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ADR & GDR
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What is Depository Receipt?
A depositary receipt (DR) is a type of negotiable(transferable) financial security that is traded on alocal stock exchange but represents a security,usually in the form of equity that is issued by a
foreign publicly listed company.
The DR is created when a foreign company wishesto list its already publicly traded shares or debt
securities on a foreign stock exchange.
Before it can be listed to a particular stockexchange, the company in question will first have
to meet certain requirements put forth by theexchange.
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Types of DR
American Depository Receipts(ADR)
Global Depository Receipts(GDR)
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American Depository Report
A negotiable certificate issued by a U.S.bank representing a specified number ofshares (or one share) in a foreign stock
that is traded on a U.S. exchange.
ADRs are denominated in U.S. dollars,with the underlying security held by aU.S. financial institution overseas.
ADRs help to reduce administration and
duty costs that would otherwise be
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Types of ADR
There generally are three different types ofsponsored ADR programs:
Level I,
Level II, and
Level III,
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Level I ADRs are used when an issuerdoes not wish to, or is not allowed to, list
its securities on a national securitiesexchange; Level I ADRs are traded in thepink sheets. Level I ADRs must beregistered with the SEC.
Level II ADRs can be listed and traded onnational securities exchanges and mustcomply with the full registration and
reporting requirements of the SecuritiesAct and the Securities Exchange Act of1934.
Level III ADRs are the hi hest rofile
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Benefits of ADR
Help investors to invest in big foreign
Help the investors to profit from manyemerging market companies.
All transactions are done in U.S. Dollars.The competitive rates of Euro and U.S.Dollar over other market currencies also
benefit the investor.Offers more transparency and stability.
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Global Depository Receipt
A bank certificate issued in more than onecountry for shares in a foreign company. Theshares are held by a foreign branch of aninternational bank. The shares trade as
domestic shares, but are offered for saleglobally through the various bank branches.
A financial instrument used by private
markets to raise capital denominated in eitherU.S. dollars or euros.
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Foreign Investment through GDRs is treated asForeign Direct Investment.
An applicant company seeking Government'sapproval in this regard should have a consistenttrack record for good performance (financial orotherwise) for a minimum period of 3 years.
There is no restriction on the number of GDRs to befloated by a company or a group of companies in afinancial year.
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Benefits of GDR
For the Company
A company may opt to issue a GDR to obtaingreater exposure and raise capital in the worldmarket. Issuing GDRs has the added benefit ofincreasing the shares liquidity while boosting the
companys prestige on its local market.
For the InvestorInvestors gain the benefits of diversification, whiletrading in their own market under familiarsettlement and clearance conditions. Moreimportantly, GDR investors will be able to reap thebenefits of usually higher-risk, higher-returnequities, without having to endure the added risks
of going directly into foreign markets, which may
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Option contract
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DERIVATIVE
A security derived from a debt instrument ,share, loanwhether secured or unsecured, risk instrument or
contract for differences or any other form of security.
A contract which derives its value from the prices, or index ofprices, of underlying securities.
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Forwards
A forward contract is customized contract between two entities, where settlement
takes place on a specific date in the future at todays pre-agreed price.
Futures
An agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price . Futures contacts are special types of forwardcontracts in the contracts in the sense that the former are standardizedexchange-traded contracts.
Options
Options are of two types calls and puts. Calls give the buyer the right but notthe
obligation to buy a given quantity of the underlying asset, at a given price on or
before a given future date. Puts give the buyer the right, but not obligation to sella
TYPES OF DERIVATIVES
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Option Basics
Financial Option A contract that gives its owner the right (but not the
obligation) to purchase or sell an asset at a fixed priceas some future date
Call Option A financial option that gives its owner the right to buy
an asset
Put Option A financial option that gives its owner the right to sell
an asset
Option WriterThe seller of an option contract
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OPTION TERMINOLOGY (For The Equity Markets)
Important concepts in option contract:Strike Price -This is the stated price per share for which an
underlying stock may be purchased (for a call) or sold (for aput) upon the exercise of the option contract.Expiry Date - This shows the termination date of an optioncontract. Expiry date of U.S.-listed options is on the third Fridayof the expiry month
Volume - This indicates the total number of options contractstraded for the day. The total volume of all contracts is listedBid - This indicates the price someone is willing to pay for theoptions Contract.Ask- This indicates the price at which someone is willing tosell an options contract.Open Interest - Open interest is the number of optionscontracts that Are open; these are contracts that have notexpired nor been exercised.
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Call Option Put Option
OptionBuyer
Buys the right to buy theunderlying asset at theStrike Price
Buys the right to sell theunderlying asset at theStrike Price
OptionSeller
Has the obligation to sellthe underlying asset to theoption holder at the StrikePrice
Has the obligation to buythe underlying asset fromthe option holder at theStrike Price
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Hedgers - Operators, who want to transfer arisk component of their portfolio.
Speculators - Operators, who intentionallytake the risk from hedgers in pursuit of profit.
Arbitrageurs - Operators who operate in thedifferent markets simultaneously, in pursuit of
profit and eliminate mis-pricing.
