation S and some of them also in theAmerican OTC markets in accordance with Rule 144A. 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.

    Section 115 AC applicable for non-residents would not extend to them. Depositary Receipts (DRs) are negotiable securities issued outside India by a Depository Bank, on behalf of an Indian company, which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian Bank in India. DRs are traded in Stock Exchanges in the US, Singapore, Luxembourg etc. DRs listed and traded in the US markets are known as American Depository Receipts (ADRs) and those listed and traded elsewhere are known as Global Depository Receipts (GDRs).

    In the Indian context, DRs are treated as FDI. Indian companies can raise foreign currency resources abroad through the issue of ADRs/GDRs, 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 thereunder from time to time. The company can issue ADRs/GDRs if it is eligible to issue shares to persons resident outside India under the FDI Scheme.

    However, an Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue ADRs/GDRs. Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital in the international market would require prior or simultaneous listing in the domestic market, while seeking to issue such overseas instruments.

    Unlisted companies, which have already issued ADRs/GDRs in the international market, have to list in the domestic market on making profit or within three years of such issue of ADRs/GDRs, whichever is earlier. ADRs/GDRs are issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager to the issue. The proceeds so raised have to be kept abroad till actually required in India. Pending repatriation or utilisation of the proceeds, the Indian company can invest the funds in –

    Deposits with or Certificate of Deposit or other instruments offered by banks who have been rated by Standard and Poor, Fitch, IBCA or Moody’s etc. and such rating not being less than the rating stipulated by Reserve Bank from time to time for the purpose, Deposits with branch outside India of an authorised dealer in India, and Treasury bills and other monetary instruments with a maturity or unexpired maturity of the instrument of one year or less.

    There are no end use restrictions except for a ban on deployment / investment of such funds in Real Estate or the Stock Market. There is no monetary limit upto which an Indian company can raise ADRs / GDRs. Voting rights on shares issued under the Scheme shall be as per the provisions of Companies Act, 1956 and in a manner in which restrictions on voting rights imposed on ADR/GDR issues shall be consistent with the Company Law provisions.

    RBI regulations regarding voting rights in the case of banking companies will continue to be applicable to all shareholders exercising voting rights. Erstwhile OCBs who are not eligible to invest in India through the portfolio route and entities prohibited to buy, sell or deal in securities by SEBI will not be eligible to subscribe to ADRs / GDRs issued by Indian companies. The pricing of ADR / GDR issues should be made at a price not less than the higher of the following two averages: 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;  The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date. The “relevant date” means the date thirty days prior to the date on which the meeting of the general body of shareholders is held, in terms of section 81 (IA) of the Companies Act, 1956, to consider the proposed issue.

    The ADR / GDR proceeds can be utilised for first stage acquisition of shares in the disinvestment process of Public Sector Undertakings / Enterprises and also in the mandatory second stage offer to the public in view of their strategic importance. Two-way Fungibility Scheme A limited Two-way Fungibility scheme has been put in place by the Government of India for ADRs / GDRs. Under this scheme, a stock broker in India, registered with SEBI, can purchase shares of an Indian company from the market for conversion into ADRs/GDRs based on instructions received from overseas investors.

    Re-issuance of ADRs /GDRs would be permitted to the extent of ADRs / GDRs which have been redeemed into underlying shares and sold in the Indian market. Sponsored ADR/GDR issue An Indian company can also sponsor an issue of ADR / GDR. Under this mechanism, the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares, ADRs / GDRs can be issued abroad. The proceeds of the ADR / GDR issue is remitted back to India and distributed among the resident investors who had offered their rupee denominated shares for conversion.

    These proceeds can be kept in Resident Foreign Currency (Domestic) accounts in India by the resident shareholders who have tendered such shares for conversion into ADR / GDR. Reporting of ADR/GDR Issues The Indian company issuing ADRs / GDRs has to furnish to the Reserve Bank, full details of such issue in the form enclosed in Annex-8, within 30 days from the date of closing of the issue. The company should also furnish a quarterly return in the form enclosed in Annex-9, to Reserve Bank within 15 days of the close of the calendar quarter. June 29, 2006.

    The government has allowed unlisted Indian companies, which have earlier done an ADR or GDR issue, to undertake sponsored issues without getting listed for some time. The government had earlier banned companies not listed in India from listing overseas, and directed those listed on foreign markets to list in India. Unlisted companies that have not issued FCCBs, ADRs/GDRs prior to August 31, 2005, would require prior or simultaneous listing on the domestic stock exchanges for issuing FCCBs, ADRs/GDRs, or sponsoring such issues against existing shares under the scheme.

    An official release said unlisted companies that had issued FCCBs, ADRs or GDRs before August 31, 2005, and were not making profits would be permitted to sponsor issues against existing shares held by its shareholders. Such companies would be permitted to comply with listing conditions on domestic stock exchanges within three years of their starting to make profits. The permission to companies not listed in India to float sponsored issues overseas could a provision of an exit route to venture capital and private equity investors in such companies.

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