Operators in the derivatives market
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Understanding Option Contracts
The option buyer (holder)Holds the right to exercise the option and has a
long position in the contract
The option seller (writer) Sells (or writes) the option and has a short
position in the contract
Because the long side has the option to exercise,the short side has an obligation to fulfill the
contract if itis exercised.
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Interpreting Stock OptionQuotations
At-the-moneyDescribes an option whose exercise price is equal
to the current stock price
In-the-money
Describes an option whose value if immediatelyexercised would be positive
Deep in-the-money describes an option that is in-the-money and for which the strike price and stock price arefar apart
Out-of-the-moneyDescribes an option whose value if immediately
exercised would be negativeDeep out-of-the-money describes an option that is out-
of-the-money and for which the strike price and stockprice are far apart
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Options on Other Financial Securities
HedgeTo reduce risk by holding contracts or securities
whose payoffs are negatively correlated with some riskexposure
SpeculateWhen investors use contracts or securities to place a
bet on the direction in which they believe the market islikely to move
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Option Payoffs at Expiration
Long Position in an Option Contract
The value of a call option at expiration is
Where S is the stock price at expiration, Kis theexercise price, C is the value of the call option, and maxis the maximum of the two quantities in theparentheses
max ( , 0)C S K=
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Payoff of a Call Option with a StrikePrice of $20 at Expiration
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Option Payoffs at Expiration
Long Position in an Option Contract
The value of a put option at expiration is
Where S is the stock price at expiration, Kis theexercise price, P is the value of the put option, and maxis the maximum of the two quantities in theparentheses
max ( , 0)P K S=
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Short Position in an Option
An investor that sells an option has anobligation.
This investor takes the opposite side of thecontract to the investor who bought the option.
Thus the sellers cash flows are the negative ofthe buyers cash flows.
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Short Position in a Call Optionat Expiration
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Factors Affecting Option Prices
Strike Price and Stock Price
The value of a call option increases (decreases) as
the strike price decreases (increases), all other
things held constant.The value of a put option increases (decreases) as
the strike price increases (decreases), all otherthings held constant.
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Arbitrage Bounds on Option Prices
Intrinsic Value
The amount by which an option is in-the-money,or zero if the option is out-of-the-money\
Time Value (sometimes called Option Value)
The difference between an options price and itsintrinsic value
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Option Prices and Volatility
The value of an option generally increaseswith the volatility of the stock.
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Private placement
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2920-29
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What is PrivatePlacement?The sale of securities to a relatively small
number of select investors as a way of raisingcapital
SEBI DIP Guidelines
Companies Act U/s. 81(1A)
For public company only
SEBI id li
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SEBI guideline
Eligibility
qThe SEBI DIP Guidelines apply to a preferentialissue of equity shares/ Fully ConvertibleDebentures (FCDs)/ Partly Convertible Debentures(PCDs) or other Convertible
q
Preferential issue cannot be made if it is not incompliance with the Conditions of continuouslisting
q A listed company cannot make a preferentialallotment during the period commencing from thesubmission of offer document to the SEBI onbehalf of the Company for public or rights issues,till the securities referred to in the said offerdocument have been listed or the application
moneys refunded on account of non-listing or
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Exemptions
q An allotment pursuant to a
Merger and Amalgamation
Scheme approved by the High
Court
q An allotment pursuant to
rehabilitation packages approved
by BIFR
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Pricing of instruments
qThe Guidelines only lay down what mustbe the minimum price
q price in case of a preferential issue ofshares must be the higher of the:
Average of the weekly high and low ofclosing prices during six monthsPreceding the Relevant date, or
Average of weekly high and low ofclosing prices during two weeksPreceding the Relevant date
company as een
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company as eenlisted for less than six
yearIt must be higher thanq IPO price
q Average of the weekly high and low ofthe closing prices of the shares duringthe period they have been listed
q Average of weekly high and low of
closing prices during two weeksPreceding the Relevant date
Procedural
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ProceduralRequirements
qThe Explanatory Statement u/s. 173(2)to the Notice for the General Meetingmust contain several prescribeddetails
q
Practice Pointer: The CompanysAuditor must certify compliance withthe SEBI Guidelines
q A copy of such Auditors Certificate
must be placed before the GeneralMeeting held for considering the issue
q Practice Pointer: If the issue is topromoters, relatives, associates,
related entities for non-cash
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cont
the valuation of the assets received bythe company in return and such Reporthas to be filed with the Stock
Exchanges where shares are listed.The valuer could be a CA or aMerchant Banker
Practice Pointer: The proceeds of thepreferential issue must be separatelydisclosed in the Balance Sheet
f i i i d
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If it is issued toforeign investorIt is treated as FDI
It need to comply with FEMA & FIPB
Its equity shares of the same class are
listed on the NSE or BSE for at leastone year
Clause 40A the listing agreement. Atleast 10% of the issue shall be tomutual funds.
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Cont
The minimum number of allottees foreach placement of specified securitiesmade shall not be less than:
2 where the issue size is less than orequal to Rs. 250 crores;
5 where the issue size is greater than Rs.250 crores.
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All previous QIPs made in the samefinancial year shall not exceed 5 times the
net worth of the issuer
There is a lock-in of 1 year from the date ofallotment, except for sale on a recognized
stock exchange
Restrictions on amount
raised
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Thank you